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- 23 Jun 2010
- Working Paper Summaries
The Role of Institutional Development in the Prevalence and Value of Family Firms
Family firms dominate economic activity in most countries, and are significantly different from other companies in their behavior, structural characteristics, and performance. But what explains the significant variation in the prevalence and value of family firms around the world? The two leading explanations are legal investor protection and institutional development, but cross-country studies are unable to rule out the alternative explanation that cultural norms are what account for these differences. In contrast, China provides an excellent laboratory for addressing this question because it offers great variation in institutional efficiency across regions, yet the country as a whole shares cultural and social norms together with a common legal and regulatory framework. In this paper, HBS professor Belén Villalonga and coauthors study ownership data from a sample of nearly 1,500 publicly listed firms on the Chinese stock market. They conclude that institutional development plays a critical role in the prevalence and value of family firms, and that the differences observed across regions are not attributable to cultural factors. Key concepts include: Family firms do not inhibit growth and development, as is sometimes argued. This seems clear due to the relatively higher prevalence of family firms even in regions with high institutional efficiency. The effects of family, ownership, control, and management in China are remarkable similar to those found by professor Villalonga in her earlier research based on U.S. data. Namely, family ownership is positively related to value, family control in excess of ownership is negatively related to value, and family management, when exercised by the firm's founders as is primarily the case in China, is positively related to value. However, in China these effects are largely driven by the low institutional efficiency regions. In the high efficiency regions, none of these effects are significant. These findings are particularly relevant for China as it continues its transition from a central planning system to a market economy. On average, family firms are significantly smaller, younger, and less capital-intensive than non-family firms. Yet they exhibit significantly lower systematic risk, and they are not significantly different from non-family firms in their growth and leverage. Closed for comment; 0 Comments.
- 22 Apr 2010
- Working Paper Summaries
Audit Quality and Auditor Reputation: Evidence from Japan
High-quality external auditing is a central component of sound corporate governance, yet what determines audit quality? Douglas J. Skinner, of the University of Chicago Booth School of Business, and Suraj Srinivasan, of Harvard Business School, study the Japanese audit market, where recent events provide a powerful setting for investigating the effect of auditor reputation on audit quality absent litigation effects. Specifically, Skinner and Srinivasan analyze events surrounding the collapse of ChuoAoyama, the PricewaterhouseCoopers affiliate in Japan that was implicated in a massive accounting fraud at Kanebo, a large Japanese cosmetics company. Taken as a whole, the researchers' evidence provides support for the view that auditor reputation is important in an economy where the legal system does not provide incentives for auditors to deliver quality. Key concepts include: Auditors' reputation for delivering quality is extremely important. A substantial number of clients dropped ChuoAoyama as the extent of its audit quality problems became apparent, but before it became clear that the firm would be forced out of business. The events at ChuoAoyama and particularly the decision by the Japanese Financial Services Agency (FSA) to suspend the firm's operations can be seen as a watershed event in Japanese audit practice. The FSA used these events to send a message to the Japanese auditing community that the old ways of doing business would no longer be tolerated, and that it was serious about reforming audit practice. Closed for comment; 0 Comments.
- 19 Apr 2010
- Research & Ideas
The History of Beauty
Fragrance, eyeliner, toothpaste—the beauty business has permeated our lives like few other industries. But surprisingly little is known about its history, which over time has been shrouded in competitive secrecy. HBS history professor Geoffrey Jones offers one of the first authoritative accounts in Beauty Imagined: A History of the Global Beauty Industry. Closed for comment; 0 Comments.
- 15 Mar 2010
- HBS Case
Developing Asia’s Largest Slum
In a recent case study, HBS assistant professor Lakshmi Iyer and lecturer John Macomber examine ongoing efforts to forge a public-private mixed development in Dharavi—featured in the film Slumdog Millionaire. But there is a reason this project has languished for years. From the HBS Alumni Bulletin. Closed for comment; 0 Comments.
