First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty. Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice. For complete details on faculty research, see our Working Papers section.

Jan. 20

Do you need sign-off from headquarters when you want to make decisions? Or can you undertake capital investments, hire new employees, introduce new products, and otherwise exercise managerial independence in your daily work? In the age of globalization, the extent of firm decentralization and the reasons behind it are still something of a mystery, leading HBS professor Raffaella Sadun and colleagues to wonder whether product competition is one factor spurring the trend toward decentralization. The basic idea is this: Local managers' information might be increasingly valuable as more products crowd the marketplace.

To test this proposition Sadun, Nicholas Bloom, and John Van Reenen analyzed data on nearly 4,000 firms across 12 countries in Europe, North America, and Asia. "We find that competition does indeed seem to foster greater decentralization," they write in their working paper, "Does Product Market Competition Lead Firms to Decentralize?" [PDF]

The results by geography were also telling: "Intriguingly, we found that firms in developing countries (Brazil, China, and India), tended to be the most centralized, with almost all major decisions taken by the owners in the corporate headquarters. Japanese firms were also relatively centralized. In contrast, firms in Anglo-Saxon and Scandinavian countries (Canada, Germany, Sweden, UK, and US) were relatively decentralized. The rest of Europe (e.g. France, Italy, and Poland) tended to be in the middle of the decentralization ranking." Developing countries might experience tighter control from HQ due to less product competition, the authors suggest.


Working Papers

Contracting in the Self-reporting Economy (revised)


This paper examines the effect of accounting on the use of intellectual property. We analyze the licensing of intellectual property in exchange for royalties that depend on the self-report of a licensee. Self-reporting gives rise to demand for auditing by the licensor or third-party attestation by the licensee. We characterize the optimal royalty contract, accounting system choice by the licensee, and audit strategy choice by the licensor. We show when the owner prefers to license the property in exchange for a royalty and when it prefers to use the property directly. We find that variable royalty arrangements that depend on either audited self-reports or third-party attestation become more attractive as accounting information system costs decrease and as the benefits from outsourcing the use of intellectual property increases. We also examine how the variability of payoffs to effort affects the optimal way the owner of the intellectual property uses it.

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Does Product Market Competition Lead Firms to Decentralize?


There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address the empirical lacuna we have developed a research program to measure the internal organization of firms—including their decentralization decisions—across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local manager's information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital, information and communication technology, culture, and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few datasets that exist are either from a single industry or (at best) across many firms in a single country. We analyze data on almost 4,000 firms across 12 countries in Europe, North America, and Asia. We find that competition does indeed seem to foster greater decentralization.

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Accountability and Control as Catalysts for Strategic Exploration and Exploitation: Field Study Results


This paper reports the collective finding from 102 field studies that look at the relationship between two organization design variables: span of control and span of accountability. Clustering the data yields propositions suggesting that the relationship between these variables may be an important determinant of strategic exploitation and exploration activities. Data from the field studies suggest that, in accordance with the controllability principle, accountability and control are tightly aligned for exploitation activities. However, this result was found in only a small number of tasks and functions. In the majority of situations, spans of accountability were wider than spans of control. This "Entrepreneurial Gap" is posited to be a result of management's desire for innovation and exploration—and used as a catalyst for changing strategy, creating high levels of customer satisfaction, or motivating people to navigate complex matrix organizations.

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Substitution Patterns of the Random Coefficients Logit


Previous research suggests that the random coefficients logit is a highly flexible model that overcomes the problems of the homogeneous logit by allowing for differences in tastes across individuals. The purpose of this paper is to show that this is not true. We prove that the random coefficients logit imposes restrictions on individual choice behavior that limit the types of substitution patterns that can be found through empirical analysis, and we raise fundamental questions about when the model can be used to recover individuals' preferences from their observed choices. Part of the misunderstanding about the random coefficients logit can be attributed to the lack of cross-level inference in previous research. To overcome this deficiency, we design several Monte Carlo experiments to show what the model predicts at both the individual and the population levels. These experiments show that the random coefficients logit leads a researcher to very different conclusions about individuals' tastes depending on how alternatives are presented in the choice set. In turn, these biased parameter estimates affect counterfactual predictions. In one experiment, the market share predictions for a given alternative in a given choice set range between 17% and 83% depending on how the alternatives are displayed both in the data used for estimation and in the counterfactual scenario under consideration. This occurs even though the market shares observed in the data are always about 50% regardless of the display.

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International Differences in Entrepreneurship

Publisher's Abstract

Often considered one of the major forces behind economic growth and development, the entrepreneurial firm can accelerate the speed of innovation and dissemination of new technologies, thus increasing a country's competitive edge in the global market. As a result, cultivating a strong culture of entrepreneurial thinking has become a primary goal throughout the world. Surprisingly, there has been little systematic research or comparative analysis to show how the growth of entrepreneurship differs among countries in various stages of development. International Differences in Entrepreneurship fills this void by explaining how a country's institutional differences, cultural considerations, and personal characteristics can affect the role that entrepreneurs play in its economy. Developing an understanding of the origins of entrepreneurs as well as the choices they make and the complexity of their activities across countries and industries are of central importance to this volume. In addition, contributors consider how environmental factors of individual economies, such as market regulation, government subsidies for banks, and support for entrepreneurial culture affect the industry and the impact that entrepreneurs have on growth in developing nations

Too Big to Save? How to Fix the U.S. Financial System

Publisher's Abstract

Too Big To Save? provides a comprehensive review of the financial crisis, explaining not only the factors causing the crisis but also evaluating the government responses to date and suggesting practical reforms for the future.

