Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan [1 ed.] 9783836611695, 9783836661690

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Dusko Lukac

Key Success Factors for Foreign Direct Investment (FDI)

Copyright © 2008. Diplomica Verlag. All rights reserved.

The Case of FDI in Western Balkan

Diplom.de Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Dusko Lukac Key Success Factors for Foreign Direct Investment (FDI) The Case of FDI in Western Balkan ISBN: 978-3-8366-1169-5 Druck: Diplomica® Verlag GmbH, Hamburg, 2008

Copyright © 2008. Diplomica Verlag. All rights reserved.

Dieses Werk ist urheberrechtlich geschützt. Die dadurch begründeten Rechte, insbesondere die der Übersetzung, des Nachdrucks, des Vortrags, der Entnahme von Abbildungen und Tabellen, der Funksendung, der Mikroverfilmung oder der Vervielfältigung auf anderen Wegen und der Speicherung in Datenverarbeitungsanlagen, bleiben, auch bei nur auszugsweiser Verwertung, vorbehalten. Eine Vervielfältigung dieses Werkes oder von Teilen dieses Werkes ist auch im Einzelfall nur in den Grenzen der gesetzlichen Bestimmungen des Urheberrechtsgesetzes der Bundesrepublik Deutschland in der jeweils geltenden Fassung zulässig. Sie ist grundsätzlich vergütungspflichtig. Zuwiderhandlungen unterliegen den Strafbestimmungen des Urheberrechtes. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten wären und daher von jedermann benutzt werden dürften. Die Informationen in diesem Werk wurden mit Sorgfalt erarbeitet. Dennoch können Fehler nicht vollständig ausgeschlossen werden und der Verlag, die Autoren oder Übersetzer übernehmen keine juristische Verantwortung oder irgendeine Haftung für evtl. verbliebene fehlerhafte Angaben und deren Folgen. © Diplomica Verlag GmbH http://www.diplomica.de, Hamburg 2008 Printed in Germany

Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Table of contents:

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1 2 3

Executive Summary ............................................................................................ 3 Acknowledgements ............................................................................................. 5 Introduction.......................................................................................................... 7 3.1 Occupational training as successful business idea ........................................ 9 4 Strategic Issues in RFH as non-for-profit company ............................................11 4.1 Strategy evaluation in non-for-profit organisation..........................................13 5 Why companies go international? ......................................................................17 5.1 Which foreign market to enter and on what scale? .......................................19 5.2 The choice of Bosnian market for foreign expansion ....................................21 5.3 Why is FDI the best mode of entry a foreign market for RFH?......................23 5.4 FDI by acquisition as successes factor for RFH in Bosnia ............................29 6 Economic overview, Educational Sector and Investment Climate in Bosnia and Herzegovina - Market blue sheet .................................................................33 6.1 Current political background and economic situation overview .....................33 6.2 Critical discussion of political situation and structure ....................................34 6.3 Critical discussion of macroeconomic situation .............................................35 6.4 Educational sector – Vocational Training and Adult Training ........................40 7 Legal basic conditions ........................................................................................47 7.1 Capital Investment Law .................................................................................47 7.2 Corporation Law / Legal forms of organizations ............................................48 7.3 Tax - / Fiscal Law ..........................................................................................50 7.4 Taxation incentives in Federation of Bosnia and Herzegovina .....................52 7.5 Taxation incentives in Republika Srpska ......................................................53 7.6 Sales tax .......................................................................................................53 7.7 Labour legislation / Social insurance regulations ..........................................54 7.8 Employment of foreigners .............................................................................55 7.9 Social Security Law.......................................................................................55 7.10 Foreign Exchange regulations ......................................................................56 7.11 Legal conditions in Republika Srpska versus legal conditions in Federation .....................................................................................................57 7.12 Business related indicators overview ............................................................57 8 Key successes factors for FDI ............................................................................61 8.1 Analysis of the competitive industry environment in Bosnia ..........................63 8.2 Five Forces analysis of educational and vocational training sector in Bosnia and Herzegovina ...............................................................................65 8.3 What RFH can do, to develop sustainable competitive advantage? .............67 8.4 Failure factors in the foreign business ..........................................................69 9 Determination of suitable business location in Bosnia and Herzegovina as key success factor for RFH ................................................................................71 9.1 Analysis and specification of the business location.......................................73 10 Prudential financing policy as key success factor...............................................77 10.1 Capital requirements and profitability ............................................................77 10.2 Profitably work – what does this mean? ........................................................78 10.3 Approach for the determination of the turnover .............................................80 10.4 How can RFH raise the turnover and save the costs? ..................................81 10.5 Financing of business – Total capital requirements for FDI in 2006..............82 10.6 Financing scheme .........................................................................................84 1

Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

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11 Controlling and forecast calculations as key success factor ...............................85 11.1 Bar graph projected turnover overview 2006 - 2009 .....................................90 11.2 Projected ROI and ROCE on the end of the year .........................................92 11.3 Liquidity projection 2006 -2009 .....................................................................94 11.4 How can RFH make efficient liquidity policy?................................................95 12 Legal issues and choice of appropriate legal structure of the company as key success factor ....................................................................................................97 12.1 Specifics regarding legal form for subsidiaries founded by German nonfor- profit organizations .................................................................................97 12.2 Arbitration board for disputes in Bosnia ........................................................99 13 Appropriate marketing strategy as key success factor .....................................101 13.1 How can RFH fulfil the wishes of future customers? ...................................101 13.2 How can RFH win customers and build customer retention? ......................103 13.3 Ways to successful customer retention .......................................................105 14 Suitable pricing for services or products as key successes factor ....................107 14.1 Basic price strategy approaches .................................................................108 14.2 Possible mistakes with the pricing ..............................................................110 14.3 An example of the service and trade price calculation for RFH ..................111 14.4 Price as key success factor for RFH ...........................................................113 15 Organisation, HR and Control of foreign business as key success factor ........115 15.1 Organization of the subsidiary of the RFH in Bosnia...................................115 15.2 HR management and control of business in Bosnia ...................................116 16 Foreign business coverage and hedging as key success factor.......................121 16.1 Assistance programmes .............................................................................122 16.2 Public Private Partnership (PPP) ................................................................123 17 Conclusion and Recommendation ....................................................................125 18 Outlook .............................................................................................................133 19 References .......................................................................................................135 19.1 Bibliography and Articles: ...........................................................................135 19.2 Publicly and web available sources: ...........................................................146 19.3 Statistics, Economic and Business Indicators - Sources.............................151 19.4 Education in Bosnia and Herzegovina - Sources ........................................152

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

1 Executive Summary International expansion present new opportunities for companies to generate extra value added and have become a vital aspect of corporate strategy development and implementation. Nowadays most European Foreign Direct Investments (FDI) within European continent outflows towards Eastern Europe in the countries like Hungary or Czech Republic. Each nation-state will have some competitive advantages. Why should non-forprofit company like RFH choose to enter just Bosnian market, the country which was destroyed by the war a few years ago and where progress is still needed in many areas and not some of markets mentioned above? Which special strategic and legal issues non-forprofit organisation must consider in such case? Why choices of investment locations, mode of entry and initial pricing strategy have critical impact on value added to the firm's competitive advantage? This report will give answers on these and further arising questions. It concerns Information technological (IT)-Centre of one German non-for-profit organisation (RFH), and its attempts to benefit of global capital while diminishing the negative effects of economic swings in the home country. On studying and analysis of the literature relevant and reliable sources of information, to invest in Bosnia and Herzegovina in the vocational training and educational sector is nowadays moreover absolutely a recommendable commercial decision. All economic indicators argue for it. The analysis determinate four main reasons for it: -

Improvement of vocational Training and Adult Training sector is one of the emergent sector priorities settled in governmental Poverty Reduction Strategy Paper and European Commission “Feasibility Study” as a precondition for cooperation between EU and Bosnia.

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Local competition in the area of Vocational and Adult Training is extremely weak

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(currently there are existing only 2 private companies similarly to RFH). -

Bosnian market offers enough potential customers which may use Vocational and Adult Training offers. These customers are local industry as well as students, scholars and unemployed people (Rate of unemployment in Bosnia amounts to 43%).

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A row of investment incentives and financial incentives are offered by European Union (EU), Bosnian government and Germany they reduce risks of FDI in Bosnia.

The idea of the expansion is interesting for every company, but, nevertheless, it requires detailed analysis of foreign market. This report includes determination and analysis of basic

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

FDI conditions, competition analysis and development of key success factors for FDI in educational sector in Bosnia. Furthermore, the analysis in this work determines how the RFH is affected by local business conditions and what are its strengths and weaknesses on the Bosnian market. The following major points can be ascertained from the report: -

Analyses have shown that FDI is as the best mode of entry for company which offers separable services on the Bosnian market, in educational sector.

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Foreign firm performance is determined not only by firm-specific characteristics, but also by location. Investigations have indicated that Banja Luka compared with Sarajevo has more favourable investment conditions with regard to expenses and legislation within the single entities in Bosnia.

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Ltd. is the most appropriate company legal form for RFH subsidy in Bosnia.

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Pricing and product differentiation combined with response to local needs are the source for competitive advantage.

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Most favourable source for financing of international business by credit is the offer by KFW (German Loan Corporation for reconstruction).

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Recommended assistance sources for RFH are offers by the German government, the so-called PPP (Public Private Partnership) and offer by EU, so called CARDSProgram.

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Combination of incentive systems and control of subsidiary in the form of output control is most appropriate initial way for RFH to conduct the business abroad. RFH benefits of choose of international division structure.

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-

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

2 Acknowledgements

I should like to thank:

•

My tutor Prof. Dr. Hans Wilhelm Müller for his supervision, for his effort and advice during the time that I was planning, developing and writing this report

•

The Manager of IT – Centrum of the RFH, Prof. Dr. Dieter Hein for his support and who allowed me time to discuss my report with him and provided me with access to necessary records

•

My family, especially my wife Ioana, my mother Elza and father Mirko for all the help

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and support they have provided during my studies

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

3 Introduction The aim of the work is to investigate and examine the successes factors and conditions for Foreign Direct Investment (FDI) in the educational sector, in South Eastern Europe for Western European enterprises, with country focus on Bosnia and Herzegovina. This work deals with considerations and intention of Information technological (IT)-Centre of one non for profit company (RFH) to set up the branch in Bosnia, which should offer occupational and vocational training courses. This FDI activity is considered to be used as possible alternative way of funding. RFH is non-for-profit organisation, private university in free sponsorship. The responsible body RFH (Incorporated Society) is responsible for the establishment, the maintenance and the organization of the university (RFH, 2005). University is sponsored financially partly by the state. RFH works with long-standing experience in the area of the IT-services as well as the continuing education and vocational training in different areas, inter alia the areas of usage of the topical industrial software applications. RFH provides among other things certificate-linked courses as for example Cisco Network Academy courses (certificated continuing education in the IT area), Catia V5 courses (construction software for the automobile industry), E-Plan courses (Certificated continuing education in the area of computer aided engineering) etc.. For instance, Eplan application is used for all computerassisted electrical engineering tasks, both prior to and during the development of a product and is most-used industrial engineering software globally (Eplan, 2005). The kinds of courses which are provided by IT-Centre of RFH in Germany are very popular at the home market, what doesn’t justify assumption at all that these will be accepted on foreign market. Entering new markets with new or existing products is fraught with challenges (Koudal, 2005). Thus precisely investigations of foreign market are necessary.

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Bosnia and Herzegovina have got out a little from the vantage point in the euphoria around the EU Eastern extension (Bfai, 2004). It led to interesting development of business conditions in certain areas. While some of the sectors like Training and Adult Training sectors are underdeveloped in Bosnia (PRSP, 2004), in the same time developing sectors, like local automotive and IT industry has a huge demand for skilled labour, products and services. Due to lack of suitable know-how on the local-market a local Bosnian companies often concluding the contracts and place an order to Croatian, Serbian or even German companies (Lorenz, 2003). Improvement of educational sector in Bosnia, especially vocational Training and Adult Training sector is one of the emergent sector priorities settled

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

in Bosnian governmental Poverty Reduction Strategy Paper and European Commission “Feasibility Study” (IBF International Consulting and the British Council, 2004) as one of the steps “to be taken by Bosnia and Herzegovina to prepare for a Feasibility Study on opening Negotiations on a Stabilisation and Association Agreement“ (Commission of the European Communities , Report from the Commission to Council , 2003). Vocational education in Bosnia must enable its recipients to use the skills they have acquired at school and to swiftly enter the labour market. It is of “utmost importance to ensure that vocational education and training correspond with labour market needs” (OSCE, 2005). My research will rely on resource-based theory and partly on eclectic theory. At the beginning I’ll investigate and theoretically analyse three basic decisions that firm contemplating foreign expansion should make (Lynch, 2003): which markets to enter, when to enter those markets and on what scale. In this work I’ll also deal with the question of choosing of the most suitable expanding strategy, entry modes as well with the main strategic issues in non-profit organisations. I’ll evaluate theory and current trends in coordinating of the subsidiary in Western Balkan. Specific focus will be given to determination of organizational structure. As stated by Campbel, Goold and Alexander (1995), if there is a fit between parent and its business, the parent is likely to create the value. In this work I’ll asses fit between RFH (corporate parent) and its business (subsidiary in Bosnia). This can help to identify opportunities of parenting, particularly if e.g. business-unit mangers in subsidiary abroad lack the time and skills to become expert in engineering and technical issues, parent company (an expert) can create values by helping the business unit raise technical standards. I’ll analyse furthermore, all aspects they have impact on choice of business location, because determination of business location (Bishop, Gripaios and Gillian Bristow, 2003) and choice of new location supports not only the company’s survival, but also its ability to continue to grow (Hsing, 2003). Location also influences development of customer retention strategy (Laurino and Lindel, 2004).

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Identification of appropriate means of control and coordination (Smith, 2002) as well as development of suitable financing policy and enabling policies (Pastakia, 2002) are further aspects they contribute to creation of competitive advantage. In this work I’ll analyse them and will give according to analysis certain recommendations to RFH. I’ll develop framework with basics of marketing and pricing policy, specially tailored for RFH international business in Bosnia. I’ll also deal with legal issues concerning international and national business (e.g. legal specialties concerning non-for-profit organizations), considering questions like choice of most appropriate legal form for subsidiary in Bosnia or choice of legal business

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

representatives. Furthermore, it will be necessary to design the framework of decisionmaking responsibilities within the organisational structure and to establish integrating mechanism in order to coordinate the activities of the subunit in Bosnia. In addition I’ll develop forecasting scheme in order to develop basics for financial policy and financial controlling of subsidiary on the Bosnian market. At least, alternatives for reduction of risks of international expansion will be illustrated as well as possibilities for foreign business coverage. In all mentioned issues concerning key success factors I’ll refer to possible failure factors and sources of failures occurring in foreign business. In order to make idea of this work in short time feasible I will to descry necessary steps for successful FDI in Bosnia and Herzegovina, and give recommendations what are the main issues and problems to look up. To do that I’ll critically review existing theoretical and practical approaches and apply them. The work should be also a general example for the company concerning the most important issues to look up, in the case of international expansion in South-Eastern Europe. This Management Reports is developed according to the guidelines UEL (Cocking, 2004) which contains predetermined structure and description how Management Report (MR) is commonly to be written. I used also further reading about how to write MR, especially the book Research Methods for Business Students from Saunders, Lewis and Thorhill (2003).

3.1 Occupational training as successful business idea The globalisation of the markets concerns not only the industries produce the tangible products (Hodgetts and Rugman, 2003) as for example automobile industry or textile industry, which mostly move its production plants because of good wage conditions, in the cheap wage countries. More and more service suppliers like banks ,assurances, IT companies or educational institutions see a chance to achieve superior financial position through capture of the new finance markets (Martin, 2004) by e.g. the establishment of new subsidies in the cheap wage and poor countries in Eastern- or South Eastern-Europe, which above all make them available very good manpower (Bfai, 2003). A job can be seen as the Copyright © 2008. Diplomica Verlag. All rights reserved.

start on the road out of poverty (Kemp, 2005), and the questions how one can get a good workplace or maintain it, are arising not only from people in the developed economic nations, but particularly also in the countries affected by the globalisation. Most people do need to acquire new skills if they want to remain competitive, or even employable, in the workplace (Hubbard, 2005). Computer training goals and software skills of employees should be updated and reviewed on a regular basis (Welch, 1993). The times of the socialist system in many countries, as for example in the East-European or Southeast-European countries, where almost every one had established post, are over. The

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

fall of Communism is sharply boosting global competition and creating new markets (Manzella, 2004). The people (employers and employees) have realized that they are individually responsible for themselves and they career advancement and less the state. Hence, many people try to reach the career purposes by continuing education (SuarezOrozco and Baolian Qin-Hilliard, 2005). As stated by Manzella (2004) unemployment is lower among workers with higher levels of education, thus the companies they offer occupational training courses gain governmental support as a part of unemployment reduction strategy as well as a big customer base (especially in countries with high level of unemployment like Bosnia) which allows educational institutions to achieve superior financial results through internationalisation of they curriculum (Wynne and Filante, 2004). An essential and global need of people for constantly education in order to achieve the career purposes, gives reason to educational institutions to set up subsidiaries in emerging markets and to float a business. Companies look to hire the best and the brightest and then give them the experience and education they need to advance through the ranks or to educate existing employees and retain its talent. Along with irreplaceable on-the-job experience, many experts have identified advanced education as an important way to improve skills and gain knowledge and exposure to new ideas (Fenton, 2004). Bommer (2004) explains that training is one of the most crucial aspects of the firm’s strategy. As stated by Zorn (2004) entrepreneurial capital (composed of human and social capital) is the most important factor for entrepreneurial success. Companies’ productivity hinges on employees skills development (Young, 1999). Training is an excellent tool to recruit the best and brightest employees and to retain them. Furthermore, it ties directly into firm’s strategy by helping employees increase productivity and develop personally and professionally into future leaders of the firm. According to research by Zwick (2005) external courses (in special educational institutions) have the largest positive impact on productivity while self-induced learning, participation at seminars and talks and job

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rotation do not enhance productivity and training on the job has a negative productivity impact. Most employers consider their employees an important investment both to accomplish the organization's current goals and to have the right people in place for the future (Rasmussen, 2005) and by that reason they (financially) support they education. Many of the courses that RFH offers in Germany are visited very well. It appears that occupational training and providing of certified courses is a successful business idea, which can be conveyed to other markets, especially to emerging countries. From this point of view potential customers, which are willing to educate themselves in order to achieve they carrier goals will be likely to find also on the foreign market.

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

4 Strategic Issues in RFH as non-for-profit company “Twenty years ago, management was a dirty word for those involved in non profit organizations. It meant business, and non profits prided themselves on being free of the taint of commercialism and above such sordid considerations as the bottom line. Now most of them have learned that nonprofits need management even more than business does, precisely because they lack the discipline of the bottom line” P.F. Drucker (1989) in Harvard Business Review, as cited by Speckbacher (2003), p. 267

According to Peter F. Drucker (1989), as one of the world's most influential writers on management and organization, management is a crucial and vital component to all organizations in society. Non-for-profit organisation gain benefits inter alia of effective marketing management and public relations in communities and in the same time they are obliged to maintain public trust (Clarke, 2005). The sole reason that non-for-profit organisations account for average 1 in every 20 jobs in nations throughout the world (Economist, 1998) affirms that knowledge of non-profit organisations is important. Typically non-profit organisations can be both private and public organisations (Wheelen, 2004), and are usually founded for reasons other than commercial considerations as for example welfare, research or education or wealth-care. The non-for-profit sector is important for two reasons (Lynch, 2003). On the one side from society perspective because society desires goods and services that profit-making companies cannot or will not provide as for example paved roads, museums, schools etc. On the other side from non-for-profit organisational perspective, because private non-profit organisations tends to receive benefits from society that private profit-making firm cannot obtain, like preferred tax status to non-stock corporations, or exemptions from various other states, local and federal taxies. In Germany, for instance, non-for-profit associations are released from the sales tax and corporation tax because they serve the general good. But advanced governmental considerations like to Copyright © 2008. Diplomica Verlag. All rights reserved.

allow nonprofits groups to sell tax-exempt bonds to purchase land and then use revenue from selling like in USA (Enochs, 2005) do not existing in Germany. The German (Bürgerliches Gesetzbuch) civil law code (BGB = Civil Code) makes a distinction between economic and to the not economic (ideal) association. The objective is determining. For example RFH as not economic (ideal) association and private non-for profit organization, is released from:

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

- The corporation tax - §5 paragraph 1 No. 9 KStG (corporation tax law) - The trade tax - §3 No. 6 GewStG (trade tax law), - The property tax - §3 paragraph 1 No. 12 VStG (withholding tax), - The inheritance and donation tax - §13 paragraph 1 No. 16 ErbStG (Capital transfer Tax) and - The real estate tax, provided if the property is used for non-profit, charitable or ecclesiastical purposes (§3 paragraph No.1 , No. 3b and 4 GrStG (Real estate Tax Law)). Also they need to pay only the half one of - Sales tax (nowadays 7%) (§12 paragraph 2 No. 8a UStG (salex tax law). All these benefits are allowed (as in many countries throughout the world) because private non-profit organisation are service organisations which are expected to use any excess of revenue over costs and expenses (a surplus rather than profit) either to improve service or to reduce the price of their service for society. But on another side non-for-profit organisations do not have access to capital equity market (Wareham, 2004) and need to find alternative funding sources because governmental funding is usually not unlimited!. Also selling an intangible product has challenges: There are no fancy product shots to grab people's attention, because company can’t increase sales by offering a lifetime warrantee (Sausik, 2005). Till recently traditionally studies in strategic management have dealt with profit-making companies to the exclusion of non-profit or public governmental organisations (Wheelen, 2004). But these tendencies are changing because public service and non-for-profit organisations depends heavily for financial support either on government founds or on private donations, assessments or dues like tuition fees as in the case of RFH. Every nonprofit may not be able to generate all it’s funding through revenue-generation, but every nonprofit certainly can generate a greater percentage than it is doing now (Shuman and Fuller, 2005). Thus, non-for-profit organisations need to recognise the impact on they market

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orientation and to develop sustainable competitive advantage in the sense to compete for finance from potential providers (Kara, Spillan, DeShields, 2005). Many of strategic management concepts can be equally applied to business and for non-for-profit organisations, where others cannot. As stated by McGill (1988) mission statements, SWOT analysis, stakeholder analysis and corporate governance are, however, just as relevant to a non-for-profit as they are to profit-making organizations.

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

4.1 Strategy evaluation in non-for-profit organisation In the public governmental units and non-for-profit organisations, the criteria need to reflect the broader aspect of their service or contribution to the public. The best strategic way always depend on the nature and needs of the business (Campbell and Goold,1987), thus different decision-making processes and beliefs that motivate many organisations make evaluation of strategy options in not-for-profit organisations more diffuse and open ended (Lynch, 2003). Decision-making methods traditionally employed by public sector agencies are inadequate for dealing with the demands facing (Smith and Stupak, 1994). The key criteria for strategy development in non-for-profit organisations is the pressure on such organisations, to provide more services than sponsors and clients can pay for, and to develop strategies to help them meet their desired service objectives (Wheelen, 2004). Nonfor-profit organizations often rely on volunteers (Ratje, 2003). “Some smart nonprofits are letting others do the work for them” (Fielding, 2005), by use of e.g. college students as volunteers in order to keep costs low brings financial benefits (Farrell, 2005) but it is usually heavy, because such a resource needs to be handled with care, by reason that perceptions of their status can affect their ability (Watts, 2002) and some need to be given greater degree of freedom that would be appropriate in commercial organisation. Thus non-for-profit organisations are often choosing strategies of piggybacking, mergers and strategic alliances to reduce its costs and to find new sources of funding (Wheelen, 2004). Nielsen (1984) explains the term of strategic piggybacking as the development of a new activity for nonfor-profit organisation that would generate the funds needed to make up the difference between revenues and expenses. This strategy is not new and companies are often trying to jolt sales by piggybacking (Reynolds, 2004). The purpose of the strategy is to help subsidize the primary service program, as a form of diversification around the core business (concentric diversification) engaged only for money-generating value (Rijamampianina, Abratt and February, 2003). The organisation invests, in new, safe cash cows to fund its current cash-hungry, question marks and dogs, in an inverted use of portfolio analysis. Copyright © 2008. Diplomica Verlag. All rights reserved.

According to research of Bacon (1995), 70% of colleges and universities now offer “auxiliary” services, such as bookstores, conference rooms, computer centres or stores outside of the main building or even allowing of the companies name to appear on products as source of income. The critics as for example U.S. Internal Revenue Service (IRS) (2005) (http://www.irs.gov/) advises that non-for-profit organisations engaged in a business not related to the organisation’s exempt purposes (central mission) may jeopardize its taxexempt status, if income exceeds approximately 20% of total organisations revenue. In Germany the taxation border for corporation tax and trade tax is 30678 Euro. If the gross

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

incomes is higher as the taxation border of 30.678 Euro (§ 64 paragraph 3 AO = Abgabenordnung (German Fiscal Code)), and the profit lies more than 3.835 Euro, corporation tax has to be paid. According to law, corporation tax results only in the area of the economic business concern. It results not in the ideal area e.g. if the association works for instance in scientific, artistic, beneficent, sporty, sociable one or ecclesiastical tasks and in the area of the administration of property. It follows: even if the economic business concern serves merely to finance the non-for-profit activity, the profit while crossing of above mentioned taxation borders are paid tax on. Even though, strategic piggybacks can help non-for-profit organisations better use their resources and self-subsidize their primary mission. As stated by Nielsen (1986) there are several potential drawbacks. For instance, the venture could subvert, interfere with, or even take over the primary mission. Or the public, as well as other sponsors, could reduce their contributions because of negative responses to such “money-grubbing activities” or because of mistaken belief that the non-for-profit organisation is becoming self-supporting. Research by U.S. National Association of College and University Business Officers (1995) predicts that 90% of U.S. colleges and universities will use strategic piggybacks and for other non-forprofit organisations similar trends are expected. Usage of the strategy heavily relies on donations and taxpayer support for non-for-profit organisations revenue. As stated in Wheelen (2004), based on experiences of Edward Skoolt, an consultant to notfor-profit organisations, not-for-profit should have five resources before engaging in strategic piggybacking: something to sell (people my be wiling to pay for services and goods closely related to organisations primary activity), critical mass of management talent (most competent not-for-profit professionals don’t want to be managers), trustee support (trustees can have strong feelings against earned-income venture like in the case of licensing of Sesame Street to toy companies by Children’s Television Workshop), entrepreneurial attitude (Non-profit-organisation must have able management who can combine interests in

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innovative ideas and businesslike practicality) and venture capital (because it takes money to make money). Further corporate level strategic alternatives for non-for profit organisations are strategic alliances and mergers and acquisitions. Increasing number of non-for-profits consider mergers and acquisitions as a way of reducing costs (Collins, 1993). According to Hiland (2003) reasons for nonprofits to consider merger are numerous but the primary drivers, however, are financial and include the desire to grow or to strengthen market share. Rugman (2003) defines strategic alliances “as a business relationship in which two or more companies work together to achieve collective competitive advantage”. Strategic alliances is

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

an term often used to embrace a variety of arrangements between potential or actual competitors including licensing agreements, formal joint ventures or informal cooperative arrangements (Hill,2005). As stated by Provan (1984) and Pointer (1989) strategic alliances are often used by not-for-profit organizations e.g. in Health Care industry, as a way to serve clients, to acquire resources while still enabling them to keep their identity or as a way to enhance their capacity. But already business corporations are forming alliances with universities to fund university research and gain value of partnering (Whitaker, Henderson and Altman-Sauer, 2004), in exchange for options on the result of that research or to educate their employees. An example for such kind of alliances is collaboration between RFH and Ford Company in Cologne. Business firms find it cheaper to meld the right resources (Leonavičienė and Ilonienė, 2005) thus to pay universities to do basic research, or to educate their employees on the universities than to do it themselves. In return, universities receive research funds to attract top professors and to maintain expensive labs. Such kind of alliances of convenience is being criticized, but they are likely to continue (Wheelen, 2004). Strategic alliances have risks because organization can give away more than it receives. The failure rate for international strategic alliances seems to be high. According to Ernst and Bleeke (1991) research including 49 international strategic alliances, 33% are ultimately rated as failures. In order to make strategic alliances efficient is to select the right ally, which can achieve the firm’s goals or shares the firm’s vision without to try to opportunistically exploit the alliance for its own ends. As stated by Perks (2004), value in long-term co-development derives from the enduring exchange processes developed throughout the collaboration. In foreign business, intercultural business competence is related to the quality of long-term relationships (Huang, Rayner and Zhuang, 2003). Very important factor in the case of international business deals with sensitivity to cultural differences, which requires building interpersonal relationship between the firm’s managers (Hill, 2005). Impact on strategy implementation in non-for-profit organizations and

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complications to implementation are possible, because decentralization in non-for-profit organization is complicated. The company heavy depends on sponsors for revenue support and the top managers of the non-for-profit organization must always alert to the sponsor’s view of an organizational activity, even though decentralization allows the introduction of flexible HR systems and practices (Shim, 2001). Further problems in such organizations can be that executive development and job enlargement can be restrained by professionalism (Lynch, 2003), because the difficulty is that there is much confusion about the definition of quality among the professionals (Milliken and Colohan, 2004). According to Wheelen, (2004) organisations that employ large number of professionals, like in universities or hospitals,

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

must design jobs that appeal to prevailing professional norms. Because professional often see managerial jobs as nonprofessional, promotion into management position is not always vied positively. Furthermore special needs arises for people in buffer roles, like Dean of External Affairs they are often judged on basis of they ability to rise extramural support from funding agencies and other benefactors (Cronin and Crawford,1999). They have to relate inside and outside groups, especially when sponsors are diverse (e.g. federal funds, membership fees and donations) and service is intangible like “good” education. Information systems have as well impact on non-for-profit organization. According to Malik and Goyal (2003) information’s systems and internet may bring competitive advantage but, for most, it becomes a need for survival. Ravichandran and Chalermsak (2005) argue that firm's performance can be explained by how effective the firm is in using information technology to support and enhance its core competencies. In order to stay competitive and to allure more potential clients, non-profit organizations are establishing internet services and enable clients to accesses knowledge of specials or to accesses libraries in distant locations. Sustainability of IT-based competitive advantages depends on the nature of IT systems whereby stand-alone based IT systems are not sustainable (Makido, Kimura and Mourdoukoutas, 2005). Most of every non-for-profit organization and universities today have its own Web site providing services or offering complete courses and degree programs over Internet like University of Phoenix Online (http://www.uopxonline.com/) or open, distance

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University of Hagen (http://www.fernuni-hagen.de/) in Germany.

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

5

Why companies go international?

