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.

November 13

Rethinking the competitiveness of countries

Professors Michael E. Porter, who along with Professor Jan Rivkin is heading up Harvard Business School's United States Competitiveness Project , has a new working paper on the topic: The Determinants of National Competitiveness. The paper is coauthored by Mercedes Delgado, Christian Ketels, and Scott Stern. It poses a new framework based on "output per potential worker" to help determine a country's global investment attractiveness.

Where multinationals go to grow

As multinational companies continue to push out their activities around the world, interesting trends have come to the surface about where they locate. It seems that just as companies and industries cluster around geographical areas in their home countries, such as automakers around Detroit, expanding multinationals are also clustering in specific areas, such as Silicon Valley plants in Bangalore and auto company subsidiaries in Slovakia. In the new working paper The Global Agglomeration of Multinational Firms, Laura Alfaro and Maggie Chen look for "patterns and determinants" of such activity and find that how companies cluster at home bears little relationship to their overseas agglomeration.

A spin-off at Brinks

With a case on Brinks Company, Suraj Srinivasan, Aldo Sesia, and Amy Kaser offer students an opportunity to consider how to value a company as a whole versus as a sum of its pieces. "Brink's Company: Activists Push for a Spin-off" looks at Brinks' decision to sell off its home security division. "The decision followed intense pressure on the company by three activist hedge funds that felt that Brink's was chronically undervalued and the individual businesses were worth more than the combined company," according to the case. Was it the right decision? You decide.

 

Publications

Misvaluing Innovation

Abstract

We demonstrate that a firm's ability to innovate is predictable, persistent, and relatively simple to compute, and yet the stock market ignores the implications of past successes when valuing future innovation. We show that two firms that invest the exact same in research and development (R&D) can have quite divergent, but predictably divergent, future paths. Our approach is based on the simple premise that while future outcomes associated with R&D investment are uncertain, the past track records of firms may give insight into their potential for future success. We show that a long-short portfolio strategy that takes advantage of the information in past track records earns abnormal returns of roughly 11% per year. Importantly, these past track records also predict divergent future real outcomes in patents, patent citations, and new product innovations.

Read the paper: http://www.people.hbs.edu/lcohen/pdffiles/dimalco.pdf

Paying It Forward: Generalized Reciprocity and the Limits of Generosity

Abstract

When people are the victims of greed or recipients of generosity, their first impulse is often to pay back that behavior in kind. What happens when people cannot reciprocate, but instead have the chance to be cruel or kind to someone entirely different-to pay it forward? In five experiments, participants received greedy, equal, or generous divisions of money or labor from an anonymous person, and then divided additional resources with a new anonymous person. While equal treatment was paid forward in kind, greed was paid forward more than generosity. This asymmetry was driven by negative affect, such that a positive affect intervention disrupted the tendency to pay greed forward. Implications for models of generalized reciprocity are discussed.

Read the paper: http://www.people.hbs.edu/mnorton/gray ward norton.pdf

What Makes Analysts Say 'Buy'?

Abstract

An abstract is unavailable at this time.

Read the article: http://hbr.org/product/what-makes-analysts-say-buy/an/F1211B-PDF-ENG

The Internalization of Advertising Services: An Inter-Industry Analysis

Abstract

This study investigates the extent to which U.S. advertisers use in-house rather than independent advertising agencies and examines inter-industry variation in such internalization. Contrary to the widely held impression that use of an in-house advertising agency is more the exception than the rule, we find that vertical integration of advertising services is much more widespread than has hitherto been appreciated. Drawing on concepts from research on scale economies and transaction costs, we develop a set of hypotheses about differences in the expected depth of internalization across industries. We test these hypotheses in cross-sectional analyses of data covering 69 two-digit SIC industries at two points in time, 1991 and 1999. In both years, approximately half of advertisers of all sizes operated an in-house agency. Across industries, we find that the likelihood of internalization of at least some advertising services decreases as the size of advertising outlays increase but increase as advertising intensity and technological intensity increase, and is greater for "creative" industries.

