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.
September 14, 2010
While many expect venture capital to be a prime source of start-up funding for companies entering the dynamic clean energy markets, it's not at all clear that the VC industry is poised to take advantage. In fact, according to research by Harvard Business School's Shikhar Ghosh and Ramana Nanda, structural problems in this emerging industry prevent VCs from exiting their investments at the appropriate time. This problem presents "one of the key bottlenecks threatening the innovation pipeline in energy production," the researchers write in their working paper, Venture Capital Investment in the Clean Energy Sector.
In other new releases this week, the case study Chrysler Fiat 2009 explores Chrysler's entrance into a prepackaged bankruptcy that resulted 40 days later in a deal with Fiat, the U.S. Treasury, and the United Auto Workers to keep the company operating. And Associate Professor Dennis Campbell offers what he believes is the first study to find a direct link between employee selection and better management control outcomes.
Recent Advances in the Empirics of Organizational Economics
|Authors:||Nicholas Bloom, Raffaella Sadun, and John Van Reenen|
|Publication:||,em>Annual Review of Economics Vol. 2 (2010)|
We present a survey of recent contributions in empirical organizational economics, focusing on management practices and decentralization. Productivity dispersion between firms and countries has motivated the improved measurement of firm organization across industries and countries. There appears to be substantial variation in management practices and decentralization not only between countries, but also especially within countries. Much of the poorer average management quality in countries like Brazil and India seems to result from a long tail of poorly managed firms, which barely exist in the United States. Some stylized facts include the following: (1) competition seems to foster improved management and decentralization; (2) larger firms, skill-intensive plants, and foreign multinationals appear better managed and are more decentralized; (3) firms that are both family owned and managed appear to have worse management and are more centralized; and (4) firms facing an environment of lighter labor market regulations and more human capital specialize relatively more in people management. There is evidence for complementarities between information and communication technology, decentralization, and management, but the relationship is complex, and identification of the productivity effects of organizational practices remains a challenge for future research.
Does Intellectual Property Rights Reform Spur Industrial Development?
|Authors:||Lee Branstetter, Ray Fisman, C. Fritz Foley, and Kamal Saggi|
|Publication:||Journal of International Economics (forthcoming)|
An extensive theoretical literature generates ambiguous predictions concerning the effects of intellectual property rights (IPR) reform on industrial development. The impact depends on whether multinational enterprises (MNEs) expand production in reforming countries and the extent of decline in imitative activity. We examine the responses of U.S.-based MNEs and domestic industrial production to a set of IPR reforms in the 1980s and 1990s. Following reform, MNEs expand the scale of their activities. MNEs that make extensive use of intellectual property disproportionately increase their use of inputs. There is an overall expansion of industrial activity after reform, and highly disaggregated trade data indicate higher exports of new goods. These results suggest that the expansion of multinational activity more than offsets any decline in imitative activity.
Download the paper: http://www.people.hbs.edu/ffoley/IPRImit.pdf
Venture Capital Investment in the Clean Energy Sector
|Authors:||Shikhar Ghosh and Ramana Nanda|
|Publication:||In America's Energy Innovation Problem|
We examine the extent to which venture capital is adequately positioned for the rapid commercialization of clean energy technologies in the U.S. While there are several startups in clean energy that are well-suited to the traditional venture capital investment model, our analysis highlights a number of structural challenges related to venture capital (VC) investment in the sector that is particularly acute for startups involved in the production of clean energy. One of the key bottlenecks threatening innovation in energy production is the inability of VCs to exit their investments at the appropriate time. This hurdle did exist in industries such as biotechnology and communications networking that faced a similar problem when they first emerged but was ultimately overcome by changes in the innovation ecosystem. However, incumbents in the oil and power sector are different in two respects. First, they are producing a commodity and hence face little end-user pressure to adopt new technologies. Second, they do not tend to feel as threatened by potential competition from clean energy startups, given the market structure and regulatory environment in the energy sector. We highlight that the problem is unlikely to get solved without the active involvement of the government. Even if it does, historical experience suggests it may take several years.
