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.

March 20

Do private equity firms and utilities belong together?

Do private equity firms have a role (and a business) in bringing floundering utility companies back to life? A recent case study looks at Abraaj Capital's $360 million investment in Karachi Electric Supply Company, a troubled utility serving Pakistan's largest city. The learning objective is to introduce the challenges of dealing with private equity in emerging markets and of integrating ESG (environmental, social, and governance) goals into an investment program. "Is this the direction for private equity in the future?" ask authors Josh Lerner, Asim Ijaz Khwaja, and Ann Leamon.

Time to change Omega's strategy

In the case "The Swatch Group," authors Rohit Deshpandé, Karol Misztal, and Daniela Beyersdorfer follow the decisions of CEO Nicolas Hayek as he considers a new positioning approach for its flagship Omega brand against its chief rival, Rolex. Students who study the case will gain a better understanding of how to segment a market and position a brand against competitors in a multibrand portfolio.

Capitalism and democracy

Professor Emeritus Bruce R. Scott says democracy is one of the world's two great systems of governance. The other? Capitalism. "Inevitably these two systems develop as well as transform one another through time, and imbalances of power in either system can lead to the subversion of expected relationships in the other." Read Scott's new book, "Capitalism: Its Origins and Evolution as a System of Governance."



Capitalism: Its Origins and Evolution as a System of Governance


Two systems of governance, capitalism and democracy, prevail in the world today. Operating simultaneously in partially distinct domains, these two systems rely on indirect governance through regulated competition among political as well as economic actors in structures that in many ways parallel the competition found in organized sports. Inevitably these two systems develop as well as transform one another through time, and imbalances of power in either system can lead to the subversion of expected relationships in the other.

This book rejects the simple equation of capitalism with markets or with trade, in favor of a three-level system that embraces factor markets as well those for goods and services and competition between political as well as economic actors. Capitalist competition takes place in markets that exist in legal and regulatory frameworks and are governed by a political authority with the power and legitimacy to empower as well as regulate behavior and punish transgressors as well as redesign institutions. Economic markets constitute a first level in the system, regulatory systems the second level, and political authority the third. This multi-level system could not emerge until sovereign political authorities relinquished some power in order to release the energy of potential economic actors. The critical release of energy came in the factor markets (for land, labor capital, and knowledge), and it required the abandonment of feudalism.

Unlike trade, capitalism spreads by political decisions and by political units such as states. As a consequence, Canada has a different capitalist system than the U.S. despite the existence of free trade in labor and capital as well as goods and services between the two countries. Thus, Canada had no financial crisis in 2007-08.

Capitalism is a system of governance because it embodies human purposes, which differ from one sovereign entity to another. Whereas trade takes place through a largely unguided process like biological evolution with a gradual impact upon the distribution of power among economic and political actors, the emergence of factor markets typically required fundamental reordering of power relationships, as between landowners and their serfs or between consumers and producers, and such changes typically required the mobilization of political power to overcome resistance to such changes. In order to support such developmental changes, the political authorities of capitalism had to acquire the capacity, and the legitimacy to modify institutions as circumstances, including human purposes, evolved.

While the invisible hand of the pricing mechanism can balance supply and demand on a global basis, or in subunits thereof, the visible hand of political authority is essential to the formulation of human purposes and the appropriate modification of institutions to achieve those purposes among the various political units, e.g., states. Thus, capitalism is appropriately described as a system of governance and as a system for balancing supply and demand.

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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.

A "Core Periphery" Framework to Navigate Emerging Market Governments—Qualitative Evidence from a Biotechnology Multinational


We build on the emerging literature of influence-based models to study how multinational firms can navigate host governments. Our 'core-periphery' framework posits that the actions that an MNC takes with actors in what we call the 'periphery'-comprised of state, quasi-state, and civil society actors-can lead to positive or negative influence with interconnected state actors in a 'core'. There are two mechanisms by which this can happen: engaging the periphery may either change the information set of the core or help align incentives of multiple core actors. Engaging the periphery might be particularly relevant in settings where the institutional framework is still emerging. We build a case study of a multinational firm in the biotechnology sector to illustrate how the core-periphery framework works in multiple emerging markets across institutional differences. The analysis is based on 32 interviews conducted with the CEO and other executives of Genzyme at the corporate headquarters in Cambridge, Massachusetts, and in subsidiaries in Brazil, China, Costa Rica, France, India, and the United States.

