Country Case-Studies

**96**

*Emerging Markets*

**References**

2014;**29**(2):21-49

[1] Block WE. Justifying a stateless legal order: A critique of Rand and Epstein. Journal of Private Enterprise.

[2] Chartier G. Anarchy and Legal Order: Law and Politics for a Stateless Society. New York, NY: Cambridge University Press; 2013. pp. 433

[3] Hoppe HH. The private production of defense. Journal of Libertarian

[4] Murphy RP. Chaos Theory. Auburn, Alabama: Ludwig von Mises Institute;

[5] Rothbard MN. Society without a state. Nomos. 1978;**19**:191-207

[6] Rothbard MN. Power and Market. Auburn, Alabama: Ludwig von Mises

[7] Stringham EP. Anarchy and the Law: The Political Economy of Choice. Somerset, NJ: Transaction Publishers;

Studies. 1999;**14**(1):27-52

2010

2011

Institute; 1970

**99**

**1. Introduction**

**Chapter 6**

**Abstract**

Development

The Influence of Economic

and Guatemala on National

*Verena Habrich, Vito Bobek and Tatjana Horvat*

Activity of Women in Malaysia

Emerging markets are amongst some of the fastest-growing economies on the globe. However, it is necessary to enhance human capital to enable the long-term development of a nation. The theory states that the increase in workforce participation favorably impacts GDP per capita. Additionally, developing markets can grow even further if they increase women's rates in the labor market. The authors' desire is to determine the main obstacles for women in the job market and identify the impact of female participation on national development. The authors applied the following methods of work: description and compilation of different literature and deduction method to show which relevant factors are recommended to make higher women's economic activity to impacts the economy in a broader sense. The results show that Emerging markets must overcome gender inequalities, properly enforce femalerelated regulations, and invest in human development. The results also point out the relevance of a country's level of development, culture, education, female-related laws, and their influence on women's decision or ability to work. The discussion demonstrates that the rate of women in the workforce is increasing, but it is still severely lower than the men's rate. The main issues are cultural stereotypes, limited access to the job market, and difficulties with combining work and childcare. When it comes to infrastructure and educational possibilities, remote areas are still underdeveloped. Furthermore, gender bias is still deeply rooted in rural society. The elimination of these stereotypes and the improvement (and enforcement) of women-related poli-

cies will contribute to higher female workforce participation in the future.

**Keywords:** Female labor force participation, impact on economic growth, economic development, human development, gender and development,

Emerging markets are amongst the fastest growing markets on the globe. Investment in infrastructure and human development are necessary to enable this growth process. Improving human capital has a positive impact on a nation's

In most emerging markets, the female labor force participation (FLFP) is lower than in developed countries. The lowest rates of FLFP are seen mostly in the

economy and eliminates certain hurdles for a country to prosper.

human capital, gender gap, gender equality

#### **Chapter 6**

## The Influence of Economic Activity of Women in Malaysia and Guatemala on National Development

*Verena Habrich, Vito Bobek and Tatjana Horvat*

#### **Abstract**

Emerging markets are amongst some of the fastest-growing economies on the globe. However, it is necessary to enhance human capital to enable the long-term development of a nation. The theory states that the increase in workforce participation favorably impacts GDP per capita. Additionally, developing markets can grow even further if they increase women's rates in the labor market. The authors' desire is to determine the main obstacles for women in the job market and identify the impact of female participation on national development. The authors applied the following methods of work: description and compilation of different literature and deduction method to show which relevant factors are recommended to make higher women's economic activity to impacts the economy in a broader sense. The results show that Emerging markets must overcome gender inequalities, properly enforce femalerelated regulations, and invest in human development. The results also point out the relevance of a country's level of development, culture, education, female-related laws, and their influence on women's decision or ability to work. The discussion demonstrates that the rate of women in the workforce is increasing, but it is still severely lower than the men's rate. The main issues are cultural stereotypes, limited access to the job market, and difficulties with combining work and childcare. When it comes to infrastructure and educational possibilities, remote areas are still underdeveloped. Furthermore, gender bias is still deeply rooted in rural society. The elimination of these stereotypes and the improvement (and enforcement) of women-related policies will contribute to higher female workforce participation in the future.

**Keywords:** Female labor force participation, impact on economic growth, economic development, human development, gender and development, human capital, gender gap, gender equality

#### **1. Introduction**

Emerging markets are amongst the fastest growing markets on the globe. Investment in infrastructure and human development are necessary to enable this growth process. Improving human capital has a positive impact on a nation's economy and eliminates certain hurdles for a country to prosper.

In most emerging markets, the female labor force participation (FLFP) is lower than in developed countries. The lowest rates of FLFP are seen mostly in the Middle East and North Africa. This is followed closely by South Asia and Central America. However, in underdeveloped countries, the empowerment of women would boost economic growth [1]. Women have long been a new source of talent. They are an untapped resource that has enormous potential for the labor market and economy [2]. The act of fostering female human capital is one of the highestreturn investments a developing economy can generate. The enhancement of girls' education leads to society's following indicators: (a) higher workforce participation of women and (b) a decrease in gender gap issues. In the future, this will be even more crucial since the workforce demand is growing, especially in sectors where female participation is currently low [3].

Even if awareness of the importance of gender equality has been raised, there are still many obstacles for females to enter the job market. Women make out half of the world's population, but they currently only create 37% of the global GDP. If females would reach their full potential in the labor market, forecasters say that this would lead to global GDP growth of 26% by 2025 [4].

The high growth in emerging markets leads to higher demand in the labor force. On the other hand, there is often unused workforce potential within a country because many females are not part of the labor force. Therefore, the increase in women's economic activity is necessary to enable human development and long-term economic growth. To achieve this unrealized potential, there is an urgency in analyzing existing obstacles for women and the impact of female empowerment.

Gender disparity is the most prevalent form of inequality on the globe and hinders human development. According to the United Nations' (UN) current Human Development Report, the global gender gap is more deeply rooted than initially thought [5]. This fact supports the idea of this chapter. It increases the authors' motivation to identify hurdles for women and to present the obstacles faced by the global community for future growth.

#### **2. The research question and methods of work**

The main research question in this research is:

"Which are relevant factors that influence women's economic activity and how this impacts the economy in a broader sense?"

The authors aim at shedding light on this relation and the importance of policies, markets, and institutions within this concept. The authors will then produce suggestions for improvement on this pressing issue.

Based on the problem statement, the authors came to some personal theories. The following are the authors' selected assumptions for this research:


Different sources underline the link between gender inequality and national development. However, when it comes to female workforce participation and its impact on the economy, there is still a literature gap. This has created obstacles for many researchers in conducting a proper analysis of women's role in the economy

**101**

growth theories.

employ additional workers.

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

factors influencing the female labor force participation rate.

[6]. The literature lacks detailed information about the reasons for gender disparities across the globe, i.e., how culture and education affect inequality [7]. The UN confirms that there is more data available about men-related than female-related topics. This Gender Data Gap creates a problem in research because women's

The majority of literature states that gender inequality and economic development are correlated in a two-way relation. There are two main factors in this type of relationship. First, the level of development of a country determines the number of economically active women. Second, the rate of female workforce participation impacts the economic growth of a country [9]. This chapter will elaborate on economic development and growth, gender roles within this concept, and the main

We will use these methods of work: description and compilation of different literature and deduction method to show which relevant factors are recommended to make higher women's economic activity to impacts the economy in a broader sense.

The economy is an important topic to discuss for both emerging and developed

During the Industrial Revolution, there were several views on economic success and from this rose the role of labor. This social mindset change produced renowned classic growth theories written by Adam Smith, Karl Marx, or Max Weber [11]. In combination with the Malthusian concept, these economic theories argue that an increase in population eliminates efficiency and economic growth. However, they have omitted factors such as technology and modernization [12]. These theories have long been considered outdated and have been replaced or adapted by modern

One of the first neoclassical growth theories is the Solow Growth Model, established in the 1950s. It states that exogenous (external) factors lead to economic growth. In Solow's point of view, a high rate of income saved by individuals leads to capital accumulation. This enables higher investment rates, a higher GDP per capita, and higher wealth within a country. Solow stated that population growth could negatively impact GDP per capita because more investment is needed to

Another modern economic model is Rostow's manifesto of 1960. It explains the five stages of growth. Rostow was convinced that economic growth is driven by both demand and supply. He extended on Solow's view by believing that economic changes are based on entrepreneurship and society's consumption level. Rostow described the transition from a traditional society into a modernized society.

markets. Two terms are mentioned frequently: (a) economic growth and (b) economic development. Economic growth is known as the increase in a country's output. It is usually linked to an increase in income and is measured with quantitative indicators, i.e., GDP per capita. Economic development describes the combination of economic growth and a shift in national structure. This might include a positive change in education, income distribution, technological progress, and the ability to lift the population out of poverty [10]. The following subsections provide an overview of modern economic growth theories and one specific economic development driver: human development. Additionally, there will be an elaborated

discussion over the role of gender within the development concept.

*DOI: http://dx.doi.org/10.5772/intechopen.97486*

progress cannot easily be observed [8].

**3. Economic development**

**3.1 Modern economic growth theories**

*The Influence of Economic Activity of Women in Malaysia and Guatemala... DOI: http://dx.doi.org/10.5772/intechopen.97486*

[6]. The literature lacks detailed information about the reasons for gender disparities across the globe, i.e., how culture and education affect inequality [7]. The UN confirms that there is more data available about men-related than female-related topics. This Gender Data Gap creates a problem in research because women's progress cannot easily be observed [8].

The majority of literature states that gender inequality and economic development are correlated in a two-way relation. There are two main factors in this type of relationship. First, the level of development of a country determines the number of economically active women. Second, the rate of female workforce participation impacts the economic growth of a country [9]. This chapter will elaborate on economic development and growth, gender roles within this concept, and the main factors influencing the female labor force participation rate.

We will use these methods of work: description and compilation of different literature and deduction method to show which relevant factors are recommended to make higher women's economic activity to impacts the economy in a broader sense.

#### **3. Economic development**

*Emerging Markets*

empowerment.

Middle East and North Africa. This is followed closely by South Asia and Central America. However, in underdeveloped countries, the empowerment of women would boost economic growth [1]. Women have long been a new source of talent. They are an untapped resource that has enormous potential for the labor market and economy [2]. The act of fostering female human capital is one of the highestreturn investments a developing economy can generate. The enhancement of girls' education leads to society's following indicators: (a) higher workforce participation of women and (b) a decrease in gender gap issues. In the future, this will be even more crucial since the workforce demand is growing, especially in sectors

Even if awareness of the importance of gender equality has been raised, there are still many obstacles for females to enter the job market. Women make out half of the world's population, but they currently only create 37% of the global GDP. If females would reach their full potential in the labor market, forecasters say that this would

The high growth in emerging markets leads to higher demand in the labor force. On the other hand, there is often unused workforce potential within a country because many females are not part of the labor force. Therefore, the increase in women's economic activity is necessary to enable human development and long-term economic growth. To achieve this unrealized potential, there is an urgency in analyzing existing obstacles for women and the impact of female

Gender disparity is the most prevalent form of inequality on the globe and hinders human development. According to the United Nations' (UN) current Human Development Report, the global gender gap is more deeply rooted than initially thought [5]. This fact supports the idea of this chapter. It increases the authors' motivation to identify hurdles for women and to present the obstacles faced by the

"Which are relevant factors that influence women's economic activity and how

The authors aim at shedding light on this relation and the importance of policies, markets, and institutions within this concept. The authors will then produce

Based on the problem statement, the authors came to some personal theories.

• The rate of female labor force participation impacts economic development in

• The female workforce participation is influenced by certain external factors,

such as education, culture, regulations, and overall development.

• If more women would enter the labor market, the economy will prosper.

Different sources underline the link between gender inequality and national development. However, when it comes to female workforce participation and its impact on the economy, there is still a literature gap. This has created obstacles for many researchers in conducting a proper analysis of women's role in the economy

The following are the authors' selected assumptions for this research:

where female participation is currently low [3].

lead to global GDP growth of 26% by 2025 [4].

global community for future growth.

emerging markets.

**2. The research question and methods of work**

The main research question in this research is:

suggestions for improvement on this pressing issue.

this impacts the economy in a broader sense?"

**100**

The economy is an important topic to discuss for both emerging and developed markets. Two terms are mentioned frequently: (a) economic growth and (b) economic development. Economic growth is known as the increase in a country's output. It is usually linked to an increase in income and is measured with quantitative indicators, i.e., GDP per capita. Economic development describes the combination of economic growth and a shift in national structure. This might include a positive change in education, income distribution, technological progress, and the ability to lift the population out of poverty [10]. The following subsections provide an overview of modern economic growth theories and one specific economic development driver: human development. Additionally, there will be an elaborated discussion over the role of gender within the development concept.

#### **3.1 Modern economic growth theories**

During the Industrial Revolution, there were several views on economic success and from this rose the role of labor. This social mindset change produced renowned classic growth theories written by Adam Smith, Karl Marx, or Max Weber [11]. In combination with the Malthusian concept, these economic theories argue that an increase in population eliminates efficiency and economic growth. However, they have omitted factors such as technology and modernization [12]. These theories have long been considered outdated and have been replaced or adapted by modern growth theories.

One of the first neoclassical growth theories is the Solow Growth Model, established in the 1950s. It states that exogenous (external) factors lead to economic growth. In Solow's point of view, a high rate of income saved by individuals leads to capital accumulation. This enables higher investment rates, a higher GDP per capita, and higher wealth within a country. Solow stated that population growth could negatively impact GDP per capita because more investment is needed to employ additional workers.

Another modern economic model is Rostow's manifesto of 1960. It explains the five stages of growth. Rostow was convinced that economic growth is driven by both demand and supply. He extended on Solow's view by believing that economic changes are based on entrepreneurship and society's consumption level. Rostow described the transition from a traditional society into a modernized society.

This provided a method of clustering countries into developing, emerging, and developed markets [13]. The five stages of growth, according to Rostow, are the following [13]:


When establishing his Endogenous Growth Theory in the 1980s, Romer disagreed with Solow and Rostow's perspectives. He was convinced that economic growth derives from within an economic system. The crucial determinant for growth is the behavior of the economy. Romer claimed that external factors, such as technological progress, are available to all countries globally. Nevertheless, some countries progress economically faster than others. Therefore, he concluded that endogenous (internal) factors, such as labor force and rise in productivity, have an increased impact on income per capita, and therefore the standard of living. This is echoed in Romer's presumptions that state investment in workers' knowledge leads to capital accumulation and long-term economic growth [14].

When it comes to capital accumulation, the Lucas Model from 1988 agrees with Romer's opinion. Lucas was convinced that education and learning have a significant impact on labor productivity and economic growth [15]. Romer [14] considered Lucas's opinion as incredibly powerful. Lucas's statement's most notable opinion is that workers migrate to places where human capital is existent to a greater extent. This is seen as a crucial perspective on national development.

According to more recent literature, a combination of the following factors is pivotal for the long-term economic success of a country [10]:


Information provided by major global consulting firms gives further meaningful insights into the topic of economic development. The Boston Consulting Group claims that economic growth and society's well-being are tightly linked to each other. In the course of their last surveys, the agency identified that the ability of a country to transfer wealth into societal welfare has a significant influence on the level of long-term economic success. To achieve that, developing and emerging countries must invest in the improvement of education, health, infrastructure, and governmental institutions [16].

**103**

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

Consultants from McKinsey & Company agree, particularly when it comes to the importance of governance and education. Their surveys confirm that labor productivity and talent seeking are crucial steps for a country's economy [17]. Bain & Company state that people are the most basic form of capital a country has at its disposal. The investment in employees helps companies and countries to improve

The majority of growth theories acknowledge human capital as a highly influential driver for a country's economic progress [19]. The author considers this a crucial fact for this research. It underlines the impact of increasing labor activity on the economic development of an emerging market. The mentioned theories and surveys display different views on how economic growth arises. Nevertheless, the overall consensus is an increase in workforce participation, together with a rise in efficiency, leads to long-term economic success. This is an essential ideology for this research because countries with low (female) labor force participation possess many unused potentials. Subsection 3.2 elaborates on human development and its

Human capital determines the level of knowledge of a nation's workers. It is a meaningful dimension to describe a country's economic, political, and social situation. Investing in human capital can be undertaken through education and training. If executed correctly, it can increase the nation's output and efficiency in the long-term. Human capital is perceived as an exceedingly necessary form of capital a

Schultz [21] highlighted the importance of labor and the impact of social investment on a country's wealth. Alternative human development theories arising in the 1970s underlined the connection between economic prosperity and human development. In theory, the shift led to the understanding of particular areas of the field revolving around sustainable goals. The four relevant subtopics are: (a) social relations and networks, (b) diversity, (c) environment, and (d) gender equality and

Becker [23] expanded with these concepts by underlining the correlation between a worker's knowledge and economic growth. He concluded that countries with a high education level usually experience more efficiency and higher income per capita. According to Inglehart et al. [24], modernization and social change are forms of human development. These aspects correlate with a change in people's values. The increase in human development is linked to a higher level of democracy

and gender equality. This provides a fundamental finding for this research.

An often-used measurement to indicate that the well-being of a country is the GDP. However, GDP could be insufficient in providing a broad picture of a nation's economic situation. There are other forms of measurement that are more adequate in the measurement of human development. The Human Development Index (HDI) is one of these measurement techniques. This index analyses the level of education, health, and welfare within a country [10]. It contributes an in-detail insight into a society's living conditions. HDI accomplishes this through the combination of

As mentioned at the beginning of this section, economic growth has a significant impact on the level of income and society's well-being. It can lift people out of poverty and raise the standard of living. However, economic growth does not automatically decrease poverty due to existing income inequalities in many countries [19]. When it comes to education, health, life satisfaction, income, and labor force participation, emerging markets show a greater inequality rate than developed countries [25]. HDI

*DOI: http://dx.doi.org/10.5772/intechopen.97486*

their long-term economic performance [18].

relation to economic prosperity.

**3.2 Human development**

country possesses [20].

empowerment [22].

three dimensions (**Figure 1**) [5].

*The Influence of Economic Activity of Women in Malaysia and Guatemala... DOI: http://dx.doi.org/10.5772/intechopen.97486*

Consultants from McKinsey & Company agree, particularly when it comes to the importance of governance and education. Their surveys confirm that labor productivity and talent seeking are crucial steps for a country's economy [17]. Bain & Company state that people are the most basic form of capital a country has at its disposal. The investment in employees helps companies and countries to improve their long-term economic performance [18].

The majority of growth theories acknowledge human capital as a highly influential driver for a country's economic progress [19]. The author considers this a crucial fact for this research. It underlines the impact of increasing labor activity on the economic development of an emerging market. The mentioned theories and surveys display different views on how economic growth arises. Nevertheless, the overall consensus is an increase in workforce participation, together with a rise in efficiency, leads to long-term economic success. This is an essential ideology for this research because countries with low (female) labor force participation possess many unused potentials. Subsection 3.2 elaborates on human development and its relation to economic prosperity.

#### **3.2 Human development**

*Emerging Markets*

following [13]:

This provided a method of clustering countries into developing, emerging, and developed markets [13]. The five stages of growth, according to Rostow, are the

1.The traditional society - with limited or unsteady growth conditions,

2.The pre-conditions for take-off - where a foundation for growth is created,

3.The take-off - where hurdles for long-term growth are finally left behind,

4.The drive to maturity - with constant growth and technological progress,

When establishing his Endogenous Growth Theory in the 1980s, Romer disagreed with Solow and Rostow's perspectives. He was convinced that economic growth derives from within an economic system. The crucial determinant for growth is the behavior of the economy. Romer claimed that external factors, such as technological progress, are available to all countries globally. Nevertheless, some countries progress economically faster than others. Therefore, he concluded that endogenous (internal) factors, such as labor force and rise in productivity, have an increased impact on income per capita, and therefore the standard of living. This is echoed in Romer's presumptions that state investment in workers' knowledge leads

When it comes to capital accumulation, the Lucas Model from 1988 agrees with Romer's opinion. Lucas was convinced that education and learning have a significant impact on labor productivity and economic growth [15]. Romer [14] considered Lucas's opinion as incredibly powerful. Lucas's statement's most notable opinion is that workers migrate to places where human capital is existent to a greater

According to more recent literature, a combination of the following factors is

• Human population, fertility rate, workforce participation, and labor skills,

Information provided by major global consulting firms gives further meaningful insights into the topic of economic development. The Boston Consulting Group claims that economic growth and society's well-being are tightly linked to each other. In the course of their last surveys, the agency identified that the ability of a country to transfer wealth into societal welfare has a significant influence on the level of long-term economic success. To achieve that, developing and emerging countries must invest in the improvement of education, health, infrastructure, and

5.The age of high-mass consumption.

to capital accumulation and long-term economic growth [14].

pivotal for the long-term economic success of a country [10]:

• Human capital, education, and health,

• Natural resources and the environment.

governmental institutions [16].

• Entrepreneurship, organization, and innovation,

extent. This is seen as a crucial perspective on national development.

• Employment/unemployment, migration, and urbanization,

• Capital formation, investment choice, and technological progress,

**102**

Human capital determines the level of knowledge of a nation's workers. It is a meaningful dimension to describe a country's economic, political, and social situation. Investing in human capital can be undertaken through education and training. If executed correctly, it can increase the nation's output and efficiency in the long-term. Human capital is perceived as an exceedingly necessary form of capital a country possesses [20].

Schultz [21] highlighted the importance of labor and the impact of social investment on a country's wealth. Alternative human development theories arising in the 1970s underlined the connection between economic prosperity and human development. In theory, the shift led to the understanding of particular areas of the field revolving around sustainable goals. The four relevant subtopics are: (a) social relations and networks, (b) diversity, (c) environment, and (d) gender equality and empowerment [22].

Becker [23] expanded with these concepts by underlining the correlation between a worker's knowledge and economic growth. He concluded that countries with a high education level usually experience more efficiency and higher income per capita. According to Inglehart et al. [24], modernization and social change are forms of human development. These aspects correlate with a change in people's values. The increase in human development is linked to a higher level of democracy and gender equality. This provides a fundamental finding for this research.

An often-used measurement to indicate that the well-being of a country is the GDP. However, GDP could be insufficient in providing a broad picture of a nation's economic situation. There are other forms of measurement that are more adequate in the measurement of human development. The Human Development Index (HDI) is one of these measurement techniques. This index analyses the level of education, health, and welfare within a country [10]. It contributes an in-detail insight into a society's living conditions. HDI accomplishes this through the combination of three dimensions (**Figure 1**) [5].

As mentioned at the beginning of this section, economic growth has a significant impact on the level of income and society's well-being. It can lift people out of poverty and raise the standard of living. However, economic growth does not automatically decrease poverty due to existing income inequalities in many countries [19]. When it comes to education, health, life satisfaction, income, and labor force participation, emerging markets show a greater inequality rate than developed countries [25]. HDI

**Figure 1.**

*Dimensions of the human development index (own illustration, based on [5]).*

does not include indications about inequality, poverty, or gender disparity. Therefore HDI might not be a sufficient measure to analyze the welfare of a society [5].

There is a necessity to deliberate on the subject of gender disparity. The issues that ensue due to gender disparity are the most prevalent in explaining inequality on the globe. Gender disparity creates a significant hurdle for human development in the short- and long-term. According to the UN's Human Development Report, the global gender gap is more deeply rooted than initially thought. The UN set forth a goal to achieve global gender equality by the year 2030. Unfortunately, the signs of this being achieved within this timeframe seems intangible [5].

The issue of gender equality is highly relevant for (a) the economy and (b) development-related research. The discovery of this issue was one of the main reasons for the authors to focus on this topic. This research expects to provide further insights into its complexity. Gender disparity favorably impacts human and economic development. Subsection 3.3 elaborates on the role of gender within the development concept.

#### **3.3 Gender and development**

Women contribute to the wealth of an economy to a great extent [26]. If females are economically active in the official workforce, they stimulate improved living conditions for other women and girls. This translates into an enhanced health system, a reduction in domestic violence, a rise in their social status, and an overall economic development [27]. However, many women are employed in the informal sectors. This alludes to their wages and regulations not being appropriate. Their increased participation in the official workforce is essential for women's well-being and overall development [1]. If women cannot use their full potential in the labor market, the economic gender gap is created. This has negative impacts on income per capita, particularly in developing countries. **Figure 2** displays the twenty countries with the highest economic losses globally, resulting from labor-force-related gender gaps [28].

Even if awareness for gender-related topics is existent, the causes for gender gaps and their impacts are still not fully realized. This is seen even more so in emerging markets. The data in these markets are insufficient in many cases [29]. Development theories have often been criticized for analyzing women's role and their living conditions solely in a qualitative matter. This led to the implementation of gender-related indices, i.e., the Gender Development Index (GDI). It outlines the gender gap across countries and includes decisive factors regarding female life expectancy, literacy rates, school enrolment, and income [30]. This index is an

**105**

development.

worldwide [3].

**Figure 2.**

analysis.

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

additional indicator of human development under consideration of gender disparity. It displays the ratio between female HDI and male HDI [5]. Countries with a high level of human development usually have higher rates of gender equality [5]. The Global Gender Gap Index is another measure established by the World Economic Forum (WEF). This index analyses 144 countries and considers men's and women's labor participation, job opportunities, health, education, and political empowerment. It allows for a global comparison of gender disparity. The research focuses on output rather than input and analyses the actual living conditions

*GDP losses resulting from labor-force-related gender gaps (own illustration, based on data provided by [28].*

The World Bank's Index of Women, Business and the Law measures the economic outcome concerning female empowerment with the help of eight indicators: mobility, workplace, income, marriage, parenthood, entrepreneurship, assets, pension. This index provides a broad picture of gender-related laws [31]. All three indices provide a detailed insight into women's situation and will be used for further

Two approaches should be examined to comprehend the importance of the relationship between gender and development: (a) Women in Development (WID) and (b) Gender and Development (GAD) [32]. These approaches have provided an essential basis for global female empowerment. The overall assumptions will be expanded on in the following paragraphs to grasp the importance of this topic.

The concept of WID established itself between the 1950s and 1960s due to feminist movements created in the US and Europe [33]. This movement's goal was to lift the sexes out of poverty, in turn, enabling them to equally benefit from improvements in their society and economy [34]. The main goal was to include women in the development process by improving their access to education, work, and property [32]. The WID movement set the foundation for female-related studies. Boserup's publication "Woman's role in economic development" from 1970 was the first work that analyzed female workers' impact on a country's economic growth, especially in underdeveloped countries. She knew that hindering women from being economically active creates obstacles for a nation and its growth process. This statement coincides with the theories mentioned in Sections 3.1 and 3.2. It points out how an increasing FLFP can enhance economic development and is a crucial finding for this research. The next approach has a contrasting ideology on the matter of gender and

*DOI: http://dx.doi.org/10.5772/intechopen.97486*

*The Influence of Economic Activity of Women in Malaysia and Guatemala... DOI: http://dx.doi.org/10.5772/intechopen.97486*

#### **Figure 2.**

*Emerging Markets*

**Figure 1.**

development concept.

gender gaps [28].

**3.3 Gender and development**

does not include indications about inequality, poverty, or gender disparity. Therefore

There is a necessity to deliberate on the subject of gender disparity. The issues that ensue due to gender disparity are the most prevalent in explaining inequality on the globe. Gender disparity creates a significant hurdle for human development in the short- and long-term. According to the UN's Human Development Report, the global gender gap is more deeply rooted than initially thought. The UN set forth a goal to achieve global gender equality by the year 2030. Unfortunately, the signs of

The issue of gender equality is highly relevant for (a) the economy and (b) development-related research. The discovery of this issue was one of the main reasons for the authors to focus on this topic. This research expects to provide further insights into its complexity. Gender disparity favorably impacts human and economic development. Subsection 3.3 elaborates on the role of gender within the

Women contribute to the wealth of an economy to a great extent [26]. If females are economically active in the official workforce, they stimulate improved living conditions for other women and girls. This translates into an enhanced health system, a reduction in domestic violence, a rise in their social status, and an overall economic development [27]. However, many women are employed in the informal sectors. This alludes to their wages and regulations not being appropriate. Their increased participation in the official workforce is essential for women's well-being and overall development [1]. If women cannot use their full potential in the labor market, the economic gender gap is created. This has negative impacts on income per capita, particularly in developing countries. **Figure 2** displays the twenty countries with the highest economic losses globally, resulting from labor-force-related

Even if awareness for gender-related topics is existent, the causes for gender gaps and their impacts are still not fully realized. This is seen even more so in emerging markets. The data in these markets are insufficient in many cases [29]. Development theories have often been criticized for analyzing women's role and their living conditions solely in a qualitative matter. This led to the implementation of gender-related indices, i.e., the Gender Development Index (GDI). It outlines the gender gap across countries and includes decisive factors regarding female life expectancy, literacy rates, school enrolment, and income [30]. This index is an

HDI might not be a sufficient measure to analyze the welfare of a society [5].

this being achieved within this timeframe seems intangible [5].

*Dimensions of the human development index (own illustration, based on [5]).*

**104**

*GDP losses resulting from labor-force-related gender gaps (own illustration, based on data provided by [28].*

additional indicator of human development under consideration of gender disparity. It displays the ratio between female HDI and male HDI [5]. Countries with a high level of human development usually have higher rates of gender equality [5].

The Global Gender Gap Index is another measure established by the World Economic Forum (WEF). This index analyses 144 countries and considers men's and women's labor participation, job opportunities, health, education, and political empowerment. It allows for a global comparison of gender disparity. The research focuses on output rather than input and analyses the actual living conditions worldwide [3].

The World Bank's Index of Women, Business and the Law measures the economic outcome concerning female empowerment with the help of eight indicators: mobility, workplace, income, marriage, parenthood, entrepreneurship, assets, pension. This index provides a broad picture of gender-related laws [31]. All three indices provide a detailed insight into women's situation and will be used for further analysis.

Two approaches should be examined to comprehend the importance of the relationship between gender and development: (a) Women in Development (WID) and (b) Gender and Development (GAD) [32]. These approaches have provided an essential basis for global female empowerment. The overall assumptions will be expanded on in the following paragraphs to grasp the importance of this topic.

The concept of WID established itself between the 1950s and 1960s due to feminist movements created in the US and Europe [33]. This movement's goal was to lift the sexes out of poverty, in turn, enabling them to equally benefit from improvements in their society and economy [34]. The main goal was to include women in the development process by improving their access to education, work, and property [32].

The WID movement set the foundation for female-related studies. Boserup's publication "Woman's role in economic development" from 1970 was the first work that analyzed female workers' impact on a country's economic growth, especially in underdeveloped countries. She knew that hindering women from being economically active creates obstacles for a nation and its growth process. This statement coincides with the theories mentioned in Sections 3.1 and 3.2. It points out how an increasing FLFP can enhance economic development and is a crucial finding for this research. The next approach has a contrasting ideology on the matter of gender and development.

The GAD approach focuses on the underlying causes of gender inequality. GAD categorizes aspects of race, culture, history, patriarchal behavior, and economic or social status together in relationship with one another [32]. Economic, social, and political changes impact the sexes in different ways. The approach of GAD investigates those effects on each gender group. Gender identities are not necessarily based on a person's sexuality presented at birth since gender roles can be flexible in today's society. This topic brings up the notion that it might not be sufficient to only address women within the framework of equality and development [30].

The WID and GAD approaches compete with each other, whereas WID has been criticized for being suitable only for the Western world, relying too much on modernization and government. Especially for less developed countries with weak institutions, it might not be an appropriate concept [32]. This resulted in the GAD concept now being more widely used. On the one hand, feminists have criticized this since the concept of women cannot be replaced by that of gender [34]. However, GAD considers a broader range of factors than the initial WID approach. Making a clear statement regarding gender-related issues usually requires the comparison of both sexes [32].

According to The World Bank, enhancing gender equality increases the efficiency and productivity of a country. It can be seen as a way of doing Smart Economics [5]. The Smart Economics approach provides oversight on how to analyze common issues of today's economy. This is accomplished logically and straightforwardly with long-term solutions in mind. This approach has an inclusion of gender-specific issues.

Smart Economics examines the economic activity of both women and men within a household. This approach points out the importance of education for a household's prosperity. It is easier for families with a higher level of education to keep up on the job market. Furthermore, those families have higher chances of increasing their household income in the short- and long-term [35]. The Smart Economics approach additionally investigates the chances for women in the business world and their potential wages. In the past decades, women received more access to business areas that were previously dominated by males. Women were, therefore, able to increase their income. However, there is still a gap in specific sectors. Combining childcare and work is still a considerable obstacle for many women [35]. On average, women are still the primary caretakers of children, elderlies, disabled people, and households [32]. Institutions have to provide an appropriate framework to enable females to be economically active and combine work and other responsibilities. Increasing the number of active women in the labor market is a crucial step for female development. It increases women's skills and long-term opportunities [27].

Findings from all three approaches (WID, GAD, and Smart Economics) evoke policies that foster gender equality within the governmental and labor markets. The main drivers the approaches contemplate for gender-related outcomes are education, economic development, laws, and political empowerment [36]. This is a crucial finding for this research. The authors decided to investigate these drivers more and analyze their impact on female workforce participation in the following Section 4.

#### **4. Female labor force participation (FLFP)**

The labor participation rate (or employment rate) gives an indication of the level of income and well-being of people within a country. It is defined as the proportion of the labor force compared to the number of people working age and who can work [20]. A country requires workers to produce a specific output level, leading to the

**107**

**Figure 3.**

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

long-term growth, especially in emerging markets [4].

labor force participation within a nation directly linked to its real GDP. However, the labor force participation rate omits factors like productivity and discrimination in the job market [6]. The rise in labor productivity is crucial for consumption and

The main drivers that boost the FLFP are legal policies and demographic factors, i.e., education [37]. The overall level of development of a country and cultural aspects play a significant role as well. The impact of these factors on FLFP will be

Economic development and female empowerment influence each other in a two-way relation. Economic development increases equality and enables women to benefit from opportunities that come with growth. The empowerment of women boosts economic prosperity and decreases poverty [38]. There can be a push- and pull-causes for women to decide to enter the labor market. Either the job market pulls in women due to their level of education. Alternatively, women are pushed into the labor force because they have to increase the household income or keep the

The link between income and economic activity can be observed in a global comparison. The rate of women in the labor force is exceptionally low in the Middle East and Northern Africa, followed by South Asia and Central America [1]. In underdeveloped countries, women suffer from poverty more than man, since income disparity is more prevalent [38]. However, developing countries that display a high level of poverty usually experience a higher rate of FLFP, since women are forced to contribute to the household income. In times of economic shocks, the labor activity of women often rises. An international overview demonstrates a U-shaped relationship between economic development and female workforce participation. The rate of FLFP in middle-income countries is usually lower than in low-income countries since more men work in industrial jobs. In high-income countries, the curve rises due to a high level of female education and

McKinsey's research from 2015 supports this U-shaped theory (see **Figure 3**). It demonstrates the link between FLFP and GDP per capita between 2004 and 2014,

current standard of living, i.e., if prices for necessities have risen [35].

*U-shaped relation between FLFP rate and GDP per capita (own illustration, based on [4]).*

*DOI: http://dx.doi.org/10.5772/intechopen.97486*

explained in the following subsections.

**4.1 Level of development**

empowerment [6].

*The Influence of Economic Activity of Women in Malaysia and Guatemala... DOI: http://dx.doi.org/10.5772/intechopen.97486*

labor force participation within a nation directly linked to its real GDP. However, the labor force participation rate omits factors like productivity and discrimination in the job market [6]. The rise in labor productivity is crucial for consumption and long-term growth, especially in emerging markets [4].

The main drivers that boost the FLFP are legal policies and demographic factors, i.e., education [37]. The overall level of development of a country and cultural aspects play a significant role as well. The impact of these factors on FLFP will be explained in the following subsections.

#### **4.1 Level of development**

*Emerging Markets*

comparison of both sexes [32].

of gender-specific issues.

opportunities [27].

**4. Female labor force participation (FLFP)**

The GAD approach focuses on the underlying causes of gender inequality. GAD categorizes aspects of race, culture, history, patriarchal behavior, and economic or social status together in relationship with one another [32]. Economic, social, and political changes impact the sexes in different ways. The approach of GAD investigates those effects on each gender group. Gender identities are not necessarily based on a person's sexuality presented at birth since gender roles can be flexible in today's society. This topic brings up the notion that it might not be sufficient to only address

The WID and GAD approaches compete with each other, whereas WID has been criticized for being suitable only for the Western world, relying too much on modernization and government. Especially for less developed countries with weak institutions, it might not be an appropriate concept [32]. This resulted in the GAD concept now being more widely used. On the one hand, feminists have criticized this since the concept of women cannot be replaced by that of gender [34].

However, GAD considers a broader range of factors than the initial WID approach. Making a clear statement regarding gender-related issues usually requires the

According to The World Bank, enhancing gender equality increases the efficiency and productivity of a country. It can be seen as a way of doing Smart Economics [5]. The Smart Economics approach provides oversight on how to analyze common issues of today's economy. This is accomplished logically and straightforwardly with long-term solutions in mind. This approach has an inclusion

Smart Economics examines the economic activity of both women and men within a household. This approach points out the importance of education for a household's prosperity. It is easier for families with a higher level of education to keep up on the job market. Furthermore, those families have higher chances of increasing their household income in the short- and long-term [35]. The Smart Economics approach additionally investigates the chances for women in the business world and their potential wages. In the past decades, women received more access to business areas that were previously dominated by males. Women were, therefore, able to increase their income. However, there is still a gap in specific sectors. Combining childcare and work is still a considerable obstacle for many women [35]. On average, women are still the primary caretakers of children, elderlies, disabled people, and households [32]. Institutions have to provide an appropriate framework to enable females to be economically active and combine work and other responsibilities. Increasing the number of active women in the labor market is a crucial step for female development. It increases women's skills and long-term

Findings from all three approaches (WID, GAD, and Smart Economics) evoke policies that foster gender equality within the governmental and labor markets. The main drivers the approaches contemplate for gender-related outcomes are education, economic development, laws, and political empowerment [36]. This is a crucial finding for this research. The authors decided to investigate these drivers more and analyze their impact on female workforce participation in the following Section 4.

The labor participation rate (or employment rate) gives an indication of the level of income and well-being of people within a country. It is defined as the proportion of the labor force compared to the number of people working age and who can work [20]. A country requires workers to produce a specific output level, leading to the

women within the framework of equality and development [30].

**106**

Economic development and female empowerment influence each other in a two-way relation. Economic development increases equality and enables women to benefit from opportunities that come with growth. The empowerment of women boosts economic prosperity and decreases poverty [38]. There can be a push- and pull-causes for women to decide to enter the labor market. Either the job market pulls in women due to their level of education. Alternatively, women are pushed into the labor force because they have to increase the household income or keep the current standard of living, i.e., if prices for necessities have risen [35].

The link between income and economic activity can be observed in a global comparison. The rate of women in the labor force is exceptionally low in the Middle East and Northern Africa, followed by South Asia and Central America [1]. In underdeveloped countries, women suffer from poverty more than man, since income disparity is more prevalent [38]. However, developing countries that display a high level of poverty usually experience a higher rate of FLFP, since women are forced to contribute to the household income. In times of economic shocks, the labor activity of women often rises. An international overview demonstrates a U-shaped relationship between economic development and female workforce participation. The rate of FLFP in middle-income countries is usually lower than in low-income countries since more men work in industrial jobs. In high-income countries, the curve rises due to a high level of female education and empowerment [6].

McKinsey's research from 2015 supports this U-shaped theory (see **Figure 3**). It demonstrates the link between FLFP and GDP per capita between 2004 and 2014,

**Figure 3.** *U-shaped relation between FLFP rate and GDP per capita (own illustration, based on [4]).*

with an average global FLFP rate of 64%. Furthermore, it shows the best-in-region scenario 2025, assuming an average global FLFP rate of 74%. In addition to that, it indicates the full-potential scenario 2025, assuming full female employment with an average global FLFP rate of 95%. As can be seen in the figure, the latter pushes the U-curve upwards, meaning that the FLFP rate would be more or less constant throughout all income levels [4].

The study further indicates that a rise in FLFP would not automatically lead to men dropping out of the workforce since its overall economic growth is pushed. New opportunities arise from that [4]. An analysis of within-country levels provides a detailed insight into this complex topic. The FLFP rates in rural areas differ tremendously from those in urban areas. Rural areas are usually less developed, translating into inadequate infrastructure and limited job opportunities, especially for women [39].

It can be stated that economic and social development usually leads to a higher FLFP rate. This decreases poverty and lowers the vulnerability of females [38]. Besides, it translates into a positive change of gender bias [30]. However, perspectives on gender are influenced by several other factors besides economic development, one of them being culture, which will be explained in the upcoming Section 4.2.

#### **4.2 Cultural aspects**

Culture, which is defined as a set of individual beliefs and values embedded within a society, significantly influences economic activity and development [11]. Rostow [13] mentioned that social motives and human beliefs drive economic changes. Culture and ethnicity are essential factors that form people's behavior and attitude. They induce different perspectives on gender-related topics [26]. Inglehart et al. [24] share this view and state that society's values impact governmental behavior and the enforcement of gender equality.

Historical events have formed the attitude regarding gender roles within a cultural group to a great extent [40]. In cultures with strong family ties and traditional gender roles, the unequal distribution of work in a household or the job market is instead accepted. These societies tend to have a higher level of gender inequality and a lower rate of FLFP [40]. Increasing a woman's authority can change her status within the family and society and, therefore, the overall perspective on gender roles [41]. Religion, as part of a society's culture, influences the economic activity of women also. Research indicates that in patriarchal societies (i.e., in Catholic and Muslim countries), the female labor force participation is usually lower [27].

Geert Hofstede is one of the pioneers in clustering national values and culture. He established six dimensions (see **Figure 4**) that compare cultural aspects in different countries. This is a primary method for academic purposes and management strategies [42]. Thus, this approach is widely used amongst researchers [7].

The author considers one cultural dimension as specifically relevant for this research: power distance. The level of power distance indicates to which extent the unequal distribution of power is accepted in society and how inequality is handled [42]. It is linked to strong hierarchies [7] and the perspective on gender-related roles within society [43].

Females are more sensitive to the execution of power. They tend to fulfill tasks that are expected by society and stick to traditional roles [44]. However, if power is more equally allocated amongst people, women can develop themselves, make political decisions, and contribute to the economy [7].

The dimension of masculinity vs. femininity, other than the terms might suggest, is not linked to gender-related issues. It is a synonym for "tough vs. tender"

**109**

**4.3 Policies**

**Figure 4.**

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

behavior in society and describes the level of competitiveness and consensusorientation [42]. Therefore, this dimension and the other four dimensions are not

• If jobs are scarce, should men have more right to a job than women?

• Is being a housewife as fulfilling than working in a paid job?

• Do men make better business executives than women?

• Is university education more important for a boy than for a girl?

Cultural beliefs impact gender-related perspectives and society's behavior. Culture links economic, political, and legal views. Thus, a country's laws reflect its

Even if the development level can push female economic activity, this is only possible in combination with specific policies [38]. Deficient policies are amongst the most pervasive reasons for gender inequalities. Improving them leads to higher female labor participation [46]. In many countries, economic access for women is limited—regulations constraint their participation in specific sectors and their access to financial capital. Unwritten rules, based on tradition and culture, hinder

However, governments have realized how crucial female empowerment is for economic stability. They invest in childcare facilities and family-friendly policies. Regulations regarding parental leave are another influential factor for a woman's choice or ability to enter the labor market [27]. There is criticism regarding a high rate of FLFP and its negative impact on the fertility rate. History shows that a significant increase in women entering the labor market might lead to a sinking

The authors also used the World Values Survey (WVS) data, a research project founded by Ronald Inglehart. With the help of their surveys, WVS analyses the cultural attitude of people across countries. Results prove that social beliefs impact overall development and perspectives on gender roles [40]. A representative sample of residents within a country (under consideration of equal gender and age distribution from urban and rural areas) is asked a set of questions during a specific period. Amongst others, it includes the following gender-related questions [45]:

*DOI: http://dx.doi.org/10.5772/intechopen.97486*

used for further analysis in this research.

*Hofstede's cultural dimensions (own illustration, based on [42]).*

culture and are based on society's values.

women from entering the job market [1].

*The Influence of Economic Activity of Women in Malaysia and Guatemala... DOI: http://dx.doi.org/10.5772/intechopen.97486*

**Figure 4.**

*Emerging Markets*

for women [39].

Section 4.2.

**4.2 Cultural aspects**

behavior and the enforcement of gender equality.

political decisions, and contribute to the economy [7].

throughout all income levels [4].

with an average global FLFP rate of 64%. Furthermore, it shows the best-in-region scenario 2025, assuming an average global FLFP rate of 74%. In addition to that, it indicates the full-potential scenario 2025, assuming full female employment with an average global FLFP rate of 95%. As can be seen in the figure, the latter pushes the U-curve upwards, meaning that the FLFP rate would be more or less constant

The study further indicates that a rise in FLFP would not automatically lead to men dropping out of the workforce since its overall economic growth is pushed. New opportunities arise from that [4]. An analysis of within-country levels provides a detailed insight into this complex topic. The FLFP rates in rural areas differ tremendously from those in urban areas. Rural areas are usually less developed, translating into inadequate infrastructure and limited job opportunities, especially

It can be stated that economic and social development usually leads to a higher FLFP rate. This decreases poverty and lowers the vulnerability of females [38]. Besides, it translates into a positive change of gender bias [30]. However, perspectives on gender are influenced by several other factors besides economic development, one of them being culture, which will be explained in the upcoming

Culture, which is defined as a set of individual beliefs and values embedded within a society, significantly influences economic activity and development [11]. Rostow [13] mentioned that social motives and human beliefs drive economic changes. Culture and ethnicity are essential factors that form people's behavior and attitude. They induce different perspectives on gender-related topics [26]. Inglehart et al. [24] share this view and state that society's values impact governmental

Historical events have formed the attitude regarding gender roles within a cultural group to a great extent [40]. In cultures with strong family ties and traditional gender roles, the unequal distribution of work in a household or the job market is instead accepted. These societies tend to have a higher level of gender inequality and a lower rate of FLFP [40]. Increasing a woman's authority can change her status within the family and society and, therefore, the overall perspective on gender roles [41]. Religion, as part of a society's culture, influences the economic activity of women also. Research indicates that in patriarchal societies (i.e., in Catholic and Muslim countries), the female labor force participation is usually lower [27].

Geert Hofstede is one of the pioneers in clustering national values and culture. He established six dimensions (see **Figure 4**) that compare cultural aspects in different countries. This is a primary method for academic purposes and management

The author considers one cultural dimension as specifically relevant for this research: power distance. The level of power distance indicates to which extent the unequal distribution of power is accepted in society and how inequality is handled [42]. It is linked to strong hierarchies [7] and the perspective on gender-related

Females are more sensitive to the execution of power. They tend to fulfill tasks that are expected by society and stick to traditional roles [44]. However, if power is more equally allocated amongst people, women can develop themselves, make

The dimension of masculinity vs. femininity, other than the terms might suggest, is not linked to gender-related issues. It is a synonym for "tough vs. tender"

strategies [42]. Thus, this approach is widely used amongst researchers [7].

**108**

roles within society [43].

*Hofstede's cultural dimensions (own illustration, based on [42]).*

behavior in society and describes the level of competitiveness and consensusorientation [42]. Therefore, this dimension and the other four dimensions are not used for further analysis in this research.

The authors also used the World Values Survey (WVS) data, a research project founded by Ronald Inglehart. With the help of their surveys, WVS analyses the cultural attitude of people across countries. Results prove that social beliefs impact overall development and perspectives on gender roles [40]. A representative sample of residents within a country (under consideration of equal gender and age distribution from urban and rural areas) is asked a set of questions during a specific period. Amongst others, it includes the following gender-related questions [45]:


Cultural beliefs impact gender-related perspectives and society's behavior. Culture links economic, political, and legal views. Thus, a country's laws reflect its culture and are based on society's values.

#### **4.3 Policies**

Even if the development level can push female economic activity, this is only possible in combination with specific policies [38]. Deficient policies are amongst the most pervasive reasons for gender inequalities. Improving them leads to higher female labor participation [46]. In many countries, economic access for women is limited—regulations constraint their participation in specific sectors and their access to financial capital. Unwritten rules, based on tradition and culture, hinder women from entering the job market [1].

However, governments have realized how crucial female empowerment is for economic stability. They invest in childcare facilities and family-friendly policies. Regulations regarding parental leave are another influential factor for a woman's choice or ability to enter the labor market [27]. There is criticism regarding a high rate of FLFP and its negative impact on the fertility rate. History shows that a significant increase in women entering the labor market might lead to a sinking

birth rate. In the long-run, this results in a decrease in population, which negatively impacts the economy [33]. Nonetheless, several pieces of literature claim that fertility does not automatically decrease when FLFP rises provided that there are adequate policies that support family-work balance [46].

Tax policies are a way of boosting the FLFP. When family taxation is applied, the household's secondary earner (often the woman) is disadvantaged. Individual taxation eliminates this tax burden and translates into financial relief for many women. Additionally, the retirement system should be created so that women are not disadvantaged than men, i.e., through lower pensions due to maternity leave [1].

Labour market policies are crucial for the rate of FLFP as well. They are established by the government to provide equality of male and female workers. This includes equal treatment, wages, and promotion opportunities, without any gender-related discrimination [27]. Policies that enable women to be part of the workforce are accepted by government and society to a greater extent than other policies that aim at increasing the workforce, such as raising the retirement age or immigration of workers [46].

Not only governments but also employers can create regulations that foster FLFP, i.e., flexible working hours or a home-office option for parents [27]. Furthermore, quotas are a way to enhance female activity in the workforce. This can be in the form of a minimum percentage of women in leadership, management boards, or political positions. This fosters female empowerment and eliminates gender stereotypes [37].

Divorce laws are another issue. In underdeveloped countries, women have significant disadvantages compared to men in case of a divorce, often losing their assets. This results in a significant financial and social burden and decreases a woman's capital that might be spent on health care or education [38].

Specific policies that are beneficial for society or the economy might also negatively impact women and their labor force activity. For instance, child benefits provided by the government support a family to afford childcare. On the other hand, those benefits lead to a lower FLFP rate since additional income might not be needed. Part-time allows parents to combine work and childcare, whereas, at the same time, part-time employees are more likely to leave the labor force [46]. Part-time workers are often disadvantages compared to their full-time colleagues. They have less access to training or job benefits and receive lower average wages per hour [46]. Regulations that enable extended parental leave might negatively impact female human capital because women's time or education is reduced. Additionally, due to family-friendly solutions, companies might avoid employing female workers, especially for top positions. If firms are forced to provide flexible working hours and maternity leave, it might be more costly for them to hire women than men [27].

A high retirement age also negatively impacts the FLFP rate. If elderlies retire late, they might not care for their grandchildren, which forces mothers (especially those who cannot afford childcare) to stay home and do not enter (or re-enter) the labor market. Welfare-friendly regulations might influence a woman's decision to work, as well. This is especially the case for low-educated women, whose expected wages on the labor market are not high compared to the welfare payments [46]. This again points out the significance of education for women and their choice or ability to be part of the workforce.

#### **4.4 Education**

In his work on human capital, Schultz [21] identified that education and the rate of labor force participation are tightly linked to each other. He underlined the

**111**

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

them in other sectors, given that they have the required knowledge [30].

positive influence of social investment on a country's development. Some claim that in times of globalization and digitalization, the need for human capital decreases. However, the economy needs skilled and educated workers to develop and handle new technologies [47]. Even if technological progress has reduced specific job opportunities for women (i.e., in the service sector), it also creates new chances for

Education positively impacts female economic activity. Well-educated women are more likely to be pulled in by the job market since it would economically not make sense to give up on the additional household income [35]. The education level determines women's wages; in other words, their value in the job market. This influ-

However, access to educational attainment is still limited for many girls and women around the globe. It can be stated that in developing countries, these gender-related gaps in education are more prevalent compared to developed countries [47]. Nevertheless, statistics show that low-income nations are catching up with developed countries regarding female school enrollment. At the primary and secondary school level, girls' enrollment rates are almost at the same level as the

East Asia and Latin America have been outperformers in increasing enrolment rates and literacy levels for both genders and were, therefore, able to boost human capital. However, those two regions' results show different effects of education on

Furthermore, when looking at within-country comparisons, there is often a significant gap between urban and rural areas [49]. In rural areas, many girls do not get the chance to attend secondary school and beyond. The reasons are poor infrastructure and gender-related stereotypes. Many girls are expected to stay home and help in the household, whereas boys can attend school. Another cause is the lack of financial resources within a family [50]. Studies prove that years of schooling often depend on the number of remittances. Especially in developing and emerging countries, this additional form of income is necessary for families to afford their

When it comes to the tertiary educational level, the rate of female students in colleges and universities is usually higher than males' rate. This is not only true for developed but also for emerging or developing countries [27]. There is a significant difference between education levels. Primary and secondary school enrolment rates are higher for boys than for girls across continents. However, at the primary level, the rates are close to gender parity. The tertiary level shows that women are more

Nevertheless, a high female education level does not always lead to a higher FLFP [27]. Even if tertiary education is a decisive factor for women to join the labor force [6], there is often a cultural gender bias about the kind of work women are supposed to do. This limits their opportunities in the job market [38]. In some societies, women's marital status has an impact on their path of education or career. Early marriage decreases females' access to school or work. They are pushed into the stereotype of being a wife and caretaker, and this gender gap lowers the talent pool of a country [36]. Thus, educational attainment is linked to culture to a certain extent. Schools are

Another reason for low FLFP is the lack of work. A country must create jobs that match the opportunities which emerge through education [6]. From the author's perspective, it creates significant problems if a country invests in education but does not get the potential return. If a well-educated workforce cannot enter the job market, they might migrate to other countries and, therefore, will not contribute to

a channel of communicating social values and forming people's attitudes [48].

economic development due to the differing quality of institutions [48].

*DOI: http://dx.doi.org/10.5772/intechopen.97486*

ences their decision to be economically active [27].

ones of boys in an average global comparison [1].

likely to participate in higher education than men [5].

children's education [50].

their home country's economy.

#### *The Influence of Economic Activity of Women in Malaysia and Guatemala... DOI: http://dx.doi.org/10.5772/intechopen.97486*

*Emerging Markets*

immigration of workers [46].

gender stereotypes [37].

women than men [27].

to be part of the workforce.

**4.4 Education**

birth rate. In the long-run, this results in a decrease in population, which negatively impacts the economy [33]. Nonetheless, several pieces of literature claim that fertility does not automatically decrease when FLFP rises provided that there are

Tax policies are a way of boosting the FLFP. When family taxation is applied, the household's secondary earner (often the woman) is disadvantaged. Individual taxation eliminates this tax burden and translates into financial relief for many women. Additionally, the retirement system should be created so that women are not disadvantaged than men, i.e., through lower pensions due to maternity leave [1]. Labour market policies are crucial for the rate of FLFP as well. They are established by the government to provide equality of male and female workers. This includes equal treatment, wages, and promotion opportunities, without any gender-related discrimination [27]. Policies that enable women to be part of the workforce are accepted by government and society to a greater extent than other policies that aim at increasing the workforce, such as raising the retirement age or

Not only governments but also employers can create regulations that foster FLFP, i.e., flexible working hours or a home-office option for parents [27]. Furthermore, quotas are a way to enhance female activity in the workforce. This can be in the form of a minimum percentage of women in leadership, management boards, or political positions. This fosters female empowerment and eliminates

Divorce laws are another issue. In underdeveloped countries, women have significant disadvantages compared to men in case of a divorce, often losing their assets. This results in a significant financial and social burden and decreases a

Specific policies that are beneficial for society or the economy might also negatively impact women and their labor force activity. For instance, child benefits provided by the government support a family to afford childcare. On the other hand, those benefits lead to a lower FLFP rate since additional income might not be needed. Part-time allows parents to combine work and childcare, whereas, at the same time, part-time employees are more likely to leave the labor force [46]. Part-time workers are often disadvantages compared to their full-time colleagues. They have less access to training or job benefits and receive lower average wages per hour [46]. Regulations that enable extended parental leave might negatively impact female human capital because women's time or education is reduced. Additionally, due to family-friendly solutions, companies might avoid employing female workers, especially for top positions. If firms are forced to provide flexible working hours and maternity leave, it might be more costly for them to hire

A high retirement age also negatively impacts the FLFP rate. If elderlies retire late, they might not care for their grandchildren, which forces mothers (especially those who cannot afford childcare) to stay home and do not enter (or re-enter) the labor market. Welfare-friendly regulations might influence a woman's decision to work, as well. This is especially the case for low-educated women, whose expected wages on the labor market are not high compared to the welfare payments [46]. This again points out the significance of education for women and their choice or ability

In his work on human capital, Schultz [21] identified that education and the rate of labor force participation are tightly linked to each other. He underlined the

woman's capital that might be spent on health care or education [38].

adequate policies that support family-work balance [46].

**110**

positive influence of social investment on a country's development. Some claim that in times of globalization and digitalization, the need for human capital decreases. However, the economy needs skilled and educated workers to develop and handle new technologies [47]. Even if technological progress has reduced specific job opportunities for women (i.e., in the service sector), it also creates new chances for them in other sectors, given that they have the required knowledge [30].

Education positively impacts female economic activity. Well-educated women are more likely to be pulled in by the job market since it would economically not make sense to give up on the additional household income [35]. The education level determines women's wages; in other words, their value in the job market. This influences their decision to be economically active [27].

However, access to educational attainment is still limited for many girls and women around the globe. It can be stated that in developing countries, these gender-related gaps in education are more prevalent compared to developed countries [47]. Nevertheless, statistics show that low-income nations are catching up with developed countries regarding female school enrollment. At the primary and secondary school level, girls' enrollment rates are almost at the same level as the ones of boys in an average global comparison [1].

East Asia and Latin America have been outperformers in increasing enrolment rates and literacy levels for both genders and were, therefore, able to boost human capital. However, those two regions' results show different effects of education on economic development due to the differing quality of institutions [48].

Furthermore, when looking at within-country comparisons, there is often a significant gap between urban and rural areas [49]. In rural areas, many girls do not get the chance to attend secondary school and beyond. The reasons are poor infrastructure and gender-related stereotypes. Many girls are expected to stay home and help in the household, whereas boys can attend school. Another cause is the lack of financial resources within a family [50]. Studies prove that years of schooling often depend on the number of remittances. Especially in developing and emerging countries, this additional form of income is necessary for families to afford their children's education [50].

When it comes to the tertiary educational level, the rate of female students in colleges and universities is usually higher than males' rate. This is not only true for developed but also for emerging or developing countries [27]. There is a significant difference between education levels. Primary and secondary school enrolment rates are higher for boys than for girls across continents. However, at the primary level, the rates are close to gender parity. The tertiary level shows that women are more likely to participate in higher education than men [5].

Nevertheless, a high female education level does not always lead to a higher FLFP [27]. Even if tertiary education is a decisive factor for women to join the labor force [6], there is often a cultural gender bias about the kind of work women are supposed to do. This limits their opportunities in the job market [38]. In some societies, women's marital status has an impact on their path of education or career. Early marriage decreases females' access to school or work. They are pushed into the stereotype of being a wife and caretaker, and this gender gap lowers the talent pool of a country [36]. Thus, educational attainment is linked to culture to a certain extent. Schools are a channel of communicating social values and forming people's attitudes [48].

Another reason for low FLFP is the lack of work. A country must create jobs that match the opportunities which emerge through education [6]. From the author's perspective, it creates significant problems if a country invests in education but does not get the potential return. If a well-educated workforce cannot enter the job market, they might migrate to other countries and, therefore, will not contribute to their home country's economy.

Fostering entrepreneurship is another way of creating new job opportunities for women. This can be done by providing female entrepreneurs with technical and administrative assistance, capital, information, and the necessary network [51]. Entrepreneurial activity of women can be considered a response to gender discrimination and is crucial for economic development globally [52].

The increase in workforce participation positively impacts GDP per capita. Several economic theories prove that the enhancement of human capital influences the long-term development of a nation. Especially countries with a low rate of FLFP have lots of unused workforce potential. Developing markets can grow further if they increase women's chances to enter the labor market. However, this requires investment in education, improvement of policies, and elimination of gender bias. From the author's point of view, it poses a significant problem for a country if jobs are not made available for women, especially for well-educated women. Individuals and governments invest in knowledge but do not get the full potential return.