In today’s world, growth and creation of value usually has international implications. In an era of keen global competition, firms realise that the effective use of global sourcing contributes significantly to their market performance (Murray, 2001). For some companies from today, globalisation and international expansion have become a vital aspect of strategy development and implementation. Segal-Horn (2002) explains that one of the most farreaching benefits available to global firms is that they can locate different bits of their business activities wherever in the world it is most efficient for them, thus they can disaggregate their value chain of business activities. International expansion present new opportunities to generate extra value added and sustainable competitive advantage. As stated by Lynch (2003) corporate strategy seeks two main opportunities from international expansion: 1. Market opportunities and 2. Production and resource opportunities. The market opportunities should deliver new sales, especially as barriers to trade have been reduced over the last 50 years and the production and resource opportunities should arise in some countries because of special resources in concerning countries, such as the availability of low-cost, natural resources and special skills. According to Delios and Beamish (1999) research shows that going international is positively associated with firm profitability. Every firm can select between several strategic options like “market penetration, product expansion, market expansion etc.” (Aaker (1995) cited by Moon (2005)), the most appropriate approach for it to use in entering a foreign market or establishing subsidiaries in another country. The options of implementation vary from simple exporting to acquisitions to management contracts (Wheelen, 2004). Besides the pre-eminent goal of the firms to maximise long-term profitability there are further reasons why companies go international. Copyright © 2008. Diplomica Verlag. All rights reserved.

Rugman and Hodgetts (2003) argue that some of the reasons for companies are to diversify themselves against the risks uncertainties of the domestic business cycle. As stated by (Geringer, Tallman and Olsen , 2001) international diversification is argued to provide new markets in which to sell similar products or to apply knowledge developed in old markets, while simultaneously reducing diversifiable risks (Kim, Hwang, and Burgers, 1993). Thus for international company it is possible to diminish the negative effects of economic swings in the home country. According to Quian (2000) potential for risk reduction from diversification may be more meaningful in developing countries (like Bosnia) than in developed countries.

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

The reasons for it are according to Quian (1994) “greater differences across the business cycles of the domestic market and developing country economies than across the domestic market and other developed country economies”. Jones and Hill (1988) argue that increasing levels of diversification can; in general, also raise the cost of governing the firm. According to research by Kogut's (1985) and Buhner's (1987) “geographic diversification” helps firms take advantage of economies of scope, scale, and experience through offer of new products and services. As stated by Rugman (1979) imperfections of international market provide opportunities for internationally diversified firms to achieve high levels of profitability. Levitt (1983) and Yip (1989) argued that geographic diversification make possible a firm to diminish costs by standardizing services and products as much as possible among the countries in which it acts. In order to balance local demands and global vision companies have at least four options for its international expansion (Prahalad and Doz, 1986). According to Hill (2005) four basic strategies to enter and compete in internationally environment are: an international strategy, a multidomestic strategy, a global strategy, and a transnational strategy. In the literature transnational strategy is often called as “third hybrid strategy” and international strategy is often used as generic term for multidomestic, global strategy and a transnational strategy (Harzing, 2002). As stated by Yadong (1999) after controlling for size, cultural effects and equity effects, it is found that strategy type is important for the overall performance of international expansion. Domke-Damonte (2002) considers international entry decisions by service firms (like RFH), and develops following hypothesis: the more multidomestic a firm's strategy, the greater the preference for low control entry modes (like franchising) and the more global a firm's strategy, the greater the preference for high control entry modes (like subsidiaries). Low-control entry mode provide flexibility and control while also offer some pooling of risk. As posited by Kogut (1984) using international strategy, internationally diversified firms can gain greater bargaining power and increased flexibility that result from a multidomestic network. According to Hill, Hwang and Kim (1990) international strategy suggest that a firm's choice of international entry mode is dependent

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upon the company’s expectation about the role that a particular country will play in the overall firm’s strategy. This strategy is inappropriate in manufacturing industry with high cost pressure (Hill, 2005). They also argue that a firm that follows a multidomestic strategy will prefer low-control entry modes to maintain greater global flexibility. According to Bartlett and Ghoshal (1992) and Harzing (2000) within the multidomestic strategy international subsidiaries of the company are relatively autonomous and are allowed to be very responsive to the local market. Yadong (1999) argues that multidomestic strategy is positively associated with local market expansion but comes at the expense of high uncertainty, while an organization following a global strategy will prefer high-control entry

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

modes (Hill, Hwang and Kim (1990) cited by Domke-Damonte (2002)) and global strategy suffers from loss of growth opportunities in an emerging market and is systematically related to low risk. According to Hout, Porter, Rudden (1982), global strategy implies the existence and coordination of scale and scope economies. Global strategy is inappropriate by high demands for local responsiveness (Hill, 2005). Transnational strategy increases operating flexibility and outperforms other postures in aligning with a dynamic emerging market and attaining benefits from both country-specific and ownership-specific advantages (Yadong, 1999). Hill (2005) argues that transnational strategy make sense, when organisation faces high pressures for cost reduction, for local responsiveness and where there are opportunities for leveraging valuable skills within global network of operations. Based on the above discussion, I formulate the following hypotheses related to emerging markets (like Bosnian market): The decision about most appropriate way company should enter the internationally and geographically diversified emerging market, depends upon dynamism of the emerging market, preference for control and of companies business portfolio (service company / manufacturing company). Transnational strategy with simultaneous achieving of costs and differentiation advantages would make sense for the company with high need and pressure for national and global responsiveness. Global strategy would mean standardization of the product and choose of the low-cost market, because of low pressure for national responsiveness. Multidomestic strategy would make sense for companies they want to gain little from global activity by high local responsiveness and international strategy make sense for services companies (no need for duplication of manufacturing facilities) they face neither of the pressures for cost reduction or for national responsiveness but still see opportunities to sell their products or services internationally. If e.g. expanding company has a high preference for control (it depends of the market conditions as e.g. legal conditions for acquisitions) and offers unique products and services with low pressures on the local market the most appropriate strategic option for international

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expansion is international strategy with setting up of international subsidiary.

5 .1

Which foreign market to enter and on what scale?

Each nation-state will have some competitive advantages, based on its resources as for example physical location, such as Singapore’s position on shipping routes between Europe and Asia (Lynch, 2003). Generally, strategists are agreed that analysis and understanding of environment is an essential element of development of corporate strategy. Qian (1994, 1996)

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

pointed out that it is largely suggested that effective international operations of a firm depend on the ownership advantages it possesses and the local environment host countries provide. The goal of external environmental analysis is that organisations should perceive opportunities that might be explored and threats that need to be contained (Andrews, 1987). As stated by Porter (1980), study of the environment will provide information’s on the nature of competition as a step to developing sustainable competitive advantage. Johnson (2002) argues that a wide range of environmental influences and factors can affect organisational strategies and performance. These factors are to be explored in the host market in order to be able to develop suitable strategy and structure of international business. The results of Walsh (2005) research, suggest that a better understanding of the performance of companies within a changed environment can be achieved using of a so called PESTEL analysis. According to PESTEL framework, influences and factors they affect performance of companies are: •

Political factors like government stability, taxation policy etc., or

•

Socio-cultural factors like consumerism, levels of education, income distribution etc.,

•

Economic factors, like inflation, unemployment, present wealth etc., or

•

Environmental factors like waste disposal etc. or

•

Technological factors like rates of obsolesce, speed of technological transfer etc. or

•

Legal factors, like monopolies legislation, employment law etc.

This factors relating to Bosnia and Herzegovina will be analysed later on in this work. Hill (2005) argued that, any firm contemplating foreign expansion must first struggle with the issue of which markets to enter as well as the timing and scale of entry. The choice which markets to enter should be ultimately driven by an assessment of relative long-run growth and profit potential. For example Diebold (http://www.diebold.com/), an company which produces automated teller machines, has decide to enter developing markets as Brazil, India and China because of its assessments that long-term demand for the automated teller Copyright © 2008. Diplomica Verlag. All rights reserved.

machines in these countries would be high (Arndt , Engardio and Goodman, 2001). Generally some markets are very large measured by number of consumers, but limited purchasing power and lower world interest rate (Guest and McDonald (2004) will cause a loss in living standard and therefore will have negative impact on economic and business terms. Some countries are political stabile developed with free market system, with well economical key indicators like no dramatic upsurge in either inflation private sector debt, another not. But companies are entering (with success) also markets in countries they are not absolutely political stabile and are not economically advanced. There are many examples

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

for such firms like Coca-Cola, which has subsidiaries in huge number of developed and developing countries among others also in Bosnia and Herzegovina. As stated by Tilles (1998) future of Bosnian consumerism, rests largely in the hands of foreign companies, such as Coca-Cola, Wrigley’s, Henkel, and Electrolux. Another example for the Western Balkan is the successful strategy of Austrian Raiffeisenbank (REB). Raiffeisenbank is now market leader in banking sector in South-Eastern Europe. Obviously the awkward political situation in the area of former Yugoslavia was not obstacle for the company to act on this market. The drivers of the expansion were others, inter alia underdeveloped banking sector and the appropriate timing of entry (RZB, Reiffeisen central bank, 2001) before other foreign firms have already established themselves. According to Karl Sevelda, CEO of the REB, success came by duly recognition of the chances in South Eastern Europe and adaptation to local circumstances. He said: „This was and is also a secret of our success in this region. It would be wrong to be thought that we must still teach everything these countries and force our enterprise culture“(Feldkirch, 2004). A further issue that an international business needs to consider is the scale of entry. As stated by Hill (2005), there are two possibilities, to enter the market. These are: entering the market on large scale or on small scale. Large scale mode involves commitment of significant resources but implies rapid entry. The rapid large scale market entry can have important influence on the nature of competition on the market and it is very interesting option for RFH, because of small competition and probably small commitment of resources needed. Small scale entry allows firms to learn about foreign market and reduces the risks, but it makes more difficult to build market share and to capture first-mover or early mover advantage.

5.2 The choice of Bosnian market for foreign expansion A nowadays expansion trend in East Europe goes towards Hungary or Czech Republic. Considering the trends, the question comes up why should RFH enter Bosnian market and

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not some of these markets, or other markets in the region? Cohen and Carey (2000) pointed out that according to research by Deloitte & Touché Consulting Group customer sharply focuses interest in greater demand for convenience, and that demand for specific product/service increases exponentially at certain points (trigger points) in a country’s development. Identification of this trigger point of demand is therefore a critical factor of determination of best time to enter emerging markets. This trigger point is the time when enough people have enough money to buy what company has to sell, before competition is established (Wheelen, 2004). Companies are scared to make first step to enter instable markets but they are strongly influenced by entering strategies of other companies. Many

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

investors have been deterred because of the country's continued political uncertainty (Barnard and Ladika, 2000). As cited by Platt (2002) “investors from Austria and Germany have stated that without the presence of a large multinational such as Coca-Cola, they would not consider investing in Bosnia and Herzegovina”. The reality today is that Coca-Cola is the market leader in Bosnian and other companies with similar portfolio play only a secondary role. The answer to the question, why should RFH enter just Bosnian market deals exactly with the strategy of companies like Coca-Cola, Interbrew (Belgium's biggest brewer) or Austrian Raiffeisenbank (REB)! Hypothetically I argue that REB (like Coca-Cola and other companies) saw behind underdeveloped banking sector, improved business conditions in Bosnia also mentioned trigger point as drivers for they investment. Comprehensive, descriptive term for they investment strategy is so called first-mover or early mover advantage strategy. According to information’s of German Chamber of Foreign Trade in Sarajevo (AHK) (2005) and British Chamber of Commerce (2005), in Bosnia and Herzegovina currently doesn’t exist the companies they work in the area of certificated continuing education of computer aided engineering like E -Plan or Catia V5. According to FIPA (2005) and my online research, there are only two private competitors they offering CISCO occupational training courses in IT area. These are “CCED” (http://www.cced.ba/) in Sarajevo and “IT Professional” in Banja Luka (http://www.itprofessional.org/). Local Bosnian companies but often concluding the contracts and place an order to Croatian, Serbian or even German companies due to lack of skilled labour and know-how in the local market (Bfai, 2003). In the year 1998 Siemens Private Communication Systems group was active in both Slovenia and Croatia, selling mainly they systems to corporate customers, and was beginning to look at Bosnia-Herzegovina (Biddlecombe, 1998).Today they are represented with three companies in Sarajevo, Banja Luka and Mostar and they are market leader in the telecommunication area (Siemens, 2005). It signifies, that there is existing a high demand inter alia for IT education, but there are not enough companies (underdeveloped educational sector) they can meet the demands. The mentioned trigger point seems to be now.

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According to Tallman (1991) the value an international business can create in a foreign market depends on the suitability of its products offering to that market and nature of indigenous competition. If the international business can offer a product and services that has not been widely available in that market and that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if international business simply offers the same type of products that indigenous competitors and other foreign entrants are already offering (Hill, 2005).

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With the variety of the product and services RFH offers, which is much bigger as these of the competitors (evidentially due to analysis of competitors websites), and with know-how and technology it disposes, RFH could create very quickly (at least for short time period) sustainable competitive advantage. Furthermore with the ability to preempt rivals and capture demand by establishing a strong company and brand name as well as with ability to build sales volume and ride down the experience curve ahead of rivals giving cost advantage over later entrants, RFH may now use the first mover advantage in order to offer its products and services for cheap price by good quality. For later entrants (competitors) it might be very time and cost consuming to outbalance the business position of the RFH as first mover.

5.3 Why is FDI the best mode of entry a foreign market for RFH? The choice of entry mode into foreign markets has received a lot of attention from international business researchers in recent decades (Harzing, 2002). An inappropriate entry mode may block opportunities and substantially limit the range of strategic options open to the firm (Alderson (1957) cited by Ekeledo and

Sivakumar, (2004)). A mode of entry is a

way of carrying out and organizing international business transactions and it is an institutional arrangement that a firm uses to market its product in a foreign market in the first three to five years, which is generally the length of time it takes a firm to completely enter a foreign market (Root, 1987; Root, 1994). Setting up a wholly-owned subsidiary is usually “the last stage of doing business abroad” (Rugman, 2003). Many studies have investigated factors that might influence the choice for different entry modes (Harzing, 2002) between equity-based entry modes, in which the local enterprise is either partially or wholly owned and non-equity entry modes such as exporting through agents and licensing, usually with underpinned argument that framework of Ownership -Location- Internationalization and transaction cost theory have major impact on the decision (i.a. Arora and Fosfuri, 2000; Hill, Hwang and Kim, 1990; Anderson and Gatignon, 1986; Caves, 1982). Brouthers (1995) hast

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pointed out that the perception of international risk plays a large role in the manager's strategy selection process of entry mode. According to Hill (2005) companies can use six different modes to enter foreign markets: These are: exporting, turnkey projects, licensing, franchising, establishing joint ventures or setting up a new wholly-owned subsidiary in the host country or strategic alliances. Entry modes vary in the degree of control (Anderson and Gatignon, 1986) that the firm entering the market has over the decision making, resources, and rents associated with the business in the new market. Licensing and franchising the lowest degree of control, and Foreign Direct Investment (FDI) (joint ventures, acquisitions,

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

mergers, and new, wholly owned subsidiaries) with substantial equity participation, e.g., wholly owned subsidiaries, provide the most control (Domke-Damonte, 2002). A strategic alliance is common strategy of non-for-profit organizations and it was analyzed within the scope of analysis of strategies in non-for-profit organisation. In case, if an equity mode of entry into a foreign market is chosen, company can choose between options to establish a wholly owned subsidiary in a host country by building a subsidiary from the ground up, the so-called Greenfield strategy, or by Acquiring or Merger an enterprise in foreign market. A remarkable number of studies have investigated factors that might influence the choice between these two options (i.a. Cho and Padmanabhan, 1995; Caves and Mehra, 1986; Wilson, 1980; Hennart and Park, 1993). According to Harzing (2002) research, by multinational companies, international strategy has impact on the choice between Greenfield’s and Acquisitions, whereby acquisitions are more likely for multidomestic companies and Greenfield’s are more likely for global companies. However, companies might be "forced" to accept a non-preferred entry mode, for instance company might follow a global strategy to acquire an existing company because of (temporary) lack of managerial resources or government regulations in particular countries preventing new entries. According to study of Desai, Davis, and Francis (2000) business unit strategy was not a significant determinant of entry mode choice, but corporate-level strategies such as global integration. All of these mode types have their advantages and disadvantages (Hill, 2005). Research by Daniels and Bracker (1989) shows “that in terms of the performance implications of internationalization, evidence supports the idea that foreign market entry, regardless of mode, significantly increases returns on sales and assets” (Rasheed, 2005). Analysis in this work will show why just FDI in form of Greenfield strategy or by Acquisition is the best entry mode is for RFH. As stated by Rugman (2003) the typical process by which a

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firm will seek initially to involve itself in a foreign market is: •

to license, than

•

to export via agent or distributor, than

•

to export through own sales representatives or sales subsidiary, than

•

to establish local packing and/or assembly, and

•

at least to do FDI (defined as the long-term investment by company in the technology, management skills, brands and physical assets of a subsidiary in another country (Economics, 2005)).

This process relates to firms producing standardized products. As stated by (Ekeledo and Sivakumar 2004) most research studies on entry mode strategies have focused exclusively

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

on manufacturing firms but the question of whether findings from these studies are applicable to the service sector has not been empirically investigated (Ekeledo and Sivakumar, 1998). Accoring to Anderson and Gatignon (1986) transaction costs theory views each choice of entry mode as an individual transaction that involves trade-off between resource commitment and a control. Entry mode involves two interdependent decisions-location and mode of control (Rasheed, 2005). Accordingly foreign licensing is foreign located and is controlled contractually; exporting is located domestically and is controlled administratively; and FDI is foreign located and is controlled administratively. The RFH does not produce some tangible product; it will offer the services on foreign market. In that case every type of exporting or local assembling would not be appropriate or possible because it is about services. Boruthers and Brouthers (2008) suggest that organizations that have developed strong intangible capabilities may be able to more readily leverage these capabilities through greenfield start-ups. According to Lu and Beamish (2001) both nonequity and equity- based modes of entry have the capacity for increasing financial performance, exporting had a negative effect on financial growth. Licensing would be in case of RFH unwise, because to give another firm access to proprietary information such as know-how, technological expertise etc. means possibility of loss of control over know-how, its technology etc. by licensing it. Many firms, like RCA Corporation (www.rca.com), once licensed its technology to Japanese firms, have made mistakes of thinking they could maintain control over know-how within the framework of a licensing agreement (Hill,2005). For RFH, technological know-how as well as long-standing experience in the area of the ITservices, constitutes basis of firms competitive advantage. The local licensee or other local firms, like in case of RCA Corporation, could quickly assimilate the technology and knowhow; improve on it, and use it to spread on the local market. Of course there are the ways of reducing the risks of licensing. Hill (2005) explains the practices of several firms they develop the ways of reducing the risk by licensing. Thus, the U.S. biotechnology firm Amgen (www.amgen.com) has made so called cross-licensing agreement with Kirin, the Japanese Copyright © 2008. Diplomica Verlag. All rights reserved.

pharmaceutical company and has licensed one of its key drugs (Maggon, 2003). Crosslicensing agreement enables firms to hold each other hostage, which reduces the probability that they will behave opportunistically toward each other (Williamson, 1985). Thus, the firm can license some valuable intangible property to a foreign partner, can claim a royalty payments, and might also claim that the foreign partner license some of its valuable knowhow to the firm.

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Further possibility of reducing the risk is the model of Fuji-Xerox. They form Joint Venture in which licensor and licensee take important equity stakes (Deogun and Hechinger,2001), in which both companies would become "the document company", viewing documents of each other as a medium that conveys information and knowledge (Umemoto , Endo and Machado, 2004). The interests of both are aligned, because both have a stake in ensuring that the venture is successful. According to evidence provided by Mosakowski (1988), for service firms joint ventures perform better than internal arrangements and licensing; research and development (R&D) joint ventures perform worse; sales joint ventures' performance falls between the two; and licensing detracts from performance when compared to using internal arrangements. But in the case of RFH a cross - licensing agreement and joint venture with Bosnian company seems to be currently not possible because, one finds no suitable company which could license the RFH know-how or technology and as a consideration (quid pro quo) could bring valuable know-how which the RFH could use. According to German Federal Agency for Foreign Trade and Payments (Bfai, 2003) in Bosnia and Herzegovina there are only few Bosnian companies they export to foreign countries and EU, as for example the company „Aluminum Mostar“ (Aluminum manufacturer). Furthermore there are some smaller companies they produce and export the niche products like Ajvar, soft fruits, ready salads, tea and mushrooms. All these companies can give no suitable license to the RFH in return for licensing of RFH’s know-how in the area of the IT-services and vocational training which the RFH could use, never mind, according to my personal observation possibly none of Bosnian companies would be ready to pay additional royalty payment (as in the case of cross-licensing agreement). In addition, these few Bosnian exporters come from quite different business area as RFH. Possible agreements RFH could made with e.g. foreign companies

of

similar

type

like

e.g.

Goethe

Institute

in

Sarajevo

(http://www.goethe.de/ins/ba/sar/ lhr/sem/deindex.htm) which operates in educational business area but it offers some niche products/services, for instance language courses for Copyright © 2008. Diplomica Verlag. All rights reserved.

student they want to study in Germany. Turnkey projects, as further possible entry mode, are appropriate and most common for companies they have specialized in the design, construction etc. like chemical, pharmaceutical or metal refining industries, all of which use expensive, complex production technologies. Because of the business type which RFH does (educational sector), it is obvious that this entry mode isn’t suitable. Franchising is similar to licensing, a form of licensing agreement in which the contractor (franchiser) provides the licensee (franchisee) with pre-formed package of activity. Franchiser is responsible for the brand name, marketing and probably training and franchisee is responsible for distribution,

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

selling etc. (Johnson, 2002). The RFH has a franchising agreement with Cisco Network Academy, and it is authorized to provide certificated continuing education in the IT area. The RFH has advantages of it like, that some of the basic tests of business proposition were undertaken by franchiser and through it; the RFH is relieved of the risks and costs of opening a foreign market on its own. But Cisco-courses are only one of the wide ranges of services in educational sector the RFH could provide on Bosnian market. So the franchising is possible entering mode but not completely solution. Extant option if an equity mode is chosen is FDI by establishing of a wholly owned subsidiary (Greenfield venture) in Bosnia or FDI by Mergers or Acquisitions. FDI is a more competitive way than exporting for operating in international markets because the value of FDI was greater at later stages (Lu and Beamish (2001) cited by Rasheed (2005). Mathematical based model by Tang and Yu's (1990) so called “revenue maximization model” concluded that a wholly owned subsidiary is the optimal strategy because it generates the highest level of economic profit and maximizes control of critical knowledge indefinitely. This model “determined transfer prices in other entry strategies are higher than marginal costs, making subsequent operations inefficient”. According to Rasheed (2005) international revenue growth is higher for equity-based modes (local enterprise is either partially or wholly owned) when foreign market risks are high. Bosnian market is according to Moody's rating agency improved but still risky (Raffeisenbank, 2004). Mergers and Acquisitions (M&A) are similar to each other, whereby mergers are in the sense of two companies combining. On the other hand, acquisition is where an organization develops its resources and competencies by taking over another organization (Johnson, 2002). According to Lynch (2003), mergers arise because neither company has scale to acquire the other company on its own, and has potential benefit of being more friendly, but requires special handling if the benefits are to be realized. But if the scale is given, the acquisitions have significant advantages: they may reduce competition from a rival. Behind that they are quick to execute and managers may believe that acquisitions are to be less risky than Green-filed ventures, because the revenue Copyright © 2008. Diplomica Verlag. All rights reserved.

and profit stream that a Greenfield Ventures might generate is uncertain because it dies not yet exist (Hill, 2005). The advantage of the Greenfield Venture is that it gives a firm greater ability to build subsidiary company in the way it wants but the establishing of Greenfield companies is much slower. Important disadvantage of a Greenfield Venture is possibility of being outdistanced by more aggressive competitor who enters or exceeds the market (if local company acquires its competitor) via acquisition.

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Ekeledo and Sivakumar (2004) have investigated how firm-specific resources interact with the nature of the product (goods versus services) and may influence choice of entry mode. They distinguish between non-separable and separable services, whereby separable are “such services, as e.g. musical entertainment, college education and television programs, they allow production and consumption to be decoupled” and non-separable services (like e.g. hospitals and restaurants) require close physical proximity with the service provider and simultaneity of production and consumption (Sampson and Snape, 1985 Erramilli, 1990; Boddewyn et al., 1986; Erramilli and Rao, 1990;). This analysis contributes to hypothetical findings, why FDI is generally the best mode for RFH as company which offer separable services enter Bosnian market. They pointed out that “(1) the resource-based theory has good explanatory abilities for entry mode strategies; and (2) entry mode concepts and practices in the manufacturing sector are not always generalisable to service firms”. They findings support contention of Erramilli and Rao (1993) according to the unique characteristics of services affect a service firm's choice of entry mode in a foreign market, as in the case of RFH and the unique characteristic of the services they offer. The considerations about most appropriate entry mode for FDI in Bosnia rely mostly on resource-based theory but partly also on eclectic theory considering location advantage, ownership advantage, and internalisation advantage (Dunning 1980) as its key components. According to theory (Pisano et al., 1997; Peteraf, 1993; and Barney, 1991) competitive advantage resides in the resources available to the firm and the resource-based theory views the company, not the industry, as the source of competitive advantage (Capron and Hulland, 1999). Based on previous discussion, I argue that application of relevant theory about entry mode depends on conditions on the entering market. A turnkey projects, licensing agreements and joint ventures seem to be inappropriate for RFH because of market conditions and companies portfolio respectively. According to the fact that the two competitors in Bosnia are Copyright © 2008. Diplomica Verlag. All rights reserved.

well-established incumbent companies, the easiest and fastest way might be to eliminate competition by FDI by acquisition. This choice will be deeply analyzed in following chapter. As noted previously, mathematical based model by Tang and Yu's (1990) recommend but the Greenfield strategy as optimal entry mode. Thus, the establishing a wholly owned subsidiary including simultaneous or subsequently franchising agreements (because of nature of the product that RFH offers – i.a. franchising Cisco courses) might also is an appropriate choice of entry mode for RFH. The resource-based approach suggests that appropriate entry mode is one that balances cost efficiency with effective marketing and

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

decision makers should recognize the impact of inseparability of production and consumption in evaluating entry modes (Ekeledo, Sivakumar 2004). Based on considerations discussed above, the final choice will have been driven by managerial implications of RFH managers and they considerations based on of firm-specific resources that afford their firm competitive advantage in the target foreign market with its specific conditions.

5.4 FDI by acquisition as successes factor for RFH in Bosnia Many companies are making strategic moves into emerging or overseas markets. There are many examples of acquisitions in Bosnia, among the others Interbrew company, Belgium's biggest brewer. With acquiring 51 percent of Uniline Brewery in September 1999, it became one of the first foreign investors in Bosnia-Herzegovina (Barnard and Ladika, 2000). The acquisition occurred in the time of weak competition in brewing sector in Bosnia. Reason for they acquisition was according to Christian Plingers, corporate affairs manager for Interbrew, “increase of market share and minimisation of competition”. According to Barney (1991) there can be no sustainable advantage to the entry strategy, per se, unless firms have inimitable resources, because the entry strategy itself is perfectly imitable (Boulding and Christen, 2003). As already stated in the text, in the area of vocational training in IT area and industrial software application area (like Eplan, Catia etc.), currently there is almost no competition for RFH in the Bosnia and Herzegovina. There are two mentioned local potential competitors offering the Cisco courses: IT Professional - Microsoft and Cisco IT Academy in Banja Luka and “CEED”, they differ in they legal nature. IT Professional is private licensed company and “CEED” is company working closely with the University of Sarajevo sponsored by United Nations Development Program (UNDP) and the World Bank Group, offering the courses mostly for the students of the Sarajevo University. Sarajevo and Banja Luka are two biggest towns in Bosnia, and are placed geographically quite far away form each other. According to information’s of the competitor in Banja Luka, waiting period for the courses

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takes some months. This signifies a huge demand and high volume of contingent customers. Acquisition of the sponsored Academy at the University of Sarajevo seems to be not possible because of governmental obstacles, but to acquire the competitor in Banja Luka is possible according to the business nature of the company. Such acquisition would mean for RFH to have (al least for a short time) no competitors in the region! Competitive environment in practice is constantly changing, thus faced with changing economic environment companies will need to chart new strategies if they are to win a share (Williamson, 2005). Strategic management should involve the study of firms in the context of their market situation as one

29

Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

of the key successes factors for company (Jenkins, 2005), thus one or more immediate competitors I’ll analyze in depth (competitor profiling) within the scope of defining of successes factors for FDI in Bosnia in educational sector. In the case of aimed business of RFH, to enter Bosnian markets in educational sector by acquisition and to reduce or even eliminate competition, ones can refer to first-mover advantage. As stated by Hill (2005), according to new trade theory, firms that establish a first-mover advantage with regard to the production of particular new product or new services (as in the case of RFH and their offering of vocational training in the area of topical industrial applications) “may subsequently dominate local trade in that product and or offering of service”. For RFH the clear massage is that it should pay to invest financial resources in trying to build a first-mover, or early mover, advantage through acquisition of the two existing competitors. An extensive empirical and theoretical literature as for example (Golder and Tellis 1993; Lieberman and Montgomery 1988 etc), investigates the effects of the market entry order. Study by Boulding and Christen (2003) replicates the typical demand-side pioneering advantage but finds an even greater average cost disadvantage, which is the source of the pioneering profit disadvantage. “There can be no pioneering advantage without heterogeneity in resources across firms” (Barney, 1991). According to Shaver, Mitchell and Yeung (1997) pioneering costs are “costs that an early entrant hast to bear that a later entrant can avoid”. These pioneering costs must not be so high for RFH because “first entrant can also benefit from a period of monopoly profits that are eroded over time as later entrants make inroads” (Boulding and Christen, 2003). These costs occur due to ignorance of the foreign environment (Hill, 2005), when the business system in foreign country is so different from that in a firm’s home market and firm has to devote considerable effort, expense and time to learn rules of the new business system.

Because of international

presence in Bosnia and Herzegovina and presence and EU Special Representatives, the Bosnian economy and law are gradually adapted to European standards. They have prioritised justice, rule of law and economic reform and stressed the need for a properly Copyright © 2008. Diplomica Verlag. All rights reserved.

functioning State administration (European parliament, 2003). Also the summary of statelevel laws related to Foreign Direct Investment (Foreign Investment Promotion Agency (FIPA) of Bosnia and Herzegovina, 2004) shows that Bosnian FDI law is modernized at European level. Thus, the risks of pioneering cots might be very low. Johnson (2002) explains some of the disadvantages of acquisition behind the pioneering costs and these are that the acquirer pay too much or might be unable to add value to its purchases. The predicted synergistic benefits are often not realised because of the “inability to integrate the new company into the activities of the old”. The synergistic effects are difficult to measure

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

using the historical data of the companies involved. The problems can also occur due to of clash of national cultures particularly where target “foreign” (Hill, 2005; Hofstede, 2004). Furthermore, the costs of the acquiring companies must be exactly calculated, which is often the problem because acquiring firms often overpay for the assets of acquired firm. There are different ways to determine value of the acquired firm, like e.g. “chop-shop” approach or Break-up value first proposed by Dean Lebaron and Lawrence Speidell (1987) of Batterymarch Financial Management. However, if the RFH is going to make an acquisition, expectably its management must be cognizant of the risks associated with acquisition and consider these when determine the company to purchase. According to Carpenter and Nakamoto (1989) when product quality is ambiguous to customers the order of entry affects preferences in a way that favours pioneers, therefore pioneering should be more advantageous in markets where customers are unmotivated and/or unable to learn about alternatives after initial trial of the first-mover's product. In sum behind the analytically supported idea, the timing of entry is significant. Managers they evaluate an entry timing strategy (trigger point), might give precisely consideration to how and why the strategy will provide a sustainable advantage. Based on discussion above, the option of international expansion by using international strategy seems to be at the moment appropriate for RFH considering the fact, that Bosnian market is currently not dynamic and diversified in such scale like China’s market and that RFH has a high preference for control and could offer unique services (and have no need of establishing of manufacturing facilities because of intangibility of products). Mentioned trigger point, thus the best timing for investment in occupational training sector seems to be achieved. RFH faces low pressure for cost reduction (partly funded by government) and has medium need for national responsiveness (needs occurs due to partly dependency of governmental financing sources and they decision-making impact) but still see opportunities to sell their products or services internationally and wants to benefit of global capital while

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diminishing the negative effects of economic swings in the home country. On consideration based analysis indicates that the Foreign Direct Investment activity by Acquisition could create an short-term advantages for RFH like, subsequently domination of local market, protection of technology and know-how (as constitutes basis of its competitive advantage) or ability to realize location and experience economies. But also this way would bring disadvantages like high costs and risks. According to Rugman (2003) finale stage of foreign involvement comes when the firm has generated sufficient knowledge about host country to overcome its perceptions of risk. Thus,

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

in order to consider the Foreign Direct Investment activity, it is necessary for RFH to have key economical information’s about Bosnia and Herzegovina as well as necessary information’s about investment climate in educational sector in Bosnia and Herzegovina. Key economical and business indicators related to FDI in Bosnia, economic policy etc. I’ve

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investigated in the following chapter.

