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удк 330.14 M. Ye. Serov
TRANSACTION COSTS: EFFICIENCY OF RESOURCES ON CAPITAL MARKET
The paper considers transaction costs on the capital market. The author identifies direct dependence between transaction costs on the capital market and inflow of foreign capital to economy. The typology of administrative barriers as phenomenon of transaction costs on the capital market is presented.
Key words: transaction costs, capital market, foreign investments, financial agent, investment climate, perfect capital market, redistribution of capital.
M.E. Серов
ИЗДЕРЖКИ ВЗАИМОДЕЙСТВИЯ: ЭФФЕКТИВНОСТЬ РЕСУРСОВ НА РЫНКЕ КАПИТАЛА
В статье рассмотрены транзакционные издержки на рынке капитала. Выявлена прямая зависимость между величиной транзакционных издержек на рынке капитала и притоком иностранного капитала в экономику страны. Структурирована типология административных барьеров как феномена транзакционных издержек на рынке капитала.
Ключевые слова: транзакционные издержки, рынок капитала, иностранные инвестиции, финансовый посредник, инвестиционный климат, теория идеального рынка, перераспределение капитала.
Capital market is a mechanism for carrying out optimal allocation of resources and efficient transfer of national savings into investment, which is a factor and a prerequisite for economic growth. Capital markets help to fund investments in the economic development generating a positive effect: innovation, business restructuring, infrastructure development, large corporate transformation, expanding economic horizons and respective capitalization, and expansion of business in global markets.
In a market economy capital market acts as a communication mechanism between saving and investment, wealth accumulation and development. Transfer of free resources from savers to borrowers and investors is the first and foremost, conceptual and essential function of financial markets. Some authors call this a redistribution function [5, p. 51] which shows an organic link between the functions of the capital market and capital itself.
But it is also important to note that the redistribution or transfer of funds in the capital market leads to an objective decrease in the efficiency of resources. The reason is that the interaction causes a certain waste of resources referred to as transaction costs, or costs of interaction. This phenomenon discovered in 1937 by an American economist Ronald Coase accompanies any economic activity including reallocation of resources in the capital market. In the case under study transaction costs are understood as the costs of interaction of players in the capital market. This type of costs includes the cost of any necessary resources that are not spent directly at production of economic goods, but secure successful implementation of the process. It is because of this “securing” role transaction costs have often been compared to the cost of resources to overcome friction in the system of interaction [1, p. 12].
Thus, in the era of globalization the impact of the institutional structure (a wide range of interactions between investors and recipients of investment) of the investment market on the investment climate is defined primarily by
the fact that it determines the structure and volume of transaction costs in the investment process, which, along with the operating costs of investing are one of criteria in the decision-making about investments. Investment market institutions affect all components of transaction costs, including those that emerge prior to the transaction, and those that are caused by the interaction of partners after the transaction. In the area of investment the first group includes costs of searching for information about a potential investor (recipient) and the market situation, losses related to the incomplete information available, costs of negotiating the terms of investment and cost of the contract (for registration of the transaction). The second group includes costs of monitoring (monitoring compliance with the conditions of the investment) and preventing opportunism (avoiding the conditions), specifications cost and costs to protect property rights (costs of arbitration courts, reinstatement of infringed rights in the course of the contract and some others), costs of protection against third party claims to obtain part of the useful effect as a result of investment. It should be noted that transaction costs for foreign investment can reach a critical value which determines inexpediency of such investment because economic players executing investments represent different national economic systems that requires high level of competence from them. From this point of view, it is necessary to develop the institutional structure of investment market in the direction of the establishing an institution of international investment intermediaries.
The world economy has accumulated vast experience of the powerful and diverse network of financial and credit institutions that perform various forms of capital transfers from owners of free money to its recipients. The very existence of agents of money capital reduces unsystematic risk by diversifying investments, reduces circulation costs of public capital by specializing in certain types of financial transactions. Individuals and firms that wish to invest money but are unable to efficiently assess financial information
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and do not wish to bear substantial transaction costs resort to financing through an intermediary.