#### **5. Conclusion**

This chapter has demonstrated how the level of development, culture, policies, and education can directly or indirectly shape an emerging market's economic growth.

Increasing female human capital and raising women's participation in the workforce leads to a rise in economic growth and overall development in Emerging markets. In order to achieve that, Emerging markets must (a) overcome gender inequalities, (b) properly enforce female-related regulations, (c) and invest in human development. This points out the relevance of a country's level of development, culture, education, female-related laws, and their influence on women's decision or ability to work. In the authors' point of view, the following actions are recommended:


**113**

migration.

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

• Gender bias, power distance, and patriarchal attitudes must be eliminated to overcome inequality, especially in male-dominated industries and remote areas. This can be done through the means of education and female role models

• School enrolment in low-developed emerging markets for girls on primary and secondary levels should be increased. Female students should be pushed into a diversity of study fields. Tuition fees must be made affordable for public and

The findings of this research meet the authors' expectation and assumption that women's economic activity impacts national development in emerging markets to a great extent. An increase in the FLFP rate would translate into economic prosperity. The problem statement must be stated that women only create 37% of the global GDP even though they make up half of the world's population. The authors sought to address this issue by raising awareness for this complex topic and underline the

In providing an insight into this gender-related issue within emerging markets, the authors attempted to reduce the research gap. Furthermore, the authors paid particular attention to the effects of culture and education. This is due to prior researchers claiming that there is a lack in literature when it comes to the impact of

Economic development in Emerging markets requires investment in education, improvement of policies, and gender bias elimination. From the authors' point of view, a country must offer jobs for well-educated women and promote female entrepreneurship. Otherwise, valuable workforce potential might be lost due to

Besides, a country should not be dependent on a high amount of remittances. A country should create development within its economy and foster its human capital in the long-term. This corresponds to well-known economic growth theories and

The research was conducted with some limitations. The authors were dependent on meaningful and reliable secondary sources. However, the authors found during the process that certain in-depth data was not available, especially in case of multicultural countries with several ethnic groups. It was not possible to provide a deeper

Additionally, when it comes to the impact of education on labour force participation, statistical data usually only includes primary, secondary, and tertiary education. This means that the effects of job trainings and life-long learning on economic activity can hardly be traced by a researcher. Therefore, the authors only examined primary, secondary, and tertiary educational levels in the course of analyzing the influence that education has on the rate of female workforce participation.

Furthermore, the persistent Gender Data Gap has led to difficulties in this research. The authors identified that a lack in literature decreases the chances to examine the reasons for gender disparities across the globe. In numerous scientific articles and publications, the hurdles for women in the labour market are discussed. However, the sources lack in adequate recommendations how the gender disparities can be minimized in

In order to better understand the implications of these problems, future studies could address the difference in culture and ethnicity within the countries. This would contribute to the realization of the impact of cultural attitudes on genderrelated perspectives to a greater extent. Additionally, future research might explain the gap between rural and urban areas when it comes to gender-roles,

human development concepts mentioned throughout this chapter.

practice and how the rate of FLFP can be increased in emerging markets.

insight into statistics for all the different groups of society.

private schools, i.e., by offering scholarships for female students.

importance of women within the concept of development.

these two factors on global gender disparities.

*DOI: http://dx.doi.org/10.5772/intechopen.97486*

who empower other women.

*The Influence of Economic Activity of Women in Malaysia and Guatemala... DOI: http://dx.doi.org/10.5772/intechopen.97486*

*Emerging Markets*

**5. Conclusion**

recommended:

compliance policy.

Fostering entrepreneurship is another way of creating new job opportunities for women. This can be done by providing female entrepreneurs with technical and administrative assistance, capital, information, and the necessary network [51]. Entrepreneurial activity of women can be considered a response to gender discrimi-

The increase in workforce participation positively impacts GDP per capita. Several economic theories prove that the enhancement of human capital influences the long-term development of a nation. Especially countries with a low rate of FLFP have lots of unused workforce potential. Developing markets can grow further if they increase women's chances to enter the labor market. However, this requires investment in education, improvement of policies, and elimination of gender bias. From the author's point of view, it poses a significant problem for a country if jobs are not made available for women, especially for well-educated women. Individuals and governments invest in knowledge but do not get the full potential return.

This chapter has demonstrated how the level of development, culture, policies, and education can directly or indirectly shape an emerging market's economic growth. Increasing female human capital and raising women's participation in the workforce leads to a rise in economic growth and overall development in Emerging markets. In order to achieve that, Emerging markets must (a) overcome gender inequalities, (b) properly enforce female-related regulations, (c) and invest in human development. This points out the relevance of a country's level of development, culture, education, female-related laws, and their influence on women's decision or ability to work. In the authors' point of view, the following actions are

• Based on these conclusions, practitioners should consider raising awareness about the importance of the female labor force in emerging markets and their

• Governments must try to control and ban informal work. Furthermore, female-related policies and anti-discrimination laws must be adequately enforced, and penalties should be established in case of violation.

• Political empowerment and job opportunities must be raised. The binding of female quotas should be introduced in politics and companies' management. The government could offer tax reductions to companies to promote these female quotas. Firms should be forced to integrate gender equality into their

• A method to overcome a lack in the job market is to foster female entrepreneurship. This could be accomplished by offering capital, network, and assistance to the female population. Additionally, there should be a ban on complex or

• In order to urge more mothers into the labor market, infrastructure in remote areas must be improved. Besides, formal childcare facilities must be established and made available for these working mothers. Foreign investment is necessary for this issue to be resolved. Investors should be actively involved, i.e., by promoting the high rate of a young workforce the country will have in the future.

impacts on economic growth and overall development.

bureaucratic steps that come with starting a business.

nation and is crucial for economic development globally [52].

**112**


The findings of this research meet the authors' expectation and assumption that women's economic activity impacts national development in emerging markets to a great extent. An increase in the FLFP rate would translate into economic prosperity.

The problem statement must be stated that women only create 37% of the global GDP even though they make up half of the world's population. The authors sought to address this issue by raising awareness for this complex topic and underline the importance of women within the concept of development.

In providing an insight into this gender-related issue within emerging markets, the authors attempted to reduce the research gap. Furthermore, the authors paid particular attention to the effects of culture and education. This is due to prior researchers claiming that there is a lack in literature when it comes to the impact of these two factors on global gender disparities.

Economic development in Emerging markets requires investment in education, improvement of policies, and gender bias elimination. From the authors' point of view, a country must offer jobs for well-educated women and promote female entrepreneurship. Otherwise, valuable workforce potential might be lost due to migration.

Besides, a country should not be dependent on a high amount of remittances. A country should create development within its economy and foster its human capital in the long-term. This corresponds to well-known economic growth theories and human development concepts mentioned throughout this chapter.

The research was conducted with some limitations. The authors were dependent on meaningful and reliable secondary sources. However, the authors found during the process that certain in-depth data was not available, especially in case of multicultural countries with several ethnic groups. It was not possible to provide a deeper insight into statistics for all the different groups of society.

Additionally, when it comes to the impact of education on labour force participation, statistical data usually only includes primary, secondary, and tertiary education. This means that the effects of job trainings and life-long learning on economic activity can hardly be traced by a researcher. Therefore, the authors only examined primary, secondary, and tertiary educational levels in the course of analyzing the influence that education has on the rate of female workforce participation.

Furthermore, the persistent Gender Data Gap has led to difficulties in this research. The authors identified that a lack in literature decreases the chances to examine the reasons for gender disparities across the globe. In numerous scientific articles and publications, the hurdles for women in the labour market are discussed. However, the sources lack in adequate recommendations how the gender disparities can be minimized in practice and how the rate of FLFP can be increased in emerging markets.

In order to better understand the implications of these problems, future studies could address the difference in culture and ethnicity within the countries. This would contribute to the realization of the impact of cultural attitudes on genderrelated perspectives to a greater extent. Additionally, future research might explain the gap between rural and urban areas when it comes to gender-roles,

education, and workforce participation. Supplementary research is needed to determine the exact relationship between GDP and women's economic activity in emerging markets.

Besides, future research could study the effects of education, culture, regulations, and political empowerment on female labor force participation to a greater extent. The analysis of these factors from a quantitative viewpoint might provide a more profound comprehension of their correlation or causation. The authors recommend conducting a multiple-case analysis, including more than two cases for future research, to provide an enhanced comparison of the results.

#### **Author details**

Verena Habrich1 , Vito Bobek1 \* and Tatjana Horvat<sup>2</sup>

1 University of Applied Sciences FH Joanneum, Graz, Austria

2 Faculty of Management, University of Primorska, Koper, Slovenia

\*Address all correspondence to: vito.bobek@fh-joanneum.at

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**115**

*The Influence of Economic Activity of Women in Malaysia and Guatemala...*

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**Author details**

Verena Habrich1

, Vito Bobek1

provided the original work is properly cited.

1 University of Applied Sciences FH Joanneum, Graz, Austria

\*Address all correspondence to: vito.bobek@fh-joanneum.at

2 Faculty of Management, University of Primorska, Koper, Slovenia

\* and Tatjana Horvat<sup>2</sup>

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

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[29] Alba, A. Foreword. Theoretical

perspectives on gender and development. In J. L. Parpart, P. Connelly, & E. Barriteau, editors. Ottawa: International Development Research Centre; 2000. p. v–vii.

[30] Momsen, J. H. *Gender and development*. Abington: Routledge; 2004.

[31] The World Bank. *Gender* [Text/ HTML]. The World Bank. 2020.

org/en/topic/gender [Accessed:

[32] Connelly, M. P., Murray Li, T., MacDonald, M., & Parpart, J. L. Feminism and Development:

Theoretical Perspectives. Theoretical

perspectives on gender and

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Available from: https://www.worldbank.

perspectives on gender and development. In J. L. Parpart, P. Connelly, & E. Barriteau, editors. Ottawa: International Development Research Centre; 2000*.* p. 1-22.

27.3.2019]

izawol.289

www.mckinsey.com/businessfunctions/strategy-and-corporate-

five-forces-reshaping-the-globaleconomy-mckinsey-global-surveyresults [Accessed: 3. 3. 2019]

[18] Garton, E. The Case for Investing More in People. Bain & Company. 2017. Available from: https:/www.bain.com/ insights/the-case-for-investing-morein-people-hbr/ [Accessed: 17.3.2019]

[19] Barro, R. J., & Sala-i-Martin, X. Economic growth. Cambridge: MIT

[20] Blanchard, O., & Johnson, D. R. *MACROECONOMICS* (Seventh Edition). London: Pearson; 2017.

[21] Schultz, T. W. *Investment in Human Capital.* The American Economic Review. 1961; 51 (1): 1-17. Available

28196103%2951%3A1%3C1%3AIIHC%3 E2.0.CO%3B2-4 [Accessed: 17.4.2019]

[22] Pieterse, J. N. Development theory: Deconstructions/reconstructions (2nd ed). Thousand Oaks: Sage Publications;

[23] Becker, G. S. Human capital: A theoretical and empirical analysis, with special reference to education (Fith edition ed). Chicago: The University of

[24] Inglehart, R., & Welzel, C. Modernization, Cultural Change, and Democracy: The Human Development Sequence*.* Cambridge: Cambridge University Press; 2005. http://www. SLQ.eblib.com.au/patron/FullRecord. aspx?p=320947 [Accessed: 18.3.2019]

[25] Balestra, C., Llena-Nozal, A., Murtin, F., Tosetto, E., & Arnaud, B.

Chicago Press; 2005.

from: http://links.jstor.org/ sici?sici=0002-8282%

finance/our-insights/

Press; 2004.

**116**

2010.

[33] Duiker, W. J. *Contemporary world history* (5th ed). Wadsworth: Cengage Learning; 2010.

[34] Reddock, R. Why Gender? Why Development? Theoretical perspectives on gender and development In J. L. Parpart, M. P. Connelly, & V. E. Barriteau, editors. Ottawa: International Development Research Centre; 2000. p. 23-50.

[35] Walden, M. L. *Smart economics: Commonsense answers to 50 questions about government, taxes, business, and households*. Santa Barbara: Praeger Publishing; 2005.

[36] OECD. *Atlas of gender and development: How social norms affect gender equality in non-OECD countries*. Paris: Organization for Economic Co-operation and Development; 2010.

[37] Gonzales, C., Jain-Chandra, S., Kochhar, K., & Newiak, M. Fair Play: More Equal Laws Boost Female Labor Force Participation. International Monetary Fund. 2015; 15 (2). Available from: https://doi.org/10.5089/978149 8354424.006 [Accessed: 28.3.2019]

[38] Duflo, E. Women's empowerment and economic development. NBER Working Paper Series No. 17702. Cambridge: National Bureau of Economic Research; 2011. Available from: http://www.nber.org/papers/ w17702 [Accessed: 1.3.2019]

[39] Morikawa, Y. The Opportunities and Challenges for female labor force participation in Morocco. Working Paper No. 86; Global Economy and Development. Washington: The Brookings Institution; 2015.

[40] Alesina, A., & Giuliano, P. Family Ties. In P. Aghion & S. N. Durlauf,

editors. *Handbook of economic growth*. Amsterdam: Elsevier; 2014. p. 177-215.

[41] Chase, O. G. *Law, culture, and ritual: Disputing systems in a crosscultural context*. New York: New York University Press; 2005.

[42] *Hofstede Insights—Country Comparison, Malaysia, and Guatemala*. Helsinki: Hofstede Insights. 2020. Available from: https://www.hofstedeinsights.com/country-comparison/ [Accessed: 15.2.2019]

[43] Glick, P. Ambivalent sexism, power distance, and gender inequality across cultures. In S. Guimond, editors. *Social comparison and social psychology: Understanding cognition, intergroup relations, and culture.* Cambridge*:* Cambridge University Press; 2006. p. 283-302.

[44] Carl, D., Gupta, V., & Javidan, M. Power Distance. In R. J. House, editors. *Culture, leadership, and organizations: The GLOBE study of 62 societies.* Thousand Oaks: Sage Publications; 2004. p. 513-563.

[45] WVS. *WVS Database*. Vienna: World Values Survey. Available from: http://www.worldvaluessurvey.org/ WVSOnline.jsp [Accessed: 30. 4. 2020]

[46] Jaumotte, F. *Labour Force Participation of Women: Empirical Evidence on the role of policy and other determinants in OECD countries.* Paris: OECD Economic Studies; 2003. p. 52-108.

[47] ILO. *Key indicators of the labor market* (9th edition). Geneve: International Labour Office; 2016.

[48] Basu, A., & King, E. M. Does education promote Growth and Democracy? In L. Whitehead, editors. *Emerging Market Democracies—East Asia and Latin America.* Baltimore: The Johns Hopkins University Press; 2002. p. 152-181.

[49] The World Bank (Ed.). *Gender equality and development*. Washington: The World Bank; 2012.

[50] Bowen, D. S., & Leap Miller, A. Education, leadership, and conservation: Empowering young Q'eqchi' women in Guatemala. International Journal of Educational Development. 2018; 59: 28-34.

[51] Arif, I., Raza, S. A., Ivkovi, & Suleman, M. T. *The Role of Remittances in the Development of Higher Education: Evidence from Top Remittance Receiving Countries*. Social Indicator Research; 2019.

[52] IEDC. *The Power of Knowledge and Leadership* - Economic Development Reference Guide. Washington: The International Economic Development Council; 2015.

**119**

**Chapter 7**

*Gonca Atici*

**1. Introduction**

measures to their citizens.

**Abstract**

Digital and Digitalized Economy

Covid-19 still pressures global economies. Pandemic has seriously damaged both macro and micro indicators of countries. Economies try to accelerate their efforts towards a digital new normal in order to preserve their activities. Decreasing trust in monetary authorities and tools as a side effect of global financial crisis, decreasing demand for cash as a precaution towards virus, increasing demand for fast payment, increasing search for yield, search for a trustless, cost saving, peer to peer financial system accelerates the progress of creative destructors. The way to leapfrog developed countries requires benefiting more from digitalization. Governments, central banks, financial institutions and corporations that are aware of this swift transformation are in an effort to adapt the system to take the lead. This study aims to explore leading game changers, potential use cases and their potential

**Keywords:** cryptocurrencies, blockchain, distributed ledger technologies, ICTs,

World economies are struggling with an ambiguous challenge, Covid-19, till the first quarter of 2020. Governments have locked down a majority of their economic activities in order to control and prevent the spread of virus in their economies. Countries have closed their borders and minimized their trade activities as precautions. They have simultaneously implemented several quarantine

In a few months, pandemic has brought the global economy to a catastrophic halt by introducing a wall between supply and demand. Still, world economies try to fight this invisible enemy while trying to adapt new conditions under several

Uncertainty, which is the basic outcome of the pandemic is still a crucial problem. According to World Uncertainty Index [1], global uncertainty has increased significantly since 2012 for all 143 countries covered by the Index. Though it has unwinded by the second quarter of 2020, after a sky-high reached by the first quarter, it seems to stay as a serious threat for global economies for the coming quarters unless a

Almost every sector has affected from Covid-19 negatively. In order to support economies on the fiscal side, governments have implemented several measures such as subsidizing corporations, forbidding layoffs, deferring debt and tax payments for a specific period. Simultaneously central banks employed

in EMs: A Focus on Turkey

impacts on EMs with a special focus on Turkey.

limitations which is referred to as "new normal".

widely used effective treatment and/or a vaccine is found.

digital economy, digitalization, Covid-19, EMs, Turkey

#### **Chapter 7**

*Emerging Markets*

The World Bank; 2012.

Education, leadership, and conservation: Empowering young Q'eqchi' women in Guatemala. International Journal of Educational Development. 2018; 59: 28-34.

[49] The World Bank (Ed.). *Gender equality and development*. Washington:

[50] Bowen, D. S., & Leap Miller, A.

[51] Arif, I., Raza, S. A., Ivkovi, & Suleman, M. T. *The Role of Remittances in the Development of Higher Education: Evidence from Top Remittance Receiving* 

[52] IEDC. *The Power of Knowledge and Leadership* - Economic Development Reference Guide. Washington: The International Economic Development

*Countries*. Social Indicator

Research; 2019.

Council; 2015.

**118**

## Digital and Digitalized Economy in EMs: A Focus on Turkey

*Gonca Atici*

#### **Abstract**

Covid-19 still pressures global economies. Pandemic has seriously damaged both macro and micro indicators of countries. Economies try to accelerate their efforts towards a digital new normal in order to preserve their activities. Decreasing trust in monetary authorities and tools as a side effect of global financial crisis, decreasing demand for cash as a precaution towards virus, increasing demand for fast payment, increasing search for yield, search for a trustless, cost saving, peer to peer financial system accelerates the progress of creative destructors. The way to leapfrog developed countries requires benefiting more from digitalization. Governments, central banks, financial institutions and corporations that are aware of this swift transformation are in an effort to adapt the system to take the lead. This study aims to explore leading game changers, potential use cases and their potential impacts on EMs with a special focus on Turkey.

**Keywords:** cryptocurrencies, blockchain, distributed ledger technologies, ICTs, digital economy, digitalization, Covid-19, EMs, Turkey

#### **1. Introduction**

World economies are struggling with an ambiguous challenge, Covid-19, till the first quarter of 2020. Governments have locked down a majority of their economic activities in order to control and prevent the spread of virus in their economies. Countries have closed their borders and minimized their trade activities as precautions. They have simultaneously implemented several quarantine measures to their citizens.

In a few months, pandemic has brought the global economy to a catastrophic halt by introducing a wall between supply and demand. Still, world economies try to fight this invisible enemy while trying to adapt new conditions under several limitations which is referred to as "new normal".

Uncertainty, which is the basic outcome of the pandemic is still a crucial problem. According to World Uncertainty Index [1], global uncertainty has increased significantly since 2012 for all 143 countries covered by the Index. Though it has unwinded by the second quarter of 2020, after a sky-high reached by the first quarter, it seems to stay as a serious threat for global economies for the coming quarters unless a widely used effective treatment and/or a vaccine is found.

Almost every sector has affected from Covid-19 negatively. In order to support economies on the fiscal side, governments have implemented several measures such as subsidizing corporations, forbidding layoffs, deferring debt and tax payments for a specific period. Simultaneously central banks employed conventional and nonconventional policies to prevent spillover effect of the crisis from real sector to the financial sector. For this reason, United States Fed has continued monetary easing and reached a balance sheet of almost 7 trillion dollars as of August 2020, from a level of almost 4. 3 trillion dollars of March 2020. Likewise, European Central Bank has announced a €1,350 billion pandemic emergency purchase programme (PEPP) to lower borrowing cost and increase lending in the euro zone [2].

Physical distancing and testing, tracing and isolating are the main instruments to fight the spread of the virus. However, these instruments create additional costs to economies. While waiting for good news, OECD published an economic outlook covering a potential single-hit and a double-hit scenario for the coming period. According to both scenarios, global economic activity seems not to turn back to pre-Covid-19 level in the short-run. Moreover, by the end of 2021, loss of income is expected to exceed that of any previous recessions over the last 100 years excluding wartimes. Restrictions in terms of mobilization, production, trade and investment have started to re-rotate the globalized world economies towards nationalization and reshape the way of doing business.

EMs deserve a closer look since they have several acute problems that have recurred during this period. Declining commodity prices, capital outflows, weaker consumer demand, decreasing investment, import and export, decreasing resources to fight Covid-19, decreasing consumer and business confidence, increasing government and corporate debt ratios and eventually, as a reflection of all these factors negative or low growth rates are the major challenges that EMs should confront.

During lockdowns some corporations benefit from teleworking which has made employment considerably sustainable especially for some sectors. For some others, lockdowns have deteriorated inequality among workers especially in EMs. Governments have tried to find solutions to the problem in the short-run with limited resources which seems impossible to sustain in the medium and long run. Monetary and fiscal policies are coordinated carefully as they would harm macro indicators more which are already fragile for some time.

Economic agents use alternative ways to fulfill their responsibilities such as teleworking, distance education, online meetings, increased e-commerce and telehealth. Since hygiene has turned out to be a very critical factor, countries like China has started to quarantine paper money as a way to fight the virus. Additionally, people have opted to use less money but more online banking to carry out their financial transactions. Some of the central banks like Central Bank of China have accelerated their preparations to shift digital money as this is a good time for rerailing. Observing the decreasing demand for cash, European Central Bank put digital money on its agenda and try to make a decision whether it is time to introduce digital Euro as a complement to cash in order to keep up with the digital transformation [3].

During the past two quarters with Covid-19, corporations have discovered that works can be done without being in an office. Moreover, they have seen that there is a crucial saving dimension of teleworking in terms of decreasing general expenditures and several cost items. Corporate meetings are started to be held online. Periodical meetings in terms of planning, budget, marketing, monitoring etc. have started to be held as digital meetings. Financial institutions have confronted with the necessity of further digitalization in lending activities. Manufacturing and trade finance corporations have found that supply-chain could be vulnerable as it depends overwhelmingly on human force. So, they have realized the importance of moving activities to digital which can make them more independent but which also requires

**121**

as stablecoins.

*Digital and Digitalized Economy in EMs: A Focus on Turkey*

to use digitalized economy to see the big picture.

behaviors of strategic decision maker units.

considerable amount of investment to technology. Governments have found that there are several areas that could be moved to digital for non-stop functioning of

In brief, we can state that in today's fast-moving world there is no reversal to pre-Covid-19 environment so the only way is to adapt "digital new normal". The more countries shift their activities to digital the more they will perform without interruption. It should be expected that there are pros and cons of this change. In this study, we will try to shed light to game changers such as cryptocurrency, blockchain and distributed ledger technology. We try to explore impacts of this game-changers on the economic development of EMs with a special focus on Turkey. Study proceeds as follows: Section 2 presents digital economy. Section 3 introduces blockchain implementations in business. Section 4 analyzes literature on digitalization and growth nexus. Section 5 focuses on Turkey. Concluding remarks are presented

Digital economy refers to a broad range of economic activities that use digitized information as key factors of production. Interconnectedness between individuals, businesses, data, processes and machines that arise from internet, mobile technology and internet of things (IoT) compose the backbone of digital economy [4]. Bukht and Heeks [5] highlight several definitions of digital economy as a reflection of the times and practices that this concept has emerged. They define digital economy as the part of economic output derived only from digital technologies with a business model based on digital goods and services. Due to the measurement problem of digital economy they suggest to use digitalized economy on a widest scale, which comprise use of Information and Telecommunication Technologies (ICTs) in all economic fields. In the study, when it's difficult to separate these two concepts we opt

Digitalized economy has started to change traditional approaches and processes in terms of business structures, firm interactions, consumer behaviors, information and goods and services especially since the onset of industry 4.0. which refers to technological transformation from embedded systems to cyber physical systems. Bitcoin is one of the financial instruments of the digital economy. It is a private, decentralized digital currency. It has first developed in 2008 and has become operational by 2009 [6]. Bitcoin is not backed by a government decree. There is no authority that is in charge of its supply. Bitcoin has a network that consists of computers covering the entire system. As a section of data in a massive database, it is just like a computer file that is assigned to a certain owner's digital address. It operates using peer-to-peer networking that eliminates the intermediary so that the exchange can be realized directly between parties. Users have digital wallets so they can trade between themselves. System employs cryptography to maintain the anonymity of its users to secure the transactions and to control the creation of additional units of currency, namely the "cryptocurrency" [7]. Game theory is another factor that ensures the security of the process by mathematically modeling

There are thousands of cryptocurrencies with different marketcaps. Yet, majority of cryptocurrencies are almost clones of bitcoin and referred to as 'altcoins'. On the other side, there are a number of cryptocurrencies that share common features of bitcoin but also have innovative features that provide substantial differences [8] such

*DOI: http://dx.doi.org/10.5772/intechopen.94494*

economies under crisis environments.

in Section 6.

**2. Digital economy**

#### *Digital and Digitalized Economy in EMs: A Focus on Turkey DOI: http://dx.doi.org/10.5772/intechopen.94494*

considerable amount of investment to technology. Governments have found that there are several areas that could be moved to digital for non-stop functioning of economies under crisis environments.

In brief, we can state that in today's fast-moving world there is no reversal to pre-Covid-19 environment so the only way is to adapt "digital new normal". The more countries shift their activities to digital the more they will perform without interruption. It should be expected that there are pros and cons of this change. In this study, we will try to shed light to game changers such as cryptocurrency, blockchain and distributed ledger technology. We try to explore impacts of this game-changers on the economic development of EMs with a special focus on Turkey. Study proceeds as follows: Section 2 presents digital economy. Section 3 introduces blockchain implementations in business. Section 4 analyzes literature on digitalization and growth nexus. Section 5 focuses on Turkey. Concluding remarks are presented in Section 6.

#### **2. Digital economy**

*Emerging Markets*

lending in the euro zone [2].

and reshape the way of doing business.

should confront.

digital transformation [3].

conventional and nonconventional policies to prevent spillover effect of the crisis from real sector to the financial sector. For this reason, United States Fed has continued monetary easing and reached a balance sheet of almost 7 trillion dollars as of August 2020, from a level of almost 4. 3 trillion dollars of March 2020. Likewise, European Central Bank has announced a €1,350 billion pandemic emergency purchase programme (PEPP) to lower borrowing cost and increase

Physical distancing and testing, tracing and isolating are the main instruments to fight the spread of the virus. However, these instruments create additional costs to economies. While waiting for good news, OECD published an economic outlook covering a potential single-hit and a double-hit scenario for the coming period. According to both scenarios, global economic activity seems not to turn back to pre-Covid-19 level in the short-run. Moreover, by the end of 2021, loss of income is expected to exceed that of any previous recessions over the last 100 years excluding wartimes. Restrictions in terms of mobilization, production, trade and investment have started to re-rotate the globalized world economies towards nationalization

EMs deserve a closer look since they have several acute problems that have recurred during this period. Declining commodity prices, capital outflows, weaker

During lockdowns some corporations benefit from teleworking which has made employment considerably sustainable especially for some sectors. For some others, lockdowns have deteriorated inequality among workers especially in EMs. Governments have tried to find solutions to the problem in the short-run with limited resources which seems impossible to sustain in the medium and long run. Monetary and fiscal policies are coordinated carefully as they would harm macro

Economic agents use alternative ways to fulfill their responsibilities such as teleworking, distance education, online meetings, increased e-commerce and telehealth. Since hygiene has turned out to be a very critical factor, countries like China has started to quarantine paper money as a way to fight the virus. Additionally, people have opted to use less money but more online banking to carry out their financial transactions. Some of the central banks like Central Bank of China have accelerated their preparations to shift digital money as this is a good time for rerailing. Observing the decreasing demand for cash, European Central Bank put digital money on its agenda and try to make a decision whether it is time to introduce digital Euro as a complement to cash in order to keep up with the

During the past two quarters with Covid-19, corporations have discovered that works can be done without being in an office. Moreover, they have seen that there is a crucial saving dimension of teleworking in terms of decreasing general expenditures and several cost items. Corporate meetings are started to be held online. Periodical meetings in terms of planning, budget, marketing, monitoring etc. have started to be held as digital meetings. Financial institutions have confronted with the necessity of further digitalization in lending activities. Manufacturing and trade finance corporations have found that supply-chain could be vulnerable as it depends overwhelmingly on human force. So, they have realized the importance of moving activities to digital which can make them more independent but which also requires

indicators more which are already fragile for some time.

consumer demand, decreasing investment, import and export, decreasing resources to fight Covid-19, decreasing consumer and business confidence, increasing government and corporate debt ratios and eventually, as a reflection of all these factors negative or low growth rates are the major challenges that EMs

**120**

Digital economy refers to a broad range of economic activities that use digitized information as key factors of production. Interconnectedness between individuals, businesses, data, processes and machines that arise from internet, mobile technology and internet of things (IoT) compose the backbone of digital economy [4]. Bukht and Heeks [5] highlight several definitions of digital economy as a reflection of the times and practices that this concept has emerged. They define digital economy as the part of economic output derived only from digital technologies with a business model based on digital goods and services. Due to the measurement problem of digital economy they suggest to use digitalized economy on a widest scale, which comprise use of Information and Telecommunication Technologies (ICTs) in all economic fields. In the study, when it's difficult to separate these two concepts we opt to use digitalized economy to see the big picture.

Digitalized economy has started to change traditional approaches and processes in terms of business structures, firm interactions, consumer behaviors, information and goods and services especially since the onset of industry 4.0. which refers to technological transformation from embedded systems to cyber physical systems. Bitcoin is one of the financial instruments of the digital economy. It is a private, decentralized digital currency. It has first developed in 2008 and has become operational by 2009 [6]. Bitcoin is not backed by a government decree. There is no authority that is in charge of its supply. Bitcoin has a network that consists of computers covering the entire system. As a section of data in a massive database, it is just like a computer file that is assigned to a certain owner's digital address. It operates using peer-to-peer networking that eliminates the intermediary so that the exchange can be realized directly between parties. Users have digital wallets so they can trade between themselves. System employs cryptography to maintain the anonymity of its users to secure the transactions and to control the creation of additional units of currency, namely the "cryptocurrency" [7]. Game theory is another factor that ensures the security of the process by mathematically modeling behaviors of strategic decision maker units.

There are thousands of cryptocurrencies with different marketcaps. Yet, majority of cryptocurrencies are almost clones of bitcoin and referred to as 'altcoins'. On the other side, there are a number of cryptocurrencies that share common features of bitcoin but also have innovative features that provide substantial differences [8] such as stablecoins.

#### *Emerging Markets*

In one sense, blockchain is the underlying technology of bitcoin. We can call it as a public ledger that keeps the history of each transaction. Blockchain is sustained by participating computers which verify transactions in chunks called "blocks" and relay them across the network [9]. Validation process relies on data being encrypted using algorithmic hashing. Encrypted value is a series of numbers and letters that does not share similarity with the original data, and is called "hash". Cryptocurrency mining involves working with this hash. Proof-of-work is a distributed consensus algorithm that Bitcoin's blockchain network participants use to agree on the contents of a blockchain to create and hash blocks together. When the computer in a network employs proof-of-work for mining, it needs to solve a challenging mathematical problem. If the computer which is also named as node, successfully solves the problem, it must then be verified by other nodes in the network. Following this step, the transaction is deemed to be verified and completed, and the miner that solved the problem is rewarded by bitcoins. Mining requires a considerable computational power so to ease this difficulty, another consensus algorithm named proof-of-stake is employed by validators for minting but not for mining to determine valid transactions. In proof of stake, cryptocurrency amount in wallets are crucial to create blocks. The amount of cryptocurrency in wallets determines power of validators and the shares of validators within the system. So, cryptocurrencies are held not to make transactions but to get the right to create blocks in the system.

Proof of work and proof of stake are the leading consensus algorithms that are used. Yet, there are almost 80 other consensus mechanisms with different features such as proof of space, proof of burn and proof of activity. Most important functions of consensus algorithms are their prevention of double blockchain creation and double expenditure.

Blockchain, being the first and most popular example of distributed ledger technology is also a subsection of distributed database. Major difference between blockchain and distributed ledger technology is the way they form data.

Blockchain has some characteristics such as decentralization, persistency, anonymity and auditability. Being decentralized, blockchain does not require a third party. As a persistent system it is almost impossible to delete a transaction from the system when it is added to the chain. Besides, system quickly detects invalid transactions. Though there is no 100% anonymity, users interact via their generated addresses. If it is required, system may enable tracking transactions, as each transaction is dependent to one another [10].

There are different blockchain systems that can be listed as; public blockchain, private blockchain and consortium blockchain. In public blockchain, all records are open to public and anyone could join the consensus process. Consortium blockchain enables participation of just a group of nodes in the consensus process. Finally, private blockchain allows only nodes of a specific organization to participate the consensus mechanism [11].

Public blockchain attract interest of communities and users since it is open to everyone's participation. Though, consortium blockchain is generally used for businesses [10].

#### **3. Blockchain implementations in business**

Like agricultural revolution, industrial revolution was also backed by technology which enabled economic agents to produce more efficiently and made manufacturers more productive.

**123**

*Digital and Digitalized Economy in EMs: A Focus on Turkey*

government, health, science, agriculture and culture [12].

Transformation of industrial production can be divided into periods. The first period, where machines were operated by power of steam and water instead of human labor was defined as Industry 1.0. The second period where electricity, motors and invention of assembly line enabled producers to produce more efficiently was defined as Industry 2.0. Industry 3.0. was backed by computers, electronics so by automated production systems which raised significant cost saving and Industry 4.0. of today, denotes an integrated system of automation, internet of things and digital services that enables efficiency and flexibility in working processes. Developed as a multi-functional technology in 2008, blockchain has a big creative destruction potential that seems to reconfigure almost all aspects of society and way of doing things. Evolution of this technology can also be examined in periods. Namely, blockchain 1.0 presents currency and digital payment systems of cryptocurrencies. Blockchain 2.0 presents contracts for extensive transactions such as bonds, derivative products, smart property and smart contracts. Finally, Blockchain 3.0 introduces blockchain implementations especially in the areas of

A survey made by Cambridge University in 2017 covering data from over 200 companies, central banks and public sector organizations reveals the fact that much of the blockchain use cases are related to banking and finance which is followed by government, insurance and healthcare [13]. This result is quite understandable since jurisdictions and financial institutions are well aware the place of this creative destructors in global competition. In the current environment, blockchain technology offers solutions in a wide range of fields such as digital currency and tokens, digital identity verification, Know Your Customer (KYC), payment and cross-border payment, stock exchange transactions, trade finance, tax collection and management, microfinance, syndicated loans, crowdfunding, accounting, audit, reporting, hedge funds, voting, supply chain and all other fields that require trust between parties [14]. In a survey covered over 800 executives, World Economic Forum recorded that 58% of respondents expect 10% of GDP to be stored on the blockchain by 2025; and 73% of those surveyed expect tax to be first collected by a government via blockchain in 2023 [15]. Development of blockchain suggests a growth path that is far from linear and it signals the possibility to reach the stage of mainstream adoption by 2025 [16]. During the global financial crisis, a considerable number of economic agents have lost their trust in global financial system, its actors and its tools. On the other side, expectations for a fast, transparent, pseudonymous and cost-effective peerpeer payment system which would be processed 24/7 have raised significantly. Investors, in search for yield, have looked for alternative investment vehicles. Moreover, under Covid-19, economic agents have started to decrease their demand for cash because of the concern that cash may transmit the virus. These concerns and expectations have accelerated the intent to move towards digital payments [17]. Based on the ideas of Tobin [18], the concept of central bank digital currency has developed and discussed by a group of central banks. The idea of general purpose or retail central bank digital money is presented as a central bank liability, for the use of individuals and for non-financial corporations in less developed economies. On the contrary, wholesale central bank digital money concept is developed for the settlement between financial institutions of more advanced economies. Nevertheless, central bank digital currency project is still in the experimentation phase and no jurisdiction is announced to issue a central bank digital currency at the moment. Although there are several ongoing projects like E-dollar of Canada, E-euro of ECB, E-ringgit of Malaysia, E-rouble of Russia and E-rupiah of Indonesia we should note that China is at the most advanced stage of its project, Digital

*DOI: http://dx.doi.org/10.5772/intechopen.94494*

#### *Digital and Digitalized Economy in EMs: A Focus on Turkey DOI: http://dx.doi.org/10.5772/intechopen.94494*

*Emerging Markets*

get the right to create blocks in the system.

each transaction is dependent to one another [10].

**3. Blockchain implementations in business**

and double expenditure.

consensus mechanism [11].

businesses [10].

more productive.

In one sense, blockchain is the underlying technology of bitcoin. We can call it as a public ledger that keeps the history of each transaction. Blockchain is sustained by participating computers which verify transactions in chunks called "blocks" and relay them across the network [9]. Validation process relies on data being encrypted using algorithmic hashing. Encrypted value is a series of numbers and letters that does not share similarity with the original data, and is called "hash". Cryptocurrency mining involves working with this hash. Proof-of-work is a distributed consensus algorithm that Bitcoin's blockchain network participants use to agree on the contents of a blockchain to create and hash blocks together. When the computer in a network employs proof-of-work for mining, it needs to solve a challenging mathematical problem. If the computer which is also named as node, successfully solves the problem, it must then be verified by other nodes in the network. Following this step, the transaction is deemed to be verified and completed, and the miner that solved the problem is rewarded by bitcoins. Mining requires a considerable computational power so to ease this difficulty, another consensus algorithm named proof-of-stake is employed by validators for minting but not for mining to determine valid transactions. In proof of stake, cryptocurrency amount in wallets are crucial to create blocks. The amount of cryptocurrency in wallets determines power of validators and the shares of validators within the system. So, cryptocurrencies are held not to make transactions but to

Proof of work and proof of stake are the leading consensus algorithms that are used. Yet, there are almost 80 other consensus mechanisms with different features such as proof of space, proof of burn and proof of activity. Most important functions of consensus algorithms are their prevention of double blockchain creation

Blockchain, being the first and most popular example of distributed ledger technology is also a subsection of distributed database. Major difference between

Blockchain has some characteristics such as decentralization, persistency, anonymity and auditability. Being decentralized, blockchain does not require a third party. As a persistent system it is almost impossible to delete a transaction from the system when it is added to the chain. Besides, system quickly detects invalid transactions. Though there is no 100% anonymity, users interact via their generated addresses. If it is required, system may enable tracking transactions, as

There are different blockchain systems that can be listed as; public blockchain, private blockchain and consortium blockchain. In public blockchain, all records are open to public and anyone could join the consensus process. Consortium blockchain enables participation of just a group of nodes in the consensus process. Finally, private blockchain allows only nodes of a specific organization to participate the

Public blockchain attract interest of communities and users since it is open to everyone's participation. Though, consortium blockchain is generally used for

Like agricultural revolution, industrial revolution was also backed by technology which enabled economic agents to produce more efficiently and made manufacturers

blockchain and distributed ledger technology is the way they form data.

**122**

Transformation of industrial production can be divided into periods. The first period, where machines were operated by power of steam and water instead of human labor was defined as Industry 1.0. The second period where electricity, motors and invention of assembly line enabled producers to produce more efficiently was defined as Industry 2.0. Industry 3.0. was backed by computers, electronics so by automated production systems which raised significant cost saving and Industry 4.0. of today, denotes an integrated system of automation, internet of things and digital services that enables efficiency and flexibility in working processes. Developed as a multi-functional technology in 2008, blockchain has a big creative destruction potential that seems to reconfigure almost all aspects of society and way of doing things. Evolution of this technology can also be examined in periods. Namely, blockchain 1.0 presents currency and digital payment systems of cryptocurrencies. Blockchain 2.0 presents contracts for extensive transactions such as bonds, derivative products, smart property and smart contracts. Finally, Blockchain 3.0 introduces blockchain implementations especially in the areas of government, health, science, agriculture and culture [12].

A survey made by Cambridge University in 2017 covering data from over 200 companies, central banks and public sector organizations reveals the fact that much of the blockchain use cases are related to banking and finance which is followed by government, insurance and healthcare [13]. This result is quite understandable since jurisdictions and financial institutions are well aware the place of this creative destructors in global competition. In the current environment, blockchain technology offers solutions in a wide range of fields such as digital currency and tokens, digital identity verification, Know Your Customer (KYC), payment and cross-border payment, stock exchange transactions, trade finance, tax collection and management, microfinance, syndicated loans, crowdfunding, accounting, audit, reporting, hedge funds, voting, supply chain and all other fields that require trust between parties [14]. In a survey covered over 800 executives, World Economic Forum recorded that 58% of respondents expect 10% of GDP to be stored on the blockchain by 2025; and 73% of those surveyed expect tax to be first collected by a government via blockchain in 2023 [15]. Development of blockchain suggests a growth path that is far from linear and it signals the possibility to reach the stage of mainstream adoption by 2025 [16].

During the global financial crisis, a considerable number of economic agents have lost their trust in global financial system, its actors and its tools. On the other side, expectations for a fast, transparent, pseudonymous and cost-effective peerpeer payment system which would be processed 24/7 have raised significantly. Investors, in search for yield, have looked for alternative investment vehicles. Moreover, under Covid-19, economic agents have started to decrease their demand for cash because of the concern that cash may transmit the virus. These concerns and expectations have accelerated the intent to move towards digital payments [17].

Based on the ideas of Tobin [18], the concept of central bank digital currency has developed and discussed by a group of central banks. The idea of general purpose or retail central bank digital money is presented as a central bank liability, for the use of individuals and for non-financial corporations in less developed economies. On the contrary, wholesale central bank digital money concept is developed for the settlement between financial institutions of more advanced economies. Nevertheless, central bank digital currency project is still in the experimentation phase and no jurisdiction is announced to issue a central bank digital currency at the moment. Although there are several ongoing projects like E-dollar of Canada, E-euro of ECB, E-ringgit of Malaysia, E-rouble of Russia and E-rupiah of Indonesia we should note that China is at the most advanced stage of its project, Digital

Currency Electronic Payments (DC/EP). Several countries declared their intent to use central bank digital currency as a complement to cash if they would realize the project [19]. Implementation of the process is expected to differ across countries according to their economic readiness, expectations and technical platforms. Apart from central bank digital currency project, central banks closely follow the developments on cryptocurrencies and underlying technologies in order to fasten and improve their transaction processes to preserve their roles in the digital new normal. Capital markets and wholesale banks globally cooperate with financial technology companies in experimenting distributed ledger technologies to eliminate expensive processes so to increase efficiency and transparency and to reduce costs. They also focus to the potential of smart contracts to increase automation in several areas. Cong and He [20], designed a trade finance transaction diagram covering all sides of the transaction. They suggest that smart contracts can shrink informational asymmetry and may add welfare and customer surplus through increased entry and competition.

Syndicated loan facility is another field that may benefit from blockchain technology. As an international financing method with a transaction volume of almost 5 trillion dollars globally [21], a large group of lenders work together to provide funds to a borrower. Participants act according to terms and conditions of the loan agreement. At maturity, parties of the agreement may agree to roll over the loan. So, blockchain may add value to the process by increasing transparency, speed, and by decreasing bureaucracy and cost. Smart contracts can be included to the system since participants act according to loan contracts with specific terms and conditions.

Microfinance institutions may replace conventional banking institutions in underdeveloped regions when customers deem ineligible for banking services. In Nigeria, an open-source platform, Stellar and a microfinancing software provider, Oradian built a platform for providing financial products and services to the users. With a user profile of over 90% female customers, the project reveals the potential of blockchain technology in the development of rural systems and economic empowerment of women in developing countries [22]. According to World Bank estimates, almost one billion people over the world do not have any legally recognized identification. Besides, almost 3.5 billion people have some kind of legally recognized identification but have limited ability to use it. While the remaining 3.2 billion have a legally recognized identity and participate in the digital economy they may have problems in online. Technology may increase financial inclusion of those who do not have a legally recognized identification and increase these groups' access to financial services, government benefits, and labor markets which will lead to a saving of time and money. From institutions and government's perspective, an increasing digital footprint of users means saved cost and time, increased GDP, increased labor productivity, expanded tax base, decreased fraud and further steps to a formal and deeper financial system [23].

Increasing digitalization in finance is expected to create some positive effects for emerging countries. According to the estimates, almost 1.5 billion people is expected to access financial services. Governments are expected to save almost 100 billion dollars from the decreasing leakage and increasing tax revenue. Financial institutions are expected to save almost 400 billion dollars annually from direct costs. Emerging economies are expected to reach an annual increase in their GDP by almost 4 trillion dollars by 2025. Almost two thirds of the increase is expected from productivity of businesses and government due to digital payments. One third would arise from financial inclusion of individuals and SMEs and the rest would stem from saved time that would enable increasing hours of work. Increased GDP is expected to create 95 million jobs across all sectors [24].

**125**

*Digital and Digitalized Economy in EMs: A Focus on Turkey*

**4. Literature on digitalization and growth nexus**

Jurisdictions and leading technology companies enhance their investments on this technology as they have already discovered the potential and have anticipated to share in its future. Although global patent filings remained limited during the first years of blockchain, they have considerably increased as of 2016. By the third quarter of 2019, number of patents filed globally has reached almost 6.000. Leading countries in the patent race are China with 3.200 patent applications and USA with 1.300 applications. These countries are followed by United Kingdom, Germany,

Since developing and emerging countries lag behind the developed ones, the way for developing and emerging counties to leapfrog the developed nations is reaching advanced technology. Yet in our case, it is quite difficult to analyze the specific effects of blockchain and digital economy on growth indicators. As highlighted by Bukht and Heeks [5], measuring proceeds of digital economy and separating it from ICT is quite impossible across countries and between different periods. So, we opt to focus ICT and growth nexus and use the concept of digitali-

Burlamaqui and Kattel [26], defines technology leapfrogging as the adaption of advanced technology in a specific area. This concept overwhelmingly addresses the developing and emerging countries and it has been suggested that developing countries do not have any alternative in technology adoption, except to leapfrog to new and advanced technologies [27–29]. Literature on the relationship between ICT diffusion and economic growth is recent and it goes back to 1980s. Though theories predict a positive effect of digitalization on growth across countries, empirical stud-

Dewan and Kraemer [30] suggest a positive relation between digitalization and growth according to the data of 14 developing and 22 developed countries collected for years 1985–1993. However, results differ between developed and developing countries with respect to structure of returns from technological capital investments. While there is positive effect of capital stock on GDP growth in developed countries it is insignificant for the developing ones. Pohjola [31], performs his study based on an expectation that benefits from digitalization accrue as an improvement in productivity and economic growth. Based on a data of 42 countries for the period of 1985–1999, he finds that results differ between USA and the rest. While use of technology significantly impact the performance of the USA economy, evidence for other countries is reported as weak. Another interesting finding is that relationship is not statistically significant for the subsamples of industrial or high-income countries. Papaioannou and Dimelis [32] in their study comprising 42 developed and developing countries for 1993–2001 analyze the impact of digitalization on labor productivity growth. Findings of the study present high impact for developed countries than developing ones. Commander, Harrison and Filho [33] work with around 1000 manufacturing firms from Brazil and India with data of 2005 and they report a significant relation of technology and productivity in both countries. In India specific analysis, results suggest that poor infrastructure quality and labor market policy are associated with low return on investment and low levels of technology adoption. Dedrick, Kraemer, and Shih [34] work with a data set consists of 45 upper-income developing and developed countries for the period 1994–2007. They find that upper-income developing countries have significantly positive gains from technology in the recent period as they increase their investment more and as they gain more experience in the use of information technologies. They suggest

*DOI: http://dx.doi.org/10.5772/intechopen.94494*

Japan and Canada [25].

zation instead of ICT.

ies produced mixed results.

*Emerging Markets*

increased entry and competition.

and conditions.

deeper financial system [23].

expected to create 95 million jobs across all sectors [24].

Currency Electronic Payments (DC/EP). Several countries declared their intent to use central bank digital currency as a complement to cash if they would realize the project [19]. Implementation of the process is expected to differ across countries according to their economic readiness, expectations and technical platforms. Apart from central bank digital currency project, central banks closely follow the developments on cryptocurrencies and underlying technologies in order to fasten and improve their transaction processes to preserve their roles in the digital new normal. Capital markets and wholesale banks globally cooperate with financial technology companies in experimenting distributed ledger technologies to eliminate expensive processes so to increase efficiency and transparency and to reduce costs. They also focus to the potential of smart contracts to increase automation in several areas. Cong and He [20], designed a trade finance transaction diagram covering all sides of the transaction. They suggest that smart contracts can shrink informational asymmetry and may add welfare and customer surplus through

Syndicated loan facility is another field that may benefit from blockchain technology. As an international financing method with a transaction volume of almost 5 trillion dollars globally [21], a large group of lenders work together to provide funds to a borrower. Participants act according to terms and conditions of the loan agreement. At maturity, parties of the agreement may agree to roll over the loan. So, blockchain may add value to the process by increasing transparency, speed, and by decreasing bureaucracy and cost. Smart contracts can be included to the system since participants act according to loan contracts with specific terms

Microfinance institutions may replace conventional banking institutions in underdeveloped regions when customers deem ineligible for banking services. In Nigeria, an open-source platform, Stellar and a microfinancing software provider, Oradian built a platform for providing financial products and services to the users. With a user profile of over 90% female customers, the project reveals the potential of blockchain technology in the development of rural systems and economic empowerment of women in developing countries [22]. According to World Bank estimates, almost one billion people over the world do not have any legally recognized identification. Besides, almost 3.5 billion people have some kind of legally recognized identification but have limited ability to use it. While the remaining 3.2 billion have a legally recognized identity and participate in the digital economy they may have problems in online. Technology may increase financial inclusion of those who do not have a legally recognized identification and increase these groups' access to financial services, government benefits, and labor markets which will lead to a saving of time and money. From institutions and government's perspective, an increasing digital footprint of users means saved cost and time, increased GDP, increased labor productivity, expanded tax base, decreased fraud and further steps to a formal and

Increasing digitalization in finance is expected to create some positive effects for emerging countries. According to the estimates, almost 1.5 billion people is expected to access financial services. Governments are expected to save almost 100 billion dollars from the decreasing leakage and increasing tax revenue. Financial institutions are expected to save almost 400 billion dollars annually from direct costs. Emerging economies are expected to reach an annual increase in their GDP by almost 4 trillion dollars by 2025. Almost two thirds of the increase is expected from productivity of businesses and government due to digital payments. One third would arise from financial inclusion of individuals and SMEs and the rest would stem from saved time that would enable increasing hours of work. Increased GDP is

**124**

Jurisdictions and leading technology companies enhance their investments on this technology as they have already discovered the potential and have anticipated to share in its future. Although global patent filings remained limited during the first years of blockchain, they have considerably increased as of 2016. By the third quarter of 2019, number of patents filed globally has reached almost 6.000. Leading countries in the patent race are China with 3.200 patent applications and USA with 1.300 applications. These countries are followed by United Kingdom, Germany, Japan and Canada [25].

#### **4. Literature on digitalization and growth nexus**

Since developing and emerging countries lag behind the developed ones, the way for developing and emerging counties to leapfrog the developed nations is reaching advanced technology. Yet in our case, it is quite difficult to analyze the specific effects of blockchain and digital economy on growth indicators. As highlighted by Bukht and Heeks [5], measuring proceeds of digital economy and separating it from ICT is quite impossible across countries and between different periods. So, we opt to focus ICT and growth nexus and use the concept of digitalization instead of ICT.

Burlamaqui and Kattel [26], defines technology leapfrogging as the adaption of advanced technology in a specific area. This concept overwhelmingly addresses the developing and emerging countries and it has been suggested that developing countries do not have any alternative in technology adoption, except to leapfrog to new and advanced technologies [27–29]. Literature on the relationship between ICT diffusion and economic growth is recent and it goes back to 1980s. Though theories predict a positive effect of digitalization on growth across countries, empirical studies produced mixed results.

Dewan and Kraemer [30] suggest a positive relation between digitalization and growth according to the data of 14 developing and 22 developed countries collected for years 1985–1993. However, results differ between developed and developing countries with respect to structure of returns from technological capital investments. While there is positive effect of capital stock on GDP growth in developed countries it is insignificant for the developing ones. Pohjola [31], performs his study based on an expectation that benefits from digitalization accrue as an improvement in productivity and economic growth. Based on a data of 42 countries for the period of 1985–1999, he finds that results differ between USA and the rest. While use of technology significantly impact the performance of the USA economy, evidence for other countries is reported as weak. Another interesting finding is that relationship is not statistically significant for the subsamples of industrial or high-income countries. Papaioannou and Dimelis [32] in their study comprising 42 developed and developing countries for 1993–2001 analyze the impact of digitalization on labor productivity growth. Findings of the study present high impact for developed countries than developing ones. Commander, Harrison and Filho [33] work with around 1000 manufacturing firms from Brazil and India with data of 2005 and they report a significant relation of technology and productivity in both countries. In India specific analysis, results suggest that poor infrastructure quality and labor market policy are associated with low return on investment and low levels of technology adoption. Dedrick, Kraemer, and Shih [34] work with a data set consists of 45 upper-income developing and developed countries for the period 1994–2007. They find that upper-income developing countries have significantly positive gains from technology in the recent period as they increase their investment more and as they gain more experience in the use of information technologies. They suggest

that productivity effects of digitalization are bound to country specific factors which comprise human capital, foreign direct investment and quality and cost of technological infrastructure. Sassi and Goaied [35], analyze both the impact of financial development and digitalization on economic growth in Middle East and North Africa (MENA) countries for years, 1960–2009. The interaction between digital penetration and financial development is found positive and significant in the empirical study. This implies that economies in MENA region can benefit from financial development only when a specific level of digitalization is reached. Cirera, Lage, and Sabetti [36] examine the firm-level data for a sample of six Sub-Saharan African countries. Although there is a huge gap in terms of digitalization between these group of countries and developed ones, results of the study point a considerable heterogeneity among samples. Findings reveal that digitalization has an important impact on production and innovation for all these countries but final impact depends on the degree of the novelty that is introduced in firm base. Luo and Bu [37] study how digitalization improves the productivity of emerging economies by analyzing 6236 firms from 27 emerging economies. They argue that technology enhances productivity since it leads to effective knowledge sharing and integration. They further argue that emerging economies' level of economic development, institutionalization and qualified infrastructure would affect the level digitalization that contributes to knowledge management and thus to firm performance. Authors suggest that technology would enhance productivity in an emerging economy when the said economy is less economically developed. Niebel [38], in a recent research based on a sample of 59 countries for the period of 1995–2010 indicates that developing and emerging countries are not gained more from investments in digitalization than developed ones.

Some studies [39–42] provide that digitalization could impose negative impacts on employment and labor market in developing countries. This literature argues that the rapid digitalization eliminates unskilled workers and exclude poor since they are not qualified, so it will increase poverty and income inequalities. Besides, they argue that digitalization provides more advantages to developed countries to compete with developing countries in their local markets.

There are few empirical studies on digitalization and growth nexus for Turkey. Yaprakli and Saglam [43] examine this relationship for the period of 1980–2008. According to results, economic growth is positively affected by digitalization in the short and long run. However, contribution to economic growth from this channel is less than that of other product factors in Turkey. Kılıçaslan et al. [44] examine the impact of digitalization on labor productivity growth in Turkish manufacturing industry for the period of 2003–2012. They report that the impact of digitalization on productivity is larger by about 25 to 50% than that of conventional capital. In a recent study, Sarıdogan and Kaya [45], find a positive relation between digitalization and economic performance for years 1998–2017 for 28 EU members and Turkey.

Empirical studies across countries reveal heterogeneous results. From our standpoint, this could be the result of differing countries, samples, time periods and measurement techniques.

#### **5. A focus on Turkey**

Turkey is a dynamic emerging country with an average growth rate of around 4–5%. Though banking sector has an overwhelming share in the financial system, capital markets are progressing to reach a well-deserved place. Search for yield in a negative real interest environment, especially under Covid-19, leads local investors to alternative investment tools. Results from an international survey conducted with

**127**

service as of 2019 [53].

**6. Conclusion**

*Digital and Digitalized Economy in EMs: A Focus on Turkey*

1000 respondents in 2019 reveal the enthusiasm of Turkey towards cryptocurrencies and its underlying technologies. Index of positive attitudes towards cryptocurrencies is reported as 62% for Turkey while it is 20% for Germany, 24% for France and 24% for United Kingdom. 46% of Turkish respondents states their preference for a cashless society when the ratio is 22% in total Europe. 55% of Turkish respondents denote their personal efforts to learn the mechanism of cryptocurrency while it is 26% in Germany, 20% in France and 22% in United Kingdom [46]. Turkish authorities have a positive attitude towards cryptocurrency and blockchain technology, as well. For the time being there is no specific regulation about the use of cryptocurrencies. In order to make clear the difference, it is stated that cryptocurrency cannot be deem as an electronic money under The Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions

Yet, in the Eleventh Development Plan, Turkish authorities declared their intent to introduce a blockchain based central bank digital currency within four years. Blockchain technology is planned to be used especially on transportation and custom services. Improving technological infrastructure and processes to benefit more from digitalization for the improvement of government services is aimed in the mediumrun [48]. To synchronize the flow of information among Borsa Istanbul, Istanbul Settlement and Custody Bank and Central Securities Depository of the Turkish capital markets, Borsa Istanbul has developed Turkey's first financial blockchain based project in 2018. The project that was designed under Know Your Customer concept enables addition of new customers, editing of information and management of documentation in the blockchain network [49]. Istanbul Settlement and Custody Bank developed a blockchain based "BiGA Digital Gold" Project, in 2019. It was established as the first known blockchain network with the contribution of participating banks in Turkey. In this project, gold that is physically stored in Borsa Istanbul is converted to BiGA and transferred to the BiGA Platform by issuing method. With this method, the transformation and reconciliation between the digital asset and the physical asset is possible. Gold balances can be transferred between participating banks 24/7 through the platform provided by Istanbul Settlement and Custody Bank via their own systems [50]. As another example of milestone to the increasing efforts on blockchain, Isbank, a major Turkish bank, joined a global blockchain platform, R3's Corda, and completed an international trade finance transaction with Commerzbank based on distributed ledger technology. Trade transaction data was distributed only to the parties along the workflow of trade, making the settlement process much quicker and more efficient. It is also possible to integrate third parties into the data flow where required by banks and trade partners. All parties involved

were able to communicate and view trading data simultaneously [51].

Akbank, another leading Turkish bank entered a business partnership with Ripple in 2017 to benefit from the transparency and low-cost provided by Ripple in international money transfers [52]. Aktif Bank, a large investment bank in Turkey has incorporated Attivo Bilisim to invest in the crypto-asset service industry. As the second bank-backed exchange around the world and structured by Attivo, Bitmatrix Crypto-Assets Trading Platform provides the crypto-assets custody

In this study we try to shed light to the transformation of economies and the role of creative destructors in this change. Covid-19 has served as a catalyst and accelerated the transition towards digital new normal. Central banks' digital currency

*DOI: http://dx.doi.org/10.5772/intechopen.94494*

numbered 6493 [47].

#### *Digital and Digitalized Economy in EMs: A Focus on Turkey DOI: http://dx.doi.org/10.5772/intechopen.94494*

*Emerging Markets*

tion than developed ones.

and measurement techniques.