Read the article: http://www.degruyter.com/view/j/roms.2012.10.issue-1/1546-5616.1142/1546-5616.1142.xml

The Balanced Scorecard: Comments on Balanced Scorecard Commentaries

Abstract

This paper provides the author's insights about five papers written in this volume about his published work on the balanced scorecard (BSC). The author finds that academic commentary on the BSC often ignores its role in strategy execution. The paper discusses how the BSC can be used in public sector applications, as well as for companies that want to internalize environmental, social, and community objectives in their strategies. It also presents constructive suggestions for how to teach about the BSC in MBA and executive programs.

Accelerate!

Abstract

An abstract is unavailable at this time.

Read the article: http://hbr.org/2012/11/accelerate/ar/1

Deal Making 2.0: A Guide to Complex Negotiations

Abstract

An abstract is unavailable at this time.

Read the article: http://hbr.org/2012/11/deal-making-20-a-guide-to-complex-negotiations/ar/1

A Whole New Way of Looking at the World

Abstract

An abstract is unavailable at this time.

Read the article: http://hbr.org/2012/11/a-whole-new-way-of-looking-at-the-world/ar/1

Mumbai's Models of Service Excellence

Abstract

An abstract is unavailable at this time.

Read the article: http://hbr.org/2012/11/mumbais-models-of-service-excellence/ar/1

 

Working Papers

The Global Agglomeration of Multinational Firms

Abstract

The explosion of multinational activities in recent decades is rapidly transforming the global landscape of industrial production. But are the emerging clusters of multinational production the rule or the exception? What drives the offshore agglomeration of multinational firms? Using a unique worldwide plant-level dataset that reports detailed location, ownership, and operation information for plants in over 100 countries, we construct a spatially continuous index of agglomeration and investigate the patterns and determinants underlying the global economic geography of multinational firms. Our analysis shows that the emerging offshore clusters of multinationals are not a simple reflection of domestic industrial clusters. Location fundamentals including market access and comparative advantage and under-emphasized agglomeration economies including capital-good market externality and technology diffusion play a particularly important role in multinationals' offshore agglomeration.

Download the paper: http://ssrn.com/abstract=1524857

Do Prices Determine Vertical Integration? Evidence from Trade Policy

Abstract

This paper shows that product prices determine organizational design by studying how trade policy affects vertical integration. Property rights theory asserts that firm boundaries are chosen by stakeholders to mediate organizational goals (e.g., profits) and private benefits (e.g., operating in preferred ways). We present an incomplete-contracts model in which vertical integration raises output at the expense of lower private benefits. A key implication is that higher prices should result in more integration, since the organizational goal becomes relatively more valuable than private benefits. Trade policy provides a source of exogenous price variation to test this proposition: higher tariffs should lead to more vertical integration; moreover, ownership structures should be more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tariffs to examine the impact of prices on organizational choices. Our empirical results provide strong support for the predictions of the model.

Download the paper: http://ssrn.com/abstract=1625503

The Determinants of National Competitiveness

Abstract

We define foundational competitiveness as the expected level of output per working-age individual that is supported by the overall quality of a country as a place to do business. The focus on output per potential worker, a broader measure of national productivity than output per current worker, reflects the dual role of workforce participation and output per worker in determining a nation's standard of living. Our framework highlights three broad and interrelated drivers of foundational competitiveness: social infrastructure and political institutions, monetary and fiscal policy, and the microeconomic environment. We estimate this framework using multiple data sets covering more than 130 countries over the 2001-2008 period. We find a positive and separate influence of each driver on output per potential worker. The microeconomic environment has a positive effect on output per potential worker even after controlling for historical legacies. Using our framework we define a new concept, global investment attractiveness, which is the cost of factor inputs relative to a country's competitiveness. This analysis reveals important insight into the economic trajectory of individual countries. Our framework also offers a novel methodology for the estimation of a theoretically grounded and empirically validated measure of national competitiveness.