- 10 Mar 2010
- Working Paper Summaries
A Reexamination of Tunneling and Business Groups: New Data and New Methods
"Tunneling" refers to efforts by firms' controlling owner-managers to take money for themselves at the expense of minority shareholders. Looking at emerging economies in general and at India in particular, HBS professor Jordan I. Siegel and doctoral student Prithwiraj Choudhury argue for a simultaneous analysis of corporate governance and strategic activity differences in order to reveal the quality of firm-level corporate governance. The development of rigorous methodology in corporate governance is not merely an academic issue but has enormous real-world consequences. It is critical that scholars gain deeper empirical and theoretical insights into the question of whether these business groups serve primarily as theft devices for the controlling owners, or whether they serve primarily as a positive force that enables the creation of scale and scope efficiencies. Key concepts include: It is too simple to say that business groups are the primary culprits of bad governance in emerging economies. Scholars need to analyze strategic activity differences across firms. In contrast to prior views, Indian business groups are not, on average, engaging in tunneling, but are on average exhibiting good corporate governance, especially in light of the markedly different business strategies they typically undertake. Business groups, through knowledge-based capabilities, have grown larger and more diversified with market liberalization, and they continue to tower over stand-alones in their marketing and technological capabilities. Closed for comment; 0 Comments.
- 22 Feb 2010
- Op-Ed
Tragedy at Toyota: How Not to Lead in Crisis
"Toyota can only regain its footing by transforming itself from top to bottom to deliver the highest quality automobiles," says HBS professor Bill George of the beleaguered automobile company that in recent months has recalled 8 million vehicles. He offers seven recommendations for restoring consumer confidence in the safety and quality behind the storied brand. Key concepts include: Toyota Motor Corporation's problem is first and foremost a leadership crisis. It needs a credible leader with a strong, cohesive plan. Competitors Ford and GM are working to regain the market share they have lost to Toyota. Rather than blame floor mats and panicky drivers, as Toyota did when complaints first arose, it should have acknowledged that its vaunted quality system failed. Toyota should seize the opportunity to make radical changes to renew the company and restore consumers' trust. Closed for comment; 0 Comments.
- 08 Feb 2010
- HBS Case
Looking Behind Google’s Stand in China
Google's threat to pull out of China is either a blow for Internet freedom or cover for a failed business strategy, depending on with whom you talk. Professor John A. Quelch looks behind the headlines in a new case. Key concepts include: China has become more emboldened and self-confident as a result of its increasing economic significance. Google acted precipitously without giving due consideration to the impact of its announcement on stakeholders. The Google issue has become a cause célèbre that exacerbates the already fragile and festering U.S.-China relationship. Closed for comment; 0 Comments.
- 07 Jan 2010
- Working Paper Summaries
International Differences in the Size and Roles of Corporate Headquarters: An Empirical Examination
Are small headquarters more nimble and efficient than large ones? Not necessarily, according to HBS adjunct professor David Collis and coauthors David Young and Michael Goold. Even within a single industry in one country, the variance can be enormous: In Germany in the late 1990s, for instance, Hoechst, the chemical and pharmaceutical manufacturer, had only 180 people in the headquarters function at the same time that Bayer had several thousand. This paper seeks to fill gaps in the research by using a unique database of over 600 companies in seven countries to determine whether systematic differences in the size and roles of corporate headquarters between countries actually exist, and if so, how they differ. In particular, the authors examine whether there is a systematic difference between market- and bank-centered economies, and between developed and developing countries. Key concepts include: Contrary to popular expectations, corporate headquarters in the United States are about twice the size of European counterparts yet appear to be more effective. It is not universally valuable to have small corporate headquarters. While companies with small headquarters can be successful, it is clear that larger headquarters can also be correlated with high performance and executive satisfaction with their role and cost- effectiveness. Japanese headquarters are substantially larger than elsewhere—a factor of nearly four times Europe. However, those headquarters are becoming smaller because of dissatisfaction with their performance. The developing country model of headquarters appears to fit none of the developed country models. There is no "market-centered" and "bank-centered" model of corporate headquarters, suggesting that at the level of key corporate decisions, other phenomenon have important independent influences. The size and role of corporate headquarters vary widely both between countries and within countries. There is more variation within each country than there is between countries. Closed for comment; 0 Comments.
