- 27 Sep 2006
- Working Paper Summaries
How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages
Does FDI help developing countries as much as we think? While theoretical models imply that FDI is beneficial for a host country's development—a belief widely shared among policymakers—the empirical evidence does not support this view. This paper bridges the gap between theoretical and empirical literature with a model and calibration exercises that examine the role of local financial markets. Ultimately, Alfaro and colleagues contribute to existing research that emphasizes how local policies and institutions may actually limit the potential benefits that FDI could provide to a host country. Key concepts include: Research shows that an increase in FDI leads to higher growth rates in financially developed countries compared to rates observed in financially poor countries. Local conditions, such as the development of financial markets and the educational level of a country, affect the impact of FDI on economic growth. Policymakers should exercise caution when trying to attract FDI that is complementary to local production. The best connections are between final and intermediate industry sectors, not necessarily between domestic and foreign final goods producers. Human capital plays a critical role in achieving growth benefits from FDI. Closed for comment; 0 Comments.
- 07 Sep 2006
- Working Paper Summaries
Optimal Value and Growth Tilts in Long-Horizon Portfolios
Long-term investors look for portfolio strategies that optimally trade off risk and reward, not in the immediate future, but over the long term. It is unrealistic to expect long-term investors to adopt an "invest and forget" strategy, but creating a portfolio strategy that adjusts asset allocations in response to changing risk premia, interest rates, and expected inflation remains a challenge in finance. Jurek and Viceira have devised a solution method that aims at a practical implementation of dynamic portfolio choice models with realistically complex investment opportunity sets. They have applied their method to study the role of value stocks and growth stocks in the portfolios of long-term investors, and have found that long-term investors might want to tilt their portfolios away from value stocks despite the fact that the average return on value stocks is larger than the average return on growth stocks (the so-called "value premium"). Their findings provide support for the idea that the superior performance of value stocks might reflect simply that they are riskier than growth stocks at long horizons. Key concepts include: The solution can be readily implemented for investment opportunity sets with any number of assets and state variables. On average, equity-only investors with short horizons optimally choose portfolios that are heavily tilted toward value and away from growth, regardless of the investor's risk aversion. Aggressive short-term investors find it best to tilt their portfolios toward value because of their higher average return. Conservative equity-oriented investors optimally tilt their portfolios toward value stocks because of their small return volatility and high correlation with growth. However, for investors with longer horizons, the optimal allocation to value decreases dramatically as the optimal allocation to growth increases. Value stocks appear to be riskier than growth stocks at long horizons because they tend to be more highly correlated with permanent shocks to the value of the aggregate stock market, while growth stocks appear to be more highly correlated with transitory shocks. In the presence of time varying risk premia, interest rates, and expected inflation, it is optimal for most investors to dynamically rebalance their portfolios in response to changes in investment opportunities. The paper finds that for long-horizon investors who can invest in equities, bond, and cash, welfare losses from adopting investment policies with infrequent reevaluation of portfolio weights are large, regardless of the investor's risk aversion. Closed for comment; 0 Comments.
- 06 Sep 2006
- Working Paper Summaries
Cross Functional Alignment in Supply Chain Planning: A Case Study of Sales & Operations Planning
Why do companies have such a hard time getting various functions to coordinate? Leitax, the pseudonym for a consumer electronics company studied by the authors, was suffering major supply-chain planning problems in 2002. The chief reason was typical to organizations: poor integration among the various functions. In response, the company introduced a system (rather than just a set of mechanisms) to better coordinate all processes and functions. The new system led to better collaboration from all participants, improved information-sharing, accurate and validated plans, and alignment in the execution of those plans. Key concepts include: Achieving true information sharing between functions is not just about creating the right information-sharing tool. True integration requires paying attention to the behavioral dynamics within operations management. Within supply chain management, coordinating systems can integrate the information requirements for planning yet also uphold the organizational differentiation that different stakeholders require. Such planning systems have great potential for capturing the advantages of simultaneous demand and supply management. A consensus forecasting system has advantages for buy-in and integration, and can respond promptly in a dynamic and challenging supply chain environment. Closed for comment; 0 Comments.