**5. A focus on Turkey**

that productivity effects of digitalization are bound to country specific factors which comprise human capital, foreign direct investment and quality and cost of technological infrastructure. Sassi and Goaied [35], analyze both the impact of financial development and digitalization on economic growth in Middle East and North Africa (MENA) countries for years, 1960–2009. The interaction between digital penetration and financial development is found positive and significant in the empirical study. This implies that economies in MENA region can benefit from financial development only when a specific level of digitalization is reached. Cirera, Lage, and Sabetti [36] examine the firm-level data for a sample of six Sub-Saharan African countries. Although there is a huge gap in terms of digitalization between these group of countries and developed ones, results of the study point a considerable heterogeneity among samples. Findings reveal that digitalization has an important impact on production and innovation for all these countries but final impact depends on the degree of the novelty that is introduced in firm base. Luo and Bu [37] study how digitalization improves the productivity of emerging economies by analyzing 6236 firms from 27 emerging economies. They argue that technology enhances productivity since it leads to effective knowledge sharing and integration. They further argue that emerging economies' level of economic development, institutionalization and qualified infrastructure would affect the level digitalization that contributes to knowledge management and thus to firm performance. Authors suggest that technology would enhance productivity in an emerging economy when the said economy is less economically developed. Niebel [38], in a recent research based on a sample of 59 countries for the period of 1995–2010 indicates that developing and emerging countries are not gained more from investments in digitaliza-

Some studies [39–42] provide that digitalization could impose negative impacts on employment and labor market in developing countries. This literature argues that the rapid digitalization eliminates unskilled workers and exclude poor since they are not qualified, so it will increase poverty and income inequalities. Besides, they argue that digitalization provides more advantages to developed countries to

There are few empirical studies on digitalization and growth nexus for Turkey. Yaprakli and Saglam [43] examine this relationship for the period of 1980–2008. According to results, economic growth is positively affected by digitalization in the short and long run. However, contribution to economic growth from this channel is less than that of other product factors in Turkey. Kılıçaslan et al. [44] examine the impact of digitalization on labor productivity growth in Turkish manufacturing industry for the period of 2003–2012. They report that the impact of digitalization on productivity is larger by about 25 to 50% than that of conventional capital. In a recent study, Sarıdogan and Kaya [45], find a positive relation between digitalization and economic performance for years 1998–2017 for 28 EU members and Turkey. Empirical studies across countries reveal heterogeneous results. From our standpoint, this could be the result of differing countries, samples, time periods

Turkey is a dynamic emerging country with an average growth rate of around 4–5%. Though banking sector has an overwhelming share in the financial system, capital markets are progressing to reach a well-deserved place. Search for yield in a negative real interest environment, especially under Covid-19, leads local investors to alternative investment tools. Results from an international survey conducted with

compete with developing countries in their local markets.

**126**

1000 respondents in 2019 reveal the enthusiasm of Turkey towards cryptocurrencies and its underlying technologies. Index of positive attitudes towards cryptocurrencies is reported as 62% for Turkey while it is 20% for Germany, 24% for France and 24% for United Kingdom. 46% of Turkish respondents states their preference for a cashless society when the ratio is 22% in total Europe. 55% of Turkish respondents denote their personal efforts to learn the mechanism of cryptocurrency while it is 26% in Germany, 20% in France and 22% in United Kingdom [46]. Turkish authorities have a positive attitude towards cryptocurrency and blockchain technology, as well. For the time being there is no specific regulation about the use of cryptocurrencies. In order to make clear the difference, it is stated that cryptocurrency cannot be deem as an electronic money under The Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions numbered 6493 [47].

Yet, in the Eleventh Development Plan, Turkish authorities declared their intent to introduce a blockchain based central bank digital currency within four years. Blockchain technology is planned to be used especially on transportation and custom services. Improving technological infrastructure and processes to benefit more from digitalization for the improvement of government services is aimed in the mediumrun [48]. To synchronize the flow of information among Borsa Istanbul, Istanbul Settlement and Custody Bank and Central Securities Depository of the Turkish capital markets, Borsa Istanbul has developed Turkey's first financial blockchain based project in 2018. The project that was designed under Know Your Customer concept enables addition of new customers, editing of information and management of documentation in the blockchain network [49]. Istanbul Settlement and Custody Bank developed a blockchain based "BiGA Digital Gold" Project, in 2019. It was established as the first known blockchain network with the contribution of participating banks in Turkey. In this project, gold that is physically stored in Borsa Istanbul is converted to BiGA and transferred to the BiGA Platform by issuing method. With this method, the transformation and reconciliation between the digital asset and the physical asset is possible. Gold balances can be transferred between participating banks 24/7 through the platform provided by Istanbul Settlement and Custody Bank via their own systems [50]. As another example of milestone to the increasing efforts on blockchain, Isbank, a major Turkish bank, joined a global blockchain platform, R3's Corda, and completed an international trade finance transaction with Commerzbank based on distributed ledger technology. Trade transaction data was distributed only to the parties along the workflow of trade, making the settlement process much quicker and more efficient. It is also possible to integrate third parties into the data flow where required by banks and trade partners. All parties involved were able to communicate and view trading data simultaneously [51].

Akbank, another leading Turkish bank entered a business partnership with Ripple in 2017 to benefit from the transparency and low-cost provided by Ripple in international money transfers [52]. Aktif Bank, a large investment bank in Turkey has incorporated Attivo Bilisim to invest in the crypto-asset service industry. As the second bank-backed exchange around the world and structured by Attivo, Bitmatrix Crypto-Assets Trading Platform provides the crypto-assets custody service as of 2019 [53].

#### **6. Conclusion**

In this study we try to shed light to the transformation of economies and the role of creative destructors in this change. Covid-19 has served as a catalyst and accelerated the transition towards digital new normal. Central banks' digital currency

#### *Emerging Markets*

project, cryptocurrencies and distributed ledger technologies take the lead in this period. We have focused on the use cases of blockchain in business. Emerging countries try to benefit from digitalization to leapfrog the developed countries and to take their positions in the digital race. Yet, there are still issues to be solved such as defining new technologies, structuring regulations, tax collection, cyber security, fraud and energy consumption in digitalization. Besides, cooperation among countries would help developing common directives, regulations and implementations which could boost benefits from digitalization.

#### **Author details**

Gonca Atici Istanbul University, Istanbul, Turkey

\*Address all correspondence to: goncaatici@istanbul.edu.tr

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**129**

IEEE.)

*Digital and Digitalized Economy in EMs: A Focus on Turkey*

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[13] https://hbr.org/2017/03/

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[16] Credit Suisse. (2018). Blockchain 2.0. Switzerland: Credit Suisse.

[17] Auer, R, G Cornelli and J Frost (2020): Covid-19, cash and the future of payments", BIS Bulletin, no 3, April.

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[19] Auer, R., Cornelli, G., & Frost, J. (2020). Rise of the central bank digital currencies: drivers, approaches and technologies (No. 880). Bank for

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*DOI: http://dx.doi.org/10.5772/intechopen.94494*

[1] https://worlduncertaintyindex. com

[2] https://www.ecb.europa.eu/home/ search/coronavirus/html/index.en.html

[3] https://www.ecb.europa.eu/ press/key/date/2020/html/ecb. sp200910~31e6ae9835.en.html

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[5] Bukht, R., & Heeks, R. (2017). Defining, conceptualising and measuring the digital economy. Development Informatics working

[6] Nakamoto, S. (2008). Bitcoin: A Peer-to Peer Electronic Cash System.

[7] ElBahrawy, A., Alessandretti, L., Kandler, A., Pastor-Satorras, R., and Baronchelli, (2017), A. Bitcoin ecology: Quantifying and Modelling the Longterm Dynamics of the Cryptocurrency Market. [Online] Available: https://www.semanticscholar.

[8] Hileman, Garrick & Michel Rauchs,

alternative-finance/publications/globalcryptocurrency/#.XB0TY1UzbIU

[10] Zheng, Z., Xie, S., Dai, H., Chen, X., & Wang, H. (2017, June). An overview of blockchain technology: Architecture, consensus, and future trends. In 2017 IEEE international congress on big data (BigData congress) (pp. 557-564).

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Triumph Books

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html

paper, (68).

### **References**

*Emerging Markets*

project, cryptocurrencies and distributed ledger technologies take the lead in this period. We have focused on the use cases of blockchain in business. Emerging countries try to benefit from digitalization to leapfrog the developed countries and to take their positions in the digital race. Yet, there are still issues to be solved such as defining new technologies, structuring regulations, tax collection, cyber security, fraud and energy consumption in digitalization. Besides, cooperation among countries would help developing common directives, regulations and implementa-

tions which could boost benefits from digitalization.

**128**

**Author details**

Istanbul University, Istanbul, Turkey

provided the original work is properly cited.

\*Address all correspondence to: goncaatici@istanbul.edu.tr

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

Gonca Atici

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[8] Hileman, Garrick & Michel Rauchs, (2017), Global Cryptocurrency Benchmarking Study. [Online] Available: https://www.jbs.cam. ac.uk/faculty-research/centres/ alternative-finance/publications/globalcryptocurrency/#.XB0TY1UzbIU (November 1, 2018)

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[28] Mansell, R., & Wehn, U. (1998). Knowledge societies: Information technology for development. Oxford University Press

[29] Davison, R. M., Vogel, D. R., Harris, R. W., & Jones, N. (2000). Technology leapfrogging in developing countries–an 3711 Technology Leapfrogging for Developing Countries T inevitable luxury? The Electronic Journal on Information Systems in Developing Countries, 1(5), 1-10.

[30] Dewan, S., & Kraemer, K. L. (2000). Information technology and productivity: evidence from countrylevel data. Management science, 46(4), 548-562.

[31] Pohjola, M. (2002). The new economy in growth and development. Oxford Review of Economic Policy, 18(3), 380-396.

[32] Papaioannou, S. K., & Dimelis, S. P. (2007). Information technology as a factor of economic development: Evidence from developed and developing countries. Economics of Innovation and New Technology, 16(3), 179-194.

[33] Commander, S., Harrison, R., & Menezes-Filho, N. (2011). ICT and productivity in developing countries: New firm-level evidence from Brazil and India. Review of Economics and Statistics, 93(2), 528-541.

[34] Dedrick, J., Kraemer, K. L., & Shih, E. (2013). Information technology and productivity in developed and developing countries. Journal of Management Information Systems, 30(1), 97-122.

[35] Sassi, S., & Goaied, M. (2013). Financial development, ICT diffusion and economic growth: Lessons from MENA region. Telecommunications Policy, 37(4-5), 252-261.

[36] Cirera, X., Lage, F., & Sabetti, L. (2016). ICT use, innovation, and productivity: evidence from Sub-Saharan Africa. The World Bank.

[37] Luo, Y., & Bu, J. (2016). How valuable is information and communication technology? A study of emerging economy enterprises. Journal of world business, 51(2), 200-211.

[38] Niebel, T. (2018). ICT and economic growth–Comparing developing, emerging and developed countries. World Development, 104, 197-211.

[39] Freeman, C., & Soete, L., (1985). Information technology and employment: an assessment. SPRU. Sussex, UK.

[40] Freeman, C., & Soete, L. (1994). Work for all or mass unemployment? Computerized technical change into the twenty-first century. UK: London Printer.

**131**

*Digital and Digitalized Economy in EMs: A Focus on Turkey*

[50] https://www.takasbank.com. tr/en/services/services-provided/

[51] https://www.isbank.com.tr/en/ about-us/first-turkish-german-tradefinance-transaction-on-marco-poloblockchain-network-with-isbank-and-

[52] https://www.akbanklab.com/ en/news/newsroom/blockchaintechnology-is-used-first-in-turkey-by-

[53] https://www.aktifbank.com.tr/ en/siteabout/pressroom/news/Pages/ Crypto-assets-are-all-secured-with-

biga-platform.

commerzbank

Bitmatrix.aspx

akbank.

*DOI: http://dx.doi.org/10.5772/intechopen.94494*

[41] Freeman, C., & Soete, L. (1997). The economics of industrial innovation

[42] Aghion, P., & Howitt, P. (1998). Endogenous Growth Theory. Cambridge. Mass. MIT Press,

[43] Yaprakli, S., & Saglam, T. (2010). Türkıye'de Bılgı Iletısım Teknolojıleri Ve Ekonomık Büyüme: Ekonometrık Bır Analız (1980-2008)(1)/Informatıon And Communıcatıons Technology And Economıc Growth In Turkey: An Econometrıc Analysıs (1980-2008). Ege

[44] Kılıçaslan, Y., Sickles, R. C., Kayış, A. A., & Gürel, Y. Ü. (2017). Impact of ICT on the productivity of the firm: evidence from Turkish manufacturing. Journal of Productivity Analysis, 47(3),

[45] Saridogan, H. O., & Kaya, M. V. (2019). KNOWLEDGE ECONOMY AND ECONOMIC PERFORMANCE: COMPARISON OF TURKEY AND THE

EUROPEAN UNION.

72d8561140a7-m4fvJGf

kalkinma-planlari/

hayata-gecirildi

[48] (https://www.sbb.gov.tr/

[49] https://www.borsaistanbul.com/tr/ duyuru/1096/turkiyenin-ilk-finansalblockchain-projesi-borsa-istanbulbilisim-teknolojileri-ekibi-tarafindan-

[46] (https://think.ing.com/ uploads/reports/IIS\_New\_Tech\_ Cryptocurrencies\_report\_18092019.

[47] https://www.tcmb.gov.tr/wps/ wcm/connect/2f1f7375-31cb-4c3bb5c6-72d8561140a7/6493Kanun.pdf?M OD=AJPERES&CACHEID=ROOTW ORKSPACE-2f1f7375-31cb-4c3b-b5c6-

((3rd ed.)). UK: London and

Washington Printer.

Massachusetts, USA.

Akademik Bakis, 10(2), 575.

277-289.

pdf).

*Digital and Digitalized Economy in EMs: A Focus on Turkey DOI: http://dx.doi.org/10.5772/intechopen.94494*

[41] Freeman, C., & Soete, L. (1997). The economics of industrial innovation ((3rd ed.)). UK: London and Washington Printer.

*Emerging Markets*

Company.

[23] McKinsey Global Institute. (2019). Digital Identification (A Key to Inclusive Growth). New York: McKinsey &

as a factor of economic development: Evidence from developed and developing countries. Economics of Innovation and New Technology, 16(3),

[33] Commander, S., Harrison, R., & Menezes-Filho, N. (2011). ICT and productivity in developing countries: New firm-level evidence from Brazil and India. Review of Economics and

[34] Dedrick, J., Kraemer, K. L., & Shih, E. (2013). Information technology and productivity in developed and developing countries. Journal of Management Information Systems,

[35] Sassi, S., & Goaied, M. (2013). Financial development, ICT diffusion and economic growth: Lessons from MENA region. Telecommunications

[36] Cirera, X., Lage, F., & Sabetti, L. (2016). ICT use, innovation, and productivity: evidence from Sub-Saharan Africa. The World Bank.

[37] Luo, Y., & Bu, J. (2016). How valuable is information and communication technology? A study of emerging economy enterprises. Journal of world business, 51(2),

[38] Niebel, T. (2018). ICT and economic

growth–Comparing developing, emerging and developed countries. World Development, 104, 197-211.

[39] Freeman, C., & Soete, L., (1985). Information technology and employment: an assessment. SPRU.

[40] Freeman, C., & Soete, L. (1994). Work for all or mass unemployment? Computerized technical change into the twenty-first century. UK: London

Policy, 37(4-5), 252-261.

Statistics, 93(2), 528-541.

30(1), 97-122.

200-211.

Sussex, UK.

Printer.

179-194.

[24] McKinsey&Company. (2019, 06). Blockchain and retail banking: Making the connection. Financial Services.

[26] Burlamaqui, L., & Kattel, R. (2016). Development as leapfrogging, not convergence, not catch-up: Towards Schumpeterian theories of finance and development. Review of Political

[25] https://www.withersrogers. com/ebrochure/ip-review/ winter-2019/9/#zoom=z

Economy, 28(2), 270-288.

networking for technology leapfrogging. Cooperation South Journal, 2, 40-52. Retrieved December 12, 2007, from http://tcdc.undp.org/ CoopSouth/1998\_2/cop9827.pdf

University Press

Countries, 1(5), 1-10.

[30] Dewan, S., & Kraemer, K. L. (2000). Information technology and productivity: evidence from countrylevel data. Management science, 46(4),

[31] Pohjola, M. (2002). The new economy in growth and development. Oxford Review of Economic Policy,

[32] Papaioannou, S. K., & Dimelis, S. P. (2007). Information technology

[27] Choucri, N. (1998). Knowledge

[28] Mansell, R., & Wehn, U. (1998). Knowledge societies: Information technology for development. Oxford

[29] Davison, R. M., Vogel, D. R., Harris, R. W., & Jones, N. (2000). Technology leapfrogging in developing countries–an 3711 Technology Leapfrogging for Developing Countries T inevitable luxury? The Electronic Journal on Information Systems in Developing

**130**

548-562.

18(3), 380-396.

[42] Aghion, P., & Howitt, P. (1998). Endogenous Growth Theory. Cambridge. Mass. MIT Press, Massachusetts, USA.

[43] Yaprakli, S., & Saglam, T. (2010). Türkıye'de Bılgı Iletısım Teknolojıleri Ve Ekonomık Büyüme: Ekonometrık Bır Analız (1980-2008)(1)/Informatıon And Communıcatıons Technology And Economıc Growth In Turkey: An Econometrıc Analysıs (1980-2008). Ege Akademik Bakis, 10(2), 575.

[44] Kılıçaslan, Y., Sickles, R. C., Kayış, A. A., & Gürel, Y. Ü. (2017). Impact of ICT on the productivity of the firm: evidence from Turkish manufacturing. Journal of Productivity Analysis, 47(3), 277-289.

[45] Saridogan, H. O., & Kaya, M. V. (2019). KNOWLEDGE ECONOMY AND ECONOMIC PERFORMANCE: COMPARISON OF TURKEY AND THE EUROPEAN UNION.

[46] (https://think.ing.com/ uploads/reports/IIS\_New\_Tech\_ Cryptocurrencies\_report\_18092019. pdf).

[47] https://www.tcmb.gov.tr/wps/ wcm/connect/2f1f7375-31cb-4c3bb5c6-72d8561140a7/6493Kanun.pdf?M OD=AJPERES&CACHEID=ROOTW ORKSPACE-2f1f7375-31cb-4c3b-b5c6- 72d8561140a7-m4fvJGf

[48] (https://www.sbb.gov.tr/ kalkinma-planlari/

[49] https://www.borsaistanbul.com/tr/ duyuru/1096/turkiyenin-ilk-finansalblockchain-projesi-borsa-istanbulbilisim-teknolojileri-ekibi-tarafindanhayata-gecirildi

[50] https://www.takasbank.com. tr/en/services/services-provided/ biga-platform.

[51] https://www.isbank.com.tr/en/ about-us/first-turkish-german-tradefinance-transaction-on-marco-poloblockchain-network-with-isbank-andcommerzbank

[52] https://www.akbanklab.com/ en/news/newsroom/blockchaintechnology-is-used-first-in-turkey-byakbank.

[53] https://www.aktifbank.com.tr/ en/siteabout/pressroom/news/Pages/ Crypto-assets-are-all-secured-with-Bitmatrix.aspx

**133**

**Chapter 8**

**Abstract**

country.

**1. Introduction**

Rise of Hindutva Politics,

Enterprises in India

*Geeta Sinha and Bhabani Shankar Nayak*

**Keywords:** Hindutva politics, MSMEs, demonetisation, India

Demonetisation, and Its Impact

In India, different political regimes have introduced varied policies for the economic and social development of the nation. Within the context of industrial sector development, MSMEs contribute and play a pivotal role in the growth of Indian economy. These enterprises nurture local entrepreneurship and generate large employment opportunities that are comparatively less capital intensive and stands next to agriculture. This paper examines the relationship between the rise of Hindutva politics and MSMEs in India and argues that the rise of Hindutva politics and its demonetisation policies have adversely impacted the MSME sector. The demonetisation policies proved to be fatal and laden with complexities for the MSME sector to cope that mostly overlaps with the informal sector. The paper explores the impacts of demonetisation on MSMEs that proved detrimental and unfavourably affected the lives of the people, hence, rendering to its decline in the

In India, people witness varied schemes and policies introduced by different reigning political regimes for the economic and social development of the country. However, this paper attempts to examine the rise of right-wing politics also referred as Hindutva politics and its impact on MSMEs in the country. With the parliamentary elections in the year 2014, Bhartiya Janata Party (BJP) came into power and the Congress party was reduced to nearly forty-four seats. It is important to note that BJP and its allied parties have their roots in an organisation called Rastriya Sevak Sangh (RSS) that epitomises the philosophies, ideas and ideologies of Hindutva. Hence, BJP is considered as the political front of RSS and an upsurge of right-wing narrative can be observed nationwide. The Hindutva ideology ingrained in parties and organisations like Bharatiya Janata Party (BJP) and its allies including Shiv Sena, Bajrang Dal, Akali Dal are inclined towards hard core philosophy of the rightwing politics. This inclination towards Hindutva or right-wing politics allows them to favour capitalism and privatisation and believe in the policy of laissez-faire and free trade [1]. Against the backdrop of national interest, the policies and programs

on Micro, Small and Medium

#### **Chapter 8**

## Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium Enterprises in India

*Geeta Sinha and Bhabani Shankar Nayak*

### **Abstract**

In India, different political regimes have introduced varied policies for the economic and social development of the nation. Within the context of industrial sector development, MSMEs contribute and play a pivotal role in the growth of Indian economy. These enterprises nurture local entrepreneurship and generate large employment opportunities that are comparatively less capital intensive and stands next to agriculture. This paper examines the relationship between the rise of Hindutva politics and MSMEs in India and argues that the rise of Hindutva politics and its demonetisation policies have adversely impacted the MSME sector. The demonetisation policies proved to be fatal and laden with complexities for the MSME sector to cope that mostly overlaps with the informal sector. The paper explores the impacts of demonetisation on MSMEs that proved detrimental and unfavourably affected the lives of the people, hence, rendering to its decline in the country.

**Keywords:** Hindutva politics, MSMEs, demonetisation, India

#### **1. Introduction**

In India, people witness varied schemes and policies introduced by different reigning political regimes for the economic and social development of the country. However, this paper attempts to examine the rise of right-wing politics also referred as Hindutva politics and its impact on MSMEs in the country. With the parliamentary elections in the year 2014, Bhartiya Janata Party (BJP) came into power and the Congress party was reduced to nearly forty-four seats. It is important to note that BJP and its allied parties have their roots in an organisation called Rastriya Sevak Sangh (RSS) that epitomises the philosophies, ideas and ideologies of Hindutva. Hence, BJP is considered as the political front of RSS and an upsurge of right-wing narrative can be observed nationwide. The Hindutva ideology ingrained in parties and organisations like Bharatiya Janata Party (BJP) and its allies including Shiv Sena, Bajrang Dal, Akali Dal are inclined towards hard core philosophy of the rightwing politics. This inclination towards Hindutva or right-wing politics allows them to favour capitalism and privatisation and believe in the policy of laissez-faire and free trade [1]. Against the backdrop of national interest, the policies and programs

are so designed that they are lop-sided and tend to defend the profit-making big corporations and businesses instead of overall development of the nation and people.

The rise of BJP politics has even given rise to communalism, insecurities amongst religious minorities and their vulnerability has been further strengthened by the government ministers and members of parliament who openly air communalist, divisive and reactionary sentiments while making hate speeches and inciting violence against minorities [2]. Communalism is very much the tool of the ruling class politics and in the words of Singh [3], "Communalism in contemporary India, as ideology and practice, is above all an aspect of the politics of the ruling classes in a society with a massive feudal colonial inheritance, deep religious divisions, and undergoing its own, historically specific form of capitalist development". Besides favouring capitalist mode of development, they have also disrupted the enabling environment of doing business and start-ups by promoting communalism, violence and insecurities amongst people and societies.

MSMEs considered as "growth engines" play pivotal role of providing industrialisation opportunities in rural and backward areas coupled with employment generation, thereby contributing to reduction of regional imbalance and equitable distribution of national income [4]. MSMEs are also considered as ancillary units or supplementary units to large industries as they provide raw materials and backward linkages, which adds to socio economic development. It consists of 633.88 lakhs (63.388 million) of units and provides employment to nearly 11.10 crores (11.1 million) of people in the country as per the National Sample Survey (NSS) 73rd round, conducted by National Sample Survey Office, Ministry of Statistics & Programme Implementation during the period 2015–2016 [5, 6]. Some of the important programmes and policies to drive economic and social development in India by BJP government included abrupt demonetisation, introduction of GST, campaigns for "Make in India", "Skills India", "Incredible India" and "sab ka saath sab ka vikas (together with all, development for all)". However, these initiatives by the government did not assist the MSME sector to leverage growth but on the contrary turned disadvantageous for their growth.

According to Karani and Panda [7], the need for employment generation is crucial to the nation as the youth occupy the highest share in the pie of the demographic profile of India. The authors further explain that the various employment challenges include relevant skills development and large-scale job creation, coping capacity of employers with turbulent global manufacturing ecosystem and social security initiatives to address the needs of the employees [7]. However, it becomes imperative for the ruling government to introduce such policies and programmes that cater to the needs of the local employers, employees and create new entrepreneurs. On the contrary, with an increasingly intolerant Hindutva political climate in India, the initiatives of BJP government have been more towards creating ideal national identity (Hindutva) that interconnects with liberalisation and globalisation of the economy.

Additionally, the policies of the BJP government have been precarious and more instrumental in promoting big profit-making giants, multinationals and corporations while local enterprises remain neglected. In the words of Banaji [8], a new narrative of forward thinking has emerged where wealth and national pride would be delivered to Indians and business opportunities to industrialists by the leadership. Hence, the key objective of this study is to explore the encounters and impact of BJP governments policies including demonetisation and GST on MSMEs that proved detrimental and unfavourably affected the lives of the people, hence, rendering to its decline. The methodology adopted for this study is the analysis of secondary data and content analysis.

**135**

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium…*

The paper focuses on the demonetisation policy thrusted upon the people of the country on 8th of November 2016 where in the BJP government demonetised the 500 and 1000 banknotes. The objective behind demonetisation process was to curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activities and terrorism, that witnessed mixed reactions from the economists and people of the country. This move directed to eliminate "black money" and corruption

The independence from colonial rule coupled with partisan of British India during 1947 witnessed the making of Muslim-majority Pakistan and Hindu-majority India, a result of two nation-theory based on two distinct religious identities. The then leaders of independent India including Jawaharlal Nehru, Mahatma Gandhi, Baba Ambedkar and many more scholars envisioned secular nationalism that formed the basis of India's constitutional democracy. But, on the contrary the birth of RSS, BJP as political party and its allies emphasised on communal identity and reiterates the narrative of Hindu nationalism/ Hindutva. This discourse/ narrative has been gaining momentum in the recent years since the BJP came into power with full majority in the year 2014. Their focus has been to create Hindu Rashtra (Hindu nation), rattle against Pakistan and critique in what they believe is the advantaged status of the religious minorities in the country [9]. According to Banaji ([8], p. 334), "this narrative positions Adivasis, Muslims, Christians and atheists as outsiders, a threat to the nation and the state, citizens only in a "minority" sense: on sufferance". The contemporary populism in India has changed the nature of political discourses or rather introduced new set of practices and narratives by giving new meanings. According to Gudavarthy [10], the focus of current populism has been on the larger narrative of "us" versus "them" where they are fragmenting the polity on the one hand and conjoining them with a unified Hindutva narrative on the other. However, this current mode of populism is not restricted merely to electoral purposes but has strategically dictated the policy frame as witnessed during some of the instances like demonetisation and GST.

The roots and ideology of BJP are so ingrained in Hindutva that their economic policies are reflective of the same. The ruling party argues for aggressive economic development in the form of increased privatisation, technology and digitisation [8]. The "Make in India" movement is one such example that was launched by this government in September 2014, to convert India into a new global manufacturing hub and attract investments. The same commitment has been reiterated at various international forums by the Prime Minister Narendra Modi. The three major tactics focussed to administer it included reviving domestic investment, ensuring ease of doing business and attracting FDI for fostering the manufacturing sector [11]. Correspondingly, the ruling party has been proactive in branding the nation as the Incredible India to which Edwards and Ramamurthy suggest that this campaign "frames India as a hybrid nation, open to global capital but distinctively Hindu in nature. It can be understood as an extension of cultural chauvinism, justified through the economic imperative to engage with global markets" ([12], p. 325). Gudavarthy further describes that this party "allows for a discourse that is pro-corporate but anti-modernity; it helps to push for high-end capitalist growth marked by bullet trains and urbanisation and also address the community anxieties that capitalist modernity introduces; it allows to claim a legacy of a pure past to be enjoined with claims for a radically altered future; it sympathises with preserving of community identities, including control of their women and property, yet it can lay a claim to a politics that is beyond caste and religious considerations" ([10], p. 7).

*DOI: http://dx.doi.org/10.5772/intechopen.94310*

failed to achieve its intended outcomes.

**2. Hindutva politics and its economic policies**

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium… DOI: http://dx.doi.org/10.5772/intechopen.94310*

The paper focuses on the demonetisation policy thrusted upon the people of the country on 8th of November 2016 where in the BJP government demonetised the 500 and 1000 banknotes. The objective behind demonetisation process was to curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activities and terrorism, that witnessed mixed reactions from the economists and people of the country. This move directed to eliminate "black money" and corruption failed to achieve its intended outcomes.

#### **2. Hindutva politics and its economic policies**

*Emerging Markets*

people.

are so designed that they are lop-sided and tend to defend the profit-making big corporations and businesses instead of overall development of the nation and

The rise of BJP politics has even given rise to communalism, insecurities amongst religious minorities and their vulnerability has been further strengthened by the government ministers and members of parliament who openly air communalist, divisive and reactionary sentiments while making hate speeches and inciting violence against minorities [2]. Communalism is very much the tool of the ruling class politics and in the words of Singh [3], "Communalism in contemporary India, as ideology and practice, is above all an aspect of the politics of the ruling classes in a society with a massive feudal colonial inheritance, deep religious divisions, and undergoing its own, historically specific form of capitalist development". Besides favouring capitalist mode of development, they have also disrupted the enabling environment of doing business and start-ups by promoting communalism, violence

MSMEs considered as "growth engines" play pivotal role of providing industrialisation opportunities in rural and backward areas coupled with employment generation, thereby contributing to reduction of regional imbalance and equitable distribution of national income [4]. MSMEs are also considered as ancillary units or supplementary units to large industries as they provide raw materials and backward linkages, which adds to socio economic development. It consists of 633.88 lakhs (63.388 million) of units and provides employment to nearly 11.10 crores (11.1 million) of people in the country as per the National Sample Survey (NSS) 73rd round, conducted by National Sample Survey Office, Ministry of Statistics & Programme Implementation during the period 2015–2016 [5, 6]. Some of the important programmes and policies to drive economic and social development in India by BJP government included abrupt demonetisation, introduction of GST, campaigns for "Make in India", "Skills India", "Incredible India" and "sab ka saath sab ka vikas (together with all, development for all)". However, these initiatives by the government did not assist the MSME sector to leverage growth but on the contrary turned

According to Karani and Panda [7], the need for employment generation is crucial to the nation as the youth occupy the highest share in the pie of the demographic profile of India. The authors further explain that the various employment challenges include relevant skills development and large-scale job creation, coping capacity of employers with turbulent global manufacturing ecosystem and social security initiatives to address the needs of the employees [7]. However, it becomes imperative for the ruling government to introduce such policies and programmes that cater to the needs of the local employers, employees and create new entrepreneurs. On the contrary, with an increasingly intolerant Hindutva political climate in India, the initiatives of BJP government have been more towards creating ideal national identity (Hindutva) that interconnects with liberalisation and globalisation

Additionally, the policies of the BJP government have been precarious and more instrumental in promoting big profit-making giants, multinationals and corporations while local enterprises remain neglected. In the words of Banaji [8], a new narrative of forward thinking has emerged where wealth and national pride would be delivered to Indians and business opportunities to industrialists by the leadership. Hence, the key objective of this study is to explore the encounters and impact of BJP governments policies including demonetisation and GST on MSMEs that proved detrimental and unfavourably affected the lives of the people, hence, rendering to its decline. The methodology adopted for this study is the analysis of

and insecurities amongst people and societies.

disadvantageous for their growth.

secondary data and content analysis.

**134**

of the economy.

The independence from colonial rule coupled with partisan of British India during 1947 witnessed the making of Muslim-majority Pakistan and Hindu-majority India, a result of two nation-theory based on two distinct religious identities. The then leaders of independent India including Jawaharlal Nehru, Mahatma Gandhi, Baba Ambedkar and many more scholars envisioned secular nationalism that formed the basis of India's constitutional democracy. But, on the contrary the birth of RSS, BJP as political party and its allies emphasised on communal identity and reiterates the narrative of Hindu nationalism/ Hindutva. This discourse/ narrative has been gaining momentum in the recent years since the BJP came into power with full majority in the year 2014. Their focus has been to create Hindu Rashtra (Hindu nation), rattle against Pakistan and critique in what they believe is the advantaged status of the religious minorities in the country [9]. According to Banaji ([8], p. 334), "this narrative positions Adivasis, Muslims, Christians and atheists as outsiders, a threat to the nation and the state, citizens only in a "minority" sense: on sufferance". The contemporary populism in India has changed the nature of political discourses or rather introduced new set of practices and narratives by giving new meanings. According to Gudavarthy [10], the focus of current populism has been on the larger narrative of "us" versus "them" where they are fragmenting the polity on the one hand and conjoining them with a unified Hindutva narrative on the other. However, this current mode of populism is not restricted merely to electoral purposes but has strategically dictated the policy frame as witnessed during some of the instances like demonetisation and GST.

The roots and ideology of BJP are so ingrained in Hindutva that their economic policies are reflective of the same. The ruling party argues for aggressive economic development in the form of increased privatisation, technology and digitisation [8]. The "Make in India" movement is one such example that was launched by this government in September 2014, to convert India into a new global manufacturing hub and attract investments. The same commitment has been reiterated at various international forums by the Prime Minister Narendra Modi. The three major tactics focussed to administer it included reviving domestic investment, ensuring ease of doing business and attracting FDI for fostering the manufacturing sector [11]. Correspondingly, the ruling party has been proactive in branding the nation as the Incredible India to which Edwards and Ramamurthy suggest that this campaign "frames India as a hybrid nation, open to global capital but distinctively Hindu in nature. It can be understood as an extension of cultural chauvinism, justified through the economic imperative to engage with global markets" ([12], p. 325). Gudavarthy further describes that this party "allows for a discourse that is pro-corporate but anti-modernity; it helps to push for high-end capitalist growth marked by bullet trains and urbanisation and also address the community anxieties that capitalist modernity introduces; it allows to claim a legacy of a pure past to be enjoined with claims for a radically altered future; it sympathises with preserving of community identities, including control of their women and property, yet it can lay a claim to a politics that is beyond caste and religious considerations" ([10], p. 7).

Another obscure initiative that took the nation to stagger was the demonetisation on 8 November 2016 when the Prime Minister of India scrapped Indian banknotes of 500 and 1000 to weed-out black money and fake currency in the system. The government believe that this currency ban would address four issues and they are to control inflation, to bar corruption, to abolish the use of illicit and counterfeit currency to fund illegal activities and terrorism and to discourage the cash transaction [13, 14]. Several economists, industrialists, political leaders and research scholars have divergent views over its impact on the economy. This is not the first time that demonetisation had happened but had witnessed the same in the in the year 1978 where the Indian banknotes of 500, 1000 and 10,000 had been scrapped. The objective then too was to eliminate "the possible use of such notes for financing illegal transactions" ([15], p. 77). According to Rajakumar & Shetty [16], the demonetisation then witnessed limited attention and had miniscule impact on the daily lives of common people as the demonetised banknotes were of high value and were of little use for common people. The author further states that the high denomination notes demonetised then, formed just about 0.6% of the total currency in circulation as compared to the 2014 where the demonetised ₹500 and ₹1000 notes constitute over 85% of total notes in circulation by value. Demonetisation for a short term reduced demand and hampered production, especially in the informal sector that transacts mainly in cash [5, 6]. Another justification of demonetisation prompted by the BJP government was advancement towards financial inclusion and transition to Digital India. However, according to the findings of Daya and Mader [17], the uptake of digital transactions among the banked poor remained minimal, and changes in savings behaviour were negligible. They concluded that in a country where many people still worry about their family's next meal and cannot afford education or sanitation, using government policy to expand financial, rather than other services, misses the mark. Cash shortage in the economy due to demonetisation ravaged the informal economy to which many of the MSMEs belong. The study by Shankar and Sahni [18] investigates the effects of demonetisation in the informal economy including waste chains where the initiative triggered its own set of adverse consequences in a segment of the informal markets, much to the detriment of the labouring poor. It ended up in disturbing the delicate balance of trust in the informal economy and upheavals in the economy, resulting in mistrust in the government and its institutions.

#### **3. Overview of MSME economy in India**

The Micro, Small and Medium Scale Enterprises (MSMEs) play a pivotal role and contributes to the economic and social development of the developing countries. They are often considered as "engines of economic growth" in India [19]. These MSMEs play a significant role in creating large employment opportunities, wealth creation, develop entrepreneurship and innovation, social cohesion and augment local and regional development in [20]. After agriculture, these MSMEs are the second largest in generating large employment opportunities that are comparatively less capital intensive in nature. According to Annual Report of MSME 2017–2018, MSMEs are considered as ancillary units and are supplements to large industries that significantly contributes to the inclusive industrial growth [21]. According to the same report, during the period 2015–2016, there were 633.88 lakh unincorporated non-agriculture MSMEs in the country engaged in different economic activities including 196.64 lakh in Manufacturing, 230.35 lakh in Trade and 206.84 lakh in Other Services. It is seen that 31% MSMEs were found to be engaged in manufacturing activities, while 36% were in trade and 33% in other services.

**137**

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium…*

Again, out of 633.88 estimated number of MSMEs, 324.88 lakh MSMEs (51.25%) were in rural areas and 309 lakh MSMEs (48.75%) were in the urban areas. The Micro sector with 630.52 lakh estimated enterprises accounts for more than 99% of total estimated number of MSMEs. Small sector with 3.31 lakh and Medium sector with 0.05 lakh estimated MSMEs accounts for 0.52% and 0.01% of total estimated MSME.As per the National Sample Survey (NSS) 73rd round conducted during the period 2015–2016, MSME sector has been creating 11.10 crore jobs (360.41 lakh in Manufacturing, 387.18 lakh in Trade and 362.82 lakh in Other Services and 0.07 lakh in Non-captive Electricity Generation and Transmission) in the rural and the urban

MSMEs constitute more than 80% of the total number of industrial enterprises

The economic liberalisation in India took place in the year 1991, when India opened

and support industrial development. Indian MSMEs have moved up from the manufacture of traditional goods including leather, gems and jewellery, agricultural goods to much more value addition in the manufacturing sector to its entry in the

**4. Relationship between business and Hindutva politics in India**

doors for foreign and private investment and thrusted upon market and serviceoriented initiatives. With the advent of neoliberalism, the means to approach, study and measure country's growth and development parameters have changed. The era of neoliberals if often identified and linked with globalisation, capitalism and financialisation. According to Epstein [23], in the era of neoliberalism, capitalism is reflected in the "increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies". The advocates of neoliberalism focusses more on the GDP growth rates while the human developmental and other social, economic and environmental indicators remain ignored and neglected. According to Siddiqui [24], the state plays a minimal role while the private property and free market are dominant and favoured in neoliberalism regime. Siddiqui ([2], p. 150), further adds that "neoliberal and corporate-led growth, with a heavy reliance on market forces for employment and welfare, have displaced the earlier policies of state-sponsored equity and created increased insecurities and tensions that scapegoat vulnerable minorities, tribal peoples and Dalit, all of whom have become easy targets for collective violence." The author further adds that it focuses excessively on growth and overlooks other crucial elements like inequality, unemployment and poverty and hence development is synonymous to increase in growth rates achieved by the inflow of foreign capital by multinational companies [2]. The advent of neoliberalism in India is considered in the sphere of economy while the rise of Hindutva is investigated in the cultural domain. This emerging new narrative/ regime led by the BJP government and its allies is a fusion of neoliberalism and Hindutva representing economic policy and identity politics respectively. According to Kaul [25], neoliberalism is deterritorialises capital, disrupts traditional communitarian affiliations of identity and weakens the nation-state foundation by shifting power toward the globally mobile transnational corporate entities and away from the governments with greater constrains and limited power to regulate, what, how and to what extent. Such pro-foreign business policy and strategies of governance facilitates corporate to takeover domestic businesses, lands and mineral resources from rural people [26], thus leading to large-scale dispossessions and displacements of rural and marginalised communities and their migration to the cities [27]. In recent years, the take-over of the nationalist space by fascist forces (Hindutva politics) has left the Indian constitution and the judiciary vulnerable

*DOI: http://dx.doi.org/10.5772/intechopen.94310*

areas across the country.

value-added services as well [22].

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium… DOI: http://dx.doi.org/10.5772/intechopen.94310*

Again, out of 633.88 estimated number of MSMEs, 324.88 lakh MSMEs (51.25%) were in rural areas and 309 lakh MSMEs (48.75%) were in the urban areas. The Micro sector with 630.52 lakh estimated enterprises accounts for more than 99% of total estimated number of MSMEs. Small sector with 3.31 lakh and Medium sector with 0.05 lakh estimated MSMEs accounts for 0.52% and 0.01% of total estimated MSME.As per the National Sample Survey (NSS) 73rd round conducted during the period 2015–2016, MSME sector has been creating 11.10 crore jobs (360.41 lakh in Manufacturing, 387.18 lakh in Trade and 362.82 lakh in Other Services and 0.07 lakh in Non-captive Electricity Generation and Transmission) in the rural and the urban areas across the country.

MSMEs constitute more than 80% of the total number of industrial enterprises and support industrial development. Indian MSMEs have moved up from the manufacture of traditional goods including leather, gems and jewellery, agricultural goods to much more value addition in the manufacturing sector to its entry in the value-added services as well [22].

#### **4. Relationship between business and Hindutva politics in India**

The economic liberalisation in India took place in the year 1991, when India opened doors for foreign and private investment and thrusted upon market and serviceoriented initiatives. With the advent of neoliberalism, the means to approach, study and measure country's growth and development parameters have changed. The era of neoliberals if often identified and linked with globalisation, capitalism and financialisation. According to Epstein [23], in the era of neoliberalism, capitalism is reflected in the "increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies". The advocates of neoliberalism focusses more on the GDP growth rates while the human developmental and other social, economic and environmental indicators remain ignored and neglected. According to Siddiqui [24], the state plays a minimal role while the private property and free market are dominant and favoured in neoliberalism regime. Siddiqui ([2], p. 150), further adds that "neoliberal and corporate-led growth, with a heavy reliance on market forces for employment and welfare, have displaced the earlier policies of state-sponsored equity and created increased insecurities and tensions that scapegoat vulnerable minorities, tribal peoples and Dalit, all of whom have become easy targets for collective violence." The author further adds that it focuses excessively on growth and overlooks other crucial elements like inequality, unemployment and poverty and hence development is synonymous to increase in growth rates achieved by the inflow of foreign capital by multinational companies [2].

The advent of neoliberalism in India is considered in the sphere of economy while the rise of Hindutva is investigated in the cultural domain. This emerging new narrative/ regime led by the BJP government and its allies is a fusion of neoliberalism and Hindutva representing economic policy and identity politics respectively. According to Kaul [25], neoliberalism is deterritorialises capital, disrupts traditional communitarian affiliations of identity and weakens the nation-state foundation by shifting power toward the globally mobile transnational corporate entities and away from the governments with greater constrains and limited power to regulate, what, how and to what extent. Such pro-foreign business policy and strategies of governance facilitates corporate to takeover domestic businesses, lands and mineral resources from rural people [26], thus leading to large-scale dispossessions and displacements of rural and marginalised communities and their migration to the cities [27]. In recent years, the take-over of the nationalist space by fascist forces (Hindutva politics) has left the Indian constitution and the judiciary vulnerable

*Emerging Markets*

Another obscure initiative that took the nation to stagger was the demonetisation on 8 November 2016 when the Prime Minister of India scrapped Indian banknotes of 500 and 1000 to weed-out black money and fake currency in the system. The government believe that this currency ban would address four issues and they are to control inflation, to bar corruption, to abolish the use of illicit and counterfeit currency to fund illegal activities and terrorism and to discourage the cash transaction [13, 14]. Several economists, industrialists, political leaders and research scholars have divergent views over its impact on the economy. This is not the first time that demonetisation had happened but had witnessed the same in the in the year 1978 where the Indian banknotes of 500, 1000 and 10,000 had been scrapped. The objective then too was to eliminate "the possible use of such notes for financing illegal transactions" ([15], p. 77). According to Rajakumar & Shetty [16], the demonetisation then witnessed limited attention and had miniscule impact on the daily lives of common people as the demonetised banknotes were of high value and were of little use for common people. The author further states that the high denomination notes demonetised then, formed just about 0.6% of the total currency in circulation as compared to the 2014 where the demonetised ₹500 and ₹1000 notes constitute over 85% of total notes in circulation by value. Demonetisation for a short term reduced demand and hampered production, especially in the informal sector that transacts mainly in cash [5, 6]. Another justification of demonetisation prompted by the BJP government was advancement towards financial inclusion and transition to Digital India. However, according to the findings of Daya and Mader [17], the uptake of digital transactions among the banked poor remained minimal, and changes in savings behaviour were negligible. They concluded that in a country where many people still worry about their family's next meal and cannot afford education or sanitation, using government policy to expand financial, rather than other services, misses the mark. Cash shortage in the economy due to demonetisation ravaged the informal economy to which many of the MSMEs belong. The study by Shankar and Sahni [18] investigates the effects of demonetisation in the informal economy including waste chains where the initiative triggered its own set of adverse consequences in a segment of the informal markets, much to the detriment of the labouring poor. It ended up in disturbing the delicate balance of trust in the informal economy and upheavals in the economy, resulting in

**136**

mistrust in the government and its institutions.

**3. Overview of MSME economy in India**

The Micro, Small and Medium Scale Enterprises (MSMEs) play a pivotal role and contributes to the economic and social development of the developing countries. They are often considered as "engines of economic growth" in India [19]. These MSMEs play a significant role in creating large employment opportunities, wealth creation, develop entrepreneurship and innovation, social cohesion and augment local and regional development in [20]. After agriculture, these MSMEs are the second largest in generating large employment opportunities that are comparatively less capital intensive in nature. According to Annual Report of MSME 2017–2018, MSMEs are considered as ancillary units and are supplements to large industries that significantly contributes to the inclusive industrial growth [21]. According to the same report, during the period 2015–2016, there were 633.88 lakh unincorporated non-agriculture MSMEs in the country engaged in different economic activities including 196.64 lakh in Manufacturing, 230.35 lakh in Trade and 206.84 lakh in Other Services. It is seen that 31% MSMEs were found to be engaged in manufacturing activities, while 36% were in trade and 33% in other services.

to cynical distortion and manipulation. However, the fusion of neo-liberalism and Hindutva by the fascist forces is being cemented with more support from big business [2]. Unlike the previous government, these pro-business rhetoric and capitalist competition stands against policies to provide public and social sector goods to backward communities while they garner significant backing from major financial conglomerates [28]. Most recently, the sudden scrapping of Rs. 500 and Rs. 1000 badly affected those in MSME and informal sector due to cash shortage while this act boosted the electronic trade for the corporates. Similarly, the introduction of GST again proved unfavourable and damaging for the businesses in the informal sector. In the name of economic reforms, Modi's government strategy seems to be to cut subsidies, increase regressive taxes and capital expenditure and privatise public sector banks and state-owned enterprises such as the Indian Railways [2]. However, the calculated invisibility of new forms of imperialism has rendered the whole economy and political space ambiguous and utterly chaotic.

The current Prime Minister of India (Modi) is represented as an icon and leader of both Hindus and of business by his followers, media and party members. Kaul [25] argues that the Modi-led BJP government generates contradictions and ambiguities in terms of competing/contradictory focus while spanning its interests of Hindutva, business and development. The author cites an instance that "those voted for Modi solely or primarily for "development" expect access to infrastructure and a better quality of life, those who see him as a muscular "Hindutva" leader expect him to promote the traditional conservative religious values along the lines of "make India a Hindu nation," the "business" interests expect him to be a deregulating freemarket reformer. In order to cope with incongruent interests, a strategy of using different idioms that present the interests as uniform for both big business and poor is termed as "speaking with a forked tongue" by Kaul ([25], p. 523). She further explains how the propagation of a neoliberal subjectivity and high-technology capital intensive solutions favoured by corporates remain vital and becomes essential while they laud people who provide for themselves what the government should provide as public goods, hence minimising their role in providing services.

#### **5. Hindutva and decline of MSMEs in India**

The policies and programmes of the contemporary government of BJP ushered with Hindutva philosophy have impacted the MSME sector that mostly overlaps with the informal economy in India. According to FICCI [29], the census of Micro, Small & Medium Enterprises (2006–2007) depicts that nearly 95.7% of the 361 lakh MSMEs in India are unregistered and many of them operate in the unorganised/ informal sector. The micro and small businesses mostly from the informal economy in India are highly fragmented and heterogeneous in nature [30]. This section investigates how the policy decisions taken by the government including demonetisation and GST affects the MSMEs in the country and has led to its decline.

According to some of the scholar's money being "essential"— because the total set of transactions achievable with money is much larger, than the one's achievable without money ([31, 32], p. 47). More than eighty percent of the transactions take place in cash in India and this make it a heavily cash reliant country (cited in [33]). Hence, the shocking decision to demonetise Rs. 500 and Rs.1000 banknotes immediately constrained the MSME sector and unfavourably impacted the economic wellbeing of the people across the country. This abrupt reduction in monetary transactions in the economy came relatively hard-hitting on informal economy including businesses and enterprise in the MSME sector, hence, impacting the economic wellbeing of the people involved in it. The reason being that many such

**139**

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium…*

businesses operate in the shadow of the formal economy, generate funds through informal channels such as friends, relatives, money lenders or micro-finance institutions, who do not maintain proper accounts, often buy and sell in cash, employ casual workers, or rely on family labour [30]. Furthermore, Mankar and Shekhar [33] adds on that this sector depends on cash for making payments to employees, availing raw materials from suppliers and collecting revenue from customers. Waknis [34], describes this step of demonetisation as a pervasive reduction in liquidity that is bound to adversely affect both current and future consumption and investment decisions. The effect of demonetisation was pronounced in this sector as these small businesses largely operated in the cash-based economy, heavily affected the purchasing power and hence, failed to keep afloat [34]. Besides the consumers and businesses owners being impacted, the financial institutions too had their set back that resulted in low growth and poor portfolio performance. Chandrashekhar [35] states that this move was weak, poorly designed followed by unplanned implementation as the government was slow in replacing the new notes against the withdrawn ones in the economy. The author further elaborates that the disruption of production and shrinking of demand came at a time when the economy was already facing recession and deflation and this sudden cash shortage further aggravated the earlier slowdown and depressed prices [35]. It would be important to

The existing informal sector accounts for a large chunk of the Indian economy and its high dependence on cash transactions led Mankar & Shekhar [33] to believe that demonetisation affected the growth of India's GDP too. Due to demonetisation the thriving businesses faced several issues and some of them withered off due to cash crunch. The most damaging effects have been on jobs and that too jobs from the informal sector including MSMEs. India's micro, small and medium (MSMEs) have seen dramatic job losses of 35 lakh in the last four-and-half years, according to a survey by the All India Manufacturers' Organisation (AIMO). According to Waknis, some of the firms and businesses in this sector that shut down due to lack of cash supply would not revive even after the restoration and supply of new currency. However, La Porta and Shleifer [36] opines that such informal businesses are mostly less productive than their formal counterparts and hence would not have drastic impact on output or real GDP. The Economic survey 2016–2017 explains that "the national income accounts estimate informal activity on the basis of formal sector indicators, which have not suffered to the same extent [34]. But the costs have nonetheless been real and significant" [37]. The same report recognises that the short-term costs caused hardships and inconvenience for those in the cash intensive sector and informal sectors who lost income, employment and livelihood. However, these costs are considered transitory and is minimised in recorded GDP as the national income accounts estimate informal activity based on formal sector (mostly big and international corporations) indicators, which have not suffered to the same extent. The percentage share of MSME in GDP has declined from 29.57% in the year 2011–2012 to 28.77% in the year 2015–2016 as per the Annual Report-2017-2018 on MSME. The growth rate too has declined from 15.27% (2012–2013) to 7.62% for the year 2015–2016. It would be interesting to analyse data for last two years 2016-2017- 18 (currently unavailable) to get a clear picture of the impact of the economic policies posed by the BJP government. However, there is a declining trend that depicts

the repercussions of the pro-foreign business policies of the government.

The Economic survey 2017–2018 report highlights the shock of demonetisation to have largely faded away by mid-2017, when the cash-GDP ratio stabilized. But the BJP government was non-stoppable and during the same year when the so-called stabilisation was taking place, they introduced another policy namely Goods and Services Tax (GST). This was launched in July 2017 as an initiative to make uniform

*DOI: http://dx.doi.org/10.5772/intechopen.94310*

see the impact of demonetisation on the GDP of India.

#### *Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium… DOI: http://dx.doi.org/10.5772/intechopen.94310*

businesses operate in the shadow of the formal economy, generate funds through informal channels such as friends, relatives, money lenders or micro-finance institutions, who do not maintain proper accounts, often buy and sell in cash, employ casual workers, or rely on family labour [30]. Furthermore, Mankar and Shekhar [33] adds on that this sector depends on cash for making payments to employees, availing raw materials from suppliers and collecting revenue from customers. Waknis [34], describes this step of demonetisation as a pervasive reduction in liquidity that is bound to adversely affect both current and future consumption and investment decisions. The effect of demonetisation was pronounced in this sector as these small businesses largely operated in the cash-based economy, heavily affected the purchasing power and hence, failed to keep afloat [34]. Besides the consumers and businesses owners being impacted, the financial institutions too had their set back that resulted in low growth and poor portfolio performance. Chandrashekhar [35] states that this move was weak, poorly designed followed by unplanned implementation as the government was slow in replacing the new notes against the withdrawn ones in the economy. The author further elaborates that the disruption of production and shrinking of demand came at a time when the economy was already facing recession and deflation and this sudden cash shortage further aggravated the earlier slowdown and depressed prices [35]. It would be important to see the impact of demonetisation on the GDP of India.

The existing informal sector accounts for a large chunk of the Indian economy and its high dependence on cash transactions led Mankar & Shekhar [33] to believe that demonetisation affected the growth of India's GDP too. Due to demonetisation the thriving businesses faced several issues and some of them withered off due to cash crunch. The most damaging effects have been on jobs and that too jobs from the informal sector including MSMEs. India's micro, small and medium (MSMEs) have seen dramatic job losses of 35 lakh in the last four-and-half years, according to a survey by the All India Manufacturers' Organisation (AIMO). According to Waknis, some of the firms and businesses in this sector that shut down due to lack of cash supply would not revive even after the restoration and supply of new currency. However, La Porta and Shleifer [36] opines that such informal businesses are mostly less productive than their formal counterparts and hence would not have drastic impact on output or real GDP. The Economic survey 2016–2017 explains that "the national income accounts estimate informal activity on the basis of formal sector indicators, which have not suffered to the same extent [34]. But the costs have nonetheless been real and significant" [37]. The same report recognises that the short-term costs caused hardships and inconvenience for those in the cash intensive sector and informal sectors who lost income, employment and livelihood. However, these costs are considered transitory and is minimised in recorded GDP as the national income accounts estimate informal activity based on formal sector (mostly big and international corporations) indicators, which have not suffered to the same extent. The percentage share of MSME in GDP has declined from 29.57% in the year 2011–2012 to 28.77% in the year 2015–2016 as per the Annual Report-2017-2018 on MSME. The growth rate too has declined from 15.27% (2012–2013) to 7.62% for the year 2015–2016. It would be interesting to analyse data for last two years 2016-2017- 18 (currently unavailable) to get a clear picture of the impact of the economic policies posed by the BJP government. However, there is a declining trend that depicts the repercussions of the pro-foreign business policies of the government.

The Economic survey 2017–2018 report highlights the shock of demonetisation to have largely faded away by mid-2017, when the cash-GDP ratio stabilized. But the BJP government was non-stoppable and during the same year when the so-called stabilisation was taking place, they introduced another policy namely Goods and Services Tax (GST). This was launched in July 2017 as an initiative to make uniform

*Emerging Markets*

to cynical distortion and manipulation. However, the fusion of neo-liberalism and Hindutva by the fascist forces is being cemented with more support from big business [2]. Unlike the previous government, these pro-business rhetoric and capitalist competition stands against policies to provide public and social sector goods to backward communities while they garner significant backing from major financial conglomerates [28]. Most recently, the sudden scrapping of Rs. 500 and Rs. 1000 badly affected those in MSME and informal sector due to cash shortage while this act boosted the electronic trade for the corporates. Similarly, the introduction of GST again proved unfavourable and damaging for the businesses in the informal sector. In the name of economic reforms, Modi's government strategy seems to be to cut subsidies, increase regressive taxes and capital expenditure and privatise public sector banks and state-owned enterprises such as the Indian Railways [2]. However, the calculated invisibility of new forms of imperialism has rendered the whole economy

The current Prime Minister of India (Modi) is represented as an icon and leader of both Hindus and of business by his followers, media and party members. Kaul [25] argues that the Modi-led BJP government generates contradictions and ambiguities in terms of competing/contradictory focus while spanning its interests of Hindutva, business and development. The author cites an instance that "those voted for Modi solely or primarily for "development" expect access to infrastructure and a better quality of life, those who see him as a muscular "Hindutva" leader expect him to promote the traditional conservative religious values along the lines of "make India a Hindu nation," the "business" interests expect him to be a deregulating freemarket reformer. In order to cope with incongruent interests, a strategy of using different idioms that present the interests as uniform for both big business and poor is termed as "speaking with a forked tongue" by Kaul ([25], p. 523). She further explains how the propagation of a neoliberal subjectivity and high-technology capital intensive solutions favoured by corporates remain vital and becomes essential while they laud people who provide for themselves what the government should provide as public goods, hence minimising their role in providing services.

The policies and programmes of the contemporary government of BJP ushered with Hindutva philosophy have impacted the MSME sector that mostly overlaps with the informal economy in India. According to FICCI [29], the census of Micro, Small & Medium Enterprises (2006–2007) depicts that nearly 95.7% of the 361 lakh MSMEs in India are unregistered and many of them operate in the unorganised/ informal sector. The micro and small businesses mostly from the informal economy in India are highly fragmented and heterogeneous in nature [30]. This section investigates how the policy decisions taken by the government including demoneti-

According to some of the scholar's money being "essential"— because the total set of transactions achievable with money is much larger, than the one's achievable without money ([31, 32], p. 47). More than eighty percent of the transactions take place in cash in India and this make it a heavily cash reliant country (cited in [33]). Hence, the shocking decision to demonetise Rs. 500 and Rs.1000 banknotes immediately constrained the MSME sector and unfavourably impacted the economic wellbeing of the people across the country. This abrupt reduction in monetary transactions in the economy came relatively hard-hitting on informal economy including businesses and enterprise in the MSME sector, hence, impacting the economic wellbeing of the people involved in it. The reason being that many such

sation and GST affects the MSMEs in the country and has led to its decline.

and political space ambiguous and utterly chaotic.

**5. Hindutva and decline of MSMEs in India**

**138**

tax system and to centralise capital, further pushed out the small traders and manufacturers in the MSME from the economy. According to Banerjee and Prasad [38], the main aim of GST was "to create a uniform market by removing existing distortions, barriers, and complicated multi-tiered tax structures. The Indian version of GST that has three layers-state GST, central GST, and integrated GST-with multiple rates, however, does not look simple". This policy decision demonstrates the fascist and aggressive capitalist nature of their inbuilt Hindutva politics where the formal sector or the multinational corporations are favoured while the MSME and the informal sector remains neglected. This policy decision due to its scale and complexity encountered challenges of policy, law and information technology systems that largely affected the informal sector. According to Chandrashekhar [35], the shift to the GST regime is more towards FDI friendly environment that is conducive for big corporations, catalysing privatisation, encouraging cashless economy through digital transactions and fiscal consolidation. GST came with increased compliances and paper that coping with it became very difficult for small businessmen and traders in the MSME sector. This largely disrupted the functioning of supply chains involving small traders that supplied intermediaries to large manufacturing companies mostly belonging to formal sector. This highlights the unpreparedness of the government in a heterogeneous Indian nation where disparities are evident and holds a legacy of disconnect between policymaking and implementation [38].