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

6 Economic overview, Educational Sector and Investment Climate in Bosnia and Herzegovina - Market blue sheet 6 .1

Current political background and economic situation overview

Bosnia and Herzegovina (BaH) lies at the heart of South-East Europe (please see picture below) and borders in the East and Southeast on Serbia and Montenegro and it shares its borders in the North and the West with the Republic of Croatia. 12 km long Adriatic Coast in the Southwest offers the only access of the land to the sea. With a territory of 51,129 square kilometres, BaH is approximately 7 times smaller than Germany. In July 2005, the population was estimated at 4,025,476 million. The capital and largest city is Sarajevo with approximately 350,000 inhabitants. Other important cultural and commercial centres are: Zenica, Banja Luka, Mostar and Tuzla. The currency in Bosnia is Convertible Mark (BAM=KM) which is linked at a fixed rate of 1, 9558 to Euro (CIA -The World Fact Book, 2005).

Germany Austria Hungary Slovenia

Romania Croatia

Bosnia and Herzegovina

Serbia and Montenegro

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Adriatic Sea EU 25 Member In negotiations. Should become EU Member 2007 EU Candidate since 1999 Apply 2004 to become Candidate

Bulgaria Macedonia Albania

Greece

Source: Adapted from Raiffeisenbank Austria (2004), Financial centre Bosnia and Herzegovina - Report, December 2004, p.1

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

6.2 Critical discussion of political situation and structure Bosnia and Herzegovina was formally recognized as one of the six republics of former Socialist Federal Republic of Yugoslavia, or SFRY in November 1945. BaH was behind Macedonia one of the SFRY's least developed republics. In the today's borders and geographical structure the Republic of Bosnia and Herzegovina exists since 1992 after declaration of independence of SFRY. It is recognized as an independent state by the EU on 6 April 1992 (European Parliament, 2003). After declaration of independence followed the war, triggering a three-year conflict during which the three ethnic groups (Srbs, Croats and Muslims) were at war with each other in varying alliances. The Dayton Peace Agreement signed on 21 November 1995 by the Bosnian, Croatian and then Yugoslav presidents, put an official end to the fighting. According to Dayton Agreement the country is divided into two entities: Republika Srpska (49% of the territory) with the area capital Banja Luka (approximately 280,000 inhabitants) and the Federation of Bosnia and Herzegovina (51%). Sarajevo serves as a common capital of both partial areas. The agreement included a new constitution and establishing of the Office of the High Representative (OHR) as the highest authority with powers to impose legislation and remove unsatisfactory officials. The High Representative (since May 2002 Paddy Ashdown, former British politician) holds wideranging powers to impose laws and binding decisions in cases where the Government is unable to agree, or where it is deemed to be in the interest of the political and economic development of the country (EU Parliament, Autralian Department of Foreign Affairs, 2004). Just ten years have passed since signing the Dayton peace agreement which has finished the war in Bosnia and Herzegovina. The nationalistic teams dominate the domestic shops. In November 2003 the European Commission consented to Feasibility Study which reviewed BaH readiness to open negotiations on a Stabilisation and Association Agreement (SAA) with the European Union. The Feasibility Study has identified 16 priority reform areas as for

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example, more effective public administration, more effective governance etc. which has to be addressed over the course of 2004. According to Business Information on Central and Eastern Europe of the Austrian Raiffeisen Bank (2004), under the strong pressure of the High Representative, and through the efforts of Bosnian government, reforms of national defence and the secret service were decided and the law on indirect taxation was passed in the meantime, which among others provides for the introduction of value added tax predicted at the rate 17% in 2005/2006. As stated by World Bank and EU’s Office for Reconstruction and Development of South East Europe (2004), through implementation of the governmental macroeconomic reform (so called: Medium-Term Development Strategy) BaH should, by

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

end-2007, to create conditions for sustainable and balanced economic development, to reduce poverty and to accelerate EU integrations (BaH Medium-Term Development Strategy (PRSP), 2004). The key features of economic development and main elements and specific priorities of PRSP which have been identified for each sector and which are already underway are the improvement of business environment in Bosnia and Herzegovina and creation of a favourable climate for foreign investments (Bosnian Foreign Investment Promotion Agency (FIPA), 2005). Sectoral priorities covered by the BaH Medium-Term Development Strategy are inter alia improvement of social welfare system, information and communication technology sector and education sector (PRSP, 2004). According to German Federal Foreign Office (Auswärtiges Amt) (2005) and German Federal Agency for Foreign trade (Bfai) (2005) today in the majority of the areas there is essential progress, so that for Bosnia and Herzegovina has moved closer to the beginning of SAA negotiations. Start of negotiations is expected before the end of 2005 (DEG, 2004).

6.3 Critical discussion of macroeconomic situation “In of the euphoria around the EU-East extension the Balkan countries have got out a little from the vantage point. The central position in the Balkans, well qualified employees and the high investment demand make Bosnia and Herzegovina an interesting location for longer-term engagement. Especially the industries energy, transport and telecommunication have immense investment demand” German Federal Agency for Foreign trade (Bfai) News, October 2004

“The improvement of business environment in BaH has taken a fast track mode, thanks to, inter alia, the activities of the Bulldozer Committee led by the Employers’ Association of BaH, comprising businessmen, representatives of the key international financial organisations and Copyright © 2008. Diplomica Verlag. All rights reserved.

the authorities of BaH, and aimed at identifying and removing those legal provisions that make it difficult for companies to further develop their businesses and to create new job opportunities” Adnan Terzic, Chairman of BaH Council of Ministers Foreign Investment Promotion Agency (FIPA) of Bosnia and Herzegovina, January 2005

In spite of the stumble in the policy, progress was registered with the economic reforms. This sped up decisively the so-called bulldozer committee, a union of sales representatives from

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

economy, policy and from international organizations. Committee has the assignment to work out reforms and to remove bureaucratic hurdles which hinder the economic development and the creation of new workplaces (DEG, 2004). According to International Monetary Fund (IMF, 2004), GDP in Bosnia tripled in the post-war period while the rate of real growth stabilized between 4 and 5%, with the exception of 2003 when it was somewhat lower form the projected 4%. The main causes were a severe drought in the region, as well as the 45% decline of donor assistance in comparison with 2003. Estimated GDP per Capita more than doubled from around KM 900 in late 1995 to an estimated KM 2,900 in 2003, although one needs to emphasize that the aforementioned level of GDP remains around half of the level executed in 1990 (PRSP, 2004).

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Bosnia and Herzegovina – Selected Indicators Change form previous year in % GDP (real) Industrial output (real) Federation Industrial output (real) Rep. Srpska Consumer prices (yearly average) Federation Consumer prices (yearly average) Rep. Srpska Budget Balance (in % of GDP) In EUR Mil. Merchandise exports Merchandise imports Current account balance Current account balance (in % of GDP) FDI net inflow Fiscal deficit (in % of GDP) Interest Rates (long term) in % Average exchange rate: BAM/EUR Average exchange rate: BAM/USD

2000

2001

2002

2003

2004

2005 Forecast

5.5

4.4

5.5

3.3

5.0

5.5

8.8

12.2

9.2

4.8

15.0

-

5.3

-12.9

-2.5

5.8

10.0

-

1.2

1.7

-0.2

-0.5

0.8

0.8

14.0

7.0

1.7

1.9

1.4

2.2

-7.5

-2.5

-2.0

0.4

-0.1

-0.7

1.272 4.114

1.267 4.571

1.140 4.578

1.310 4.750

1.300 4.298

1.440 4.390

-9.55

-1.362

-1.795

-1.830

-1.610

-1.520

-12.5

-16.0

-18.9

-17.7

-15.6

-15.0

159

140

309

169

489

453

-7.0

-2.5

-2.0

0.4

-0.1

-0.7

18.0

14.0

10.6

9.2

8.23

9.35

1.96

1.96

1.96

1.96

1.96

1.96

2.12

2.19

2.08

1.74

1.49

1.50

Sources: Bank Austria Economics Department, IFM, OHR, PRSP (2003-2005)

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Projected most important macroeconomic indicators for Bosnia and Herzegovina until 2009 can

be

find

on

the

website

of

International

Monetary

Fund

(IFM)

under:

http://www.imf.org/external/np/ms/2005/041705.htm The economic situation in Bosnia and Herzegovina improved in the first half of the year 2004 in comparison to year before (F.A.Z., 2004). A positive trend is to be recognized also with the economic growth: the economic performance increases continuously. In 2003 it could be increased compared with the year before. Indeed, the dynamism of the economy weakens: in the first years after end of the war the growth rates - also on reason of the low source level of the economy - still lay in the two-digit percent area, in 2002 the economy grew about 5.5% (IMF,2004). According to Feasibility Study of EU Commission industrial production in 2003 still shows positive growth rates, whereby the scope of industrial production in RS in 2003 grew by 5 percent and in FBaH it grew by about 4, 5 %. In the year 2004 the industrial production has further increased, in the Federation about 15% and in the Republika Srpska about 10% and higher exports might had contribute to the lowering of the current account deficit which according to IFM (2004) for 2003 accounted for -17,7%. According to official statistical data of Central Bank of BaH (2004), in December 2004 the official number and rate of unemployment (registered with employment bureaus) , conducted in both Entities (for the age group 15-64) was 43.2% (44.85% in the FBaH and 41.55% in the RS) of active population. As stated by Human Development Report of UNDP (2002) and Economic Institute Sarajevo (2002) the size of the “grey economy” led the World Bank to conclude that real unemployment rate could be as low as 16.7%.As stated by Central Bank of BaH an OHR statistics for March 2005 the average net wage at the BaH level amounted to KM 499,935 KM (254, 07 Euro). Allocated to entities, in RS average wage amounted 452 KM and in FBaH 547, 87 KM (Institute of Statistics RS, Federal Office of Statistics FBaH, April 2005). In total, it exceeded the net average wage from December 2004 by 1.0% and the net average wage from December 2003 by 2.4% At the same time, in March 2005, the net wage in FBaH exceeded the consumer basket (in April 2005 in FBaH 455,73 KM = 232,51 Euro) by KM Copyright © 2008. Diplomica Verlag. All rights reserved.

92,14 or 20.38%, whereas the net wage in RS fell short of the consumer basket by KM 0,10 and covered only 99.97% of the consumer basket of 452,10 KM = 230,66 Euro (In December 2003, the net wage in RS covered only 82.2% of the consumer basket). (Central Bank of BaH, December 2004). The biggest reform success registered Bosnia and Herzegovina in the area of the price and currency stabilization. The Currency Board the system by which the Bosnian currency Convertible Mark (KM) is coupled with a steady exchange rate to the Euro, has proved itself

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

and to a great extent has created price stability. In 2003 the inflation in the whole state amounted to only 0.6%. While in the Federation in 2004 the consumer prices with an increase of 1.3% remained nearly stable, the price decrease amounted in the RS in the annual average to 0.5%. The RS wrote during the past years always higher inflation rates than the Federation; the approach of the installments shows but that the entities come slowly closer to the fusion of her economies. Bosnia and Herzegovina had to owe the high GDP growth rates in the past, above all, to the financial help from abroad. There, comes that the being lame global economy in 2004, the economy measures brake the economic situation in the Bosnian household as well as which from the central bank to prescribed measures to the attenuation of the credit growth. Due to successful reforms in the banking sector, the interest rates (borrowing conditions) in BaH are more favourable than in other countries in the region. In year 2004 long interest rates amounted to 8.23%, which is much better as e.g. in Croatia 9, 5%, Serbia and Montenegro 13% or in Slovenia 8, 5%. Small increase of interest rates in the year 2005 is caused through acceleration of reforms in the real sector of the economy, which lags significantly behind the banking sector (PRSP, 2004). One of the pressing problems of the Bosnian economy is the foreign-trade imbalance. The export structure of the land is barely developed, and Bosnian goods are not competitive in the international comparison (Bfai, 2002). Consequently the Bosnian import reaches a far higher value than the exports and foreign direct investment (FDI) will need to increase (Economist Intelligence Unit, 2005). The domestic economy engaging again - which might also result from the increasing grant of credit of the banks to the private sector - will provide for furthermore high import. However, the exports might rise also strongly as a result of the stimulation of the global economy. The most important trading partners Bosnia and Herzegovina are Croatia as well as Serbia and Montenegro and - according to the ethnic distribution of the population on the entities - maintains the RS mainly with Serbia and Montenegro and the Federation especially with Croatia commercial contacts (Bfai, 2003). Germany and Italy are the most important trading partners in old EU-15 to whom a total of Copyright © 2008. Diplomica Verlag. All rights reserved.

about 40% of the exports go and from which about 40% of the imports come. Compared to his neighboring states Bosnia and Herzegovina is interlaced only relatively slightly with old EU-15. Because Bosnia and Herzegovina aims, however, at a stabilization agreement with the EU, trade might increase. For the land the inflows are importantly (F.A.Z., 2004), because thereby the falling financial assistances of international credit grantors can be partially caught. By the positive economic development Bosnia and Herzegovina wakes up bit by bit the interest of foreign investors. In 2003 about 320 Mil US $ of foreign direct investments would flow into the land. Investors from Croatia, followed by such from Kuwait,

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Slovenia, Germany and Austria have the biggest interest in the inventory of foreign direct investments in Bosnia and Herzegovina.According to Information’s of BaH Ministry of Foreign Trade and Economics Relation (2005) FDI growth continued at a faster rate in 2003 compared to 2001, although more slowly than in 2002. The reason for it was the sudden increase due to completion of previously arranged privatisation of several banks. Until October 2004 FDI increased on 489 million Euros due to improved conditions and positive prospects for FDI. In August, 2004 occurred the biggest investment of a foreign enterprise up to now, when an interest of 51% of the biggest steelworks of the land was sold to holding companies LNM, the second largest steel group worldwide. LNM has accepted to invest farther 235 million USD during the next 10 years. The increasing interest in Bosnia and Herzegovina is to be gone back also on the improved juridical basic conditions (Bank Austria, 2003). Foreign investors are treated as equal by law to domestic ones. Numerous free trade agreements (among the others with Germany and UK) make easier trade in the region and open a market with more than 5.5 million consumers, even if the purchasing power is partially still low in some countries. Besides, production companies profit from low labour costs – the medium monthly take-home pay lies in the Federation with 300 US $, in the RS with 220 US $-, and a big supply of employees. Many of them have studied abroad and speak several languages (F.A.Z., 2004) Obstacles with investments likewise still originate from the splitting of the economic area British Chambers of Commerce (2005). On reason of the high independency of both entities different lawful bases often exist in the land shares, and there is no central administrative authority. Also one has not succeeded up to now to introduce a value added tax uniform in the whole land (OHR,2005). The Bosnian parliament has dismissed a transitional law which intends the creation of a central authority for the indirect taxation. This institution should prepare the introduction of indirect taxes at whole-state level and regulate the distribution of the income. Besides, a uniform customs system should be set up. In spite of the trouble Bosnia and Herzegovina turns out promising market with high potential (DEG, 2004). The Copyright © 2008. Diplomica Verlag. All rights reserved.

continuously sped up reform exchange rate is the basis for a positive development of the land, and the economy remains, above all, thanks to foreign money on growth exchange rate. As stated by Bfai (2003) and PRSP (2004), in order to meet macroeconomic goals it will be necessary for BaH to further attract additional foreign direct investments which are considered essential for a restructuring of the Bosnian economy; it is also hoped that FDI will also compensate for the slackening influx of financial assistance from the international community of donors. However, the interest of investors who would be able to inject capital and know-how has remained extremely meager to date. This is a great challenge for

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Bosnian state due to the fact that there is strong competition among countries in the region, which also base their economic development on attracting foreign investment. The progress of the land is appreciated by international page. In February 2004 the International Monetary Fund (IMF) closed his fourth and finishing ones examination of the 101 Mil. USD credits with positive result. The IMF ascertained the fact that Bosnia and Herzegovina could register significant progress in many reform areas. However, with the preservation of the macroeconomic stability still numerous challenges are imminent. Another fiscal-political rationalization is necessary, in particular with wages and pensions. In July 2004 IMF started with Bosnian government negotiations about the conditions of a new assistance agreement. The most extensive national support in 2005 comes from the USA (33.5 Mil Euro) according to covenants, as well as from Sweden (28 Mil Euro) and Switzerland (15.5 Mil Euro) (Bfai, 2004). As stated by Pudschedl (2004) aside from the stable rate of inflation, the prosperous consolidation of the budget also has a positive impact and contributed to considerably improving the country’s state of indebtedness. The general evaluation of EU Commission (2003) is that BaH is developing stable and solid macroeconomic policies and achieving results in structural reforms. At the end of March 2004 Bosnia and Herzegovina got rating with positive view of the rating agency Moody's (Raffeisenbank, 2004). The international rating agency Moody's has registered the success of the land and has recorded the land recently for the first time in his evaluation. In his rating Bosnia and Herzegovina for his credit risk receives the assessment B3. Farther progress is to be expected in particular because the land progresses on his way to the EU. Bosnia and Herzegovina conducts nowadays with the EU negotiations about a Feasibility study for a stability and association agreement. The distant destination of the agreement is an integration of the land in the EU.

6.4 Educational sector – Vocational Training and Adult Training “The overall reform of the educational system is a time consuming process. Within this Copyright © 2008. Diplomica Verlag. All rights reserved.

process, the Reform of vocational training could be a key link for the economic development and reduction of unemployment and poverty in Bosnia and Herzegovina, because it creates a presumption for the establishment of schools for those professions that are needed in the market, and which have a greater employment potential, such as business schools, IT training and the like” Bosnia and Herzegovina Medium-Term Development Strategy - Poverty Reduction Strategy Paper (PRSP) (2004), p.186

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

“Vocational education must enable its recipients to swiftly enter the labour market and use the skills they have acquired at school. It is of utmost importance to ensure that vocational education and training correspond with labour market needs” OSCE Mission to Bosnia and Herzegovina (2005), http://www.oscebih.org/education/vocational_edu.asp?d=2, 18.06.2005,18:13h

Nowadays to invest in Bosnia and Herzegovina in the vocational training and educational sector is, on studying and analysis of the literature relevant and sources of information, moreover absolutely a equitable commercial decision. All economic indicators argue for it. This on the one hand because the reform of vocational training is one area that is defined in the EC Feasibility Study as a precondition for cooperation with BaH ("The Report of the Commission to the Council" (EC Feasibility Study), Brussels, 18th November, 2003, page 34) and the EU as well because Bosnian government take pains to realize and to conform to EU requirements. One of the emergent sector priorities settled in governmental Poverty Reduction Strategy Paper (PRSP) is improvement of vocational Training and Adult Training (PRSP, side 186). On the other hand because of rate of unemployment of 43% in BaH, and due to fast development of the local industry one will find with certainty enough potential customers in the local industry as well as among the person subgroup of students, scholars and unemployed persons. Unemployed people as well as the subgroup of people with small income are often supported by financial programs offered by international community to the educational companies (Tempus Guide, 2004).

The web side of EU Vocational and

Educational Programme http://www.euvet.org/en/ schools.asp), shows the list of the private schools in Bosnia which offering Vocational Training. None of them are offering IT-Services or the same kind of curses like RFH. In the Area of Banja Luka one finds mainly tourist and agriculture vocational schools. This affirmed my appraisal in form of survey in Banja Luka, that mainly the Students interesting in IT- Network Courses is going to Croatia or Serbia to visit the vocational training courses (like CISCO Network courses). The costs for the 1 level

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course amounts, according to information’s of the provider the company “IT Professional” in Banja Luka, 1304 Euro! This was confirmed to me also by the German Foreign Trade Chamber (AHK) in Sarajevo. The same course on the RFH costs 400 € for RFH students and 800 € for external customers. Generally, the local competition in the area of Vocational and Adult Training, in the kind like the RFH it offers here in Germany, is extremely weak. For instance under the known Internet portal http://www.firmlist.com (please see picture below) where the companies are listed geographically related to countries and the towns in the related country and they act, inter alia, in the Educational and Vocational Training

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Sectors shows precisely no entry of a Bosnian company which acts in the area Education/Vocational of Training acts.

British governmental agency DFID (Department for International Development) (2004) found out that in Bosnia and Herzegovina present, professional training is most often conducted on the job. Employers which were surveyed pointed to the shortage of a sufficiently qualified labour force in the labour market. Further result of DFID analysis was that employers are not particularly avid and eager to training the employees through the existing institutions for

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professional training due to the inefficiency and the lack of funding of professional educational programs being offered. In other words the existing offers (inter alia also from private institutions) are too expensive. According to Bosnian government the problems in vocational training and professional education area are due to the fact that existing vocational and professional education does not meet the needs of a modern labour market (PRSP, 2004). In addition, it exist no legal framework and there is a lack of interest on the part of the private sector to invest in this area. Thus it is obviously that the employers should wake up her interest in vocational training. Thus to carry out FDI with successes it is determining to choose a suitable strategy. These should correspond exactly to the local

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

needs of the local industry and public and private institutions (Tilles, 1998). Furthermore it is necessary to make vocational training more attractive for employers through efficient advertising. Also it is obviously possible to develop strategic alliances with employers and to develop curricula to meet they needs. Potential vocational training company as RFH should in that case develop a system of labor market information’s in order to gain competitive advantage through information projection. The vocational education and training institution should consider the shortness mentioned by OSCE in their statement to “Establishment of modern vocational education and training “ (2005) in Bosnia according to companies “should be specialised post-secondary, orientated to labour-market training for adults and youth, including displaced and unemployed persons”. Also it is of particular importance to establishing a system for in-service and initial training of teachers (like Goethe Institute in Sarajevo it already does) ensuring that teachers within vocational education and training institutions have access to high quality training. In order to make FDI feasible inquiries of the relevant market conditions (Rugman, 2003) belong among other things to the initial work. In following the most important indicators which are relevant to fathom the key successes factors for FDI in Bosnia and Herzegovina in educational sector will be presented.

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Universities Federation University of Bihac University of Mostar I University of Mostar II University of Sarajevo University of Tuzla Total Republika Srpska University of Banja Luka University of Srpsko Sarajevo Total Bosnia and Herzegovina total

Schools

Academies

Associate programs

Total

5 7 8 23 8 51

0 0 1 3 1 5

2 1 1 4 0 8

7 8 10 30 9 64

12

1

2

15

13

3

0

16

25

4

2

31

76

9

10

95

Source: PRSP (2004)

Bosnia has 7 public universities with a total of approximately 100,000 students. The University of Sarajevo is the largest in the country. In the last 3 years, there has been an ongoing process of establishing private universities. To offer the courses they correspond to local needs is very rare in Bosnia. The Faculty of Forestry of University in Banja Luka has specialist courses in textiles that cater to the needs of local businesses. The students are

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

mainly not oriented to needs of the industry but to popularity of the studies. For Instance medicine and agriculture are very popular, just like electrical and mechanical engineering (but not necessarily important demanded from local companies) (FIPA, 2005). In the meantime, the percentage of students enrolled at private universities is negligible. Public and private higher education institutions are subject to identical laws and regulations and only have academic autonomy, e.g. the right to select their staff according to the regulation of the university and the laws on higher education. This fact is currently changing through Articles 13-20, of the draft of the new Framework Law on Higher Education. Further, still it lacks in many places of modern equipment and new textbooks, the university reforms lead the way only slowly and aid money is necessary (Tanovic, 2003). The mobility of the students is mostly irreversible and in one-way – it leads to what is called "brain-drain". Significant numbers of Bosnian-Herzegovina students leave to study abroad, in other European countries (especially Austria) and do not come back (Bologna Process Working Group, 2004). In the following is presented the average wages by moths in BaH (April, 2005) the

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employees inter alia in education sector (Institute of Statistics of RS, 2005).

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

Data related to average number of working hours by gender and type of employment are according to Federal Office of Statistics of Federation FBaH, Living Standards Measurement Study, Module 5 (2005). These data are important with the later calculation of the pricing and capital requirements and considerations about organization of human resources e.g. hiring of employees.

According to statistics, the males are working longer as females and most hours are achieved by private employees in private companies. The abovementioned data of Institute of Statistics of RS and of Federal Office of Statistics of Federation BaH, counts as reliable and were used as sources among others also by Bfai (German Federal Agency for Foreign

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trade and payments) in their Issue “Wage labor costs and non-wage labor costs” (2003).

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

7 Legal basic conditions Bosnia and Herzegovina exists of two entities with the own constitutions in each case: While the Republika Srpska is organized centralistic, the Federation Bosnia and Herzegovina consists of ten cantons. Besides, there exists the district Brcko. The laws related to FDI and setting up of the company are: •

Law on Free Zones (Official Gazette of BaH no. 3/02, 13/03))

•

Law on Foreign Direct Investment Policy (Official Gazette of BaH no. 17/98, 13/03)

•

Law on Foreign Trade Policy (Official Gazette of BaH no. 7/98)

•

Law on Customs Policy (Official Gazette of BaH nos. 21/98 and 34/00, 10/02)

•

Law on Competition (Official Gazette of BaH no. 30/01)

•

Law on Industrial Property (Official Gazette of BaH no. 3/02)

•

Copyright Law (Official Gazette of BaH no. 7/02)

•

Framework Law on the Privatization of Enterprises and Banks (Official Gazette of BaH no. 14/98, 12/99 and 14/00, 34/00, 10/02, 16/02)

•

Law on the Central Bank (Official Gazette of BaH no. 1/97, 29/02, 13/03)

•

Law on Communications (Official Gazette of BaH no. 31/03)

•

Law on Associations and Foundations (Official Gazette of BaH no. 32/01)

•

Law on Concessions (Official Gazette of BaH no. 32/02)

7.1 Capital Investment Law In Bosnia and Herzegovina or in both entities counts since 1998 the whole-state law about Foreign Direct Investments (BaH Official Gazette No. 4/98, 1998). It regulates among other things also the participation of foreign investors in Bosnian companies. Foreign participation

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is expressly protected and is favored. A 100% participation of foreigners is allowed in all economic areas. The foreign capital share in a company whose object of a is the production as well as the sales of weapons, ammunition, explosive and military equipment or the public reporting may not cross 49%. Investments in sectors, they are subject of the restrictions, need the approval of the responsible institution of the respective entity. As a „Foreign Direct Investment " counts the acquisition which allows the acquisition or the rise of the control about a company establishment or extension of every business activity as well as every activity, only or with other foreign investors. Also the extension of a company which is

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

already under foreign control counts as a foreign direct investment. The company can act in the industry, the agriculture, in trade or in the service sector (F.A.Z., 2004) As a „Foreign control„ counts every participation of more than 10% of the capital and/or the rights to vote, whose direct bearer are foreign investors or a local juridical person which are under foreign control. The foreign investor can reinvest the profit from his investment in all economic areas, namely in the same form and under the same conditions which are defined for the resident (Area-resident) from Bosnia and Herzegovina. Foreign investors have the same rights and duties like residents (FIPA Investment Guide, 2005). Foreign investments are excluded from the payment of customs and customs liabilities, exclusively of the customs evidence, if it the regulations of the law about the customs policy of Bosnia and Herzegovina do not intend differently.

7.2 Corporation Law / Legal forms of organizations In April, 2003 the decision was made about the setting up and work of representatives of foreign persons in BaH. A representation may accept orders, but no commercial operations in the own name and at own account effect, because it is no juridical person. The representation carries out business in on behalf of the founder. A foreign person must submit the registration for the entry in the register of the representations of foreign persons in BaH which is led at the ministry of foreign trade and economic relations BaH (Bosnian: Ministarstvo vanjske trgovine i ekonomskih odnosa). In the Republika Srpska the registration follows at the ministry of economic relations with the foreign country (Bosnian: Ministarstvo za ekonomske odnose sa inostranstvom). The registration for the entry can submit a foreign

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person or by a commissioner (FIPA, 2004). The registration must contain the following: •

Name and seat of the founder as well as accredited trade register extract,

•

The decision of the management about the setting up of the representation in BaH,

•

Seat of the representation,

•

Specifications about the for job of the representation responsible persons, as well as about that, how many residents and foreigners should be employed,

•

Affirmation in lieu of an oath about all activities the representation,

•

Document about the entry of the foreign ones person in the economic register,

•

Specification of a bank account at a local bank,

•

Proof about the payment of the fee amounting to 100 Convertible Marks (KM).

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Lukac, Dusko. Key Success Factors for Foreign Direct Investment (FDI) : The Case of FDI in Western Balkan, Diplomica Verlag, 2008. ProQuest Ebook Central,

The foreigners occupy within the representation need a work permit.

Regulations in Federation of Bosnia and Herzegovina Republika Srpska In the Federation of Bosnia and Herzegovina the law about trading companies has been enacted (Official gazette of the Federation Bosnia and Herzegovina No. 23/99) which defines a incorporated corporation (trading company) as a juridical person who independently carries out an economic activity for the purpose of profit acquisition. Local as well as foreign natural or juridical persons can found incorporated corporations. The property of a juridical person receives the company with the entry in the trade register. It is liable with its whole property. The following legal forms are possible (Reiffeisenbank, Investment Guide, 2004):

Legal forms of organisations

Federation of Bosnia and Herzegovina

Republika Srpska

Company with unrestricted joint and several liability of the partner - Unlimited Joint Liability Company (Bosnian: Društvo sa neograničenom odgovor- nošću (d.n.o.))

Two or more partners required, BaH citizens or foreigners, individual persons only; Founders are liable to use all their assets, including rights, services and personal property; No demands for minimum or maximum investments; One or more owners required;

Two or more partners required, BaH citizens or foreigners;

Limited Liability Company (Ltd.) – (Bosnian: Društvo sa ograničenom odgovornošću (d.o.o.))

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Limited Partnership (Bosnian: Komanditno društvo (k.d)):

Public limited company PLC (Joint Stock Company ) (Bosnian: Dioničko društvo (d.d.))

Minimum initial capital required amounts 2.000 KM; At least one complementary and a limited partner. 1 partner (complementary) with full liability (including private property) and at least 1 partner with limited liability, the liability being limited by the value of the share agreed upon;

One-Person Joint Stock Company possible. One or more stockholders; Minimum initial capital required amounts 50,000 KM; The least nominal value of a stock is 10 KM.