Download the paper: http://papers.nber.org/papers/w18249

Clusters, Convergence, and Economic Performance

Abstract

This paper evaluates the role of regional cluster composition in the economic performance of industries, clusters, and regions. On the one hand, diminishing returns to specialization in a location can result in a convergence effect: the growth rate of an industry within a region may be declining in the level of activity of that industry. At the same time, positive spillovers across complementary economic activities provide an impetus for agglomeration: the growth rate of an industry within a region may be increasing in the size and "strength" (i.e., relative presence) of related economic sectors. Building on Porter (1998, 2003), we develop a systematic empirical framework to identify the role of regional clusters-groups of closely related and complementary industries operating within a particular region-in regional economic performance. We exploit newly available data from the U.S. Cluster Mapping Project to disentangle the impact of convergence at the region-industry level from agglomeration within clusters. We find that, after controlling for the impact of convergence at the narrowest unit of analysis, there is strong evidence for cluster-driven agglomeration. Industries participating in a strong cluster register higher employment growth as well as higher growth of wages, number of establishments, and patenting. Industry and cluster level growth also increases with the strength of related clusters in the region and with the strength of similar clusters in adjacent regions. Importantly, we find evidence that new regional industries emerge where there is a strong cluster environment. Our analysis also suggests that the presence of strong clusters in a region enhances growth opportunities in other industries and clusters. Overall, these findings highlight the important role of cluster-based agglomeration in regional economic performance.

Download the paper: http://papers.nber.org/papers/w18250

The Consequences of Mandatory Corporate Sustainability Reporting

Abstract

We examine the effect of mandatory corporate sustainability reporting (MCSR) on several measures of social responsibility using both country and firm-level data. Using data for 58 countries, we show that after the adoption of MCSR laws and regulations, the social responsibility of business leaders increases and both sustainable development and employee training become a higher priority for companies. Moreover, for companies in countries with MCSR, corporate governance improves and on average, companies implement more ethical practices, bribery and corruption decrease, and managerial credibility increases. These effects are larger for countries with stronger law enforcement and more widespread assurance of sustainability reports. We complement the country-level analysis using environmental, social, and governance metrics at the firm-level in conjunction with a differences-in-differences research design, and we find that for the treatment group, energy as well as waste and water consumption significantly decline, while investments in employee training significantly increase after the adoption of MCSR laws and regulations.

Download the paper: http://ssrn.com/abstract=1799589

 

Cases & Course Materials

HGRM: Bringing Back High Touch Hospitality

Lynda M. Applegate and Gabriele Piccoli
Harvard Business School Case 813-019

The case centers on the dilemma faced by Carlo Fontana, the owner-operator of a small chain of two four-star urban hotels located in Lugano, Switzerland, and the other in Milan, Italy. Having developed an extensive customer service and operations information system, called Happy Guests Relationship Management, Fontana is entertaining the possibility of commercializing his innovation. Doing so may provide a welcome new source of income during the greatest economic slowdown in recent history, and it would help in keeping the HGRM design and development team motivated to refine and improve the solution. However, commercializing the innovation may also stretch his organization too thin and bring his team into a business, the software industry, completely foreign to them.

Purchase this case:
http://hbr.org/search/813019-PDF-ENG

Preem (A)

Bo Becker, Annelena Lobb, and Aldo Sesia
Harvard Business School Case 213-008

High yield bond fund Proventus Capital Partners (PCP) has invested in underwater bonds issued by Preem, a large oil refinery. As maturity approaches, in the midst of financial crisis, Preem appear unlikely to be able to refinance. Meanwhile, Prreem has a complicated multi-currency capital structure with both senior, secured bank loans and junior bonds. PCP has to decide whether to push for bankruptcy in a European court, or to push for out of court renegotiations. The case is a tool for studying the difference between liquidity problems and solvency problems, weighing bankruptcy vs. out of court restructuring, and dealing with negotiations between creditors.