Catering Through Nominal Share Prices


We propose and test a catering theory of nominal stock prices. The theory predicts that when investors place higher valuation on low-price firms, managers will maintain share prices at lower levels, and vice-versa. Using measures of time-varying catering incentives based on valuation ratios, split announcement effects, and future returns, we find empirical support for the predictions in both time-series and firm-level data. Given the strong cross-sectional relationship between capitalization and nominal share price, an interpretation of the results is that managers may be trying to categorize their firms as small firms when investors favor small firms.

Local Dividend Clienteles


We exploit demographic variation to identify the effect of dividend demand on firm payout policy. Retail investors tend to hold local stocks and older investors prefer dividend-paying stocks. Together, these tendencies generate geographically varying demand for dividends. Firms headquartered in areas in which seniors constitute a large fraction of the population are more likely to pay dividends, initiate dividends, and have higher dividend yields. However, the fraction of seniors is uncorrelated with share repurchases, investment, or profitability, suggesting that geographic variation in dividend payout is not driven by some unmeasured firm characteristic affecting the ability or willingness to distribute cash to shareholders. We also provide indirect evidence as to why firm managers may cater to the demand for dividends from local seniors. Overall, these results suggest that the composition of a firm's investor base affects corporate policy choices.

The Price of Equality: Suboptimal Resource Allocations across Social Categories


This paper explores the influence of social categories on the perceived trade-off between relatively bad but equal distribution of resources between two parties and profit maximizing, yet asymmetric, payoffs. Studies 1 and 2 show that people prefer to maximize profits when interacting within their social category, but chose suboptimal individual and joint profits when interacting across social categories. Study 3 demonstrates that outside observers, who were not members of the focal social categories, also were less likely to maximize profits when resources were distributed across social category lines. Study 4 shows that the transaction utility of maximizing profits required greater compensation when resources were distributed across, in contrast to within, social categories. We discuss the ethical implications of these decision-making biases in the context of organizations.

Price Pressure in the Government Bond Market

An abstract is unavailable at this time.

The Dynamics of Silencing Conflict


In many organizations, when people perceive a difference with another they often do not fully express themselves. Despite creating innumerable problems, silencing conflict is a persistent phenomenon. While the antecedents of acts of silence are well documented, little is known about why norms of silencing conflict evolve. To explore this evolution, we draw on an ethnographic study that spanned the entire life of a, starting with its founding and ending with its sale to a larger company. Distilling our data using causal loop diagrams, we document the processes through which acts of silence became self-reinforcing. The dynamic model of silencing conflict induced from our data has implications not only for norm development, but also for a variety of other domains including network analysis, autonomous actor models, diversity and demography, and change management.


Cases & Course Materials

Congressional Candidate Ron Klein and KNP Communications

Amy J.C. Cuddy and Nithyasri Sharma
Harvard Business School Case 910-013

In the 2006 election cycle, Ron Klein was running for the U.S. Congressional seat from Florida's 22nd District. He was up against Rep. Clay Shaw, a popular 26-year incumbent with significant name recognition in the district. Leading up to the election, Klein's campaign manager realized that Klein had to find a way to relate to his voters on a personal level if he wanted to win the election and advised him to work with KNP Communications, a consulting firm. Over the course of a few sessions, Klein worked with the team from KNP to learn techniques that would help him connect with his voters. On election night, Klein wondered if KNP's training had allowed him to successfully connect with his voters and, more importantly, if this personal connection mattered more to voters than his competence and skills.

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Dawn Stokes: The View from the Driver's Seat

Boris Groysberg and Lindsay Tanne
Harvard Business School Case 410-064

Dawn Stokes founded and was successful as CEO of Texas Driving Experience, a company that provided driving lessons, both safety-based for teens, and high-performance racecar driving for individual thrill seekers and corporate events. Although the company had done well, economic hard times were beginning to take their toll. What aspects of the business should Stokes focus on? And would a policy of aggressive geographic expansion make sense?

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A Giant Among Women

Willy Shih, Ethan S. Bernstein, Maly Hout Bernstein, Jyun-Cheng Wang, and Yi-Ling Wei
Harvard Business School Case 610-005

Tony Lo, the CEO of Giant Manufacturing, the largest bicycle manufacturer in the world, finally realized that his products were not meeting the needs of women customers when even his wife complained to him that the equipment did not fit her needs. Lo commissioned his CFO Bonnie Tu to open the first all-women's bicycle store in Taipei and charged her not only with figuring out the needs of women customers, but also mandating that she turn a profit. "Because your only customers are women, if you don't know how to sell to them, you're out of business—period. So you experiment for survival," explained Lo. The case examines the company's integration into retail stores and looks closely at the Liv/giant pilot and the surprising business model that it developed.

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IFRS in China

Karthik Ramanna, G.A. Donovan, and Nancy Dai
Harvard Business School Case 110-037

In 2005, China announced plans to "converge with," but not completely adopt, IFRS. China also began to lobby for changes to specific IFRS provisions, such as for related party disclosures by state-owned firms, to bring them more into line with Chinese interests. China's accounting system had already undergone significant reforms during the two decades when its economy had grown to become the fourth largest in the world. However, enforcement of accounting standards remained weak, the financial system was relatively immature, and large state-owned firms still dominated many sectors of the economy.

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