The academic paper of the Institute for Economy in T ran-sition states that “the main reason for the emergence and development of financial sector is the imperfection of markets caused by the existence of information and transaction costs” [3, p. 131]. This statement contains some inaccuracy - both historical and methodological. Indeed, capital markets reduce these costs but those markets did not appear because of the transaction costs and even more so they can not be called their main reason. Isolation of financial market segment and its intermediaries from the common market was caused by an objective need to optimize distribution and accumulation of capital.
Transaction costs or costs of market interaction greatly complicate the activity operation of economic agents and increase the cost of doing business. J. Greenwood and B. Jovanovich in the “Financial development, growth and income distribution” (1990) showed that such costs may be a limitation of investments. The situation improves if these costs are passed on to financial intermediaries [7, p. 108].
Financial intermediation also helps to optimize corporate control costs. Thus, when executing loan agreements banks take upon management quality control costs including them in the standard procedure for assessing the creditworthiness of customers and credit monitoring procedures. This phenomenon was studied by K. Blackburn, N. Bose, S. Capasso in their work “Financial development, choice of financing and economic growth” (2001) [6, p. 198]. When financing complex projects and syndicated lending, delegating control over management to a leading lender also optimizes transaction costs.
The concept of transaction costs helps to explain why in counties with “transitional” economies with such a low intensity of labor there is so little investment. From the perspective of neoclassical analysis it is a paradox. Indeed, from the course in microeconomics, it follows that the return on capital investments in these countries should be simply enormous. Capital should move from developed countries towards developing countries. In fact, the opposite is true. The solution to the paradox is that investments in emerging markets are “tied up” by high transaction costs: potential benefits are instantly “eaten up” by all kinds of kinds of overhead costs (bribes, red tape, “agency” costs, protection of company property, etc.) [2, p. 37].
Indeed, if we look at a growing market through potential investors' perspective, the following “typical” problems become apparent.
1. Changes in legislation. In the countries with “transitional” economies laws are changing constantly. Therefore, there is a high risk of revision of the “rules of the game” to the disadvantage of the property owner side.
2. High level of bureaucracy. To start any kind of activity one needs to obtain a license, certificate or permit, which requires an authorization from a large number of government agencies, such as Federal Agency for Government Communications and Information Under the President of the Russian Federation, Committee for city property management, Department of Export Control, Ministry of Economic Development and Trade of the Russian Federation, various municipalities, etc. It requires enormous time and money for completing various reporting forms and negotiating with agency officials. Getting a permission to carry out any activity often takes about six months of hard work
providing necessary information that must meet certain standards and codes and coordinating one's actions with the authorities.
3. Complex customs procedures. A foreign investor is faced with a rather complicated customs procedure at the Russian border. This became especially noticeable after the recent reforms in the customs rules. That is why when ordering equipment a foreign company first tries to find a manufacturer of similar equipment on the Russian territory or to find representatives of foreign manufacturers who supply the equipment to Russia in order to avoid interaction with customs. In the absence of both a company has to go to the manufacturer directly. On the one hand, it shortens delivery time because it reduces the number of intermediaries, on the other hand, it creates additional problems during the customs procedures which takes from 2 weeks to 2.5 months and wastes not only the saved time but also financial resources.
The cost of imported goods increase at least 50 - 60% because of all sorts of customs duties and VAT (there is no such tax for imported goods abroad), penalties for late filing of documents for registration of the declaration and for storage of goods in a customs warehouse and other expenses related to customs clearance. For comparison, in France one phone call to the customs authorities about the goods ownership is sufficient. Customs procedure takes from 1 to 3 days and costs 10 - 15% of the ordered equipment. Transaction costs account for about 30 - 40% of the budget of the investor In Russia, transaction costs account for approximately 60 - 70% of the budget [4, p. 45].
In addition, customs clearance in Russia involves the provision of various certificates, letters of guarantee, filling out report forms in all the higher authorities, such as the State Committee for Environmental Protection, FAGCI etc. One needs to prove that the imported equipment does not pose a threat to society, environment, will not be used for military purposes, is imported for own use and is not for further sale. Sometimes, after all this work cleared by the customs goods become useless.
4. Vagueness of the “rules”. Typically in developing countries legislation is constructed in such a way that a lot is left up to the official (not governed by laws but by people). This greatly increases the uncertainty and increases the risks of any investment.