- 05 Sep 2006
- Working Paper Summaries
Optimal Reserve Management and Sovereign Debt
One of the puzzles in the study of emerging markets is understanding why developing countries accumulate reserves as a means to avoid a financial crisis, rather than work to reduce their sovereign debt. In 2005, for example, reserve accumulation totaled 20 percent of gross domestic product in low- and middle-income countries but only about 5 percent in high-income countries. The costs and benefits of reserve accumulation still aren't clear, nor do economists agree on the optimal level of foreign reserves that sovereign countries should hold. By testing a model of a small, open economy with non-contingent debt and reserve assets, Alfaro and Kanczuk explored the issue in depth. Key concepts include: For economists to better understand high levels of foreign reserves holdings, future research should model additional constraints on a sovereign country's ability to reduce its debt. Political economy explanations may better address reserve accumulation in emerging markets. Closed for comment; 0 Comments.
- 05 Sep 2006
- Working Paper Summaries
International Financial Integration and Entrepreneurship
Why does entrepreneurship flourish in some countries and struggle in others? Economists and policymakers are divided on whether the rapid rate of global financial integration, specifically the explosive growth of foreign direct investment, helps or hurts local entrepreneurs and domestic economies. To see the differential effects of restrictions on capital mobility on entrepreneurship, Alfaro of HBS and Charlton of the London School of Economics analyzed data on 24 million firms—listed and unlisted—in nearly 100 countries in 1999 and 2004. Key concepts include: Contrary to the fears of many, capital mobility has not hindered entrepreneurship: Instead, international financial integration is related to greater firm activity. Countries with fewer barriers to international capital have a higher proportion of small firms. By the same token, firms tend to be older in less financially integrated countries. International financial integration might increase the total amount of capital in the economy and improve the availability of capital and credit. Thanks to FDI, local firms could benefit from linkages with foreign firms. This work did not look at growth or the overall welfare effects of capital liberalization on individual countries, an important area for future research. Closed for comment; 0 Comments.
- 23 Aug 2006
- Working Paper Summaries
Capturing Benefits from Tomorrow’s Technology in Today’s Products: The Effect of Absorptive Capacity
It seems clear that firms with an existing R&D function are better able to use related outside research than firms without an R&D function. But can specific products also "absorb" a firm's knowledge of related technologies? Using patent data and the example of automobile carburetors, Daniel Snow studied how companies may adapt a component of a "radical innovation" technology for their own current-technology products. He also poses a far-reaching question for companies: Can they capture the returns of these inventive activities? Key concepts include: Firms that have experience working with a "future technology" or radical innovation can efficiently adapt components from such innovations for their own current-technology products. They are also more likely to adapt such components. For any positive effects, the future-technology components should already be closely related to the product's current components. Whether firms can capture the returns of their own inventive activity may boil down to the fact that intellectual property is difficult to protect: The possibility of free-riding may affect firms' willingness to invest in future technologies. Closed for comment; 0 Comments.
- 17 Aug 2006
- Working Paper Summaries
Corporate Governance and Networks: Bankers in the Corporate Networks of Brazil, Mexico, and the United States circa 1910
Brazil today looks like a typical case in which business groups and close relations between companies and banks play an important role to overcome information and monitoring problems. This was not always the case. To study how the development of financial markets can change the interaction between banks and corporations, Musacchio compared the importance of interlocking boards of directors between corporations and banks in Brazil, Mexico, and the United States at the turn of the twentieth century. This paper and previous research support Musacchio's hypothesis that financial markets in Brazil were sustained by an institutional framework that protected investors, enforced credit contracts, and promoted regular financial disclosure of company accounts. The development of bond and stock markets, and the relatively good corporate governance practices in Brazil before 1930, made connections with bankers less necessary. Key concepts include: Even though Brazil, Mexico, and the United States had very different network structures, all three achieved rapid industrial growth before 1910. Connections with bankers might be good in an environment where access to credit is limited or where close relations help to reduce asymmetries of information. But once financial markets develop, these connections to lenders are less necessary. The development of good disclosure and corporate governance practices in Brazil circa 1910 allowed companies to depend less on connections with banks in the form of corporate bond interlocks. In Brazil, bankers were less central in the network of corporate board interlocks than in Mexico and the United States. In Mexico, foreign companies had access to financial markets abroad and fewer connections with banks. This strong, dense network in Mexico substituted for some of the institutions that promoted financial development and growth in Brazil. While most people see networks and financial markets as substitutes, networks in the United States functioned as complements to financial markets. Networks may successfully substitute for some institutions and generate the credible commitments that are necessary for the expansion of markets. Closed for comment; 0 Comments.