- 16 Dec 2009
- Working Paper Summaries
The End of Chimerica
Economic historians Niall Ferguson and Moritz Schularick of Freie Universität Berlin consider the problem of global imbalances and try to set events in a longer-term perspective. First published in 2009. Closed for comment; 0 Comments.
- 10 Dec 2009
- Working Paper Summaries
State Owned Entity Reform in Absence of Privatization: Reforming Indian National Laboratories and Role of Leadership
Is privatization necessary? In India and across emerging markets, state-owned entities (SOEs) continue to make up a large proportion of industrial sales, yet they lag behind private counterparts on performance measures. But SOEs may be able to significantly improve performance even in the absence of property rights, according to HBS doctoral candidate Prithwiraj Choudhury and professor Tarun Khanna. As they document, 42 Indian state-owned laboratories started from a base of negligible U.S. patents, yet in the period 1993-2006 (during which the Indian government launched an ambitious privatization program), the labs were granted more patents than all domestic private firms combined. The labs then licensed several of these patents to multinationals, and licensing revenue increased from 3 percent to 15 percent as a fraction of government budgetary support. Findings are relevant to firms and R&D entities around the world that depend on varying degrees of government budgetary support and government control, especially in emerging markets like India, where SOEs control up to one-third of all industrial activity. Key concepts include: Despite the absence of property rights, 42 Indian state-owned laboratories significantly increased U.S. patents and licensing revenue from multinationals without negatively affecting publication quality and quantity. This development may be due to incentive policy change and leadership change at the labs. U.S. patents as well as revenue from multinationals increased sharply in response to director changes, an event whose timing was dictated by rigid government employment rules. Private firms including multinationals can play a catalytic role in driving up revenue at SOEs. The state-owned labs leveraged the U.S. institutional context in effecting their turnaround. The general point is that organizations in emerging markets can leverage institutions from outside their location of origin, once they have some established source of competitive advantage (in this case, their R&D-generated know-how). Although the labs were able to commercialize projects without sacrificing publication quality and quantity, a question remains as to whether and why national labs should concern themselves with commercialization. Closed for comment; 0 Comments.
- 18 Nov 2009
- Working Paper Summaries
India Transformed? Insights from the Firm Level 1988-2005
Between 1986 and 2005, Indian growth put to rest the concern that there was something about the "nature of India" that made rapid growth difficult. Following broad-ranging reforms in the mid-1980s and early 1990s, the state deregulated entry, both domestic and foreign, in many industries, and also hugely reduced barriers to trade. Laura Alfaro of Harvard Business School and Anusha Chari of the University of North Carolina at Chapel Hill analyze the evolution of India's industrial structure at the firm level following the reforms. Despite the substantial increase in the number of private and foreign firms, the overall pattern that emerges is one of continued incumbent dominance in terms of assets, sales, and profits in both state-owned and traditional private firms. Key concepts include: In sectors dominated by state-owned and traditional private firms before liberalization (with assets, sales, and profits representing 50 percent or higher shares), these firms remain the dominant ownership group following the reforms. Rates of return remain stable over time and show low dispersion across sectors and across ownership groups within sectors. The high levels of state ownership and ownership by traditional private firms in India raise the question of whether existing resources could be allocated more efficiently and whether remaining barriers to competition jeopardize the effectiveness of reform measures that have been put in place. Closed for comment; 0 Comments.