Investment versus Propaganda in the Formation of Beliefs about the Argentine Water Privatization


Argentina privatized most public utilities during the 1990s but re-nationalized the main water company in 2006. We study beliefs about the benefits of the privatization of water services amongst low- and middle-income groups immediately after the 2006 nationalization. Negative opinions about the privatization prevail. These are particularly strong amongst households that did not benefit from the privatization and amongst households that were reminded of the government's negative views about the privatization. A person's beliefs in the benefits of the water privatization were almost 30% more negative (relative to other privatizations) if his/her household did not gain access to water after the privatization. Similarly, a person's view of the water privatization (relative to other privatizations) was 16% more negative if he/she was read a vignette with some of the negative statements about the water privatization that Argentina's president expressed during the nationalization process. Interestingly, the effect of the vignette on households that gained water is insignificant, while it is largest (and significant) amongst households that did not gain water during the privatization. This suggests that propaganda was persuasive when it had a basis in reality.

Foreign Entry and the Mexican Banking System, 1997-2007


What is the impact of foreign bank entry on the pricing and availability of credit in developing economies? The Mexican banking system provides a quasi-experiment to address this question because in 1997 the Mexican government radically changed the laws governing the foreign ownership of banks: the foreign market share therefore increased five-fold between 1997 and 2007. We construct and analyze a panel of Mexican bank financial data covering this period and find no evidence that foreign entry increases the availability of credit. We also find that switching from domestic to foreign ownership is associated with a decrease in non-performing loans and an increase in interest rate spreads, suggesting that foreign concerns bought domestic banks that had been making loans with low interest rates to parties that had a low probability of repayment.


Working Papers

The International Politics of IFRS Harmonization


The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of some international political dynamics of countries' IFRS harmonization decisions. The analysis is based on field studies in three jurisdictions: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize the jurisdictions' IFRS responses: proximity to existing political powers at the IASB and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.

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When Do User Innovators Start Firms? A Theory of User Entrepreneurship


A rich and distinguished body of research has documented the importance of user innovations. For the most part, this literature has found that users innovate but do not commercialize their innovations. Instead, users benefit from using their innovations and allow manufacturers to commercialize innovations with financial value. Yet scholars have recently shown that entrepreneurial activity by users is more widespread than previously believed. We present data and statistics documenting the prevalence, technological impact, and economic impact of user entrepreneurship. Then, to reconcile these divergent empirical findings, we develop a theoretical model that explains when user innovations are commercialized by users, by manufacturers, or not commercialized at all. At the core of our model is the notion that users and manufacturers differ along two critical dimensions: their estimates of the financial returns to entering the product market and their profit thresholds. Depending upon the magnitude of these differences, we propose alternative commercialization outcomes. This model helps to explain why user entrepreneurs are likely to spawn the creation of altogether new product markets and even industries. We illustrate our model with examples from the field of consumer sporting goods. The significance of user entrepreneurship and the implications of our model for theories of innovation, entrepreneurship, and industry emergence are discussed.

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Cases & Course Materials

Joe Gifford in Tal Afar, Iraq (A)

Joseph Badaracco, Richard Burgess Jr., Robert Carpio III, and William Wheeler
Harvard Business School Case 311-085

A lieutenant leading a platoon in Iraq must make a complex ethical, military, and leadership decision: whether to risk his life and that of other soldiers to reenter a home rigged with an explosive to save three Iraqis.

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Joe Gifford in Tal Afar, Iraq (B)

Joseph Badaracco, Richard Burgess Jr., Robert Carpio III, and William Wheeler
Harvard Business School Supplement 311-086

A lieutenant leading a platoon in Iraq must make a complex ethical, military, and leadership decision: whether to risk his life and that of other soldiers to reenter a home rigged with an explosive to save three Iraqis. The (B) case describes the decision made and the rationale behind it.

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Claude Grunitzky

Julie Battilana, Lakshmi Ramarajan, and James Weber
Harvard Business School Case 412-065

Claude Grunitzky, a media entrepreneur, develops, maintains, and leverages an extensive personal and professional network across three continents. The case considers the steps he has taken to build and cultivate a network that creates value for himself and others.