No demands for minimum or maximum investments;

1-30 partners. No limit to the number of shareholders if they also employees in the company; Minimum initial capital amounts 2.000 KM; No least capital regulation and no least cash requirement. One person at least has unlimited liability for the company, along with another partner; The evaluation of the real values and rights is carried out from judicial sworn experts. If the value of the real values and rights does not cross 3,000 KM, the evaluation can be carried out by the founders. One-Person Joint Stock Company possible. Setting up form: simultaneous or successively. One to 50 stockholders for foreign companies pooled together in one go, and 2 or more stockholders for the companies pooled (associated) successively; The minimum initial capital required amounts 10.000 KM for companies pooled in one go and 20.000 KM for companies pooled successively; The least nominal value of a stock is 1KM

Sources: FIPA BaH (2005), Raiffeisenbank Austria (2004), Financial centre Bosnia and Herzegovina -Report, December 2004

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The inserts of joint stock can follow in the form of money, property or rights. The registration for the entry in the trade register submits that person who is appointed according to company acts to the representative office of the company (the CEO). After the entry of the Ltd. in the trade register or after the court confirmation that the entry has followed, company must turn to the statistical office of the Federation of BaH for the purpose of assignment a register number to receive the uniform identification number of 13 digits (Bank Austria, 2003). The application for registration is to be made to the Ministry of Commerce (board of trade) of the FBaH which has his seat in Mostar however; the documents can be also submitted in a department of the Ministry in Sarajevo. The law about company in the Republika Srpska (RS) defines the setting up and the business activity of company in similar way (FIPA, 2005). The difference to Federation is that of minimum setting up capital of the PLC amounts to 10,000 KM (in the case of simultaneous setting up) or 20,000 KM (in the case of successive setting up). The minimum capital of the Ltd. lies with 5,000 KM. For the company with unrestricted joint and several liabilities of the partner and the limited partnership there is no minimum capital regulation (Reiffeisenbank, Investment Guide, 2004).

7.3 Tax - / Fiscal Law The competence to the charge of taxes in Bosnia and Herzegovina lies at the level of the entities. The FBaH and the Republika Srpska have in each case its own tax legislation, and the tax rates are not harmonized. A basic tax revision is planned in collaboration with an international expert's team, as a consequence thereof adaptation to free-market economy. A new bill to the income tax is on the hand and the value added tax system should be standardized soon (DEG, 2004).

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Income tax regulations in Federation of Bosnia and Herzegovina According to Law on Corporate Income Tax (South Europe Economic Forum, 2005) by the taxation of the income of natural persons in the Federation of BaH counts the so called partial taxation whereas each type of income revenue is taxed separately. Besides, it can also come to a multiple taxation of the same income on different levels (entity and canton!). A double taxation is given in particular with not independent income which is liable at first for wage tax on entity level and is taxed with excess of a certain gross income at canton level.

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The tax duty for the wage tax on entity level goes back to the residence or usual stay of the employee in the FBaH. A limited tax duty exists if wage income is achieved with missing residence or usual stay within the Federation of BaH. The tax rate amounts to 5% of the calculation basis. Calculation basis is the wage or the net salary after deduction of the social security contributions. The wage tax is withheld in the deduction procedure by the employer monthly from the non-independent income and is led away to the treasury. An annual adjustment of income tax or another annual tax return by the employee is not planned (F.A.Z., 2004). The income already inferior the wage tax becomes at canton level afterwards once again taxed within the scope of the taxation of the gross income of natural persons to the income tax, if these gross incomes – e.g. in the case of the canton Sarajevo - cross the three times as much of the medium income in the canton (Bank Austria, 2003). The income tax duty for the taxation at cantonal level depends upon residence, the activity in a representation or - in case of from foreign citizens - to the job in the respective canton. The tax rate of the income tax is dependent on canton and amounts nowadays e.g. in the canton Sarajevo to 10% on the income to be paid tax on. The free allowance amounts to about 20,000 KM as a function of marital status. For foreign employees this free allowance doubles. Assessment period is the calendar year. The sale period is announced by public appeal. Beside the non-independent wage income the gross income also encloses income from independent activity as well as from property and property right, in each case as net amounts. Deductible are the personal free allowances which are granted in case of by foreigners again by double height. Not, in addition deductible are advertising costs and special expenses which are to be considered already, by the net principle, as satisfied. The periods of limitation amounts in each case to five years for the fixing and payment.

Income tax regulations in Republika Srpska

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In the Republika Srpska the first 10,000 KM of the annual income are released from the income tax (Reiffeisenbank, 2004). About that the income tax rate is regressive: •

Incomes between 10,000 and 15,000 KM: 25%,

•

Incomes between 15.001 and 25,000 KM: 20%,

•

Incomes more than 25.001 KM: 15%.

Income tax rates in 2005 in Germany, according to German Embassy in Washington D.C. (2005) range from 15 % to 42%.

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7.4 Taxation incentives in Federation of Bosnia and Herzegovina The profits tax law of the FBaH became effective since the 1st January, 1998 (FIPA, 2005). Unrestrictedly are accordingly taxable, companies, banks and other financing institutes which try to achieve a profit by the sales of products and services at the market and have its seat in the FBaH. Limited taxable are business premises of foreign companies with profit achievement intention. Calculation basis for the profits tax is the profit according to tax balance, and is to be corrected by additions and shortenings.(DEG, 2004). The tax rate amounts uniform for retention and distribution to 30% of the profit to be paid tax on. Besides, a withholding tax on dividends is to be noticed, which accounts for 15% of the distributed amount. According to German Federal Ministry of Finance (Bundesfinanzministerium) (2005) this regulation also stands in harmony with the double taxation agreement (DTA) between Germany and Bosnia and Herzegovina which contains no explicit regulation for (box of) dividends. According to a writing of German Federal Ministry of Finance to the DTA with Croatia (German Federal Law Gazette (BGBl) 1992 II S. 1146), it is to emanate from the nonapplicability of the exemption method, because it acts with the identical DTA with former Yugoslavia (Fifo-Ost, 2005). The same regulation counts for Bosnia and Herzegovina. The profits tax law grants various tax reductions and-tax exemption: Thus all companies founded anew in the first financial year receive a reduction from 100%, in the second year one of 70% and in the third year one of 30%. Companies in duty-free zones are released during the first five years completely from the profits tax. With the pyramiding of the profit in the company scope of business from which the profit comes, the profits tax decreases in the circumference of the effected investment, with the investment in another scope of business the profits tax responsible is reduced about 75%.

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A company liable to tax in which a foreign person with at least 20% is involved enjoys during five years a tax exemption on the profit which is entitled to the foreign capital share.. If foreign capital flows within six or more years once more into the same company, this can be considered no more in full circumference for a renewed tax reduction (Pudschedl, 2004; F.A.Z., 2004) With a change of the Profit Tax Law from February, 2000 regulations were carried out closer to the tax balance and tax deduction ability by company expenses. Accordingly reserves are for uncertain liabilities (risks) and expenses reserves (e.g., reserves for compensations,

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maintenance and started judicial disputes etc.) tax deductible and to take into consideration and to include in the tax balance. Because expenses reserves in the visible trade balance (commercial balance sheet) according to International Accounting Standards (IAS) are not to consider and to declare as liabilities (FIPA, 2005). Shortenings can arise, e.g., by special depreciations up to 25% about the normal sentences if the assets serve the environmental care, the research or as a PC equipment. Losses carried forward are capable of talk up to five years; it use is not delimited between the years. Due to change of the law from February, 2001 it is required that proofs about the realization of the investment (payment orders, transfer bearers) are to be added to the tax return (DEG, 2004). This might be problematic, because up to issue of the tax return, investments from the realized profit as a rule are not effected yet. The law permits itself under certain requirements also the tax consolidation of parent companies and subsidiaries. Besides, the group of companies can apply for the charging of profits and losses of the single companies of the team, even if it about different legal persons (incorporates). The profits tax return is to be handed in, till the end of March of the sequence year (Bank Austria, 2003).

7.5 Taxation incentives in Republika Srpska The profit tax rate in the Republika Srpska is relatively low and amounts to only 10%. Anew founded companies (with the exception of the banks, insurance companies and trading ventures) receive in the first financial year a tax reduction from 100%, in the second year one of 70% and in the third year one of 30% of the regular tax liability. All companies in the Republika Srpska receive a profits tax reduction if they invest in material inserts, or acquire capital shares in the own or in other companies in the RS (FIPA, 2005).

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7.6 Sales tax Sales tax regulations in Federation of Bosnia and Herzegovina In the Federation BaH the turnover is paid tax on, by products to the final consumer, and it does not come for a multiphase taxation like with the value added tax. Therefore, an input tax deduction is also not planned like in the value added tax system. Companies’ juridical persons and natural persons who carry out an activity in the harmony with the law are taxable (DEG,2004). Place of delivery and performance place is as a rule the seat of the company in

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the FBaH. Also the so-called import services which foreign persons produces to a domestic taxable, counts as executed in the inland, and the performance consignee must lead away a service tax at the rate of 10%. According to Law on Sales Taxes (South Europe Economic Forum, 2005), assessment basis is the remuneration less sales tax and transportation costs. A correction of the assessment basis is basically not possible downward with resulted additional discount or demand failure. Therefore, it is hesitated in the practice often by writing bills if these are not paid ex ante (F.A.Z, 2004). The tax rates are built up according to rate system like the customs and sway between 5% and 60%. The standard rate amounts to 20% for deliveries of goods as well as 10% for services. For computer, electricity and gasoline a tax counts rate of 15%. Construction performances are subject of the sales tax only (for services) if her value contains no building material which has been already registered by the sales tax (for goods). As a rule the sales tax is due to the payment within five days at the end of the week by which the payment entrance has followed for the delivery or performance. However, the sales tax gets due anyway at the latest after 30 days to the payment, no matter whether a payment of the bill has followed. There is basically no possibility to extend this period (Bank Austria, 2003). A sales tax allowance procedure to foreigner is not planned legally and also it is barely necessary in the practice because of the tax relief possibilities.

Sales tax regulations in Republika Srpska The sales tax system of the Republika Srpska is very similar to that of the FBaH, because both have the same origin in the Ex--Yugoslavian control system. According to FIPA (2005) the standard tax rate in the Republika Srpska amounts to 18% and for services 10%. A reduced tax rate of 8% counts to food. Bread and milk are excluded from the sales tax.

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7.7 Labour legislation / Social insurance regulations In the FBaH the labor law (Official Gazette of the FBaH 43/99) is applied with changes and supplements from the year 2000 (Official Gazette of the FBaH 32/2000). The law intends the conclusion of an employment contract on certain (maximum two years) and uncertain time as well as in written or oral form. The trial period amounts to maximum six months. If there is no written contract, the employer must pass at least a written explanation to the employee (DEG, 2004).

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7.8 Employment of foreigners In the FBaH the law about the employment of foreigners (Official Gazette FBaH 8/99) from 1999 regulates the conditions and the way of the activity of foreigners. Accordingly a foreigner can conclude an employment contract or a contract about the performance of passing or temporary employment if he owns a work permit. He/She needs a license for the constant residence or a sojourn (temporarily stay) besides, similarly as e.g. in Germany must be guaranteed that no local person fulfils the conditions desired by the employer. The work permit is limited – it is issued at most for a year. Exceptionally the work permit can be issued indefinitely to a foreigner who owns a license for a constant residence in the Federation. The work permit can be taken away from the foreigner, in case he practices a criminal offense or a heavy action against the public order.

7.9 Social Security Law The Bosnian “Social Security Law” includes regulations about the pensions, health insurance and unemployment insurance. Independent small businessmen, freelances as well as managers of companies are also basically contributory (Bank Austria, 2003). There is no social security income ceiling, so that on high salaries appears extremely high financial burdens. The minimum assessment bases which are defined as a function of average wage in the Federation, count to self-employed persons. The following social security contributions must be paid over: Contribution

Employer’s contribution in %

Employee’s contribution in %

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Federation of Bosnia and Herzegovina Pension scheme (insurance)

7

17

Health insurance

4

13

0.5

2

Pension scheme (insurance)

12

12

Health insurance

7.5

7.5

Unemployment insurance

0.5

0.5

1

1

Unemployment insurance Republika Srspka

Child benefit

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The social insurance agreement between Yugoslavia and Germany is applied further between Bosnia and Herzegovina and Germany (German Federal Foreign Office, 2005). According to regulation about the minimum employment number, the employee's number is depending on sector of the company activity and encloses beside the director (manager) as a rule farther 1 to 15 employees. Thus, e.g., a company which is registered with (head) company object in the building trade sector may not announce less than 15 employees, and the must be insured according to social security law. Together with the restrictive right to cancel in the labor law the order about the least employment figure is a serious obstacle for foreign investors (IMF, Staff report, 2004). Another obstacle for foreign investors is the unsolved question of the social insurance of foreigners they work in Bosnia and Herzegovina. According to regulation, the manager (CEO) of a company in Bosnia and Herzegovina (although he/she is foreigner) must be employed in this company (what signifies at the same time that he/she must be insured socially in Bosnia and Herzegovina) (World Bank, Doing business in Bosnia, 2005).

7 .1 0

Foreign Exchange regulations

The law about the foreign currency economy, the law about loan businesses with the foreign country and the law about the domestic payments form the juridical framework. Foreign currency regulations regulate Article 11 of the Law about the Foreign Direct Investments (2003) as well as the existing bilateral Investment Protection Agreements. “The free profit transfer for foreign investors is assured” (FIPA, 2005). Local persons can maintain at domestic banks indefinitely foreign currency accounts. There is also no compulsory exchange of currency receipts from abroad. Foreign currency can be freely used in the transport of delivery and performance transport - but not in the pure capital transfer - with the foreign country. The allocation of credits abroad or a capital transfer, e.g., for opening a representation or subsidiary abroad needs the approval of the central bank. Thus it should be

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prevented that foreign currency runs off uncontrollably abroad. In order to fulfill foreign currency liabilities with the foreign country, domestic means of payment (Convertible Mark, KM) can be exchanged without limitation at the commercial banks in foreign currency. The domestic natural persons, which (additionally) work abroad, may untrammeled take with, foreign currency and bonds. The regulations in the cash trade to the money-laundering are to be noticed also from these persons. In the business dealings between local persons (company) foreign currency payments are also allowed, as far as they are arranged by contract (DEG, 2004). Domestic payments to the state (taxes, customs, other fees and duties) have to follow exclusively in KM.

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7 .1 1

Legal conditions in Republika Srpska versus legal conditions in Federation

In Republika Srpska the profit tax law as well as the income tax law does not prescribe taxation of the profit transfer, the dividends or other incomes which were acquired by the participation in the profit of the company, and also the transfer of these incomes abroad. With it the distribution of this profit is not taxable in addition to foreign owner of the capital after the assessment and payment of the profits tax by the company, In FBaH the profits tax law sees a withholding tax of 15% on dividends, interest and royalty which are paid to the non-resident before. That means that after the taxation of the profit also those amounts of the rest profit which are paid to the non-resident are taxed, in addition. Officially this tax is justified with the fact that it should promote abroad the reinvestment of the profit in the FBaH instead of the transfer. However, in the practice this does not stimulate the foreign depositor (F.A.Z., 2004). Its profit is taxed in the FBaH twice (30% of profits tax plus 15% of withholding tax) - although it concerns two quite different bases of the taxation: one is the profits tax of the company, the other the income tax of the foreign depositor who has acquired the shares of the company in FBaH. To the foreign depositor remains the possibility that the taxes paid in the FBaH, he/she can assert tax-diminishing in the own land. The withholding tax deduction also stands in the harmony with the existing double taxation agreement with Germany, because this does not know the case of the profit distribution to Germany - in contrast to profit distribution to Bosnia and Herzegovina. Against it, the withholding of the 15% withholding tax on payment of interest to Germany is according to the double taxation agreement inadmissibly. The Bosnian Ministry of Finance has not commented on the procedure of the exemption yet (DEG, 2004). A special obstacle for foreign layouts is that Bosnia and Herzegovina has signed up to now with no land an agreement to the avoidance of the double taxation.

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7.12 Business related indicators overview In the following all business indicators mentioned in the text, are presented in brief. These indicators are important and used for later calculations. All data in overview are taken from the official Bosnian institutions like statistical offices of FBaH and RS, IFM and World Bank etc., however but also by my direct inquiries as in case of determination of average costs for renting of offices in Banja Luka and Sarajevo (secondary data) because statistics for it are not to find by statistical offices. The overview makes easier later search.

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Bosnia and Herzegovina – Business related indicators overview Bosnia and Herzegovina

Federation of Bosnia and Herzegovina

Republika Srspka

Useful Indicators Rate of Unemployment Average Net Wage Consumer Basket

43.2%

44.85%

41.55%

254, 07 Euro

279,53 Euro

230,61 Euro

231,59 Euro

232,51 Euro

230,66 Euro

Interest Rates1

8,23%

Social insurance contribution2 Working hours per week by gender (man/women) and sector (private/public)3

32 % (Uniform rate) 43,91/39,02 (Average) 45,16/42,78 (Average)

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Taxes

Income tax

The first 10,000 KM of the annual income are released 5% on entity level + 10% in from the income tax; average (dependent on Incomes between 10,000 and canton) = Multiple taxation of 15,000 KM: 25%; 15.001 and the same income. 25,000 KM: 20%; more than 25.001 KM: 15%.

Profits tax

Tax rate amounts uniform for retention and distribution to 30% of the profit; Besides, a The profits tax rate in is withholding tax on dividends relatively low and amounts is to be noticed, which to only 10%. No additional accounts for 15% of the taxation of the profit distributed amount transfer, the dividends or (inadmissibly according to the other incomes! double taxation agreement with Germany).

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The tax rates are built up according to rate system like the customs and sway between 5% and 60%. The standard rate amounts to 20% for deliveries of goods as well as 10% for services. For computer, electricity and gasoline a tax counts rate of 15%.

Sales tax

The standard tax rate in the Republika Srpska amounts to 18% and for services 10%. A reduced tax rate of 8% counts to food. Bread and milk are excluded from the sales tax.

Anew founded companies (with the exception of the banks, insurance companies Tax reductions and-tax and trading ventures) exemption: the first financial receive in the first financial year 100%, reduction; in the year a tax reduction from second year one of 70% and in 100%, in the second year the third year one of 30%; A one of 70% and in the third company in which a foreign year one of 30% of the person with min. 20% is regular tax liability. All involved enjoys during 5 years a companies receive a profits tax exemption on the profit which tax reduction if they invest is entitled to the foreign capital in material inserts, or share. acquire capital shares in the own or in other companies in the RS.

Tax incentives

Costs Average costs for rent of the offices per m2 (downtown)4

Sarajevo : 8,5 Euro

Banja Luka : 8 Euro

8,44 Euro / Month

7,88 Euro / Month

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Power per 0,07 Euro (Low) – kilowatt hour 0,14 Euro (High) for companies Water per m3 for companies

1,38 Euro

Gas per m3 for companies

0,32 Euro

International calls to neighbouring countries

0,13 Euro/min 0,039 Euro/min (EU Average)

Internet user per 100 inhabitants5

2,62 23.7 (Europe Average)

Internet prices 8,16 Euro / Month including tele(BaH Average) 6 phone (ISDN) VAT predicted7

17%

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Starting a Business8 Number of procedures to start business

12 (OECD Average = 6)

Time (days) to start the business9

54(OECD Average = 25)

Difficulty of Hiring Index

76 (OECD Average = 26,2)

Difficulty of Firing Index

30 (OECD Average = 26,8)

1

2004 “Social insurance contributions are not separated according to employers and employees” ; Bank Austria(September 2003), Investment Guide Bosnia and Herzegovina, p.34 3 According to Federal Office of Statistics of FBaH, 2005, Statistics includes behind public and private also owners and self-employed. 4 Source: Internet Business guide BaH, Small ads, http://www.bih-oglasi.com/malioglasi/oglas.asp?kat_id=9&id_oglasa=11160&kategorija=9 5 Source: International Telecommunication Union (2003) http://www.itu.int/digitalbridges/docs/ presentations/09-Gray-DAI.pdf 6 BHTelecom- Internet Provider (2005): http://www.bhtelecom.ba/isdn_cijene.html 7 Value added tax predicted at the rate 17% in 2005/2006, OHR 8 World Bank (2004) http://rru.worldbank.org/DoingBusiness/ExploreEconomies/BusinessClimate Snapshot.aspxeconomyid=26 9 According to PRSP (2004), time required to start the business in 2006will be reduced to 6 days

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2

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8 Key successes factors for FDI “The service markets have developed considerably faster during the last years than the goods markets. German companies still export about 6 times more goods than services abroad. Only a few service companies still offer its services also internationally” German Federal Ministry of Economic Affairs and Employment, Worldwide Active, 2004

“In functionality, quality and service German products are a world first-class. Hence, the global market is open to them. Chances offer not only delivering a product abroad, but also various services all around the delivered product: from the servicing up to training of the employees” Roland Berger Strategy Consultants, Finding the formula for growth, 2005

To define key success factors means to understand the business (Lynch,2003). In every business, certain issues or activities are key and critical to performance and to creation of competitive advantage. To develop corporate-level strategy an analysis of key success factors is not usually necessary because business-level plans define the success factors. But to summarize success factors is important in order to confirm their importance with the business-level mangers and to prove if circumstances in the business have changed (Campbell, Goold & Alexander, 1995). In this chapter I will analyse the potential rival companies on the Bosnian market (environmental scanning) as a first step for development of the strategy implementation in order to develop basic condition for development of strategies they will be essential for RFH to stay competitive and be successful on the Bosnian market. Analysis will be carried out according to techniques for analysing industries and competitors developed by M.E. Porter Copyright © 2008. Diplomica Verlag. All rights reserved.

(1980). After I’ve identify them I’ll create key success factors – framework (with theoretical evidence and practical recommendations), in order to enable the RFH to develop competitive advantage against them, specifically advantages that can be sustained over time. Success factors are differently defined among theorists and are depending of the aimed strategy and view. E.g. as stated by Holtbrugge (2004) a key success factor of international strategic business cooperation is the choice of the right partner (Brouthers, Brouthers, & Wilkinson, 1993; Geringer, 1988; Stiles, 2001). According to Galbratch (2005) from the resource-based view firm's success is largely driven from resources that posses certain special

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characteristics. Here I want to point out that, in my analysis, I’ll strongly base my research on resource-based theory and partly on eclectic theory considering location advantage, ownership advantage, and internalisation advantage (Dunning 1980) as its key components. Also I imply that RFH will predominantly compete with rivals on the Bosnian market rather than cooperate with them. That’s because I used the Porters Five Forces Model. In other case of analysis of the co-operative environment I refer to other models of environmental analysis as for instance the Four Links Model. The borders of, as well as critical comments to Five Forces Model are expressed e.g. by Lynch (2003) or Wheelen and Hunger (2005). In strategic analysis of the environment, there is an illimitable range of issues that can potentially be explored, creating a problem for most companies, which have neither the time nor resources to cope with such open-end task. The analysis can be narrowed down by identifying the key success factors in the sector or industry and than using these to focus the analysis on particularly important environmental matters. The key success factors are those attributes, skills an resources of the company, that are essential to deliver (long-term) success in market place and development of sustainable competitive advantage. Success does not mean only profitability, and may take broader meaning e.g. in public service and non-profit-making organisations (Lynch, 2003). Michael E. Porter has developed in his book „Competitive Strategy: Techniques for Analyzing Industries and Competitors“in 1980, the model of the Five Competitive Forces. Potential entrants T h re a t o f Entrants

Industry Competitors

Suppliers

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Bargaining power

Bargaining power

Competitive rivalry amongst existing firms

Buyers

T h re a t o f Substitutes Substitutes Source: M.E. Porter (1980), Competitive Strategy, Techniques for Analyzing Industries and Competitors, Free Press 1980, p.4

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According to him, the model of five forces framework helps to identify the sources of competition in sector or in industry. As stated by Johnson and Scholes (2002) the five forces frame work must be used at the level of strategic business unites and not at the level of the whole organization as well as that five forces (Competitors, Potential entrants, Buyers, Substitutes and Suppliers) are not independent of each other. Competitive behavior may be concerned with disrupting these forces and not simply to accommodating them. In particular, according to Lynch (2003) each of mentioned five forces has following meaning: •

Threat of Entry – include factors which must be overcome by new entrants on the market if they want to compete successfully (e.g. Product differentiation, Experience of early entrants into market, Accesses to distribution channels, Economies of scale etc.)

•

Threat of Substitutes – include factors which reduce demand for particular class of products and services as customers switch to the alternatives. This depends on whether a substitute provides a higher perceived value or benefit.

•

Bargaining power of Suppliers – include factors and conditions which make suppliers more powerful. The term 'suppliers' comprises all sources for inputs that are needed to produce the final goods or services (Reclies, 2001). Supplier is powerful when inter alia his product is unique and has high switching cost, if there only few suppliers on the market etc.

•

Bargaining power of Buyers – include factors and conditions which make suppliers more powerful. Buyers are powerful when buyers have potential to integrate backward, if buyers are concentrated and there are few of them, if the product or service from organisation is undifferentiated etc.

•

The extent of competitive rivalry – include factors which define the market more or

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less competitive. High competitive market and intense rivalry is related to number of competitors, rate of industry growth, diversity of rivals etc.

8.1 Analysis of the competitive industry environment in Bosnia In further analysis the term “industry” defines “a group of firms producing the same principal product” (Rutherford, 1995) or more broadly “the group of firms producing products that are close substitutes for each other” (Porter, 1980). I’ll especially analyse these companies with

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similar or the same range of products and services to RFH. In particular these companies should offer following products and services in order to be characterised as “rivalry”: CISCO courses, EPLAN, CatiaV5 and web services as well as hosting services. The companies with these characteristics are: •

CCED Academy in Sarajevo (Federation of Bosnia and Herzegovina) (Product range : CCNA, IT Essentials 1 and 2, Wireless LAN, Network Security ,ECDL , IBM ACE) : Price for Cisco course CCNA – 2200 KM + 17% VAT

•

IT Professional – Association of Information Technology in Banja Luka (Republika Srpska) (Product Range : CCNA, Microsoft Certified Systems Administrator (MCSA) ) – Price for Cisco course CCNA – 1304 €

•

IT Centre of University of Banja Luka (Product Range : Courses to Word, Excel, Access, Internet Web design, Services :Internet Web design and Hosting) : Prices for Web Hosting – 25€/mothly – 5Mb space

•

EPLAN – No subsidiaries in Bosnia and Herzegovina; Eplan courses are offered by subsidiaries in Croatia (EXOR d.o.o. / Zagreb - offers courses for Federation of BaH) and in Serbia and Montenegro (VESIMEPX d.o.o. / Belgrade – offers courses for Republika Srpska), Price for EPLAN course in Zagreb: Eplan Basic 1 and 2 – 670 €.

Note: There is a huge rage of firms offering the web design and hosting services in Bosnia and Herzegovina (high competition). Only in Sarajevo and Banja Luka there more than 80 companies

in

total

(Source:

http://www.bosnia-online.com/web

/Kompjuteri/

Internet/Web_Dizajn/index1.shtml). Also there is certain number of institutions the offering language courses tailored for German teachers in Bosnia as e.g. Goethe-Institute in Sarajevo (http://www.goethe.de/ins/ba/sar/deindex.htm) or SOROS School which offers TOFEL preparation courses. Goethe-Institute in Sarajevo offers also tailored language courses for businessman’s and executives of the local companies (“Geschäftsdeutsch“– Business German). In Banja Luka is service range of these type of courses compared with Copyright © 2008. Diplomica Verlag. All rights reserved.

Sarajevo rare. Information’s about prices I obtained through direct E-mail correspondence with firms. In the following chapter I’ll analyse the core business area of RFH, which is offering of vocational training courses. By setting up of the new subsidiary it is necessary for RFH to analyse also companies they offer additional services as for example: Web design and Hosting services (especially they product range), language courses etc. in order to develop differentiation strategies and reduce bargaining power of buyers.

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8 .2

Five Forces analysis of educational and vocational training sector in Bosnia and Herzegovina

Threat of new entrants

Bargaining power of suppliers

Competitors: - CCED - IT Professional - IT Centre of University of Banja Luka - EPLAN subsidiaries in Croatian and SerbiaMontenegro

Bargaining power of buyers

Threat of substitutes Analysis: Threat of new entrants - medium In Bosnia and Herzegovina in vocational training area a huge demand for IT courses and foreign language courses is existent. In addition governmental concern to attract and support Copyright © 2008. Diplomica Verlag. All rights reserved.

new companies in this area subsists (PRSP, 2004). Capital requirements and legal barriers are still higher compared with neighbouring countries, especially with Croatia which means lower amount of FDI (South Europe Economic Forum, 2005). Product differentiation with attributes as branding, customer knowledge, special levels of service, doesn’t really create barriers for new entrants in educational sector. Existing distribution channels as e.g. Internet are sufficient developed for that kind of courses RFH aims to offer. Governmental policy is becoming friendlier for foreign investors (especially in Republika Srpska, which has backlogs

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compared with Federation). More competition and established companies in the area of vocational courses (language, IT-Courses) and IT-Services are to find in Federation of BaH. Threat of substitutes – high Product-for-product substitution, as for example MS Word substitutes Open Office is low, especially because the licensing control of the software application is underdeveloped compared with European countries and mainly applications are for free available. But on the market my be substitution of need by new service as e.g. management courses in foreign languages caused through higher degree of industrial growth and out of it increased collaboration of Bosnian companies with foreign companies. According to analysis I imply, that the costs of providing the vocational courses will be probably reduced because compared with Germany or even Croatia the vocational training courses are still very expensive. Even it is likely that the companies will accept the limit of profits but under pressure of the competitor may reduce the prices. Generic substitution may occur in the area of services for disposable income like MS – Office courses, which are relatively easy to learn. In the area of industrial application E-Plan, CatiaV5, there is even no competition on the market. During my analysis I found only one company offering AutoCAD 200 courses.

Bargaining power of buyers – generally low At the moment is bargaining power of buyers low, because of lack on competition and differentiation on specific products (e.g. CCNA). Buyers are rather not concentrated, and there are alternative buyers to find. The costs of switching of the favourable and cheap suppliers are high, especially in the area of Banja Luka, if customers are not willing to change the location and drive to other cities to visit the (same price CCNA in Sarajevo cots almost the same) courses. The supplying industry comprises a small number of small

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operators.

Bargaining power of suppliers– generally high The vocational training business is B2C business. With lack of competition in some areas companies can overcharge their services and products and offer them for expensive conditions. It is the fact that in Bosnia and Herzegovina, are only one or none suppliers of certain services. These is not the case in the range e.g. of English courses or EDCL (European Computer Driving Licence) because there are a lot of institutions offering them and the particular suppliers must to compete with rivalry.