The Economic Survey 2017–2018 report mentions about the improved economic growth in the later phase of the year where corrective actions were taken and the global economic recovery boosted exports were synchronised. The report further reflects on the cumulative actions to improve the business climate, India jumped 30 spots on the World Bank's Ease of Doing Business rankings, while similar actions to liberalize the foreign direct investment (FDI) regime helped increase flows by 20 percent. However, the purpose of the government is well served as they were lauded by the India's big capitalist lobby and harnessed goodwill from big financial global bodies including IMF and World Bank, all representing the interests of global finance capital. As demonstrated by the government, the objective to plug the informal economy into formal set-up may have benefits theoretically but not in praxis. However, the cost can outweigh the benefits if done forcefully through radical reforms [38]. But the most damning thing is this: there is no rethinking on GST after its all-round damaging impact on the small traders and manufacturers has been revealed in all its dimensions.

#### **6. Conclusion**

The government has been proactive in satisfying the global needs of the international corporations rather than addressing the domestic needs of the informal sector including MSME. The formal sector, equipped with resources and access to information, is somehow coping with this disruption, but the first shock wave of demonetisation has swept small businesses off their feet. It is clear that the rise of Hindutva right wing politics and their policy of demonetisation coupled with GST led to the fall of MSME in India. The Hindutva led demonetisation policies were disruptive and severely affected the cash driven small, micro and medium enterprises due to shortage of cash flow and decreased demand. It led to the growth of unemployment in the MSMEs sector. The entire MSMEs sector faced disruption in their normal operations in India. The negative transition of economy due to demonetisation has pushed the entire sector into an uncharted territory of uncertainty and crisis. Therefore, it can be said that Hindutva led demonetisation is a thoughtless policy that had huge negative implications for MSMEs in India.

**141**

**Author details**

University, India

\* and Bhabani Shankar Nayak<sup>2</sup>

2 University for the Creative Arts, Epsom, London, UK

\*Address all correspondence to: gsinha@jgu.edu.in

provided the original work is properly cited.

1 Jindal School of Government and Public Policy (JSGP), O.P. Jindal Global

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

Geeta Sinha1

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium…*

*DOI: http://dx.doi.org/10.5772/intechopen.94310*

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium… DOI: http://dx.doi.org/10.5772/intechopen.94310*

### **Author details**

*Emerging Markets*

tax system and to centralise capital, further pushed out the small traders and manufacturers in the MSME from the economy. According to Banerjee and Prasad [38], the main aim of GST was "to create a uniform market by removing existing distortions, barriers, and complicated multi-tiered tax structures. The Indian version of GST that has three layers-state GST, central GST, and integrated GST-with multiple rates, however, does not look simple". This policy decision demonstrates the fascist and aggressive capitalist nature of their inbuilt Hindutva politics where the formal sector or the multinational corporations are favoured while the MSME and the informal sector remains neglected. This policy decision due to its scale and complexity encountered challenges of policy, law and information technology systems that largely affected the informal sector. According to Chandrashekhar [35], the shift to the GST regime is more towards FDI friendly environment that is conducive for big corporations, catalysing privatisation, encouraging cashless economy through digital transactions and fiscal consolidation. GST came with increased compliances and paper that coping with it became very difficult for small businessmen and traders in the MSME sector. This largely disrupted the functioning of supply chains involving small traders that supplied intermediaries to large manufacturing companies mostly belonging to formal sector. This highlights the unpreparedness of the government in a heterogeneous Indian nation where disparities are evident and holds a legacy of

The Economic Survey 2017–2018 report mentions about the improved economic growth in the later phase of the year where corrective actions were taken and the global economic recovery boosted exports were synchronised. The report further reflects on the cumulative actions to improve the business climate, India jumped 30 spots on the World Bank's Ease of Doing Business rankings, while similar actions to liberalize the foreign direct investment (FDI) regime helped increase flows by 20 percent. However, the purpose of the government is well served as they were lauded by the India's big capitalist lobby and harnessed goodwill from big financial global bodies including IMF and World Bank, all representing the interests of global finance capital. As demonstrated by the government, the objective to plug the informal economy into formal set-up may have benefits theoretically but not in praxis. However, the cost can outweigh the benefits if done forcefully through radical reforms [38]. But the most damning thing is this: there is no rethinking on GST after its all-round damaging impact on the small traders and manufacturers

The government has been proactive in satisfying the global needs of the international corporations rather than addressing the domestic needs of the informal sector including MSME. The formal sector, equipped with resources and access to information, is somehow coping with this disruption, but the first shock wave of demonetisation has swept small businesses off their feet. It is clear that the rise of Hindutva right wing politics and their policy of demonetisation coupled with GST led to the fall of MSME in India. The Hindutva led demonetisation policies were disruptive and severely affected the cash driven small, micro and medium enterprises due to shortage of cash flow and decreased demand. It led to the growth of unemployment in the MSMEs sector. The entire MSMEs sector faced disruption in their normal operations in India. The negative transition of economy due to demonetisation has pushed the entire sector into an uncharted territory of uncertainty and crisis. Therefore, it can be said that Hindutva led demonetisation is a thoughtless

policy that had huge negative implications for MSMEs in India.

disconnect between policymaking and implementation [38].

has been revealed in all its dimensions.

**6. Conclusion**

**140**

Geeta Sinha1 \* and Bhabani Shankar Nayak<sup>2</sup>

1 Jindal School of Government and Public Policy (JSGP), O.P. Jindal Global University, India

2 University for the Creative Arts, Epsom, London, UK

\*Address all correspondence to: gsinha@jgu.edu.in

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

### **References**

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[4] Shaik, M., Ramesh, K.V., Kumar, K. A. and Babu, G.S., (2017), Performance of MSMEs Sector in India, *SSRG-International Journal of Economics and Management Studies*, Vol. 4 (3), pp. 11-15

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[12] Edwards, L. and Ramamurthy, A. (2017), "(In)credible India? A Critical Analysis of India's Nation Branding," *Communication, Culture & Critique*, Vol. 10(2) p, 322-343.

[13] Kushwaha, H., Kumar, A. and Abbas, Z. (2018), Impact of Demonetisation on Indian Economy: A Critical Study, *International Journal of Management Studies*, Vol.–V, Issue –2(7), p. 25-31

[14] Deb, R. and Paul, K, N. R. (2017), Demonetisation and Beauty Parlour Business, *Journal of Entrepreneurship and Management,* Vol.6 (3), pp. 17-34

[15] Reserve Bank of India (1977-78): Report on Currency and Finance 1977- 78, Mumbai: RBI.

[16] Rajkumar, J.D & Shetty, S.L. (2016), Demonetisation: 1978, the Present and the Aftermath, *Economic and Political Weekly*, Vol-51, Issue no-48.

[17] Daya, M. and Mader, P. (2018), Did Monetisation Accelerate Financial Inclusion? *Economic and Political Weekly*, Vol. 53 (45).

[18] Shankar, V.K. and Sahni, R. (2018), How Demonetisation Affected Informal Labour: Waste Chains in a City, *Economic and Political Weekly*, Vol-53, Issue no-26-27.

[19] Manna, P. and Mistri, T. (2017), Status of Micro Small and Medium Enterprises (MSME) in India: A Regional Analysis, *IOSR Journal of Humanities and Social Science (IOSR-JHSS),* Vol: 22 (9), Ver. 13, pp. 72-82.

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523-548

pp. 84-99.

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233-247.

Delhi, India.

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[30] KPMG and IMC (2017), Catalysing MSME entrepreneurship in India: Capital, technology and public policy, White paper, KPMG and IMC Chamber

[31] Wallace, N (2001): "Whither Monetary Economics?" *International Economic Review,* Vol 42, pp. 847-69.

[32] Nosal, E and G Rocheteau (2011): "*Money, Payments, and Liquidity*," *MIT Press*, Ed 1, Vol 1, MIT Press Books.

[33] Mankar, R. and Shekhar, S. (2017), Demonetisation and the Delusion of GDP Growth, *Economic and Political* 

[34] Waknis, P. (2017), Demonetisation through Segmented Markets: Some Theoretical Perspectives, *Economic and* 

*Weekly,* Vol-52, Issue-18.

*Political Weekly*, Vol. 52 (9).

[35] Chandrashekhar, C.P. (2017), Erroneous Understanding of

*and Political Weekly*, Vol. 52(9).

109-26.

Government of India

Vol. 52 (38).

[38] Banerjee, S. and Prasad, P. (2017), Small Businesses in the GST Regime, *Economic and Political Weekly*,

Macroeconomic Challenges, *Economic* 

[36] La Porta, R and A Shleifer (2014): "Informality and Development," *Journal of Economic Perspectives*, American Economic Association, Vol 28, No 3, pp.

[37] GOI, (2017), Economic Survey 2016- 17, Ministry of Finance Department of Economic Affairs, Economic Division,

*DOI: http://dx.doi.org/10.5772/intechopen.94310*

[20] Bidja, A. B., and Mandizvidza, K. (2017), Strengthening enterprises growth and effectiveness in developing economies: A case of very Small, Small and Medium-sized Enterprises in Cameroon, IOSR Journal of Business and Management (IOSR-JBM),

[21] Nagaraja, B. A. (2013), Micro analysis on the performance of micro, small and medium enterprises in North Eastern states, *International Research Journal of Agricultural Economics and Statistic*, Vol.4(1), pp. 109- 114.

[22] Sharma, R. and Afroz, Z. (2014), Growth and Performance of MSME's in Present Scenario for the Development of India, *International Journal of Interdisciplinary and Multidisciplinary* 

*Financialization and the World Economy*,

[25] Kaul, N. (2017), Rise of the Political Right in India: Hindutva-Development Mix, Mody Myth, and Dualities, *Journal of Labor and Society*, Vol.20 (4), pp.

[26] Siddiqui, K. (2014), Growth and crisis in India's political economy from 1991 to 2013, *International Journal of Social and Economic Research*, Vol. 4(2),

[27] Jha, M. (2018), Neo-liberal

[28] Naseemullah, A. (2017), The Political Economy of Economic Conservatism in India: From Moral Economy to Pro-business Nationalism,

*Weekly*, Vol-53, Issue-47.

Transformations and the Challenges of Governing India, *Economic and Political* 

*Studies*, Vol:1 (5), pp. 136-143.

Cheltenham, UK: Edward Elgar

[24] Siddiqui, K. (2012). Developing countries experience with neoliberalism and globalisation, *Research in Applied Economics*, Vol.4 (4), pp. 12-37.

[23] Epstein, G.A. (2005),

Vol.19(3), pp. 19-27.

*Rise of Hindutva Politics, Demonetisation, and Its Impact on Micro, Small and Medium… DOI: http://dx.doi.org/10.5772/intechopen.94310*

[20] Bidja, A. B., and Mandizvidza, K. (2017), Strengthening enterprises growth and effectiveness in developing economies: A case of very Small, Small and Medium-sized Enterprises in Cameroon, IOSR Journal of Business and Management (IOSR-JBM), Vol.19(3), pp. 19-27.

[21] Nagaraja, B. A. (2013), Micro analysis on the performance of micro, small and medium enterprises in North Eastern states, *International Research Journal of Agricultural Economics and Statistic*, Vol.4(1), pp. 109- 114.

[22] Sharma, R. and Afroz, Z. (2014), Growth and Performance of MSME's in Present Scenario for the Development of India, *International Journal of Interdisciplinary and Multidisciplinary Studies*, Vol:1 (5), pp. 136-143.

[23] Epstein, G.A. (2005), *Financialization and the World Economy*, Cheltenham, UK: Edward Elgar

[24] Siddiqui, K. (2012). Developing countries experience with neoliberalism and globalisation, *Research in Applied Economics*, Vol.4 (4), pp. 12-37.

[25] Kaul, N. (2017), Rise of the Political Right in India: Hindutva-Development Mix, Mody Myth, and Dualities, *Journal of Labor and Society*, Vol.20 (4), pp. 523-548

[26] Siddiqui, K. (2014), Growth and crisis in India's political economy from 1991 to 2013, *International Journal of Social and Economic Research*, Vol. 4(2), pp. 84-99.

[27] Jha, M. (2018), Neo-liberal Transformations and the Challenges of Governing India, *Economic and Political Weekly*, Vol-53, Issue-47.

[28] Naseemullah, A. (2017), The Political Economy of Economic Conservatism in India: From Moral Economy to Pro-business Nationalism, *Studies in Indian Politics*, Vol.5 (2), pp. 233-247.

[29] FICCI (2017), Informal Economy in India: Setting the framework for formalisation, Federation of Indian Chambers of Commerce and Industry and Konrad- Adenauer- Stiftung, New Delhi, India.

[30] KPMG and IMC (2017), Catalysing MSME entrepreneurship in India: Capital, technology and public policy, White paper, KPMG and IMC Chamber of Commerce.

[31] Wallace, N (2001): "Whither Monetary Economics?" *International Economic Review,* Vol 42, pp. 847-69.

[32] Nosal, E and G Rocheteau (2011): "*Money, Payments, and Liquidity*," *MIT Press*, Ed 1, Vol 1, MIT Press Books.

[33] Mankar, R. and Shekhar, S. (2017), Demonetisation and the Delusion of GDP Growth, *Economic and Political Weekly,* Vol-52, Issue-18.

[34] Waknis, P. (2017), Demonetisation through Segmented Markets: Some Theoretical Perspectives, *Economic and Political Weekly*, Vol. 52 (9).

[35] Chandrashekhar, C.P. (2017), Erroneous Understanding of Macroeconomic Challenges, *Economic and Political Weekly*, Vol. 52(9).

[36] La Porta, R and A Shleifer (2014): "Informality and Development," *Journal of Economic Perspectives*, American Economic Association, Vol 28, No 3, pp. 109-26.

[37] GOI, (2017), Economic Survey 2016- 17, Ministry of Finance Department of Economic Affairs, Economic Division, Government of India

[38] Banerjee, S. and Prasad, P. (2017), Small Businesses in the GST Regime, *Economic and Political Weekly*, Vol. 52 (38).

**142**

*Emerging Markets*

**References**

pp. 775-778

[1] Kumari, A. (2018), Impact of Right Wing Politics in India in 21st Century, *RESEARCH REVIEW International Journal of Multidisciplinary*, Vol.3 (8),

[11] Shukla, K., Purohit, M., and Gaur, S. P. (2017), Studying 'Make in India' from the Lens of Labour Reforms, *Management and Labour Studies*,

[12] Edwards, L. and Ramamurthy, A. (2017), "(In)credible India? A Critical Analysis of India's Nation Branding," *Communication, Culture & Critique*, Vol.

[14] Deb, R. and Paul, K, N. R. (2017), Demonetisation and Beauty Parlour Business, *Journal of Entrepreneurship and Management,* Vol.6 (3), pp. 17-34

[15] Reserve Bank of India (1977-78): Report on Currency and Finance 1977-

[16] Rajkumar, J.D & Shetty, S.L. (2016), Demonetisation: 1978, the Present and the Aftermath, *Economic and Political* 

[13] Kushwaha, H., Kumar, A. and Abbas, Z. (2018), Impact of Demonetisation on Indian Economy: A Critical Study, *International Journal of Management Studies*, Vol.–V, Issue –2(7),

Vol.42(1), pp. 1-19.

10(2) p, 322-343.

78, Mumbai: RBI.

*Weekly*, Vol-51, Issue no-48.

*Weekly*, Vol. 53 (45).

Issue no-26-27.

72-82.

[17] Daya, M. and Mader, P. (2018), Did Monetisation Accelerate Financial Inclusion? *Economic and Political* 

[18] Shankar, V.K. and Sahni, R. (2018), How Demonetisation Affected Informal

Labour: Waste Chains in a City, *Economic and Political Weekly*, Vol-53,

[19] Manna, P. and Mistri, T. (2017), Status of Micro Small and Medium Enterprises (MSME) in India: A Regional Analysis, *IOSR Journal of Humanities and Social Science (IOSR-JHSS),* Vol: 22 (9), Ver. 13, pp.

p. 25-31

[2] Siddiqui, K. (2017), Hindutva, Neoliberalism and the Reinventing of India, *Journal of Economic and Social Thought*, Vol. 4(2), pp. 142-186

[3] Singh, R. (1990), Communalism and struggle against communalism: A Marxist view, *Social Scientist*, Vol.

[4] Shaik, M., Ramesh, K.V., Kumar, K. A. and Babu, G.S., (2017), Performance of MSMEs Sector in India, *SSRG-International Journal of Economics and Management Studies*, Vol. 4 (3), pp. 11-15

[5] GOI, (2018), Annual Report: 2017-18, Ministry of Micro, Small and Medium Enterprises, Government of

[6] GOI, (2018), Economic Survey: 2017-18 - Volume-1, Department of Economic Affairs, Ministry of Finance,

[7] Karani, A. and Panda, R. (2018), 'Make in India' Campaign: Labour Law Reform Strategy and Its Impact on Job Creation Opportunities in India, *Management and Labour Studies*, Vol. 43

[8] Banaji, S. (2018), Vigilante Publics: Orientalism, Modernity and Hindutva Fascism in India, *Javnost - The Public*,

[9] Haqqani, H. (2003), The Politics of Hindutva in India, Asian Wall Street

[10] Gudavarthy, A. (2018), How BJP Appropriated the Idea of Equality to Create a Divided India, *Economic* and Political Weekly, Vol-53, Issue No-17.

18(207-08), pp. 4-21

India, New Delhi.

Government of India.

(1-2), pp. 58-69

Vol.25 (4), pp. 333-350

Journal, Jan 28, p. A.9

**145**

**Chapter 9**

*Alessandro Torello*

**Abstract**

August 1, 2020.

SAFE, Vietnam, WCO

**1. Introduction**

infrastructures.

The Simplification of Customs

Authorized Economic Operator

(AEO) in Vietnam and in the EU

Customs clearance operations of goods can be facilitated if importers, forwarders, or logistics operators have obtained the status of Authorized Economic Operator (AEO). The simplification of customs formalities, as well as a lower number of document-based customs controls and of physical inspections, speed up the international trade flows and reduce the delivery time of goods. The World Customs Organization (WCO) has promoted the implementation of standardized procedures since 1970s. On this matter, the WCO adopted the Kyoto Convention in 1974 and the Revised Kyoto Convention (RKC) in 1999. The article analyzes the role of the AEO status in Vietnam and in the European Union, and the opportunities of customs cooperation between Vietnam and the European Union, taking into consideration the Free Trade Agreement (EVFTA) which entered into force on

**Keywords:** AEO, customs, EVFTA, Kyoto Convention, MRA, pre-clearing, RKC,

The transport of goods has been revolutionized since the end of the Second World War. Nowadays buying products in any part of the world thanks to the e-commerce or shipping spare parts of cars or machines from Asia to Europe in less

Until November 1989, because of the two-block division of the world, a large number of communist and planned-economy states had no chance to develop an international-trade-oriented economy and a modern system of transport and

As a result of the end of the Cold War and the economic boom of Asian economies (like the Vietnamese economy since the 1990s), the number of stakeholders and international trade players dealing with customs procedures as well as customs compliance rules has increased remarkably. International flows of goods have been

than 24 hours by air transport, or in almost 2 weeks by train, is possible.

progressively influenced by features pertaining to customs legislation.

Formalities: The Role of the

#### **Chapter 9**

## The Simplification of Customs Formalities: The Role of the Authorized Economic Operator (AEO) in Vietnam and in the EU

*Alessandro Torello*

### **Abstract**

Customs clearance operations of goods can be facilitated if importers, forwarders, or logistics operators have obtained the status of Authorized Economic Operator (AEO). The simplification of customs formalities, as well as a lower number of document-based customs controls and of physical inspections, speed up the international trade flows and reduce the delivery time of goods. The World Customs Organization (WCO) has promoted the implementation of standardized procedures since 1970s. On this matter, the WCO adopted the Kyoto Convention in 1974 and the Revised Kyoto Convention (RKC) in 1999. The article analyzes the role of the AEO status in Vietnam and in the European Union, and the opportunities of customs cooperation between Vietnam and the European Union, taking into consideration the Free Trade Agreement (EVFTA) which entered into force on August 1, 2020.

**Keywords:** AEO, customs, EVFTA, Kyoto Convention, MRA, pre-clearing, RKC, SAFE, Vietnam, WCO

#### **1. Introduction**

The transport of goods has been revolutionized since the end of the Second World War. Nowadays buying products in any part of the world thanks to the e-commerce or shipping spare parts of cars or machines from Asia to Europe in less than 24 hours by air transport, or in almost 2 weeks by train, is possible.

Until November 1989, because of the two-block division of the world, a large number of communist and planned-economy states had no chance to develop an international-trade-oriented economy and a modern system of transport and infrastructures.

As a result of the end of the Cold War and the economic boom of Asian economies (like the Vietnamese economy since the 1990s), the number of stakeholders and international trade players dealing with customs procedures as well as customs compliance rules has increased remarkably. International flows of goods have been progressively influenced by features pertaining to customs legislation.

#### *Emerging Markets*

In the current global trade scenario, it is useful to bear in mind that the simplification of customs-related operations is an important feature, as *de facto* it influences positively the global value chains and the opportunity of cost savings thanks to delivery time reduction, and it increases the level of efficiency of the supply chains. On this matter, the AEO (Authorized Economic Operator) is an instrument that has been designed for offering advantages and preferential treatment to economic operators and business integrated in the international supply chains, principally in terms of reduced numbers of customs administrative controls and physical inspections.

#### **2. Containerized transport in Asian harbors**

The containerization has played a central role in the international transport dynamics over the last 40 years. The volume of container traffic has risen remarkably since the fall of the Berlin Wall, particularly in Asia. In 1989, no Chinese ports were included in the list of the main transshipment hubs in the world, apart from Hong Kong, which was the most important international harbor for the traffic of containers (4.5 millions of TEUs—Twenty-foot Equivalent Units). In reality, in 1989 Hong Kong was still part of the territory of the United Kingdom. In fact, Hong Kong passed under the Chinese sovereignty in July 1997, becoming the Special Administrative Region of Hong Kong (HKSAR) on the basis of "the one country, two system" principle.

With the new millennium, the situation changed completely: East and Southeast Asian harbors soared. In 2018, the first nine busiest transshipment ports in the world were located in China (including HKSAR), Singapore, and South Korea: Shanghai (42 millions of TEUs), Singapore (36.6), Ningbo-Zhoushan (26.3), Shenzhen (25.7), Guangzhou (21.9), Busan (21.6), Hong Kong (19.6), Qingdao (19.3), and Tianjin (16) [1].

It is also interesting to consider the growth of volumes from 2010 to 2018 in certain Asian ports. For instance, in 2010 in the harbors of Shanghai and Singapore, the throughput was 29 and 28.4 million TEUs, respectively, which means about three-quarters of the container volume measured in 2018. A significant increase of transshipped containers was observed in the Chinese port of Ningbo-Zhoushan during 2010–2018: the 2010 throughput (13.14 million TEUs) was exactly half of the volume reached in 2018 (source: Journal of Commerce—JOC).

Several factors have allowed to reduce the costs of transport and the transit time to ship goods from Asia to other continents:


**147**

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator…*

• paperless trading, dematerialization of documents, and exchange of documents electronically (e.g. e-customs, e-documents, digital signature) [3];

• the investments in upgrading harbors and their infrastructures, especially in the majority of the Eastern Asian Countries (China and HKSAR, South Korea,

Regarding the modernization of ports, the gigantic size of containerships like ultra-large container vessels (ULCVs) has required the expansion of several harbors and modern systems of cranes for loading and unloading containers. In fact, during the 1990s, Panamax and Post-Panamax vessels could load 4000–8000 TEUs, while

Concerning Vietnam, in terms of transshipment, two of the main Vietnamese ports are Ho Chi Minh City, which is located in Southern Vietnam, and Hai Phong in the North. In 2018, the harbor of Ho Chi Minh City was the 28th busiest international harbor with 6.33 millions of TEUs transshipped. The volume of containers in

As far as the whole container cargo throughput in Vietnamese harbors is concerned, in 2000 the volume was equal to 1.18 million TEUs. Ten years later (2010), the container traffic was more than five times that of 2000: 5.96 million TEUs. In 2018, the total container port throughput reached 16.37 million TEUs, which represented 3.7% of the total container cargo throughput of East Asia and Pacific region (437.8 million TEUs), and 2% of the world-wide container volume (792.6 million TEUs) [4, 5].

In the first half of the 1980s Vietnam was one of the poorest Asian countries in the world: Vietnamese per capita income was estimated less than 100 USD a year in 1981 by the UN, and 160 USD in 1985 by the IMF [6]. The domestic policies implemented in Vietnam at the end of the 1970s and at the beginning of the 1980s were ineffective to overcome the problem of poverty. The Soviet-type centrally planned economic system resulted inadequate to struggle macroeconomic instability, malnutrition, and scarcity of essential consumer goods, especially medicines. More to the point, the Vietnamese development plans mainly depended on economic aid and assistance of the Soviet Union and of European socialist countries. In fact, in 1975 Vietnam reached an aid agreement with the USSR pertaining to the five-year economic plan of 1976–1980. Three years later, in 1978, Vietnam became officially the tenth member of the Council for Mutual Economic Assistance (COMECON). As a consequence of the COMECON membership, Vietnam was absorbed in the sphere of influence of Soviet Union and obtained both the economic support and military protection of the USSR and of its satellite countries [7]. It is worth to note that during the second half of the 1970s, Vietnam was still paying the socio-economic and environmental consequences of the Second Indochina War, also known as the Vietnam's War. Bombings and chemical defoliant used during the war had caused devastating effects on civilians, agriculture, and production sites. The end of the Vietnam's War in April 1975 allowed to reunite North and South Vietnam, giving birth to the Socialist Republic of Vietnam on 2 July 1976—after the First Indochina War, in 1954 the Vietnamese territory had been

divided into two zones along the 17th Parallel by the Geneva Accords.

of the bilateral relations between China and Vietnam in November 1991 [8].

Furthermore, the Sino-Vietnamese border conflict of February to March 1979 opened a phase of regional disequilibrium which lasted until the full normalization

*DOI: http://dx.doi.org/10.5772/intechopen.93609*

currently the ULCVs can store over 23,000 TEUs.

the port of Hai Phong was 4.76 million TEUs (source: JOC).

**3. Vietnam accessing the global trade scenario**

and Singapore).


*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator… DOI: http://dx.doi.org/10.5772/intechopen.93609*


Regarding the modernization of ports, the gigantic size of containerships like ultra-large container vessels (ULCVs) has required the expansion of several harbors and modern systems of cranes for loading and unloading containers. In fact, during the 1990s, Panamax and Post-Panamax vessels could load 4000–8000 TEUs, while currently the ULCVs can store over 23,000 TEUs.

Concerning Vietnam, in terms of transshipment, two of the main Vietnamese ports are Ho Chi Minh City, which is located in Southern Vietnam, and Hai Phong in the North. In 2018, the harbor of Ho Chi Minh City was the 28th busiest international harbor with 6.33 millions of TEUs transshipped. The volume of containers in the port of Hai Phong was 4.76 million TEUs (source: JOC).

As far as the whole container cargo throughput in Vietnamese harbors is concerned, in 2000 the volume was equal to 1.18 million TEUs. Ten years later (2010), the container traffic was more than five times that of 2000: 5.96 million TEUs. In 2018, the total container port throughput reached 16.37 million TEUs, which represented 3.7% of the total container cargo throughput of East Asia and Pacific region (437.8 million TEUs), and 2% of the world-wide container volume (792.6 million TEUs) [4, 5].

#### **3. Vietnam accessing the global trade scenario**

In the first half of the 1980s Vietnam was one of the poorest Asian countries in the world: Vietnamese per capita income was estimated less than 100 USD a year in 1981 by the UN, and 160 USD in 1985 by the IMF [6]. The domestic policies implemented in Vietnam at the end of the 1970s and at the beginning of the 1980s were ineffective to overcome the problem of poverty. The Soviet-type centrally planned economic system resulted inadequate to struggle macroeconomic instability, malnutrition, and scarcity of essential consumer goods, especially medicines.

More to the point, the Vietnamese development plans mainly depended on economic aid and assistance of the Soviet Union and of European socialist countries. In fact, in 1975 Vietnam reached an aid agreement with the USSR pertaining to the five-year economic plan of 1976–1980. Three years later, in 1978, Vietnam became officially the tenth member of the Council for Mutual Economic Assistance (COMECON). As a consequence of the COMECON membership, Vietnam was absorbed in the sphere of influence of Soviet Union and obtained both the economic support and military protection of the USSR and of its satellite countries [7].

It is worth to note that during the second half of the 1970s, Vietnam was still paying the socio-economic and environmental consequences of the Second Indochina War, also known as the Vietnam's War. Bombings and chemical defoliant used during the war had caused devastating effects on civilians, agriculture, and production sites. The end of the Vietnam's War in April 1975 allowed to reunite North and South Vietnam, giving birth to the Socialist Republic of Vietnam on 2 July 1976—after the First Indochina War, in 1954 the Vietnamese territory had been divided into two zones along the 17th Parallel by the Geneva Accords.

Furthermore, the Sino-Vietnamese border conflict of February to March 1979 opened a phase of regional disequilibrium which lasted until the full normalization of the bilateral relations between China and Vietnam in November 1991 [8].

*Emerging Markets*

inspections.

two system" principle.

(19.3), and Tianjin (16) [1].

**2. Containerized transport in Asian harbors**

In the current global trade scenario, it is useful to bear in mind that the simplification of customs-related operations is an important feature, as *de facto* it influences positively the global value chains and the opportunity of cost savings thanks to delivery time reduction, and it increases the level of efficiency of the supply chains. On this matter, the AEO (Authorized Economic Operator) is an instrument that has been designed for offering advantages and preferential treatment to economic operators and business integrated in the international supply chains, principally in terms of reduced numbers of customs administrative controls and physical

The containerization has played a central role in the international transport dynamics over the last 40 years. The volume of container traffic has risen remarkably since the fall of the Berlin Wall, particularly in Asia. In 1989, no Chinese ports were included in the list of the main transshipment hubs in the world, apart from Hong Kong, which was the most important international harbor for the traffic of containers (4.5 millions of TEUs—Twenty-foot Equivalent Units). In reality, in 1989 Hong Kong was still part of the territory of the United Kingdom. In fact, Hong Kong passed under the Chinese sovereignty in July 1997, becoming the Special Administrative Region of Hong Kong (HKSAR) on the basis of "the one country,

With the new millennium, the situation changed completely: East and Southeast

Asian harbors soared. In 2018, the first nine busiest transshipment ports in the world were located in China (including HKSAR), Singapore, and South Korea: Shanghai (42 millions of TEUs), Singapore (36.6), Ningbo-Zhoushan (26.3), Shenzhen (25.7), Guangzhou (21.9), Busan (21.6), Hong Kong (19.6), Qingdao

It is also interesting to consider the growth of volumes from 2010 to 2018 in certain Asian ports. For instance, in 2010 in the harbors of Shanghai and Singapore, the throughput was 29 and 28.4 million TEUs, respectively, which means about three-quarters of the container volume measured in 2018. A significant increase of transshipped containers was observed in the Chinese port of Ningbo-Zhoushan during 2010–2018: the 2010 throughput (13.14 million TEUs) was exactly half of the

Several factors have allowed to reduce the costs of transport and the transit time

• the formation of strategic alliances, despite the establishment of an ever-

shipping groups (2M Alliance, Ocean Alliance, and The Alliance) [2];

• the expansion of Suez Canal (2015) and of Panama Canal (2016);

• the use of Information and Communication Technologies (ITC);

increasing concentrated container sector (the Gini coefficient rose from 0.53 in 2006 to 0.59 in 2019) leading to an oligopoly consisting of three container liner

• the economic boom of BRICS (Brazil, Russia, India, China, and South Africa);

volume reached in 2018 (source: Journal of Commerce—JOC).

to ship goods from Asia to other continents:

• the economies of scale;

• the modernization of containerization;

**146**

A sign of a restored stability in the Indochinese region was the launch of the Greater Mekong Subregion (GMS) economic cooperation program in 1992. With the support of the Asian Development Bank (ADB), Vietnam and China, together with other four Asian countries sharing the Mekong River (Cambodia, Laos, Myanmar, and Thailand), implemented the GMS in order to facilitate trade and regional collaboration, and to stimulate investments in agriculture, energy and infrastructures [9].

During the Sixth National Party Congress in 1986, the Communist Party decided to implement a program of economic reforms ("Doi Moi") to transform the centrally planned economy into an experimental economic system having a lot of similarities with the Chinese socialist market economy [10]. Indeed, in China, at the end of the 1970s, Deng Xiaoping had focused on the transition from a fully socialist economy to a "partially" market-oriented economy under socialist ideology [11].

Since 1979, China has incorporated the concept of market inside a socialist and planned economy undergoing a continuous and gradual process essentially based on economic experiments such as the establishment of free-market oriented areas the first special economic zones (SEZs) were Shenzhen, Shantou, and Zhuhai in Guangdong Province and Xiamen in Fujian Province. Deng Xiaoping used the metaphor of "crossing the river by feeling the stones under the feet."

Likewise, the Vietnamese socialist-oriented market economy was based on the application of principles of a market-based economy in a state having a socialist-oriented political apparatus and administration. During the 1990s, the model adopted by Vietnam to integrate its economy in global markets was strictly correlated with the development of export processing zones (EPZs) and the establishment of industrial zones (IZs) to support export-oriented manufacturing enterprises. Since the end of the 1990s, mainly after the Asian financial crisis which started in Thailand in 1997, Vietnam has invested in high-tech IZs [12].

Despite the high level of indigence measured during the first years of the 1980s, Vietnam was able to grow quickly and to reduce poverty during the 1990s. Correlating the poverty reduction and the growth rate in Vietnam and China in the period 1992–1998, even though the average rate of Vietnamese development and growth was lower than that of China (6.4% in Vietnam and 9.2% in China), the rate of poverty reduction was almost the same: 7.5% in Vietnam and 8.4% in China (source: World Bank) [13].

In order to be part of the international context, Vietnam, along with the "Doi Moi" program, gradually diversified its external relations, paying special attention to multilateralization and to the creation of strategic partnerships both with Asian emerging countries (China and India) and with consolidated global powers (USA, Japan, and Russia, after the dissolution of the Soviet Union in December 1991) [14].

In this regard, 1995 represented an important year for the admittance of Vietnam to the international scenario. Firstly, bilateral relations between Vietnam and the United States were normalized. Secondly, Vietnam became part of an intergovernmental organization in Southeast Asia: ASEAN. Three years later, Vietnam was also incorporated in the regional economic forum of the Asian-Pacific Economic Cooperation (APEC). Joining the WTO in January 2007, Vietnam was fully integrated into the international trade scheme.

#### **4. The impressive growth of Vietnamese economy**

From 2000 to 2019, despite phases of macroeconomic instability, such as the 2012 turmoil (soaring unemployment rate, high inflation, budget deficit, foreign exchange reserve reduction, mismanagement of fiscal and monetary policies) [15], Vietnamese economy experienced regular and remarkable GDP growth levels.

**149**

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator…*

Since 2000 the GDP has risen by an average of about 6% per year—with a peak of 7.5% in 2004 and 2005. In particular, in 2000 the GDP was 31 billion USD (GDP per capita was 390 USD yearly). Ten years later (2010), GDP was almost four times that of 2000: 115 billion USD. In 7 years, from 2010 to 2017, Vietnamese GDP almost doubled: in 2017 it reached 223 billion USD. In 2019, GDP was 261.9 billion USD and GDP per capita was 2715 USD (i.e. seven times that of 2000) [16]. Because of the Covid-19 pandemic, as foreseen for the majority of the worldwide economies, in

Regarding the growth of export, in 1986 the total merchandize exported by Vietnam represented only 6% of GDP. In 10 years that ratio soared up to a third of GDP and the volume of export in 1995 reached 6.5 billion USD. After 6 years, in 2001, the export of goods was almost three times that of 1995 (around 18 billion USD), representing 55% of the GDP. From 2007 (year of the WTO membership) to 2010, the Vietnamese export climbed from 54.5 billion USD (70.5% of GDP) to 83.4 billion USD (72% of GDP). In 2019 export represented 106.8% of GDP, which

Currently, the main Vietnamese export includes both goods produced by laborintensive industries (food and seafood processing, rubber, footwear, and garments) and high-tech products (automotive components, electronics, and computers).

**5. The World Customs Organization and customs procedures** 

terms of customs procedures harmonization and simplification.

which is split into 10 chapters, and the Special Annexes (A–K).

SAFE Framework identifies four core elements.

Since the 1970s, the Customs Cooperation Council, then World Customs Organization (WCO), has encouraged global customs integration, especially in

The International Convention on the Simplification and Harmonization of Customs procedures, also known as Kyoto Convention, entered into force in 1974. In line with the provision of Article 2 of the Kyoto Convention, "each Contracting Party undertakes to promote the simplification and harmonization of Customs procedures and, to that end, to conform, in accordance with the provisions of this Convention, to the Standards, Transitional Standards and Recommended Practices

In 1999, the WCO Council adopted the revised Kyoto Convention (RKC), which entered into force in 2006, in order to modernize customs operations by making use of customs guidelines, and to facilitate international trade procedures. The RKC body consists of five principal chapters and a group of annexes: a General Annex,

Both the first Kyoto Convention and the RKC stressed the necessity of transparency of customs actions and the need of simplifying customs-related operations. As indicated in the Preamble and in Article 2 of the RKC, both the Kyoto Conventions aim to eliminate the customs practices that hamper international trade and other international exchanges, as well as to promote the simplification and harmonization

Along with the simplification of customs operations, the WCO has also paid attention to the level of security of the international supply chain. In 2005, the WCO Council adopted the SAFE Framework of Standards to Secure and Facilitate Global Trade in order to improve the supply chain security standards. The SAFE Framework is updated every 3 years. In line with the 2018 version provisions, the

The first issue deals with the harmonization of the advance electronic cargo

information requirements on inbound, outbound, and transit shipments.

*DOI: http://dx.doi.org/10.5772/intechopen.93609*

2020 the Vietnamese GDP is expected to plummet.

means over 279 billion USD [17].

in the Annexes to this Convention."

of customs procedures.

**simplification**

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator… DOI: http://dx.doi.org/10.5772/intechopen.93609*

Since 2000 the GDP has risen by an average of about 6% per year—with a peak of 7.5% in 2004 and 2005. In particular, in 2000 the GDP was 31 billion USD (GDP per capita was 390 USD yearly). Ten years later (2010), GDP was almost four times that of 2000: 115 billion USD. In 7 years, from 2010 to 2017, Vietnamese GDP almost doubled: in 2017 it reached 223 billion USD. In 2019, GDP was 261.9 billion USD and GDP per capita was 2715 USD (i.e. seven times that of 2000) [16]. Because of the Covid-19 pandemic, as foreseen for the majority of the worldwide economies, in 2020 the Vietnamese GDP is expected to plummet.

Regarding the growth of export, in 1986 the total merchandize exported by Vietnam represented only 6% of GDP. In 10 years that ratio soared up to a third of GDP and the volume of export in 1995 reached 6.5 billion USD. After 6 years, in 2001, the export of goods was almost three times that of 1995 (around 18 billion USD), representing 55% of the GDP. From 2007 (year of the WTO membership) to 2010, the Vietnamese export climbed from 54.5 billion USD (70.5% of GDP) to 83.4 billion USD (72% of GDP). In 2019 export represented 106.8% of GDP, which means over 279 billion USD [17].

Currently, the main Vietnamese export includes both goods produced by laborintensive industries (food and seafood processing, rubber, footwear, and garments) and high-tech products (automotive components, electronics, and computers).

#### **5. The World Customs Organization and customs procedures simplification**

Since the 1970s, the Customs Cooperation Council, then World Customs Organization (WCO), has encouraged global customs integration, especially in terms of customs procedures harmonization and simplification.

The International Convention on the Simplification and Harmonization of Customs procedures, also known as Kyoto Convention, entered into force in 1974. In line with the provision of Article 2 of the Kyoto Convention, "each Contracting Party undertakes to promote the simplification and harmonization of Customs procedures and, to that end, to conform, in accordance with the provisions of this Convention, to the Standards, Transitional Standards and Recommended Practices in the Annexes to this Convention."

In 1999, the WCO Council adopted the revised Kyoto Convention (RKC), which entered into force in 2006, in order to modernize customs operations by making use of customs guidelines, and to facilitate international trade procedures. The RKC body consists of five principal chapters and a group of annexes: a General Annex, which is split into 10 chapters, and the Special Annexes (A–K).

Both the first Kyoto Convention and the RKC stressed the necessity of transparency of customs actions and the need of simplifying customs-related operations. As indicated in the Preamble and in Article 2 of the RKC, both the Kyoto Conventions aim to eliminate the customs practices that hamper international trade and other international exchanges, as well as to promote the simplification and harmonization of customs procedures.

Along with the simplification of customs operations, the WCO has also paid attention to the level of security of the international supply chain. In 2005, the WCO Council adopted the SAFE Framework of Standards to Secure and Facilitate Global Trade in order to improve the supply chain security standards. The SAFE Framework is updated every 3 years. In line with the 2018 version provisions, the SAFE Framework identifies four core elements.

The first issue deals with the harmonization of the advance electronic cargo information requirements on inbound, outbound, and transit shipments.

*Emerging Markets*

A sign of a restored stability in the Indochinese region was the launch of the Greater Mekong Subregion (GMS) economic cooperation program in 1992. With the support of the Asian Development Bank (ADB), Vietnam and China, together with other four Asian countries sharing the Mekong River (Cambodia, Laos, Myanmar, and Thailand), implemented the GMS in order to facilitate trade and regional collaboration, and to stimulate investments in agriculture, energy and infrastructures [9]. During the Sixth National Party Congress in 1986, the Communist Party decided to implement a program of economic reforms ("Doi Moi") to transform the centrally planned economy into an experimental economic system having a lot of similarities with the Chinese socialist market economy [10]. Indeed, in China, at the end of the 1970s, Deng Xiaoping had focused on the transition from a fully socialist economy to a "partially" market-oriented economy under socialist ideology [11]. Since 1979, China has incorporated the concept of market inside a socialist and planned economy undergoing a continuous and gradual process essentially based on economic experiments such as the establishment of free-market oriented areas the first special economic zones (SEZs) were Shenzhen, Shantou, and Zhuhai in Guangdong Province and Xiamen in Fujian Province. Deng Xiaoping used the

metaphor of "crossing the river by feeling the stones under the feet."

started in Thailand in 1997, Vietnam has invested in high-tech IZs [12].

Likewise, the Vietnamese socialist-oriented market economy was based on the application of principles of a market-based economy in a state having a socialist-oriented political apparatus and administration. During the 1990s, the model adopted by Vietnam to integrate its economy in global markets was strictly correlated with the development of export processing zones (EPZs) and the establishment of industrial zones (IZs) to support export-oriented manufacturing enterprises. Since the end of the 1990s, mainly after the Asian financial crisis which

Despite the high level of indigence measured during the first years of the 1980s, Vietnam was able to grow quickly and to reduce poverty during the 1990s. Correlating the poverty reduction and the growth rate in Vietnam and China in the period 1992–1998, even though the average rate of Vietnamese development and growth was lower than that of China (6.4% in Vietnam and 9.2% in China), the rate of poverty reduction was almost the same: 7.5% in Vietnam and 8.4% in China

In order to be part of the international context, Vietnam, along with the "Doi Moi" program, gradually diversified its external relations, paying special attention to multilateralization and to the creation of strategic partnerships both with Asian emerging countries (China and India) and with consolidated global powers (USA, Japan, and Russia, after the dissolution of the Soviet Union in December 1991) [14]. In this regard, 1995 represented an important year for the admittance of Vietnam to the international scenario. Firstly, bilateral relations between Vietnam and the United States were normalized. Secondly, Vietnam became part of an intergovernmental organization in Southeast Asia: ASEAN. Three years later, Vietnam was also incorporated in the regional economic forum of the Asian-Pacific Economic Cooperation (APEC). Joining the WTO in January 2007, Vietnam was

From 2000 to 2019, despite phases of macroeconomic instability, such as the 2012 turmoil (soaring unemployment rate, high inflation, budget deficit, foreign exchange reserve reduction, mismanagement of fiscal and monetary policies) [15], Vietnamese economy experienced regular and remarkable GDP growth levels.

**148**

(source: World Bank) [13].

fully integrated into the international trade scheme.

**4. The impressive growth of Vietnamese economy**

The second point refers to the purpose of reduction of security threats through accurate risk analysis.

The issue of the third core element is the application of a methodology based on non-intrusive detection equipment to inspect high-risk cargo and transport conveyances, such as X-ray machines and radiation detectors. According to the definitions provided by the WCO in Annex I of the SAFE Framework of Standards, high risk cargo is considered "that for which there is inadequate information or reason to deem it as low-risk, that tactical intelligence indicates as high risk, or that a riskscoring assessment methodology based on security-related data elements identifies as high risk."

On this matter, it is also useful to mention the Container Weight Verification Requirement discipline of SOLAS (International Convention for the Safety of Life at Sea of 1974) pertaining to the risk-based analyses and the verification of gross mass (VGM) of packed containers before loading them onto vessels [amendments to SOLAS Regulation VI/2 of Resolution MSC.380(94) of 21 November 2014], as well as the three declarations (effective since January 2018) that were added to the standardized declaration forms of the Convention on Facilitation of International Maritime Traffic of 1965, also known as FAL Forms: security-related information as required under SOLAS Regulation XI-2/9.2.2; advance electronic cargo information for customs risk assessment purposes; advanced notification form for waste delivery to port reception facilities.

The fourth core element of the SAFE Framework underlines the significance of conferring tangible benefits to those businesses and economic operators who are able to comply with supply chain security standards and best practices.

Furthermore, in order to improve the cooperation between customs authorities, and the opportunities to create a dialog between customs administrations and economic operators, the SAFE Framework identifies a three-pillar configuration.

Pillar 1 underscores the need of customs-to-customs cooperation, Pillars 2 and 3 emphasize the cooperation among customs authorities, governmental and intergovernmental agencies, and business and economic operators. In this respect, the AEO is a key issue, especially in terms of customs-to-business cooperation outline. In fact, economic operators and businesses, if rated as safe and reliable international commercial partners by customs administrations, benefit from a reduced number of customs controls. That makes the supply chain more efficient thanks to a faster flow of goods.

Focusing on Pillar 1, as indicated in the SAFE Framework (2018 version), customs administrations "must work co-operatively with common and accepted standards to maximize the security and facilitation of the international trade supply chain as cargo shipments and transport conveyances move along the nodes of the global trading system". In effect, as part of the cooperation between customs administrations, in order to improve the level of security of supply chains and the harmonization of customs procedures, customs authorities are required to agree on mutual recognition of inspection results and on AEO programs which are implemented in different countries, or inside a customs union like the EU [18].

In addition, Pillar 1 takes into consideration the opportunity of inspecting and screening cargoes before the arrival of vessels at harbors, instead of clearing goods that are loaded onto vessels only when ships have arrived at ports. In this respect, the declaration at sea (i.e. pre-clearing) is a valid opportunity for importers, shipping companies, terminal operators, and intermodal operators. Clearing goods before vessels enter the harbor improves the efficiency of the international supply chains and reduces the storage time of containers. Also, a regimented pre-clearing mechanism speeds up the handling operations and lessens the transit time of containers inside harbors, avoiding the risks of container congestion at ports and

**151**

(VKFTA).

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator…*

of demurrage charges for importers. Specifically, demurrage charges are levied by shipping lines to importers when containers are stored in the harbor terminal

On this subject, the first paragraph of Article 7 of the WTO Trade Facilitation Agreement (TFA), also known as the Bali Package, stresses the need of implementing the pre-clearing, stating that "each member shall adopt or maintain procedures allowing for the submission of import documentation and other required information, including manifests, in order to begin processing prior to the arrival of goods with a view to expediting the release of goods upon arrival." In order to implement the TFA, developing and least-developed countries (LDCs) are supported by the WTO's Trade Facilitation Agreement Facility (TFAF) grant and assistance

The AEO is a central part of the SAFE Framework. In relation to the main purposes of the AEO program, enterprises and economic operators are encouraged to cooperate with customs authorities in order to establish a functioning mechanism

The enterprises that are able to meet AEO legal discipline and criteria, gain several advantages, primarily a reduced number of inspections and a lower documentbased customs controls. The AEO status can be obtained by economic operators and businesses actively involved in the principal stages of the global supply chain (e.g. importers; exporters; manufacturers; freight forwarders and carriers; warehouse

The WCO provides a general definition of AEO in the first Annex of the SAFE Framework: "a party involved in the international movement of goods in whatever function that has been approved by or on behalf of a national Customs administration as complying with WCO or equivalent supply chain security standards." In connection with the SAFE Framework, the WCO has put emphasis on the Mutual Recognition Agreement (MRA) strategy in order to reinforce the security of global supply chains and to avoid safety controls being replicated. In particular, AEOs have to be mutually recognized by customs administrations of different countries in terms of reciprocal benefits. As indicated by the WCO, the MRA "is a broad concept embodied within SAFE, whereby two countries close an agreement or arrangement to mutually recognize AEO authorizations that has been properly

The EU reached MRAs with a group of countries: Norway and Switzerland (two EFTA Members) in 2009; Japan in 2010; the United States in 2012; and China in 2014. Vietnam has been negotiating an MRA with South Korea. It is worth pointing out that in 2015 Vietnam and South Korea signed a bilateral free trade agreement

In Vietnam the AEO pilot project was launched in May 2011. The official program started in June 2013. The Vietnamese AEO status is granted for 3 years to customs brokers and import-export enterprises demonstrating an elevated yearly turnover (generally at least 100 million USD). Thus, the turnover is a very selective criterion to grant the AEO status in Vietnam. In this respect, the General Department of Vietnam Customs estimated that in 2017 and 2018 the AEOs

of collaboration pertaining to customs procedures simplification.

keepers; terminal operators; logistic operators; and customs agents).

granted by one customs administration" [20].

**7. The AEO in Vietnam and in the EU**

*DOI: http://dx.doi.org/10.5772/intechopen.93609*

program [19].

**6. An overview of the AEO**

without meeting the deadline indicated by shipping lines.

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator… DOI: http://dx.doi.org/10.5772/intechopen.93609*

of demurrage charges for importers. Specifically, demurrage charges are levied by shipping lines to importers when containers are stored in the harbor terminal without meeting the deadline indicated by shipping lines.

On this subject, the first paragraph of Article 7 of the WTO Trade Facilitation Agreement (TFA), also known as the Bali Package, stresses the need of implementing the pre-clearing, stating that "each member shall adopt or maintain procedures allowing for the submission of import documentation and other required information, including manifests, in order to begin processing prior to the arrival of goods with a view to expediting the release of goods upon arrival." In order to implement the TFA, developing and least-developed countries (LDCs) are supported by the WTO's Trade Facilitation Agreement Facility (TFAF) grant and assistance program [19].

#### **6. An overview of the AEO**

*Emerging Markets*

as high risk."

accurate risk analysis.

ery to port reception facilities.

faster flow of goods.

The second point refers to the purpose of reduction of security threats through

The issue of the third core element is the application of a methodology based on non-intrusive detection equipment to inspect high-risk cargo and transport conveyances, such as X-ray machines and radiation detectors. According to the definitions provided by the WCO in Annex I of the SAFE Framework of Standards, high risk cargo is considered "that for which there is inadequate information or reason to deem it as low-risk, that tactical intelligence indicates as high risk, or that a riskscoring assessment methodology based on security-related data elements identifies

On this matter, it is also useful to mention the Container Weight Verification Requirement discipline of SOLAS (International Convention for the Safety of Life at Sea of 1974) pertaining to the risk-based analyses and the verification of gross mass (VGM) of packed containers before loading them onto vessels [amendments to SOLAS Regulation VI/2 of Resolution MSC.380(94) of 21 November 2014], as well as the three declarations (effective since January 2018) that were added to the standardized declaration forms of the Convention on Facilitation of International Maritime Traffic of 1965, also known as FAL Forms: security-related information as required under SOLAS Regulation XI-2/9.2.2; advance electronic cargo information for customs risk assessment purposes; advanced notification form for waste deliv-

The fourth core element of the SAFE Framework underlines the significance of conferring tangible benefits to those businesses and economic operators who are

Furthermore, in order to improve the cooperation between customs authorities, and the opportunities to create a dialog between customs administrations and economic operators, the SAFE Framework identifies a three-pillar configuration. Pillar 1 underscores the need of customs-to-customs cooperation, Pillars 2 and 3 emphasize the cooperation among customs authorities, governmental and intergovernmental agencies, and business and economic operators. In this respect, the AEO is a key issue, especially in terms of customs-to-business cooperation outline. In fact, economic operators and businesses, if rated as safe and reliable international commercial partners by customs administrations, benefit from a reduced number of customs controls. That makes the supply chain more efficient thanks to a

Focusing on Pillar 1, as indicated in the SAFE Framework (2018 version), customs administrations "must work co-operatively with common and accepted standards to maximize the security and facilitation of the international trade supply chain as cargo shipments and transport conveyances move along the nodes of the global trading system". In effect, as part of the cooperation between customs administrations, in order to improve the level of security of supply chains and the harmonization of customs procedures, customs authorities are required to agree on mutual recognition of inspection results and on AEO programs which are imple-

mented in different countries, or inside a customs union like the EU [18].

In addition, Pillar 1 takes into consideration the opportunity of inspecting and screening cargoes before the arrival of vessels at harbors, instead of clearing goods that are loaded onto vessels only when ships have arrived at ports. In this respect, the declaration at sea (i.e. pre-clearing) is a valid opportunity for importers, shipping companies, terminal operators, and intermodal operators. Clearing goods before vessels enter the harbor improves the efficiency of the international supply chains and reduces the storage time of containers. Also, a regimented pre-clearing mechanism speeds up the handling operations and lessens the transit time of containers inside harbors, avoiding the risks of container congestion at ports and

able to comply with supply chain security standards and best practices.

**150**

The AEO is a central part of the SAFE Framework. In relation to the main purposes of the AEO program, enterprises and economic operators are encouraged to cooperate with customs authorities in order to establish a functioning mechanism of collaboration pertaining to customs procedures simplification.

The enterprises that are able to meet AEO legal discipline and criteria, gain several advantages, primarily a reduced number of inspections and a lower documentbased customs controls. The AEO status can be obtained by economic operators and businesses actively involved in the principal stages of the global supply chain (e.g. importers; exporters; manufacturers; freight forwarders and carriers; warehouse keepers; terminal operators; logistic operators; and customs agents).

The WCO provides a general definition of AEO in the first Annex of the SAFE Framework: "a party involved in the international movement of goods in whatever function that has been approved by or on behalf of a national Customs administration as complying with WCO or equivalent supply chain security standards."

In connection with the SAFE Framework, the WCO has put emphasis on the Mutual Recognition Agreement (MRA) strategy in order to reinforce the security of global supply chains and to avoid safety controls being replicated. In particular, AEOs have to be mutually recognized by customs administrations of different countries in terms of reciprocal benefits. As indicated by the WCO, the MRA "is a broad concept embodied within SAFE, whereby two countries close an agreement or arrangement to mutually recognize AEO authorizations that has been properly granted by one customs administration" [20].

The EU reached MRAs with a group of countries: Norway and Switzerland (two EFTA Members) in 2009; Japan in 2010; the United States in 2012; and China in 2014. Vietnam has been negotiating an MRA with South Korea. It is worth pointing out that in 2015 Vietnam and South Korea signed a bilateral free trade agreement (VKFTA).

#### **7. The AEO in Vietnam and in the EU**

In Vietnam the AEO pilot project was launched in May 2011. The official program started in June 2013. The Vietnamese AEO status is granted for 3 years to customs brokers and import-export enterprises demonstrating an elevated yearly turnover (generally at least 100 million USD). Thus, the turnover is a very selective criterion to grant the AEO status in Vietnam. In this respect, the General Department of Vietnam Customs estimated that in 2017 and 2018 the AEOs

accounted for almost 35% of the total import-export trade [21]. Exporter enterprises are also categorized according to three macro-sectors: agri-food, seafood, and high-tech. As of March 2019, the number of Vietnamese AEOs was 68—in 2013 there were only 11 AEOs (source: General Department of Vietnam Customs).

Thanks to Law on Customs No. 54/2014/QH13 of 23 June 2014 and Decree No. 08/2015/ND-CP of 21 January 2015, Vietnamese legislator has facilitated customs operations and implemented a system to support international customs cooperation. In particular, Article 3 of Law 54 of 2014 affirms that "the State of Vietnam shall facilitate customs formalities applied to import, export, exit, entry and transit in the Vietnamese territory" (English translation).

Within the context of the development of the AEO status in Vietnam, Article 42 of Law 54 of 2014, Article 10 of Decree No. 08/2015/ND-CP of 21 January 2015, and Article 12–17 of Circular 72/2015/TT-BTC of 12 May 2015, provide a list of requirements which must be satisfied by economic operators in order to obtain customs privileges, benefits and priority when clearing goods: strict observation of customs and fiscal law for two consecutive years; compliance with accounting and audit regulations, as well as the existence of an internal control system; the application of ITC programs and of e-customs procedures to manage import-export activities and to ensure the security of the supply chain (e.g., container inspections); the possibility of making via-bank payments; absence of violations against taxation and customs law (e.g., tax evasion, tax fraud, goods smuggling, and illegal trafficking across the border).

Among the privileges given to enterprises, the first paragraph of Article 43 of Law 54 of 2014 includes the exemption "from examination of relevant documentary evidence in customs documents and […] from physical inspection of goods in the course of carrying out customs formalities, except cases in which law violation are detected or random inspection is needed to assess law compliance." On this subject, paragraph 2 of Article 9 of Decree No. 08/2015/ND-CP provides that "enterprises given priority by customs authorities and harbor warehousing agencies shall be permitted to get procedures for shipping and taking delivery of their cargos as well as customs examination and supervision procedures completed first."

Hence, Vietnamese customs authorities guarantee advantages to AEOs during clearing operations, mainly in terms of priority policy. In line with Articles 5–11 of Circular 72/2015/TT-BTC, the priority policy is essentially based on the exemption from document and physical inspections of goods, customs clearance with incomplete declarations (fulfilling the compulsory obligations successively), faster procedures in case of tax refund, and post-clearance analyses [22].

In terms of comparison, the AEO discipline was introduced in the European Union customs territory during 2005–2006 by EU Regulations 648/2005 and 1875/2006. EU customs authorities grant the AEO status if an economic operator is able to comply with best practices and security requirements in the international supply chain. Specifically, according to Article 38 of Regulation 952 of 2013 (the EU Customs Code in force) and Article 24 of Delegated Regulation 2446 of 2015, two types of AEO are granted:

• AEO type C (customs simplification), which enables the AEO holder to benefit from more favorable risk assessment and consequently fewer document-based controls and physical inspections than economic operators not owning the AEO status.

**153**

in Vietnam.