5. Weak mechanism for enforcing the “rules of the game.” If there are some “rules” in economy there must be a mechanism for their enforcement. In “transitional” countries laws are often just “declared” but not enforced. In order to secure one's rights in practice, it is necessary to incur certain expenses (for example, to bribe officials for “an accelerated solution of the problem” which they must solve quickly anyway).
6. Risk of unlawful encroachment. This is a consequence of the previous problem. The danger of unlawful encroachment comes not only from competitors but also from government officials (sign of corruption) and state (in the form of nationalization).
7. “Non-transparency” of accountancy Investors who do not have a direct involvement in the company should be able to control the actions of their agents (management). In developed countries, the emergence of new, modern methods of accounting and auditing has reduced previously high costs of information and control over business operations. Firms have become transparent to their
owners. In the “young markets” this problem remains to be solved.
These factors force investors to “switch” to less “capital intensive” and short-term projects. Thus, they lose the opportunity to benefit from large long-term investments in productive capital which are at the core of impressive achievements of modern market economy. Thus, high transaction costs and lack of long-term investments lead to a range of negative consequences.
The most serious consequences are preservation of inefficient technologies, job cuts and delayed development of new markets and economy as a whole.
These conclusions are indirectly confirmed by official statistics. The World Bank and International Finance Corporation have released the seventh annual report on conducting business in the world - «Doing Business-2010: Reforming through Difficult Times» [9]. Particularly interesting in this study is a rating that reflects the easiness of doing business in 183 countries around the world. The study examines formal rules governing business activities in a country throughout the entire cycle of business activity, including establishment of business and business operation, conducting foreign trade, taxation, and, finally, liquidation of enterprises.
In the overall ranking Russia occupies the 120-th place which understandably is not very good for the Russian investment image even compared to other post-Soviet countries as Russia overtook only Ukraine, Uzbekistan and Tajikistan in the ranking.
Particularly dismal is Russian performance in the construction industry. According to the ease of obtaining construction documents Russia is in the last but one last from the bottom place (182). To obtain a building permit one needs to spend 206 thousand dollars (2141% of average per capita gross national income), to prepare 54 documents, which will take 704 days, unless, of course, there are mistakes on the part of the company. The easiest countries to get construction permit are Hong Kong, Singapore and New Zealand. Singapore has a system that allows to obtain building permits through the Internet without personal visits to the regulator. Russia has good results only in two parameters: “Enforcement of Contracts” (19th place) and “Property registration” (45th place).
“Ernst & Young” conducted its annual study on the investment attractiveness of different countries and foreign capital inflow into the European economies [8]. The study analyzes foreign investment volume over the past 12 months and readiness of global investors for potential investment in the short and medium term. The four leaders are Britain, France, Germany and Spain which hold leading positions among European countries.
Furthermore, in our view, the presence of transaction costs in economy refutes the theory of perfect capital mar-
ket supported by some economists. According to them main characteristics of perfect capital market are:
- absence of transaction costs;
- absence of taxes;
- a large number of buyers and sellers, none of whom can affect market price of financial assets;
- equal access to markets for all investors;
- equal volume of information for all market participants;
- the same expectations of all market participants;
- absence of costs related to financial difficulties (threat of bankruptcy).
In our opinion, if taxes or interest may not be taken into account when choosing a strategy, transaction costs must be taken into account at all times. Thus, if we consider stock market, these costs include brokerage commission, clearing and commission fee for membership on the exchange. Often, transaction costs are so high that it makes stock market participants to abandon the strategy which has seemed quite reasonable. In addition, stock market participants incur costs not only when opening or closing a positions but also during correction.
Thus, markets in effective form (with zero transaction costs) are practically unattainable. In the real world they are formed when competition is so strong that due to market arbitration and effective feedback mechanism “the Coase conditions” are approximated, i.e. zero transaction costs, so that market participants can make a profit at the rate determined in accordance with the neoclassical theory. All these strict conditions are met very rarely but they are the key to a successful economic life.
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УДК 330.341.1 A.A. Sytnik
MODERN APPROACHES TO THE DEFINITION OF TECHNOLOGICAL WAYS
The paper deals with modern approaches to the definition of technological way. The author gives an original interpretation of that concept and reveals a classification of economic ways as well as the process of their change and the phenomenon of heterogeneous economy.
Key words: technological way, change of technological way, heterogeneous economy.