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The extent of competitive rivalry – medium The competitors in educational sector are mostly roughly of equal size, but there is no evidence that one competitor gain share over the others. The market is growing on medium .

tempo, and there is no recognition that e.g. “IT Academy” -company from Banja Luka wishes to grain dominance in CISCO courses sector in whole Bosnia and Herzegovina. More competition is to be found in Web service and Hosting sector which is rather very good developed with highly professional companies, which offer their services to lot of foreign firms. In this area is also very difficult to differentiate the products and services. The chances for RFH, I see in sector of offering of educational courses for software applications (wide range from MS office to special CAD Courses like Eplan), among others on German language (because of increase of the market share of German and Austrian companies). Only Goethe –Institute is offering special training for German teachers combined with holidays (with Hotel accommodation etc.). These kinds of courses are not to find in region of Banja Luka, although it is second biggest town of Bosnia and Herzegovina. Also it is not to fin the evidence that the exiting companies have not expressed a determination to achieve a strategic stake in the Bosnian market. For final decision about to developed strategy I recommend to company to visit the Bosnian market or coveted location, at the face. The communication with the locals and officials as well as exploring directly of the business conditions will bring better understanding and necessary experience in setting up strategy.

8.3 What RFH can do, to develop sustainable competitive advantage? Options to Influence Five Forces results

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After the investigations of the market conditions and analysis of potential future and current state of the Porters five forces, company should search for options to influence these forces in their organization’s interest. According to Recklies (2001) there are general possibilities how company can react on certain results. The options of an organization are determined by the external market environment and by its own internal resources, competences and objectives. According to results stated above (medium threat of new entrants, high threat of substitutes, high bargaining power of suppliers, medium extent of competitive rivalry) RFH could follow following strategies:

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Reducing the Bargaining Suppliers through:

Power

Partnering Supply chain management Supply chain training Increase of dependency Build knowledge of supplier costs and Methods Take over a supplier (competitor)

Reducing the Threat of Substitutes through: Legal actions Increase of switching costs Alliances Customer surveys to learn about their preferences Enter substitute market and influence from within Accentuate differences (real or perceived)

of Reducing the Treat of New Entrants through: Increasing of minimum efficient scales of operations Creating a marketing / brand image (loyalty as a barrier) Patents, protection of intellectual property Alliances with linked products / services Tie up with suppliers Tie up with distributors Retaliation tactics Reducing the Competitive Rivalry between Existing Players through: Avoidance of price competition Differentiation of product or service Buying out competition Reducing of industry over-capacity Focusing on different segment Communication with competitors

Achieving of competitive advantage demands that the firm make choices. Firms decide the type of competitive advantage (based on cost or differentiation) and the market scope or product mix width. By choosing a given generic strategy, a firm always risks making the wrong choice (Keegan and Green, 2002). Cost leadership advantage is based on a position as a low-cost producer, in broadly defined markets or across a wide mix of products. Cost leadership is sustainable only if barriers prevent competitors from achieving the same low

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costs (e.g., IBM had an advantage in printers; then the Japanese gained the low-cost advantage) (Geringer, Tallman and Olsen, 2001). When a product has a perceived uniqueness, it enjoys a differentiation advantage (Kotler and Armstrong, 2005). This can be effective for defending market position and obtaining above-average financial returns (e.g., Maytag in large home appliances). The source of competitive advantage, the differentiation combined with response to local needs will likely to be the most effective and best way for RFH to be successesful on Bosnian market. Having analysed the main environmental factors, in following chapter I’ll identify key success factors and refer to failures factors.

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8.4 Failure factors in the foreign business In spite of the positive perspectives for FDI – the success in the foreign business is not selfadjusting. The Internet shows that the competition will become harder because local, regional or national convert themselves into global markets (German Ministry of Employment and Economy, 2004). This also signifies that the engagement abroad entails risks, which differ clearly from that in the domestic market. As stated by Dr. Gerd Herx, CEO of German Federal Agency for Foreign trade and payments (Bfai, 2005) to the successful foreign business belongs detailed planning just as lengthiness. According to him “who promises quick success to himself, it is often disappointed”. According to research by Chamber of Commerce Germany- Switzerland (2004), following factors are often observed and can lead to flop in foreign business: •

Lacking content preparation on the foreign business – customers behavioural and competition – often endangers the success. The information inquiry is too meagre.

•

Recipes for success from the inland are simply transmitted, without taking into consideration the specific features of the foreign market.

•

The products are not adapted to the new market (packaging, name, etc.).

•

The price elasticity, (the customer's reactions to price divergences towards competitors) is wrong estimated. Who offers a products and services less expensive, must not have most customers.

•

The distribution and the logistics are not matured. Who is represented with final consumer's products and services per one bureau of every town, indeed, is present all over the country – but by no means must this be successfully. Failures are done with the choice of the right marketing policy and strategy.

•

The necessary financial and personnel application is considerably underestimated. The employees are often not prepared sufficient, for the new markets. The continuous foreign market development and market observation is more complex

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than by the domestic market. In the literature, one can often find abovementioned and similar recommendations. Thus, having identified this issue, my first step towards investigation of successful business in Southeast European, and especially Bosnian market was beside the theoretical success analyses, intensive information’s inquiry. All information’s must be reliable, relevant and contemporary (Rugman, 2003). In the following chapter I’ll identify attributes they determinate suitable location for business within Bosnia and Herzegovina as key success factor.

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9 Determination of suitable business location in Bosnia and Herzegovina as key success factor for RFH Location should be considered as a relevant growth determinant (Hoogstra and van Dijk, 2004). According to Laurino and Lindel (2004), location supersedes brand in terms of where a consumer will decide to go. “How a foreign firm chooses its location in a host country is critical for its success” (Li, 2004). The decision for or against a location refer to all important factors of a company concept: customers, industry, competition, employees etc. This signifies that company must find a location which supports best of the entire concept and the objective of the company. Piper (2004) suggests that the location question should be reconsidered anew over and over again because “with company extensions it is not always the location position elected before, which promises the greatest possible business management success”. Which location is the right one, depends of course on the specific features and resources of the company (Barney, 1991). As a rule several locations for the choice should exist. They should be compared according to objective criteria with each other, to find an optimum decision (German Institute for Economic Research, 1995). According to Institute there are to main range of factors each company should consider. These factors are selected in two categories: hard and soft location factors. Hard location factors (e.g., transport binding) is hardly reproducible in data and figures reproduce and have measurable impact on the company activity. Soft location factors (e.g., residential sphere, environmental quality, leisure worth, image of the local authority district) are against it, heavily measurably and have as a rule less leverage on the concrete company activity but they can play an important role for the job motivation and availability of employees. The table below shows an overview of the most important hard and soft location factors which company should consider when choosing

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optimal location for business:

Which hard location factors environment offers?

Which soft location factors environment offers?

Market

Municipal management , Consultation

Customers: Are enough customers in the location? Which journey ways must accept customers? The critical time threshold lies after the results of a row of studies with 30-minute running time. This corresponds with it to the external border of the enterprise catchments area. However, differences exist between town and land. Competitors: Is there competition in the

Municipal management: Is the municipal management friendly to founder? Between single locations there can be differences of the job of the municipal management.

Consultation offers on site: Are there

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location? How good is the competition (in the matter of product design, range, guarantee performances, customer service, prices etc.)? Are there possibilities to contrast compared with the competition by new or additional supplies and services and to increase therefore the customer's use?

consultation offers on site? Consultation and information are according to experience important requirements for the setting up success. In many regions, towns and circles have formed by the union of different partners from economy, facilities of the public hand and science, consultation and setting up networks.

Surfaces and Transport link

Image of the location

Available trade surfaces: Are there satisfactory free and opened trade surfaces? Founder and IT technology centres offer optimum basic conditions for many newcomers: on individual needs cut spaces, consultation and service supplies, a wide spectrum in infrastructure facilities e.g., from the communication nets up to cafeteria. Transport link: Is the transport binding well? Is the location well accessible? Is an airport nearby? A delimited efficiency of the regional and national traffic route net leads to the fact that customers, suppliers and employees must accept long In and departure ways or are missing or cancel.

Image: Does the location have an attractive image? For customers and employees such putative less important location factors get more and more important. Above all, the location image opens special sales opportunities. This counts especially to certain industries, as for example the IT industry which settles preferentially in high tech centres. Quality of life : Is the quality of life well? Are there (pleasant) residential possibilities? Are the rents payable? Is the environment intact? Are there attractive leisure possibilities?

Cost , Sponsor and special subsidies Height of the trade taxies: Is the trade tax acceptable? Are better offers in Federation of BaH or in Republika Srpska? Height of the rents or lease: Is the rent level or lease level acceptable? Does property justify the demanded rent expenses or lease expenses? Do rent expenses and additional costs fit in the financial concept? Differences on rent prices between Sarajevo and Banja Luka are shown in the business related indicators. However, only the question of the rent height or lease height should not be decisive.

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Environment Supplier: Are there enough supplier? Employees: Are there enough skilled employees? Skilled employees are important. However, also the labour costs structure must be taken into consideration. Active scientific environment: Is there an active scientific environment? Are there universities, advanced technical colleges, research facilities on site? Just by settings up oriented to technology (e.g., IT industry) the nearness to scientific facilities and scientific younger generation is an important location factor

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Detailed analysis of the location factors, contributes fundamental to development of the competitive advantage of the company (Hoogstra and van Dijk, 2004). Thus in following, I’ll analyse and determine the best choice for location for business in educational sector in Bosnia and Herzegovina for RFH. For the analysis I used, behind secondary sources also statistical figures from scheduler abstract “Business related indicators overview”.

9.1 Analysis and specification of the business location Industry in Bosnia is concentrated around the large urban areas of Sarajevo, Zenica and Mostar in the Federation, and Banja Luka, Modrica and Bijeljina in the RS (Economist Intelligence Unit , 2005). Important aspect involved in analysis is that behind local industry, scholars and students are RFH target customer group.

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Location factor is Location factor important for the company Proximity to customer Supplier's nearness Competition Labour costs Supply of qualified employees Supply of trade surfaces and spaces Property prices Trade rents Transport link Sponsor and special subsidies Energy expenses Taxes Aerial traffic facility National railroad connections Nearness to high and advanced technical colleges Nearness to research facilities Quality of the municipal administration

x

Location : Sarajevo / District : Grbavica (near by Faculty of Electrical Engineering)

The conditions in the location are Good

Satisfactory

Bad

x

x x x

Location : Banja Luka / District Borik (near by Faculty of Electrical Engineering)

Good

Satisfactory

x

x

x x

x x

x x

x x x

x

x x x

x x x

x

x

x

x x

x x x

x

x

x

x

x

x

x

x

x

x

x

x

x

Bad

x

x

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Support by government Support by Chambers Services of the local banks Good image of the town and region Cultural offers Close rest possibilities Educational facilities Medical care In total

x

x

x

x x

x x

x

x

x

x

x x x

x x

x

x 9

x x 10

5

10

x 11

3

Source: Adapted from German Institute for Economic Research in Berlin, Choice of business location (1995)

For the purpose of analysis of the suitable location, I used the upper schema, developed by German Institute for Economic Research in Berlin (1995) (Deutsches Institut für Wirtschaftsforschung). Discussion: The analysis in view of the customer's demand and the target group, of possible locations Sarajevo and Banja Luka has proved that both locations are favourable. The analysis is narrowed to the districts of town there Faculty of Electrical Engineering and the main manufacturing and service companies (e.g. Telekom Sprska and Siemens) are placed, because scholars and students as well as the local industry are the main target group. With small distance Banja Luka would be more favourable. It comes about that are at the moment in Republika Srpska better FDI conditions (especially less income tax and less profit tax of only 10% - more information’s about in Business related indicators overview ) than in Federation. Besides, existing double taxation a negative impact on the FDI conditions in Federation. Also in Banja Luka, company has to act with less competition. Both towns are student towns with developed local industry and have IT or Electrical Engineering Faculties. Copyright © 2008. Diplomica Verlag. All rights reserved.

Nevertheless, Sarajevo has a little bit better image but it is more expensive. Specifications about quality of the municipal administration, support by government were covered etc. by secondary sources (my personal talks with the inhabitants of the bought towns). The analysis of the support by chambers was done on account of their internet presentations and offering of support. Based on the analysis of conditions in possible locations more appropriate choice for RFH is to set up subsidiary in Banja Luka. An option of the setting up farther subsidiary in Sarajevo or other important Bosnian towns (e.g. Mostar) is open and can be realized in case that business will run well. After decision where to locate the business, it is necessary to

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consider financial aspects of setting up of the company in Bosnia and Herzegovina. In

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following chapter I deal with this issue.

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10 Prudential financing policy as key success factor 10.1 Capital requirements and profitability According to Zorn (2005), entrepreneurs that underestimate the strain on the global network and have limited insight into the true cost of products and services sold can jeopardize their investments and growth plans. Before start-up the company, there must be written a description of the business's future (Tiffany, 2001). Besides, company must know whether this investment is also worth while or whether the plan is profitable. That means, the turnover of the company must be so high that all company expenses are covered and, in addition, the calculated profit is achieved. According to Perridon and Steiner (2004) right at the beginning of the setting up preparations the following questions should be answered: •

How much money must company invest in the project?

•

How much money must company at least earn to finance the current expenses (wages/salaries, rent, insurances etc.)?

•

How much company would like to earn in the short term, in the medium term and in the long term?

•

How much services/goods must be sold in the first financial year in order to company makes profit (Break Even-Point)?

•

Will the prospective profit also correspond in the medium term and in the long term to agenda?

•

How much company must earn in the short term, medium and in the long term to create a financial reserve?

Besides, one should also take into consideration a buffer for unforeseen expenses (e.g., Copyright © 2008. Diplomica Verlag. All rights reserved.

repair, car etc.). After a clear start-up phase (six to twelve months) the company should be in the position to finance the current expenses (German Federal Ministry of Economic Affairs an Employment, 2005). On which figures should RFH fall back if it still has no similar (foreign) subsidiary? In this case company must work with figures of comparable companies, with bid prices of future suppliers and demand prices of potential customers (BBE Consulting, 2005). The investigated figures flow in onto the so-called profitability preview. It belongs beside the Investment plan, the Capital requirements plan and the Liquidity plan in the business concept. With the profitability preview one confronts the turnover to be expected

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with the expenses to be expected. The profitability preview should enclose three financial years. The third year counts as especially critical (Piorkowsky, 2004). If RFH uses interest-favorable financing from loan/support programs (e.g. in the Case of Bosnia and Herzegovina support programs are offered by German KfW (Kreditanstalt für Wiederaufbau- Loan corporation for reconstruction), company must begin as a rule only later with the repayment. Than the financial charge rises by leaps and bounds. The more realistically and more exactly the calculation is, the start phase will be the more certainly and precisely. Many companies underestimate the expenses for new subsidiaries Investments and current operating resources (German Federal Ministry of Economic Affairs an Employment, 2005).

10.2 Profitably work – what does this mean? With an invested company capital of 50,000 Euro, 10,000 € of profit signify a Return on Equity (ROE = in the case without shares of companions/shareholder (total capital employed) outside the group) of 20 percent. If the 10,000 € were earned against it, with 100,000 €, only one return of equity of 10 percent has been reached. Therefore, profitably work means to reach a very high return of equity of the invested capital or to achieve a very high profit per turnover process (Allis, 2005). In order to measure the profitability, liquidity and efficiency of business, the company use financial ratios. The role of the financial rations is to provide relatively simple and quick means of examining the financial health of a business. Ratio by itself will not tell us very much about the performance or position of the business. But if we compare the ratio with some ‘benchmark’ that the information can be interpreted an evaluated (Atrill and Mc Laney, 2004). These ratios are often used to evaluate the profitability of the business (Revsine, Collins and Johnson, 2005). These are: Return on Equity (ROE), Return on Sales (ROS) (Also known as Net profit margin), Return on ordinary shareholder’s funds (ROSF) – important for public companies, Return on capital employed (ROCE) and Return on Investment (ROI). In this work I imply knowledge of the subject, thus each of these Copyright © 2008. Diplomica Verlag. All rights reserved.

ratio I’ll not expülain in detail. For better understanding of the calculation and analysis of financial statements I recommend to use further reading, as e.g. Account and Finance for Non-Specialist (Atrill, McLaney ,2004); Financial Reporting and Analysis (Revsine, Collins and Johnson, 2005), etc.). I this work I’ll especially use ROI and ROCE behind calculation of liquidity as indicators for wealth of business. Calculation of efficiency and further liquidity ratios is strongly recommended. ROI figures out, how independent of the financing of the company, the success from the used capital has originated (Allis, 2005). ROI is expressed in percentage terms and is to be calculated as follow:

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ROI =

Net profit before interest and taxation (Total benefit - total costs) × 100 Net Worth (Total costs)

ROE is reference number to the profit position of a company / credit institute which displays the result (annual profit) in proportion to used company capital. Briefly: The higher the return of equity the greater the financial success. More objectively, however, it is to draw on a standard of comparison: e.g., how much the invested capital would yield if one would invest it, for example, at a bank. Using the DuPont Model, according to Kennon (2005), ROE can be also calculated as product of (Net Profit Margin) x (Asset Turnover) x (Equity Multiplier). Regularly is expressed in percentage terms and is to be calculated as follow:

ROE =

Net profit before interest and taxation (Net income) × 100 (Average) Shareholder's equity

ROCE (Return on Capital Employed) belong to the most important reference figures for the entrepreneur (Revsine, Collins and Johnson, 2005) even for the internal assessment and control of the company as well as for external consultants, banks and evaluators to assess the setting up and development plan and their course. ROCE shows how rich in yield the company works for the investors or lender of capital, e.g., banks, in total. Therefore, it is also refereed to as company profitability (Naderer, 2003).

ROCE =

Net profit before interest and taxation × 100 Share capital + Reserves + Long-term Loans

For the financial assessment of the company ROCE is more important than a ROI if the enterprise is financed with company capital and external capital. ROS points how much profit the turnover introduces, thus for example, how much cent of profit per set off amount or with services per hour is achieved. It is an indicator for the market strength of the company (Atrill / Copyright © 2008. Diplomica Verlag. All rights reserved.

Mc Laney, 2004). It is expressed in percentage terms and is as follow:

ROS =

Net profit before interest and taxation (Net income) × 100 Sales

Note: It is important not to relay only and exclusively on ratios, thereby losing sight of information contained in the underlying financial statements. When comparing two businesses it is useful to asses’ absolute size of profits and relatively profitability of each business. For example if one Business has ROCE of 14% and generate 1 million € and other

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Businesses has ROCE of 20% and generate only 100000 €, although second business has higher ROCE (level of profitability) it generates lower total profits. That means that second business is indeed profitable but not efficient I can be indicator for e.g. operational problems within the company (Revsine, Collins and Johnson, 2005).

How much turnover should RFH gain? Lower expenses – higher turnover Many companies tend to estimate the turnover to be expected too high and the expenses too low Secondary expenses will simply often forget apparently in the planning (Kennon, 2005).. Also possible price increases in the purchasing are neglected. How high will the turnover be? No easy, but for it the more important question. The turnover calculation is a corner pillar for the setting up concept and the financing of venture (German Federal Ministry of Economic Affairs an Employment, 2005). Without realistic sales forecast one can draw up no expressive profitability preview. Expressively it signifies that company can explain all compiled planned figures and justify them. The turnover planning contains turnovers achieved by the sales of goods and services. The more thoroughly company run their research, the more precisely becomes their turnover planning (BBE Consulting, 2005). (Hence, I’ve detailed analyzed the investment climate in Bosnia and Herzegovina). Nevertheless, up to certain masses planning remains unsafe. Besides, one should also take into consideration usual seasonal fluctuations in the sector (Naderer, 2003). An external consultant (e.g., German Foreign Chamber in Sarajevo) should be if necessary, asked for support.

10.3 Approach for the determination of the turnover

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The turnover calculation is a corner pillar for setting up concept and financing. Without realistic sales forecast company can erect no expressive profitability preview. According to Prof. Piorkowsky (2004), determination of the turn over includes: 1. Calculation of the price of the product or service. With the price or the fee, the company must cover all their expenses (besides, one must take into consideration also reserves for future tax payments) and, in addition, to achieve a profit.

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2. Company should calculate how is necessary to sell in a certain period in order to cover the expenses Company should calculate rather pessimistically. A basis should be marketing data of the competitors (who are not available as a rule). 3. Company should compare calculated prices to those of competitors.Are the prices competitive? Can the expenses be reduced? Which price strategy company would like to be of used: Low prices (with big sales amounts), high prices (with unusual benefits and sufficient number of customers), middle prices (market-usual prices). 4. When is to be counted on the first turnovers? Depending on how the business starts and also according to industry and customer's structure, either equally from the first day turnovers originate or only later. Important: After the setting up of the company, it should always compare the really achieved actual values with the debit (target) values (best of all, monthly comparison). If the debit values divergences get too big – positively as negatively –, than it exists action demand. Company should analyze causes for it and consider suitable countermeasures.

10.4 How can RFH raise the turnover and save the costs? Have the company used all possibilities of the marketing? The marketing measures must be adapted over and over again to the customer needs and customer wishes. Considering analysis made by Spagat (2001) and Koch (2004), different company activities are appropriate to raise the turnover and to save the costs. To achieve this target, RFH should generally consider following: •

Regularly to compare the offer concerning price, quality, appearance and services to that of the competitors.

•

To ask the customers for they wishes, e.g. to observe target group (e.g. Students)

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and to use their preferential media as a source of information. The changes in the consumer behavior can be revealed through it. •

To check the price strategy: low prices, middle prices or high prices, discounts and cash discount. RFH should ascertain what is usual in the sector in Bosnia and what the customers expect.

•

To run regularly advertising this appeals to the actual customers.

•

To train and motivate staff, so that it works as much customer-oriented as possible.

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Foreign business requires suitable source of financing (German Ministry of Employment and Economy, 2004). If a company takes the credit, so every credit is linked with the interests who curtail the profit and the liquidity of the company. Here helps public support/loan program (Revsine, Collins and Johnson, 2005) which often offer favorable repayment and interest conditions (e.g., 2 years free of repayment, then yearly rising). The company can save labour costs in the start-up time, if they work in the beginning more with freelances instead to employ salaried employees (Tiffany,2001) or in the case of RFH also if they employ volunteers. Furthermore, for instance bids of service companies can be used: e.g., reception and office service, etc. In the next step I‘ll analyse most favorable sources for financing, develop financing scheme and determine total capital requirements for FDI in Bosnia.

1 0 .5

Financing of business – Total capital requirements for FDI in 2006

According to Keown and Martin (2004) the traditional problem faced in financial forecasting begins with the sales forecast and involves making forecasts of the impact of predicted sales on the firm's various expenses, assets, and liabilities. As stated by Atrill and Mc Laney (2004), sources of financing the business can be external and internal. External sources require agreement of someone beyond the directors and mangers oft the business, whereas internal sources not. The main external long-term sources of financing are loans, leases and in the case of public companies shares (ordinary or preference). Internal company can finance itself if it has tighter control of debtors, reducing stock levels and delaying payments to creditors. Improvement of company’s internal performance is its one of the key success factors. Financial managers clearly favour the use of internally generated equity in the financing of capital required (Keown, 2004). In the following I’ll calculate total capital requirements for 2006 (implied setting up date:

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01.01.2006) and develop financing scheme for FDI of RFH in Bosnia and Herzegovina. Capital requirements for the financing of the setting up of the company during start-up phase were registered and calculated with the help of the software CD-ROM „ Software package for founders and entrepreneurs “(„Softwarepaket für Gründer und Unternehmer“) of the German Federal Ministry of Economic Affairs an Employment (2005). Not available data were covered from secondary sources (Company internal accounting) or were determined by comparison. Comparative figures are available e.g. from: German Chamber of Commerce (www.bis-handwerk.de), Regional finance office, savings banks (www.starups-hop.de) etc.

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Total capital requirements in 2006 (annualised) for the formation of a company Setting up expenses Consultation Notary Registrations / entries Education and trainings Deposits The other Sum setting up expenses

Euro 1000.00 300.00 150.00 1000.00 2000.00 4450.00

Investments Machines Vehicle park Business equipment Patent, license, franchise fees The other Other Insurance (Buildings insurance etc.) Advertising expenditures and travel expenses Sum investments before setting up

15000.00 3000.00 500.00 3758.82 11000.08 33258.90

Cost of materials Raw, auxiliary materials and company materials Goods External labours The other Sum cost of materials .= Total capital requirements before setting up

2400.00

4800.00 7200.00 44908,9

Personnel (HR) costs for 2006 Wages Salaries Entrepreneur's salary (only for ownerships) The other Sum personnel (HR) costs

34531.56

34531.56

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Company expenses for 2006 Rent expenditure Gas/Electricity/Water/Heating Phone/Mobile phone/Fax/Internet Cleaning of company spaces The other Sum company expenses

10200.00 1480.00 600.00 600.00

Total capital requirements in 2006

92320.46

11880.00

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10.6 Financing scheme The calculation implies that RFH is investing partly cash company capital on the one side and use comparatively wise favourable loan-program (interest rate 4,58%) for FDI by German loan Corporation for Reconstruction.

Financing scheme for setting up in 2006 Capital requirements before setting up Available company capital Cash assets Bank balances Construction savings contracts Material inserts necessary for company Own contributions (provided that capable of activation) Donations Funds of private third parties Sum of the available company capital Available securities House possession and property Guarantees of third parties Sum of the available securities Credits ERP - capital for setting up Total sum credits

Euro 44908.90 16000.00

16000.00

50000.00 50000.00

Available total capital

66000.00

Debit / Credit balance

.+ 21091.10

ERP: Financing program by KFW (loan corporation for reconstruction) – KFW promotion bank Capital for Employment and Investment in foreign countries Program number 57 Price class A Copyright © 2008. Diplomica Verlag. All rights reserved.

Outside capital tranche Maximum run time

: 10 years

Maximum years free of repayment

: 2 years

Maximum interest connection period

: 10 years

Max. interest rate eff. in % p.a.

: 4,58

Source: http://www.kfw-formularsammlung.de/Konditionen/Konditionentabelle1.pdf As at 7/18/2005

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11

Controlling and forecast calculations as key success factor

Following charts are presenting monthly forecast calculation (forecast requirements) of all necessary cost for the period from in 2006-2009. Besides, the following expenses have been taken into consideration with the help of the software: HR costs, Cost of company formation (accompanying expenses around the formation of a company), Material and Operational cots. This calculation is necessary in order to develop efficient controlling mechanism and to detect potential financial changes over the time and to react properly (Ritzman and Krajewski, 2004). Optimal controlling mechanism is key success factor of every company (Perridon and Steiner, 2004). HR costs: These costs include the social expenditure and the other additional costs for personnel. Social expenditure can be divided again into lawful and voluntary social expenditure: an essential part of the lawful social expenditure is the employer's shares for the single social insurance forks. Voluntary social expenditure is, for example, payments of the employer in a pension cash desk, premiums, and special payments, the expenses for the plant catering or for training measures of the employees. Other HR costs are, for example, the expenses for advertisements of the company in the course of the staff search or the acquisition of relocation expenses for employees (German Federal Ministry of Economic Affairs an Employment, 2005). Cost of company formation: (No total capital requirements! Total capital requirements are calculated separately) Calculation of these costs takes into consideration all accompanying expenses around the formation of a company like e.g.: expenses of the consultation, expenses of the notary, registrations and entries, constant training expenses, deposits and others. Some of these expenses are taken into consideration interest wise for 2006 in the capital requirements level for the company formation (implied setting up date: 01.01. 2006).

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Material costs: These costs are expenditures for: row materials (e.g., copier paper), goods, external services, miscellaneous. Operating costs: These costs are expenditures for: occupancy costs (rent cost for the office space), Gas/ Electricity/Water and heating expenditures, Phone / Internet, cleaning of the company spaces, miscellaneous.

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Year 2006 Detailed projected costs in Euro - 2006

HR costs

Costs of company formation

Material costs

Operating costs

Discussion: A high caccompanying expenses around the formation of a company occurs because of the expenses for registrations and entries, notary and advertising etc. Starting advertising costs for 2006 were taken into consideration also in capital requirement plan and are estimated according to Business Development Center (2004). The HR costs (here: costs per employee Copyright © 2008. Diplomica Verlag. All rights reserved.

amounts 657 € + Social insurance contribution = in both entities of BaH uniform rate of 32 + 14% overhead expenses according to Deinert (2005)) are calculated for 3 employees (initial number of the office workers). Cost of materials was calculated according to the consumption estimate. Operating caresses were determined in accordance with selected business indicators. Calculation follows rather pessimistically and includes securities.

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Year 2007

Detailed projected costs in Euro - 2007

HR costs

Costs of company formation

Material costs

Operating costs

Discussion: Further high accompanying expenses around the formation of a company occurs because of the expenses for training of employees, advertising etc. The HR costs calculation is same as

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for 2006 (small increase according to CPI (please see Selected indicators) is taken into consideration). Cost of materials was calculated according to the consumption estimate. Operating caresses were determined as in 2006. Calculation follows rather pessimistically and includes securities.

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Year 2008

Detailed projected costs in Euro - 2008

HR costs

Costs of company formation

Material costs

Operating costs

Discussion: Reduction of accompanying expenses around the formation of a company occurs because of reduction of the expenses for training of employees. Necessary costs are advertising cots as

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well as unpredicted miscellaneous costs. The HR costs calculation is same as for 2007 (small increase according to CPI (please see Selected indicators) is taken into consideration). Cost of materials was calculated according to the consumption estimate. Operating caresses were determined as in year before. Calculation follows rather pessimistically (normally, operating costs could be reduced) and includes securities.

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Year 2009

Detailed projected costs in Euro - 2009

HR costs

Costs of company formation

Material costs

Operating costs

Discussion: Accompanying expenses around the formation of a company are almost the same as in 2008. Necessary costs are advertising cots as well as unpredicted miscellaneous costs. The

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HR costs calculation is same as for 2008 (small increase according to CPI (please see Selected indicators) is taken into consideration). Cost of materials was calculated according to the consumption estimate. Operating caresses were determined as in year before. Calculation follows rather pessimistically and includes securities.

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1 1 .1

Bar graph projected turnover overview 2006 - 2009

Following charts are giving graphic overview of projected sales revenues over the time from 2006 till 2009. Projected sales revenues in Euro - 2006

Discussion: The turnovers in the first year get as relatively small projected because I go out from an establishing time of the company on the new market. How one can easily notice, I also go out from it that from June till August smaller turnover is to be calculated. These are empirical values of the RFH, because the students and pupils (as target customer group) are occupied with the exams and go on holiday (vacation).

Projected sales revenues in Euro - 2007

Discussion:

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The turnovers in the following year carry forward projected sales revenues from Dec. 2006 because I go out from first integration steps of the company on the new market. The task of the management is to achieve at least the projected sales figures. I also go out further from it that from June till August smaller turnover is to be calculated because of above mentioned reasons.

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Projected sales revenues in Euro - 2008

Discussion: The turnovers in the following year carry forward projected sales revenues from Dec. 2007. The integration of the company on the new market is advanced. The task of the management is to achieve at least the projected sales figures. I also imply further the lower sales figures from June till August because of above mentioned reasons.

Projected sales revenues in Euro - 2009

Discussion:

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The turnovers in the following year carry forward projected sales revenues from Dec. 2008. The company is fully integrated on the new market. The task of the management is to achieve at least the projected sales figures. Now I go out from higher sales revenues from June till August.

After three years the company should be able to attract more customers (German Ministry of Employment and Economy, Worldwide active, 2004), thus in the time period from June till August, through new innovative vocational training programs (as for example special tailored vocational training courses for the employees or executives of the local industry, foreign language courses or special MS Word courses for alumni etc.) company should increase their sales figures.

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11.2 Projected ROI and ROCE on the end of the year According to Revsine, Collins and Johnson (2005), the total capital profitability should lie (because of the risks company capital meets) clearly over the income return of an alternative financial investment on the capital market. Following table includes projected monthly profitability for the time period 2006-2009.

