Aldo Musacchio

17 Results

 

In Strange Company: The Puzzle of Private Investment in State-Controlled Firms

Why do "mixed corporations" exist? In which conditions could they become efficient organizational forms? In this paper, the authors argue that the effectiveness of mixed enterprise depends on a hybrid governance structure combining elements of private ownership with public checks-and- balances against uncertain governmental interference. This is a delicate equilibrium to obtain and one not without challenges. Exploring the promise and perils of this approach by looking at the recent experience of a sample of national oil companies (NOCs)-Brazil's Petrobras, Norway's Statoil, and Mexico's Pemex-the authors suggest that from the perspective of a social planner, the coexistence of minority private investors with state actors can generate improvements in operational and financial performance. From the perspective of private shareholders, there are risks that can be outweighed by some of the advantages of state-owned enterprises. Three different factors explain private investor interest. These are 1) the existence of countervailing privileges from partnering with the government, 2) the resort to improved corporate governance and legal constraints that limit the opportunity for political abuse, and 3) ex ante price discounting. Read More

These Are the Good Old Days: Foreign Entry and the Mexican Banking System

In this paper, the authors take on an aspect of contract design that is fundamental to explain economic development and financial stability. They study the incentives contained in the "partnership" contract between bankers, the government, depositors, and bank shareholders, and examine how the incentives that come out of that contract explain the volatility of the banking system. The main insight is that bankers in developing countries with weak property rights demand rents (such as high barriers to entry) and lax regulation, as a way to compensate them for the political risk they face of being expropriated by the government or used for policy objectives (for example, if the government forces banks to buy its debt). Depositors, on the other hand, demand deposit insurance in case bankers are reckless, while minority shareholders demand high returns to compensate for the risk of insider lending or reckless behavior on the part of bankers. Then, the combination of high barriers to entry, lax regulation, and deposit insurance induces bankers to take on more risks to try to maximize their rents, and does not encourage depositors and minority shareholders to monitor bankers either (as the government limits downside risk for them). This dynamic, in the case of Mexico, led to frequent banking crises between the 1970s and the 1990s. This was the case until 1997, when the government allowed foreign bankers take over the largest domestic commercial banks and improved the monitoring of banks. This increased the stability of the system. There has not been a crisis since then, partly because of improvements in regulation and partly because foreign bankers have been more conservative, not only because they have standardized procedures to deal with risk but also because they are closely monitored by their parent banks abroad. Read More

Not Your Father’s State-Run Capitalism

The face of state-owned companies in Russia, China, and other countries has changed dramatically over the last several decades, says professor Aldo Musacchio. What capitalists need to know about these increasingly powerful competitors. Closed for comment; 1 Comment posted.

Leviathan in Business: Varieties of State Capitalism and their Implications for Economic Performance

State capitalism, the widespread influence of the government in the economy, still looms large in developed and developing countries after over two decades of extensive state reform and privatization. Research by Aldo Musacchio and Sergio G. Lazzarini documents the extent and reach of state capitalism around the world and explores the economic implications of these new forms of state capitalism. There are three key arguments: First, state capitalism in the twenty-first century combines majority ownership of state-owned enterprises with a hybrid form that includes minority equity investments as well as other forms of support for private firms (such as subsidized loans). Second, all of those forms are present around the world, both in rich and poor countries, and in most cases they co-exist. Although some countries appear to have a prevalence of the minority investor mode while other countries emphasize the majority mode, in most cases the two modes jointly occur. Third, the emergence of those modes is explained by a host of environmental, political, and historical factors; and the economic performance of each mode depends on certain contingencies that should affect their benefits and costs, such as the economic distortions that they may generate. Read More

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China

Economists have argued that the "Great Divergence" between the developed and underdeveloped world in the nineteenth century was reinforced—if not caused—by rapid improvements in schooling that occurred in the advanced economies. Explaining differences in economic development today may hinge on understanding why most societies failed to develop adequate primary education in the late nineteenth and early twentieth centuries. This study sheds new light on the comparative experiences of Brazil, Russia, India, and China (BRIC) during the formative years of their primary education systems. Read More

What Do Development Banks Do? Evidence from Brazil, 2002-2009

Private firms in developed and developing markets find themselves competing with the so-called "national champions"—private and state-owned enterprises that receive entitlements, mostly trade protections and/or subsidized credit from the government. Most of these national champions get support by proposing long-term projects with large capital investment that would usually not be easy to fund using private capital. This paper, written by Research by Sergio G. Lazzarini, Aldo Musacchio, Rodrigo Bandeira-de-Mello, and Rosilene Marcon, uses evidence from Brazil to look at what happens to firm performance, investment, and financial expenditures when companies get subsidized credit from the Brazilian National Bank of Economic and Social Development, known as BNDES. Read More

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China, 1880-1930

In deducing why some nations are more developed than others, it makes sense to look at their educational systems. While comparative studies on the subject focus either on developed nations or on differences between developed and developing economies, this paper hones in four of the largest developing nations at the turn of the twentieth century: Brazil, Russia, India, and China (BRIC). Research was conducted by Aldo Musacchio of Harvard Business School, Laktika Chaundhary of Scripps College, Steven Nafziger of Williams College, and Se Yan of Peking University. Read More