- 27 Aug 2009
- Working Paper Summaries
Measuring and Understanding Hierarchy as an Architectural Element in Industry Sectors
In an industry setting, classic supply chains display strict hierarchy, whereas clusters of firms have linkages going in many different directions. Previous theory has often assumed the existence of the hierarchical relationships among firms, and empirical industry studies tend to focus on a single-layer industry, or a two-layer structure comprising buyers and suppliers. And yet, some industries have a multilayer structure with a multistep supply chain. Others comprise a cluster of complementary firms producing different parts of a large system. HBS professor Carliss Y. Baldwin and colleagues use network analysis to study multilayer industries both empirically (in the case of Japan) and theoretically and to explore how industries are organized at the sector level in an attempt to reveal the underlying rules that determine how industry architectures form and change. Key concepts include: Empirical analysis shows that the automotive sector in Japan exhibits a significantly higher degree of hierarchy and higher transaction breadth (average number of customers per firm) than the electronics sector. The degree of hierarchy in an industry sector may be traced back to fundamental properties of the underlying technologies. This research helps points the way to new approaches for understanding industry architectures and the factors that influence the architecture of industry sectors. Closed for comment; 0 Comments.
- 30 Jul 2009
- Working Paper Summaries
Fluid Teams and Fluid Tasks: The Impact of Team Familiarity and Variation in Experience
In the context of team performance, common wisdom suggests that performance is maximized when individuals complete the same work with the same people. Although repetition is valuable, at least up to a point, in many settings such as consulting, product development, and software services organizations consist largely of fluid teams executing projects for different customers. In fluid teams, members bring their varied experience sets together and attempt to generate innovative output before the team is disassembled and its individual members move on to new projects. Using the empirical setting of Wipro Technologies, a leading firm in the Indian software services industry, this study examines the potential positive and negative consequences of variation in team member experience as well as how fluid teams may capture the benefits of variation while mitigating the coordination costs it creates. Key concepts include: As organizations continue to depend on the output of teams, and teams, in turn, rely on members with varied prior experience, it becomes critical for teams to manage these differences and dependencies successfully. If the most valuable assets of many companies are their employees, then organizations need to shift from only thinking about their project portfolio to also considering their employee-experience portfolio. Managing employee-experience portfolios will require managers to consider the breadth of types of experience (e.g., customer, technology, etc.) captured across the members of a team as well as their familiarity with each other. Doing so may offer managers an important new lever for improving organizational performance. Closed for comment; 0 Comments.
- 14 Jul 2009
- Research & Ideas
Business Summit: China in the Global Economy
While the global economic downturn will affect China's exports, the domestic economy is expected to remain strong, agreed panelists at the HBS Business Summit. Closed for comment; 0 Comments.
- 10 Jul 2009
- Research Event
Business Summit: The Coming World Oil Crisis
Without enormous changes the world faces an imminent oil crisis—and there are no silver bullet solutions. People must wake up to the sobering ramifications of peak oil, which may be the defining issue of this century. Closed for comment; 0 Comments.
- 07 Jul 2009
- Research Event
Business Summit: Historical Roots of Globalization
In this breakout session, panelists shared insights, informed by history, of the convergence that globalization promotes. Closed for comment; 0 Comments.
- 19 Jun 2009
- Research Event
Business Summit: The Evolution of Agribusiness
Agribusiness has come to be seen not just as economically important, but as a critical part of society. The future for this massive industry will be both exciting and complex. Closed for comment; 0 Comments.