Purchase this case:
http://hbr.org/search/213008-PDF-ENG

Preem (B)

Bo Becker
Harvard Business School Supplement 213-014

Preem's creditors and owners made a deal with an 18 month extension of debt maturities and a minor equity injection in 2009. Now, in 2010 ,the new maturity is approaching, and refinancing is again unlikely. This time, all the firm's debt is coming due. What went wrong in the first restructuring and what should PCP do to facilitate a more permanent solution?

Purchase this supplement:
http://hbr.org/search/213014-PDF-ENG

Gary Hirshberg and Stonyfield Farm

Nancy F. Koehn, Nora N. Khan, and Elizabeth W. Legris
Harvard Business School Case 312-122

Gary Hirshberg and Stonyfield Farm is the story of one entrepreneur's vision and journey to create a market-leading, environmentally responsible business founded on the principles of product quality, organizational alignment, and sustainability. A former environmental activist, Hirshberg built Stonyfield Farm (an organic yogurt maker based in New Hampshire) up from a seven-cow operation into a business that in 2010 had $360 million in annual revenues. The narrative pays particular attention to the early, turbulent years of the yogurt company and the excitement and uncertainty of entrepreneurial life. The case also details the supple, innovative marketing the company created to expand its customer base, the means it devised to cultivate and maintain customer loyalty, and the strategies it employed to penetrate the highly competitive yogurt and dairy categories nationwide. Throughout, readers will encounter the challenges that Hirshberg, his colleagues, and his family confronted as they all worked to create a business with a firm commitment to both sustainability and high quality-a commitment rooted in Hirshberg's dedication to spreading the "gospel" of organic production to consumers.

Purchase this case:
http://hbr.org/search/312122PDF-ENG

Olympus (A)

Jay W. Lorsch, Suraj Srinivasan, and Kathleen Durante
Harvard Business School Case 413-040

As 2012 approached, the woes of the financial crisis seemed to be fading, companies were resuming business as usual, and some of the scrutiny on corporate governance practices began to recede as well. That is until another major financial scandal emerged in Japan in the fall of 2011. It was slowly revealed that the 92-year-old camera and medical photo-imaging company, Olympus, had been hiding its losses for more than a decade-to the tune of $1.7 billion-long before the current economic pressures, slow job growth, and poor investor confidence plagued the global economy. The fraud renewed the focus on corporate governance policies worldwide, but especially in Japan, where the lack of board independence and a deep-rooted corporate culture entrenched in personal loyalties fostered an environment that made it difficult for scandals such as this to be unveiled, let alone for whistleblowers to come forward about them.

Purchase this case:
http://hbr.org/search/413040-PDF-ENG

Olympus (B)

Jay W. Lorsch, Suraj Srinivasan, and Kathleen Durante
Harvard Business School Supplement 413-075

This case outlines Michael Woodford's awards and honors, after having been fired from Olympus in October 2011. It discusses the repercussions following an investigation into the fraud and the report that was released thereafter. It also discusses the lawsuit that followed (filed by Woodford against Olympus), its settlement, and the new Olympus board and the fate of the Olympus executives who were at Olympus while the scandal occurred.

Purchase this supplement:
http://hbr.org/search/413075-PDF-ENG

Brink's Company: Activists Push for a Spin-off

Suraj Srinivasan, Aldo Sesia, and Amy Kaser
Harvard Business School Case 112-055

The case studies the decision of the security services corporation Brink's Company to spin-off its home security division from the rest of the company. The decision followed intense pressure on the company by three activist hedge funds that felt that Brink's was chronically undervalued and the individual businesses were worth more than the combined company. The company resisted the decision for over a year before agreeing to the break up. The case follows the argument made by the company and each of the investors. It also describes the actions by the company to convince its shareholders of the merits of keeping the company together, as well as the actions the activist investors took to get the attention of management, the board, and other investors. The businesses, secure transportation, and home security monitoring are described from both a business strategy and a financial perspective so that the potential value of different value enhancing options can be analyzed.

Purchase this case:
http://hbr.org/search/112055-PDF-ENG