Download the paper: http://www.hbs.edu/research/pdf/11-020.pdf
Wellsprings of Creation: How Perturbation Sustains Exploration in Mature Organizations
|Authors:||David James Brunner, Bradley R. Staats, Michael L. Tushman, and David M. Upton|
Organizations struggle to balance simultaneous imperatives to exploit and explore, yet theorists differ as to whether exploitation undermines or enhances exploration. The debate reflects a gap: the missing mechanism by which organizations break free of old routines and discover new ones. We propose that the missing link is perturbation: novel stimuli that disrupt the execution of specialized routines. Perturbation creates opportunities for organizations to invoke exploratory, general-purpose problem-solving routines. In mature organizations, perturbations become increasingly scarce to the point that exploration is stifled and inertia sets in. We suggest that mature organizations can sustain exploration by deliberately inducing perturbations in their own processes. Our theory yields testable hypotheses about the relationships between exploitation, perturbation, and exploration. We provide illustrations from the Toyota Motor Company to show how deliberate perturbation enables efficient exploration in the midst of intense exploitation.
Download the paper: http://www.hbs.edu/research/pdf/09-011.pdf
Employee Selection as a Control System
Theories from the economics, management control, and organizational behavior literatures predict that when it is difficult to align incentives by contracting on output, aligning preferences via employee selection may provide a useful alternative. This study investigates this idea empirically using personnel and lending data from a financial services organization that implemented a highly decentralized business model. I exploit variation in this organization in whether or not employees are selected via channels that are likely to sort on the alignment of their preferences with organizational objectives. I find that employees selected through such channels are more likely to use decision-making authority in the granting and structuring of consumer loans than those who are not. Conditional on using decision-making authority, their decisions are also less risky ex post. These findings demonstrate employee selection as an important, but understudied, element of organizational control systems.
Download the paper: http://www.hbs.edu/research/pdf/11-021.pdf
The Impact of Corporate Social Responsibility on Investment Recommendations
|Authors:||Ioannis Ioannou and George Serafeim|
Using a large sample of publicly traded U.S. firms over 16 years, we investigate the impact of corporate socially responsible (CSR) strategies on security analysts' recommendations. Socially responsible firms received more favorable recommendations in recent years relative to earlier ones, documenting a changing perception of the value of such strategies by the analysts. Moreover, we find that firms with higher visibility receive more favorable recommendations for their CSR strategies and that analysts with more experience, broader CSR awareness, or those with more resources at their disposal are more likely to perceive the value of CSR strategies more favorably. Our results document how CSR strategies can affect value creation in public equity markets through analyst recommendations.
Download the paper: http://www.hbs.edu/research/pdf/11-017.pdf
What Drives Corporate Social Performance? International Evidence from Social, Environmental and Governance Scores
|Authors:||Ioannis Ioannou and George Serafeim|
We investigate the institutional drivers of Corporate Social Performance (CSP) by focusing on its three fundamental components: social, environmental, and governance performance. Using a large cross section of firms from 42 countries over 7 years, we are able to explain 41%, 46%, and 63% of the variation in social performance, environmental performance, and corporate governance respectively, with observable firm, industry, and institutional factors. More specifically, we hypothesize that country institutions have a profound influence on CSP. We find that political institutions, followed by legal and labor market institutions are the most important country determinants of social and environmental performance. In contrast, legal institutions, followed by political institutions, are the most important country determinants of governance. Capital market institutions appear to be less important drivers of CSP. Our results provide insights on the demand and supply forces that determine CSP internationally.
Download the paper: http://www.hbs.edu/research/pdf/11-016.pdf
Corporate Governance When Founders Are Directors
|Authors:||Feng Li and Suraj Srinivasan|
We examine CEO compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a non-founder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared to non-founder firms. Overall, the evidence suggests that boards with founder-directors provide more high powered incentives in the form of pay and retention policies than the average U.S. board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared to non-founder firms.
Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1663905
Cases & Course Materials
Tennant Company: Innovating Within and Beyond the Core
Lynda M. Applegate, Toby Stuart, and James Weber
Harvard Business School Case 810-139
Tennant, a leading producer of floor cleaning equipment, must determine the business model to use for its new chemical-free cleaning technology. In 2005, Tennant Company had developed an innovative, environmentally friendly cleaning technology that could potentially revolutionize cleaning. Historically, Tennant was a producer of floor and carpet washing machines for industrial and commercial markets. Over time, it became clear that the technology had applications far beyond Tennant's core markets. In mid-2009, the company set up a new venture to develop the technology's promise. In 2010 this venture was wholly owned by Tennant and run by a Tennant manager. The case examines the decisions the CEO and new venture head must make to best structure and position the venture to succeed.
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To Catch a Vandal: A Power & Influence Exercise
Amy J.C. Cuddy, Ruwan Gunatilake, and Meredith Hodges
Harvard Business School Exercise 911-013
This exercise is based on the popular group game "Mafia" and is designed to give students a broad introduction to multiple theories of influence and to challenge their instincts about which techniques are the most powerful and how they may be employed. In this version, two section-mates have been linked to the vandalizing of school property. Students are secretly assigned to different roles (e.g., Moderator, Vandals, Leadership and Values Representative, and Innocent Section Members), and the object of the game is for the players to debate the identities of the Vandals and vote to eliminate suspects.
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Eden McCallum: A Network-Based Consulting Firm (B)
Heidi K. Gardner and Erin McFee
Harvard Business School Supplement 411-027
To weather the 2009 financial crisis, Eden McCallum's cofounders must renegotiate partners' compensation, attract independent consultants to meet different client demands, and reassure their advisory board that their network-based consulting model remains sound. The case outlines decisions taken and financial results through the end of fiscal year 2010.
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Cypress Sharpridge: Raising Capital in a Time of Crisis
Lena G. Goldberg and Adam Nebesar
Harvard Business School Case 310-140
Cypress Sharpridge, a REIT investing in agency securities, launched its IPO just before the collapse of the subprime mortgage market. The IPO failed. In June 2009, an IPO window seemed to be opening. Should the company try again? CEO Kevin Grant knew that his company's survival depended on differentiating itself from discredited real estate investment strategies and raising permanent capital. But if its IPO failed again, the company might lose any remaining credibility and be forced to fold.
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Chrysler Fiat 2009
J. Bruce Harreld, Paul W. Marshall, and David Lane
Harvard Business School Case 809-165
In spring 2009, Chrysler entered a prepackaged bankruptcy and exited 40 days later in a deal with Fiat, the U.S. Treasury, and the UAW that kept the automaker alive. Looking forward, what was necessary for Chrysler to move beyond the life support it had received? What was possible? Looking back, how should the company's restructuring be assessed?
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Momentive Performance Materials, Inc.
Victoria Ivashina and David S. Scharfstein
Harvard Business School Case 210-081
After getting close to violating its loan covenants in 2009, Momentive took a variety of actions over several months to restructure its debt. In particular, in May of 2009, Momentive had exchanged a fraction of its outstanding notes. In November of 2009, it proposed an amendment that sought to extend the maturity on the loan used to finance the Momentive buyout and allow issuance of senior secured notes. The case is set up from the perspective of a hedge fund that holds a fraction of Momentive's syndicated loan. The case serves as a vehicle for discussing contractual differences between public and private debt and challenges in its restructuring.
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Michael E. Porter, Boon-Siong Neo, and Christian H.M. Ketels
Harvard Business School Case 710-483
Looking through the lenses of both macro and micro economic policy, this case examines how Singapore has achieved such stellar success throughout its history, from independence through 2008. The case discusses the different policy choices the Singaporean government has made as well as how the government's structure has aided development.
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Hema Hattangady and Conzerv (B)
Michael L. Tushman and David Kiron
Harvard Business School Supplement 411-012
An abstract is not available at this time.
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