- 15 May 2009
- Working Paper Summaries
Barriers to Household Risk Management: Evidence from India
Insurance markets are growing rapidly in developing countries. Despite the promise of these markets, however, adoption to date has been relatively slow. Yet households often remain exposed to movements in local weather; regional house prices; prices of commodities like rice, heating oil, and gasoline; and local, regional, and national income fluctuations. In many cases, financial contracts simply do not exist to hedge these exposures, and when contracts do exist their use is not widespread. Why don't financial markets develop to help households hedge these risks? Why don't more households participate when formal markets are available? HBS professor Shawn Cole and coauthors attempt to shed light on these questions by studying participation in rural India in a rainfall risk-management product that provides a payoff based on monsoon rainfall. The results suggest that it may take a significant amount of time—and substantial marketing efforts—to increase adoption of risk-management tools at the household level. Key concepts include: To increase the insurance penetration rate of insurance products, it is important to minimize transaction and administrative costs and foster competition among insurance providers. Technological advances and contractual innovations may improve these products. The estimated significance of trust and vendor experience suggests that product diffusion through the population may be relatively slow until a track record is established. Optimal contract design could help by paying a positive return with sufficient frequency. "Catastrophe"-type insurance might be most beneficial for households, since it provides payouts that are concentrated in states of nature where the marginal utility of consumption is particularly high. Closed for comment; 0 Comments.
- 15 May 2009
- Working Paper Summaries
Money or Knowledge? What Drives Demand for Financial Services in Emerging Markets?
Why is there apparently limited demand for financial services in emerging markets? On the one hand, low-income individuals may not want formal services when informal savings, credit, and insurance markets function reasonably well, and the benefits of formal financial market participation may not exceed the costs. On the other hand, limited financial literacy could be the barrier: If people are not familiar or comfortable with products, they will not demand them. These two views carry significantly different implications for the development of financial markets around the world, and would suggest quite different policy decisions by governments and international organizations seeking to promote "financial deepening." HBS professor Shawn Cole and coauthors found that financial literacy education has no effect on the probability of opening a bank savings account for the full population, although it does significantly increase the probability among those with low initial levels of financial literacy and low levels of education. In contrast, modest financial subsidies significantly increase the share of households that open a bank savings account within the subsequent two months. Key concepts include: Subsidies or price reductions may represent a more cost-effective way of drawing households into the financial system. Financial literacy efforts targeted at the general population may be relatively ineffective. These results do not necessarily constitute support for financial literacy education even among the low-literacy subpopulation. Even if financial literacy programs are carefully targeted, they may still not be cost-effective. Closed for comment; 0 Comments.
From Russia with Love: The Impact of Relocated Firms on Incumbent Survival
The relocation of the machine tool industry from the Soviet-occupied zone of postwar Germany to western regions is a unique laboratory for studying the impact of industrial structures on incumbent survival. Typically, geographic agglomerations of similar firms offer benefits to each member firm by reducing the transportation costs for material goods, specialized workers, and industry knowledge among the firms. Of course, tight geographic concentration comes with countervailing costs as firms compete for local inputs. In this paper, HBS professor William R. Kerr and coauthors study the impact of increased local concentration on incumbent firms by considering postwar Germany, when the fear of expropriation (or worse) in the wake of World War II prompted many machine tool firm owners to flee to western Germany, where they reestablished their firms. Key concepts include: Relocations significantly increased the likelihood of incumbent failure, which suggests that the costs of increased competition for local inputs dominated the potential benefits from agglomeration economies. By contrast, during the same postwar period, new start-up entrants—whose location choices were more opportunistic—were not associated with increased incumbent failure rates. The increased failure rates of incumbents in western Germany due to relocating firms was concentrated in regions where labor forces were constrained due to low inflows of expellees from eastern Germany. In regions with a significant inflow of expellees and favorable input conditions, there was no effect of relocations on incumbent firms' risk of failure. The relocation of the machine tool industry from eastern to western Germany was substantial. In total, a fifth of the industry present in eastern Germany migrated during a narrow window of 1949-1956, representing an 8 percent increase in total industry size for the receiving zones. These location choices were made under extreme duress, with little regard to existing business conditions across regions in western Germany. Upon arrival, the relocating firms substantially impacted local industrial conditions as they quickly regained much of their former production capacity. Closed for comment; 0 Comments.