Profitability projection 2006 - 2009 All data in Euro Sales revenue Other revenues Sum sales revenue Cost of materials HR expenditure Interests Operating expenses Sum costs Profit / deficit Annual surplus

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Sales revenue Other revenues Sum sales revenue Cost of materials HR expenditure Interests Operating expenses Sum costs Profit / deficit Annual surplus

Sales revenue Other revenues Sum sales revenue Cost of materials HR expenditure Interests Operating expenses Sum costs Profit / deficit Annual surplus

Jan 06 Feb 06 Mar 06 Apr 06 Mai 06 Jun 06 Jul 06 Aug 06 Sep 06 Oct 06 Nov 06 Dec 06 4800 4800 4800 4800 4800 3500 3500 3500 5500 5500 5500 5500 4800 600

4800 600

4800 600

4800 600

4800 600

3500 600

5500 600

5500 600

5500 600

5500 600

2878

2878 204 990 4672 128

2878 191 990 4659 141

2878 191 990 4659 141

2878 2878 2878 2878 191 191 191 191 990 990 990 990 4659 4659 4659 4659 141 -1159 -1159 -1159

2878 191 990 4659 841

2878 191 990 4659 841

2878 191 990 4659 841

2878 191 990 4659 841

990 4468 332 770

3500 600

3500 600

Jan 07 Feb 07 Mar 07 Apr 07 Mai 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 5500 5500 5500 5500 5500 3500 3500 3500 6500 6500 6500 6500 5500 650 2880 191 1005 4726 774 7288

5500 650 2880 191 1005 4726 774

5500 650 2880 191 1005 4726 774

5500 650 2880 191 1005 4726 774

5500 3500 3500 3500 650 650 650 650 2880 2880 2880 2880 191 191 191 191 1005 1005 1005 1005 4726 4726 4726 4726 774 -1226 -1226 -1226

6500 650 2880 191 1005 4726 1774

6500 650 2880 191 1005 4726 1774

6500 650 2880 191 1005 4726 1774

6500 650 2880 191 1005 4726 1774

Jan 08 Feb 08 Mar 08 Apr 08 Mai 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 6500 6500 6500 6500 6500 3500 3500 3500 7000 7000 7000 7000 6500 600 2900 191 1000 4691 1809 14708

6500 600 2900 191 1000 4691 1809

6500 600 2900 191 1000 4691 1809

6500 600 2900 191 1000 4691 1809

6500 3500 3500 3500 600 600 600 600 2900 2900 2900 2900 191 191 191 191 1000 1000 1000 1000 4691 4691 4691 4691 1809 -1191 -1191 -1191

7000 600 2900 191 1000 4691 2309

7000 600 2900 191 1000 4691 2309

7000 600 2900 191 1000 4691 2309

7000 600 2900 191 1000 4691 2309

Jan 09 Feb 09 Mar 09 Apr 09 Mai 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09

Sales revenue Other revenues Sum sales revenue Cost of materials

7000

7000

7000

7000

7000

4500

4500

4500

7500

7500

7500

7500

7000 700

7000 700

7000 700

7000 700

7000 700

4500 700

4500 700

4500 700

7500 700

7500 700

7500 700

7500 700

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HR expenditure Interests Operating expenses Sum costs Profit / deficit Annual surplus

3000 191 1050 4941 2059

3000 191 1050 4941 2059

3000 191 1050 4941 2059

3000 191 1050 4941 2059

3000 191 1050 4941 2059

3000 191 1050 4941 -441

3000 191 1050 4941 -441

3000 191 1050 4941 -441

3000 191 1050 4941 2559

3000 191 1050 4941 2559

3000 191 1050 4941 2559

3000 191 1050 4941 2559

19208

Following important projected profitability ratios arises from projected profitability: ROI (2006) = 0,8340513 ROI (2007) = 7,89424143 ROI (2008) = 15,9314631 ROI (2009) = 20,8057889

Projected Return on Investment 2006 - 2009

20,81 15,93

7,89 0,83

2006

2007

R1 2008

Year

2009

A rate of ROI higher than 15 percent counts as excellent. An adequate rate lies at 11 percent Copyright © 2008. Diplomica Verlag. All rights reserved.

of the balance sheet total (BBE Consulting, 2005).

ROCE (2006) = ROCE (2007) = ROCE (2008) = ROCE (2009) =

3,12390125 10,376898 18,4141197 23,2884455

ROE (2006) = ROE (2007) = ROE (2008) = ROE (2009) =

4,8125 45,55 91,925 120,05

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Projected Return on Capital employed 2006 - 2009

23,29 18,41

10,38 3,12

2006

2007

R1 2008

Year

2009

Discussion: Higher ROCE compared with the ROI results because of the integration of the interest in the numerator. The rise of the ROE I explain through the rise of the external funds and by lowering of her company capital rate in the same time (also called as Leverage-Effect).

11.3 Liquidity projection 2006 -2009 Collins and Johnson (2005) explain that beside the capital requirements plan a setting up concept should also contain an assessment of liquidity and solvency: the projected income of the company is confronted with the projected expenses. From the difference arises the monthly profit or the deficit company can draw the conclusions on the future capital

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requirements.. Liquidity refers to the company short-term ability to generate cash for working capital needs and immediate debt payment needs and solvency refers to the long-term ability to generate cash internally or from external sources in order to satisfy plant capacity needs, fuel growth, and repay debt when due. Short-term liquidity problems arise because operating cash inflows do not mach the outflows (Ritzman and Krajewski, 2004). The more company relies on long-term borrowing to finance its business activities, the higher its debt ratio and greater the long term solvency risk (Atrill and Mc Laney, 2004)

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Liquidity projection (annual) 2006 - 2009 All data in Euro Period Sales revenues Other Revenues Credits / External funds Sum payments Payment Investments Personnel costs Materials / Goods Operating expenses Interest Repayment Sales tax other taxes Withdrawals The other Sum payment Profit +/- Deficit Balance previous month Operating resources credit Actual liquidity

Year 2006 Year 2007 Year 2008 56500,00 64000,00 71000,00

Year 2009 78500,00

50000 106500,00

64000,00

71000,00

78500,00

33258,90 34531,56 7200,00 11880,00 2111,86

4000,00 34560,00 7800,00 12060,00 2289,96

4000,00 34800,00 7200,00 12000,00 2289,96

9720,00 36000,00 8400,00 12600,00 2289,96

5650

6400

7100

7850

67109,96 -3109,96 6757,72

67389,96 3610,04 3647,76

76859,96 1640,04 7257,8

3647,76

7257,8

8897,84

2000 96632,32 9867,68

9867,68

11.4 How can RFH make efficient liquidity policy? The management of the company must guarantee that the company is constantly solvent. Besides, is to be taken into consideration that in certain expenses nothing is to be changed (e.g., purchasing of office supplies and consumable materials, HR expenses) (Roland Berger Strategy Consultants, 2005). Note: Calculation stated above is carried out rather pessimistically. In the upper example, I use

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assumption that only CISCO courses are offered to average 8 persons, during the whole year. Other revenues sources (as for example, other types of courses like i.a. Eplan, MS Office , web configuration revenues, hosting income or revenues from repairs etc.) were not taken into consideration for calculation (by the same operating expenses).

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Liquidity Projection 2006 - 2009 in € 9867,68 8897,84 7257,8

3647,76

2006

2007 Year

2008 2009

Discussion: According to analysis, an effective possibility for RFH to remain solvent is to hold the investment costs from 2 financial years low. In the beginning in the 1 year these cost are understandable very high (because of purchasing of the new equipment (PC-s., Office equipment etc.) and higher advertising costs). In the 2-ten and 3-ten year these are held low (main expenses for marketing as well as possible repair costs), but in 2009 they are raised because of the objective between June and September (semester break) to acquire more customers (Please, see profitability projection table 2006-2009). More about ways for successful marketing strategy as key success factor and methods how RFH can win the new Copyright © 2008. Diplomica Verlag. All rights reserved.

customers I’ve explained later on in this work. Further remained very important formal key success issue is choice of the legal form as well as legal issues in business in Bosnia and Herzegovina that RFH is strongly recommended to consider.

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12

Legal issues and choice of appropriate legal structure of the company as key success factor

The decision in which legal form one should lead the company has financial, tax and juridical consequences. Generally, there is no optimum legal form for a company. It is especially to be pointed out that the RFH as a non-for- profit organization is limited by the choice of the legal form of their subsidiary, what is taken into consideration in the following. Besides, special aspects of legal conditions according to Bosnian law are as well taken into consideration.

1 2 .1

Specifics regarding legal form for subsidiaries founded by German non-for- profit organizations

According to German law (obligatory for RFH with the seat in Germany), while an association (non-for-profit organization) needs at least three members for the setting up at least seven and to the continuity, an Ltd can be also founded by a single person, the one-man Ltd. (as possible in Bosnia). The Ltd., thus a limited liability company, is like an association a juridical person. It can be seen as a special form of the association which is meant by the legislator especially for business undertakings. As companions associations, foundations, and corporate bodies of the public right or farther Ltd.-s is also possible beside natural persons. Consequently a single association (non-for-profit organization) as RFH can found a Ltd. in Bosnia. This is referred to from view of the association also as subsidiary Ltd. to express the dominating leverage of the (mother-) association (Koch, 2004). Participation in a stock corporation (e.g., stocks, Ltd. shares, cooperative shares) belongs with a non-for-profit association basically to the area of the tax-free administration of property. In exception cases participation also can to be added to the economic business enterprise (e.g., cooperative interest in one the bank at which the account of the economic business enterprise is led)

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(German Ministry of Finance, 2004).

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According to Münster (2005), the decision for (or against) a legal form should a company meet only when they have covered a clear position with the following points:

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Decision-making support issues: Enterprise independence

Im a g e

Wants the company to carry the sole responsibility and to determine alone or if it wants to involve the other persons in the company, they make available capital for it, to share risk and profit with, but to also to "interfere" in the business decisions? Much enterprise independence has: single companies, one person's Ltd.

The choice of a legal form is always also an act of the self representation of the company. Briefly: the possible effect of the legal form on business partner and customers belongs to the basis considerations of a marketing concept..

Formalities

Accounting

Which formalities (adoption of resolutions, summoning and documentation of companion's meetings etc.) the company has to notice and how exactly it must take it with it, is very different with the single legal forms (according to Bosnian right). To the assessment of the handling belongs also the question how complicated or simply itself is the monetary transfer between private property and company property. Few formalities have: sole proprietorship. Some formalities: all the other legal forms. A lot of formalities: PLC.

Whether company decides on an accounting-liable legal form, is doubt-worth: It makes already the difference, with the expenses, as well as with the knowledge necessity for it. In Bosnia for all companies (independent of the size) counts a auditing duty. As it is quoted in Bank Austria Investment Guide BosniaHerzegovina (2003), "The law does not make a distinction between companies by size (as is the case, for example, in Austria). Hence all companies have to keep accounting records and to prepare financial statements to the full extent and apply the accounting standards"

L i a b i l i ty

Publicity

Who assures by contract of a performance as an entrepreneur, is liable for the fact that this performance is also produced and offered. That means: if the customer does not receive the promised performance, he can demand, e.g., compensation. The height of the compensation can be limited by the legal form: stock corporations are liable only up to height of her insert. Restriction of liability: Ltd. Full liability: partnership (general partnership), complementary with the limited partnership.

Publicity-liable companies must according to Bosnian law disclose their balance and – according to size – even more. This means, this information is accessible to every prospective customer. According to this decision criterion the legal form choice, is difficult. Affected companies avoid not seldom to make its balances public, because they assume, e.g., disadvantages in the competition or with the pricing, above all, with bulk purchasers. Publicity duty: Ltd, PLC (Stock Corporation)

T a x ie s

Procurement of capital

The taxation of a company depends (e.g. in Germany) not least on its legal form. Unfortunately, there is no tax saving model for every opportunity. According to business situation (e.g., profit height) with the tax saving has sometimes one, sometimes the other legal form the advantages of a marketing concept. According to Bosnian taxation law there are no differences regarding taxation according to legal form (excepting foundations).

The question whether the business should be financed instead of by credits rather by company capital of "foreign" investors (e.g., companion, partner) occurs to many companies only during the run of company development. However, legal form is importantly to this question; it decides on the fact which co-determination and controlling rights the investors have and under which conditions they can pull her capital again.

As quoted in Bank Austria Investment Guide BosniaHerzegovina (2003) „The tax is payable by any company or other legal entity that earns income by selling products and services on the market“

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Setting up and capital requirements

Auditing duty

This point is now and then overestimated by the legal form choice. Expenses fall in for lawyer, notary as well as registration fees. Besides, the expenses for lawyer and notary by a company setting up orientate themselves as a rule after the height of the joint stock. Considerably more expensive it can become only if luxurious social contracts must be sketched to adapt a legal form to the needs and wishes of the founders. Possibly is this with setting up of general partnership, limited partnership, partnership company and Ltd. A legally prescribed least capital in Bosnia is prescribed for Ltd ( at least 1,022.58€ =2000 KM till 511,291.88 € = 1000000KM if Ltd has more than 10 stockholders),and PLC (25,564.59 € = 50000 KM)

For some companies in Europe (medium-sized and big Ltd) an auditing duty is obliged. This rule is connected with considerable costs. As stated in Bank Austria Investment Guide Bosnia - Herzegovina (2003) in BaH, the international standards of Auditing (ISA) is applied. Foreign auditing companies may perform audits in the territory of Bosnia only together with local (residential) auditing firms. An audit in Republika Srpska (RS) must best of all performed by 30th of September of the year following the accounting year at the latest and in contrast to Austria, no obligations of disclosure exist in the RS. A foreign auditing company in RS may found an auditing company only on condition of reciprocity, with at leases 51% of the capital to be held by the local auditors.

Discussion: Decision about legal form of the RFH subsidiary, requires analysis of the judicial systems in Germany as well as in Bosnia, because of the special position of the RFH as a non-for-profit organization. According to German law such an organization has the possibility to have shares in other stock corporations or to set up such corporation. Based on considerations above, Ltd. is favourable and possible legal form because preconditions of German law for non-for-profits and because of the delimited liability as well as low capital requirements which are necessary for the setting up in Bosnia. German Ministry of Employment and Economy (2004) strongly recommends companies in their booklet about FDI (“Weltweit aktiv”), to engage foreign lawyers to draw up the contracts. In Bosnia and Herzegovina, according to Information of German F.A.Z. Institute for Management (2004) very liable and well-versed Austrian lawyer’s office with German speaking lawyers with subsidiary in Sarajevo is office of Lanky, Ganzer & Partner d.o.o. (www.lansky.at).

12.2 Arbitration board for disputes in Bosnia

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Bosnia-Herzegovina has ratified the arrangement about the recognition and enforcement of foreign arbitrations (New York arrangement) from the 10th June, 1958, which was ratified by more than 100 states likewise (Reiffeisenbank Austria, 2004). In this arrangement the contract states is obliged, to recognize and to score arbitrations on the Highness's area of another contract state. Hence, the competence of the International Arbitration Board, the International Chamber of Commerce (ICC) or another institutional arbitration board can be agreed in contract.

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Recommended

arbitral

clause

by

International

Chamber

of

Commerce

(ICC)

(www.iccwbo.org/) is defined as follows: „All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” Advanced information gives e.g.: International arbitration board of the Economic Chamber of Austria (www.wko.at/arbitration). After company has handled all formalities to set up a new business, the further step for company is to acquire new customers and to develop appropriate customer retention strategy. In next chapter I’ll analyse these aspects and identify the most suitable marketing strategy as key success factor for RFH’s foreign

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business in Bosnia.

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13

Appropriate marketing strategy as key success factor

“The customer is always right” The age-old adage

We all know that old adage. That is definitely not always true, but when the customer is wrong, company must handle it properly. But unfortunately, it is not always the case. For many entrepreneurs most important is they own offer, the customer is not seldom a disturbing factor. According to Dorfman (2005), investing in customer advisory programs and involving of customers in marketing strategy deliver mutual benefit for the company and the customer. As stated by to Kottler (2002) because consumers and business buyers face an abundance of suppliers seeking to satisfy their every need, companies and not-for-profit organizations cannot survive today by simply doing a good job. According to information’s of German Ministry of Economic Affairs and Employment (2004), the number of the formations of the companies has strongly risen during the last years. A comparably big increase of bankruptcies stands in the way of it. Besides lacking qualification, information deficits were responsible in more than 60 percent of the cases for the failure of the companies. Products and services must to be disposed for cost-appropriate and competitive prices. Above all, the companies which are anew on the market must find the first customers (ExpertConsult, 2003)."Marketing" is a term which is often used, by founders of a new business and young entrepreneurs, rarely; however, it is completely understood. It begins with the facts that marketing is very often equated with advertising. Kottler (2002) defines marketing as the organization function charged with defining customer targets and the best way to satisfy their needs and wants competitively and profitably.

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13.1 How can RFH fulfil the wishes of future customers? Many companies orientate themselves to the question, how to fulfil the wishes of the customers best of all. In the study of the University St. Gallen from 1998-2005 (“Best practice in marketing”) the following requirements/conditions are specified and applied to RFH in order to win customers:

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Make the right offer:

The right customer:

Products or performances must satisfy a demand for a satisfactory price. They must be useful (recognizably) as well they must be delivered fast and punctually.

To be able to sell – useful – product, it requires customers with 1. Suitable demand and 2. Sufficient financial possibilities (customer is able to buy).

The decisive difference (product differentiation):

Sales planning: Whether company has met the (local) needs, and whether it provides right offer to the customers and has determined the decisive difference, is not left – in the ideal case – to the chance. „ Customers retention “can be prearranged and planned” Besides, basis of every planning is the possibly detailed and current knowledge of the market.

It is likely that the competition already holds similar offers ready and has already identified the suitable clientele. Whether this clientele decides now on a one offer or another, depends on the so-called USP ("unique selling proposition" = unique advantage towards the competitors). This can lie, e.g., in particular product benefit, in the spatial nearness of the company to the customer (e.g. vocational training institution is nearby of Important questions RFH should consider are: university or particular company), a special • How big is the market potential for the service or, however, in the price. Product offer? differentiation is the extent of a product’s perceived uniqueness (e.g., Monsanto achieved • Which needs have the customers? differentiation and erected a barrier in the artificial • Where are important customer's groups sweetener industry by having Nutrasweet appear to be found? on diet soft drink cans) (Keegan and Green, • Which offers are at the market? 2002). • Which engineering / technical high demands customers make? It follows that the RFH could offer new courses • Which maximum price customers are tailored to local industry response but also able and willing to pay? courses like e.g. software application training • Which engineering / technological which are very often used (world wide) but developments are to be taken into not to find on the local market , e.g. Catia V5 consideration? courses or E-Plan. For instance the E-Plan • How will the market develop? training for Bosnia and Herzegovina is offered in Croatia (Company EXOR d.o.o. for customers The answers on many of these questions are to from Federation of Bosnia and Herzegovina) and find in the determination of key successes factors in Serbia and Montenegro (Company VESIMEPX for FDI in educational sector in BaH as well as in d.o.o. for customers from Republika Srpska) the market blue sheet of BaH. (Please see: http://www.eplan.de/ -> E-Plan Customer groups and needs of local industry and international -> Bosnia and Herzegovina). educational sector were one of the main

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indicators for suggestion where to locate the business in BaH (Please see chapter : Choice of right business location in Bosnia and Herzegovina as success factor for RFH)

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13.2 How can RFH win customers and build customer retention? "Company's first task is to create customers" Peter F. Drucker

Kottler (2002) defines customer satisfaction as the outcome felt by buyers who have experienced a company performance that has fulfilled expectations. “Customers are satisfied when their expectations are met and delighted when their expectations are exceeded”. Satisfied customers remain loyal longer, buy more, are less price sensitive, and talk favourably about the company. But the first question is how to win them? The company it wants with it products or services to enter the market, can use a row of instruments available, in order to acquire a new customers (Müllner and Tomczak, 2004). Which instrument is the right one and which instruments should be combined with each other, depends always on the fact which advantages the respective instrument offers and for whom it is especially suitable. The University of St. Gallen (2004) has put together the most important instruments to the customer's production in their study. The most used marketing instruments appropriate for companies with description of advantage and suitable target group are shown in the table below: Media advertising:

Information’s / Trainings / Trade advertising :

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Announcements in daily -, weekly newspapers, For instance training of salesclerks in trade. professional journals Television, radio and film advertising, posters, posters, light advertising Advantage: Specific and detailed customer's information about supplies Advantage: Good price-performance ratio For w hom: can be used by company which offer For w hom: For almost all industries suitably; less consultation-intensive goods about trade for very much technically oriented (in need for explanation) products and services or for a very small, special clientele: losses due to nonselective advertising are too high there

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Direct marketing:

Internet:

Direct E-mailing , circulars, Response possibility Homepage, Internet shop, E-mail for the destination persons: reply cards , coupons, hotline, Telefax, Advantages: Very big accessibility of relevant target groups, precise tunings supply customers Advantage: Turns in contrast to media possibly. Company information in the Internet advertising not to anonymous masses, but to (e.g., a goods catalog) is quick to update, big single customers. Important requirement for the information capacities can be presented success is very exactly to know potential attractively and clear. There are specific customers. Therefore: it is necessary before to searching possibilities for the customers. search for "target groups" and destination Complicated and explanation-destitute products persons" and record them possibly in a database. or services can be visualized, with text, picture With her help promising target addresses are and tone. How intensely customers use the selected and used for direct marketing-measures. Internet presence, can be determined by access statistics precisely. There are no closing time For w hom: Especially in trade, but also with times. services (e.g. specialist shops, Fast-Food service) and for many consumer goods. For For w hom: For all consumer groups products in need for explanation and services A row of farther instruments for the customer's mailings can wake up interest and point to dates production as for example exclusive offers, sales for presentations or possible sales talks. talk, telephone call etc are available. Nevertheless, these are not treated in detail there because they are not suitable for customer acquisition strategy of the RFH.

Discounts/Special offers: Discount, seasonal offers. Advantage: Favorable prices are for purchase decisively For w hom: Above all, for trade. However, they can be also used in the catering trade (seasonal offers) and in many other services.

Discussion: Especially for RFH internet, media advertising (in the early phase in the well-known daily press) and special offers (e.g. for students and scholars) are appropriate to use. In the beginning phase advertising should, arouse interest in the reader and make a professional, Customers expecting a West-European oriented picture of company (Tilles, 1998). Copyright © 2008. Diplomica Verlag. All rights reserved.

Customers should recognize unique advantage of (comparative cheap) products and services towards the RFH competitors. In order to make product and services attractive regarding price, prudent pricing policy of the company is necessary. In following chapter I’ll exemplify measures and develop price calculation scheme, how RFH can develop well pricing policy and gain competitive advantage from price as key success factors.

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13.3 Ways to successful customer retention According to experience about 80 percent of the turnover is achieved with only 20 percent of the customers (Kotler & Armstrong, 2005). These core customers must be investigated and they must be treated carefully. According to Lennardt (2004), current customer satisfaction analyses prove in the most different industries as strategically success factors of the customer's connection: High quality together with Innovation power, High service of delivery (fast and reliably), Good price and performance relation and Intensive customer's communication. ExpertConsult marketing company together with German Federal Ministry of Employment and Economy (2004) refers to the following instruments for customer retention, which have

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proved themselves with the attempt to bind customers: Creation of customer's competence:

Personal telephone calls, hotlines, m a ilin g s :

Personal trainings, operating instructions and user's guides etc., especially by H-FI devices, cameras, computer. To invest in customer's competence the customer satisfaction, the repurchases or the purchase from raises as can be proved the customer's use of the acquired products and with it.

Regular telephone calls with the customers should investigate: „ Is something absent? Can one help? “Hotlines allow the execution of current customer's problems or customer's questions, just with technically complicated products. Mailings give the feeling to the customer that one looks after them.

Complaint management:

Bonus programs, customers contact programs:

It serves the stabilization of threatened relations with customers. About 82% of the customers whose complaints have fast been solved would shop again with the same supplier.

Discounts, access to addition performances, free Park ticket are possible. These programs make sense, above all, in the service and consumer goods industry (e.g. trade, cinema).

Customer's magazines:

Current customer's information and customer's contacts:

They should be decorated editorially so that they give information about company and supplies to the customers, maintain and generate sympathy. Also they should allow contacts with other customers e.g., about reader's hotlines and reader's columns.

E.g., operations and specials, useful tips around the offered products and around services, extensions of the supply etc.

Service:

Additional offers:

E.g., support by connection and servicing of devices

It is conceivable to take back the products for the purpose of recycling, pick up and bring-service, parking lots and game corners for children.

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Discussion: Some of the instruments for customer retention would be appropriate for RFH. Especially services and creation of customer’s competence in trade sector as well as bonus programs, customer magazines and additional offers in service sector. Some of the instruments stated above are in Bosnia in developing stadium. Marketing phenomenon worldwide is pricebehavior of customers (Kotler & Armstrong, 2005). Customers are rather willing to buy cheaper products or services rather than expensive, with assumption that products or services fulfill basic quality standards. Price is in the fact one of the key success factors for

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companies. More about suitable pricing strategy for RFH I’ll explain in following chapter.

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14

Suitable pricing for services or products as key successes factor

Pricing an important factor in determining success, according to a number of industry experts (Connolly, 2001). Revenue management is in broad terms, the practice of maximizing revenue through pricing (Cross ,1997 ; cited by Flouris and Walker, 2005). Pricing strategies may focus on customers, on competitors, or on global factors. Customer-oriented pricing requires an understanding of reference prices, price awareness, price/quality relationships, odd-even price perceptions, limited offers, and target pricing. Price levels are often markedly different in different locations (Matanovich, 2004). A competitor-oriented pricing considers leader follower scenarios, going rates, discounting, and competitive bids. Global considerations include funds transfer and exchange rates as well as counter trading or barter. To implement a price strategy prices must be set and then communicated. Also there are numerous unethical practices in pricing such as giving misleading information or using unfair price discrimination. Inexperienced companies fix her prices – for products or services – not seldom only "by rule of thumb" instead of calculating them carefully (Gilber / Frazier, 2002). However, what belongs to a careful price calculation? How many a product or a service should exactly cost? This is one of the most important and most difficult company’s questions generally. The response to this question decides, how well or badly product or service will be sold (Kersting / Schwolow, 2004). In addition, it depends on it how profitably the company will economize. A precise price calculation orientates itself by three important examinations: •

Supply and demand determine the price

•

Cost prices: the price should be so high that a turnover can be achieved which covers the expenses and gains profit.

•

Market prices: the price should be competitive

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The price arranges on the one hand for the fact that the demand for products or services can be satisfied (especially importantly for consumers). On the other hand, it makes sure that offers are sold (especially importantly for the suppliers). Vice versa counts: for a supply which is available in large quantities at the market as for example outlet models of computers the price is low, above all when the demand is rather held back. (Kersting / Schwolow, 2004)

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14.1 Basic price strategy approaches The concept of price strategy is delivering customer value. Objective is to find a balance between what customers are willing to pay and the costs associated with the strategy (Gilber / Frazier, 2002). Two basic price strategy approaches are: so called market penetration and market skimming (Barzen, 2005). If company want to aim for a large market share with a low price they would want to consider market penetration as a pricing strategy. This would mean setting a low price (and correspondingly lower profit margin on each unit), but selling a higher volume. Market skimming as pricing policy (when company may want to remain as a niche market product and set a high price (with a higher profit margin on each one sold) makes sense for a company when a sufficient number of buyers have a high current demand, the unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear; the high initial price does not attract more competitors to the market; and the high price communicates the image of a superior product. As stated by Elliot (2001), factors they lead to the decline in prices and shifting from price skimming to price penetration (as for example selling of new products or new services like completely new vocational training courses) are economies of scale (as more and more units are sold, economies of scale kick in, thereby lowering the cost of manufacturing) and increase of competition (more competitors came into the market and started competing on price). Finally, after companies had a chance to recover their investments, they could have found it easier to shift from price skimming to price penetration. According to Kottler (2005) the so called "three Cs" affect the setting of prices is: costs, competitors and customers. Perreault and McCarthy (1999) include in the key factors that influence price setting inter alia: demand, price of other products in line, legal environment etc. Basically, the costs set a floor to the price. The price should cover these expenses (prime costs) and also an additional profit (for services like in the case of RFH) it is usually that company calculates a profit extra charge of approx. 10% (Kersting, 2004). Competitors' prices and the price of

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substitutes provide an orienting point. Customers' assessment of unique product features establishes the ceiling price. Value-based pricing recognizes value, not simply costs. Valuebased pricing begins by understanding customers and the competitive marketplace. It looks at the value customers perceive in owning the product. Cost-based pricing does not look at that value, but rather looks at the costs of doing business, adds a profit, and arrives at a price (Gilber / Frazier , 2002).

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Compettion

Costs

Price setting

Demand;Legal environment; Price of other products in the line etc.

Customers

Source: Kottler, Philip (2005) - Marketing Management; Perreault and McCarthy (1999) - Key Factors that influence price setting

The question is how should a RFH integrate cost-, demand-, and competition-based pricing considerations? As already mentioned, according to Kottler (2005) pricing involves the customer demand schedule, the cost function, and competitors’ prices. Have legal environment in Bosnia huge impact of pricing? In setting a price the RFH, will have to consider the following cost-, demand-, and competition-based pricing decisions:

Pricing decisions: competition-based: Pricing decisions: demand-based: To set prices effectively, an organization (RFH) must be aware of the prices charged by competitors. Among the major questions here are: • •

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•

Among the variables here are the type of demand for the product (prestige, price-oriented, etc.), changes in buyer attitude toward price with changes in the economic environment (uncontrollable variables), and the elasticity of Will some competitors try to absorb much demand of the cost increases to induce brand • What is the elasticity of demand by switching? market segment (alumni courses, Will all competitors raise their prices by vocational rehabilitation etc.)? the same percentage? Will competitors react to cost increases • Are the short- and long-range effects of more slowly to try to increase their price increases the same? market share? • Will consumers switch to applicable courses that contain less theory?

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Pricing decisions : cost-based: Marginal analysis and break-even analysis are the two primary methods in cost-based pricing decisions: • •

What is the impact of a 5 percent cost increase in the price of CISCO - course costs? What is the impact on marketing costs of a 10 percent demand reduction?

14.2 Possible mistakes with the pricing In a non-representative survey with the help of the Federal Organization of the German management consultants (BDU - http://www.bdu.de) (2005) among consultants of professional organization „ Management + Marketing “, the most important mistakes with the pricing which occur among the entrepreneurs were ascertained. These are: 1. No calculation of the price. Prices are arranged unsystematic without calculation. 2. No cost overview. The actual expenses are not known. 3. HR costs are not taken into consideration. The factor "time" is not included or not enough included. Firm delivers more than it gains. 4. Only cost price is taken into consideration. The company includes only of the cost prices and calculates on the basis of her accounting. However, besides, it neglects the market prices. 5. No market information available. The company has not enough information about, which prices in competition at the market are accepted (test customers inevitably!). 6. Competition is imitated. The company imitates the price strategy of the competition. 7. Wrong expectations. Firm calculates much too optimistically and goes out from high profit expectations. 8. Company is without security. The company is not protected against impositions they Copyright © 2008. Diplomica Verlag. All rights reserved.

can result after a certain period as for example taxes, credit paybacks, labour costs, organizational expenses which can carry out pricing pressure. 9. Bid quality is neglected. The company neglects the cost situation and/or the quality of product or service. 10. Missing arguments. Arguments why expensive product or service has high quality are absent.