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator…*

Before May 2016, the AEO could be granted in three different types: AEO-C (customs simplification); AEO-S (security and safety); and AEO-F (full: customs simplification plus security and safety). The current EU Customs Code does not

According to Articles 38 and 39 of the EU Customs Code, the main criteria for granting the status of AEO in the European Union can be summed up as follows: the absence of repeated and/or serious infringement of customs legislation and taxation rules; the demonstration of control of the flow of goods; managing commercial and transport records effectively; proven financial solvency and absence of bankruptcy proceedings; and appropriate security and safety standards, especially in case of

In case of serious infringements and of criminal offenses, the AEO status is revoked (Article 39 of the EU Customs Code). It is worth noting that as far as penal proceedings is concerned, Article 42 of the EU Customs Code states that "each Member State shall provide for penalties for failure to comply with the customs legislation. Such penalties shall be effective, proportionate and dissuasive." However, even though Article 83 of Treaty on the Functioning of the EU (TFEU) tries to regulate the matter of finding a homogenous definition of criminal offenses and sanctions inside the EU, penalties might be different in each Member State due to the lack of harmonization of national criminal laws and the absence of synchro-

Despite the advantages and benefits guaranteed by the AEO status, a large gap comes out among EU Member States, as the number of AEOs is still limited in various EU Countries, such as Bulgaria, Croatia, Finland, Slovakia, Portugal, and Romania. As of 30 April 2019, the total number of AEO valid authorizations in the EU customs territory was 17,504—almost 40% of AEO authorizations were released in Germany (7146). With reference to 2019 figures, other EU Member States investing in the AEO opportunities were France with 1689 AEO authorizations, the Netherlands (1561) Italy (1378), Poland (865), and Spain (762). The total number of AEO authorizations in United Kingdom was 815. The statistics of the United Kingdom deserves some attention, as the United Kingdom, notwithstanding its official withdrawal from the EU in January 2020, will be part of the EU customs territory until the end of 2020. The distribution of AEO authorizations in the EU per sector was the following: 22% exporters, 20% importers, 17% manufacturers, 9% customs broker and freight forwarders, respectively, 8% warehouse keepers, and carriers 5% (source: European Commission—DG TAXUD, Unit A3 Risk

**8. A conclusive analysis: The EU-Vietnam Free Trade Agreement**

In 2018, the principal export markets of Vietnam were the following: the United States (19%), China (17%), the European Union (17%), ASEAN Members (10%), Japan (8%), and South Korea (8%). Therefore, the EU was the second largest export market of Vietnam. In particular, the EU has been one of the main global importer of telephone sets, electronics, garments, and footwear that are produced

During the same year (2018), Vietnam exported globally an amount of 49 billion

USD of telephone sets and components, almost a fourth of which (13.1 billion USD) were directed to the EU. The Vietnamese export of electronics and computers amounted to 29.3 billion USD (4.7 billion USD exported to the EU market). Also, Vietnam exported 30.4 billion USD of garments and 16.2 billion USD of footwear in

*DOI: http://dx.doi.org/10.5772/intechopen.93609*

nized criminalization regimes in the EU [23].

mention the AEO type F.

AEO type S applications.

Management and Security).

• AEO type S (security and safety), which entitles the holder to facilitations pertaining to security and safety.

#### *The Simplification of Customs Formalities: The Role of the Authorized Economic Operator… DOI: http://dx.doi.org/10.5772/intechopen.93609*

Before May 2016, the AEO could be granted in three different types: AEO-C (customs simplification); AEO-S (security and safety); and AEO-F (full: customs simplification plus security and safety). The current EU Customs Code does not mention the AEO type F.

According to Articles 38 and 39 of the EU Customs Code, the main criteria for granting the status of AEO in the European Union can be summed up as follows: the absence of repeated and/or serious infringement of customs legislation and taxation rules; the demonstration of control of the flow of goods; managing commercial and transport records effectively; proven financial solvency and absence of bankruptcy proceedings; and appropriate security and safety standards, especially in case of AEO type S applications.

In case of serious infringements and of criminal offenses, the AEO status is revoked (Article 39 of the EU Customs Code). It is worth noting that as far as penal proceedings is concerned, Article 42 of the EU Customs Code states that "each Member State shall provide for penalties for failure to comply with the customs legislation. Such penalties shall be effective, proportionate and dissuasive." However, even though Article 83 of Treaty on the Functioning of the EU (TFEU) tries to regulate the matter of finding a homogenous definition of criminal offenses and sanctions inside the EU, penalties might be different in each Member State due to the lack of harmonization of national criminal laws and the absence of synchronized criminalization regimes in the EU [23].

Despite the advantages and benefits guaranteed by the AEO status, a large gap comes out among EU Member States, as the number of AEOs is still limited in various EU Countries, such as Bulgaria, Croatia, Finland, Slovakia, Portugal, and Romania. As of 30 April 2019, the total number of AEO valid authorizations in the EU customs territory was 17,504—almost 40% of AEO authorizations were released in Germany (7146). With reference to 2019 figures, other EU Member States investing in the AEO opportunities were France with 1689 AEO authorizations, the Netherlands (1561) Italy (1378), Poland (865), and Spain (762). The total number of AEO authorizations in United Kingdom was 815. The statistics of the United Kingdom deserves some attention, as the United Kingdom, notwithstanding its official withdrawal from the EU in January 2020, will be part of the EU customs territory until the end of 2020. The distribution of AEO authorizations in the EU per sector was the following: 22% exporters, 20% importers, 17% manufacturers, 9% customs broker and freight forwarders, respectively, 8% warehouse keepers, and carriers 5% (source: European Commission—DG TAXUD, Unit A3 Risk Management and Security).

#### **8. A conclusive analysis: The EU-Vietnam Free Trade Agreement**

In 2018, the principal export markets of Vietnam were the following: the United States (19%), China (17%), the European Union (17%), ASEAN Members (10%), Japan (8%), and South Korea (8%). Therefore, the EU was the second largest export market of Vietnam. In particular, the EU has been one of the main global importer of telephone sets, electronics, garments, and footwear that are produced in Vietnam.

During the same year (2018), Vietnam exported globally an amount of 49 billion USD of telephone sets and components, almost a fourth of which (13.1 billion USD) were directed to the EU. The Vietnamese export of electronics and computers amounted to 29.3 billion USD (4.7 billion USD exported to the EU market). Also, Vietnam exported 30.4 billion USD of garments and 16.2 billion USD of footwear in

*Emerging Markets*

across the border).

types of AEO are granted:

AEO status.

pertaining to security and safety.

accounted for almost 35% of the total import-export trade [21]. Exporter enterprises are also categorized according to three macro-sectors: agri-food, seafood, and high-tech. As of March 2019, the number of Vietnamese AEOs was 68—in 2013 there were only 11 AEOs (source: General Department of Vietnam Customs).

in the Vietnamese territory" (English translation).

Thanks to Law on Customs No. 54/2014/QH13 of 23 June 2014 and Decree No. 08/2015/ND-CP of 21 January 2015, Vietnamese legislator has facilitated customs operations and implemented a system to support international customs cooperation. In particular, Article 3 of Law 54 of 2014 affirms that "the State of Vietnam shall facilitate customs formalities applied to import, export, exit, entry and transit

Within the context of the development of the AEO status in Vietnam, Article 42 of Law 54 of 2014, Article 10 of Decree No. 08/2015/ND-CP of 21 January 2015, and Article 12–17 of Circular 72/2015/TT-BTC of 12 May 2015, provide a list of requirements which must be satisfied by economic operators in order to obtain customs privileges, benefits and priority when clearing goods: strict observation of customs and fiscal law for two consecutive years; compliance with accounting and audit regulations, as well as the existence of an internal control system; the application of ITC programs and of e-customs procedures to manage import-export activities and to ensure the security of the supply chain (e.g., container inspections); the possibility of making via-bank payments; absence of violations against taxation and customs law (e.g., tax evasion, tax fraud, goods smuggling, and illegal trafficking

Among the privileges given to enterprises, the first paragraph of Article 43 of Law 54 of 2014 includes the exemption "from examination of relevant documentary evidence in customs documents and […] from physical inspection of goods in the course of carrying out customs formalities, except cases in which law violation are detected or random inspection is needed to assess law compliance." On this subject, paragraph 2 of Article 9 of Decree No. 08/2015/ND-CP provides that "enterprises given priority by customs authorities and harbor warehousing agencies shall be permitted to get procedures for shipping and taking delivery of their cargos as well

Hence, Vietnamese customs authorities guarantee advantages to AEOs during clearing operations, mainly in terms of priority policy. In line with Articles 5–11 of Circular 72/2015/TT-BTC, the priority policy is essentially based on the exemption from document and physical inspections of goods, customs clearance with incomplete declarations (fulfilling the compulsory obligations successively), faster

In terms of comparison, the AEO discipline was introduced in the European Union customs territory during 2005–2006 by EU Regulations 648/2005 and 1875/2006. EU customs authorities grant the AEO status if an economic operator is able to comply with best practices and security requirements in the international supply chain. Specifically, according to Article 38 of Regulation 952 of 2013 (the EU Customs Code in force) and Article 24 of Delegated Regulation 2446 of 2015, two

• AEO type C (customs simplification), which enables the AEO holder to benefit from more favorable risk assessment and consequently fewer document-based controls and physical inspections than economic operators not owning the

• AEO type S (security and safety), which entitles the holder to facilitations

as customs examination and supervision procedures completed first."

procedures in case of tax refund, and post-clearance analyses [22].

**152**

the international markets. The Vietnamese exportation of garments and footwear to the European Union was equal to 4.1 billion USD and 4.6 billion USD, respectively (source: Vietnam's General Statistics Office and General Department of Vietnam Customs) [24].

Along with the application of the Generalized Scheme of Preferences (GSP), which provides trade preferences and customs benefits to products having developing-country origin and entering the EU internal market (as established by EU Regulation 978/2012), on 30 June 2019 the European Union and Vietnam signed a free trade agreement, which had been previously approved in the EU with Decision 753 of 30 March 2020.

The free trade agreement between the European Union and the Socialist Republic of Vietnam (EVFTA), officially in force since August 1, 2020, has created a free trade area between the EU and Vietnam in line with the provisions of Article XXIV of GATT 1994 on customs unions and free trade areas. Specifically, according to Article XXIV of GATT 1994 (Paragraph 8b), a free trade area refers to "a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV, and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories."

As indicated in Article 2.1 of the EVFTA, "the parties shall progressively liberalize trade in goods and improve market access over a transitional period starting from the entry into force of this Agreement in accordance with the provisions of this agreement and in conformity with Article XXIV of GATT 1994."

Thus, the agreement on the one hand enhances the chance of doing business in Vietnam for European enterprises; on the other hand, it may increase the level of Vietnamese export to the EU. In addition to the benefits of the GSP, goods having Vietnamese preferential origin enter the EU customs territory with no duty (Article 2.7 of the EVFTA), apart from a few exceptions in delicate sectors requiring a gradual and year-on-year reduction of duties, such as agri-food and fishing industry (Annex 2-A, Section A of the EVFTA, and Appendices 2-A-1 and 2-A-2 on EU and Vietnamese tariff schedule). Furthermore, quotas have been confirmed on sensitive products: specific agricultural goods imported in the EU from Vietnam like eggs, rice, garlic, sweet corn, tuna, sugar, and products containing high levels of sugar (Annex 2-A, Section B of the EVFTA about tariff rate quotas).

Concerning customs-related operations facilitation and the simplification of customs procedures, the first paragraph of Article 4.1 of the EVFTA states that "the parties recognize the importance of customs and trade facilitation matters in the evolving global trading environment. The parties shall reinforce cooperation in this area with a view to ensuring that their respective customs legislation and procedures fulfill the objectives of promoting trade facilitation while ensuring effective customs control." In addition, Article 4.5 underlines that "each party shall provide for simplified customs procedures that are transparent and efficient in order to reduce costs and increase predictability for economic operators, including for small and medium-sized enterprises. Easier access to customs simplifications shall also be provided for authorized traders according to objective and non-discriminatory criteria."

Inside the new commercial scenario created by the EVFTA, the AEO status becomes a valid instrument of accreditation and a symbol of correctness and fairness for European and Vietnamese economic operators and businesses which are part of the international supply chain and of the global freight distribution.

The AEO, especially if combined with the implementation of single windows, can offer advantages in terms of time-reduction of customs clearance operations and bureaucratic procedures. In this regard, as highlighted by the UNECE in

**155**

**Author details**

Alessandro Torello

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator…*

Recommendation No. 33, a single window is "a facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfill all import, export, and transit-related regulatory requirements" [25]. Therefore, the implementation of a network of single windows in the customs system accelerates customs clearance operations, improves the efficiency of the entire supply chain system, reduces the risks of delays, and consequently facilitates the activity of any economic operator involved in international trade [26].

Department of Economics and Law, University of Macerata, Macerata, Italy

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

\*Address all correspondence to: a.torello@unimc.it

provided the original work is properly cited.

*DOI: http://dx.doi.org/10.5772/intechopen.93609*

*The Simplification of Customs Formalities: The Role of the Authorized Economic Operator… DOI: http://dx.doi.org/10.5772/intechopen.93609*

Recommendation No. 33, a single window is "a facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfill all import, export, and transit-related regulatory requirements" [25]. Therefore, the implementation of a network of single windows in the customs system accelerates customs clearance operations, improves the efficiency of the entire supply chain system, reduces the risks of delays, and consequently facilitates the activity of any economic operator involved in international trade [26].

### **Author details**

*Emerging Markets*

Customs) [24].

753 of 30 March 2020.

the international markets. The Vietnamese exportation of garments and footwear to the European Union was equal to 4.1 billion USD and 4.6 billion USD, respectively (source: Vietnam's General Statistics Office and General Department of Vietnam

Along with the application of the Generalized Scheme of Preferences (GSP), which provides trade preferences and customs benefits to products having developing-country origin and entering the EU internal market (as established by EU Regulation 978/2012), on 30 June 2019 the European Union and Vietnam signed a free trade agreement, which had been previously approved in the EU with Decision

The free trade agreement between the European Union and the Socialist Republic of Vietnam (EVFTA), officially in force since August 1, 2020, has created a free trade area between the EU and Vietnam in line with the provisions of Article XXIV of GATT 1994 on customs unions and free trade areas. Specifically, according to Article XXIV of GATT 1994 (Paragraph 8b), a free trade area refers to "a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV, and XX) are eliminated on substantially all the trade between the

As indicated in Article 2.1 of the EVFTA, "the parties shall progressively liberalize trade in goods and improve market access over a transitional period starting from the entry into force of this Agreement in accordance with the provisions of

Thus, the agreement on the one hand enhances the chance of doing business in Vietnam for European enterprises; on the other hand, it may increase the level of Vietnamese export to the EU. In addition to the benefits of the GSP, goods having Vietnamese preferential origin enter the EU customs territory with no duty (Article 2.7 of the EVFTA), apart from a few exceptions in delicate sectors requiring a gradual and year-on-year reduction of duties, such as agri-food and fishing industry (Annex 2-A, Section A of the EVFTA, and Appendices 2-A-1 and 2-A-2 on EU and Vietnamese tariff schedule). Furthermore, quotas have been confirmed on sensitive products: specific agricultural goods imported in the EU from Vietnam like eggs, rice, garlic, sweet corn, tuna, sugar, and products containing high levels

constituent territories in products originating in such territories."

this agreement and in conformity with Article XXIV of GATT 1994."

of sugar (Annex 2-A, Section B of the EVFTA about tariff rate quotas).

Concerning customs-related operations facilitation and the simplification of customs procedures, the first paragraph of Article 4.1 of the EVFTA states that "the parties recognize the importance of customs and trade facilitation matters in the evolving global trading environment. The parties shall reinforce cooperation in this area with a view to ensuring that their respective customs legislation and procedures fulfill the objectives of promoting trade facilitation while ensuring effective customs control." In addition, Article 4.5 underlines that "each party shall provide for simplified customs procedures that are transparent and efficient in order to reduce costs and increase predictability for economic operators, including for small and medium-sized enterprises. Easier access to customs simplifications shall also be provided for authorized traders according to objective and non-discriminatory

Inside the new commercial scenario created by the EVFTA, the AEO status becomes a valid instrument of accreditation and a symbol of correctness and fairness for European and Vietnamese economic operators and businesses which are part of the international supply chain and of the global freight distribution.

The AEO, especially if combined with the implementation of single windows, can offer advantages in terms of time-reduction of customs clearance operations and bureaucratic procedures. In this regard, as highlighted by the UNECE in

**154**

criteria."

Alessandro Torello Department of Economics and Law, University of Macerata, Macerata, Italy

\*Address all correspondence to: a.torello@unimc.it

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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**156**

*Emerging Markets*

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and challenges. Zeitschrift für

DOI: 10.1515/zfw-2016-0035

[12] BTM T. SEZ development in Cambodia, Thailand and Vietnam and the regional value chains. In: Hiratsuka D, editor. EEC Development and Transport Facilitation Measures in Thailand, and the Development Strategies by the Neighboring Countries. BRC Research Report. 24. Bangkok: Bangkok Research Center; 2019. p. 87. Available from: https://210.148.106.167/library/English/ Publish/Download/Brc/pdf/24\_05.pdf

[Accessed: 14 August 2020]

2004. pp. 40-41

10.31219/osf.io/ctj5z

[13] Dollar D. Reform, growth and poverty. In: Glewwe P, Agrawal N, Dollar D, editors. Economic Growth, Poverty, and Household Welfare in Vietnam. Washington DC: World Bank;

[14] Thayer CA. Vietnam's foreign policy in an era of rising Sino-US competition and increasing domestic political

influence. Asian Security. 2017;**13**(3):195. DOI: 10.1080/14799855.2017.1354570

[15] Economic Reforms LH. External liberalization and macroeconomic performance in Vietnam. International Research Journal of Finance and Economics. 2019;**176**:134. DOI:

[16] World Bank. World Development Indicators: GDP (current USD)

[Internet]. Available from: https://data. worldbank.org/indicator/NY.GDP. MKTP.CD [Accessed: 05 August 2020]

[17] World Bank. World Development Indicators: Export of goods and services

Wirtschaftsgeographie. 2016;**60**(3):123.

[11] Sigley G. Chinese governmentalities: Government, governance and the socialist market economy. Economy and Society. 2006;**35**(4):498-501. DOI: 10.1080/03085140600960773

[2] UNCTAD. Review of Maritime Transport. Geneva: United Nations;

[3] United Nations. Digital and Sustainable Trade Facilitation: Global Report 2019. Geneva: United Nations;

TU [Accessed: 28 July 2020]

[5] UNCTAD. Container Port Throughput, Annual [Internet]. Available from: https://unctadstat. unctad.org/wds/TableViewer/ tableView.aspx?ReportId=13321

[Accessed: 28 July 2020]

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[6] Kimura T. Vietnam--Ten years of economic struggle. Asian Survey. 1986;**26**(10):1040-1041. DOI:

[8] Vuving AL. Strategy and evolution of Vietnam's China policy: A changing mixture of pathways. Asian Survey. 2006;**46**(6):814-815. DOI: 10.1525/

[9] ADB. Great Mekong Subregion: Twenty Years of Partnerships. Mandaluyong: Asian Development

[10] Revilla Diez J. Vietnam 30 years after Doi Moi: Achievements

[7] Kelemen P. Soviet Strategy in Southeast Asia. Asian Survey. 1984;**24**(3):344-345. DOI: 10.2307/

[4] World Bank. World Development Indicators: Container Port Traffic [Internet]. Available from: https://data. worldbank.org/indicator/IS.SHP.GOOD.

**159**

**Chapter 10**

**Abstract**

**1. Introduction**

and the rise in the value of the dollar.

impacts of Covid −19.

**2. International context**

*Daniela Ramírez*

Chile in Times of Pandemic

This chapter provides an overview of the economic impact in Chile caused by Covid −19, the evolution of the Chilean economy in a compact and direct view. The restrictions imposed on consumption and production, as well as the decline of private investment are be the main obstacles that will keep the country from growing, exacerbated by the consequences on labor activity; on the other hand, the increase in public spending helps to counteract these effects, but only to a certain extent. We will consider a brief look at the political situation in the country, since the Chilean economy was in a vulnerable position at the time of receiving the pandemic with an economic contraction of 4.1% in the last quarter of 2019, as the result of the social crisis triggered in October of the mentioned year. The following aspects will be developed which include quantitative information about; Chilean economic situation, making reference and taking comparative parameters to the foreign sector, public sector, fiscal policy and monetary policy. Economic prospects and political situation.

**Keywords:** economic impact, social crisis, pandemic, uncertainty, politic

Chile is one of the Latin American economies that in the last four decades has had rapid and sustained growth, within a stable economic framework, which has allowed it to reduce poverty even when the international economic context has not been the most favorable, The crisis in 1995, the Asian crisis of 1998 and the world crisis of 2008 hit the working class of this country to different degrees. Today, while the world is debating whether we are entering a new depression, in Chile the collapse of the economy appears to be one of the biggest in recent times, with the price of copper at its worst levels, the stock market falling at the same time. Long 2020

This research is motivated by the interest in achieving a better knowledge of the economic and social situation in Chile in times of pandemic. In this work, based on a quantitative research, we present a series of statistical indicators, obtained from Chilean and international organizations that allow us to contextualize the current situation based on said data, and that lead us to analyze and comment on the initial

By the end of the first half of 2020, the world economic outlook is one of great uncertainty, the unprecedented effects of the pandemic have caused financial conditions to ease and the economic slowdown that has dragged on since 2018,

## **Chapter 10** Chile in Times of Pandemic

*Daniela Ramírez*

### **Abstract**

This chapter provides an overview of the economic impact in Chile caused by Covid −19, the evolution of the Chilean economy in a compact and direct view. The restrictions imposed on consumption and production, as well as the decline of private investment are be the main obstacles that will keep the country from growing, exacerbated by the consequences on labor activity; on the other hand, the increase in public spending helps to counteract these effects, but only to a certain extent. We will consider a brief look at the political situation in the country, since the Chilean economy was in a vulnerable position at the time of receiving the pandemic with an economic contraction of 4.1% in the last quarter of 2019, as the result of the social crisis triggered in October of the mentioned year. The following aspects will be developed which include quantitative information about; Chilean economic situation, making reference and taking comparative parameters to the foreign sector, public sector, fiscal policy and monetary policy. Economic prospects and political situation.

**Keywords:** economic impact, social crisis, pandemic, uncertainty, politic

### **1. Introduction**

Chile is one of the Latin American economies that in the last four decades has had rapid and sustained growth, within a stable economic framework, which has allowed it to reduce poverty even when the international economic context has not been the most favorable, The crisis in 1995, the Asian crisis of 1998 and the world crisis of 2008 hit the working class of this country to different degrees. Today, while the world is debating whether we are entering a new depression, in Chile the collapse of the economy appears to be one of the biggest in recent times, with the price of copper at its worst levels, the stock market falling at the same time. Long 2020 and the rise in the value of the dollar.

This research is motivated by the interest in achieving a better knowledge of the economic and social situation in Chile in times of pandemic. In this work, based on a quantitative research, we present a series of statistical indicators, obtained from Chilean and international organizations that allow us to contextualize the current situation based on said data, and that lead us to analyze and comment on the initial impacts of Covid −19.

#### **2. International context**

By the end of the first half of 2020, the world economic outlook is one of great uncertainty, the unprecedented effects of the pandemic have caused financial conditions to ease and the economic slowdown that has dragged on since 2018,



#### **Figure 1.**

*Real world GDP. Official data obtained from the World Bank. Source: World Bank. Note: e = estimate; f = forecast. 1. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates. 2. Annual GDP is on fiscal year basis, as per reporting practice in the country. 3. Quarterly data are preliminary.*

particularly for emerging countries, has created the perfect scenario. For a projected global economic contraction in GDP of 5.2%, this situation puts on the table the urgent need to take support measures to cushion the effects of Covid-19 and protect economies from events of similar characteristics in the future.

According to World Bank estimates [1], contractions of more than 7%, mainly in the Eurozone, 5% in the United States, Japan and Brazil and 0.4% in China, directly affect the exports of a country with a powerful development of an open economy (**Figure 1**).

#### **3. Economic situation in Chile**

At the time of the pandemic, Chile was in a position of economic and social vulnerability, as a result of the social crisis triggered in October 2019, this situation causes a strong health and economic impact due to its negative effect on supply and demand, reflected in numbers [2] for 2018, the expansion of GDP in Chile reached 3.9%, while in 2019 it only grew by 1.1%.

The pandemic has hit the Chilean economy by several sides, the stagnation of economic growth as a result of the fall in private investment, restrictions on consumption and production and the consequences of unemployment will further weaken the supply and demand situation. That can be reversed to some extent with increased public spending.

On the other hand, the Chilean economy is also being hit hard by the international context, especially by the fall in the price of copper and the increase in the value of the Dollar [3] (which reaches almost \$ 860 pesos) and the Euro (which reaches \$ 925). Although the international collapse in the price of oil has been welcome news, which somewhat offset the trade balance, there is concern that it could deepen the international economic crisis.

The economic activity index as of March 2020 reflected a slight increase in relation to the last quarter of 2019, which was interrupted by the magnitude of Covid-19, the official data of the Central Bank Chile [4] provides an advance of the impact with a fall in activity −13.2% between April and June (**Figure 2**).

In the field of foreign trade and according to the statistical information of the National Customs Service, Chile's commercial exchange decreased 14.2% in the

**161**

*Chile in Times of Pandemic*

decrease of 18.5% [5].

**Figure 2.**

to US \$ 252 million [5].

purchase of crude oil with −46.1% [5].

purchases of generators and corn for consumption [5].

decrease of 16.1%.

**4. Public policies**

*DOI: http://dx.doi.org/10.5772/intechopen.96648*

*Comparative GDP variation previous quarter. Based on data [4].*

first semester 2020, exports reached US \$ 34,070.9 million, equivalent to a negative variation of 9.9%, while imports reached US \$ 26,388, 3 million, registering a

Despite this contraction in exports during the first semester, shipments to China, Chile's main trading partner, registered an increase of 7.5% with US \$ 11,896.7 million and a share of 34.9%, followed by The United States with 14.3% and Japan with 9.1% participation, which translates into total sales of 58.3% [5]. Exports related to mining represented 51.7% of total shipments reaching US \$ 17,616 million, which caused a decrease of 3.1%. Copper within mining products represents 41.1% of the total, reaching a variation of −2.5%, equivalent to US \$ 185 million. However, iron and its concentrates had an increase of 79.3% corresponding

Non-mining exported products totaled US \$ 16,455 million, presenting a

On the other hand, imports decreased by 18.5%, equivalent to US \$ 26,388 million. China, even as the main seller with a 25.5% share of total international purchases, decreased by 8.1%; The United States with 19.8% and Brazil with 7.5%. Fuel imports accounted for 14.4% of total revenues, highlighting the drop in the

In parallel, imports of non-fuel products totaled US \$ 22,585, which represents

Promoted by the International Monetary Fund, all over the world countries are applying extraordinary measures to mitigate the effects of Covid-19 on the well-being of the population and the economy; in Chile, the Ministry of Finance announced the Emergency Economic Plan as economic support for families, workers and small businesses (SME); This plan involves fiscal resources for US \$ 11,750 million equivalent to 4.7% of annual GDP, in addition to US \$ 5,000 million allocated by the Treasury to protect the economy and income, totaling 17,000 million equivalent to 6.9% of GDP [6]. The arguments presented by Chile in this fiscal package include an increase in health spending, additional transfers to all municipalities in the country, a special

a decrease of 15.6%. In relation to these variations, there is an increase in the

#### **Figure 2.**

*Emerging Markets*

(**Figure 1**).

**Figure 1.**

**3. Economic situation in Chile**

3.9%, while in 2019 it only grew by 1.1%.

could deepen the international economic crisis.

increased public spending.

particularly for emerging countries, has created the perfect scenario. For a projected global economic contraction in GDP of 5.2%, this situation puts on the table the urgent need to take support measures to cushion the effects of Covid-19 and protect

*Real world GDP. Official data obtained from the World Bank. Source: World Bank. Note: e = estimate; f = forecast. 1. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates. 2. Annual GDP is on fiscal year basis, as per reporting practice in the country. 3. Quarterly data are preliminary.*

According to World Bank estimates [1], contractions of more than 7%, mainly in the Eurozone, 5% in the United States, Japan and Brazil and 0.4% in China, directly affect the exports of a country with a powerful development of an open economy

At the time of the pandemic, Chile was in a position of economic and social vulnerability, as a result of the social crisis triggered in October 2019, this situation causes a strong health and economic impact due to its negative effect on supply and demand, reflected in numbers [2] for 2018, the expansion of GDP in Chile reached

The pandemic has hit the Chilean economy by several sides, the stagnation of economic growth as a result of the fall in private investment, restrictions on consumption and production and the consequences of unemployment will further weaken the supply and demand situation. That can be reversed to some extent with

On the other hand, the Chilean economy is also being hit hard by the international context, especially by the fall in the price of copper and the increase in the value of the Dollar [3] (which reaches almost \$ 860 pesos) and the Euro (which reaches \$ 925). Although the international collapse in the price of oil has been welcome news, which somewhat offset the trade balance, there is concern that it

The economic activity index as of March 2020 reflected a slight increase in relation to the last quarter of 2019, which was interrupted by the magnitude of Covid-19, the official data of the Central Bank Chile [4] provides an advance of the

In the field of foreign trade and according to the statistical information of the National Customs Service, Chile's commercial exchange decreased 14.2% in the

impact with a fall in activity −13.2% between April and June (**Figure 2**).

economies from events of similar characteristics in the future.

**160**

*Comparative GDP variation previous quarter. Based on data [4].*

first semester 2020, exports reached US \$ 34,070.9 million, equivalent to a negative variation of 9.9%, while imports reached US \$ 26,388, 3 million, registering a decrease of 18.5% [5].

Despite this contraction in exports during the first semester, shipments to China, Chile's main trading partner, registered an increase of 7.5% with US \$ 11,896.7 million and a share of 34.9%, followed by The United States with 14.3% and Japan with 9.1% participation, which translates into total sales of 58.3% [5].

Exports related to mining represented 51.7% of total shipments reaching US \$ 17,616 million, which caused a decrease of 3.1%. Copper within mining products represents 41.1% of the total, reaching a variation of −2.5%, equivalent to US \$ 185 million. However, iron and its concentrates had an increase of 79.3% corresponding to US \$ 252 million [5].

Non-mining exported products totaled US \$ 16,455 million, presenting a decrease of 16.1%.

On the other hand, imports decreased by 18.5%, equivalent to US \$ 26,388 million. China, even as the main seller with a 25.5% share of total international purchases, decreased by 8.1%; The United States with 19.8% and Brazil with 7.5%. Fuel imports accounted for 14.4% of total revenues, highlighting the drop in the purchase of crude oil with −46.1% [5].

In parallel, imports of non-fuel products totaled US \$ 22,585, which represents a decrease of 15.6%. In relation to these variations, there is an increase in the purchases of generators and corn for consumption [5].

#### **4. Public policies**

Promoted by the International Monetary Fund, all over the world countries are applying extraordinary measures to mitigate the effects of Covid-19 on the well-being of the population and the economy; in Chile, the Ministry of Finance announced the Emergency Economic Plan as economic support for families, workers and small businesses (SME); This plan involves fiscal resources for US \$ 11,750 million equivalent to 4.7% of annual GDP, in addition to US \$ 5,000 million allocated by the Treasury to protect the economy and income, totaling 17,000 million equivalent to 6.9% of GDP [6].

The arguments presented by Chile in this fiscal package include an increase in health spending, additional transfers to all municipalities in the country, a special unemployment insurance fund, as well as the deferral of tax payments for companies with smaller sales. at \$ 12 million.

In addition, the government agreed to an emergency Family Income as a complement to family income, extendable so that each household has at least 110 euros per person from a minimum floor of 30 dollars.

Also, a subsidy was established for independent workers who have suffered a sharp decrease in their income, considering an average income of less than 540 euros.

A capitalization of the Guarantee Fund for small Entrepreneurs of 3 billion dollars was ordered with the objective of leveraging guaranteed loans.

For reference, if we compare these data with other countries in the region, the measures taken by the Chilean government are some of the highest, being surpassed only by Peru, Argentina for example in its government aid program reaches 3, 5% of GDP; This position is also positive if we compare it with countries like Germany, which is equivalent to 156 billion euros, equivalent to 4.9% of GDP, or that of France with 110 billion, close to 5% GDP [6].

Considering the macroeconomic impairment, the decrease in income is justified, and it is projected that the Central Government's income will contract by a real 16.1% compared to 2019.

In April 2020, the Budget Office announced that as a result of the economic measures adopted by the pandemic, the effective deficit will reach 9.6% of GDP and a structural deficit of 3.5%. Thus, for the end of this year, an increase in fiscal spending of 11.4% is expected compared to 2019 and it is projected that the gross debt of the government will be located at 32.7% of GDP and 35.7% at the end of 2021, reaching 40% in 2024 [6].

The foregoing dangerously brings us closer to a debt threshold that significantly increases the payment of interest and with this the possibility of entering a debt crisis, estimates indicate an interest payment of the order of US \$ 4.5 billion in 2024.

#### **5. Employment**

The Chilean labor market prior to facing the crisis due to COVID-19 was in a fragile position due to the internal social crisis that unleashed as of October 18, 2019, clearly there is a difference in facing a crisis with a robust labor market and dynamic that with a weakened market, Chile is unfortunately in the latter situation. According to what was reported by INE-National Institute of Statistics of this country, in the quarter prior to this pandemic (December 2019–February 2020), total formal jobs had fallen by 37,423 annually and informal employment had increased by 193,519. For its part, the creation of formal private salaried employment in the December 2019–February 2020 quarter was only 67,057, which contrasts with the 129,830 in the August October 2019 quarter; This, despite fiscal efforts to avoid company bankruptcies and worker layoffs, did not prevent many from closing permanently. The severity of the health crisis then accelerated the collapse of employment [7].

The unemployment rate reached 7.8% in the moving quarter December 2019–February 2020, this percentage has been sustained by the dramatic increase in informal employment, which has prevented the unemployment percentage from rising sharply.

Although during recessions the unemployment rate increases, it is cushioned by the changes that occur in the composition of employment, however, the severity of the current health crisis compared to other crises is that it directly prevents or

**163**

economies.

**7. Economic outlook**

the estimated 3.2% [12].

*Chile in Times of Pandemic*

work [7].

**6. Monetary policies**

cal minimum of 0.5% [8].

evident in May with a 0.1% drop [9].

*DOI: http://dx.doi.org/10.5772/intechopen.96648*

mobile quarter November–January 2019 [7].

hinders the execution of jobs that allow people to avoid a situation of total unemployment, which entails fewer options for an increase in informal employment and

According to the figures for the April–June 2020 quarter (Nacional Institute Statistic) show that the employment rate fell by 20% compared to the same period of the previous year, which implies 1.78 million jobs lost in 12 months; Employed persons in April–June reached 7.14 million people in contrast to 9.12 million in the

We must bear in mind that the contract suspension measure of the recent "employment protection" law maintains an employment relationship with more than 800 thousand people who maintain a link with their employer, receiving in

The seriousness of the health crisis can be expressed more clearly in that the total number of effective hours worked fell by 32% in twelve months. The average hours worked reached 32.4 hours per week, far from the legal 45 hours of salaried

Faced with the signs of an economic slowdown since October 2019 and the repercussions of the last quarter of the year, the Central Bank's council had lowered the interest rate by 1%, which had been sustained at 3% since January 2019 and that after the social outbreak it fell again, reaching 1.75%. Faced with the pandemic, the Central Bank reduces the refinancing interest rate by 1.25%, leaving it at its techni-

The annual record of inflation remained below the Central Bank's target range of 3% from September 2018 to December 2019 [9]; Between January and March, the effect of the accelerated devaluation of the peso became tangible, which had a rapid impact on import prices. In the immediate future, the decrease in household consumption will put downward pressure on consumer prices, which is already

For its part, the dollar, at the beginning of the social crisis in October 2019, was worth 713 pesos, reaching a maximum of 838 pesos in November, and then falling again thanks to the exchange intervention of the Central Bank [10]. Said intervention with an amount close to US \$ 20,000 million, began on December 2, 2019 and has been maintained with some oscillations according to the variation of the exchange market; In conclusion, the dollar scenario in Chile is strongly marked by global uncertainty, the evolution of the pandemic and its impact on various

The Central Bank of Chile in June lowered its projections for March and modeled a fall in the economy between −5.5% and − 7.5% while it projects a rapid recovery with growth of 4.75% to 6, 25% for the year 2021 and 3 to 4 percent for the year 2022. For the government, the fall in domestic demand would reach 9.8% in 2020, much greater than the contraction of 3.3% forecast in April [11]; and it is anticipated that the dollar would end the year with an approximate value of 792 pesos, GDP is expected to expand on average 3.5% between 2022 and 2024 above

most cases a lower remuneration and/or return to work after four weeks.

consequently there are more abrupt rises in the unemployment rate.

#### *Chile in Times of Pandemic DOI: http://dx.doi.org/10.5772/intechopen.96648*

*Emerging Markets*

540 euros.

nies with smaller sales. at \$ 12 million.

per person from a minimum floor of 30 dollars.

France with 110 billion, close to 5% GDP [6].

16.1% compared to 2019.

**5. Employment**

employment [7].

rising sharply.

2021, reaching 40% in 2024 [6].

unemployment insurance fund, as well as the deferral of tax payments for compa-

Also, a subsidy was established for independent workers who have suffered a sharp decrease in their income, considering an average income of less than

A capitalization of the Guarantee Fund for small Entrepreneurs of 3 billion

For reference, if we compare these data with other countries in the region, the measures taken by the Chilean government are some of the highest, being surpassed only by Peru, Argentina for example in its government aid program reaches 3, 5% of GDP; This position is also positive if we compare it with countries like Germany, which is equivalent to 156 billion euros, equivalent to 4.9% of GDP, or that of

Considering the macroeconomic impairment, the decrease in income is justified,

and it is projected that the Central Government's income will contract by a real

In April 2020, the Budget Office announced that as a result of the economic measures adopted by the pandemic, the effective deficit will reach 9.6% of GDP and a structural deficit of 3.5%. Thus, for the end of this year, an increase in fiscal spending of 11.4% is expected compared to 2019 and it is projected that the gross debt of the government will be located at 32.7% of GDP and 35.7% at the end of

The foregoing dangerously brings us closer to a debt threshold that significantly increases the payment of interest and with this the possibility of entering a debt crisis, estimates indicate an interest payment of the order of US \$ 4.5 billion in 2024.

The Chilean labor market prior to facing the crisis due to COVID-19 was in a fragile position due to the internal social crisis that unleashed as of October 18, 2019, clearly there is a difference in facing a crisis with a robust labor market and dynamic that with a weakened market, Chile is unfortunately in the latter situation. According to what was reported by INE-National Institute of Statistics of this country, in the quarter prior to this pandemic (December 2019–February 2020), total formal jobs had fallen by 37,423 annually and informal employment had increased by 193,519. For its part, the creation of formal private salaried employment in the December 2019–February 2020 quarter was only 67,057, which contrasts with the 129,830 in the August October 2019 quarter; This, despite fiscal efforts to avoid company bankruptcies and worker layoffs, did not prevent many from closing permanently. The severity of the health crisis then accelerated the collapse of

The unemployment rate reached 7.8% in the moving quarter December 2019–February 2020, this percentage has been sustained by the dramatic increase in informal employment, which has prevented the unemployment percentage from

Although during recessions the unemployment rate increases, it is cushioned by the changes that occur in the composition of employment, however, the severity of the current health crisis compared to other crises is that it directly prevents or

dollars was ordered with the objective of leveraging guaranteed loans.

In addition, the government agreed to an emergency Family Income as a complement to family income, extendable so that each household has at least 110 euros

**162**

hinders the execution of jobs that allow people to avoid a situation of total unemployment, which entails fewer options for an increase in informal employment and consequently there are more abrupt rises in the unemployment rate.

According to the figures for the April–June 2020 quarter (Nacional Institute Statistic) show that the employment rate fell by 20% compared to the same period of the previous year, which implies 1.78 million jobs lost in 12 months; Employed persons in April–June reached 7.14 million people in contrast to 9.12 million in the mobile quarter November–January 2019 [7].

We must bear in mind that the contract suspension measure of the recent "employment protection" law maintains an employment relationship with more than 800 thousand people who maintain a link with their employer, receiving in most cases a lower remuneration and/or return to work after four weeks.

The seriousness of the health crisis can be expressed more clearly in that the total number of effective hours worked fell by 32% in twelve months. The average hours worked reached 32.4 hours per week, far from the legal 45 hours of salaried work [7].

#### **6. Monetary policies**

Faced with the signs of an economic slowdown since October 2019 and the repercussions of the last quarter of the year, the Central Bank's council had lowered the interest rate by 1%, which had been sustained at 3% since January 2019 and that after the social outbreak it fell again, reaching 1.75%. Faced with the pandemic, the Central Bank reduces the refinancing interest rate by 1.25%, leaving it at its technical minimum of 0.5% [8].

The annual record of inflation remained below the Central Bank's target range of 3% from September 2018 to December 2019 [9]; Between January and March, the effect of the accelerated devaluation of the peso became tangible, which had a rapid impact on import prices. In the immediate future, the decrease in household consumption will put downward pressure on consumer prices, which is already evident in May with a 0.1% drop [9].

For its part, the dollar, at the beginning of the social crisis in October 2019, was worth 713 pesos, reaching a maximum of 838 pesos in November, and then falling again thanks to the exchange intervention of the Central Bank [10]. Said intervention with an amount close to US \$ 20,000 million, began on December 2, 2019 and has been maintained with some oscillations according to the variation of the exchange market; In conclusion, the dollar scenario in Chile is strongly marked by global uncertainty, the evolution of the pandemic and its impact on various economies.

#### **7. Economic outlook**

The Central Bank of Chile in June lowered its projections for March and modeled a fall in the economy between −5.5% and − 7.5% while it projects a rapid recovery with growth of 4.75% to 6, 25% for the year 2021 and 3 to 4 percent for the year 2022. For the government, the fall in domestic demand would reach 9.8% in 2020, much greater than the contraction of 3.3% forecast in April [11]; and it is anticipated that the dollar would end the year with an approximate value of 792 pesos, GDP is expected to expand on average 3.5% between 2022 and 2024 above the estimated 3.2% [12].

The IMF, for its part, adjusted the projection for Chile in June 2020, estimating a 7.5% drop in GDP, this estimate is similar to the worst scenario contemplated in Chile by the Ministry of Finance.

It is important to mention that in May the International Monetary Fund, approved a flexible credit line for the Central Bank of Chile, of almost 20 billion dollars, whose objective is to guarantee the liquidity of the currencies in the case of greater complexity in the crisis. Thus, this organization projects a GDP growth of 3.7% for Latin America, positioning Chile with 5%.

In general, expectations continue to anticipate that the recovery will be gradual in the remainder of the year, although this is directly related to the health indicators and their improvement, there is optimism as the statistics show figures below 2,000 cases of Covid-19 per day, this trend indicates that it is very likely that the government will continue to soften the measures taken.

Finally, it is important to note that the price of copper continues to rise, exceeding 3 dollars per pound, however, although manufacturing in China could continue to drive the price of copper, there is also a great downside risk considering the possible slowdown in the pace of the global recovery due to the fact that the stimulus measures begin to expire in several of the economies that affect international consumption.

#### **8. Political situation**

The Chilean political context in which the health crisis has taken place is of tremendous complexity, in October 2019 the government of Sebastián Piñera had to face a wave of massive protests that lasted for months; Although the trigger for these was the increase in the price of the subway ticket, the social demands of the protesters had a heterogeneous nature and covered issues as varied as access to health, the reduction of gender disparities, the insufficient amount income and the end of the private pension system, among others. With a mobilized society and a good number of opposition political actors, two main arguments began to be structured. First, socioeconomic inequities are not sustainable and must be reduced. Second, the rigid institutional rules of the game, fundamentally enshrined in the 1980 Chilean Political Constitution, designed during the dictatorship, protect the status quo and hinder the adoption of changes that promote greater equity.

For the month of March 2020, a reactivation of the social unrest that began in October 2019 was expected, after the first case by Covid-19 announced on March 3, the political scene turned completely to contain the crisis and its effects economical. Towards the end of April and until the first fortnight of June, the expansion of Covid −19 was exponential, despite general measures, such as the closure of the border, mandatory quarantines for infected people, prohibition of public events, suspension of classes, sanitary cords and the use of mandatory masks, one of the government's mistakes was deciding general voluntary quarantine and selective and brief confinements that, far from helping to stop contagions, increased them since the Metropolitan region is a city of continuous displacement and dormitory communes; this led to the late introduction of strict quarantines.

Finally, it is feasible to think that there are two types of outcomes after this crisis, in the first place it is likely that when the waters calm down and the health crisis is no longer the first problem, the opposition forces will focus on the weaknesses of the economy market, the fragmentation and inequalities of the health system and the lack of social policies and secondly, the confinement has kept the country without social mobilizations, which may favor the ruling party to maintain a discourse of national unity that tarnishes the social reality that lives The country

**165**

**Author details**

Daniela Ramírez

Universidad de Santiago de Chile, Santiago de Chile, Chile

provided the original work is properly cited.

\*Address all correspondence to: danielaramireznavarro@gmail.com

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

*Chile in Times of Pandemic*

**9. Conclusions**

*DOI: http://dx.doi.org/10.5772/intechopen.96648*

social unrest could become more acute.

actors in the face of different uncertain factors.

is quick to venture to envision which scenario will prevail, since if the government is not able to protect the most vulnerable from the economic effects of the crisis,

The figures show the impacts of the pandemic, in short, what we have in Chile is not just a health problem that can be addressed scientifically or technically. Chilean society is literally experiencing a storm, in which three situations of economic crisis (China-US trade war, Social Outbreak and pandemic) are linked to each other; If to this we add the fact that the political system is in crisis, without major leaderships that allow organizing society as a whole or projects that can channel the demands and uncertainties that arise with the pandemic and provide effective responses to problems that arise. Have become more and more urgent, clearly, we are facing a complex situation in which each of the elements (health, economic and political) has its own dynamics that depends on different types of national and international

is quick to venture to envision which scenario will prevail, since if the government is not able to protect the most vulnerable from the economic effects of the crisis, social unrest could become more acute.

### **9. Conclusions**

*Emerging Markets*

Chile by the Ministry of Finance.

international consumption.

**8. Political situation**

3.7% for Latin America, positioning Chile with 5%.

ment will continue to soften the measures taken.

The IMF, for its part, adjusted the projection for Chile in June 2020, estimating a 7.5% drop in GDP, this estimate is similar to the worst scenario contemplated in

In general, expectations continue to anticipate that the recovery will be gradual in the remainder of the year, although this is directly related to the health indicators and their improvement, there is optimism as the statistics show figures below 2,000 cases of Covid-19 per day, this trend indicates that it is very likely that the govern-

It is important to mention that in May the International Monetary Fund, approved a flexible credit line for the Central Bank of Chile, of almost 20 billion dollars, whose objective is to guarantee the liquidity of the currencies in the case of greater complexity in the crisis. Thus, this organization projects a GDP growth of

Finally, it is important to note that the price of copper continues to rise, exceeding 3 dollars per pound, however, although manufacturing in China could continue to drive the price of copper, there is also a great downside risk considering the possible slowdown in the pace of the global recovery due to the fact that the stimulus measures begin to expire in several of the economies that affect

The Chilean political context in which the health crisis has taken place is of tremendous complexity, in October 2019 the government of Sebastián Piñera had to face a wave of massive protests that lasted for months; Although the trigger for these was the increase in the price of the subway ticket, the social demands of the protesters had a heterogeneous nature and covered issues as varied as access to health, the reduction of gender disparities, the insufficient amount income and the end of the private pension system, among others. With a mobilized society and a good number of opposition political actors, two main arguments began to be structured. First, socioeconomic inequities are not sustainable and must be reduced. Second, the rigid institutional rules of the game, fundamentally enshrined in the 1980 Chilean Political Constitution, designed during the dictatorship, protect the status quo and hinder the adoption of changes that promote greater equity.

For the month of March 2020, a reactivation of the social unrest that began in October 2019 was expected, after the first case by Covid-19 announced on March 3, the political scene turned completely to contain the crisis and its effects economical. Towards the end of April and until the first fortnight of June, the expansion of Covid −19 was exponential, despite general measures, such as the closure of the border, mandatory quarantines for infected people, prohibition of public events, suspension of classes, sanitary cords and the use of mandatory masks, one of the government's mistakes was deciding general voluntary quarantine and selective and brief confinements that, far from helping to stop contagions, increased them since the Metropolitan region is a city of continuous displacement and dormitory com-

Finally, it is feasible to think that there are two types of outcomes after this crisis, in the first place it is likely that when the waters calm down and the health crisis is no longer the first problem, the opposition forces will focus on the weaknesses of the economy market, the fragmentation and inequalities of the health system and the lack of social policies and secondly, the confinement has kept the country without social mobilizations, which may favor the ruling party to maintain a discourse of national unity that tarnishes the social reality that lives The country

munes; this led to the late introduction of strict quarantines.

**164**

The figures show the impacts of the pandemic, in short, what we have in Chile is not just a health problem that can be addressed scientifically or technically. Chilean society is literally experiencing a storm, in which three situations of economic crisis (China-US trade war, Social Outbreak and pandemic) are linked to each other; If to this we add the fact that the political system is in crisis, without major leaderships that allow organizing society as a whole or projects that can channel the demands and uncertainties that arise with the pandemic and provide effective responses to problems that arise. Have become more and more urgent, clearly, we are facing a complex situation in which each of the elements (health, economic and political) has its own dynamics that depends on different types of national and international actors in the face of different uncertain factors.

### **Author details**

Daniela Ramírez Universidad de Santiago de Chile, Santiago de Chile, Chile

\*Address all correspondence to: danielaramireznavarro@gmail.com

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

### **References Chapter 11**

[1] The World Bank. [Text/HTML] The World Bank. 2020. Available from: https://www.bancomundial.org/es/ publication/global-economic-prospects [Accessed: 09.2020]

[2] The Central Bank Chile. [Text/ HTML] The Central Bank Chile. 2020. Available from: https://www.bcentral.cl/ web/banco-central/areas/estadisticas/ pib-egional [Accessed: 09.2020]

[3] Internal Taxes Service Chile. [Text/ HTML]. The Internal Taxes Service Chile.2020. Available from: http://www. sii.cl/valores\_y\_fechas/dolar/dolar2020. htm [Accessed 09.2020]

[4] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3.bcentral.cl/ setgraficos/# [Accessed 09.2020]

[5] The National Customs Service Chile. [Text/HTML]. The National Customs Service Chile. 2020. Available from: https://www.aduana.cl/aduana/ site/edic/base/port/estadisticas. html?filtro=20181205220946 [Accessed 09.2020]

[6] The Ministry of Finance Chile. [Text/HTML]. The Ministry of Finance Chile. 2020. Available From: https:// www.hacienda.cl/areas-de-trabajo/ presupuesto-nacional/estado-de-lahacienda-publica [Accessed 09.2020]

[7] The National Statistics Institute Chile. [Text/HTML]. The National Statistics Institute Chile. 2020. https:// www.ine.cl/estadisticas/sociales/ mercado-laboral [Accessed 09.2020]

[8] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_EST\_ MACRO\_IV/PEM\_TC [Accessed 2020] [9] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_EST\_ MACRO\_IV/PEM\_PREC\_IPC2018/ PEM\_PREC\_IPC2018?cbFechaInicio=20 19&cbFechaTermino=2020&cbFrecuen cia=MONTHLY&cbCalculo=NONE&cb FechaBase= [Accessed 09.2020]

Competitive Advantages of

*Yan Chen, Fei Li, Jaime Ortiz and Wenbo Guo*

**Keywords:** China, non-location-bound competitive advantage, home-country-bound competitive advantage, cross-border M&As,

Competitive advantage is a major determinant of firm survival and sustained profitability and perhaps the most decisive factor that enables emerging market multinational enterprises (EMNEs) to catch up with MNEs from developed countries. In the existing research which delved into competitive advantage in emerging market countries, foreign direct investment (FDI) is considered the most important way to enhance EMNE competitive advantage and technological catch-up [1–3]. Luo and Tung [4] pointed out that, due to weaker innovation capabilities and

Non-Location-Bound Chinese

Cross-border mergers and acquisitions (M&As) undertaken by emerging market firms have been associated with competitive advantage. However, little research has focused on the transferability of this enhanced competitive advantage. Even less is known about the role played by state-owned enterprises. This paper investigates whether Chinese information and communications technology firms that undertake cross-border M&As can improve their non-location bound competitive advantage. We used cross-border data between 2010 and 2017 and propensity-score matching and differences-in-differences approaches. We found that cross-border M&As significantly improve the home-country-bound competitive advantage. However, the effect on non-location bound competitive advantage is not significant. From the perspective of impact mechanism, this is due to a crowding-out effect of crossborder M&As on research and development (R&D) investment which inhibits nonlocation bound advantages. It also results from state-owned enterprises which are generally considered to have institutional advantages, not effectively using crossborder M&As to enhance their competitive advantages. This research distinguishes and quantifies home-country-bound competitive advantage and non-location bound competitive advantage and establishes a framework for how cross-border M&As enhance enterprise competitive advantage. It provides an explanation for the extant research on whether state-owned enterprises can enhance their competitive advantage through cross-border M&As, and what kind of advantage they attain.

Cross-Border M&As to

ICT Firms

state-owned enterprises

**1. Introduction**

**167**

**Abstract**

[10] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from:https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_ EST\_MACRO\_IV/PEM\_TC/PEM\_TC [Accessed 09.2020]

[11] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available form: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_ EST\_MACRO\_IV/PEM\_ACTyDDA\_ IndMacT\_2/PEM\_ACTyDDA\_IndMac T\_2?cbFechaInicio=2019&cbFechaTer mino=2020&cbFrecuencia=QUARTER LY&cbCalculo=NONE&cbFechaBase= [Accessed 09.2020]

[12] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_ EST\_MACRO\_IV/PEM\_TC/PEM\_TC [Accessed 09.2020]

#### **References Chapter 11**

## Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms

*Yan Chen, Fei Li, Jaime Ortiz and Wenbo Guo*

### **Abstract**

Cross-border mergers and acquisitions (M&As) undertaken by emerging market firms have been associated with competitive advantage. However, little research has focused on the transferability of this enhanced competitive advantage. Even less is known about the role played by state-owned enterprises. This paper investigates whether Chinese information and communications technology firms that undertake cross-border M&As can improve their non-location bound competitive advantage. We used cross-border data between 2010 and 2017 and propensity-score matching and differences-in-differences approaches. We found that cross-border M&As significantly improve the home-country-bound competitive advantage. However, the effect on non-location bound competitive advantage is not significant. From the perspective of impact mechanism, this is due to a crowding-out effect of crossborder M&As on research and development (R&D) investment which inhibits nonlocation bound advantages. It also results from state-owned enterprises which are generally considered to have institutional advantages, not effectively using crossborder M&As to enhance their competitive advantages. This research distinguishes and quantifies home-country-bound competitive advantage and non-location bound competitive advantage and establishes a framework for how cross-border M&As enhance enterprise competitive advantage. It provides an explanation for the extant research on whether state-owned enterprises can enhance their competitive advantage through cross-border M&As, and what kind of advantage they attain.

**Keywords:** China, non-location-bound competitive advantage, home-country-bound competitive advantage, cross-border M&As, state-owned enterprises

#### **1. Introduction**

Competitive advantage is a major determinant of firm survival and sustained profitability and perhaps the most decisive factor that enables emerging market multinational enterprises (EMNEs) to catch up with MNEs from developed countries. In the existing research which delved into competitive advantage in emerging market countries, foreign direct investment (FDI) is considered the most important way to enhance EMNE competitive advantage and technological catch-up [1–3]. Luo and Tung [4] pointed out that, due to weaker innovation capabilities and

**166**

*Emerging Markets*

[Accessed: 09.2020]

htm [Accessed 09.2020]

09.2020]

[1] The World Bank. [Text/HTML] The World Bank. 2020. Available from: https://www.bancomundial.org/es/ publication/global-economic-prospects [9] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_EST\_ MACRO\_IV/PEM\_PREC\_IPC2018/ PEM\_PREC\_IPC2018?cbFechaInicio=20 19&cbFechaTermino=2020&cbFrecuen cia=MONTHLY&cbCalculo=NONE&cb

FechaBase= [Accessed 09.2020]

[Accessed 09.2020]

[Accessed 09.2020]

[Accessed 09.2020]

[10] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from:https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_ EST\_MACRO\_IV/PEM\_TC/PEM\_TC

[11] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available form: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_ EST\_MACRO\_IV/PEM\_ACTyDDA\_ IndMacT\_2/PEM\_ACTyDDA\_IndMac T\_2?cbFechaInicio=2019&cbFechaTer mino=2020&cbFrecuencia=QUARTER LY&cbCalculo=NONE&cbFechaBase=

[12] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_ EST\_MACRO\_IV/PEM\_TC/PEM\_TC

[2] The Central Bank Chile. [Text/ HTML] The Central Bank Chile. 2020. Available from: https://www.bcentral.cl/ web/banco-central/areas/estadisticas/ pib-egional [Accessed: 09.2020]

[3] Internal Taxes Service Chile. [Text/ HTML]. The Internal Taxes Service Chile.2020. Available from: http://www. sii.cl/valores\_y\_fechas/dolar/dolar2020.

[4] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3.bcentral.cl/ setgraficos/# [Accessed 09.2020]

[5] The National Customs Service Chile. [Text/HTML]. The National Customs Service Chile. 2020. Available from: https://www.aduana.cl/aduana/ site/edic/base/port/estadisticas.

html?filtro=20181205220946 [Accessed

[6] The Ministry of Finance Chile. [Text/HTML]. The Ministry of Finance Chile. 2020. Available From: https:// www.hacienda.cl/areas-de-trabajo/ presupuesto-nacional/estado-de-lahacienda-publica [Accessed 09.2020]

[7] The National Statistics Institute Chile. [Text/HTML]. The National Statistics Institute Chile. 2020. https:// www.ine.cl/estadisticas/sociales/ mercado-laboral [Accessed 09.2020]

[8] The Central Bank Chile. [Text/ HTML]. The Central Bank Chile. 2020. Available from: https://si3. bcentral.cl/Siete/ES/Siete/Cuadro/ CAP\_ESTADIST\_MACRO/MN\_EST\_ MACRO\_IV/PEM\_TC [Accessed 2020] knowledge of resource reserves found in their home countries, EMNEs use FDI as a 'springboard' by adding strategic assets to establish a competitive advantage and achieve corporate growth. M&As undertaken by EMNEs have increased significantly over time, especially China's cross-border ones. According to Thomson Reuters and Price Water House Coopers, in 2016 Chinese firms undertook as many as 923 cross-border M&A transactions (excluding M&As in Hong Kong SAR and Macao) representing a 142% increase from 2015.

Benefiting from the rapid economic growth of their home countries, EMNEs can expand into local markets and gain considerable economic returns through crossborder M&As [14]. However, many EMNEs have fallen into a pattern of continuous integration and strengthening of external and regional bundling assets, giving them leverage in their home markets [15]. For example, upon acquiring Volvo, Geely Automobile achieved a rapid revenue growth at the expense of Volvo's strong R&D capabilities and China's huge auto market, low labour costs, and policy support. However, Geely's overseas sales'share has been declining, with a 2016 domestic sales ratio of 97.2%. Strategic assets acquired through CBAs can only establish an EMNE's competitive advantage if they are attached to home market supports such as natural resource endowments, labour force, market scale, and local culture [16]. Although the existing literature favours the impact of cross-border M&As, mixed results have been found concerning the impact on different types of competitive advantage. To examine the inconsistency of current views, this paper distinguishes and defines two types of competitive advantage of EMNEs according to their boundedness to its home country. On the one hand, home-country-bound competitive advantages are defined as a location-bound FSA which is highly dependent on the home market and cannot transferred to other locations and therefore limits the capability of EMNEs to become global firms, e.g. home market scale [14], political connection [17]. On the other hand, non-location-bound competitive advantages are defined as those that can be transferred within the enterprise itself and can increase leverage in the global market without the boundness of location, e.g., global brand, and technology knowledge [18]. As opposed to home-country-bound competitive advantages, non-location-bound competitive advantages can reduce the liability of foreignness, and are associated with a greater capacity to penetrate geographically distant markets and achieve a global geographic scope [7]. They are therefore the rationale for measuring the internationalisation ability of enterprises [19, 20], and act as the criterion to

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

test whether cross-border M&A can constitute the "springboard" of

State ownership has also been a topic of research in cross-border M&As of EMNEs [22]. Compared to non-SOEs, characteristics of SOEs such as non-economic motivations, long-term orientation, and different risk preferences influence the foreign entry strategies of SOEs [23]. Some literature suggests that the state can provide stateowned enterprises (SOEs) with monopolist advantages at home by creating and enforcing rules that shape market entry and transactions, and by providing preferential access to financial resources [24]. SOEs have better access to resources in their home countries than non-SOEs, and thus are less concerned about the high operating costs associated with larger geographic distances [25]. On the other hand, the state's economic and social objectives can inhibit the SOEs' ability to develop FSAs [26]. However, the existing literature focuses on whether SOEs can enhance their competitive advantage through cross-border M&As and what kind of advantage they can

We studied the effect of cross-border M&As on enterprise competitive advantage by distinguishing between home-country-bound competitive advantage and non-location bound competitive advantage in Chinese ICT firms' contexts. We

2.Does state ownership enhance the competitive advantage of Chinese ICT firms

1.Can cross-border M&As improve the non-location-bound competitive

internationalisation [20, 21].

attain and remains quite controversial.

addressed the following research questions:

advantages of Chinese ICT firms?

through cross-border M&As?