- 17 Aug 2006
- Working Paper Summaries
Unfinished Business: The Impact of Race on Understanding Mentoring Relationships
Race is a critical component of relationships in organizations, particularly in the United States and, due to shifting demographics, particularly for the future. As a socially embedded phenomenon, race also provides a lens for research on mentoring. This paper discusses why race and mentoring are important, how race has been studied or omitted in research to date, and what is known about the intersection of mentoring and race in organizations. The authors then discuss their own model, which aims to guide future research. Key concepts include: There is an opportunity in the twenty-first century to show how mentoring helps to create access and inclusion that goes beyond the color line. The strength of individuals' racial group identity, work group composition, and organizational culture all matter to the specific nature of mentoring or developmental relationships. Important dimensions of these relationships include the strength of social ties, formality, content, complexity, and trust. The study of race and mentoring remains unfinished business for organizational scholars, managers, and practitioners. Closed for comment; 0 Comments.
- 08 Aug 2006
- Working Paper Summaries
Managing Governments: Unilever in India and Turkey, 1950–1980
During the postwar decades, consumer-products giant Unilever survived and even thrived in developing countries such as India and Turkey even as business conditions discouraged or drove away peer companies. Why? At least five factors explain Unilever's ability and willingness to persist in such developing countries. These factors may also explain why foreign direct investment shrank to low levels in these countries, and has remained low. Key concepts include: Most important of all, Unilever became embedded in local business and political systems, functioning as a quasi-insider. Unilever held first-mover advantage. Unilever took a long-term investment horizon, believing that sooner or later as incomes rose people would want to consume its products. A decentralized management structure gave Unilever flexibility in adjusting to the different environments of developing countries. Localization of management provided a key competitive advantage. Unilever's policy of staying outside party politics meant that it had few enemies. Closed for comment; 0 Comments.
- 08 Aug 2006
- Working Paper Summaries
Entrepreneurship and Business History: Renewing the Research Agenda
This paper identifies major opportunities to raise entrepreneurship as a central research issue in business history and to build on the strong roots that are already in place in that discipline. Historical research on entrepreneurship began in the 1940s and 1950s, much of it at Harvard Business School, but then lost momentum. Nevertheless the paper shows the major achievements in exploring how context shaped the structure of entrepreneurship, and identifying the wide variation in organizational form and entrepreneurial behavior. It concludes with the main contributions of business history to the study of entrepreneurship, and proposes a renewed research agenda. Key concepts include: Business historians are uniquely situated to integrate social science research with studies of the special character of entrepreneurship. It is important to research the historical effect of culture and values on entrepreneurial behavior, using more careful methodologies than in the past. There are major opportunities to establish the precise relationship between institutions and entrepreneurial performance. Historical research may help management researchers to understand how entrepreneurship needs to be understood within the context of time and place. Context may matter as much as the characteristics and behavior of the entrepreneurs themselves. Closed for comment; 0 Comments.