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Brasil Foods

David E. Bell and Natalie Kindred
Harvard Business School Case 512-013

In mid-2011, the management of Brasil Foods, a leading Brazilian branded foods producer and protein exporter, is evaluating strategies for international and domestic growth. The team has just received approval from Brazil's antitrust authorities to complete the merger of Perdigao and Sadia, the two massive food producers that had combined to form Brasil Foods in 2009. Now, the team is free to focus on their ambitious plan to double revenues by 2015. Domestically, the plan calls for Brasil Foods to maintain its allowed retail market share and expand its presence in the fast-growing food service sector. Internationally, the plan sets out a vision of Brasil Foods evolving from an exporter to a true multinational. The team believes their operational expertise and scale combined with Brazil's booming economy and vast agricultural resources form the ideal platform for achieving their vision. Yet, amid a wealth of possibilities, they face tough choices, such as which emerging markets to pursue first. They also face serious personnel issues, including integrating employees from Perdigao and Sadia-longtime industry rivals-and developing an international team that understands foreign markets.

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Hengdeli: The Art of Co-existence

Rohit Deshpandé and Nancy Hua Dai
Harvard Business School Case 512-058

In October 2011, Zhang Yuping, founder and chairman of Hengdeli, the largest Swiss watch retailer in the world, wondered how to work more closely with its key suppliers-Swatch Group, Richemont Group, LVMH Group, and Rolex Group-to maintain strong growth in the Greater China region. Specifically, how could Hengdeli manage the relationship with these suppliers to ensure getting more supply in a market where demand outgrew supply? How could Hengdeli balance the needs of these competing suppliers without being overreliant on one or two suppliers? How could it continue to expand its retail network to enhance its value and position? How could Hengdeli rationalize the portfolio management to maximize the return in the long-term?

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The Swatch Group

Rohit Deshpandé, Karol Misztal, and Daniela Beyersdorfer
Harvard Business School Case 512-052

In March 2011, Nicolas Hayek, the CEO of the leading Swiss watch manufacturer, Swatch Group, reflected on the positioning of Omega, its revived flagship brand. Which marketing strategy would best allow it to confront its main competitor, Rolex? And how would potential adjustments to Omega's product, pricing, distribution, and promotion strategies impact the sales of the Swatch Group's other 18 watch brands?

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Ctrip: Scientifically Managing Travel Services

David A. Garvin and Nancy Hua Dai
Harvard Business School Case 312-092

Ctrip is a $437 million Chinese online travel services company with a scientific, data driven approach to management. The case explores Ctrip's founding and early growth; its expansion into multiple market segments including hotel reservations, air ticketing, leisure travel, and corporate travel; and the sources of its competitive advantage. The firm's culture, organization, and call center operations are described in detail, as are its decision-making and business processes. At the end of the case, executives are considering whether Ctrip should actively pursue either the budget or luxury travel segments, which would mean shifting attention from the company's core customer base of Frequent Independent Travelers.

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China Development Bank

Li Jin, Matthew Preble, and Aldo Sesia
Harvard Business School Case 212-001

In May 2011, Chairman Chen Yuan of the China Development Bank (CDB) was thinking back on CDB's financing of a major project between Petroleo Brasileiro SA (Petrobras), Brazil's state-owned oil and gas producer, and China Petroleum & Chemical Corporation (Sinopec), one of China's largest oil companies. Signed two years earlier, the deal was an oil-for-loan agreement in which Petrobras committed to a 10-year oil supply to Sinopec in exchange for a $10 billion loan from CDB. The case study describes the deal and its importance to both countries. The case also discusses CDB's evolution from a policy bank to more of a commercial enterprise.

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Abraaj Capital and the Karachi Electric Supply Company

Josh Lerner, Asim Ijaz Khwaja, and Ann Leamon
Harvard Business School Case 812-019

In 2008, the Dubai-based private equity group Abraaj Capital invested $360 million in Karachi Electric Supply Company, a troubled utility serving Pakistan's largest city. In 2010, the firm has made great strides in turning around the company, but the transition is not complete. In fact, completing the task involves significant work in rebuilding the social contract, in addition to correcting matters related to company management and electricity supply. Is this the direction for private equity in the future?

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Boardroom Change in Norway

Jay W. Lorsch and Melissa Barton
Harvard Business School Case 411-089

In 2003, the Norwegian Parliament amended the Public Limited Companies Act in order to achieve greater representation of women on corporate boards. According to the amendment, all state-owned companies and public limited companies were required to have at least 40% women on their boards. This case uses firsthand accounts from Norwegian directors to document the Norwegian business community's reaction to the quota, how Norwegian boards sought women directors, and the transferability of the quota law to other nations.

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Baxter's Asia Pacific 'Talent Edge' Initiative

Jordan Siegel, Mimi Xi, and Christopher Poliquin
Harvard Business School Case 711-408

Can multinationals wield competitive advantage by aggressively hiring talented members of the excluded social group in each market? This is the subject of Siegel's global strategy research as well as the focus of this case study.

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