**169**

One of the most active fields of innovation, and also one of the fiercest areas of technological competition globally, is represented by the new generation of information and communications technology (ICT) firms which focus on cloud computing, big data, and artificial intelligence. The ICT industry has incurred substantial FDI especially across emerging economies [5, 6]. The ICT industry is also characterised by significant technological dynamism as a high proportion of firms engage in internationalisation to obtain strategic assets outside of the firm boundaries [7]. The Deloitte's 2017 China TMT Industry Overseas M&A Report shows that between 2012 and 2016, the growth rate of cross-border M&A transactions in the Chinese technology, media, and telecom (TMT) industry reached 20%. In contrast, their worldwide growth rate reached 8% in the same period. China has become the most active M&A initiator in the TMT industry. As one of the ten key areas of China's manufacturing, the new generation of information technology plays a pivotal role in China's implementation of innovation-driven development strategies and high-quality foreign cooperation. However, since 2017, cross-border M&As of China's ICT industry has faced more stringent scrutiny by the United States and EU countries. The U.S. government identifies ICT as a critical technology industry, especially in the 5G and semiconductor arena. Foreign direct investment in these industries has been subject to strict security scrutiny. For example, in February 2017, the Chinese state-owned enterprise (SOE) named National Integrated Circuit -Industry Investment -Fund Co., Ltd. acquired Xcerra, an American semiconductor testing equipment manufacturer. This acquisition was quickly objected to by the Committee on Foreign Investment in the United States (CFIUS), on national security grounds. Xcerra and the Chinese acquirer signed the termination agreement on the same day. Therefore, in the current international investment environment, it is necessary to reconsider whether cross-border M&As are the best way for Chinese ICT enterprises to enhance their core competitiveness. A case in point is whether or not the background of state-owned enterprises enhances or hinder the enterprises' use of external strategic resources to enhance their competitive advantage.

Recent studies have focused on the adaptation of internalisation theory for EMNEs [3, 8]. Such theory states that foreign investments undertaken by EMNEs in the absence of firm-specific-advantages (FSAs) are made to acquire FSAs and the intangibles of foreign firms [9]. Therefore, the goal of foreign investment is not to exploit FSAs but to acquire them [10]. However, little empirical research has been conducted to examine the actual effect and impact path of cross-border M&As on FSAs of EMNEs. In that context, internalisation theory proposes that FSAs can either be transferable (non-location-bound) such as technological knowledge, or specific to a local context (location-bound) such as local market knowledge and access to local networks [11, 12]. Some studies believe that firms from emerging economies such as China, adopt cross-border M&As to gain strategic resources and then redeploy and integrate them to establish a competitive advantage which can be transferred in the global market [2, 4]. Other scholars pointed out that EMNEs undertake cross-border M&As in order to strengthen their strategic assets in their home countries and seek local—rather than global—expansion by leveraging cheap labour, natural resources, and institutional advantages of their home countries [13].

#### *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

Benefiting from the rapid economic growth of their home countries, EMNEs can expand into local markets and gain considerable economic returns through crossborder M&As [14]. However, many EMNEs have fallen into a pattern of continuous integration and strengthening of external and regional bundling assets, giving them leverage in their home markets [15]. For example, upon acquiring Volvo, Geely Automobile achieved a rapid revenue growth at the expense of Volvo's strong R&D capabilities and China's huge auto market, low labour costs, and policy support. However, Geely's overseas sales'share has been declining, with a 2016 domestic sales ratio of 97.2%. Strategic assets acquired through CBAs can only establish an EMNE's competitive advantage if they are attached to home market supports such as natural resource endowments, labour force, market scale, and local culture [16].

Although the existing literature favours the impact of cross-border M&As, mixed results have been found concerning the impact on different types of competitive advantage. To examine the inconsistency of current views, this paper distinguishes and defines two types of competitive advantage of EMNEs according to their boundedness to its home country. On the one hand, home-country-bound competitive advantages are defined as a location-bound FSA which is highly dependent on the home market and cannot transferred to other locations and therefore limits the capability of EMNEs to become global firms, e.g. home market scale [14], political connection [17]. On the other hand, non-location-bound competitive advantages are defined as those that can be transferred within the enterprise itself and can increase leverage in the global market without the boundness of location, e.g., global brand, and technology knowledge [18]. As opposed to home-country-bound competitive advantages, non-location-bound competitive advantages can reduce the liability of foreignness, and are associated with a greater capacity to penetrate geographically distant markets and achieve a global geographic scope [7]. They are therefore the rationale for measuring the internationalisation ability of enterprises [19, 20], and act as the criterion to test whether cross-border M&A can constitute the "springboard" of internationalisation [20, 21].

State ownership has also been a topic of research in cross-border M&As of EMNEs [22]. Compared to non-SOEs, characteristics of SOEs such as non-economic motivations, long-term orientation, and different risk preferences influence the foreign entry strategies of SOEs [23]. Some literature suggests that the state can provide stateowned enterprises (SOEs) with monopolist advantages at home by creating and enforcing rules that shape market entry and transactions, and by providing preferential access to financial resources [24]. SOEs have better access to resources in their home countries than non-SOEs, and thus are less concerned about the high operating costs associated with larger geographic distances [25]. On the other hand, the state's economic and social objectives can inhibit the SOEs' ability to develop FSAs [26]. However, the existing literature focuses on whether SOEs can enhance their competitive advantage through cross-border M&As and what kind of advantage they can attain and remains quite controversial.

We studied the effect of cross-border M&As on enterprise competitive advantage by distinguishing between home-country-bound competitive advantage and non-location bound competitive advantage in Chinese ICT firms' contexts. We addressed the following research questions:


knowledge of resource reserves found in their home countries, EMNEs use FDI as a 'springboard' by adding strategic assets to establish a competitive advantage and achieve corporate growth. M&As undertaken by EMNEs have increased significantly over time, especially China's cross-border ones. According to Thomson Reuters and Price Water House Coopers, in 2016 Chinese firms undertook as many as 923 cross-border M&A transactions (excluding M&As in Hong Kong SAR and

One of the most active fields of innovation, and also one of the fiercest areas of technological competition globally, is represented by the new generation of information and communications technology (ICT) firms which focus on cloud computing, big data, and artificial intelligence. The ICT industry has incurred substantial FDI especially across emerging economies [5, 6]. The ICT industry is also characterised by significant technological dynamism as a high proportion of firms engage in internationalisation to obtain strategic assets outside of the firm boundaries [7]. The Deloitte's 2017 China TMT Industry Overseas M&A Report shows that between 2012 and 2016, the growth rate of cross-border M&A transactions in the Chinese technology, media, and telecom (TMT) industry reached 20%. In contrast, their worldwide growth rate reached 8% in the same period. China has become the most active M&A initiator in the TMT industry. As one of the ten key areas of China's manufacturing, the new generation of information technology plays a pivotal role in China's implementation of innovation-driven development strategies and high-quality foreign cooperation. However, since 2017, cross-border M&As of China's ICT industry has faced more stringent scrutiny by the United States and EU countries. The U.S. government identifies ICT as a critical technology industry, especially in the 5G and semiconductor arena. Foreign direct investment in these industries has been subject to strict security scrutiny. For example, in February 2017, the Chinese state-owned enterprise (SOE) named National Integrated Circuit -Industry Investment -Fund Co., Ltd. acquired Xcerra, an American semiconductor testing equipment manufacturer. This acquisition was quickly objected to by the Committee on Foreign Investment in the United States (CFIUS), on national security grounds. Xcerra and the Chinese acquirer signed the termination agreement on the same day. Therefore, in the current international investment environment, it is necessary to reconsider whether cross-border M&As are the best way for Chinese ICT enterprises to enhance their core competitiveness. A case in point is whether or not the background of state-owned enterprises enhances or hinder the enterprises' use of external strategic resources to enhance

Recent studies have focused on the adaptation of internalisation theory for EMNEs [3, 8]. Such theory states that foreign investments undertaken by EMNEs in the absence of firm-specific-advantages (FSAs) are made to acquire FSAs and the intangibles of foreign firms [9]. Therefore, the goal of foreign investment is not to exploit FSAs but to acquire them [10]. However, little empirical research has been conducted to examine the actual effect and impact path of cross-border M&As on FSAs of EMNEs. In that context, internalisation theory proposes that FSAs can either be transferable (non-location-bound) such as technological knowledge, or specific to a local context (location-bound) such as local market knowledge and access to local networks [11, 12]. Some studies believe that firms from emerging economies such as China, adopt cross-border M&As to gain strategic resources and then redeploy and integrate them to establish a competitive advantage which can be transferred in the global market [2, 4]. Other scholars pointed out that EMNEs undertake cross-border M&As in order to strengthen their strategic assets in their home countries and seek local—rather than global—expansion by leveraging cheap labour, natural resources, and institutional advantages of their home countries [13].

Macao) representing a 142% increase from 2015.

*Emerging Markets*

their competitive advantage.

**168**

This research enriches the understanding of FSAs and internalisation theory by building on insights from home country dependency and by taking into account the particular heterogeneity of EMNEs such as internationalisation experience and state ownership. We examined cross-border M&As data from Chinese firms in the information and communication technology industry for the period of 2010–2017. Using the propensity-score matching and differences-in-differences approaches, we compared variations in the competitive advantages of Chinese firm that have undertaken CBAs and those that have not, to observe the net effect of CBAs on competitive advantage. We compared the short-term and long-term effects and examined the impact mechanism of CBAs on competitive advantage.

assets and best innovation practices [27], enhancing technology and management levels, and transferring and deploying technology and management experience in the global market [2]. Once a merger is complete, the focus is on enhancing the EMNE's weak absorption of external strategic assets. Second, an enterprise 'bundles' external strategic assets with non-firm-specific ones to which the enterprise only has 'special access rights', such as industry franchise rights granted by the home country government and actual knowledge of the home market in order to create a regional competitive advantage that we define as 'home-country-bound'. Although the rapid growth of emerging economies has increased domestic market demand, indigenous technology applicability is generally low [28]. In order to establish economies of scale in their home countries and seize market opportunities, enterprises acquire strategic resources through cross-border M&As and introduce these resources directly into their domestic markets [13], using low manpower and resource costs, and the institutional preferential policies of their home countries to expand their scale of production. In addition, firms also promote integration into overseas business networks, enhance professional levels, and achieve geographical matching of product development, production, and sales [29]. That is to say that, when faced a huge domestic market demand, enterprises further enhance their scale efficiency advantage through cross-border M&As. Based on the above arguments, we established a theoretical framework for how cross-border M&As

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

enhance competitive advantage (**Figure 1**), and hypothesised that:

home-country-bound and non-location-bound competitive advantages.

and strategic management and constitutes a core element of the Uppsala internationalisation model [32]. Second, state ownership is the most important institutional factor affecting firms in emerging economies [22]. Different ownership systems have several home country institutional resources, such as low-interest financing and tax reduction [33], and each system's strategic goals of internationalisation are also significantly different. Enterprises with state ownership can access more institutional resources in their home countries, such as low-interest financing and tax relief [33]. Hence, their internationalisation goals are usually different from

those of private enterprises.

**Figure 1.**

**171**

*Theoretical framework.*

Hypothesis 1. Cross-border M&As effectively promote the improvement of

Besides providing an important channel for firms to obtain strategic resources, cross-border M&As also increase the complexity of operations as firms need to coordinate resources located in different geographical locations [2], and corporate heterogeneity and transaction uncertainty diversify corporate strategy and performance [30, 31]. At the same time, research has been conducted in the context of a large-scale 'going out' of Chinese enterprises into cross-border M&As conducted by firms with government support. Thus, we chose internationalisation experience and state ownership as variables to analyse the adjustment mechanism of cross-border M&As and competitive advantage. First, empirical knowledge is an important resource component of an enterprise, as it plays a key role in international business

This study contributes to the existing literature in the following ways. First, based on the transferability of competitive advantage, it distinguishes and quantifies home-country-bound competitive advantage and non-location bound competitive advantage, and establishes a framework for how cross-border M&As enhance enterprise competitive advantage. Second, it empirically analyses the effects and impacts of cross-border M&As on competitive advantage, deepening the internal logic of M&As and competitive advantage. Third, this paper focuses on the moderating effects of firm heterogeneity and internationalisation experience and enterprise ownership to find out the differences between different types of ICT enterprises in obtaining competitive advantage through cross-border M&A. It provides an explanation for the extant research on whether SOEs can enhance their competitive advantage through cross-border M&As, and what kind of advantage they attain. The empirical results have distinct implications for the Chinese government in redirecting the FDI endeavours of Chinese enterprises.

This chapter is structured as follows. We first outline the theoretical foundations, develop our hypotheses, and describe the research design and methodology. Then, we present and discuss the results. We conclude by discussing theoretical and managerial implications, recognising limitations, and suggesting future research possibilities.

#### **2. Theoretical background**

#### **2.1 Cross-border M&As and competitive advantage enhancement**

Essentially, to compete successfully in any given environment, firms need to cross certain asset thresholds. Different types of complementary assets determine specific asset thresholds, which must be bundled together. The asset threshold attained by this 'bundling' determines an enterprise's competitive advantage. Furthermore, having acquired external strategic assets through cross-border M&As, enterprises also need to integrate and bundle them with their own internal ones. Some enterprise assets are not firm-specific but are associated with those particular locations in which an enterprise only has 'special access rights. 'Bundling' external strategic assets and assets with different attributes determines alternative asset thresholds—i.e., crossborder M&As will have contrasting impacts on regional competitive advantages (linked to specific locations) and non-regional competitive ones (that are not location-specific).

First, enterprises 'bundle' external strategic assets with firm-specific-ones to create a non-regional competitive advantage, which we define as a non-locationbound competitive advantage. After the completion of cross-border M&As, firms integrate external strategic assets with their own tangible specific ones in order to develop a competitive advantage that can be transferred within the enterprise itself. On the other hand, cross-border M&As also help connect with suppliers and new customers, broadening the scope of access to external complementary strategic

#### *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

assets and best innovation practices [27], enhancing technology and management levels, and transferring and deploying technology and management experience in the global market [2]. Once a merger is complete, the focus is on enhancing the EMNE's weak absorption of external strategic assets. Second, an enterprise 'bundles' external strategic assets with non-firm-specific ones to which the enterprise only has 'special access rights', such as industry franchise rights granted by the home country government and actual knowledge of the home market in order to create a regional competitive advantage that we define as 'home-country-bound'. Although the rapid growth of emerging economies has increased domestic market demand, indigenous technology applicability is generally low [28]. In order to establish economies of scale in their home countries and seize market opportunities, enterprises acquire strategic resources through cross-border M&As and introduce these resources directly into their domestic markets [13], using low manpower and resource costs, and the institutional preferential policies of their home countries to expand their scale of production. In addition, firms also promote integration into overseas business networks, enhance professional levels, and achieve geographical matching of product development, production, and sales [29]. That is to say that, when faced a huge domestic market demand, enterprises further enhance their scale efficiency advantage through cross-border M&As. Based on the above arguments, we established a theoretical framework for how cross-border M&As enhance competitive advantage (**Figure 1**), and hypothesised that:

Hypothesis 1. Cross-border M&As effectively promote the improvement of home-country-bound and non-location-bound competitive advantages.

Besides providing an important channel for firms to obtain strategic resources, cross-border M&As also increase the complexity of operations as firms need to coordinate resources located in different geographical locations [2], and corporate heterogeneity and transaction uncertainty diversify corporate strategy and performance [30, 31]. At the same time, research has been conducted in the context of a large-scale 'going out' of Chinese enterprises into cross-border M&As conducted by firms with government support. Thus, we chose internationalisation experience and state ownership as variables to analyse the adjustment mechanism of cross-border M&As and competitive advantage. First, empirical knowledge is an important resource component of an enterprise, as it plays a key role in international business and strategic management and constitutes a core element of the Uppsala internationalisation model [32]. Second, state ownership is the most important institutional factor affecting firms in emerging economies [22]. Different ownership systems have several home country institutional resources, such as low-interest financing and tax reduction [33], and each system's strategic goals of internationalisation are also significantly different. Enterprises with state ownership can access more institutional resources in their home countries, such as low-interest financing and tax relief [33]. Hence, their internationalisation goals are usually different from those of private enterprises.

**Figure 1.** *Theoretical framework.*

This research enriches the understanding of FSAs and internalisation theory by building on insights from home country dependency and by taking into account the particular heterogeneity of EMNEs such as internationalisation experience and state ownership. We examined cross-border M&As data from Chinese firms in the information and communication technology industry for the period of 2010–2017. Using the propensity-score matching and differences-in-differences approaches, we compared variations in the competitive advantages of Chinese firm that have undertaken CBAs and those that have not, to observe the net effect of CBAs on competitive advantage. We compared the short-term and long-term effects and

examined the impact mechanism of CBAs on competitive advantage.

ernment in redirecting the FDI endeavours of Chinese enterprises.

**2.1 Cross-border M&As and competitive advantage enhancement**

**2. Theoretical background**

*Emerging Markets*

location-specific).

**170**

This study contributes to the existing literature in the following ways. First, based on the transferability of competitive advantage, it distinguishes and quantifies home-country-bound competitive advantage and non-location bound competitive advantage, and establishes a framework for how cross-border M&As enhance enterprise competitive advantage. Second, it empirically analyses the effects and impacts of cross-border M&As on competitive advantage, deepening the internal logic of M&As and competitive advantage. Third, this paper focuses on the moderating effects of firm heterogeneity and internationalisation experience and enterprise ownership to find out the differences between different types of ICT enterprises in obtaining competitive advantage through cross-border M&A. It provides an explanation for the extant research on whether SOEs can enhance their competitive advantage through cross-border M&As, and what kind of advantage they attain. The empirical results have distinct implications for the Chinese gov-

This chapter is structured as follows. We first outline the theoretical foundations, develop our hypotheses, and describe the research design and methodology. Then, we present and discuss the results. We conclude by discussing theoretical and managerial implications, recognising limitations, and suggesting future research possibilities.

Essentially, to compete successfully in any given environment, firms need to cross certain asset thresholds. Different types of complementary assets determine specific asset thresholds, which must be bundled together. The asset threshold attained by this 'bundling' determines an enterprise's competitive advantage. Furthermore, having acquired external strategic assets through cross-border M&As, enterprises also need to integrate and bundle them with their own internal ones. Some enterprise assets are not firm-specific but are associated with those particular locations in which an enterprise only has 'special access rights. 'Bundling' external strategic assets and assets with different attributes determines alternative asset thresholds—i.e., crossborder M&As will have contrasting impacts on regional competitive advantages (linked to specific locations) and non-regional competitive ones (that are not

First, enterprises 'bundle' external strategic assets with firm-specific-ones to create a non-regional competitive advantage, which we define as a non-locationbound competitive advantage. After the completion of cross-border M&As, firms integrate external strategic assets with their own tangible specific ones in order to develop a competitive advantage that can be transferred within the enterprise itself. On the other hand, cross-border M&As also help connect with suppliers and new customers, broadening the scope of access to external complementary strategic

#### **2.2 Internationalisation experience and M&A competitive advantage effect**

ownership [42], loss of key national strategic assets, and whether home-based management practices can be transferred to advanced economies [34]. Although the political connections linked to government ownership help in building legitimacy and prestige in domestic markets, these firms still participate in global

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

Our analysis of state owned EMNEs focussed on the influence of home governments on the internationalisation strategies of domestic enterprises. As agents of their home governments, SOEs garner more policy support and have stronger institutional advantages [24], including 'special access' to key resources [10, 45]. However, the internationalisation of SOEs ultimately discloses the will of the government and the need to strike a balance between economic and political goals [46]. Specifically, state ownership affects a company's resource input and internationalisation strategies and goals [47]. Both state-owned and non-SOEs face pressure from formal or informal institutions in their home countries, and their responses to these pressures are influenced by their dependency on resources. If they are highly resource-dependent, enterprises will choose to comply with institutional pressures to avoid negative consequences [48]. As SOEs are highly dependent on the government for their resource input, they are more likely to abide by political goals over economic ones. As nonstate-owned firms are more focussed on profit and efficiency goals, their motivation to seek and utilise overseas strategic resources is stronger and more efficient [47].

Hypothesis 3. State ownership moderates the effect of cross-border M&As on home-country dependent and non-location-bound competitive advantage. The positive effects will be smaller if a company is a state-owned enterprise.

We tested the hypotheses by relying on China's listed information and communications technology (computers, communications, and other electronic equipment) manufacturing firms. The selection of ICT firms was based on the following three considerations. Firstly, the new generation of ICT technology, representing cloud computing, big data and artificial intelligence, has become one of the most active fields of innovation, and one of the fiercest areas of technological competition among major countries. Besides, the ICT industry had substantial FDI around the world and, especially across emerging markets [5]. Secondly, a large number of ICT manufacturing enterprises have implemented cross-border M&As. Deloitte's '2017 China TMT Industry Overseas M&A Report'shows that, between 2012 and 2016, the annual compound growth rate of overseas M&A transactions in China's TMT industry reached 20%. Thirdly, The ICT industry is also characterised by significant technological dynamism and a high number of firms engaging in internationalisation to obtain strategic assets outside the firm boundary. The new generation of the information technology industry plays a pivotal role in China's implementation of innovation-driven development strategies and improving the country's competitiveness. Under these conditions, can Chinese ICT manufacturing enterprises improve their competitive advantage through cross-border M&As? The

We collected M&A data and financial data from two datasets, one of which was

derived from the BVD (Zephyr) database, which is a well-known international M&As database and widely used in cross-border M&A research [49, 50]. However, distorted data points remained. Thus, it was necessary to clean the original data and removed outliers before further analysis could be conducted by using the following filtering criteria: first, we only retained M&A transactions with a 'completed' or

competition and struggle to gain legitimacy in foreign ones [43, 44].

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

Based on the above arguments, we hypothesise that:

answer to this core issue has fundamental practical significance.

**3. Methods**

**173**

EMNEs face the challenges posed by their 'liability of emergingness' and are often the first generation of firms venturing abroad from their home countries, depending significantly on home country market scale [34]. An important challenge that firms face when they seek to enter foreign markets relates to their being outsiders in local networks and to their lack of knowledge of local business opportunities. However, it can be argued that firms with region-specific experience are less likely to suffer from such liability, as participation in regional networks in the internationalisation process provides them with better access to local resources and institutional contacts [35].

Organisational learning theory [36] suggests that firm experiences result in the creation of knowledge that significantly influences firm strategies and related outcomes. Firms are viewed as routine-based systems wherein prior experiences are coded into routines that guide future behaviours. In the context of cross-border M&As, internationalisation experience has also been closely linked to the ability of the acquiring firm to absorb new information related to potential targets, something that can be valuable in the improvement of competitive advantage. However, when acquiring firms are lacking in prior experience, their ability to absorb and assess acquisition-related information is generally limited [35].

In addition, the promotion of cross-border M&As for competitive advantage needs to be realised through resource integration and resource restructuring, which requires firms to have a rich international experience to deal with the integration challenges they face in the aftermath of M&As [33]. Transfer of capabilities between acquiring and target firm as one of the main pillars of integration process, which in turn is argued to have direct and indirect effects on other aspects of post-acquisition performance. However, due to its tacit and socially complex nature, transfer of knowledge across organisational boundaries is not an easy task [37]. Johanson and Vahlne [38] pointed out that such rich international experience helps firms to identify opportunities and risks, strengthen their ability to integrate global resources, and enables them to effectively build business units in overseas markets. Technology acquisition M&As allow firms integrate suppliers and customers in the value chain, leading to horizontal or vertical expansion and to the extension of technological knowledge. By the same token, a lack of international experience hinders the identification and application of technological knowledge [34], which may cause the emergence of technological reverse spillover effects [39]. In addition, EMNEs that lack an ownership advantage face more serious disadvantages and need greater resources and capabilities to cope with the adverse effects of institutional differences. International experience is an important knowledge resource for firms to cope with institutional conflicts in host countries and overcome the competitive disadvantages engendered by institutional uncertainty [40], creating a good external environment for the use of strategic resources. Based on the above arguments, we hypothesise that:

Hypothesis 2. Internationalisation experience moderates the effect of crossborder M&As on home-country-bound and non-location-bound competitive advantages, as these positive gains will be positively correlated to the richness of a firm's internationalisation experience.

#### **2.3 State ownership and M&A competitive advantage effect**

Particularly in global M&As, actors outside the merging organisations, such as government, unions, and investors, can become involved in merging process [41]. State-owned enterprises (SOEs) may face more prominent liabilities of emergingness due to the close relations maintained with home-country governments, the threat of financial protectionism, reduced MNE transparency with state

#### *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

ownership [42], loss of key national strategic assets, and whether home-based management practices can be transferred to advanced economies [34]. Although the political connections linked to government ownership help in building legitimacy and prestige in domestic markets, these firms still participate in global competition and struggle to gain legitimacy in foreign ones [43, 44].

Our analysis of state owned EMNEs focussed on the influence of home governments on the internationalisation strategies of domestic enterprises. As agents of their home governments, SOEs garner more policy support and have stronger institutional advantages [24], including 'special access' to key resources [10, 45]. However, the internationalisation of SOEs ultimately discloses the will of the government and the need to strike a balance between economic and political goals [46]. Specifically, state ownership affects a company's resource input and internationalisation strategies and goals [47]. Both state-owned and non-SOEs face pressure from formal or informal institutions in their home countries, and their responses to these pressures are influenced by their dependency on resources. If they are highly resource-dependent, enterprises will choose to comply with institutional pressures to avoid negative consequences [48]. As SOEs are highly dependent on the government for their resource input, they are more likely to abide by political goals over economic ones. As nonstate-owned firms are more focussed on profit and efficiency goals, their motivation to seek and utilise overseas strategic resources is stronger and more efficient [47]. Based on the above arguments, we hypothesise that:

Hypothesis 3. State ownership moderates the effect of cross-border M&As on home-country dependent and non-location-bound competitive advantage. The positive effects will be smaller if a company is a state-owned enterprise.

#### **3. Methods**

**2.2 Internationalisation experience and M&A competitive advantage effect**

acquisition-related information is generally limited [35].

*Emerging Markets*

EMNEs face the challenges posed by their 'liability of emergingness' and are often the first generation of firms venturing abroad from their home countries, depending significantly on home country market scale [34]. An important challenge that firms face when they seek to enter foreign markets relates to their being outsiders in local networks and to their lack of knowledge of local business opportunities. However, it can be argued that firms with region-specific experience are less likely to suffer from such liability, as participation in regional networks in the internationalisation process provides them with better access to local resources and institutional contacts [35]. Organisational learning theory [36] suggests that firm experiences result in the creation of knowledge that significantly influences firm strategies and related outcomes. Firms are viewed as routine-based systems wherein prior experiences are coded into routines that guide future behaviours. In the context of cross-border M&As, internationalisation experience has also been closely linked to the ability of the acquiring firm to absorb new information related to potential targets, something that can be valuable in the improvement of competitive advantage. However, when acquiring firms are lacking in prior experience, their ability to absorb and assess

In addition, the promotion of cross-border M&As for competitive advantage needs to be realised through resource integration and resource restructuring, which requires firms to have a rich international experience to deal with the integration challenges they face in the aftermath of M&As [33]. Transfer of capabilities between acquiring and target firm as one of the main pillars of integration process, which in turn is argued to have direct and indirect effects on other aspects of post-acquisition performance. However, due to its tacit and socially complex nature, transfer of knowledge across organisational boundaries is not an easy task [37]. Johanson and Vahlne [38] pointed out that such rich international experience helps firms to identify opportunities and risks, strengthen their ability to integrate global resources, and enables them to effectively build business units in overseas markets. Technology acquisition M&As allow firms integrate suppliers and customers in the value chain, leading to horizontal or vertical expansion and to the extension of technological knowledge. By the same token, a lack of international experience hinders the identification and application of technological knowledge [34], which may cause the emergence of technological reverse spillover effects [39]. In addition, EMNEs that lack an ownership advantage face more serious disadvantages and need greater resources and capabilities to cope with the adverse effects of institutional differences. International experience is an important knowledge resource for firms to cope with institutional conflicts in host countries and overcome the competitive disadvantages engendered by institutional uncertainty [40], creating a good external environment for the use of

strategic resources. Based on the above arguments, we hypothesise that:

State-owned enterprises (SOEs) may face more prominent liabilities of

**2.3 State ownership and M&A competitive advantage effect**

firm's internationalisation experience.

**172**

Hypothesis 2. Internationalisation experience moderates the effect of crossborder M&As on home-country-bound and non-location-bound competitive advantages, as these positive gains will be positively correlated to the richness of a

Particularly in global M&As, actors outside the merging organisations, such as government, unions, and investors, can become involved in merging process [41].

emergingness due to the close relations maintained with home-country governments, the threat of financial protectionism, reduced MNE transparency with state

We tested the hypotheses by relying on China's listed information and communications technology (computers, communications, and other electronic equipment) manufacturing firms. The selection of ICT firms was based on the following three considerations. Firstly, the new generation of ICT technology, representing cloud computing, big data and artificial intelligence, has become one of the most active fields of innovation, and one of the fiercest areas of technological competition among major countries. Besides, the ICT industry had substantial FDI around the world and, especially across emerging markets [5]. Secondly, a large number of ICT manufacturing enterprises have implemented cross-border M&As. Deloitte's '2017 China TMT Industry Overseas M&A Report'shows that, between 2012 and 2016, the annual compound growth rate of overseas M&A transactions in China's TMT industry reached 20%. Thirdly, The ICT industry is also characterised by significant technological dynamism and a high number of firms engaging in internationalisation to obtain strategic assets outside the firm boundary. The new generation of the information technology industry plays a pivotal role in China's implementation of innovation-driven development strategies and improving the country's competitiveness. Under these conditions, can Chinese ICT manufacturing enterprises improve their competitive advantage through cross-border M&As? The answer to this core issue has fundamental practical significance.

We collected M&A data and financial data from two datasets, one of which was derived from the BVD (Zephyr) database, which is a well-known international M&As database and widely used in cross-border M&A research [49, 50]. However, distorted data points remained. Thus, it was necessary to clean the original data and removed outliers before further analysis could be conducted by using the following filtering criteria: first, we only retained M&A transactions with a 'completed' or

'completed assumed'status, and confirmed the completed M&A transactions through the company's website, annual reports, and financial news. Regarding multiple cross-border M&As of a company within a year, there were multiple transactions recorded around the target firm for tax minimization purposes [51].

*y* of cross-border M&As. All samples and data of ICT firms that do not conduct

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

We constructed the dummy variable *CBA* where 'CBA ¼ 1' for a company that had implemented cross-border M&As, and 'CBA ¼ 0' for a company that had not.

where i denotes the firms in treatment group, j denotes the samples in control group, t represents time, *Pit* denotes the probability prediction value or propensity score to be estimated, *Xit*�<sup>1</sup> denotes the matching variable, *Φ* refers to the logistic function. After estimating Eq. (1), we were able to obtain the probability prediction values *P*^*it* and *P*^*jt* of the treatment and control groups, respectively. The results of

*Pi t* ¼ *Pr CBA* f g *it* ¼ 1 ¼ *Φ*f g *Xi t*�<sup>1</sup> (1)

,*j*∈ð Þ *CBA* ¼ 0 (2)

M&A (control group) were collected from the CSMAR database.

*<sup>Ω</sup>it* <sup>¼</sup> *min <sup>P</sup>*^*it* � *<sup>P</sup>*^ *jt* 

Following Jiang [52], we selected overall total factor productivity (*TFP*), enterprise size (*Size*), capital density (*Capital*), and total return on assets (*ROA*) indicators as matching variables. The lack of data on intermediate input and added value indicators made impossible to use the OP [55] and LP [56] methods to calculate TFP across enterprises. Thus, this paper follows Jiang's [52] approach to calculate TFP by using a panel data with a fixed effect. Compared with the OLS method, panel data can control the intra group differences to the greatest extent to obtain more consistent and robust capital and labour coefficients. The natural logarithm of the total number of employees is used to measure the enterprise size. The data matching was performed using a ratio of 1:3. Thus, 131 ICT firms are matched as samples in the control group. **Table 2** shows the differences in overall TFP before and after matching The matching results showed that the difference in

overall TFP between the treatment and control group is significant before matching, and there is a 'self-selection effect' in cross-border M&As. After

matching, the means of the overall TFP values of the treatment and control groups were highly similar, indicating that the 'self-selection effect' of cross-border M&As

On the basis of the data matching results, we used the differences-in-differences method to analyse the impact of cross-border M&As on home-country dependent and non-location-bound competitive advantage, constructing the respective

dummy variables CBA ¼ f g 0, 1 and CT ¼ f g 0, 1 to indicate whether a company had implemented cross-border M&As and the completion time of M&A deal. The *HCBit* and *NLBit* variables represent the home-country-bound and non-location-bound competitive advantage, respectively, and *ΔHCBi* and *ΔNLBi* represent the changes of the two types of competitive advantage. In terms of the home-country-bound competitive advantage (the non-location-bound competitive advantage is calculated in a similar way), whether the cross-period changes in cross-border M&As are

*<sup>i</sup>* respectively. Thus, the actual impact of cross-border M&As on

*<sup>i</sup>* <sup>j</sup>*CBAi* <sup>¼</sup> <sup>1</sup> (3)

*<sup>i</sup>* <sup>j</sup>*CBAi* <sup>¼</sup> <sup>1</sup> � *<sup>E</sup> <sup>Δ</sup>HCB*<sup>0</sup>

ment and matched control groups, it was possible to fit the changes of the treatment group's *HCBit* with the matched control group's *HCBit* and indirectly identify the

*<sup>i</sup>* <sup>j</sup>*CBAi* <sup>¼</sup> <sup>1</sup> in Eq. (3) is unobservable, according to the treat-

Then we used the logit method to estimate the model:

optimal matching *Ωit* can be expressed as:

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

was effectively controlled.

*<sup>i</sup>* and *ΔNLB*<sup>0</sup>

As the *E ΔHCB*<sup>0</sup>

home-country-bound competitive advantage is *δ*:

*<sup>δ</sup>* <sup>¼</sup> *<sup>E</sup> <sup>δ</sup><sup>i</sup>* ð Þ¼ <sup>j</sup>*CBAi* <sup>¼</sup> <sup>1</sup> *<sup>E</sup> <sup>Δ</sup>HCB*<sup>1</sup>

actual impact of cross-border M&As.

*ΔHCB*<sup>1</sup>

**175**

The measurement of the cross-border M&As experience advanced by Jiang [52] suggests the approval time of multinational enterprises occurs well after the time of the M&A, which may render an inaccurate recording of the subsequent M&As0 experiences that take place within the same year. Thus, we only retained the first data recorded, when the same company had implemented multiple M&As with different targets in a year. Third, we removed any samples missing M&A information and the sample of capital increase for foreign subsidiaries [53, 54]. These excluded samples were not significantly different from retained cases as far as characteristics such as the percentage of shares acquired, ownership structure of the acquiring firm, or the acquirer's acquisition experience in a target's country. The second dataset used was taken from the CSMAR database, and included three major accounting statements—the balance sheet, cash flow statement, and income statement, which provide detailed financial information for the company. The authors obtained an effective sample data of 98 cross-border M&As undertaken from 2010 to 2017. The sample description is shown in **Table 1**.

#### **3.1 Empirical model**

Distinguishing the correlation and causality between cross-border M&As and the growth of competitive advantage effect brings some challenges. This is particularly evident when enterprises with strong competitive advantage conduct cross-border M&As and the change of competitive advantage may be endogenous and selfselected. Therefore, performing an OLS estimation would be invalid. Following extant literature [47], we used the propensity score matching to assess the causal effect of cross-border M&As on the competitive advantage change of Chinese ICT firms.

First, we used the nearest-neighbour matching method to divide the ICT industry firms into two groups: one with those firms that had implemented cross-border M&As (denoted as treatment group), and the other with those that had not (denoted as control group), where the construction enterprise was a virtual variable


**Table 1.** *Sample description.* *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

*y* of cross-border M&As. All samples and data of ICT firms that do not conduct M&A (control group) were collected from the CSMAR database.

We constructed the dummy variable *CBA* where 'CBA ¼ 1' for a company that had implemented cross-border M&As, and 'CBA ¼ 0' for a company that had not. Then we used the logit method to estimate the model:

$$P\_{i\ t} = \Pr\{\text{CBA}\_{it} = 1\} = \Phi\{\mathbf{X}\_{i\ t-1}\} \tag{1}$$

where i denotes the firms in treatment group, j denotes the samples in control group, t represents time, *Pit* denotes the probability prediction value or propensity score to be estimated, *Xit*�<sup>1</sup> denotes the matching variable, *Φ* refers to the logistic function. After estimating Eq. (1), we were able to obtain the probability prediction values *P*^*it* and *P*^*jt* of the treatment and control groups, respectively. The results of optimal matching *Ωit* can be expressed as:

$$\mathcal{Q}\_{it} = \min \left\| \hat{P}\_{it} - \hat{P}\_{jt} \right\| \colon j \in (\text{CBA} = \mathbf{0}) \tag{2}$$

Following Jiang [52], we selected overall total factor productivity (*TFP*), enterprise size (*Size*), capital density (*Capital*), and total return on assets (*ROA*) indicators as matching variables. The lack of data on intermediate input and added value indicators made impossible to use the OP [55] and LP [56] methods to calculate TFP across enterprises. Thus, this paper follows Jiang's [52] approach to calculate TFP by using a panel data with a fixed effect. Compared with the OLS method, panel data can control the intra group differences to the greatest extent to obtain more consistent and robust capital and labour coefficients. The natural logarithm of the total number of employees is used to measure the enterprise size. The data matching was performed using a ratio of 1:3. Thus, 131 ICT firms are matched as samples in the control group. **Table 2** shows the differences in overall TFP before and after matching The matching results showed that the difference in overall TFP between the treatment and control group is significant before matching, and there is a 'self-selection effect' in cross-border M&As. After matching, the means of the overall TFP values of the treatment and control groups were highly similar, indicating that the 'self-selection effect' of cross-border M&As was effectively controlled.

On the basis of the data matching results, we used the differences-in-differences method to analyse the impact of cross-border M&As on home-country dependent and non-location-bound competitive advantage, constructing the respective dummy variables CBA ¼ f g 0, 1 and CT ¼ f g 0, 1 to indicate whether a company had implemented cross-border M&As and the completion time of M&A deal. The *HCBit* and *NLBit* variables represent the home-country-bound and non-location-bound competitive advantage, respectively, and *ΔHCBi* and *ΔNLBi* represent the changes of the two types of competitive advantage. In terms of the home-country-bound competitive advantage (the non-location-bound competitive advantage is calculated in a similar way), whether the cross-period changes in cross-border M&As are *ΔHCB*<sup>1</sup> *<sup>i</sup>* and *ΔNLB*<sup>0</sup> *<sup>i</sup>* respectively. Thus, the actual impact of cross-border M&As on home-country-bound competitive advantage is *δ*:

$$\delta = E(\delta\_i | \text{CBA}\_i = \mathbf{1}) = E(\Delta \text{HCB}\_i^1 | \text{CBA}\_i = \mathbf{1}) - E(\Delta \text{HCB}\_i^0 | \text{CBA}\_i = \mathbf{1}) \tag{3}$$

As the *E ΔHCB*<sup>0</sup> *<sup>i</sup>* <sup>j</sup>*CBAi* <sup>¼</sup> <sup>1</sup> in Eq. (3) is unobservable, according to the treatment and matched control groups, it was possible to fit the changes of the treatment group's *HCBit* with the matched control group's *HCBit* and indirectly identify the actual impact of cross-border M&As.

'completed assumed'status, and confirmed the completed M&A transactions through the company's website, annual reports, and financial news. Regarding multiple cross-border M&As of a company within a year, there were multiple transactions recorded around the target firm for tax minimization purposes [51]. The measurement of the cross-border M&As experience advanced by Jiang [52] suggests the approval time of multinational enterprises occurs well after the time of the M&A, which may render an inaccurate recording of the subsequent M&As0 experiences that take place within the same year. Thus, we only retained the first data recorded, when the same company had implemented multiple M&As with different targets in a year. Third, we removed any samples missing M&A information and the sample of capital increase for foreign subsidiaries [53, 54]. These excluded samples were not significantly different from retained cases as far as characteristics such as the percentage of shares acquired, ownership structure of the acquiring firm, or the acquirer's acquisition experience in a target's country. The second dataset used was taken from the CSMAR database, and included three major accounting statements—the balance sheet, cash flow statement, and income statement, which provide detailed financial information for the company. The authors obtained an effective sample data of 98 cross-border M&As undertaken from 2010

Distinguishing the correlation and causality between cross-border M&As and the growth of competitive advantage effect brings some challenges. This is particularly evident when enterprises with strong competitive advantage conduct cross-border M&As and the change of competitive advantage may be endogenous and selfselected. Therefore, performing an OLS estimation would be invalid. Following extant literature [47], we used the propensity score matching to assess the causal effect of cross-border M&As on the competitive advantage change of Chinese ICT firms.

First, we used the nearest-neighbour matching method to divide the ICT industry firms into two groups: one with those firms that had implemented cross-border M&As (denoted as treatment group), and the other with those that had not

(denoted as control group), where the construction enterprise was a virtual variable

SOE 31 Guangdong 34 <50 29 Related M&A 83 <10 52 U.S. 25 Non-SOE 67 Jiangsu 16 50–100 21 Non-related M&A 15 10–100 29 Germany 9

**Related M&A (If the first two SIC codes are the same)**

Beijing 14 100 48 >100 17 Canada 8 Zhejiang 14 U.K 5 Shandong 7 Japan 5 Hebei 5 Italy 4 Shanghai 3 Malaysia 4 Sichuan 3 Australia 3 Fujian 1 Israel 3 Gansu 1 Others 32

**Deal value (Million Euros)**

**Host country**

**Equity of acquirer (%)**

to 2017. The sample description is shown in **Table 1**.

**3.1 Empirical model**

*Emerging Markets*

**Ownership Province of**

**Table 1.** *Sample description.*

**174**

**acquirer**



Then, we converted Eq. (3) into an econometric model that could be empirically

*β* coefficient of the interaction term *CBA*

' external strategic assets with the acquirer

knowledge and technology, which can be transferred between enterprises.

EMNEs and developed economy MNEs (DMNEs) in the home market.

P*Nn*¼1 *β nLnXnit*

> þ *β t t* þ 12 *β t t* 2 þ *υit* þ *μit*

*βtntLnXnit*

board' to catch up with DMNEs [58].

*LnYi t*

**177**

¼ ð Þþ *β*<sup>0</sup> þ *wi*

þ P*Nn*¼1

enhance the home-country-bound competitive advantage or the non-location-

Our dependent variables were home-country-bound competitive advantage and non-location-bound competitive advantage. Accordingly, home-country-bound competitive advantage refers to competitive advantage with location-bound attributes gained by 'bundling' external strategic assets with the resources, markets, and institutional environments of the home country. Non-location-bound competitive advantage refers to competitive advantage with non-location-bound attributes gained

Within large and fast-growing emerging market economies that correspondingly have large and growing domestic demand bases, economies of scale are an important competitive advantage. EMNEs have non-traditional FSAs that enable them to better exploit scale economies of home countries [45], which is the home-country dependency advantage as defined in this paper. While all firms in home markets potentially have access to economies of scale, some can leverage it better. The home-countrybound competitive advantage between EMNEs is different as the heterogeneity exists in the ability of EMNEs to leverage scale economies [10]. The change in economies of scale decomposed from the TFP index measures how firm-level production diverges from a constant return to scale [57]. Thus, we measured the home-country-bound competitive advantage by scale efficiency following Bhaumik et al. [21]. The increase in scale efficiency reflected the use of external strategic assets to develop home country resources and markets, which constitutes the basis for competition between

We measured non-location-bound competitive advantage through pure technical efficiency [21]. Improvements of technical efficiency reflect the extent to which enterprises embed external strategic assets and develop their own firm-specificones, reflecting the strategic goal of EMNEs to use cross-border M&As as a 'spring-

We used the stochastic frontier model to measure the overall efficiency level (*TE*) of each individual and the Malmquist decomposition method suggested by Coelli et al. [57] to decompose it into scale efficiency (*SC*), technological progress (*EC*), and pure technical efficiency (*TC*). *SC* and *TC* are the measured home-country-bound competitive advantage (*HCB*) or the non-location-bound competitive advantage (*NLB*). The modified equation for the stochastic frontier estimation is as follows:

> þ 12 X*Nn*¼1 X*Nj*¼1

*βnjLnXnitLnXnit*

(5)

� *CT* þ

*&As to Non-Location-Bound Chinese ICT Firms*

> 0 indicates that cross-border M&As systematically

*ξit* (4)

� *CT* is the actual influence

's firm-specific assets, such as

tested as follows:

where the

**4. Measures**

'bundling

by

of cross-border M&As.

bound competitive one.

**4.1 Dependent variables**

*HCBit* ¼ *α* 0 þ *α* 1 ∙*CBA* þ *α* 2 ∙*CT* þ *β* ∙*CBA*

*Competitive Advantages of Cross-Border M*

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

*β*

**Table 2.** *PSMmatching*

 *results.* *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

Then, we converted Eq. (3) into an econometric model that could be empirically tested as follows:

$$HCB\_{it} = a\_0 + a\_1 \bullet CBA + a\_2 \bullet CT + \beta \bullet CBA \times CT + \xi\_{it} \tag{4}$$

where the *β* coefficient of the interaction term *CBA* � *CT* is the actual influence of cross-border M&As. *β* > 0 indicates that cross-border M&As systematically enhance the home-country-bound competitive advantage or the non-locationbound competitive one.

#### **4. Measures**

#### **4.1 Dependent variables**

Our dependent variables were home-country-bound competitive advantage and non-location-bound competitive advantage. Accordingly, home-country-bound competitive advantage refers to competitive advantage with location-bound attributes gained by 'bundling' external strategic assets with the resources, markets, and institutional environments of the home country. Non-location-bound competitive advantage refers to competitive advantage with non-location-bound attributes gained by 'bundling' external strategic assets with the acquirer's firm-specific assets, such as knowledge and technology, which can be transferred between enterprises.

Within large and fast-growing emerging market economies that correspondingly have large and growing domestic demand bases, economies of scale are an important competitive advantage. EMNEs have non-traditional FSAs that enable them to better exploit scale economies of home countries [45], which is the home-country dependency advantage as defined in this paper. While all firms in home markets potentially have access to economies of scale, some can leverage it better. The home-countrybound competitive advantage between EMNEs is different as the heterogeneity exists in the ability of EMNEs to leverage scale economies [10]. The change in economies of scale decomposed from the TFP index measures how firm-level production diverges from a constant return to scale [57]. Thus, we measured the home-country-bound competitive advantage by scale efficiency following Bhaumik et al. [21]. The increase in scale efficiency reflected the use of external strategic assets to develop home country resources and markets, which constitutes the basis for competition between EMNEs and developed economy MNEs (DMNEs) in the home market.

We measured non-location-bound competitive advantage through pure technical efficiency [21]. Improvements of technical efficiency reflect the extent to which enterprises embed external strategic assets and develop their own firm-specificones, reflecting the strategic goal of EMNEs to use cross-border M&As as a 'springboard' to catch up with DMNEs [58].

We used the stochastic frontier model to measure the overall efficiency level (*TE*) of each individual and the Malmquist decomposition method suggested by Coelli et al. [57] to decompose it into scale efficiency (*SC*), technological progress (*EC*), and pure technical efficiency (*TC*). *SC* and *TC* are the measured home-country-bound competitive advantage (*HCB*) or the non-location-bound competitive advantage (*NLB*). The modified equation for the stochastic frontier estimation is as follows:

$$\begin{aligned} LnY\_{i\ t} &= (\beta\_0 + w\_i) + \sum\_{n=1}^{N} \beta\_n LnX\_{nit} + \frac{1}{2} \sum\_{n=1}^{N} \sum\_{j=1}^{N} \beta\_{nj} LnX\_{nit}LnX\_{nit} \\ &+ \sum\_{n=1}^{N} \beta\_{tn} tLnX\_{nit} + \beta\_t t + \frac{1}{2} \beta\_t t^2 + \nu\_{it} + \mu\_{it} \end{aligned} \tag{5}$$

**Before matching (TFP)**

**176**

**Treatment**

2010

2011 2012 2013 2014

2015 2016

2017 *In order to save space, the above table does not report the matching results of Scale, Capital and ROA. As the duplicate matching samples are excluded, the matching results are not presented 1:3. We performed*

*the test of robustness matching according to the ratio of 1:1 and 1:2, and obtain similar results without affecting the conclusion of this paper.*

*Note: \*, \*\*, \*\*\* indicate significance*

**Table 2.** *PSM matching results.*

 *level at 10%, 5% and 1%, respectively.*

0.793

0.626

 4.900\*\*\*

 0.661

0.607

0.780

0.631

0.774

0.661 0.793

0.746

 0.100

0.683

1.000

24 13

223

14

202

28

2.551\*\*

0.607

0.633

0.370

21

163

22

 0.603

0.425

0.794

0.745

3.440\*\*\*

 0.603

8.152\*\*\*

0.425

0.458

0.663

0.412

13

144

13

0.321

8

146

13

0.367

0.750

4.831\*\*\*

0.367

0.323

 0.600

0.282

0.337

0.954

0.282

0.308

0.271

9 7

137

15

115

20

 0.315

 **group**

 **Control group**

0.412

1.832\*

0.315

0.332

0.890

3

93

6

 **t value**

 **Treatment**

 **group**

 **Control group**

 **t value**

**After matching (TFP)**

**Treatment**

 **group**

 **Control group**

 **Matching results**

*Emerging Markets*

where *Yit* is the output variable of the enterprise, expressed in terms of sales revenue. *Xnit* is an input variable, including labour input and capital investment. Labour input is expressed by the number of employees, and capital investment is expressed by net fixed assets. Sales revenue and fixed assets were deflated by the price index and the fixed asset price index, respectively. In addition, *υit* is the error term, *μit* is the inefficient term, and *wi* is the individual random effect. We assumed that *υit, μit* and *wi* retained the following distributions:

$$w\_{it} \sim N\left[0, \sigma\_{\nu}^{2}\right]; \; \mu\_{it} \sim N^{+}\left[0, \sigma\_{\mu}^{2}\right]; \; w\_{it} \sim N\left[0, \sigma\_{w}^{2}\right];$$

where *N*<sup>þ</sup> 0, *σ*<sup>2</sup> *μ* h i is a truncated normal distribution with mean 0 and variance *<sup>σ</sup>*<sup>2</sup> *μ*. Once the production function had been estimated, the inefficiency parameter *μit* could be estimated as follows:

$$\hat{E}[\mu\_{it}|e\_{it}] = \frac{\sigma\_{\varepsilon}}{1 + \lambda^2} \left[ \frac{\phi(z\_{it})}{1 - \Phi(z\_{it})} - z\_{it} \right] \tag{6}$$

of Overseas Investment Enterprises' and the sample observation period. If the approval time of the sample company lags behind the observation period or the difference was less than zero, a value of 0 was assigned to internationalisation experience. If the difference was greater than zero, a value of 1 was assigned to

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

State ownership (*ownership*): ownership was a dummy variable. The value assigned to SOEs (including SOEs and state-owned holding firms) was 1, and the

We controlled for firm heterogeneity, time effects, and regional fixed effects. Firm heterogeneity was controlled through capital density (*Capital*), enterprise size (*Size*), R&D investment (*R&D*), and marketing expenditures (*Market*) where *Capital* was expressed as the natural logarithm of the ratio of net fixed assets to the

> Stochastic frontier model and the Malmquist decomposition

Dummy variables CBA and CT indicate whether a company had implemented cross-border M&As and the completion time

Calculated by the difference between the overseas investment approval time and the sample observation period.

logarithm of the ratio of net fixed assets to the number of

logarithm of the number of

R&D investment in operating

Expressed as the percentage of sales revenue in operating

Dummy variable reflects province of the acquirers

0 and SOEs was 1.

employees

employees;

income

income

method

Ownership State ownership Dummy variable, non-SOEs was

Capital Capital density Expressed as the natural

Size Enterprise size Measured by the natural

R&D R&D investment Expressed as the percentage of

Time Time effect Dummy variable reflects year of samples

**Variables calculation Data source**

CSMAR database

Bvd-zephyr database.

zephyr database.

CSMAR database

CSMAR database

CSMAR database

CSMAR database

CSMAR database

CSMAR database

CSMAR database

China's Ministry of Commerce's 'Investment List of Overseas Investment Enterprises'; Bvd-

internationalisation experience.

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

value assigned to non-SOEs was 0.

**Variables definitions**

bound competitive advantage

bound competitive advantage

M&As Implement

HCB Home-country-

NLB Non-location-

CBA CT Cross-border

Market Marketing

Region Region effect

*Variables definitions and sources.*

**Table 3.**

**179**

expenditures

(dummy variable)

Experience Internationalisation experience

**4.4 Control variables**

**Variables label**

where *ϵit* ¼ *νit* � *μit*,*σϵ* ¼ ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi *σ*2 *<sup>ν</sup>* þ *σ*<sup>2</sup> *μ* r� �,*<sup>λ</sup>* <sup>¼</sup> *σμ σν* ,*zit* <sup>¼</sup> *<sup>ϵ</sup>it<sup>λ</sup> σϵ* ,*Φ*ð Þ∙ and *ϕ*ð Þ∙ denote the density and CDF function evaluated at *zit*.Given the translog specification in

Eq. (7) the efficiency level (*TE*) could be calculated as:

$$TE\_{it} = \exp\left(-\hat{E}[\mu\_{it}|\epsilon\_{it}]\right) \tag{7}$$

while the overall efficiency level (*TE*) was decomposed into three factors: scale efficiency *(SC)*, technological progress (*EC*), and pure technical efficiency (*TC*).

$$EC\_{it} = \frac{TE\_{it}}{TE\_{is}}\tag{8}$$

$$T\mathcal{C}\_{it} = \exp\left\{\frac{1}{2} \left[\frac{\partial L n Y\_{is}}{\partial s} + \frac{\partial L n Y\_{it}}{\partial t}\right] \right\} \tag{9}$$

$$\text{SC}\_{it} = \exp\left\{\frac{1}{2} \sum\_{n=1}^{N} [\varepsilon\_{ni} \text{SF}\_{it} + \varepsilon\_{nit} \text{SF}\_{it}] \ln\left(\frac{X\_{nit}}{X\_{nis}}\right) \right\} \tag{10}$$

where *SFis* <sup>¼</sup> *enis*�<sup>1</sup> *enis* ,*enis* <sup>¼</sup> ð Þ *<sup>∂</sup>LnYis <sup>=</sup>*ð Þ *<sup>∂</sup>Xnis* ,*eis* <sup>¼</sup> <sup>P</sup>*<sup>N</sup> <sup>n</sup>*¼<sup>1</sup>*enis*. Scale efficiency (*SC*) and pure technical efficiency (*TC*) represent the home-country-bound competitive advantage (*HCB*) and the non-location-bound competitive advantage (*NLB*Þ.

#### **4.2 Independent variable**

Our independent variable was the interaction term *CBA* � *CT* or the product of the dummy variables *CBA* ¼ f g 0, 1 and *CT* ¼ f g 0, 1 , indicating the net effect on competitive advantage of implementing cross-border M&As.

#### **4.3 Moderators**

Internationalisation experience (*experience*). Following Jiang & Jiang [59], internationalisation experience was calculated by the difference between the overseas investment approval time of China's Ministry of Commerce's 'Investment List *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

of Overseas Investment Enterprises' and the sample observation period. If the approval time of the sample company lags behind the observation period or the difference was less than zero, a value of 0 was assigned to internationalisation experience. If the difference was greater than zero, a value of 1 was assigned to internationalisation experience.

State ownership (*ownership*): ownership was a dummy variable. The value assigned to SOEs (including SOEs and state-owned holding firms) was 1, and the value assigned to non-SOEs was 0.

#### **4.4 Control variables**

where *Yit* is the output variable of the enterprise, expressed in terms of sales revenue. *Xnit* is an input variable, including labour input and capital investment. Labour input is expressed by the number of employees, and capital investment is expressed by net fixed assets. Sales revenue and fixed assets were deflated by the price index and the fixed asset price index, respectively. In addition, *υit* is the error term, *μit* is the inefficient term, and *wi* is the individual random effect. We assumed

> *μ* h i

> > *ϕ*ð Þ *zit* 1 � *Φ*ð Þ *zit*

,*<sup>λ</sup>* <sup>¼</sup> *σμ σν*

� �

is a truncated normal distribution with mean 0 and variance *σ*<sup>2</sup>

,*wit* � *<sup>N</sup>* 0, *<sup>σ</sup>*<sup>2</sup>

� *zit*

,*zit* <sup>¼</sup> *<sup>ϵ</sup>it<sup>λ</sup> σϵ*

*TEit* <sup>¼</sup> *exp* �*E*^ *<sup>μ</sup>it <sup>ϵ</sup>it* ½ � <sup>j</sup> � � (7)

*w* � �

*μ*.

(6)

(8)

(9)

(10)

,*Φ*ð Þ∙ and *ϕ*ð Þ∙ denote

that *υit, μit* and *wi* retained the following distributions:

*ν*

*<sup>E</sup>*^ *<sup>μ</sup>it <sup>ϵ</sup>it* ½ �¼ <sup>j</sup> *σϵ*

Eq. (7) the efficiency level (*TE*) could be calculated as:

*TCit* ¼ *exp*

1 2 X *N*

competitive advantage of implementing cross-border M&As.

*n*¼1

*enis* ,*enis* <sup>¼</sup> ð Þ *<sup>∂</sup>LnYis <sup>=</sup>*ð Þ *<sup>∂</sup>Xnis* ,*eis* <sup>¼</sup> <sup>P</sup>*<sup>N</sup>*

*SCit* ¼ *exp*

where *SFis* <sup>¼</sup> *enis*�<sup>1</sup>

**4.2 Independent variable**

**4.3 Moderators**

**178**

� �,*μit* � *<sup>N</sup>*<sup>þ</sup> 0, *<sup>σ</sup>*<sup>2</sup>

Once the production function had been estimated, the inefficiency parameter *μit*

<sup>1</sup> <sup>þ</sup> *<sup>λ</sup>*<sup>2</sup>

the density and CDF function evaluated at *zit*.Given the translog specification in

while the overall efficiency level (*TE*) was decomposed into three factors: scale efficiency *(SC)*, technological progress (*EC*), and pure technical efficiency (*TC*).

> *ECit* <sup>¼</sup> *TEit TEis*

and pure technical efficiency (*TC*) represent the home-country-bound competitive advantage (*HCB*) and the non-location-bound competitive advantage (*NLB*Þ.

Our independent variable was the interaction term *CBA* � *CT* or the product of the dummy variables *CBA* ¼ f g 0, 1 and *CT* ¼ f g 0, 1 , indicating the net effect on

Internationalisation experience (*experience*). Following Jiang & Jiang [59], internationalisation experience was calculated by the difference between the overseas investment approval time of China's Ministry of Commerce's 'Investment List

*∂LnYis ∂s*

þ

*enisSFis* <sup>þ</sup> *enitSFit* ½ �*Ln Xnit*

� � � �

( ) � �

*∂LnYit ∂t*

*Xnis*

*<sup>n</sup>*¼<sup>1</sup>*enis*. Scale efficiency (*SC*)

1 2

ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi *σ*2 *<sup>ν</sup>* þ *σ*<sup>2</sup> *μ*

r� �

*vit* � *<sup>N</sup>* 0, *<sup>σ</sup>*<sup>2</sup>

where *N*<sup>þ</sup> 0, *σ*<sup>2</sup>

*Emerging Markets*

*μ* h i

could be estimated as follows:

where *ϵit* ¼ *νit* � *μit*,*σϵ* ¼

We controlled for firm heterogeneity, time effects, and regional fixed effects. Firm heterogeneity was controlled through capital density (*Capital*), enterprise size (*Size*), R&D investment (*R&D*), and marketing expenditures (*Market*) where *Capital* was expressed as the natural logarithm of the ratio of net fixed assets to the


### **Table 3.**

number of employees; *Scale* was measured by the natural logarithm of the number of employees; *R&D* was expressed as the percentage of R&D investment in operating income; and *Market* was expressed as the percentage of sales revenue in operating income. Time and regional effects were controlled by incorporating time and region dummies. **Table 3** presents the definitions, calculations, and data sources of all variables.