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14.3 An example of the service and trade price calculation for RFH According to Schwolow (2004), the starting point of the calculation in the trade sector (e.g. in the case of providing of the technical/workmanship services by RFH, as for example IT – service) is the hourly rate of charging. This is calculated in following steps: •

Add up of all arising expenses in the company (except cost of materials, separate are included) (so-called expenses of the company)

•

These expenses are to be divided by the "invoiceable" hours in order to determine the hourly rate of expenses.

•

Besides, the so-called correction factor is to be taken into consideration (a factor of e.g. 80% shows a good order position). If the order position is lower, this factor also decreases.

•

With the help of the hourly rate of expenses and the number of the working hours the asking price is calculated.

An example:

Calculation of price in trade sector (in Bosnia and Herzegovina) An example of pricing of repairing and change of the switch: Type HP Procurve Switch 4140GL

Calculation of the business days in the year Days in the year Saturdays and Sundays 1 Holidays 2 Vacation entitlement Sick leave (Assumption)

Calculation of the hourly rate of charging 365 104 18 18 16

Expenses of the company (estimated) 70,000 € Invoiceable hours 4012,8

= Hourly rate of expenses (However, these hourly rate of expenses still contain no profit. With (often aimed) profit margin of 10%, the rate of expenses amounts to 19,19 € thus rounded on 14.00 €)

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= Business days

209

Calculation of invoiceable hours Business days x Hours per day x Productive employees

209 8 3

x Correction factor (= Time delays, e.g., for journeys; Preparations and post processing; Idle times because of bad order position)

80%

19,00 €

Quotation costing (Bid price) Number of the hours (e.g. 18h) x hourly rate of expenses (19.00) = Wage turnover + Material purchase price3 + Extra charge on material (e.g. 10%) + Special direct costs (manufacturing, distribution etc. (estimated)) = Prime costs

= Invoiceable hours

17,44 €

4012,8 + Venture and profit = Net bid (quotation) price + VAT (17% in BaH) = Gross bid (quotation) price

342 € 3939,36 € 393,94 € 115 € 4448,3 € 150 € 4598,3 € 405,79 € 5380 €

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1

Weltzeituhr (2005), Holidays in Bosnia and Herzegovina in 2005,http://www.weltzeituhr.com/ laender/024.shtml, 12.07.2005, 16:08h. 2 Bank Austria(September 2003), Investment Guide Bosnia and Herzegovina, “Employees in both Entities are entitled to 18 days (including Saturdays)”, p.35. 3 Dell Ltd, Product Information, HP Procurve Switch 4140GL - 40x RJ-45 10/100/1000, Ports 4. Note: With the calculation actual prices must be known. In following examples some costs are pessimistically, approximately estimated on really value. It is also a matter here, of showing the calculation way. For gross quotation are used rounded sums (e.g. 5380 €). Of course sometimes it is useful to use so called psychological pricing. In this example the price could be 5379, 9 €.

In the service sector expenses are distributed in the practice no more to hours but to shorter time units (as a rule today: 15 minutes, (Kersting, 2004), so that orders can be accounted flexibly. An ascertained hourly rate of charging must be divided for 15-minutes-time units by four. The 10% profit margin is generally calculated in the bid price. Differences in the gross quotation price occurs because of different estimated expenses, different material costs and number of hours or time units (in example below are used 50 time units) needed for competition of job.

Calculation of price in service sector (in Bosnia and Herzegovina) An example of pricing of CISCO course – CCNA 1

Calculation of the price

Expenses in the company in € per year Material / Product

1

Staff (incl. overhead expenses)2

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Occupancy costs (space)3 Other Insurance (Buildings insurance, householders comprehensive insurance etc.)4 Advertising expenditures and travel expenses 5 (estimated) Repair / maintenance (estimated) Depreciation6 Interest7

= Total costs

Spending on materials for the concerning one order (Copies, 15000 € Internet usage for invoiceable time units etc.; estimated = ) + Rate of charging (4,56 €) x 34531,9 € Number of the time units (e.g.= 96) 10200 € = Prime costs

577,2 €

289,14 €

+ 10 % profit margin

57,72 €

5500 €

= Net bid (quotation) price

634,92 €

500 € 3000 € 4115 €

+ VAT (17% in BaH) = Gross bid (quotation) price

107,93 € 685 €

73136,1 €

Calculation of the rate of charging Expenses of the company Invoiceable hours = Hourly rate of charging Invoiceable 15-minutes-time units

= Rate of charging

73136,1 € 4012,8 18,23 € 4

4,56 €

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150 €

427,2 €

1

Estimated costs (incl. 12 PC-s with equipment, paper, copier expenses etc.). Staff (calculation for 3 employees), Gross average wage in educational Sector 2005 in Bosnia and Herzegovina in the year 2005 (see S. 28): 657 € + Social insurance contribution = in both entities uniform rate of 32 + 14% overhead expenses (monthly overhead expenses in public/educational sector) according to Deinert (2005). “Social insurance contributions are not separated according to employers and employees” ; Bank Austria(September 2003), Investment Guide Bosnia and Herzegovina, p.34 3 See Business related indicators (costs for rent of office - here 100m2) 4 According to http://www.makler24.de/versicherung-vergleich.php, R+V Insurance ; Limit of indemnity = 50000 €, , 13.07.2005, 11:48h 5 Source : Small Business Development Center (2004), Average advertising costs by media type, Newspapers and online advertising for 12 weeks, www.iesbdc.org/resources/Major%20Media% 20Types.do; Estimated travel frequency 4 time/year. IT- Centre of University of Banja Luka, Customer Services , Web design, http://www.urc.bl.ac.yu/usluge.shtml; 6 In Bosnia and Herzegovina accepted only on a straight-line basis, 20% of material costs p.a. Maximum rate for computer and equipment is 33,3% , Bank Austria(2003), Investment Guide Bosnia 7 According to interest rate of 8,23 % by 50000 € of external financing. 2

Note: All estimated costs are rather pessimistically calculated than optimistically. For gross quotation are used rounded sums (e.g. 685 €). Of course sometimes it is useful to use so called psychological pricing. In this example the price could be e.g. 689,9€ .

14.4 Price as key success factor for RFH Discussion: Due to analysis, price is one of the (short – time) competitive advantages of RFH on the Bosnian market. Having calculated the price for the offer of so called CISCO course “CCNA 1”, it became evidential and apparent that the price of the courses potentially offered on RFH subsidiary in Bosnia and Herzegovina of 685 € is competitive against the competition prices. As I already stated, the same courses offered by the competition in Banja Luka (IT Professional; http://www.itprofessional.org) costs 1304 € (According to E-mail information’s of IT professional Manager from 04.03.2005). Also there is no possibility to book courses separately likes on RFH IT-center. The competition in BaH obviously uses the unique market position and offers the course to “exorbitant prices”. On the RFH all courses are offered weekly on 1 day in the week for 3h. The regularly time frame for all 4 CCNA courses is about Copyright © 2008. Diplomica Verlag. All rights reserved.

36 weeks (x 3 h = 96h) (tuition fees are paid for this regularly time and in the case of extension, they must be paid additional). The price is 400 € for RFH students and 800 € for external customers, shared in 4 CCNA main units. Thus each unit is offered for the price of 100 /200 €. Thus, flexibility in the offering of the courses (compared as on the RFH) and flexibility in payment (e.g. holdback payment) is also strategy, which should be considered. Not well funded customers pay rather more of smaller rates for the same product or service rates than cash. For the RFH, care must be taken to ensure that prices can be competitive for a longer time period, because the competition will respond to price strategy. In terms of

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Cisco courses (without other courses that would be offered) the Break-Even Point annually would be 107 soled units before company make back their total costs (73136, 1 € / 685 = 106, 7, rounded 107 courses). It seems to be low amount, but it is to be considered that company according to calculation above would have high fixed costs (salaries, operating costs etc.) which must be monthly paid! That means that (in year 2006 because of one-off material cots of 15000 €) RFH should monthly earn revenues in total of approximately 6100 €. That leads to conclusion that company should have monthly, at least approximately 81 (CISCO) customers. Calculation is shown below: Minimum number of customers (Break Even) =

6100€ = 81 (685€ / 9)

685 € - Costs for one CISCO Course 9 - Months are needed for completion of one course It follows that one CISCO course brings approx. 76 € / Month (if offered for 9 months) or approx. 114 € if offered for 6 Months (like competitor does it). I’ve used for the calculations more pessimistically case of 9 months. This amount of customers (81) is very high, according to the fact that the company is new on the market. But these figures will change from the Year 2007 because the total annual costs are reduced (there are no new high investment costs in equipment!). Thus it was necessary to take credit with sufficient funds to cover costs in first year an in order to stay liquid. In the second year (2007) the annually costs are estimated (pessimistically) on 58200 €. With this amount required number of monthly customers would be 64. It is still high, but calculated only with 1 source of revenue, CISCO Courses. Thus it is noticeable that RFH must offer diverse courses, but in the same time company should reduce the fixed cost, e.g. through reduction of salaried employees from 3 to 2, or to use the employees acting in the same time as trainers, or to choose another form of payment (basis salary based on the part time calculation and additional salary as hourly fee (honorarium payment)). This would save the

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overhead expenses as well as social insurance expenses for employees in total. Developed and integrated marketing pricing strategies are a part of setting up process. Additionally international business needs appropriate organization (Hill, 2005), means of control and evaluation. These are further key success factors for foreign business. The following chapter examines the further segment of establishment of business strategy - the evaluation of performance and the control of work activities. Guidelines are presented to help keep the likelihood of occurrence of these negative side effects to a minimum.

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15

Organisation, HR and Control of foreign business as key success factor

As stated by Lu and Beamish (2001) the issue of strategic fit in an international context takes on additional complexities due to the problems of control and coordination, confounded by the policies of foreign governments and the actions of foreign market agents, particularly for smaller and medium-sized companies. As stated by Wagner (2004), the setting up of a foreign subsidiary needs long-term preparation and this preparation includes

beside

strategic planning of the markets, strategic planning of the location and strategic planning of the basic conditions also strategic planning of the company organization. To strategic planning of the organization belong especially the organizational integration of the foreign branch and the integration of personnel responsibility.

15.1 Organization of the subsidiary of the RFH in Bosnia Structure and control should be consistent with strategy (Kidger, 2002). Geographic and cultural distance between subsidiaries and parent impacts whether the decisions of local managers will always be appropriate to the interests of the corporate organisation (Chang and Taylor, 1999). How the own subsidiary is organized abroad, depends of course, primarily, on the purpose of their business (Hennart,1993). A pure, own marketing organization requires other juridical and organizational regulations than the construction of a production plant. Radebaugh and Daniels (2004) explain that an organization’s structure is designed to help the firm implement and carry out its strategic plan. Structure depends on many factors, including degree of multidomestic, global, and transnational policies employed, location and type of foreign facilities and impact of international operations on total corporate performance. Structuring of the organisation has according to Hill (2005) three main purposes: to divide the organisation into subunits (horizontal differentiation), to locate decision-making

responsibilities

(vertical

differentiation)

and

establish

integrating

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mechanism. Especially for RFH it is necessary at the beginning to consider the point of location of decision-marking responsibilities. This because, the subsidiary will have after setting up only low number of salaried employees and the division of the subsidiary organisation into subunits should be comparatively easier.

The major structures of companies’ operating

international are: International division structure, Functional division structure, Product division structure, Geographic (area) division structure and Matrix division structure. As stated by Radebaugh and Daniels (2004) all of these structure types have their

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disadvantages and advantages. As it is quoted in Hill (2005), “according to Harvard Study the most firms choose initially international division structure when they expand abroad”. Initially this international structure might be appropriate for subsidiary of RFH. The main reason for this consideration is an easier integration of functional units of RFH in the subsidiary product lines.

Headquarter - RFH

International Division of RFH Manager(s) for international matters Area line

Domestic divisions of the RFH Product / Service line managers

Functional unit (1) E.g. IT Centre

Country (1): Bosnia – Herzegovina Local Manager Functional unit (1) E.g. Marketing

Functional unit (2) E.g. R & D …..etc.

Country (2) :… etc. Local Manager

Functional unit (2) E.g. Finance…etc.

In Germany, RFH has typically functional structure (possibly because of narrow range of products and services). For such type of the firm like RFH with functional structure at home, this might mean replicating and easier integration of the functional structure abroad. According to this structure the organisation would be designed, as it is presented on the figure: Later on, the structure type effectiveness is to be considered in regularly periods of time, because regularly, international division structure makes the relation between international activities and product divisions complicated and cumbersome. After establishment of the company on foreign market and in the case that large foreign operations Copyright © 2008. Diplomica Verlag. All rights reserved.

can not be dominated by RFH in Germany, appropriate structure could be geographic (area) structure type.

15.2 HR management and control of business in Bosnia Political, economic, cultural, and legal distances between parent and host country have according to Hamilton and Kashlak (1999) an effect on choice of control systems. Control is process that ensures that the company is achieving what it set out to accomplish. Control

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compares performance with desired results (Wheelen, 2004). Following figure, explains control an evaluation process.

Nr.1 Determine w hat to measure.

Nr.2 Establish predetermined standards.

Nr.3 Measure performance

Nr.4

Nr.5

Does performance match desired results?

Take corrective action.

STOP

Source: Adapted from Wheelen Tom and Hunger J. David (2004), Strategic Management and Business Policy, Chapter 4

Figure above is certainly not a complete model of the control process. For example, it does not include the development of an information system so that performance can be measured in step Nr.3. Nevertheless, the model is adequate as a simple representation of the basic steps in evaluation and control. It is slightly misleading to the extent that it suggests that all control is post hoc, i.e., after the fact. Normally, a corporation will often need "steering" or feed-forward controls to assess slight deviations before they become performance break-

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downs. If a process is going slightly off the desired course, the manager in charge will have to decide if the deviation is important enough to correct. If left alone, the deviation may correct itself. If the manager intercedes, she/he may cause a reaction - throwing the process off track in the other direction. These activities are not included in Figure above. Control systems are very often used together with Incentive systems – devices to reward appropriate behaviour. Griffin and Pustay (2003) define various factors that influence how much control a company needs at different stages of internationalisation. These factors are: Level of Importance (the more important the specific foreign operations are to total corporate

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performance, the higher the corporate level to which those units should report), Changes in competencies (as foreign operations increase and become more complex, competencies may develop more rapidly at the subsidiary level, requiring less control by headquarters), Changes in operating forms (as firms move along different international operating forms such as exporting, licensing, joint ventures). Several theorists including (Hamilton and Kashlak, 1999; Ouchi, 1977; Eisenhardt, 1989; Chang and Taylor, 1999) have expressed idea that the parent firm generally uses one or more forms of control, namely cultural, behavioural and output. According to Hill (2005) Personal controls, Bureaucratic controls, Output controls, and Cultural controls are the 4 main types of systems used. Personal controls are based on direct supervision through personal contact. These are widely used in small firms. In large companies managers can use this system with their direct reports. Bureaucratic controls are rules and procedures that direct the actions of subunits. Output controls require the setting of clear goals and the use of performance metrics to monitor and measure the achievement of the goals. Cultural controls are in use in situations where employees “buy into” the norms and values that govern decisions in subunits. According to research by (Li et al., 2005) when the pressure for change comes from the inside of an company and the firm is more interested in maintaining its current market position, financial control approach (e.g. output control) is usually chosen to cope with environment complexity and when the pressure for change comes from the external environment, strategic control (which focuses on the process of benchmarking) approach is chosen to cope with environmental complexity Bearing in mind that RFH is more interested in maintaining its local market position, an combination of incentive systems e.g. like in the case of Lincoln Electric, based on meritocracy where people are rewarded for individual effort and control of subsidiaries in the form of output control, e.g. subsidiaries are left alone so long as subunits meet their goal would be appropriate initial way for RFH to conduct the business abroad. Incentives are according to my personal observation usual (and even expected) in Bosnia. There is no

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evidence that incentives are not allowed in there like e.g. in Germany. Further important aspect is HR management . Especially, initially recruiting of appropriate staff has crucial importance. According to Kandola (2001), a transnational approach to recruiting employees - taking individuals from the host country - is more likely to lead to successful worldwide operation than an international approach where an expatriate workforce is deployed by the home country. Considering the fact that at the Bosnian market are existing small resources of staff in IT- educational area (Bfai,2003), together with appropriate know-how suitable for RFH business, the choice of the staff in subsidiary

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determines one of the most important factors. According to DEG (2004) ideally is a project team with two responsible managers at the head: an experienced one foreign manager of the own company and an also experienced local manager, besides, it should possess an extensive background. As already stated, according to results of financial analysis fixed cots should be kept low, thus number of staff in subsidiary is limited and must be able to take over diverse tasks (from managerial to trainer roles). Pure "domestication" of the subsidiary would signify and influence the loss of the good German image of German management practices, products and services which German companies enjoy in the Western Balkan countries (bfai,2003), thus balance of German and local corporate culture should be held. . Frazee (1998) points out that with local partner, like local search firms, company may have a better chance with recruiting of appropriate workforce and of making the right choice in the beginning. Which system of management is most appropriate for implementation of company’s strategy diverse between theorist. There are existing different systems of management as e.g. "management by objectives and self-control" (MBO) introduced by Drucker (1955) or Balanced Scorecard, which Kaplan and Norton (1992) have introduced almost 40 years later. Kaplan and Norton (1996) explain their approach which includes categories (financials, customers, internal processes, learning/innovation) as "...more than a tactical or an operational measurement system...". As stated by Hoffecker and Goldenberg, (1994) a central doctrine of the Balanced Scorecard system “is its focus on goal congruence”. According to Drucker (1955) MBO is based on idea that company will be more successful if: " companies efforts ... all pull in the same direction...fit together to produce a whole”. According to Dinesh and Palmer (1998) there are many similarities between MBO and the Balanced Scorecard systems, but “MBO has proven to be largely unsuccessful in practice, with two key failures identified as partial implementation of the system, and non-recognition of the need to adopt a human relations view…and findings suggest that MBO's failure may

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be due to a lack of understanding by management…”. According to Bechtell (1996) MBO has not worked “because of a lack of collaborative communication”. As sated by Wheelen (2004) like action planning (it states what actions are going to be taken, by whom, during what time frame, and with what expected results) MBO pinpoints individual responsibilities for each unit objective and specifies a time frame when that objective is to be achieved. Unlike action planning, however, MBO takes a more organization-wide approach to planning implementation programs and budgets. For MBO to work, it should be a complete system. Action planning can be done, in contrast, at the individual level only.

MBO acts to tie

together corporate, business, and functional objectives, as well as the strategies developed

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to achieve them (Rugman, 2003). This tying together forms a hierarchy of objectives similar to the hierarchy of strategy. Discussion: In conclusion, according to theorists which management system leads likely to success depends on addressing the larger issues as for instance flexibility and measurement systems and performance. According to Hoffecker and Goldenberg (1994) choice of system depends also on environment and competition and flexibility to react. Dinesh and Palmer (1998) recommend Balanced Scorecard only if firm can find ways to meet rapid external change while maintaining an organisation-wide measurement system, and manage the human relations model in conjunction with goal setting. Otherwise MBO is more appropriate. Furthermore In order to establish (transfer) organisational culture of RFH in subsidiary aboard as one of the ways to be able to offer services and products on the best (as it is from German company expected) way in Bosnia, personal controls are necessary. In the beginning of the business abroad, RFH Manager for international matters may use great deal of personal control to influence the behaviour of its immediate subordinates in Bosnia and Herzegovina. Money and financial funds are an important factor for decision to do foreign business (Hill, 2005). Rewards and incentives might be used as motivators associated with company’s goals. If RFH wants to reduce financial risk, there are many possibilities offered by local as well international governments for it. Success factor is not only to develop different business

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strategies, but also to cover foreign business. Following chapter deals with this issue.

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16

Foreign business coverage and hedging as key success factor

Kobrin (1981) argues that availability “relatively inexpensive” insurance of foreign business risk enables the enterprise’s ”to concentrate on the purely economic risks they face in foreign investment” and take off additional planning efforts what consequently sustain foreign business success. According to Gentile and Valahu (2004) political risk insurance of foreign business is an important instrument for non-commercial risks because doing business in an emerging economy can bring additional risks, real or perceived, of an undesirable political event that many investors are simply not prepared to deal with on their own. As stated by Euromoney Institutional Investor (2004), according to the Kearney survey, “of the top five obstacles that investors say discourage FDI, all involve non-commercial risks, including country and currency risks, and political instability”. The foreign investor is sharing much of the receiving country's risk which makes FDI difficult to arrange (Economist, 2003). According to Robock and Simmonds (1973), "political risk in international investment exists when discontinuities occur in the business environment, when they result from political change and when they are difficult to anticipate." Clark and Tunaru (2003) explain that political risk refers to FDI and country risk refers to loans made by commercial banks to developing countries, whereby according to their quantificational analysis the “cost of political risk is perceived as an external evolutionary process that affects the overall dynamics of the value of the investment”. If company feels as an investor insecure or the foreign business is sensed as risky, a row of investment incentives are offered by the Bosnian government (Investment Guide, 2005) on the one hand as well as a row of the organizational and financial support measures (TEMPUS, and CRADS program (until 2000 referred to as PHARE Programme) by the EU and German government. The so-called TEMPUS project is supported by the European committee central management education and culture. TEMPUS is one of the programs of the European community to the support of the social and economic

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reform process and/or process of development in the partner countries (inter alia BaH) (TEMPUS Guide, 2004). Besides, institutions or singles are supported by subsidies in the attempt to realize projects in the educational area. Otherwise the Federal German Government supports FDI of German companies in developing and emerging countries (as for instance Bosnia and Herzegovina) by covering political risks and by offering investors long-term protection. On the Internet side of the socalled (Auslandsgeschäftsabsicherung) Foreign Business Coverage of the Federal Republic of Germany (http://www.agaportal.de), one finds in singles explained, as for example how

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and on which scale FDI is ensured by the Federal Republic of Germany. Among the rest, ensured are, e.g.: Profit cover, to political risks, breach of legally binding commitments etc. Behind national business coverage agencies, according to Euromoney Institutional Investor (2004) on the international level Multilateral Investment Guarantee Agency MIGA (www.miga.org) (member of the World Bank Group) promote FDI into emerging economies. As stated by Wagner (1994) less well known is the coverage available against the three primary forms of political risk encountered by investors: currency inconvertibility/non-transfer, expropriation, and political violence. MIGA provides insurance products for these types of risk, that can in particularly protect lenders and investors against the risks stated above as well as e.g. risks of breach of contract etc.

16.1 Assistance programmes European Union has passed an regulation (Council Regulation (EC) No 2666/2000) according to certain countries of the Western Balkans are capable for financial aid, among the other countries also Bosnia and Herzegovina. Despite the fact that most of the countries of the Western Balkans do not yet fulfil all the political and economic criteria for the signing of an Stabilisation and Association Agreements, prospect of financial assistance for integration into the structures of the EU is open to all the countries of the Western Balkan region (Kotios, 2001). As quoted in Council Regulation according to Article 2 .Nr. 2: „The Community assistance shall inter alia be for… social development, with particular reference to poverty reduction, gender equality, education, teaching and training, and environmental rehabilitation;“ Assistance is given to all foreign institutions they support the EU purposes, thus it is suitable for RFH aims and should be considered as alternative was of financing the foreign business . It is a way of investment

risk reduction

activity.

Especially

through diminishment of the required capital for foreign to

highlight

is

EU

assistance

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((http://europa.eu.int/comm/enlargement/cards/index_en.htm))

program

because

frequently successful used assistance program in Bosnia (Hulla, 2003)

it

"CARDS"

was

most

and offers the

biggest aid sum (Heidenreich, 2004). EU Vocational Training program, so called „Training for the job market „ (2004) was already supported by CARDS in Bosnia / Sarajevo and funded with 2,4 Mil Euro. Further projects of the similar character are still supportable by CARDS. In Germany is so called Foreign Economic Assistance (“Außenwirtschaftsförderung“) a subrange of the economic assistance of the Federal Republic of Germany and the German countries. The assistance database of the German Federal Ministry of Economics gives an

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entire and current overview about supporting programs offered. The following Internet page offers further information’s: http://db.bmwa.bund.de. In Germany, additionally Federal Foreign Office offers assistance in the area of the culture and education promotion in Bosnia and Herzegovina (further information’s under: http: //www.auswaertiges-amt. de/).

16.2 Public Private Partnership (PPP) Companies choose often Private-public partnerships to raise money for training, research and commercialisation offered by government (Lett, 2005). Ability to mitigate risks of foreign investment is a major factor that will contribute to the success of future PPPs (Euromoney Institutional Investor, 2004). According to Ludwig Kirchner (2005), manager of German Study Group of Development-Political Consultants (“Arbeitsgemeinschaft Entwicklungspolitischer Gutachter“), in 2004 approx. 160 billion US dollars were used in direct investments in developing countries and threshold countries for economic development and privateeconomic (public-private) activities. To support this potential, the German Federal Government during the past years has provided money for a new instrument of the economic collaboration. The instrument calls „ Public Private Partnership (PPP) “ and offers to German companies which are involved in developing countries and transformation countries, new chances of complementary financing and engineering consultation. Whilst PPPs are well established in the U.K (Archer and Guadagnuolo , 2005) German state and Federal government have at last started to make some active headway in progressing PPP projects (Euromoney Institutional Investor,2005). "PPP" signifies state involving of a private-economic assistance which is development-politically relevant. The Federal Government of Germany and German companies divide the expenses of projects which lie in mutual interest. Per project can be provided up to 200,000 Euro of state means (public subsidy at the rate of up to 50%) if is to be recognized that the private company has a long-term interest in this land and the public contribution promotes development-political destinations. According to Linssen (2005), from special interest, e.g., qualification measures are in industry and Copyright © 2008. Diplomica Verlag. All rights reserved.

agriculture, plan of the professional education, the introduction of environmental standards and social standards in the production as well as the improvement of the social security of workers and office workers. Closer information to PPP gives also the Foundation for Economic

Development

and

Professional

Qualification

(so

called

SEQUA

-

http://www.sequa.de/).

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Bosnia and Herzegovina is one of the countries they are especially supported according to PPP program (SEQUA, 2005). PPP is therefore appropriate way for the RFH to finance

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foreign business and to reduce financial risks of the foreign expansion.

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17

Conclusion and Recommendation

All businesses, from IT retailer shops to car manufacturers, insurances to banks have their own key success factors and in many cases there is only one key factor that creates this success and build suitable compatitive advantege of the company against the competition. For a iceman it could be the quality and price, or just the quality; for Germanwings it could be the price; for Mercedes the quality and status; for a Microsoft a specialist area of expertise and for BMG in Europe the strategy of the identification of a new music talents. The aim of my work was to identify these points and then to highlight them for company I work for, the RFH in the case of esatblishment of the subsidary in educational sector on the Bosnian market. The idea of the expansion is at the beginning very interesting for every company, but, nevertheless, it requires detailed planning and, examination of the value chain of the own firm and it depends on many factors, among other things from the arrangement and conditions of the target foreign market. In the introduction I have, initially justified the commercial idea of vocational training as suitable idea especially for the Bosnian market as the target foreign market. Initially question I’ve theoretically analysed was, if FDI is a right entry mode to foreign market. The considerations about most appropriate entry mode for FDI in Bosnia relied mostly on resource-based theory but partly also on eclectic theory considering location advantage, ownership advantage, and internalization advantage as its key components. Setting up a wholly-owned subsidiary is usually the last stage of doing business abroad. In case of the start-up I have mentioned two possible strategies: the so-called Greenfield strategy, or to acquiring or merger an enterprise in foreign market. According to the analysis of the single modes, in consideration of the specific features of the RFH as a non-for-profit organisation and in consideration of business portfolios of the RFH, I have identified that FDI in Bosnia Copyright © 2008. Diplomica Verlag. All rights reserved.

provides more advantages than other possibilities as for example licensing as entry mode strategy would have. This, above all, because, RFH can profit at the Bosnian market from the so-called first mover advantage, which is in the today's time very rare and transient. My analyses have identified that at the Bosnian is existing almost no grave competition with exception of the company in Banja Luka and two companies in Sarajevo which have businesslike the same or very similar product portfolio as RFH. Additionally I’ve identified that FDI by acquisition as one of the

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successes factors for RFH engagement in Bosnia. The acquisition of the competitor, (at least for at short time period) would bring the RFH a sole position at the market. This option of FDI remains as a variant of the expansion of RFH. Beside this option, I have audited farther possibilities, among other things in case of, that mentioered acquisition of the company in Banja Luka (according to Bosnian anti-trust law) nevertheless is not possible or would take up a lot of time. This variant of the FDI, the Greenfield venture, requires at first, an consistently investigation of the economic, political and business conditions on Bosnian market related to FDI in educational sector. Without detailed information about foreign market, company cannot successful develop and apply prudent entry strategy. I’ve identified at first the macroeconomic as well as business related indicators and drivers, than I’ve analysed critically political situation, and determined advantages and disadvantages of Bosnia as a host country for foreign direct investment. The significant difference of the legislation within the single entities in Bosnia, Republika Srpska (RS) and Federation of Bosnia and Herzegovina (FBaH), regarding FDI conditions, Law, Taxation and Incentives lead to key business decisions. Above all, the double taxation regulation in FBaH is to be highlighted, but also its better image. On the other hand, RS offers better conditions with regard to low costs, salaries and costs for the renting of business premises. This not at least therefore, because the economic differences between Federation and Republika Srpska should be decreased by attraction of the foreign investors to Republika Srpska. In order to find further key success factors for the company which wants to enter new market, I have used the method for examination of the new market and development of suitable competitive advantage. From the row of the methods I’ve chosen Porters Five Forces approach as most appropriate because it is clearly laid out ,thus I began at first with environmental scanning. I’ve identified competitors which location and prices, then threat of

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new entrants, bargaining power of suppliers, threat of substitutes and bargaining power of buyers. Above all, I have identified that the adaptation of the competence is delimited to the requirements of the local industry as one possible product strategy for RFH, but also differentiation, because vocational service portfolio (with exception in the area of Web services and Hosting) of the competition in Bosnia is small. Goethe institute in Sarajevo showed very good strategic considerations with the offering of special language courses, tailored to German teachers in Bosnia (accordingly to recommendation of OHR et al.).