Leviathan as a Minority Shareholder: A Study of Equity Purchases by the Brazilian National Development Bank (BNDES), 1995-2003

There is a trend in many developing countries toward governments buying minority stakes in private companies. While there has been ample discussion on the wisdom of such actions, little has been said about how governments can make such interventions work better. This paper aims to fill that void, using data from the Brazilian National Development Bank (BNDES). Research was conducted by Sergio G. Lazzarini of the Insper Institute of Education and Research, and Aldo Musacchio of Harvard Business School. Read More

Foreign Entry and the Mexican Banking System, 1997-2007

What are the effects of foreign bank entry in developing economies? In recent years, governments around the world have been opening up their banking systems to foreign competition. In Mexico, for example, the market share of foreign ownership of banks increased fivefold between 1997 and 2007. In this paper, Stanford professor Stephen Haber and HBS professor Aldo Musacchio describe their detailed study of the impact of foreign entry in Mexico during that period. Overall, results suggest that while foreign entry in Mexico is associated with greater stability of the banking system, it has not increased the availability of credit, and foreign entry is not a solution to a property rights environment that makes contract enforcement costly. Read More

What Brazil Teaches About Investor Protection

When Brazil entered the 20th century, its companies were a model of transparency and offered investor protections that government did not. Can our financial regulators learn a lesson from history? HBS professor Aldo Musacchio shares insights from his new book. Read More

The Great Leap Forward: The Political Economy of Education in Brazil, 1889-1930

In 1890, with only 15 percent of the population literate, Brazil had the lowest literacy rate among the large economies in the Americas. Yet between 1890 and 1940, Brazil had the most rapid increase in literacy rates in the Americas, catching up with and even surpassing some of its more educated peers such as Mexico, Colombia, and Venezuela. This jump in literacy was simultaneously accompanied by a brisk increase in the number of teachers, number of public schools, and enrollment rates. Why were political elites in Brazil willing to finance this expansion of public education for all? André Martínez-Fritscher of Banco de México, Aldo Musacchio of HBS, and Martina Viarengo of the London School of Economics explain how state governments secured funds to pay for education and examine the incentives of politicians to spend on education. They conclude that the progress made in education during these decades had mixed results in the long run. Read More

Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930

Do endowments matter in determining the cost of capital for a country or state? Endowments, according to Banco de México's André C. Martínez Fritscher and HBS professor Aldo Musacchio, are the conditions that determine what kind of commodities can be produced and exported in a determined geographical region. Studying the determinants of the risk premium of the bonds issued by Brazilian states between 1891 and 1930—a period of extreme decentralization of fiscal revenues and expenditures in Brazil—the researchers find that risk premia are highly correlated with state public revenue per capita. Because these revenues came, to a large extent, from the taxes states levied on commodity exports, the researchers argue that endowments mattered to determine the cost of capital for states. Read More

Bank Accounting Standards in Mexico: A Layman’s Guide to Changes 10 Years after the 1995 Bank Crisis

Mexico was the first emerging market compelled to reformulate the financial reporting of its banks as a result of a financial crisis. In the last decade, Mexico has undergone a process of internationalization of its banking industry. Today, more than 80 percent of the equity of Mexican banks belongs to internationally active bank corporations. This internationalization demands more transparent regulation, including standardized accounting rules and better disclosure of information. The case of Mexico can therefore serve as an example of the relevance of these changes, as well as of their scope and limitations. This paper attempts to clarify the nature and structure of the new accounting standards, and explains how they have affected financial statements and their interpretation. Read More

Do Legal Origins Have Persistent Effects Over Time? A Look at Law and Finance around the World c. 1900

A significant number of recent papers find legal origins to be strongly correlated with current indices of rule of law, financial development, the regulation of entry and labor, and the concentration of ownership, among other things. Few studies, however, have explored whether correlations between institutions and economic and financial outcomes hold in the past. For this reason, we cannot be certain that the alleged persistence of the effects of these institutions passes the scrutiny of history. This paper examines specifically the relationship between legal origins and financial development by analyzing countries' legal traditions and the extent of investor protections and financial development over time. Read More

Laws vs. Contracts: Legal Origins, Shareholder Protections, and Ownership Concentration in Brazil, 1890-1950

The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. The case of Brazil is particularly interesting because, in Latin America before World War I, it boasted the second-largest equity market and largest number of traded companies. As HBS professor Aldo Musacchio shows, the considerable variation of investor protections over time at the country level, and even at the company level, urges cautions against notions about the persistency of institutions, especially of legal traditions. Read More

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. Read More

Bankers, Industrialists, and Their Cliques: Elite Networks in Mexico and Brazil During Early Industrialization

Mexico and Brazil had different institutional structures in the early 20th century. Did entrepreneurs in these two countries organize their business networks differently to deal with the different institutional settings? And, how can we compare the impact of the institutional structure of Mexico and Brazil on the networks of entrepreneurial finance and entrepreneurship in general? In this research, Musacchio and Read look at the networks of interlocking boards of directors of major joint stock companies in two large Latin American societies in 1909. Read More