#### **5. Results**

#### **5.1 Instantaneous competitive advantage effect of cross-border M&As**

**Table 4** san shows the estimation results of the M&As<sup>0</sup> instantaneous competitive advantage effect. Models (1) through (4) examine the impact of cross-border M&As on the home-country-bound competitive advantage. Models (5) through (8) examine the impact of cross-border M&As on the non-location-bound competitive advantage. The results of model (1) show that the coefficient of the interaction term *CBA* � *CT* is significantly positive at the level of 5%, indicating that cross-border M&As improve home-country-bound competitive advantage. Models (2) through (4) gradually add control variables, time, and regional fixed effects. Although the coefficients of the interaction term *CBA* � *CT* varied, they were all significantly positive. The results of model (5) show that the coefficient of the interaction term *CBA* � *CT* is positive, but not significant. After adding control variables, time, and regional fixed effects, the significance of the coefficients did not change significantly, indicating that cross-border M&As had not improved non-location-bound competitive advantage. Thus, hypothesis 1 was partially supported. The reason may be that firms invest more resources in developing their own markets, and 'realise' them more quickly than long-term strategic investments such as research and development. Although firms face competition from DMNEs—which have technological advantages in their home markets— EMNEs, due to the low technical applicability of the home markets [28], can be further consolidated by leveraging the unique advantages of their home countries, and strengthen their competitive advantage therein [10, 45].

#### **5.2 Long-run competitive advantage effect of cross-border M&As**

It takes time to bundle external strategic assets with regional ones in the home country or non-regional bundled firm-specific assets. The effect of cross-border M&As on competitive advantage may be affected by a lag. Therefore, we examined the changes in the home-country-bound competitive advantage and the nonlocation-bound competitive advantage five years after cross-border M&As. These results are shown in **Table 5**. The coefficient of the interaction term *CBA* � *CT* indicates that cross-border M&As only have a positive impact on home-countrybound competitive advantage in the first and second year after the merger, and their effect gradually weakens thereafter. There is no continuous impact on non-location-bound competitive advantage. A plausible explanation is that China lacks international management experience and capabilities, which leads to serious challenges in post-M&A integration [33]. Birkinshaw *et al.* [60] pointed out that Chinese firms adopt the M&A mode to carry out FDI and grant their target enterprises full post-M&A autonomy, retaining senior management teams and expecting cross-border M&As to become a 'highway' to catch up with developed countries. This reflects the fact that Chinese firms lack international management experience.

**Dependent**

**(1)** 0.054\*\*\*

0.063\*\*\*

(0.017)

(0.017)

0.104\*\*\*

0.109\*\*\*

(0.014)

(0.014)

*CBA*

**181**

*CT*

*CBA\*CT*

*Capital*

*Size* *R&D* *Market*

*\_Cons*

*Year* *Region*

*N* *R2* *\*, \*\*, \*\*\* indicate significance*

*group, and the subsequent tables were the same.*

**Table 4.** *Instantaneous*

 *competitive*

 *advantage effect of cross-border*

 *M*

*&As.*

no 1343 0.071

 *level at 10%, 5% and 1%, respectively.*

0.141

0.376

 *Standard errors are in parenthesis.*

0.432

 *The samples from the above test included the lag phase samples of the treatment group and the control*

0.003

0.310

0.482

0.514

1343

no

0.206\*\*\*

0.018

0.016

0.168

0.655\*\*\*

0.272

0.543\*\*\*

0.952\*\*\*

(0.205)

(0.190)

(0.200)

(0.016)

(0.152)

(0.141)

(0.139)

(0.013)

no

no

yes no 1343

yes yes 1343

1343

1343

1343

no

no

no

no

yes

no

yes

yes

1343

0.044\*\*

0.047\*\*

0.033\*\*

0.029\*

0.033

0.036

0.033

0.033

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

(0.025)

(0.025)

(0.033)

0.001\*

0.002

0.002

(0.001)

(0.001)

(0.001)

0.001\*

0.004

0.003

(0.002)

(0.002)

(0.001)

0.083\*\*\*

0.102\*\*\*

0.096\*\*\*

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

(0.009)

(0.009)

(0.009)

0.001

0.008

0.012

(0.021)

(0.009)

(0.002)

(0.033)

(0.016)

0.104\*\*\*

(0.018)

(0.016)

(0.019)

0.141\*\*\*

0.138\*\*

(0.068)

(0.020)

0.156\*\*\*

0.133\*\*\*

0.135\*\*

(0.064)

(0.034)

0.028\*\*\*

0.031\*\*\*

(0.008)

(0.007)

(0.037)

0.047\*\*\*

(0.011)

0.026\*\*

0.016\*

0.012\*

(0.006)

(0.009)

(0.013)

(0.019)

**(2)**

**(3)** 0.048\*\*\*

0.050\*\*\*

0.034

0.043\*

0.034\*

0.041\*\*

(0.021)

(0.020)

(0.025)

(0.025)

(0.025)

(0.014)

0.044\*\*\*

0.028\*\*

0.036\*

0.050\*\*

0.066\*\*\*

0.056\*\*\*

(0.019)

(0.019)

(0.022)

(0.022)

(0.011)

(0.011)

**(4)**

**(5)**

**(6)**

**(7)**

**(8)**

 **variable: HCB**

**Dependent**

 **variable: NLB**


**Table 4.** *Instantaneous*

 *competitive*

 *advantage effect of cross-border*

 *M*

*&As.*

#### *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

**181**

number of employees; *Scale* was measured by the natural logarithm of the number of employees; *R&D* was expressed as the percentage of R&D investment in operating income; and *Market* was expressed as the percentage of sales revenue in operating income. Time and regional effects were controlled by incorporating time and region dummies. **Table 3** presents the definitions, calculations, and data sources of

**5.1 Instantaneous competitive advantage effect of cross-border M&As**

countries, and strengthen their competitive advantage therein [10, 45].

**5.2 Long-run competitive advantage effect of cross-border M&As**

It takes time to bundle external strategic assets with regional ones in the home country or non-regional bundled firm-specific assets. The effect of cross-border M&As on competitive advantage may be affected by a lag. Therefore, we examined the changes in the home-country-bound competitive advantage and the nonlocation-bound competitive advantage five years after cross-border M&As. These results are shown in **Table 5**. The coefficient of the interaction term *CBA* � *CT* indicates that cross-border M&As only have a positive impact on home-countrybound competitive advantage in the first and second year after the merger, and their effect gradually weakens thereafter. There is no continuous impact on non-location-bound competitive advantage. A plausible explanation is that China lacks international management experience and capabilities, which leads to serious challenges in post-M&A integration [33]. Birkinshaw *et al.* [60] pointed out that Chinese firms adopt the M&A mode to carry out FDI and grant their target enterprises full post-M&A autonomy, retaining senior management teams and expecting cross-border M&As to become a 'highway' to catch up with developed countries. This reflects the fact that Chinese firms lack international management

**Table 4** san shows the estimation results of the M&As<sup>0</sup> instantaneous competitive advantage effect. Models (1) through (4) examine the impact of cross-border M&As on the home-country-bound competitive advantage. Models (5) through (8) examine the impact of cross-border M&As on the non-location-bound competitive advantage. The results of model (1) show that the coefficient of the interaction term *CBA* � *CT* is significantly positive at the level of 5%, indicating that cross-border M&As improve home-country-bound competitive advantage. Models (2) through (4) gradually add control variables, time, and regional fixed effects. Although the coefficients of the interaction term *CBA* � *CT* varied, they were all significantly positive. The results of model (5) show that the coefficient of the interaction term *CBA* � *CT* is positive, but not significant. After adding control variables, time, and regional fixed effects, the significance of the coefficients did not change significantly, indicating that cross-border M&As had not improved non-location-bound competitive advantage. Thus, hypothesis 1 was partially supported. The reason may be that firms invest more resources in developing their own markets, and 'realise' them more quickly than long-term strategic investments such as research and development. Although firms face competition from DMNEs—which have technological advantages in their home markets— EMNEs, due to the low technical applicability of the home markets [28], can be further consolidated by leveraging the unique advantages of their home

all variables.

*Emerging Markets*

**5. Results**

experience.

**180**


**Table 5.** *Long-run competitive*

 *advantage*

 *effect of cross-border*

 *M&As.* **5.3 Path analysis of the M&A competitive advantage effect**

(*Market*). The results are shown in **Table 6**.

*Competitive Advantages of Cross-Border M*

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

*CBA* 0.035\*\*\*

*CT* 0.022\*\*\*

*CBA\*CT* 0.026\*\*\*

*\_cons*

**Table 6.**

**183**

*Path analysis of the M*

(0.003)

(0.005)

(0.005)

0.314\*\*\* (0.026)

*Note: \*, \*\*, \*\*\* indicate significance level at 10%, 5% and 1%, respectively.*

*&A competitive advantage effect.*

The above results show that the improvement of competitive advantage is manifested in the dependency on regional resources of the home country. In order to further confirm and clarify the path of improvement, we analysed the impact mechanism of cross-border M&As by examining various post-merger business practices that affect competitive advantage based on the process perspective. Specifically, we used the interaction term *CBA CT* to regress with capital density (*Capital*), enterprise size (*Size*), R&D investment (*R&D*), and marketing expenses

*&As to Non-Location-Bound Chinese ICT Firms*

The results show that cross-border M&As play a significant role in promoting corporate capital density, enterprise size, and marketing expenses; while their impact on R&D investment is not significant, as the coefficient value is negative. The instantaneous test results in **Table 4** show that capital density, enterprise size, and marketing expenses have a positive effect on home-country-bound competitive

advantage, while R&D investment has a significant positive impact on nonlocation-bound competitive advantage. **Tables 4** and **6** confirm that in the wake of implementing cross-border M&As, enterprises strengthen their investment in fixed assets, expand their size, and increase their proportion of marketing expenditures, but overreach on R&D investment. Rugman [16] pointed out that, for emerging economies such as China, where the market is growing rapidly, the period of transformation into a leading competitive advantage through technology integration is long, and the cycle of establishing economies of scale is quite short. Due to their low technical applicability [28], these firms are more likely to take advantage of the economies of scale of their home countries by acquiring overseas strategic resources and directly feeding them back into the huge local market demand [13].

**5.4 Internationalisation experience and M&A competitive advantage effect**

Hypothesis 2 was tested by splitting the sample into two groups based on internationalisation experience and by checking whether there was a difference between firms with different degrees of international experience. The estimation results are presented in **Table 7**. The results show that, for the home-country-bound

> 0.026\*\*\* (0.003)

0.020 (0.016)

0.020\*\*\* (0.005)

0.214\*\*\* (0.018)

*Year* yes yes yes yes *Region* yes yes yes yes *N* 1343 1343 1343 1343 *R2* 0.316 0.422 0.295 0.384

**Capital Size R&D Market**

0.018\*\* (0.007)

0.016 (0.016)

0.016 (0.011)

0.212\*\*\* (0.024)

0.014 (0.011)

0.014\*\*\* (0.003)

0.008\*\* (3.733)

0.114\*\*\* (0.007) *Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

#### **5.3 Path analysis of the M&A competitive advantage effect**

The above results show that the improvement of competitive advantage is manifested in the dependency on regional resources of the home country. In order to further confirm and clarify the path of improvement, we analysed the impact mechanism of cross-border M&As by examining various post-merger business practices that affect competitive advantage based on the process perspective. Specifically, we used the interaction term *CBA CT* to regress with capital density (*Capital*), enterprise size (*Size*), R&D investment (*R&D*), and marketing expenses (*Market*). The results are shown in **Table 6**.

The results show that cross-border M&As play a significant role in promoting corporate capital density, enterprise size, and marketing expenses; while their impact on R&D investment is not significant, as the coefficient value is negative. The instantaneous test results in **Table 4** show that capital density, enterprise size, and marketing expenses have a positive effect on home-country-bound competitive advantage, while R&D investment has a significant positive impact on nonlocation-bound competitive advantage. **Tables 4** and **6** confirm that in the wake of implementing cross-border M&As, enterprises strengthen their investment in fixed assets, expand their size, and increase their proportion of marketing expenditures, but overreach on R&D investment. Rugman [16] pointed out that, for emerging economies such as China, where the market is growing rapidly, the period of transformation into a leading competitive advantage through technology integration is long, and the cycle of establishing economies of scale is quite short. Due to their low technical applicability [28], these firms are more likely to take advantage of the economies of scale of their home countries by acquiring overseas strategic resources and directly feeding them back into the huge local market demand [13].

#### **5.4 Internationalisation experience and M&A competitive advantage effect**

Hypothesis 2 was tested by splitting the sample into two groups based on internationalisation experience and by checking whether there was a difference between firms with different degrees of international experience. The estimation results are presented in **Table 7**. The results show that, for the home-country-bound


#### **Table 6.**

*Path analysis of the M&A competitive advantage effect.*

**Dependent**

**(1)**

**182**

**(2)**

**(3)**

**(4)**

**(5)**

**(6)**

**(7)**

**(8)**

**(9)**

**(10)**

*Emerging Markets*

**Year 5**

**Year 4**

**Year 3**

**Year 2**

**Year 1**

**Year 5**

**Year 4**

**Year 3**

**Year 2**

**Year 1**

*CBA*

*CT*

0.038\*\*\*

0.027\*\*\*

0.031\*\*\*

0.029\*\*

0.020

0.033\*

0.035\*

0.042\*\*

0.037\*

0.024

(0.025)

(0.021)

(0.020)

(0.019)

(0.019)

(0.015)

(0.012)

(0.010)

(0.010)

(0.012)

*CBA\*CT*

*\_cons* *Control*

*Year* *Region*

*N* *R2* *Note: \*, \*\*, \*\*\* indicate significance*

**Table 5.** *Long-run competitive*

 *advantage*

 *effect of cross-border*

 *M*

*&As.*

0.402

 *level at 10%, 5% and 1%, respectively.*

0.395

0.251

0.266

 0.273

 0.679

yes 1140

945

769

607

458

1140

945 0.732

0.610

0.552

0.590

769

607

458

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

0.013

0.193

0.012

0.025

0.075

0.960\*\*\*

1.603\*\*\*

1.535\*\*\*

1.875\*\*\*

2.535\*\*\*

(0.244)

(0.243)

(0.260)

(0.248)

(0.226)

(0.109)

(0.103)

(0.090)

(0.137)

(0.147)

0.022\*\*

0.009\*

0.008

0.004

0.018

0.019

0.032

0.046

0.035

0.028

(0.039)

(0.031)

(0.029)

(0.027)

(0.025)

(0.019)

(0.014)

(0.011)

(0.005)

(0.010)

0.041\*\*\*

0.028\*\*

0.011

0.014

0.014

0.038\*

0.043\*\*

0.056\*\*\*

0.044\*\*

0.029\*

(0.017)

(0.018)

(0.019)

(0.020)

(0.020)

(0.013)

(0.010)

(0.010)

(0.012)

(0.014)

 **variable: HCB**

**Dependent**

 **variable: NLB**


**Ownership = 1 Ownership = 0**

**(3) Dependent variable:** *HCB*

> 0.052\*\*\* (0.013)

> 0.037\*\*\* (0.012)

> > 0.034\*\* (0.015)

0.258 (0.183)

**Dependent variable:** *HCBit* **Dependent variable:** *NLBit HCBit***<sup>1</sup>** *HCBit***<sup>2</sup>** *HCBit***<sup>3</sup>** *NLBit***<sup>1</sup>** *NLBit***<sup>2</sup>** *NLBit***<sup>3</sup>**

> 0.040\* (0.023)

0.042\*\*\* (0.007)

> 0.003 (0.002)

> 0.002\* (0.001)

> 0.002 (0.002)

0.076\*\*\* (0.008)

0.001 (0.023)

0.462\*\*\* (0.086)

0.032 (0.024)

0.056\*\*\* (0.010)

> 0.003 (0.002)

> 0.003\*\* (0.001)

> 0.005 (0.005)

0.093\*\*\* (0.011)

0.007 (0.006)

0.924\*\*\* (0.192)

0.038 (0.032)

0.047\*\*\* (0.016)

> 0.003 (0.003)

0.002\*\*\* (0.001)

0.004\* (0.002)

0.089\*\*\* (0.014)

0.011\* (0.007)

1.618\*\*\* (0.320)

0.046\*\*\* (0.013)

> 0.024 (0.025)

0.002 (0.002)

0.125\*\*\* (0.022)

0.180\*\*\* (0.023)

0.029\* (0.017)

0.011\*\*\* (0.004)

0.285 (0.331)

*Year* yes yes yes yes yes yes *Region* yes yes yes yes yes yes *N* 1225 1186 1030 1225 1186 1030 *R<sup>2</sup>* 0.385 0.335 0.125 0.468 0.438 0.282

**(4) Dependent variable:** *NLB*

> 0.004 (0.021)

> 0.024 (0.020)

0.002 (0.027)

0.855\*\*\* (0.257)

**(2) Dependent variable:** *NLB*

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

0.032 (0.050)

0.079\*\* (0.040)

0.009 (0.061)

1.751\*\*\* (0.403)

*Control* yes yes yes yes *Year* yes yes yes yes *Region* yes yes yes yes *N* 354 354 989 989 *R2* 0.506 0.528 0.433 0.568

**(1) Dependent variable:** *HCB*

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

(0.059)

(0.027)

(0.056)

(0.364)

*Moderating effect of the nature of ownership.*

(0.012)

(0.085)

(0.003)

(0.031)

(0.025)

(0.020)

(0.008)

(0.099)

*CBA* 0.058\*\*\*

*CT-i* 0.093

*CBA\*CT-i* 0.004

*Capital* 0.171\*\*\*

*Size* 0.207\*\*\*

*R&D* 0.043\*\*

*Market* 0.025\*\*\*

*\_cons* 0.031

*Results of the robustness test.*

**Table 9.**

**185**

*Note: \*, \*\*, \*\*\* indicate significance level at 10%, 5% and 1%, respectively.*

0.044\*\*\* (0.012)

> 0.038 (0.047)

> 0.003 (0.003)

0.167\*\*\* (0.027)

0.177\*\*\* (0.022)

0.025\* (0.015)

0.015\*\*\* (0.005)

0.026 (0.097)

*Note: \*, \*\*, \*\*\* indicate significance level at 10%, 5% and 1%, respectively.*

*CBA* 0.015

*CT* 0.002

*CBA\*CT* 0.005

*\_cons* 0.436

**Table 8.**

#### **Table 7.**

*Moderating effect of international experience.*

competitive advantage, the coefficient of interaction *CBA* ∗*CT* is significantly positive—i.e., cross-border M&As can improve home-country-bound competitive advantage—but the promotion effect differs between enterprises with different international experience. The coefficient values *CBA* ∗*CT* show that internationally experienced firms are more able to benefit from cross-border M&As.<sup>1</sup> It is important to note that the interaction coefficient *du* ∗ *dt* of experienced enterprises is significantly positive for non-location-bound competitive advantage. Although the coefficient's value is small, it shows that internationally experienced enterprises promote their non-location-bound competitive advantage through cross-border M&As. These empirical results are consistent with Buckley et al. [34], who found that internationalised experience knowledge has become one of the key factors affecting the effectiveness of cross-border M&As. The combination of an enterprise's internationalisation experience and its internal resources can give rise to an interface competency for global resources, thereby enhancing a company's knowledge management capabilities and promoting a better use of its internal and external network resources. In the end, this will create and strengthen competitive advantage and push a strategic upgrade of a company's internationalisation [34]. Therefore, hypothesis 2 is also supported.

#### **5.5 State ownership and the M&A competitive advantage effect**

In order to test whether state ownership matters, we split the sample into two groups. **Table 8** illustrates the corresponding estimation results. In relation to non-SOEs, cross-border M&As have positive effects on home-country-bound competitive advantage; however, the impact on SOEs is not significant—i.e., non-SOEs are

<sup>1</sup> The result of T-test shows that the coefficients of CBA\*CT across the two groups (experience = 1, experience = 0) are significantly different (p < 0.01).

**Ownership = 1 Ownership = 0 (1) Dependent variable:** *HCB* **(2) Dependent variable:** *NLB* **(3) Dependent variable:** *HCB* **(4) Dependent variable:** *NLB CBA* 0.015 (0.059) 0.032 (0.050) 0.052\*\*\* (0.013) 0.004 (0.021) *CT* 0.002 (0.027) 0.079\*\* (0.040) 0.037\*\*\* (0.012) 0.024 (0.020) *CBA\*CT* 0.005 (0.056) 0.009 (0.061) 0.034\*\* (0.015) 0.002 (0.027) *\_cons* 0.436 (0.364) 1.751\*\*\* (0.403) 0.258 (0.183) 0.855\*\*\* (0.257) *Control* yes yes yes yes *Year* yes yes yes yes *Region* yes yes yes yes *N* 354 354 989 989 *R2* 0.506 0.528 0.433 0.568 *Note: \*, \*\*, \*\*\* indicate significance level at 10%, 5% and 1%, respectively.*

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

#### **Table 8.**

competitive advantage, the coefficient of interaction *CBA* ∗*CT* is significantly positive—i.e., cross-border M&As can improve home-country-bound competitive advantage—but the promotion effect differs between enterprises with different international experience. The coefficient values *CBA* ∗*CT* show that internationally experienced firms are more able to benefit from cross-border M&As.<sup>1</sup> It is important to note that the interaction coefficient *du* ∗ *dt* of experienced enterprises is significantly positive for non-location-bound competitive advantage. Although the coefficient's value is small, it shows that internationally experienced enterprises promote their non-location-bound competitive advantage through cross-border M&As. These empirical results are consistent with Buckley et al. [34], who found that internationalised experience knowledge has become one of the key factors affecting the effectiveness of cross-border M&As. The combination of an

**experience = 1 experience = 0**

**(3) Dependent variable:** *HCB*

> 0.013 (0.009)

> 0.009 (0.006)

> 0.006\*\* (0.003)

0.111\*\* (0.053)

**(4) Dependent variable:** *NLB*

> 0.019 (0.028)

> 0.029 (0.026)

0.003 (0.035)

0.526\*\*\* (0.159)

**(2) Dependent variable:** *NLB*

> 0.015\*\* (0.008)

> 0.008 (0.008)

0.001\*\* (0.000)

0.829\*\*\* (0.044)

*control* yes yes yes yes *Year* yes yes yes yes *Region* yes yes yes yes *N* 382 382 961 961 *R2* 0.351 0.398 0.418 0.360

enterprise's internationalisation experience and its internal resources can give rise to an interface competency for global resources, thereby enhancing a company's knowledge management capabilities and promoting a better use of its internal and external network resources. In the end, this will create and strengthen competitive advantage and push a strategic upgrade of a company's internationalisation [34].

In order to test whether state ownership matters, we split the sample into two groups. **Table 8** illustrates the corresponding estimation results. In relation to non-SOEs, cross-border M&As have positive effects on home-country-bound competitive advantage; however, the impact on SOEs is not significant—i.e., non-SOEs are

<sup>1</sup> The result of T-test shows that the coefficients of CBA\*CT across the two groups (experience = 1,

**5.5 State ownership and the M&A competitive advantage effect**

Therefore, hypothesis 2 is also supported.

experience = 0) are significantly different (p < 0.01).

**(1) Dependent variable:** *HCB*

(0.038)

(0.045)

(0.053)

(0.217)

*Moderating effect of international experience.*

*Note: \*, \*\*, \*\*\* indicate significance level at 10%, 5% and 1%, respectively.*

*CBA* 0.037

*Emerging Markets*

*CT* 0.102\*\*

*CBA\*CT* 0.107\*\*

*\_cons* 0.191

**Table 7.**

**184**

*Moderating effect of the nature of ownership.*


#### **Table 9.** *Results of the robustness test.*

more dependent on home country resources and markets. In addition, when both state-owned and non-SOEs are considered, cross-border M&As do not significantly promote non-location-bound competitive advantage. A possible explanation for this result is that, on the one hand, both state-owned and non-SOEs lack international management experience. Chinese enterprises often fail to integrate the strategic assets they acquire through M&As [33]. On the other hand, SOEs and their host governments may have conflicting interests. In addition to being an independent market entity, a state-owned enterprise may, in relation to certain aspects, implement the strategies of their home country governments, resulting in insensitivity to market competition [47]. The transfer of strategic assets to SOEs faces more restrictions and scrutiny [20] than those linked to the profit-seeking nature of non-SOEs, driving them to use the home market and institutions to carry out 'shortquick' cross-border M&As and obtain short term profit returns [13]. Thus, hypothesis 3 is partially supported.

advantages. These findings enrich the understanding of FSAs in internalisation theory by building on insights from the home country dependency and considering the unique heterogeneity of EMNEs such as internationalisation experience and

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms*

Although recent studies have paid attention to the adaptation of internalisation theory to EMNEs [3, 8], whether EMNEs can acquire FSA through CBAs remains controversial. Some researchers believe that EMNEs that conducted cross-border M&As can redeploy and integrate foreign strategic assets to establish a competitive

obtained can be used solely in the home country and cannot be transferred into the global market [13, 14]. Benefiting from the rapid economic growth of their home countries, EMNEs can expand into local markets and gain considerable economic returns through cross-border M&As [14]. We have provided a clearer perspective on this controversial issue by distinguishing and defining two types of competitive advantage of EMNEs according to their boundedness to their home country, and their home-country-bound competitive advantages versus their non-locationbound competitive advantages. In addition, we have found empirical evidence consistent with the views of Ramamurti and Hillemann [14], that cross-border M&As significantly improve home-country-bound competitive advantage rather than the non-location bound competitive advantage of EMNEs in the Chinese ICT industry. We have explained the reason through mechanism analysis, and therefore we have supplemented this research area. The results coming from the mechanism test suggests the presence of a crowding-out effect of cross-border M&As on R&D investment of ICT firms themselves which inhibits the expansion of independent

Another key concept in internalisation theory that follows Rugman is countryspecific advantages (CSAs). CSAs cover a wide range of external factors at countrylevel that affect firm performance, such as labour, technology levels, natural resources, or the institutional environment [23]. FSAs and CSAs are interlinked as MNEs tap into CSAs to utilise or develop their FSAs [7]. Although existing research suggests that CSA is available to all firms in the same country, while all firms in home markets potentially have access to CSAs, Bhaumik et al. [21] found that some firms leverage CSA better than others. We defined the home-country-bound competitive advantage in this paper, which is of great value for exploring the heterogeneity of EMNEs' ability to utilise CSA to develop FSA. That is, EMNEs that can better exploit CSAs in their home country have stronger home-country-bound competitive advantage. From the perspective of enterprise heterogeneity, we found that internationally experienced companies can more effectively use CBAs to enhance their home-country-bound competitive advantage. When compared with state-owned enterprises, non-state-owned companies can enhance more their home-country-bound competitive advantage through CBAs. This research has therefore enriched the understanding of FSAs in internalisation theory by building on insights from home country dependency and taking into account the particular

heterogeneity of EMNEs such as internationalisation experience, and state

The new generation of ICT technology has become one of the fiercest areas of technological competition among countries around the world. In the current global

advantage [2, 4]. However, others point out that the competitive advantage

state ownership.

**6.1 Theoretical implications**

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

R&D and innovation motivation.

ownership.

**187**

**6.2 Management implications**

#### **5.6 Robustness test**

Following Fan and Tian [61], we conducted a placebo test on the relationship between cross-border M&As and competitive advantage by constructing false cross-border M&A implementation times. Specifically, we advanced the crossborder M&A times by one, two, and three years and examined the impact of the interaction terms *CBA* ∗*CT* on the competitive advantages. If the *CBA* ∗*CT* coefficient were found to be not significant, it would indicate that there had been no systematic error in the control and treatment group samples before the implementation of cross-border M&As, and the empirical result would be stable. The results of the placebo test showed that the influence of the *CBA* ∗*CT* interaction terms on home-country-bound competitive advantage was no longer significant, indicating that the competitive advantage improvement was indeed caused by cross-border M&As, and that the empirical findings on the effect cross-border M&As on competitive advantage are stable (**Table 9**).

#### **6. Discussion and conclusions**

This paper has studied the effect of cross-border M&As on enterprise competitive advantage by distinguishing it between home-country-bound competitive advantage and non-location bound competitive advantage in the context of Chinese ICT firms. We have examined two highly relevant research questions: *Can crossborder M&As improve non-location-bound competitive advantages of Chinese ICT firms?* and *Does state ownership enhance the competitive advantage of Chinese ICT firms through cross-border M&As?*

Based on the framework of the influence mechanism of cross-border M&As on the competitive advantages of enterprises, we used the propensity score matching and the differences-in-differences methods to empirically analyse the relationship between cross-border M&As and corporate competitive advantages, the path of improvement, the moderating effect of international experience, and the nature of ownership. We found strong evidence that cross-border M&As significantly improved home-country-bound competitive advantage rather than non-location bound competitive advantage. The results of the mechanism tests suggest that this is due to a crowding-out effect of cross-border M&As on R&D investment, which inhibits the development of non-location bound advantages. It also results from state-owned enterprises, which are considered to have institutional advantages not always effective in using cross-border M&As to enhance their competitive

advantages. These findings enrich the understanding of FSAs in internalisation theory by building on insights from the home country dependency and considering the unique heterogeneity of EMNEs such as internationalisation experience and state ownership.

#### **6.1 Theoretical implications**

more dependent on home country resources and markets. In addition, when both state-owned and non-SOEs are considered, cross-border M&As do not significantly promote non-location-bound competitive advantage. A possible explanation for this result is that, on the one hand, both state-owned and non-SOEs lack international management experience. Chinese enterprises often fail to integrate the strategic assets they acquire through M&As [33]. On the other hand, SOEs and their host governments may have conflicting interests. In addition to being an independent market entity, a state-owned enterprise may, in relation to certain aspects, implement the strategies of their home country governments, resulting in insensitivity to market competition [47]. The transfer of strategic assets to SOEs faces more restrictions and scrutiny [20] than those linked to the profit-seeking nature of non-SOEs, driving them to use the home market and institutions to carry out 'shortquick' cross-border M&As and obtain short term profit returns [13]. Thus, hypoth-

Following Fan and Tian [61], we conducted a placebo test on the relationship between cross-border M&As and competitive advantage by constructing false cross-border M&A implementation times. Specifically, we advanced the crossborder M&A times by one, two, and three years and examined the impact of the interaction terms *CBA* ∗*CT* on the competitive advantages. If the *CBA* ∗*CT* coefficient were found to be not significant, it would indicate that there had been no systematic error in the control and treatment group samples before the implementation of cross-border M&As, and the empirical result would be stable. The results of the placebo test showed that the influence of the *CBA* ∗*CT* interaction terms on home-country-bound competitive advantage was no longer significant, indicating that the competitive advantage improvement was indeed caused by cross-border M&As, and that the empirical findings on the effect cross-border M&As on

This paper has studied the effect of cross-border M&As on enterprise competi-

Based on the framework of the influence mechanism of cross-border M&As on the competitive advantages of enterprises, we used the propensity score matching and the differences-in-differences methods to empirically analyse the relationship between cross-border M&As and corporate competitive advantages, the path of improvement, the moderating effect of international experience, and the nature of ownership. We found strong evidence that cross-border M&As significantly improved home-country-bound competitive advantage rather than non-location bound competitive advantage. The results of the mechanism tests suggest that this is due to a crowding-out effect of cross-border M&As on R&D investment, which inhibits the development of non-location bound advantages. It also results from state-owned enterprises, which are considered to have institutional advantages not

tive advantage by distinguishing it between home-country-bound competitive advantage and non-location bound competitive advantage in the context of Chinese ICT firms. We have examined two highly relevant research questions: *Can crossborder M&As improve non-location-bound competitive advantages of Chinese ICT firms?* and *Does state ownership enhance the competitive advantage of Chinese ICT firms*

always effective in using cross-border M&As to enhance their competitive

esis 3 is partially supported.

competitive advantage are stable (**Table 9**).

**6. Discussion and conclusions**

*through cross-border M&As?*

**186**

**5.6 Robustness test**

*Emerging Markets*

Although recent studies have paid attention to the adaptation of internalisation theory to EMNEs [3, 8], whether EMNEs can acquire FSA through CBAs remains controversial. Some researchers believe that EMNEs that conducted cross-border M&As can redeploy and integrate foreign strategic assets to establish a competitive advantage [2, 4]. However, others point out that the competitive advantage obtained can be used solely in the home country and cannot be transferred into the global market [13, 14]. Benefiting from the rapid economic growth of their home countries, EMNEs can expand into local markets and gain considerable economic returns through cross-border M&As [14]. We have provided a clearer perspective on this controversial issue by distinguishing and defining two types of competitive advantage of EMNEs according to their boundedness to their home country, and their home-country-bound competitive advantages versus their non-locationbound competitive advantages. In addition, we have found empirical evidence consistent with the views of Ramamurti and Hillemann [14], that cross-border M&As significantly improve home-country-bound competitive advantage rather than the non-location bound competitive advantage of EMNEs in the Chinese ICT industry. We have explained the reason through mechanism analysis, and therefore we have supplemented this research area. The results coming from the mechanism test suggests the presence of a crowding-out effect of cross-border M&As on R&D investment of ICT firms themselves which inhibits the expansion of independent R&D and innovation motivation.

Another key concept in internalisation theory that follows Rugman is countryspecific advantages (CSAs). CSAs cover a wide range of external factors at countrylevel that affect firm performance, such as labour, technology levels, natural resources, or the institutional environment [23]. FSAs and CSAs are interlinked as MNEs tap into CSAs to utilise or develop their FSAs [7]. Although existing research suggests that CSA is available to all firms in the same country, while all firms in home markets potentially have access to CSAs, Bhaumik et al. [21] found that some firms leverage CSA better than others. We defined the home-country-bound competitive advantage in this paper, which is of great value for exploring the heterogeneity of EMNEs' ability to utilise CSA to develop FSA. That is, EMNEs that can better exploit CSAs in their home country have stronger home-country-bound competitive advantage. From the perspective of enterprise heterogeneity, we found that internationally experienced companies can more effectively use CBAs to enhance their home-country-bound competitive advantage. When compared with state-owned enterprises, non-state-owned companies can enhance more their home-country-bound competitive advantage through CBAs. This research has therefore enriched the understanding of FSAs in internalisation theory by building on insights from home country dependency and taking into account the particular heterogeneity of EMNEs such as internationalisation experience, and state ownership.

#### **6.2 Management implications**

The new generation of ICT technology has become one of the fiercest areas of technological competition among countries around the world. In the current global investment environment, it is necessary to reconsider whether cross-border M&As are the best way for Chinese ICT enterprises to enhance their core competitiveness. Our findings have important practical implications for cross-border M&As of Chinese ICT firms. At the firm level, enterprises should rationally implement crossborder M&As. Cross-border M&As have not improved the non-location-bound competitive advantage of Chinese ICT firms currently. After cross-border M&As, the development of enterprises depends more on the rapid growth of the home market scale than on improving internal technical efficiency. Enterprises may invest more resources in developing the domestic market to obtain short-term benefits rather than long-term strategic goals such as technology research and development [28]. Improvements in the home-country-bound and non-locationbound competitive advantages cannot be achieved automatically, and the heterogeneity between enterprises will lead to differences in M&As. Therefore, enterprises should not blindly follow the trend but combine their own conditions and actively 'go out' while accumulating international experience, laying the foundation for a leap forward to advanced internationalisation. At the government level, even though state ownership can secure financial resources for enterprises, government intervention may have a negative impact on corporate FDI. Home governments can encourage firms to 'go out' by providing market and online information, rather than excessive institutional and financial support. Governments should also strengthen the supervision model of FDI, and encourage enterprises with the ability and international experience to conduct foreign investment. Governments should caution those enterprises that do not satisfy the conditions needed to invest overseas and to conduct the 'arbitrage-type' M&As that rely on the resources, markets, and institutional advantages of their home country to tread carefully.

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IJOEM-12-2018-0663

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**189**

[1] Wang L, Schweizer L, Michaelis B. Experiential learning for Chinese companies to complete cross-border acquisitions: The case of Chinese acquirers. International Journal of Emerging Markets. 2020. DOI: 10.1108/

*DOI: http://dx.doi.org/10.5772/intechopen.94032*

business theory. Journal of International Business Studies. 2019;*50*(8):1388-1400

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innovation by multinational enterprises: A review of the literature. Journal of International Business Studies. 2019;*51*:

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(2):218-235

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"Chinese" about Chinese

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[2] Bertrand O, Capron L. Productivity enhancement at home via cross-border acquisitions: The roles of learning and

investments. Strategic Management

### **Author details**

Yan Chen<sup>1</sup> , Fei Li<sup>1</sup> , Jaime Ortiz<sup>2</sup> \* and Wenbo Guo<sup>1</sup>

1 School of Economics and Management, Beijing University of Posts and Telecommunications, Beijing, P.R. China

2 University of Houston, Houston, Texas, United States

\*Address all correspondence to: jortiz22@uh.edu

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms DOI: http://dx.doi.org/10.5772/intechopen.94032*

#### **References**

investment environment, it is necessary to reconsider whether cross-border M&As are the best way for Chinese ICT enterprises to enhance their core competitiveness. Our findings have important practical implications for cross-border M&As of Chinese ICT firms. At the firm level, enterprises should rationally implement crossborder M&As. Cross-border M&As have not improved the non-location-bound competitive advantage of Chinese ICT firms currently. After cross-border M&As, the development of enterprises depends more on the rapid growth of the home market scale than on improving internal technical efficiency. Enterprises may invest more resources in developing the domestic market to obtain short-term benefits rather than long-term strategic goals such as technology research and development [28]. Improvements in the home-country-bound and non-locationbound competitive advantages cannot be achieved automatically, and the heterogeneity between enterprises will lead to differences in M&As. Therefore, enterprises should not blindly follow the trend but combine their own conditions and actively 'go out' while accumulating international experience, laying the foundation for a leap forward to advanced internationalisation. At the government level, even though state ownership can secure financial resources for enterprises, government intervention may have a negative impact on corporate FDI. Home governments can encourage firms to 'go out' by providing market and online information, rather than excessive institutional and financial support. Governments should also strengthen the supervision model of FDI, and encourage enterprises with the ability and international experience to conduct foreign investment. Governments should caution those enterprises that do not satisfy the conditions needed to invest overseas and to conduct the 'arbitrage-type' M&As that rely on the resources, markets,

and institutional advantages of their home country to tread carefully.

\* and Wenbo Guo<sup>1</sup>

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

1 School of Economics and Management, Beijing University of Posts and

**Author details**

*Emerging Markets*

, Fei Li<sup>1</sup>

, Jaime Ortiz<sup>2</sup>

2 University of Houston, Houston, Texas, United States

\*Address all correspondence to: jortiz22@uh.edu

Telecommunications, Beijing, P.R. China

provided the original work is properly cited.

Yan Chen<sup>1</sup>

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**Chapter 12**

**Abstract**

ated unemployment.

**1. Introduction**

Self-Government in Yugoslavia:

This chapter analyzes self-governing Yugoslavia in the context of capitalism. Regarding the problem of capitalism in socialist world, the practice of the former Yugoslavia cannot be ignored. The socialist Yugoslavia was predetermined to be qualified as capitalist. The Yugoslav leadership developed: (a) self-government, (b) elements of market-biased socialism, and (c) openness to the international economy or the integration in the world market. Its economy achieved remarkable results by the mid-1960s. Some notable economists compliment the results and suggest that the model is sustainable. However, since the mid-1960s, regressive tendencies have emerged that perpetuate significant social dissatisfaction. In 1968, students protested against the state of Yugoslav socialism, believing that it had absorbed capitalism. Others felt that Yugoslav socialism had not sufficiently developed market-based socialism. There were authors that argued that Yugoslav socialism had become capitalist but without capitalist rationality. In the 1970s, the *de iure* existing federation became a *de facto* confederation with closed national economies. The chapter discusses the presence of elements of capitalism in this form of socialism based on (a) dependence on the world market, (b) banks as the institutionalization of "financial mode of capital," and (c) the existence of perpetu-

*Alpar Losoncz, Andrea Ivanišević and Mark Losoncz*

**Keywords:** self-management, Yugoslavia, socialism, capitalism, market

tion of capitalism in Yugoslavia was imminent.1

Emerging after World War II, Yugoslavia was destined to be qualified as a capitalist country. Its openness to the world market, market-framed consumption, self-management that introduced democracy to economic entities, and supremacy over the working class are just a few things that have always fueled suspicion about the socialist character of Yugoslavia. However, the same qualification was given from different sources and with different intentions: sometimes as a stigma and sometimes as a praise. The list is long: as early as 1951, a prominent Trotskyist economist Ernest Germain (Mandel) [1] wrote that the emergence of the restora-

said that there had been a "counter-revolution" and "replacing of socialism with capitalism" in Yugoslavia [2]. Paul Sweezy [3], a well-known American economist, also argued in the panorama of socialist countries in the 1960s that the existing socialist countries (except China) had opened the door to the invasion of capitalist

<sup>1</sup> Yet, we should note that Mandel believed all socialist countries to be capitalist.

In 1963, a Chinese party leadership

The Path to Capitalism?

#### **Chapter 12**

[52] Jiang, G. H. (2017). 'Has China's corporate cross-border mergers and acquisitions really failed?'. *Financial*

[61] Fan ZY, Tian B. Tax competition, tax law enforcement and corporate tax avoidance. Economic Research. 2013;**9**:

99-111

[53] Huang L, Zhang H, Liu W. Research on the relationship between Chinese Enterprise M&a Experience and Transnational M&a Shares. Chinese Journal of Management. 2017a;**14**:1134-

[54] Huang Z, Zhu H, Brass DJ. Crossborder acquisitions and the asymmetric

difference on long-term post-acquisition performance. Strategic Management

effect of power distance value

Journal. 2017b;*38*(4):972-991

[55] Olley S, Pakes A. Market share, market value and innovation in a panel

[56] Levinsohn J, Petrin A. Estimating production functions using inputs to control for unobservables. The Review of Economic Studies. 2003;*70*(2):317-

[57] Coelli, T. J., Rao, D. S. P., O'Donnell, C. J., & Battese, G. E. (2005). *An Introduction to Efficiency and Productivity Analysis*. Springer Science & Business

[58] Luo Y, Tung RL. A general theory of

International Business Studies. 2018;*49*

[59] Jiang GH, Jiang DC. The 'export effect' of Chinese Enterprises' foreign direct investment. Economic Research.

[60] Birkinshaw J, Bresman H, Nobel R. Knowledge transfer in international acquisitions: A retrospective. Journal of International Business Studies. 2010;*41*

springboard MNEs. Journal of

of British manufacturing firms. Econometrica. 1996;*64*(6):1263-1297

*Research*, (4), 46-60.

*Emerging Markets*

1142

341

Media.

(2):129-152

2014;**5**:160-173

(1):21-26

**192**

## Self-Government in Yugoslavia: The Path to Capitalism?

*Alpar Losoncz, Andrea Ivanišević and Mark Losoncz*

#### **Abstract**

This chapter analyzes self-governing Yugoslavia in the context of capitalism. Regarding the problem of capitalism in socialist world, the practice of the former Yugoslavia cannot be ignored. The socialist Yugoslavia was predetermined to be qualified as capitalist. The Yugoslav leadership developed: (a) self-government, (b) elements of market-biased socialism, and (c) openness to the international economy or the integration in the world market. Its economy achieved remarkable results by the mid-1960s. Some notable economists compliment the results and suggest that the model is sustainable. However, since the mid-1960s, regressive tendencies have emerged that perpetuate significant social dissatisfaction. In 1968, students protested against the state of Yugoslav socialism, believing that it had absorbed capitalism. Others felt that Yugoslav socialism had not sufficiently developed market-based socialism. There were authors that argued that Yugoslav socialism had become capitalist but without capitalist rationality. In the 1970s, the *de iure* existing federation became a *de facto* confederation with closed national economies. The chapter discusses the presence of elements of capitalism in this form of socialism based on (a) dependence on the world market, (b) banks as the institutionalization of "financial mode of capital," and (c) the existence of perpetuated unemployment.

**Keywords:** self-management, Yugoslavia, socialism, capitalism, market

#### **1. Introduction**

Emerging after World War II, Yugoslavia was destined to be qualified as a capitalist country. Its openness to the world market, market-framed consumption, self-management that introduced democracy to economic entities, and supremacy over the working class are just a few things that have always fueled suspicion about the socialist character of Yugoslavia. However, the same qualification was given from different sources and with different intentions: sometimes as a stigma and sometimes as a praise. The list is long: as early as 1951, a prominent Trotskyist economist Ernest Germain (Mandel) [1] wrote that the emergence of the restoration of capitalism in Yugoslavia was imminent.1 In 1963, a Chinese party leadership said that there had been a "counter-revolution" and "replacing of socialism with capitalism" in Yugoslavia [2]. Paul Sweezy [3], a well-known American economist, also argued in the panorama of socialist countries in the 1960s that the existing socialist countries (except China) had opened the door to the invasion of capitalist

<sup>1</sup> Yet, we should note that Mandel believed all socialist countries to be capitalist.

content, and Yugoslavia did it as well. Now, let us do a little time traveling: Ernst Lohoff [4], a modern German Marxist, used the term "ideeller Gesamtkapitalisten" (ideal total capitalist) to describe the Yugoslav situation, that is, to represent the communist party which took care of the "social capital."

This does not mean that the list is exhausted. The mentioned assessments definitely stand for certain elements of the historically created situation in Yugoslavia. Yet, they contain certain reductions and do not capture the *procedural* character of the existence of capitalist aspects in Yugoslavia; if it is claimed that capitalism existed *per se* in Yugoslavia and *a priori* a sign of equality is placed between capitalism and Yugoslav socialism, then some important interpretation dimensions are lost. Socialist Yugoslavia disintegrated at the end of the 1980s, and that already created the impression of *pre*determination, that is, the absence of any alternatives. However, capitalism in self-governing socialism arose as an unplanned *outcome* of various socio-economic determinations and certain conflicts that were actually the articulation of the same conflicts. Capitalism in Yugoslav socialism could not be perceived on the basis of *predetermined* paths. *A conceptual distinction should be made between capitalism and the existence of elements of capitalism*: whatever the definition of capitalism we give, it represents a kind of socio-economic completeness and wholeness.

First, the paper presents a conceptual clarification based on which we have enframed the selected problems. After that, we are going to determine two ideological foundations of the Yugoslav system (self-management and social property) and describe, but not in-depth, the characteristic stages of Yugoslav socialism which relate to the chosen topic of our work. The following sections will contain discussions of the selected moments that show strong presence of capitalist elements which truly anticipate later capitalism on the ruins of Yugoslavia (reliance on the volatile world market as the supreme arbiter of economic rationality, the supremacy of banking and financial capital over social reproduction, the presence of labor market elements). This chapter does not present empirical investigations, but the claims are supported by empirical illustrations. We will neither discuss the causes of the collapse of Yugoslavia, nor the phenomena of "imitated modernizations." We will only treat the problem of the existence of capitalism in self-governing Yugoslavia on the basis of selected examples.

#### **2. Some conceptual clarifications**

Capitalism has always been prone to different interpretations. Max Weber, Werner Sombart, Joseph Schumpeter or Milton Friedman formulated the essence of capitalism in different ways. Moreover, capitalism is currently experiencing renewed and heterogeneous interpretations, some of which have even been questioning the existence of a "unitary definition of capitalism" due to "heterogeneity" [5].

Nevertheless, when discussing about Yugoslavia, we must turn to the author who is valued as the supreme landmark in terms of self-governing socialism, namely, Karl Marx because in this way the effects can be measured immanently, that is, we confront Yugoslav socialism with our own ideological self-understanding. However, Marx did not use the term capitalism as much as he referred to the "mode of capitalist production." In his perspective, structural determinations of capitalism imply certain social relations which mean that: (1) there must be wage labor which conditions (a) that direct producers are separated from the means of production and do not make investment decisions and (b) there is exploitation of direct producers in the sense that those who have the means of production command the use of labor, that is, achieve "exploitation as domination" [6], (2) there is competition between

**195**

liberalism"4

new form of "mode of production." <sup>4</sup> On neoliberalism, see [13].

*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

At least two things need to be clarified here.

tural determinations.

to the desired goal.

capital in the market, (3) "monetization of the economy" and the "financial mode of existence of capital" [7], and (4) ideological infrastructure that supports struc-

Socialism implies the appearance as well as a set of different intervention practices that abolish the specified conditions of capitalism. The same practices imply a synthesis of different interventions both in the field of ideology/rights/politics (e.g. disempowerment of property rights) and in the economic domain (e.g. creation of nonantagonistic relations in production, creation of socio-economic conditions for appropriation of surplus labor of direct producers). Therefore, socialism implies a deep-seated politicaleconomic transformation: that was the intention of the Yugoslav communists as well. Yet they (like many others) understood socialism as a "transitional state" between capitalism and communism, that is, as a process that led to the goal of history. In other words, socialism was viewed *both* procedurally *and* teleologically: the communist party was considered to be the one that was "supposed to know" the paths of history leading

*First*, although the ideologists of Yugoslav self-governing socialism were not clear about this, it must be said that capitalism and (self-managing) socialism exist in the *same* conceptual field. Both are based on what the Yugoslav communists called "commodity-based production." However, the same communists projected the possibility of turning commodity-mediated collective organizations into a *means* that could be harnessed in the course of teleologically understood history. Successful *instrumentalization* of the commodity-principle is the main prerequisite for socialism not to regress into capitalism. Socialism represents a certain relationship between finetuning of *instruments* (commodity/market) and anticipated *goals* (communism). It is important to mention that the criticism that affects the ideological projections of the Yugoslav communists from leftist perspectives centers on that they managed to realize legal and political interventions with respect to the fabric of society, but not

epochal changes in terms of transforming the structure of productions.

there is capitalism in socialism or vice versa, socialism in capitalism?

<sup>2</sup> This term is not be equalized with "social capital" popularized by Pierre Bourdieu.

Johanna Bockman [11, 12] raised a provocative thesis stating that "neo-

explicitly mentions Yugoslav economists as interlocutors who, because of greater intellectual freedom in the former Yugoslavia, had the opportunity to familiarize themselves with the neoclassical logic of Western economists and, during the intensive communication and scholarship, thus also became acquainted with the appropriate economic techniques. In addition, more liberal worldview that emerged

<sup>3</sup> See [9], quoted by Jossa [10]. Jossa is a rare theoretician who believes that if capital goods are not owned by capitalists the "system is non-capitalistic" because it "reverses the capital-labor" relation. He does not use the term of self-management as much as the term of cooperatives for which he claims to be a

does not only have transnational roots but also "leftist origins." She

*Second*, Yugoslav ideologists like Edvard Kardelj [8] referred to *social capital*<sup>2</sup>

semantic context of this term brings us back again to Marx, who in Volume III of *Capital* wrote about the self-transformation of capital (about joint-stock companies as forms of socialization of capital) "within the capitalist mode of production itself." "Cooperative firms" and "joint-stock companies" are signs that capitalism has come to its own "superseding" independently of the property rights of the means of production, which means that "workers in the association become their own capitalists."3 The same stands for the Yugoslav communists. The above given arguments indicate *the existence of capitalism and socialism on the same soil*. Does this mean that

. The

*Emerging Markets*

ness and wholeness.

Yugoslavia on the basis of selected examples.

**2. Some conceptual clarifications**

content, and Yugoslavia did it as well. Now, let us do a little time traveling: Ernst Lohoff [4], a modern German Marxist, used the term "ideeller Gesamtkapitalisten" (ideal total capitalist) to describe the Yugoslav situation, that is, to represent the

This does not mean that the list is exhausted. The mentioned assessments definitely stand for certain elements of the historically created situation in Yugoslavia. Yet, they contain certain reductions and do not capture the *procedural* character of the existence of capitalist aspects in Yugoslavia; if it is claimed that capitalism existed *per se* in Yugoslavia and *a priori* a sign of equality is placed between

capitalism and Yugoslav socialism, then some important interpretation dimensions are lost. Socialist Yugoslavia disintegrated at the end of the 1980s, and that already created the impression of *pre*determination, that is, the absence of any alternatives. However, capitalism in self-governing socialism arose as an unplanned *outcome* of various socio-economic determinations and certain conflicts that were actually the articulation of the same conflicts. Capitalism in Yugoslav socialism could not be perceived on the basis of *predetermined* paths. *A conceptual distinction should be made between capitalism and the existence of elements of capitalism*: whatever the definition of capitalism we give, it represents a kind of socio-economic complete-

First, the paper presents a conceptual clarification based on which we have enframed the selected problems. After that, we are going to determine two ideological foundations of the Yugoslav system (self-management and social property) and describe, but not in-depth, the characteristic stages of Yugoslav socialism which relate to the chosen topic of our work. The following sections will contain discussions of the selected moments that show strong presence of capitalist elements which truly anticipate later capitalism on the ruins of Yugoslavia (reliance on the volatile world market as the supreme arbiter of economic rationality, the supremacy of banking and financial capital over social reproduction, the presence of labor market elements). This chapter does not present empirical investigations, but the claims are supported by empirical illustrations. We will neither discuss the causes of the collapse of Yugoslavia, nor the phenomena of "imitated modernizations." We will only treat the problem of the existence of capitalism in self-governing

Capitalism has always been prone to different interpretations. Max Weber, Werner Sombart, Joseph Schumpeter or Milton Friedman formulated the essence of capitalism in different ways. Moreover, capitalism is currently experiencing renewed and heterogeneous interpretations, some of which have even been questioning the

Nevertheless, when discussing about Yugoslavia, we must turn to the author who is valued as the supreme landmark in terms of self-governing socialism, namely, Karl Marx because in this way the effects can be measured immanently, that is, we confront Yugoslav socialism with our own ideological self-understanding. However, Marx did not use the term capitalism as much as he referred to the "mode of capitalist production." In his perspective, structural determinations of capitalism imply certain social relations which mean that: (1) there must be wage labor which conditions (a) that direct producers are separated from the means of production and do not make investment decisions and (b) there is exploitation of direct producers in the sense that those who have the means of production command the use of labor, that is, achieve "exploitation as domination" [6], (2) there is competition between

existence of a "unitary definition of capitalism" due to "heterogeneity" [5].

communist party which took care of the "social capital."

**194**

capital in the market, (3) "monetization of the economy" and the "financial mode of existence of capital" [7], and (4) ideological infrastructure that supports structural determinations.

Socialism implies the appearance as well as a set of different intervention practices that abolish the specified conditions of capitalism. The same practices imply a synthesis of different interventions both in the field of ideology/rights/politics (e.g. disempowerment of property rights) and in the economic domain (e.g. creation of nonantagonistic relations in production, creation of socio-economic conditions for appropriation of surplus labor of direct producers). Therefore, socialism implies a deep-seated politicaleconomic transformation: that was the intention of the Yugoslav communists as well. Yet they (like many others) understood socialism as a "transitional state" between capitalism and communism, that is, as a process that led to the goal of history. In other words, socialism was viewed *both* procedurally *and* teleologically: the communist party was considered to be the one that was "supposed to know" the paths of history leading to the desired goal.

At least two things need to be clarified here.

*First*, although the ideologists of Yugoslav self-governing socialism were not clear about this, it must be said that capitalism and (self-managing) socialism exist in the *same* conceptual field. Both are based on what the Yugoslav communists called "commodity-based production." However, the same communists projected the possibility of turning commodity-mediated collective organizations into a *means* that could be harnessed in the course of teleologically understood history. Successful *instrumentalization* of the commodity-principle is the main prerequisite for socialism not to regress into capitalism. Socialism represents a certain relationship between finetuning of *instruments* (commodity/market) and anticipated *goals* (communism). It is important to mention that the criticism that affects the ideological projections of the Yugoslav communists from leftist perspectives centers on that they managed to realize legal and political interventions with respect to the fabric of society, but not epochal changes in terms of transforming the structure of productions.

*Second*, Yugoslav ideologists like Edvard Kardelj [8] referred to *social capital*<sup>2</sup> . The semantic context of this term brings us back again to Marx, who in Volume III of *Capital* wrote about the self-transformation of capital (about joint-stock companies as forms of socialization of capital) "within the capitalist mode of production itself." "Cooperative firms" and "joint-stock companies" are signs that capitalism has come to its own "superseding" independently of the property rights of the means of production, which means that "workers in the association become their own capitalists."3

The same stands for the Yugoslav communists. The above given arguments indicate *the existence of capitalism and socialism on the same soil*. Does this mean that there is capitalism in socialism or vice versa, socialism in capitalism?

Johanna Bockman [11, 12] raised a provocative thesis stating that "neoliberalism"4 does not only have transnational roots but also "leftist origins." She explicitly mentions Yugoslav economists as interlocutors who, because of greater intellectual freedom in the former Yugoslavia, had the opportunity to familiarize themselves with the neoclassical logic of Western economists and, during the intensive communication and scholarship, thus also became acquainted with the appropriate economic techniques. In addition, more liberal worldview that emerged

<sup>2</sup> This term is not be equalized with "social capital" popularized by Pierre Bourdieu.

<sup>3</sup> See [9], quoted by Jossa [10]. Jossa is a rare theoretician who believes that if capital goods are not owned by capitalists the "system is non-capitalistic" because it "reverses the capital-labor" relation. He does not use the term of self-management as much as the term of cooperatives for which he claims to be a new form of "mode of production."

<sup>4</sup> On neoliberalism, see [13].

in Yugoslavia after the break with Stalin resulted in systematic translations of economic literature in the West. This would then mean that the discursive constructions of liberal economists in Yugoslavia, who were attacking the system anyway, were an inevitable "source" for the renewal of liberal capitalism. Or it meant that one of the most famous Yugoslav economists (who regularly used the neoclassical technique), Branko Horvat, a theorist of self-management, *malgré lui* contributed to the emergence of neoliberalism. Bockman is not surprised that the Yugoslav self-governing enterprise has become an exceptional subject for various economic theorists in a capitalist perspective: neoclassical discourse has followed with great interest the models of employees being "their own capitalists" [14].

Bockmann's thesis is problematic as it overemphasizes neoclassical discourse (which cannot be equated with Hayek's Austrian discourse who played a significant role in the reshaping of the framework of today's "neoliberalism"). Moreover, changes of socialism toward capitalism or the affirmation of capitalism can be understood only by measuring the relationship between *structure* and *agencies* in Yugoslav society. The proposition that local economic discourse could contribute to the emergence of "neo-liberalism" should not be questioned, but it is of greater significance to notice that (at least if we accept that we can talk about embryos of "neoliberalism" in Yugoslavia) different social agencies were the "bearers" of this constellation.

However, there is an idea in Bockman's thesis that is important to us: it actually suggests that there is *ante litteram* capitalism on a discursive level. As for the relevance of discursive articulations, we can say that discourses have a function of revelation. Indeed, if we take a look at, for example, some economic and political discourses in the 1960s (regardless of Bockman), they actually anticipate transitional discourses of the late 1980s when, after the collapse of self-management, there was official transition to capitalism and ideology propagated definite supremacy of capitalism with respect to socialism. Or, if we evaluate the various economic discourses in the 1960s regarding the international market, then we see the absolutization of such export orientation, which is also emphasized in the post-socialist order as a panacea.

Broadly speaking, Bockman's argument is the basis for our further argumentation: the "transition period" was burdened with the "*recurrences of the past*" as ideologists said many times before (hence, there is always a path-dependent logic that determines the present) and at the same time it was determined by the elements of *future* that later became unambiguously "capitalist." Thus, the "transition period" develops *diachronic* time sequences as well as *synchronous* temporality. It is a temporal framework in which we can thematize the presence of capitalism in socialist Yugoslavia.

#### **3. Ideological fundamentals throughout the history**

There were two fundamentals of the system: self-management and social property. In both cases, the system saw itself as a pioneer [15]. The emergence of capitalism in Yugoslavia can only be understood as an *expression of the collapse* of the *synthesis* between self-management and social property.

In a nutshell, self-management meant that the "working man" in various associations was the main subject of the economic domain and the axis of all life in general [16]. At the same time, self-management as the microfoundation was the basis for macro-construction, that is, for the "self-government society." There was, therefore, an intention to expand self-management to the entire society, to transfer the norms of labor socialization to other (say, communal) levels, too.