- 25 Jul 2006
- Working Paper Summaries
A Gentler Capitalism: Black Business Leadership in the New South Africa
What role should business play in ameliorating poverty and addressing inequality? Linda A. Hill and Maria Farkas, a doctoral student, examine this question against the backdrop of post-apartheid South Africa. Focusing on the efforts of one successful black executive to recruit and develop other minority managers and integrate blacks into the mainstream economy, Hill and Farkas explore fundamental ethical and business issues affecting companies and society at large. Key concepts include: In assessing the economic or ethical soundness of a leader's decisions, the impact of his or her actions over time must be considered. All business people around the world need to think about the appropriate role of business in addressing inequality. This example of efforts in South Africa may offer valuable insights for addressing inequality elsewhere in the globe. Issues of inequality are more likely to be raised in transitional economies—as opposed to stable economies—because new institutions are being designed and new policies and practices are being established. Closed for comment; 0 Comments.
- 11 Jul 2006
- Working Paper Summaries
Globalizing the Beauty Business Before 1980
Even six-month-old infants may understand what makes faces "attractive," regardless of ethnicity, but adults vary considerably in how they present themselves through clothes, hairstyles, and physical appearance. Studying the period from 1945 to 1980, this paper examines the drivers of the globalization of beauty; the strategies that firms employed to overcome challenges to globalization; and the outcomes, including the level to which globalization has brought about a homogenization of beauty ideals and practices. Key concepts include: Barriers were surprisingly strong between the U.S. and European consumer markets in the beauty industry. Large corporations struggled to succeed in the fashion-conscious hair care and cosmetics markets. By 1980, the globalization of beauty products was much more extensive in toiletries than in cosmetics. Globalization did not result in a pervading Americanization of global beauty. Closed for comment; 0 Comments.
- 10 Jul 2006
- Working Paper Summaries
Nationality and Multinationals in Historical Perspective
Many people believe that globalization has caused companies to lose their national identity. This study traces the history of corporations and nationality and finds that multinational companies have always had ambiguities, particularly before World War I. National subsidiaries became stronger in the twentieth century, and companies like Ford, for example, would feel very American in the United States, but have a more local identity in another part of the world. In the twenty-first century, globalization has caused a reemergence of issues concerning corporate nationality. However, this research shows that in many ways corporate affiliation with a country may matter more than ever. Key concepts include: The twentieth century brought an increase in international businesses with strong national ties. Today, corporate strategy, executive leadership, government relations, and brands rely heavily on location and geography. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
What Roosevelt Took: The Economic Impact of the Panama Canal, 1903-29
The Panama Canal was expected to bring great economic benefits to the people of Panama. Instead, the United States received most of the benefits. This was a deliberate act on the part of the U.S. The U.S. didn't allow Panamanian businesses to sell goods or services in the Canal Zone, it avoided the employment of Panamanian workers, and it used its military leverage to force Panama into accepting a low payment for the Canal territory. Key concepts include: The Panama Canal's greatest benefit was its effect on transportation between the east and west coasts of the U.S. The main benefit for Panama of canal construction was the introduction of new healthcare technologies. Developing countries should be wary of large infrastructure projects such as today's pipeline and land bridge projects. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
Economic and Technical Drivers of Technology Choice: Browsers
Did Microsoft defeat Netscape in the browser war because its technology was better, or because MS created a better business strategy? The authors draw on the 1996-1999 browser battles to examine technical progress versus economic forces in driving diffusion on new technologies. Key concepts include: Rapid expansion of demand for PCs allowed Internet Explorer to capture new browser users and swamp the number of existing users of Netscape in the 1990s. More than better technology, better distribution can help second movers overcome first-mover advantage. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
Geographically-Colocated Subgroups in Globally Dispersed Teams: A Test of the Faultline Hypothesis