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Courses are offered in good hotels in Bosnia, during the holidays in form of special course "learning by making holiday". This might be an interesting idea also for the RFH. The considerations resulted out of the Porters Five Forces analysis also led at first to the decision where to locate business within Bosnia. The so-called hard and soft location factors were investigated. The analyses with the help of the "Business indicators overview ” have proved that both cities Sarajevo and Banja Luka would be suitable (among other things because of the big number of the target customers as e.g. students, but also because of higher buying power in these towns as in rural areas). However, Banja Luka has more favourable conditions with regard to expenses. Besides, in RS are at the moment no evidential problems with the double taxation as in the case of Federation as well as that the foreign investors can found better FDI incentives there. On the other hand the town has a little worse image compared with Sarajevo. However it is not reason enough to shift the business location to Sarajevo. Of course other towns of the land remain possible farther destinations of the expansion like I’ve already mentioned it in my work. This depends of the development of business situation. After decision on location, I have identified farther success factors. At first the choice of the legal form was identified. Afterwards I considered legal issues like e.g. legal disputes. Decisions on legal form required the analysis of the judicial systems in Germany as well as in Bosnia, because of the special position of the RFH as a non-for-profit organization. According to German law such an organization has the possibility to have shares in other stock corporations or to set up such corporation. I recommended the Ltd. as possible legal form because of the delimited liability as well as because of the low capital requirements which are necessary for the setting up. The Bosnian right keeps open farther option of the setting up of the foundations, however, the land offers no sufficient support in financial terms. RFH is strongly recommended to engage foreign lawyers to draw up the contracts. I recommend German speaking lawyers Lanky, Ganzer & Partner d.o.o with office in Sarajevo

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and Vienna. Further investigation has included forecasting as key success factors. Company must know whether this investment is also worth while or whether the plan is profitable. That means the turnover of the company must be so high that all company expenses are covered and, in addition, the calculated profit is achieved. A possibility for RFH in the beginning, in the anew founded company to save HR expenses would be to engage volunteers as well as interns.

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The analysis encompasses calculation of the profitability, liquidity as well as single financial ratios. Besides, all relevant cost (HR costs, operational cost, interests etc.) were, with usage of statistical data from Bosnian as well as from international offices, as e.g. IMF or World Bank, truthfully identified and taken into consideration. Calculation was carried out with the help of the special Software (please see references) of the German Ministry of Employment and Economy. Particularly I have calculated the capital requirements and developed financing and capital requirement plans. These plans have proved that the RFH must pay attention to the HR strategy. Besides, in particular are important considerations about necessary number of the employees as well as the possibilities of the reduction of the fixed costs. Preview was constructed for the years 2006 -2009, with monthly specifications to necessary revenue amount. These offered growth oriented views by observance of the given expenses. After company has handled all formalities to set up a new business, the first step for company is to acquire new customers and to develop appropriate customer retention strategy. I have identified strategies how RFH can fulfil the wishes of future customers, and how RFH can win customers and build customer satisfaction, retention and value. Especially for RFH internet, media advertising (in the early phase in the well-known daily press) and special offers (e.g. for students and scholars) are recommended. In the beginning phase advertising should arouse interest in the reader and make a professional, WestEuropean oriented picture of the company. Customers should recognize unique advantage of (comparative cheap) products and services towards the RFH competitors. In order to make product and services attractive regarding price, prudent pricing policy of the company is necessary. In separate chapter I’ve exemplified measures and developed price calculation scheme, how RFH can develop well pricing policy and gain competitive advantage from price as key success factors. Marketing phenomenon worldwide is price-behavior of customers. Customers are willing to buy cheaper products or services rather than expensive, with assumption that products or services fulfill basic quality standards. Price is in the fact one of the key success factors for companies as well as for RFH on the Bosnian market. This Copyright © 2008. Diplomica Verlag. All rights reserved.

become evidentially after I have analysed the prices of the competitors. I ascertained that these are much higher than those of the same vocational training courses in Germany. This was surprisingly and amazing because the buying power in Germany is much higher than in Bosnia. Having analysed expenses factors (as for example rents of the spaces in Banja Luka etc.) I calculated prices in product and service case. Possible mistakes with the pricing, as I have listed them exemplary in this work, like e.g. wrong expectations or if only cost price is taken

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into consideration etc. I have taken into consideration during price calculation. The calculation offered information’s how pricing should follow, as well as that price for services can be offered by RFH much lower compared with competitors. Further conclusion resulted out of calculations was that, RFH must offer diverse courses but in the same time to reduce the fixed cost, e.g. through reduction of salaried employees from 3 to 2, or to use the employees which are acting in the same time as trainers, or even to choose another form of payment (basis salary based on the part time calculation and additional salary as hourly fee (honorarium payment)). This would save the overhead expenses as well as social insurance expenses for employees in total.Developed and integrated marketing pricing strategies are a part of setting up process. International business must also have appropriate organization, means of control and evaluation. These are further key success factors for foreign business I’ve examined, with focus on the evaluation of performance and the control of work activities. Guidelines have been presented to help RFH to keep the likelihood of occurrence of negative side effects to a minimum. The analyses have proved that the international division structure is suitable organizational form of RFH international business. Ideally is a project team with two responsible managers at the head. The diagram in text shows the partitioning of the responsibility. The international division structure was suitable among other things because the RFH has the functional organization in Germany, which can easily to be integrated into the international division structure. Later on, I’ve recommended that the structure type effectiveness is to be considered in regularly periods of time, because regularly, international division structure makes the relation between international activities and product divisions complicated and cumbersome. After establishment of the company on foreign market and in the case that large foreign operations can not be dominated by RFH in Germany, recommended

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appropriate structure could be geographic (area) structure type. Based on analysis I’ve identified that local manager in Bosnia should be responsible besides top level management tasks also for further functional unit management tasks as e.g. marketing, purchasing etc. One or two employees (depends on consideration of reduction of the fixed expenses) should support him. At least two or all of the employees should be able to operate simultaneous as a vocational trainer, thus he/she must to have appropriate business relevant abilities and skills from the IT area. Farther trainers (if required) must not

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be hired as salaried employee and can be paid on fee basis in order to company can save fixed costs. HR policy of RFH should avoid pure "domestication" of the subsidiary, due to the fact that German management practices, products and services have good image in the Western Balkan countries. It has been also proposed, that a combination of incentive systems (e.g. like in the case of Lincoln Electric, based on meritocracy where people are rewarded for individual effort) and control subsidiaries in form of output control (e.g. subsidiaries are left alone so long as subunits meet their goal) is recommended initial way for RFH to conduct the business abroad. Incentives are according to my personal observation usual (and even expected) in Bosnia. There is no evidence that incentives are not allowed there like e.g. in Germany. Choice of type of management system for implementation of the strategy depends on environment and competition and flexibility to react. Balanced Scorecard is recommended only if firm can find ways to meet rapid external change while maintaining an organisationwide measurement system, and manage the human relations model in conjunction with goal setting. In other case MBO is more appropriate. Additionally I’ve considered the case if company feels as an investor insecure or the foreign business is sensed as risky. In that case a row of investment incentives are offered on the one hand by the Bosnian government (mostly taxation related) as well as a row of the organizational and financial support measures by the EU and German government on the other hand. Recommended assistance sources for RFH is the so-called PPP (Public Private Partnership) which is supported in the big masses by the German government and offers a possible financing basis for the RFH. From the EU side the assistance program for Western Balkan, so called CARDS is the best possibility for RFH to finance business in Bosnia by financial allowances. Recommended source for financing of international business by credit is the offer by KFW (German Loan Corporation for reconstruction). I’ve recommended financing program (program number 57), so called “Capital for Employment and Investment Copyright © 2008. Diplomica Verlag. All rights reserved.

in Foreign Countries”-Program. Finally I remind that every company on foreign market should respect country-specific regulations and usages and avoid obliging foreign business partners in the domestic approaches. Having analysed all aspects related to FDI in Bosnia in educational sector I argue, that competitive advantage of RFH on Bosnian market in scenario described in this work, lies in the firms’ ability to protect its business from exposure to competitors’ inimical practices and

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hostile features whilst at same time selecting a small market segment and concentrate all its efforts on achieving advantages in this segment. Such a niche will need to be distinguished by special buyer needs of the local industry and public and private institutions. The advantages of RFH that competitors cannot easily copy, lies also in development of unique features and attributes in a service that position it to appeal especially to a part of the total market. More generally, the competitive advantage of RFH is based on the stability and continuity in relationship between the parts of the organization operating in Germany and Bosnia and Herzegovina (parenting). The way that RFH leads, trains and supports its

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members may be a source of the competitive advantage that others cannot match.

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18

Outlook

RFH as well as many other incorporate societies (registered associations) recognise the nonfor-profit capital corporation, in Germany so-called “gGmbH“ (non-for-profit limited liability company) as an alternative legal form for its economic activities. Currently, RFH is carefully considering rearrangement of the legal form of IT - Centre of the RFH and its transformation in such gGmbH in order to it become able to act profitable as capital company and to operate on the basis of commercial considerations. The following major changes are expected: -

Whereas within the incorporated society (registered association) the members are decision-maker and ordinarily every member can cast its vote, with gGmbH acting partner (shareholder) is the decision-maker in all basic problems. This will considerably simplify the decision-making process within RFH.

-

According to legal regulations, in gGmbH, a representation of the organization occurs always only by the management. Indeed, the partner of gGmbH forms the uppermost organ (shareholders meeting), however, they do not represent the organisation.

-

With the clear legal position of the gGmbH-Management of IT – Centre, its operative business will have an operational security and defined decision-making responsibility.

-

Furthermore, through spin-off in gGmbH for the economic activities from the first, is only one restricted part of the association property made available as a joint stock. This will limit the liability of the incorporate society and minimize risks is e.g. FDI activity wouldn’t bring expected revenues.

This will allow that the available plans for company’s expansion can be realised and a Foreign Direct Investment will be treated as new economic activity and considered as new source of financing. This signifies that IT-Centre of RFH could begin in 2006 with the Copyright © 2008. Diplomica Verlag. All rights reserved.

concrete realisation of the project of the FDI in educational sector in Bosnia. This implementation will be at the same time the first test of the feasibility of the FDI activity, because the RFH has not yet undertaken such kind of activities with exception of external university cooperation’s activities. This will prompt to investigate other suitable markets for the expansion as for example Slovenia.

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In the long term, an FDI activity can be generally used as possible alternative way of funding. Many other German non-for-profit organisations as for instance internationally active Goethe – Institute exemplified that its subsidiaries, by the international activity in educational sector,

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especially in developing markets, can raise financial position of the parent company.

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19 1 9 .1

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BBE Consulting (2005), Handelswissen (Knowledge about Trade), Finanzrentabilität (Financial profitability),http://www.handelswissen.net/data/themen/ Finanzierung/Finanzierungsgrundsaetze/Finanzrentabilitaet.php 18:44h,21.06.2005 British Embassy in Sarajevo (2005), Trade and Investment, http://www.britishembassy.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPag e&c=Page&cid=1107292519311, 11_06_2005, 12:55h British Chambers of Commerce (2005), Bosnia and Herzegovina, http://www.chamberonline.co.uk/aNnOaTQ.html , 19_03_2005, 15:25h Bundesverband Deutscher Unternehmensberater (2005) (Federal Organization of German Management consultants), 10 Typische Fehler bei de Preisgestaltung (10 typical mistakes with the pricing), http://www.bdu.de/,13.07.2005,14:16h

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CARDS (2003) (Community Assistance for Reconstruction Development and Stabilisation) Programme of EU, CARDS General information’s, http://europa.eu.int/comm/ europeaid/projects/cards/pdf/gl_2003_en.pdf, p.1-6 CIA - The World Fact Book (2005), Bosnia and Herzegovina, http://www.cia.gov/cia/publications/factbook/geos/bk.html, 08_5_2005, 11:09h Chamber of Commerce Germany- Switzerland (2005), Bernard Zen-Ruffinen, Gleiches kulturelles Verständnis als Erfolgsfaktor (The same cultural understanding as a success factor) (2004), http://www.handelskammer-d-ch.ch/content/publikationen/ zeitungsarchiv 2.asp?ni=2&nj=1; 03.03.2005; Chamber of Trade Düsseldorf, Dr. Schwolow Ltd - Institute for formation of company and management consultancy, http://www.duesseldorf.ihk.de/de/Starthilfe/ Publikationen/ Publikationen.jsp 12.07.2005, 13:21 Commission of the European Communities (2004), Commission Staff Working Paper Bosnia and Herzegovina, Stabilisation and Association Report 2004, http://europa.eu.int/comm/external_relations/see/sap/rep3/cr_bih.htm, 12_12_2004, 13:11h Commission of the European Communities (2003), Report on the preparedness of Bosnia and Herzegovina to negotiate a Stabilisation and Association Agreement with the European Union, Brussels, 18.11.2003, p.34 Council of European Union (2003), Council Regulation (EC) No 2666/2000, http://europa.eu.int/comm/enlargement/cards/pdf/general/2666_00_en.pdf Deinert , Horst (2005), Sach- und Gemeinkosten (Overhead expenses), http://www.ruhruni-bochum.de/zme/Lexikon/btvn008.htm,University Bochum, 13.07.2005; 11:01h Deutsche Außenhandelskammer (AHK) in Sarajevo (2005), Delegation der deutschen Wirtschaft (Delegation of German Economy), Bosnien and Herzegowina (Bosnia and Herzegovina), http://www.ahk.de/bueros/b/bosnien/index.php, 13.06.2005, 11.22h

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Dinkelmann, Günter (2004), Essener Wirtschaftsförderungsgesellschaft (Essen economic development agency), Publications, http://www.ewg.de/ukpages/ukpdown/ukdmain.html,11.06.2005, 14:57h DWS Investment (2005), Fonds Lexikon, http://info.dws.de/dws/nav_info.nsf/ frameset/ EKAN-4QWP3P?OpenDocument&ContentURL=/dws/bblex_ge .nsf/webdbdocindex/DBIK4UJB27?OpenDocument, 14.07.2005,19:12h Economics (2005), Glossary, http://economics.about.com/cs/ economicsglossary/g/fdi.htm,17.05.2005,11:33h Eplan (2005), Functional engineering - the concept of the future,http://www.eplan. de/index_e.htm, 12.03.2005, 12:22h European Parliament, Division for international and constitutional affairs (2003), Information note on the political and economic situation of Bosnia and Herzegovina and its relations to European Union, European Parliament, Luxembourg, Luxembourg, June 2003

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ExpertConsult – Management Consultancy (2003), Zukunftsorientierte Wirtschaftsförderung durch internationales Standortmarketing (Future oriented economic development by international location marketing),http://www.experconsult.de/home.html, 15.07.05, 11:16h Foreign and Commonwealth Affairs of UK (2005), Country Profile: Bosnia and Herzegovina, http://www.fco.gov.uk/servlet/Front?pagename=OpenMarket/ Xcelerate/ShowPage&c=Page&cid=1007029390554, 06_06_2005, 11:33h Foreign investment promotion agency of Bosnia and Herzegovina -FIPA (2004), Summary of state-level laws related to Foreign Direct Investment, FIPA, Sarajevo 2004. Geert Hofstede (2005), Cultural Dimensions Resources, http://www.geerthofstede.com/geert_hofstede_resources.shtml, 20.06.2005, 20:09h German Institute for Economic Research (1995), Applied Economics Quarterly, Berlin http://www.diw.de/english/index.html, 19.07.2005,14:33h, 2005 German Federal Ministry of Employment and Economy (2004), Weltweit aktiv (Worldwide active), http://www.bmwa.bund.de/Navigation/Service/bestellservice, did=2350.html, 15.05.2005, 19:38h German Federal Ministry of Economic Affairs an Employment (2005), CD-ROM „ Software package for founders and entrepreneurs “(„Softwarepaket für Gründer und Unternehmer“),Version 7.1, 2005 Heidenreich, Anna-Maria (2004), Südost-Europa (Southeast Europe), Wirtschaftliche Zusammenarbeit und Wiederaufbau (Economic collaboration and reconstruction), http://www.dihk.de/eic/foerderprogramme/CARDS_Maerz _2004_ppt., DIHK , 27.07.2005.09:12h International Monetary Fond - IMF (2004), Bosnia and Herzegovina, Staff Report for the 2004, p. 7-17, IFM February 10, 2004 International Monetary Fund (IFM) (2005), Bosnia and Herzegovina 2005, Article IV Consultation, Concluding Statement of the IMF Mission, http://www.imf.org/external/np/ms/2005/041705.htm, April 14, 2005, p.11-14

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Investment Guarantees of the Federal Republic of Germany (Auslandsgeschäftsabsicherung) (2005), Foreign Direct Investments (FDI), FAQ, http://www.agaportal.de/pages/dia/service/faqs.html 15:13h, 18.06.2005 Kennon , Joshua (2005), Return on Equity - The DuPont Model, http://beginnersinvest.about.com/od/financialratio/a/aa040505.htm, 14.07.2005, 20:15h Kersting, H. and Schwolow, R. Dr. (2004), Pricing, http://www.hwk-duesseldorf. de/beraten/berater.html and http://www. krefeld.ihk.de/en/company/fdb_016959 714883.htm Koch , Christian Dipl.-Kfm. (2004), Die Unternehmensberatung für NonprofitOrganisationen (Consultancy fro non-for-profit organisations),CEO socialnet Ltd., Management consultancy ,www.npoconsult.de, 09.03.2005,14:55h

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Lennardt Jörg (2005), Geschäftsführer (CEO), Dr. Hinrich Steffen, Projektleiter Marketing und International Business Development, Wie kann man Kunden binden? (How to win the customers), ExperConsult Wirtschaftsförderung & Investition GmbH & Co. KG, http://www.experconsult.de, 12.06.2005, 21:19h Linssen, Helmuth (2005), Minister of Finance of North- Rein Westphalia, Public-PrivatePartnership (PPP) Initiative, http://www.ppp.nrw.de/, 29.07.2005, 21:22h Mitchell Berlin (1999), Jack of all trades? Product diversification in non- financial firms, Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review, http://ideas.repec.org/a/fip/fedpbr/y1999imayp15-29.html, 22.05.2005, 20:12h Ministry of Finances Rheinlandpfalz (2004) (Ministerium der Finanzen Rheinlandpfalz (2004)), Gemeinnützige Vereine (Non-for-profit associations), http://www.fm.rlp.de/service/doc/steuern/gemeinnuetzige_vereine_2004_a.pdf, p. Müllner, M. and Tomczak, T. (2004), Wie man Marketing erfolgreich implementiert, (How one implements marketing successfully) GSM, University Press St. Gallen, http://www.unisg.ch/org/imh/bpm.nsf/df76d44a9ef44c6cc 12568e400393eb2/ aa4fe52c7685c031c1256d210047d4c2/$FILE/2004_05_Mai.pdf , (Mai 2005), 15.07.2005, 12:37 h Naderer R. and Leitsmüller H. (2003), Balance Sheet Analysis, VOGB, p. 34-36 Perreault and McCarthy (1999), Key Factors That Influence Price setting, http://www.mcgrawhill.ca/college/shapiro9/olc/olc/graphics/shapiro9bm_s/ch18/slideshows/; McGrawhill, 12.07.2005, 11:18 Pieper, Markus Dr. (2004), Standortwahl (Choice of location), Wirtscahft, IHK Osnabrück Emsland, http://www.osnabrueck.ihk24.de/, 07.07.2005, 18:44h Piorkowsky Michael-Burkhard Prof. Dr. (2004), Friedrich Wilhelm-Universität Bonn, Die Evolution von Unternehmen im Haushalts- und Familienkontext, Handwerksberufen (The evolution of company in the budgetary context and family context, and technical occupations), Zeitschrift für Betriebswirtschaft (Magazine for business management), Supplement 5/2002, p. 1-19.

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Raiffeisenbank Austria (2004), Financial centre Bosnia and Herzegovina -Report, December 2004, p.4 Raiffeisenbank Feldkirch (2005), Österreichische Unternehmen haben Chancen der Ostöffnung erkannt (Austrian companies have discovered the chance for opening to East), http://www.raibafeldkirch.at/eBusiness/rai_template1/0,7572 ,102235336789857018426381552850_1009483398522-211314136769875308-NA-1NA,00.html29_05_2005, 15:02h Recklies, Dagmar (2001), Porters Five Forces, Recklies Management Project GmbH, p.2 Rheinische Fachhochschule Köln e.V. (RFH) (2005), Die Rheinische Fachhochschule Köln, Vorlesungs- und Personalverzeichnis (Lecture list and personnel list), p.5

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Roland Berger Strategy Consultants (2005); Finding the formula for growth, http://www.rolandberger.com/expertise/en/html/publications/Finding_the_formula_for_growth. html;07.06.2005;13:19h RZB- Reiffeisen Zentralbank (2001), Wachstum bei guter Ertragslage (Growth with good profit position), http://www.rzb.co.at/eBusiness/rzb.at/rzb_content _print/ 0,4114, 1023296711504-1024688700058_1025308790393-1027215046429,00.html, RZB ,12.02.2005,15:27h Sasa Jovanovic (2004), Lansky, Ganzger and partner d.o.o Sarajevo, Dustvo za pravni i poslovni konsalting (Assosiation for business and and legal advice and assistance of foreign investors in joint ventures mergers and acquisitions in Bosnia and Herzegovina), http://www.lansky.at Sequa (2005), Stiftung für wirtschaftliche Entwicklung und berufliche Qualifizierung (Foundation for economic development and professional qualification), Public-PrivatePartnership, http://www.sequa.de/, 04.05.2005, 19:38h Siemens (2005), Siemens in Bosnien-Herzegowina, http://www.siemens.com/index.jsp?sdc_p c10fi1087486l0mno1089830ps5uz 3&sdc_sid=20439498939&sdc_m4r=, 11.04.2005,20:13h South Europe Economic Forum (2005), Southeast Europe Investment Guide 2005, http://www.seeurope.net/en/pdf/ig2005/bosnia.pdf, 06.06.2005, 09:13h, p.1-14 Tiffany, Laura (2001), An Introduction to Business Plans; March 02, 2001 http://www.entrepreneur.com/article/0,4621,287323,00.html, 07.06.2005, 20:04h The Vienna Institute for International Economic Studies - Josef Pöschl (2004), Reformländer: Je weiter östlich, desto mehr Wachstum (Reform countries: Ever further to the east, the more growth), http://www.wiiw.ac.at/pdf/RR308_presse _dt.pdf, 10:47h, 07.06.2004 UK Trade and Investment (2005), Country Profile: Bosnia and Herzegovina https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/southerneurope?_nfpb=true&_pageL abel=bosniaHerzegovina, 11_06_2005, 12:13h University St. Gallen (2005), Best Practice in Marketing – Study 1998-2005, http://www.unisg.ch/org/imh/bpm.nsf/,04.02.2005, 16:33h

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Weltzeituhr (2005), Feiertage in Bosnien-Herzegowina im Jahr 2005 (Holidays in BosniaHerzegovina in 2005); http://www.weltzeituhr.com/laender/024.shtml, 12.07.2005, 14:21 Wirtschaftskammer Österreich (Austrian Federal Chamber of Economics) (2002), Vertretungsvergabe in Bosnien-Herzegowina (Representative office allocation in Bosnia-Herzegovina), Anwälte (Lawyers), p.4-9 Wolf, Wagner Dr. (2004), Distribution Center Performance Improvement: People are the Key Ingredient, http://www.kurtsalmon.com/content/main/body /alumni/ news.htm Kurt Salmon Associates, 15.04.2005, 13:22h World Bank (2005), Doing Business in Bosnia, A copublication of the World Bank, the International Finance Corporation and Oxford University Press , The International Bank for Reconstruction and Development / The World Bank (2005), p.1-8

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1 9 .3

Statistics, Economic and Business Indicators - Sources

Bank Austria (2003), Investment Guide Bosnia-Herzegovina, September 2003, p.1-43 Bfai - Bundesagentur für Außenwirtschaft (2003) (German Federal Agency for Foreign Trade and Payments), Labor Market in Post-war Bosnia and Herzegovina, Chapter 1-3, Bfai Bfai (2003) , Südosteuropa (South- Eastern Europe), Tipps für die Praxis, Lohn- und Lohnnebenkosten (Tips for the practice, wage labor costs and non-wage labor costs), Bosnien und Herzegowina, bfai Köln, p. 23-39 Bfai (2003), Slowenien (Slovenia), Tipps für die Praxis (Tips for the practice), Vertriebsbasis für Ex-Jugoslawien (Distribution basis for ex-Yugoslavia), bfai Ljubljana 2003, and p.511 und 53-56 Bfai (2002), Osteuropa im Integrationsprozess (East Europe in the process of integration), Transformation und Wirtschaftslage in Ostmitteleuropa und GUS 2001/02 (Transformation and economic situation in East- Middle Europe and CIS in 2001/02),Sammelband 2002, Berlin, p.65-73 Bfai - Bundesagentur für Außenwirtschaft (2004) (German Federal Agency for Foreign Trade and Payments), Neue Auslandshilfen für Bosnien (New foreign support to Bosnia), http://www.ihk-nordwestfalen.de/aussenwirtschaft /bindata/ awi-1-bosnien-auslandshilfen.pdf Bosnia and Herzegovina - Council of Ministers (2004), Bosnia and Herzegovina Mid Term Development Strategy - Poverty Reduction Strategy Paper (PRSP) (2004), http://www.seerecon.org/bosnia/ documents/prsp/, 15.12.2004, 18:05, p.16-18 and p.186196 Bundesfinanzministerium (German Federal Ministry of Finance) (2005), Doppelbesteuerungsabkommen (Agreement about double taxation), Bosnien und Herzegowina, http://www .bundesfinanzministerium.de/cln_04/nn_3792/DE/ Steuern/Veroeffentlichungen__zu__Steuerarten/Internationales__Steuerrecht/DBA/011.html, 22.06.2005, 15:12h Citizens Advice Bureau (2005) - Advice guide UK, Tax - In England, Income tax rates, http://www.adviceguide.org.uk/n6w/ index/life/tax/income_tax_rates/index/ life/tax/income_tax_rates.htm 22.06.2005, 11:40h

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Central Bank of Bosnia and Herzegovina (2005), Publications, Bulletin no. 4, January December 2004, Wages and Employment, http://www.cbbh.gov.ba/en/pub.html, p.24 DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH (2004) (German Investment society and developing society Ltd), Südosteuropabrief (South Eastern Europe Letter), p.22 European Private Equity and Venture Capital Association (2004), Benchmarking European Tax and Legal Environments, http://www.evca.com/ images/attachments/ tmpl_13_art_50_att_581.pdf, May 2004 Federacija Bosne in Hercegovine (FBaH), Federal Office of Statistics, Statistic Report 2005, http://www.fzs.ba/, 12_06_2005 , 15:57 h

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F.A.Z. Institute for Management, Market- and Media Information’s Ltd (2004), Conversion of the stability pact - Topical development and commercial practice, p.23 Fifo-Ost (2005), Doppelbesteuerung (Double Taxation), http://www.fifoost.org/ kroatien/ steuern/dba_brd-kro/node12.php,21.06.2005,12:27h German Embassy Washington D.C. (2005), German Taxation after Tax Reform 2000 - in Brief, http://www.germany-nfo.org/relaunch/business/taxes/german_taxes _2000b.html, 22.06.2005, 12:10h Lorenz, Ronald (2003), Bosnien und Herzegowina, Wirtschaftstrends zum Jahreswechsel 2002/2003 (Economic trends at the turn of the year in 2002/2003), Bfai Sarajevo 2003, p.5-30 Ministry of Foreign Trade and Economics Relation of Bosnia and Herzegovina (2005), Informacije o direktim ulaganjima (Information’s about FDI), http://www.mvteo.gov.ba/upload/doc/informacija_o_direktnim_stranim_ulaganjima_19942004.pdf, p.1-6 Moody’s Investor Service (2005), Ratings Interactive, http://www.moodys.com/ cust/default.asp, 14.02.2005, 20:19h OHR – Office of High Representative (2005), Monthly Economic Report – March 2005, http://www.ohr.int/ohr-dept/econ/monthly-reports/pdf/econ-rep-mar05.pdf,14.05.2005, 17:11h OHR - Office of High Representative (2005), Economic Newsletter, Vol.8 Issue 3, July 2005 Pudschedl, Walter (2004), Business Information on Central and Eastern Europe, CEEReport, Bank Austria, p.46 Republika Srpska (RS) Institute of Statistic (2005), Labour Statistic Report, http://www.rzs.rs.ba/PublikacijeENG.htm, 12_06_2005, 14:12h UNDP and Economic Institute Sarajevo (2002), Human Development Report, September 2002, Page 35.

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1 9 .4

Education in Bosnia and Herzegovina - Sources

Bfai - Bundesagentur für Außenwirtschaft (2003) (German Federal Agency for Foreign Trade and Payments), Bosnien-Herzegowina (Bosnia and Herzegovina) PHARE – National Programme(CARDS), Support to higher Education, p.2-21 Bologna Process (2004-2005), National Reports 2004-2005, Bosnia and Herzegovina, www.bologna-bergen2005.no/EN/national_impl/ 00_Nat-rep-05/National_Reports-BosniaHerzegovina_050114.pdf, p.1-6 Boris Cekrilja (2002), Education in Bosnia and Herzegovina, Country Report, p.2 CISCO Company (April 2003), Cisco Systems opens academy in Sarajevo, http://www.cisco.com/edu/emea/general/news/news_2003.shtml, 29_05_2005 18:04 CCED Academy (2005), http://www.cced.ba/index.php?action=kontakt,19.04.2005 ,12:22h, Sarajevo 2005

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Federal Ministry of Science and Education of Bosnia and Herzegovina (2005), Reform of Education, Private educational Institutions, http://www.fmon.gov.ba/index1.htm, 13.06.2005, 14:12h European Union (2004), CADRS, Cases – Bosnia and Herzegovina, Training for the job market, http://europa.eu.int/comm/enlargement/cards /pdf/cases/28_ bih_vet.pdf, 22.07.2005, 13:12h EU Vocational and Educational Programme in Bosnia and Herzegovina (1999-2005), PHARE Programme, Schools in the Project, http://www.euvet.org/, 15.06.2005, 20.55h Europäische Kommission – European Commission (2005), Generaldirektion Bildung und Kultur (Central management for education and culture), TEMPUS, Leitfaden für Antragsteller (Guide for applicants), http://europa.eu.int/comm/dgs/education_ culture,p.16, 13 FIPA (2005), Investor Guide, Interested in Investing in Bosnia and Herzegovina?, Chapter 3 – Education, p.26 Sarajevo January 2005 Goethe- Institute in Sarajevo (2005), Kurstypen (Types of courses), http://www.goethe.de/ins/ba/sar/lrn/typ/deindex.htm, 02.07.2005, 14:42h IBF International Consulting and the British Council (2004), Functional Review of Public Administration of Education Sector in Bosnia and Herzegovina, http://www. delbih .cec.eu.int/en/reviews/ Education_report_%20PDF/engI EDUCATIONSTRAT EGIES.pdf, 09.03.2005,11:23h IT Professional - Microsoft and Cisco IT Academy (2005) ,Banja Luka, Bosnia and Herzegovina, http://www.itprofessional.org/, 12.03.2005, 10:12 h Tanovic, L. Koschnick H., DAAD (2003) , Akademischer Neuaufbau Südosteuropas (Academic Reorganisation of South-Eastern Europe), http://www.daad.de/presse/de/ 2003/news/8.3_030930.html, 20.06.2005, 22:35h, OSCE Mission to Bosnia and Herzegovina (2005), Education Reforms, OSCE Press, p.722

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OSCE Mission to Bosnia and Herzegovina (2005), Establishment of modern vocational education and training, http://www.oscebih.org/education/vocational _edu.asp?d=2, 18.06.2005, 11:42h Soros Language School (2005), Courses, http://www.sorosschool.com/index.php?level=0:0:E, 02.03.2005, 15:01h, Sarajevo 2005 World Bank and Council of Europe (1999), Education in Bosnia and Herzegovina Governance, Finance and Administration, 10 November 1999 Wold Bank Group (2005), Education Restructuring Project, Bosnia and Herzegovina, http://web.worldbank.org/external/projects/main?pagePK=104231 &piPK= 73230&theSitePK=40941&menuPK=228424&Projectid=P079226, 11.06.2005, 18:44h

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