Self-management was the *negative* fundamental of the system: Yugoslav socialism was considered to be significantly different from both the Soviet type of state socialism and the organization of labor under capitalism. Self-government

**197**

*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

was supposed to realize analogous goals as well as capitalism and state socialism (economic rationality, productivism), but in a significantly superior way. Selfmanagement goals can accordingly be classified in the following modes:

a.improving efficiency while creating the necessary conditions for calibrating economic motivations—self-managing enterprise overcomes various deficits of capitalist enterprise in terms of efficiency (according to some data, the total productivity of production factors in the period 1953–1965 in capitalism was 3.3, in state socialism it was 3.0, and in self-management it was 4.7 [17], p. 170). Thus, modern economic discourse recognizes in capitalism the acute problem of "incomplete contract" [18] in terms of organization of production and control by capitalists, but in self-management this problem disappears as there is no need for constant supervision of workers who are "their own capitalists"; they are capitalists with the right motivation but without capitalism;

b.the achievement of just distribution and egalitarianism, starting from the

micro to the macro level (the Gini coefficient in the mentioned period was 0.40 in capitalist countries, 0.26 in "statist countries," and 0.25 in self-management) [17], p. 171; self-governing socialism wanted the same thing as transformed capitalisms after World War II, the prosperity, but in a different way;

c. some theorists and strategists even had the idea of abolishing the division of labor;

d.in the philosophical sense, the realization of "humanism," i.e. disalienation, or

The conception of self-management was, in certain aspects, on the ground of capitalism, but for the purpose of transcending to the capitalism, and this can be proved with the thinking of Horvat who has already been mentioned here (he once managed federal Yugoslav planning institutions to become an "internal opposition" to the system). It is characteristic that, unlike liberal economists who believed in the late 1980s that entrepreneurship was possible only with the existence of consistently derived private property (according to the Austrian concept), Horvat insisted on self-management until the end of socialism as an adequate framework for *collective entrepreneurship* [19, 20]. Still, this concept of "*collective as entrepreneur*" does not exclude personal initiative: on the contrary, this way self-management surpasses capitalism, which enables far-reaching inclusion of personal initiatives in the collectivity. Self-government in the context of "commodified production" aimed to

establish efficient and fair use of capital—but always without capitalism.

agement can establish "economic control."5

<sup>5</sup> See the discussion on property rights and appropriation [21–23].

Social property was more difficult to interpret because it had far fewer predecessors than self-management. We can understand social-property as a critique of private and group property in the sense that social-property is inclusive in relation to the exclusivity of the mentioned forms of property. Strictly speaking, "society" was the bearer of property and this clearly had an anti-capitalist trait, but it was not easy to operationalize in the context of the increasingly intensifying market in Yugoslavia. A solution was found in the separation of economic and legal aspects of property, which is again (at least partially) analogous to a joint-stock company in capitalism where shareholders are the legal holders of property, but only man-

self-management and social-property had double function: (a) finding a unique Yugoslav position toward capitalism and state socialism and (b) overcoming the

It can be said that the combination of

overcoming various forms of alienation in capitalism.

*Emerging Markets*

in Yugoslavia after the break with Stalin resulted in systematic translations of economic literature in the West. This would then mean that the discursive constructions of liberal economists in Yugoslavia, who were attacking the system anyway, were an inevitable "source" for the renewal of liberal capitalism. Or it meant that one of the most famous Yugoslav economists (who regularly used the neoclassical technique), Branko Horvat, a theorist of self-management, *malgré lui* contributed to the emergence of neoliberalism. Bockman is not surprised that the Yugoslav self-governing enterprise has become an exceptional subject for various economic theorists in a capitalist perspective: neoclassical discourse has followed with great

Bockmann's thesis is problematic as it overemphasizes neoclassical discourse (which cannot be equated with Hayek's Austrian discourse who played a significant role in the reshaping of the framework of today's "neoliberalism"). Moreover, changes of socialism toward capitalism or the affirmation of capitalism can be understood only by measuring the relationship between *structure* and *agencies* in Yugoslav society. The proposition that local economic discourse could contribute to the emergence of "neo-liberalism" should not be questioned, but it is of greater significance to notice that (at least if we accept that we can talk about embryos of "neoliberalism" in

Yugoslavia) different social agencies were the "bearers" of this constellation. However, there is an idea in Bockman's thesis that is important to us: it actually suggests that there is *ante litteram* capitalism on a discursive level. As for the relevance of discursive articulations, we can say that discourses have a function of revelation. Indeed, if we take a look at, for example, some economic and political discourses in the 1960s (regardless of Bockman), they actually anticipate transitional discourses of the late 1980s when, after the collapse of self-management, there was official transition to capitalism and ideology propagated definite supremacy of capitalism with respect to socialism. Or, if we evaluate the various economic discourses in the 1960s regarding the international market, then we see the absolutization of such export orientation, which is also emphasized in the post-socialist order as a panacea. Broadly speaking, Bockman's argument is the basis for our further argumentation: the "transition period" was burdened with the "*recurrences of the past*" as ideologists said many times before (hence, there is always a path-dependent logic that determines the present) and at the same time it was determined by the elements of *future* that later became unambiguously "capitalist." Thus, the "transition period" develops *diachronic* time sequences as well as *synchronous* temporality. It is a temporal framework in which we can thematize the presence of capitalism in socialist Yugoslavia.

**3. Ideological fundamentals throughout the history**

*synthesis* between self-management and social property.

There were two fundamentals of the system: self-management and social property. In both cases, the system saw itself as a pioneer [15]. The emergence of capitalism in Yugoslavia can only be understood as an *expression of the collapse* of the

In a nutshell, self-management meant that the "working man" in various associations was the main subject of the economic domain and the axis of all life in general [16]. At the same time, self-management as the microfoundation was the basis for macro-construction, that is, for the "self-government society." There was, therefore, an intention to expand self-management to the entire society, to transfer

Self-management was the *negative* fundamental of the system: Yugoslav social-

ism was considered to be significantly different from both the Soviet type of state socialism and the organization of labor under capitalism. Self-government

the norms of labor socialization to other (say, communal) levels, too.

interest the models of employees being "their own capitalists" [14].

**196**

was supposed to realize analogous goals as well as capitalism and state socialism (economic rationality, productivism), but in a significantly superior way. Selfmanagement goals can accordingly be classified in the following modes:


c. some theorists and strategists even had the idea of abolishing the division of labor;

d.in the philosophical sense, the realization of "humanism," i.e. disalienation, or overcoming various forms of alienation in capitalism.

The conception of self-management was, in certain aspects, on the ground of capitalism, but for the purpose of transcending to the capitalism, and this can be proved with the thinking of Horvat who has already been mentioned here (he once managed federal Yugoslav planning institutions to become an "internal opposition" to the system). It is characteristic that, unlike liberal economists who believed in the late 1980s that entrepreneurship was possible only with the existence of consistently derived private property (according to the Austrian concept), Horvat insisted on self-management until the end of socialism as an adequate framework for *collective entrepreneurship* [19, 20]. Still, this concept of "*collective as entrepreneur*" does not exclude personal initiative: on the contrary, this way self-management surpasses capitalism, which enables far-reaching inclusion of personal initiatives in the collectivity. Self-government in the context of "commodified production" aimed to establish efficient and fair use of capital—but always without capitalism.

Social property was more difficult to interpret because it had far fewer predecessors than self-management. We can understand social-property as a critique of private and group property in the sense that social-property is inclusive in relation to the exclusivity of the mentioned forms of property. Strictly speaking, "society" was the bearer of property and this clearly had an anti-capitalist trait, but it was not easy to operationalize in the context of the increasingly intensifying market in Yugoslavia. A solution was found in the separation of economic and legal aspects of property, which is again (at least partially) analogous to a joint-stock company in capitalism where shareholders are the legal holders of property, but only management can establish "economic control."<sup>5</sup> It can be said that the combination of self-management and social-property had double function: (a) finding a unique Yugoslav position toward capitalism and state socialism and (b) overcoming the

<sup>5</sup> See the discussion on property rights and appropriation [21–23].

antagonism between capital and labor as well as divergence between socialized economy and private appropriation6 .

Self-management was gradually introduced after the conflict with Stalin in 19487 and, as often described in the literature, with a great burden of the past it meant: (a) the legacy of pre-war Yugoslavia which was a peripheral capitalist country, (b) great destruction in World War II, brutal destruction of the existing capital which caused a lack of capital in the context of accelerated industrialization, (c) high disparities, that is, divergences in the development between different parts of a country with a federal structure. The Yugoslav communists knew that the weak working class, which was necessarily recruited from the peasantry in the agrarian country, lacked cognitive resources as well as habitualization for the realization of self-management. However, they assumed that the self-management processes could involve learning-by-doing principle due to the absence of time for education. Alternatively, we can say that the practiced self-management is not only a combination of goal-rational actions but also the creation of "endogenous preferences," that is, the creation of subjectivities for individual economic initiatives. Worker subjectivity is a dynamic category8 and it can change depending on institutional conditions; dynamic self-management will just develop harmony between social justice and effectiveness.

For the genealogical approach, it is purposeful to adopt the well-established scheme9 that shows briefly the dynamics of self-management with the macroelements relevant for our analysis:


**199**

*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

socialism contours;

completed.

**dependence**

socialist world.

international economic crisis.

until 1965 that "deep integration" took place.10

<sup>10</sup> For these notions but in other perspective, see [35].

aid; the modes of introducing market categories gave enormous power to the banks; a break in the "plan-market axis" in terms of the gradual disappearance of comprehensive planning; stabilization of high unemployment level; survival of regional disparities; high rate of inflation and significant social polarization; strong presence of elements of capitalism but without the appropriate capitalist rationality that would "domesticate" the results of deregulated markets; loss of

d.1974–1980: constitutional completing of national states of the existing federalism with the modes and effects of confederalization; strengthening of economic sovereignty of federation constituents; "nationalization" of different economies with mimetic reheating of political conflicts between national oligarchies (politology employs here the term of "polyarchy"); exposition to advancing

e. 1980–…: "perpetuation of Yugoslav crisis"; condensation of aggressive economic nationalism among the entities of federation leading to final disintegration; futile efforts to reconstitute Yugoslavia; openness to capitalism

**4. World market as a generator of capitalism in self-governing socialism:** 

Capital circulation in the world market represents a significant source of capitalist elements in socialist countries. However, we should demystify a myth that persists in a permanent autarchy of socialism in which strong ideology has control over the economic communication with capitalism system: this bears no reality in the context of "red globalization" [30, 31]. Yugoslavia appears here as an exception, but with regard to it, we can only discuss about gradual differences in overall

In any case, it is true that, as early as in 1950, Yugoslavia rapidly integrated into

the world capitalist system, which was under the domination of the victorious USA. There were different forms of accession: integration into economic institutions of "liberal internationalism" (Coal Committee of the Economic Committee for Europe, loans from the World Bank, the IMF and the US Export–Import Bank, as well as British banks [32]), bilateral treaties; it was indicative that there was a very favorable balance of payment in 1948 (the period which, according to many authors, is believed to be the period of autarchism). The following year, there were "efforts to find new markets in the European Economic Community and the United States for… minerals… and timber; agreed to the dinar-dollar exchange rate…so as to obtain IMF credits" [33]. These moments are only examples, but they are representative enough to demonstrate that self-governing Yugoslavia was part of the capitalist world system and that it acted *in compliance with capitalist norms*. However, there are phases that shed light on capitalist aspects: by 1965, although external financing was important, there was a certain balance between internal and external sources of financing and the debt was 1.2 billion of dollars until that period [34]. It can be said that there had been "shallow integration" by that time despite gradual integration into the world market determined by capital, and that it was not

<sup>6</sup> Jossa [24] believes that there is a question "Which is the fundamental contradiction of capitalism: the capital-labor polarity or the contrast between socialized production and private appropriation?". Yugoslav self-management was the answer to that question.

<sup>7</sup> We are not starting an otherwise important discussion here about the motivation of introduction for self-government, and we are not arguing whether the motivation was idealistic, legitimation-based (establishing of something unique compared to state socialism), or opportunistic (transfer of responsibility to working entities), i.e. positioning the party in internal power configuration.

<sup>8</sup> For example, some theoreticians [25] reject market socialism based on that because it assumes constant preferences.

<sup>9</sup> This periodization could be referred, for example, to [26, 27].

*Emerging Markets*

19487

economy and private appropriation6

subjectivity is a dynamic category8

ments relevant for our analysis:

justice and effectiveness.

scheme9

antagonism between capital and labor as well as divergence between socialized

Self-management was gradually introduced after the conflict with Stalin in

conditions; dynamic self-management will just develop harmony between social

For the genealogical approach, it is purposeful to adopt the well-established

that shows briefly the dynamics of self-management with the macroele-

a.1945–1948: industrial take off; pure imitation of state socialism including stateproperty (in 1948 the industry was 100% state-owned); the plan directly and

b.1948–1965 [28]: introduction and affirmation of self-management; double decentralization both in terms of territorial organization and in terms of basic economic entities; existence of significant economic growth; plan/market axis in the sense that the plan sets the "basic proportions" of economics, however, self-management was never implemented consistently and, in addition, it always carried an inherent sign of the politics "from above"; at the beginning of the 60s, the first signs of exhaustion of the great industrial take off from the 50s appeared, that is, the cycle that brought primarily (unrepeatable) high growth was exhausted; the necessity of choosing a new direction in terms of economics, which would create a reform in 1965 (reforms were "endemic" in

c. 1965–1974: the inflammation of hard crisis (industrial production grew at a rate of 12.7 in the period 1952–1964, and at a rate of 7.1 in the period 1964–1978 [29]); strong turn toward the world market especially in search for foreign

<sup>6</sup> Jossa [24] believes that there is a question "Which is the fundamental contradiction of capitalism: the capital-labor polarity or the contrast between socialized production and private appropriation?".

<sup>7</sup> We are not starting an otherwise important discussion here about the motivation of introduction for self-government, and we are not arguing whether the motivation was idealistic, legitimation-based (establishing of something unique compared to state socialism), or opportunistic (transfer of responsi-

<sup>8</sup> For example, some theoreticians [25] reject market socialism based on that because it assumes constant

bility to working entities), i.e. positioning the party in internal power configuration.

as legal imperative directed the economy, orders the proportions;

socialism anyway, as Adam Przeworski says);

Yugoslav self-management was the answer to that question.

<sup>9</sup> This periodization could be referred, for example, to [26, 27].

 and, as often described in the literature, with a great burden of the past it meant: (a) the legacy of pre-war Yugoslavia which was a peripheral capitalist country, (b) great destruction in World War II, brutal destruction of the existing capital which caused a lack of capital in the context of accelerated industrialization, (c) high disparities, that is, divergences in the development between different parts of a country with a federal structure. The Yugoslav communists knew that the weak working class, which was necessarily recruited from the peasantry in the agrarian country, lacked cognitive resources as well as habitualization for the realization of self-management. However, they assumed that the self-management processes could involve learning-by-doing principle due to the absence of time for education. Alternatively, we can say that the practiced self-management is not only a combination of goal-rational actions but also the creation of "endogenous preferences," that is, the creation of subjectivities for individual economic initiatives. Worker

and it can change depending on institutional

.

**198**

preferences.

aid; the modes of introducing market categories gave enormous power to the banks; a break in the "plan-market axis" in terms of the gradual disappearance of comprehensive planning; stabilization of high unemployment level; survival of regional disparities; high rate of inflation and significant social polarization; strong presence of elements of capitalism but without the appropriate capitalist rationality that would "domesticate" the results of deregulated markets; loss of socialism contours;


#### **4. World market as a generator of capitalism in self-governing socialism: dependence**

Capital circulation in the world market represents a significant source of capitalist elements in socialist countries. However, we should demystify a myth that persists in a permanent autarchy of socialism in which strong ideology has control over the economic communication with capitalism system: this bears no reality in the context of "red globalization" [30, 31]. Yugoslavia appears here as an exception, but with regard to it, we can only discuss about gradual differences in overall socialist world.

In any case, it is true that, as early as in 1950, Yugoslavia rapidly integrated into the world capitalist system, which was under the domination of the victorious USA. There were different forms of accession: integration into economic institutions of "liberal internationalism" (Coal Committee of the Economic Committee for Europe, loans from the World Bank, the IMF and the US Export–Import Bank, as well as British banks [32]), bilateral treaties; it was indicative that there was a very favorable balance of payment in 1948 (the period which, according to many authors, is believed to be the period of autarchism). The following year, there were "efforts to find new markets in the European Economic Community and the United States for… minerals… and timber; agreed to the dinar-dollar exchange rate…so as to obtain IMF credits" [33]. These moments are only examples, but they are representative enough to demonstrate that self-governing Yugoslavia was part of the capitalist world system and that it acted *in compliance with capitalist norms*.

However, there are phases that shed light on capitalist aspects: by 1965, although external financing was important, there was a certain balance between internal and external sources of financing and the debt was 1.2 billion of dollars until that period [34]. It can be said that there had been "shallow integration" by that time despite gradual integration into the world market determined by capital, and that it was not until 1965 that "deep integration" took place.10

<sup>10</sup> For these notions but in other perspective, see [35].

Changes in integration in capitalist world market were depended on the processes in the early 1960s. Namely, the economic growth as well as the growth rate was slowed down, and it was obvious that the development direction should be reconstructed. One group of theorists and politicians, who emerged from liberal milieu, focused their attention to the world market as an ultimate criterion of economic rationality. They drew attention to the fact that the products of selfgoverning companies should be tested, in other words, the results of self-managers should be proven in the market with dominant capitalist rationality and absence of communist ideas. In addition, the highest-level political officials also warned about the necessity for reorientation in a domain such as tourism in order to attract foreign investments [36]. Other theorists and politicians (in scientific literature referred to as "developmentalists") have emphasized the importance of a phenomenon commonly referred to as "import substitution industrialization," which would imply a distance between Yugoslav economy to the capitalist dimensions of world market and focus on national resources.

The 1965 reform brought the triumph of economic liberalization. It can be said that this also meant a certain victory for economists and politicians of liberal provenance who emphasized the inevitability of the competitiveness of the Yugoslav economy in the world market (exports in 1970 amounted to about 15.1% of GDP [37]). A number of typical deregulatory measures were adopted with the aim of improving efficiency of the foreign trade system, devaluation of dinar was realized, and as the official documents emphasized "free disposal of foreign exchange," "foreign exchange self-financing," and "interbanking foreign exchange market" should be achieved [38]. Import was also increased and in the period between 1961 and 1965 it was covered with export in the range of 74% and then the same coverage was gradually reduced [28], p. 104. An institution, which was completely unknown in socialist countries, appeared as an expression of new orientation, namely, joint business venture (in accordance with the legislation, there was a certain restriction that "the foreign partner could not have more than 49% of the total value of joint investments"). Simultaneously, joint ventures were unknown source of financing as well as the form of cooperation with foreign capitalist companies for profit purposes. In the period between 1967 and 1980 "joint ventures were signed to the value of 49,255 million dinars, of which the foreign participation amounted to 10,264 million dinars or 20.74% of the total" [39]. Actually, the level of investment made by different foreign multinational companies (their structure reflected the structure of foreign trade of Yugoslavia with a significant presence of Western Germany and USA) varied but it represented a significant source of financing. Therefore, it can be said that with certain restriction, self-governing socialism found the source of financing based on the profit criteria; therefore, it can be said that Yugoslavia, following market-economic rationality, used loans for investment and not for consumption.11

However, despite the results (for example, state property definitely disappeared with the reform and became social property), major problems arose. The system of the federal state was decentralized in such a way that *the possibility of joint-federal planning* was increasingly lost, that is, there was a fatal fragmentation between the members of the Yugoslav federation who were divided by nationalist interest. Decentralization is a principle that can be justified, but at that time it acquired a pronounced disintegration-nationalist meaning: the focus was on the work that merged the nationalist affirmation of justice with market criteria. Favoring of the market often had a national character, the perspective of those who benefited from

**201**

increasingly failed.

*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

inclusion in the world capitalist system. Moreover, it should be noted that the IMF, which of course implemented the norms of capitalist rationality in terms of debt, acted as a "promoter" of capitalism but internal decentralization of Yugoslavia as well12. In the meantime, Yugoslav economy became *de*regulated in significant elements losing chains between market and plan; the federation apparatus was losing its competencies and it could eventually manage only the monetary flows. It entered volatile world market with strong competitive pressures, but with subsequently drastically increased American interest rate, which resulted in the countries in debt being in undesirable situation [41], or with oil price shocks, Yugoslav economy was literally unprotected from contingent shocks of the world system. Some Yugoslav economists metaphorically called Yugoslav economy a *laissez-faire* system indicating to the absence of planning dimension, Rusinow [42] even used the term "*laissezfaire* socialism" ironically.13 During the 1980s, which were important because the world economy was also restructured and profound transformations were commonly associated with the offensive of Ronald Reagan and Margaret Thatcher (who demolished post-war Keynesian compromise), Yugoslav economy was strongly affected.14 Yugoslav economy with aspects of deregulation competed in the world market, its actors had to adopt the roles of capitalist subjects, and at the same time, Yugoslavia as a whole was left with and without *capitalist resilience* regarding the relationship between market and plan—we must not forget that the plan exists in capitalism as well (corporate planning), although it develops in a different way compared to socialism. Yugoslav communists wanted "endogenous planning"15 (as opposed to imposed exogenous planning), and in the 1970s and 1980s they even legally forced basic economic units to implement planning, but planning in Yugoslavia became less and less possible. Socialism projects planning as a control of economic flows; planning is a guarantee to reduce waste, and self-management promised virtuous cycles between plan and market—however, these projections

**5. Banks as the institutionalization of "financial mode of capital"**

market distribution of funds for investment purposes.

was no longer an operating unit but a "unit of bargaining," see [43].

<sup>15</sup> For the concept of endogenous development, see [44].

<sup>12</sup> On this, see [40], p. 123, and [32], p. 169, 170.

As we have already seen, there were various forms of financing economic activities in the 1960s and they were related to the profit motive, that is, to capitalist incentives, with the constant intensification of dependence on the world market. However, banks in Yugoslavia played a special role in the entire constellation in the 1960s. The background to the problem was the argument about adequate sources of financing because some Yugoslav actors, at the same time, proposed institutionalization of the capital market as in capitalism, which would imply a consistent

The capital market was often a subject of various discussions regarding the market socialism. Namely, the advocates of market socialism believe that it is possible to develop market but without transition into capitalism, that is, it is possible to affirm market *without* capitalism (unlike those critics who believe that market socialists are inherently "capitalist roaders" [45, 46]). The capital market

<sup>13</sup> There were efforts later to solve these problems with a specific system of bargaining where the firm

<sup>14</sup> This paper does not focus on the breakup of Yugoslavia which can be interpreted in different ways. In Yugoslavia, the debt of the country is often exaggerated because it was not more than third of the total product (see [37]) which means that interest rate did not account for high percentage of the GDP.

<sup>11</sup> Or not for consumption, as other real-socialist countries did; on this relationship between Yugoslavia and the other socialist countries, see [34], p. 47.

#### *Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

*Emerging Markets*

market and focus on national resources.

Changes in integration in capitalist world market were depended on the processes in the early 1960s. Namely, the economic growth as well as the growth rate was slowed down, and it was obvious that the development direction should be reconstructed. One group of theorists and politicians, who emerged from liberal milieu, focused their attention to the world market as an ultimate criterion of economic rationality. They drew attention to the fact that the products of selfgoverning companies should be tested, in other words, the results of self-managers should be proven in the market with dominant capitalist rationality and absence of communist ideas. In addition, the highest-level political officials also warned about the necessity for reorientation in a domain such as tourism in order to attract foreign investments [36]. Other theorists and politicians (in scientific literature referred to as "developmentalists") have emphasized the importance of a phenomenon commonly referred to as "import substitution industrialization," which would imply a distance between Yugoslav economy to the capitalist dimensions of world

The 1965 reform brought the triumph of economic liberalization. It can be said that this also meant a certain victory for economists and politicians of liberal provenance who emphasized the inevitability of the competitiveness of the Yugoslav economy in the world market (exports in 1970 amounted to about 15.1% of GDP [37]). A number of typical deregulatory measures were adopted with the aim of improving efficiency of the foreign trade system, devaluation of dinar was realized, and as the official documents emphasized "free disposal of foreign exchange," "foreign exchange self-financing," and "interbanking foreign exchange market" should be achieved [38]. Import was also increased and in the period between 1961 and 1965 it was covered with export in the range of 74% and then the same coverage was gradually reduced [28], p. 104. An institution, which was completely unknown in socialist countries, appeared as an expression of new orientation, namely, joint business venture (in accordance with the legislation, there was a certain restriction that "the foreign partner could not have more than 49% of the total value of joint investments"). Simultaneously, joint ventures were unknown source of financing as well as the form of cooperation with foreign capitalist companies for profit purposes. In the period between 1967 and 1980 "joint ventures were signed to the value of 49,255 million dinars, of which the foreign participation amounted to 10,264 million dinars or 20.74% of the total" [39]. Actually, the level of investment made by different foreign multinational companies (their structure reflected the structure of foreign trade of Yugoslavia with a significant presence of Western Germany and USA) varied but it represented a significant source of financing. Therefore, it can be said that with certain restriction, self-governing socialism found the source of financing based on the profit criteria; therefore, it can be said that Yugoslavia, following market-economic rationality, used loans for investment and not for

However, despite the results (for example, state property definitely disappeared with the reform and became social property), major problems arose. The system of the federal state was decentralized in such a way that *the possibility of joint-federal planning* was increasingly lost, that is, there was a fatal fragmentation between the members of the Yugoslav federation who were divided by nationalist interest. Decentralization is a principle that can be justified, but at that time it acquired a pronounced disintegration-nationalist meaning: the focus was on the work that merged the nationalist affirmation of justice with market criteria. Favoring of the market often had a national character, the perspective of those who benefited from

<sup>11</sup> Or not for consumption, as other real-socialist countries did; on this relationship between Yugoslavia

**200**

consumption.11

and the other socialist countries, see [34], p. 47.

inclusion in the world capitalist system. Moreover, it should be noted that the IMF, which of course implemented the norms of capitalist rationality in terms of debt, acted as a "promoter" of capitalism but internal decentralization of Yugoslavia as well12. In the meantime, Yugoslav economy became *de*regulated in significant elements losing chains between market and plan; the federation apparatus was losing its competencies and it could eventually manage only the monetary flows. It entered volatile world market with strong competitive pressures, but with subsequently drastically increased American interest rate, which resulted in the countries in debt being in undesirable situation [41], or with oil price shocks, Yugoslav economy was literally unprotected from contingent shocks of the world system. Some Yugoslav economists metaphorically called Yugoslav economy a *laissez-faire* system indicating to the absence of planning dimension, Rusinow [42] even used the term "*laissezfaire* socialism" ironically.13 During the 1980s, which were important because the world economy was also restructured and profound transformations were commonly associated with the offensive of Ronald Reagan and Margaret Thatcher (who demolished post-war Keynesian compromise), Yugoslav economy was strongly affected.14 Yugoslav economy with aspects of deregulation competed in the world market, its actors had to adopt the roles of capitalist subjects, and at the same time, Yugoslavia as a whole was left with and without *capitalist resilience* regarding the relationship between market and plan—we must not forget that the plan exists in capitalism as well (corporate planning), although it develops in a different way compared to socialism. Yugoslav communists wanted "endogenous planning"15 (as opposed to imposed exogenous planning), and in the 1970s and 1980s they even legally forced basic economic units to implement planning, but planning in Yugoslavia became less and less possible. Socialism projects planning as a control of economic flows; planning is a guarantee to reduce waste, and self-management promised virtuous cycles between plan and market—however, these projections increasingly failed.

#### **5. Banks as the institutionalization of "financial mode of capital"**

As we have already seen, there were various forms of financing economic activities in the 1960s and they were related to the profit motive, that is, to capitalist incentives, with the constant intensification of dependence on the world market. However, banks in Yugoslavia played a special role in the entire constellation in the 1960s. The background to the problem was the argument about adequate sources of financing because some Yugoslav actors, at the same time, proposed institutionalization of the capital market as in capitalism, which would imply a consistent market distribution of funds for investment purposes.

The capital market was often a subject of various discussions regarding the market socialism. Namely, the advocates of market socialism believe that it is possible to develop market but without transition into capitalism, that is, it is possible to affirm market *without* capitalism (unlike those critics who believe that market socialists are inherently "capitalist roaders" [45, 46]). The capital market

<sup>15</sup> For the concept of endogenous development, see [44].

<sup>12</sup> On this, see [40], p. 123, and [32], p. 169, 170.

<sup>13</sup> There were efforts later to solve these problems with a specific system of bargaining where the firm was no longer an operating unit but a "unit of bargaining," see [43].

<sup>14</sup> This paper does not focus on the breakup of Yugoslavia which can be interpreted in different ways. In Yugoslavia, the debt of the country is often exaggerated because it was not more than third of the total product (see [37]) which means that interest rate did not account for high percentage of the GDP.

can be rationalized in the system in which there is a synthesis of worker-control and decentralized market.

The capital market was not introduced in Yugoslav self-managing socialism. The argument for this was that, in that case, a self-manager would just be a pure "shareholder" of "social capital." At the same time, liberal economists discussed about that as being a symptom of a significant problem because the expansion of real income could not be converted into investments as it was converted into personal consumption and status of goods. This constellation encouraged some researchers to claim that Yugoslav self-management belonged to the sphere of "market socialism" [33], p. 169, due to the lack of capital market. The consumer market articulated personal consumption based on the logic of prices; there was a significant liberalization of the price mechanism in foreign trade as well, but the market mechanisms and allocative efficiency of the market were not applied in production factors. It is interesting that there is a belief even by the critical left that it was a mistake to give up on the introduction of the capital market [40], p. 291, because with appropriate infrastructure the engaged self-managers could rationalize the distribution of funding sources and control the use of resources exposed to irrational spending, that is, waste of resources. The result of this logic is that the capital market would enable rational use of social capital, which would finalize the idea regarding the targeted use of capital, but without transformation into capitalism. Conceptually, this argument emphasizes that it is completely wrong to think within the framework of a rigid dichotomy between plan and market, that is, the fact that there was no plan in Yugoslavia as coercive encompassing of economy does not mean that it represented market socialism.

However, coexistence between market and socialism has never been present without certain tensions. Actually, it was this context that the banks appeared in the 1960s as *exclusive* financiers and as financial entities in the absence of capital market. Banks, as financial institutions, did not have earlier a constitutive role in financing investments in Yugoslavia, they were simply a part of "bureaucratic planning": they did not prevent "irrational" allocation of resources, nor they could sanction "insolvencies." However, intensive liberalization in 1965 resulted in banks being analyzed from a new perspective. Actually, they were supposed to become an organic part of the "integrated self-management system" and achieve harmony between market and self-management.16

Commercial banks began to operate in accordance with capitalist norms, that is, they could borrow from the banks abroad and take deposits in foreign currency, thus being able to finance domestic companies and mediate between savings and investments [37], p. 399. The reform of the banks was intended to: (a) consequently complete the decentralization process that took place in Yugoslavia at various levels, (b) ensure price stability, and (c) prevent the supremacy of any institution that finances the Yugoslav self-managing economy. In other words, the territorial and functional organization of the banks was supposed to ensure the final triumph of self-management, that is, the victory of the working man who mastered the entire social reproduction. The self-managers actually gave a part of the "social capital" to the banks in order to rationalize the allocation of resources—that was the official argument.

However, if we try to understand the intention of financing investments and transfer of savings into investments as a "financial root" of self-management, then it can definitely be said that the reform failed. Banks in fact became superior to selfmanaging entities by becoming dominant managers over significant segments of

**203**

market basis for the housing construction. <sup>18</sup> It was the request of Diane Flaherty [50].

*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

investment increased to 28% [49].

Yugoslavia.

*anticipation.*

"social capital" allowing them to establish control over self-governing entities, even to "blackmail" self-governing actors. "Banking oligopoly" (known in the literature) became a relevant social phenomenon that soon became a political problem. This is proven by data: banks' funds in financing investments were about 7.0% in the period 1952–1958, but in the period 1964–1971, the same percentage was 30 to 41% [28], p. 99. Therefore, it should be added that "joint work" increasingly depended on financing based on foreign funds: in the period 1971–1975, foreign sources of

Banks were criticized many times and most of those criticisms were political and were addressed to monetary technocracy in banks. However, the mentioned technocracy (which has been criticized many times for being "alienated" from joint work) just implemented rationality norms in the newly developed situation. In fact, it seems as if, at this stage, the discourse of differentiation between capitalism and socialism is reversed. Namely, if we were to analyze the language of the debates of that time, then we would have the impression that the discussions were conducted in a discursive perspective or of the *Finance capital* of Rudolf Hilferding (1910), or in the perspective of later and present elements of "financialization." In fact, there were aspects of *both* retrospective and anticipatory forms of financial capital in

In Yugoslav socialism when self-criticism always had strong forms, certain influential actors (such as Kardelj who is already mentioned here) analyzed the penetration of the banking capital as a prelude to capitalism. So, it should not come as a surprise that the measures adopted in the 1960s were *homologous* to the economic-political measures realized during the transition in post-socialist countries in the 1990s (control of public finances for the purpose of curbing inflation, etc.) and other implemented measures of economic policy that *anticipated* later transition into capitalism (relying on IMF loans, encouraging of exporting-based economy, "restrictive monetarism," cutting of import and budget, or lessening of welfare provisions, etc.). In fact, the same measures can be compared with the orientation schemes of late transition to capitalism. *Capitalism was structurally present as* 

In 1965, a dissemination of certain market criteria (in the sphere of housing construction17 in the domain of service activities, etc.) was welcomed. Consequently, certain forms of social differentiation were intensified resulting in the destruction of egalitarianism as a socialist principle. The system made efforts to regulate income differences within the firm, i.e. the range of income, which provided certain forms of intra-firm egalitarianism, but the deregulated market created different forms of "rents" (which also implies different forms of inequality and exploitation).18 Self-management socialism raised its flag which wrote "reward according to work" (this form was later changed and became "reward according to the *results* of work" [40], p. 345, which implies different perspective), but the "system of rents" created such situations in which income did not depend on work but on the branch of economy in which a "self-managing worker" performed his activities (locational rent). There were forms of intra-firm interest, but the workers in certain firms

<sup>17</sup> Only certain market criteria because even in the 80s it was lamented that everyone should pay for housing investments; however, only small number of beneficiaries used them. Actually, there was still no

**6. Unemployment: elements of capitalist labor market?**

<sup>16</sup> For a detailed account, see [47]. See the analysis of Yugoslav experiment in the light of Currencyschool in banking here [48].

#### *Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

*Emerging Markets*

decentralized market.

can be rationalized in the system in which there is a synthesis of worker-control and

The capital market was not introduced in Yugoslav self-managing socialism. The argument for this was that, in that case, a self-manager would just be a pure "shareholder" of "social capital." At the same time, liberal economists discussed about that as being a symptom of a significant problem because the expansion of real income could not be converted into investments as it was converted into personal consumption and status of goods. This constellation encouraged some researchers to claim that Yugoslav self-management belonged to the sphere of "market socialism" [33], p. 169, due to the lack of capital market. The consumer market articulated personal consumption based on the logic of prices; there was a significant liberalization of the price mechanism in foreign trade as well, but the market mechanisms and allocative efficiency of the market were not applied in production factors. It is interesting that there is a belief even by the critical left that it was a mistake to give up on the introduction of the capital market [40], p. 291, because with appropriate infrastructure the engaged self-managers could rationalize the distribution of funding sources and control the use of resources exposed to irrational spending, that is, waste of resources. The result of this logic is that the capital market would enable rational use of social capital, which would finalize the idea regarding the targeted use of capital, but without transformation into capitalism. Conceptually, this argument emphasizes that it is completely wrong to think within the framework of a rigid dichotomy between plan and market, that is, the fact that there was no plan in Yugoslavia as coercive encompassing of

economy does not mean that it represented market socialism.

between market and self-management.16

However, coexistence between market and socialism has never been present without certain tensions. Actually, it was this context that the banks appeared in the 1960s as *exclusive* financiers and as financial entities in the absence of capital market. Banks, as financial institutions, did not have earlier a constitutive role in financing investments in Yugoslavia, they were simply a part of "bureaucratic planning": they did not prevent "irrational" allocation of resources, nor they could sanction "insolvencies." However, intensive liberalization in 1965 resulted in banks being analyzed from a new perspective. Actually, they were supposed to become an organic part of the "integrated self-management system" and achieve harmony

Commercial banks began to operate in accordance with capitalist norms, that is, they could borrow from the banks abroad and take deposits in foreign currency, thus being able to finance domestic companies and mediate between savings and investments [37], p. 399. The reform of the banks was intended to: (a) consequently complete the decentralization process that took place in Yugoslavia at various levels, (b) ensure price stability, and (c) prevent the supremacy of any institution that finances the Yugoslav self-managing economy. In other words, the territorial and functional organization of the banks was supposed to ensure the final triumph of self-management, that is, the victory of the working man who mastered the entire social reproduction. The self-managers actually gave a part of the "social capital" to the banks in order to rationalize the allocation of resources—that was the official

However, if we try to understand the intention of financing investments and transfer of savings into investments as a "financial root" of self-management, then it can definitely be said that the reform failed. Banks in fact became superior to selfmanaging entities by becoming dominant managers over significant segments of

<sup>16</sup> For a detailed account, see [47]. See the analysis of Yugoslav experiment in the light of Currency-

**202**

argument.

school in banking here [48].

"social capital" allowing them to establish control over self-governing entities, even to "blackmail" self-governing actors. "Banking oligopoly" (known in the literature) became a relevant social phenomenon that soon became a political problem. This is proven by data: banks' funds in financing investments were about 7.0% in the period 1952–1958, but in the period 1964–1971, the same percentage was 30 to 41% [28], p. 99. Therefore, it should be added that "joint work" increasingly depended on financing based on foreign funds: in the period 1971–1975, foreign sources of investment increased to 28% [49].

Banks were criticized many times and most of those criticisms were political and were addressed to monetary technocracy in banks. However, the mentioned technocracy (which has been criticized many times for being "alienated" from joint work) just implemented rationality norms in the newly developed situation. In fact, it seems as if, at this stage, the discourse of differentiation between capitalism and socialism is reversed. Namely, if we were to analyze the language of the debates of that time, then we would have the impression that the discussions were conducted in a discursive perspective or of the *Finance capital* of Rudolf Hilferding (1910), or in the perspective of later and present elements of "financialization." In fact, there were aspects of *both* retrospective and anticipatory forms of financial capital in Yugoslavia.

In Yugoslav socialism when self-criticism always had strong forms, certain influential actors (such as Kardelj who is already mentioned here) analyzed the penetration of the banking capital as a prelude to capitalism. So, it should not come as a surprise that the measures adopted in the 1960s were *homologous* to the economic-political measures realized during the transition in post-socialist countries in the 1990s (control of public finances for the purpose of curbing inflation, etc.) and other implemented measures of economic policy that *anticipated* later transition into capitalism (relying on IMF loans, encouraging of exporting-based economy, "restrictive monetarism," cutting of import and budget, or lessening of welfare provisions, etc.). In fact, the same measures can be compared with the orientation schemes of late transition to capitalism. *Capitalism was structurally present as anticipation.*

#### **6. Unemployment: elements of capitalist labor market?**

In 1965, a dissemination of certain market criteria (in the sphere of housing construction17 in the domain of service activities, etc.) was welcomed. Consequently, certain forms of social differentiation were intensified resulting in the destruction of egalitarianism as a socialist principle. The system made efforts to regulate income differences within the firm, i.e. the range of income, which provided certain forms of intra-firm egalitarianism, but the deregulated market created different forms of "rents" (which also implies different forms of inequality and exploitation).18 Self-management socialism raised its flag which wrote "reward according to work" (this form was later changed and became "reward according to the *results* of work" [40], p. 345, which implies different perspective), but the "system of rents" created such situations in which income did not depend on work but on the branch of economy in which a "self-managing worker" performed his activities (locational rent). There were forms of intra-firm interest, but the workers in certain firms

<sup>17</sup> Only certain market criteria because even in the 80s it was lamented that everyone should pay for housing investments; however, only small number of beneficiaries used them. Actually, there was still no market basis for the housing construction.

<sup>18</sup> It was the request of Diane Flaherty [50].

defended their own interests without respecting the interests of the working class as a whole. Relevant research indicated a tendency of agents of individual firms to behave as subjects of capitalist firms, namely, as agents of atomized firms with conflicting interests (this allows us to discuss about "fragmented" and "atomized" self-management). Although some research showed that "competitive pressures" in self-governing company was "relatively weak" [46], p. 314; [51], p. 243, in comparison to the capitalist firms, this did not imply expansion of solidarity in the form of socialist egalitarianism. *Solidarity did not overwrite atomized interests.* In capitalism, "choice in the small does not provide choice in the large"19, which means that there was a structural possibility for individual rationality to be converted into "collective irrationality" (Przeworski), or into collective myopia, and Yugoslav self-governing socialism underwent that change.

A special attention here should be paid to unemployment. It is certain that it was connected with the mentioned reform as it can be seen from data: the number of unemployed people in 1965 was 265.000 and in 1968 it was 315.000 [28], p. 105. Simultaneously, the unemployment rate increased dramatically in the underdeveloped countries. In Macedonia, which was part of Yugoslavia, the unemployment rate in 1952 was 6.3%, in 1965 it was 13.5% (with a tendency to increase), and in 1974 it was 19.7%, and in Slovenia, the unemployment rate in the same year was only 1.4% [37], p. 394.

However, it must be said that the problem of unemployment (which is not interesting for us due to its phenomenology but in the light of the presence of capitalism) has attracted constant attention since the beginning of the second Yugoslavia, that is, since 1965. The Communist Party was faced with the mentioned problem earlier so it came to the conclusion that it was impossible to avoid unemployment, that is, it concluded that there was an "inevitable"/functional unemployment rate in self-governing socialism as well. Even in the period before 1965, when the growth rate in the social sector (4%) was high, job could not be provided to a great number of people who came from rural to urban areas. After the mentioned reform in the social sector, the employment rate in the period increased at a rate of 0.8%, which was less than the growth rate of the labor force; moreover, if we compare the employment rate with the growth rate of the entire population, then we could see negative rate of −0.1% [28]. The fact causing the concern was that around 50% of unemployed people were young. If we start from the fact that the "inevitable" unemployment rate in capitalism at that time was 4–5%, then the relevant fact is that the same rate in Yugoslavia was around 7% [40], p. 294, or that in 1968, around 47% more people were looking for employment in comparison to the percentage before reform [54], which indicates to the collapse of employment policy. Statistics showed permanent, long-term unemployment, but research, at the same time, indicated to excessive unemployment in companies (contrary to Benjamin Ward's theory of self-governing firms, which suggested that the said type of firm was a labor-saving one).

The problem of unemployment affected the basic ideological matrices of selfgoverning socialism. We should not forget that its ideology was based on socialization which is based on work20, that is, on the fact that it can be integrated in social community only through the sphere of work. None can enjoy the benefits of socialism without work and a person may become *a*-social without work-biased subjectivity. The fact that aspects of labor market, which determine economic flows, also undermine socialist principle is very important here [56]. The Yugoslav communists

**205**

<sup>21</sup> On "associational power," see [58].

Yugoslavia.

**7. Conclusion**

*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

tions, the wage labor was present [60].

clearly projected the necessity of overcoming wage labor. Finally, as the important Polish economist Michal Kalecki [57] reminded us, unemployment is *per se* a political problem, that is, the employment rate always shows political configuration of power. Consequently, higher employment rate is homologous to the power and capacity of the working class. Political economy of Yugoslav unemployment was, in that sense, an adequate expression of general contradictions in terms of "real" self-governing socialism. Not only is unemployment an economic phenomenon but also *condensation* of the existing social relationships. At the same time, it shows the loss of "associational power"21, that is, disempowering of the working class which is always associated with the tendencies in the labor market. In addition, recurrent unemployment, loss of self-governing power, as published by the Yugoslav scientific literature, replicates capitalism in such a way that a "degraded worker" who loses the sense of commitment turns to infinite consumption and becomes a slave of "capitalist consumption mentality" [59]. When Yugoslav researchers tried to operationalize "alienation" (as a sense of "meaninglessness," "anomie," "social isolation") then they came to the conclusion that self-governing workers felt like wage earners; therefore, despite the desired projec-

If we understand self-management as a framework for "zero-sum game" between socialism and capitalism, then perpetuated unemployment can be viewed as a loss of socialist horizon. Due to unemployment, the Yugoslav management allowed workers to go abroad after some hesitation. In 1972, there were about million workers and their dependents in what was then West Germany; it represented 10% of the active population and "about 20 percent of those employed outside agriculture" [36], p. 199. Two-thirds of workers went abroad just after the 1965 reform [28], which shows the effects of the reform. This only completed the *extroverted* mode of existence of self-management socialism, that is, the structure of dependence from world-capitalism. The mentioned dependence was obvious in the situation when there was a stagnation in capitalism in the 70s and the Western European market was less and less absorbing labor from Yugoslavia. We also have to add that with perpetual unemployment the black market flourished which, together with aspects of dependence on the world labor market, inevitably indicated to the fact that there were constitutive dimensions of capitalism in self-governing

Yugoslav self-management promised idiosyncratic coordination between politicoeconomic actors. Self-government was determined based on the relations between the ruling communist party, capital, and labor. The goal of the self-management was to realize the dominance of labor over capital, but workers did not become "their own capitalists." Many economists have emphasized that self-management in Yugoslavia was introduced ("imposed") for noneconomic or ideological reasons. Simultaneously, there was hope that self-forcing mechanisms of self-management would create such a motivational structure of economic entities that would lead to adjustment of ideological and economic patterns. Strategists in the former Yugoslav order as well as many economists believed that the market, in the context of selfmanagement and social property, was a set of neutral mechanisms that can combine ideological teleology and economic rationality. Pro-market arguments presented by Yugoslav liberal economists did not differ from the same arguments made by theorists in capitalism (e.g. Hayek regarding the information superiority of the market.)

<sup>19</sup> See [52], p. 18, quoted by Przeworski [53].

<sup>20</sup> We use this concept here in terms of [55]. Elson [52] used the concept of socialization in different sense as a market in the public perspective.

#### *Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

*Emerging Markets*

socialism underwent that change.

only 1.4% [37], p. 394.

labor-saving one).

<sup>19</sup> See [52], p. 18, quoted by Przeworski [53].

sense as a market in the public perspective.

defended their own interests without respecting the interests of the working class as a whole. Relevant research indicated a tendency of agents of individual firms to behave as subjects of capitalist firms, namely, as agents of atomized firms with conflicting interests (this allows us to discuss about "fragmented" and "atomized" self-management). Although some research showed that "competitive pressures" in self-governing company was "relatively weak" [46], p. 314; [51], p. 243, in comparison to the capitalist firms, this did not imply expansion of solidarity in the form of socialist egalitarianism. *Solidarity did not overwrite atomized interests.* In capitalism, "choice in the small does not provide choice in the large"19, which means that there was a structural possibility for individual rationality to be converted into "collective irrationality" (Przeworski), or into collective myopia, and Yugoslav self-governing

A special attention here should be paid to unemployment. It is certain that it was connected with the mentioned reform as it can be seen from data: the number of unemployed people in 1965 was 265.000 and in 1968 it was 315.000 [28], p. 105. Simultaneously, the unemployment rate increased dramatically in the underdeveloped countries. In Macedonia, which was part of Yugoslavia, the unemployment rate in 1952 was 6.3%, in 1965 it was 13.5% (with a tendency to increase), and in 1974 it was 19.7%, and in Slovenia, the unemployment rate in the same year was

However, it must be said that the problem of unemployment (which is not interesting for us due to its phenomenology but in the light of the presence of capitalism) has attracted constant attention since the beginning of the second Yugoslavia, that is, since 1965. The Communist Party was faced with the mentioned problem earlier so it came to the conclusion that it was impossible to avoid unemployment, that is, it concluded that there was an "inevitable"/functional unemployment rate in self-governing socialism as well. Even in the period before 1965, when the growth rate in the social sector (4%) was high, job could not be provided to a great number of people who came from rural to urban areas. After the mentioned reform in the social sector, the employment rate in the period increased at a rate of 0.8%, which was less than the growth rate of the labor force; moreover, if we compare the employment rate with the growth rate of the entire population, then we could see negative rate of −0.1% [28]. The fact causing the concern was that around 50% of unemployed people were young. If we start from the fact that the "inevitable" unemployment rate in capitalism at that time was 4–5%, then the relevant fact is that the same rate in Yugoslavia was around 7% [40], p. 294, or that in 1968, around 47% more people were looking for employment in comparison to the percentage before reform [54], which indicates to the collapse of employment policy. Statistics showed permanent, long-term unemployment, but research, at the same time, indicated to excessive unemployment in companies (contrary to Benjamin Ward's theory of self-governing firms, which suggested that the said type of firm was a

The problem of unemployment affected the basic ideological matrices of selfgoverning socialism. We should not forget that its ideology was based on socialization which is based on work20, that is, on the fact that it can be integrated in social community only through the sphere of work. None can enjoy the benefits of socialism without work and a person may become *a*-social without work-biased subjectivity. The fact that aspects of labor market, which determine economic flows, also undermine socialist principle is very important here [56]. The Yugoslav communists

<sup>20</sup> We use this concept here in terms of [55]. Elson [52] used the concept of socialization in different

**204**

clearly projected the necessity of overcoming wage labor. Finally, as the important Polish economist Michal Kalecki [57] reminded us, unemployment is *per se* a political problem, that is, the employment rate always shows political configuration of power. Consequently, higher employment rate is homologous to the power and capacity of the working class. Political economy of Yugoslav unemployment was, in that sense, an adequate expression of general contradictions in terms of "real" self-governing socialism. Not only is unemployment an economic phenomenon but also *condensation* of the existing social relationships. At the same time, it shows the loss of "associational power"21, that is, disempowering of the working class which is always associated with the tendencies in the labor market. In addition, recurrent unemployment, loss of self-governing power, as published by the Yugoslav scientific literature, replicates capitalism in such a way that a "degraded worker" who loses the sense of commitment turns to infinite consumption and becomes a slave of "capitalist consumption mentality" [59]. When Yugoslav researchers tried to operationalize "alienation" (as a sense of "meaninglessness," "anomie," "social isolation") then they came to the conclusion that self-governing workers felt like wage earners; therefore, despite the desired projections, the wage labor was present [60].

If we understand self-management as a framework for "zero-sum game" between socialism and capitalism, then perpetuated unemployment can be viewed as a loss of socialist horizon. Due to unemployment, the Yugoslav management allowed workers to go abroad after some hesitation. In 1972, there were about million workers and their dependents in what was then West Germany; it represented 10% of the active population and "about 20 percent of those employed outside agriculture" [36], p. 199. Two-thirds of workers went abroad just after the 1965 reform [28], which shows the effects of the reform. This only completed the *extroverted* mode of existence of self-management socialism, that is, the structure of dependence from world-capitalism. The mentioned dependence was obvious in the situation when there was a stagnation in capitalism in the 70s and the Western European market was less and less absorbing labor from Yugoslavia. We also have to add that with perpetual unemployment the black market flourished which, together with aspects of dependence on the world labor market, inevitably indicated to the fact that there were constitutive dimensions of capitalism in self-governing Yugoslavia.

#### **7. Conclusion**

Yugoslav self-management promised idiosyncratic coordination between politicoeconomic actors. Self-government was determined based on the relations between the ruling communist party, capital, and labor. The goal of the self-management was to realize the dominance of labor over capital, but workers did not become "their own capitalists." Many economists have emphasized that self-management in Yugoslavia was introduced ("imposed") for noneconomic or ideological reasons. Simultaneously, there was hope that self-forcing mechanisms of self-management would create such a motivational structure of economic entities that would lead to adjustment of ideological and economic patterns. Strategists in the former Yugoslav order as well as many economists believed that the market, in the context of selfmanagement and social property, was a set of neutral mechanisms that can combine ideological teleology and economic rationality. Pro-market arguments presented by Yugoslav liberal economists did not differ from the same arguments made by theorists in capitalism (e.g. Hayek regarding the information superiority of the market.)

<sup>21</sup> On "associational power," see [58].

There is even a certain analogy with state socialism which aim was to govern the market; some economists thought that there was a "socialist commodity production." *Liberal economists wished self-management to be embedded in the mechanism of the market as a guarantee of different types of freedom. Communists, however, expected the market to be embedded in self-management.* However, if we take a look at the collapse of self-management in Yugoslavia, as well as the "collective irrationality" of Yugoslav socialism, then it can be said that the forms of markets that existed only prepared the way for capitalism, that is, that self-managements in Yugoslavia were "capitalist roaders." This will not after all provide general answer to the question already mentioned here as to whether market socialism is possible at all; it will only shed light on the fact that the empirical forms of the market in Yugoslavia did not prevent later capitalism. Self-management was constituted as a front against state socialism in Soviet Union and capitalism, as well (it was the so-called "third road"); *consequently, the failures of self-management marked triumph of capitalism.*

Yugoslav strategists did not think that capitalism was infeasible; on the contrary, they often mentioned "capital-relationship" as an existing horizon that should be overcome, but which returned to the self-governing scene as an internal danger. Capital was, in negative context, often mentioned in various forms, such as "state capital" (that is not "socially owned"), "trade and bank capital," and sometimes even the phrase "state capitalism" was mentioned. We have to interpret this as forms of the presence of capitalism in self-management; it cannot be otherwise. Self-governing Yugoslavia was always a strong candidate for the "bearer" of the phenomenon of capitalism due to its market orientation, which had strong deregulatory aspects. We could say that capitalism existed in self-governing socialism as a *futur antérieur.*

#### **Author details**

Alpar Losoncz1 , Andrea Ivanišević1 and Mark Losoncz<sup>2</sup> \*

1 Faculty of Technics, University of Novi Sad , Novi Sad, Serbia

2 Institute for Philosophy and Social Theory, University of Belgrade, Serbia

\*Address all correspondence to: losonczmark@gmail.com

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**207**

*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

socialisms, and the advent of

2012;(112):9-42

1988;**10**(3):287-313

neoliberalism. Radical History Review.

[13] Milton F. Neo-liberalism and its prospects. Farmand. 1951;**17**:89-93

[15] Autogestion, L'Encyclopédie internationale (without editors). 2016. Available from: https://www.syllepse. net/syllepse\_images/table-des-matie- res.pdf [Accessed: 27 July 2020]

[16] Maksimović I. Osnove i razvoj socijalističkog samoupravnog sistema privređivanja (Basis and development

[17] Horvat B. Politička ekonomija socijalizma (Political Economy of Socialism). Zagreb: Globus; 1984

[18] Bernard S. The Economics of

[19] Horvat B. An essay on Yugoslav Society. White Plains, NY: International

Arts and Sciences Press; 1969

[20] Horvat. Poduzetništvo s društvenim kapitalom

Naše teme. 1989;**11**:2830

[21] Bajt A. Društvena svojinakolektivna i individualna (Social ownership-collective and individual).

Gledišta. 1968;**XIX**:531-544

[22] Bajt A. Social Ownership –

Collective and Individual. In: Horvat B,

MIT Press; 1997

Contracts. Cambridge, MA and London:

(Enterpreneurship with social capital).

Politička ekonomija (Political Economy). Beograd: Naučna knjiga; 1976. p. 623

of self-management system of economising). In: Jurin S, editor.

[14] Avner B-N. The life-cycle of workerowned firms in market economies: A theoretical analysis. Journal of Economic Behavior and Organization.

[1] Germain E. First Balance Sheet of the Yugoslav Affair June 28, 1948–June 28, 1951. Available from: https://www. marxists.org/archive/mandel/1951/07/ yugoslav.htm [Accessed: 22 July 2020]

[2] van der Linden M. Western Marxism and the Soviet Union A Survey of Critical Theories and Debates, Since 1917. Boston, Leiden: Brill; 2007. p. 209

[3] Sweezy PM. Postrevolutionary-Society. New York, London: Monthly

[4] Lohoff E. Der dritte Weg in den Bürgerkrieg – Jugoslawien und das Ende der nachholenden Modernisierung. Bad Honeff: Horlemann-Verlag; 1996. p. 47

[5] Block FL. Capitalism: The Future of an Illusion. Oakland, CA: University of

[7] Milios J. The Origins of Capitalism as Social System. London: Routledge;

Jugoslaviji 1950-1976 (Self-management in Yugoslavia 1950-1976). Beograd: Privredni pregled; 1976. p. 24

Review Press; 1980

California Press; 2018

2018. p. 4

[6] Vrousalis N. Exploitation as domination. Southern Journal of Philosophy. 2017;**54**:527-538

[8] Kardelj E. Samoupravljanje u

Harmondsworth: Penguin Books;

[10] Jossa B. On producer cooperatives and socialism. International Critical

[11] Bockman J. Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism. Stanford: Stanford

[12] Bockman J. The long road to 1989, neoclassical economics, alternative

[9] Karl M. Capital. Vol. 3.

(1894); 1981. pp. 571-572

Thought. 2014;**4**(3):289-303

University Press; 2011

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*Self-Government in Yugoslavia: The Path to Capitalism? DOI: http://dx.doi.org/10.5772/intechopen.93673*

#### **References**

*Emerging Markets*

**206**

**Author details**

*futur antérieur.*

Alpar Losoncz1

, Andrea Ivanišević1

provided the original work is properly cited.

*self-management marked triumph of capitalism.*

1 Faculty of Technics, University of Novi Sad , Novi Sad, Serbia

\*Address all correspondence to: losonczmark@gmail.com

2 Institute for Philosophy and Social Theory, University of Belgrade, Serbia

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

There is even a certain analogy with state socialism which aim was to govern the market; some economists thought that there was a "socialist commodity production." *Liberal economists wished self-management to be embedded in the mechanism of the market as a guarantee of different types of freedom. Communists, however, expected the market to be embedded in self-management.* However, if we take a look at the collapse of self-management in Yugoslavia, as well as the "collective irrationality" of Yugoslav socialism, then it can be said that the forms of markets that existed only prepared the way for capitalism, that is, that self-managements in Yugoslavia were "capitalist roaders." This will not after all provide general answer to the question already mentioned here as to whether market socialism is possible at all; it will only shed light on the fact that the empirical forms of the market in Yugoslavia did not prevent later capitalism. Self-management was constituted as a front against state socialism in Soviet Union and capitalism, as well (it was the so-called "third road"); *consequently, the failures of* 

Yugoslav strategists did not think that capitalism was infeasible; on the contrary, they often mentioned "capital-relationship" as an existing horizon that should be overcome, but which returned to the self-governing scene as an internal danger. Capital was, in negative context, often mentioned in various forms, such as "state capital" (that is not "socially owned"), "trade and bank capital," and sometimes even the phrase "state capitalism" was mentioned. We have to interpret this as forms of the presence of capitalism in self-management; it cannot be otherwise. Self-governing Yugoslavia was always a strong candidate for the "bearer" of the phenomenon of capitalism due to its market orientation, which had strong deregulatory aspects. We could say that capitalism existed in self-governing socialism as a

and Mark Losoncz<sup>2</sup>

\*

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[7] Milios J. The Origins of Capitalism as Social System. London: Routledge; 2018. p. 4

[8] Kardelj E. Samoupravljanje u Jugoslaviji 1950-1976 (Self-management in Yugoslavia 1950-1976). Beograd: Privredni pregled; 1976. p. 24

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## *Edited by Vito Bobek and Chee-Heong Quah*

The rapid growth and development of emerging economies offer both opportunities and threats for international businesses. Understanding the economic development of emerging markets, combined with a knowledge of the increasingly complex international business market, enables better exploitation of opportunities in increasingly competitive world markets. The BRIC countries, the most prominent emerging markets, have long been discovered by foreign firms due to their enormous potential for investment opportunities. This book offers a comprehensive look at emerging markets, especially as they integrate with the global economy. It offers a conceptual framework to analyze emerging markets from multiple perspectives, including those of indigenous entrepreneurs struggling to overcome constraints to build world-class businesses, multinationals from developed countries tapping into emerging markets for their next growth spurt, and domestic and foreign investors seeking to profit from investment opportunities in emerging markets.

Published in London, UK © 2021 IntechOpen © Evgenii Mitroshin / iStock

Emerging Markets

Emerging Markets

*Edited by Vito Bobek and Chee-Heong Quah*