Team diversity can harness strengths or drive a team apart. Troublesome faultlines appear when team members identify with a subgroup more strongly than with the larger team. Previous research, conducted on teams who worked face-to-face, has shown that these faultlines can be based on demographic factors (such as differences in nationality). The authors of this paper conducted a study on faultlines that arise between subgroups in different geographic locations. They found that faultline dynamics did indeed occur in teams with subgroups in different locations, and that their geographic diversity caused disruptive group relations, diminished trust, and increased conflict between subgroups. Key concepts include: Geographic diversity is becoming increasingly important as more organizations rely on dispersed work teams to perform their core work activities. The existence of subgroups in different locations creates an "us versus them" mentality, which leads to misunderstandings and negative feelings between team members. When managing geographically dispersed teams, build relationships and instill a collective identity to integrate subgroups in different locations, and be aware of the very real potential for disruptive group dynamics. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
Improving Corporate Governance with the Balanced Scorecard
The authors review the key roles of corporate boards and recommend a Balanced Scorecard approach to help boards work smarter, not harder. Kaplan and Nagel recommend a three-part Balanced Scorecard program: Part 1: An Enterprise Scorecard that includes enterprise-wide strategic objectives, performance measures, targets, and initiatives; Part 2: A Board Scorecard that defines and clarifies the strategic contributions and requirements of the board, and provides a tool to manage the board's performance; Part 3: Executive Scorecards, which define strategic contributions of top management and are used to select, evaluate, and reward senior executives. Key concepts include: Reforms such as Sarbanes-Oxley have increased the amount of work that boards need to do. A Balanced Scorecard approach can help boards use their limited time effectively. An enterprise strategy map and enterprise Balanced Scorecard should be the primary documents distributed to the board in advance of meetings. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
Time-Driven Activity-Based Costing
Activity-based costing (ABC) has become popular in business writing and management circles. (An example of an activity would be process customer complaints.) However, calculating baselines for activities, developing the model, and retesting the model once it is implemented is time-consuming and costly. Kaplan and Anderson developed improvements in the process through what they call time-driven ABC. Time-driven ABC decreases the amount of data needed, and only requires estimates of two things: (1) the practical capacity of committed resources and their cost, and (2) unit times for performing transactional activities. Key concepts include: Building an accurate time-based algorithm in one facility will typically serve as a template that can be easily applied and customized to other plants, or even other companies in an industry. Time-driven ABC requires less time and resources to implement. At one company cited, it took two people two days per month to load, calculate, validate, and report findings, compared to the ten-person team spending over three weeks to maintain the previous (traditional ABC) model. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
The Presentation of Self in the Information Age
In the past, we knew a lot about the seller of a product (through ads, marketing, or reputation) but little about the individual buyer. Times have changed. From the Internet to store loyalty cards, technology has made the marketplace into an interactive exchange where the buyer is no longer anonymous. The future market will likely be one in which personal information is shared and leveraged. Consumers who are willing to share their information will be more attractive to sellers and more sought-after than those who have bad reputations or refuse to participate. Key concepts include: Consumers will play an increasingly leveraged role in the marketplace by "branding" themselves and sharing personal information with sellers. Technology is making the idea of consumer branding a reality, but it is unclear how personal information will be used in the marketplace, or which uses will be the most beneficial to both buyers and sellers. Look deeper into loyalty programs for the societal and commercial, and positive and negative effects of sharing personal information in the marketplace. Closed for comment; 0 Comments.
Scale without Mass: Business Process Replication and Industry Dynamics
Over the past ten years there's been a clear link between IT investment and productivity growth in the U.S. economy. But what impact has IT had on competition? This paper identifies several recent changes in the competitive dynamics of U.S. industries and shows that they are associated with IT intensity; the more IT and industry has, the greater the changes. Using case studies, previous research, and a simple model, the authors offer a theory that explains these patterns in the data. They argue that IT allows the rapid spread of business process innovations, which in turn leads to more turbulent and concentrated industries. Key concepts include: Since the mid-1990s, IT-intensive industries have seen higher levels of turbulence and concentration growth than have non-IT-intensive industries. The improved ability of firms to replicate business innovations affects not only productivity, but also the nature of business competition itself. Future research on the competitive impact of IT within a single industry could use case studies combined with economy-wide data analysis. This method would help clarify the impetus for technology investments, their timing, and their effects. Closed for comment; 0 Comments.