- 22 Jul 2008
- Working Paper Summaries
Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?
Government ownership of banks, a common phenomenon, is among the most important policy tools used to influence financial development. But what is the actual effect of such ownership on the financial development of a country? This paper uses a policy experiment in India to evaluate the effect of government ownership of banks on development. Key concepts include: Had the Indian government required bank expansion into rural areas and set lending targets, without nationalizing banks, rural areas might have achieved the same, or better, outcomes. Despite a substantial increase in agricultural credit, there is no evidence of improved agricultural outcomes in markets with nationalized banks. Bank nationalization may have slowed the growth of employment in the more developed sectors of trade and services. Closed for comment; 0 Comments.
- 17 Jul 2008
- Working Paper Summaries
A Replication Study of Alan Blinder’s “How Many U.S. Jobs Might Be Offshorable?”
The movement of business activity from developed economies to developing economies—commonly called offshoring—has become the focus of heated debates. Behind these debates lies a pivotal question of scale: How much business activity and how many jobs are at stake? Official statistics are nearly silent, and private-sector researchers vary widely in their estimates of the number of U.S. jobs that have moved offshore, will move offshore, or could move offshore. In an effort to address this gap in prior literature, Princeton economist Alan Blinder released an innovative working paper in 2007 in which he personally reviewed more than 800 occupations in the United States, assessed the "offshorability" of each, and used the evaluations to estimate the total number of U.S. jobs that might be offshorable. Here, HBS research associate Troy Smith and Professor Jan W. Rivkin describe an online exercise that allowed 152 teams of HBS MBA students, collectively, to recreate Blinder's study and to develop insights about the future of offshoring. Key concepts include: The surge in the number of potentially offshorable jobs in recent decades suggests that fewer business activities are tied to a specific location. More often, the laws of economics drive the geography of business activity. Some of the most creative applications of offshoring have taken jobs, broken them down into component tasks, bundled them in new ways, and relocated each new bundle to the place where its tasks can be completed best or cheapest. This opportunity to rethink the fundamental grouping of tasks, not just to adjust the geographic array of historical "job" bundles, gives businesspeople a broad menu of new options for taking advantage of differences across borders. Closed for comment; 0 Comments.
- 03 Jul 2008
- Working Paper Summaries
The Future of Social Enterprise
This paper considers the confluence of forces that is shaping the field of social enterprise, changing the way that funders, practitioners, scholars, and organizations measure performance. The authors trace a growing pool of potential funding sources to solve social problems, much of it stemming from an intergenerational transfer of wealth and new wealth from financial and high-tech entrepreneurs. They further examine how these organizations can best access the untapped resources by demonstrating mission performance, and then propose three potential scenarios, outlined below, for how this sector might evolve. Key concepts include: Consolidation: In this scenario of sector evolution, funding will keep growing in a gradual, linear fashion, and organizations will compete for resources by demonstrating performance, with a focus on efficiency. The sector will consolidate. Entrepreneurial: In a more optimistic future, existing and new enterprises will apply strategies to achieve and demonstrate performance, improving efficiency and effectiveness and attracting new funding sources. Expressive: Rather than focusing exclusively on performance, funders and organizations may view their investment as an expressive civic activity. Closed for comment; 0 Comments.
- 24 Jun 2008
- Working Paper Summaries
Bank Structure and the Terms of Lending to Small Businesses
Access to "soft information" and the greater sensitivity of decentralized banks to the local institutional environment can have both positive and negative consequences for small firms. Hence there may be a dark side to decentralized bank lending in certain instances. This paper argues that the same ability of decentralized banks to act on soft information also makes them more responsive to the local environment when setting terms of their loans. While this can be beneficial for small businesses in competitive markets, it also implies that the organizational structure of decentralized banks might allow them to better exploit their market power in concentrated banking markets by restricting credit or charging higher interest rates from small businesses. Key concepts include: According to the findings, small firms and those with greater "soft information" were more likely to get larger loans from decentralized banks, particularly in environments where the legal enforcements of financial contracts were relatively weak. On the other hand, decentralized banks were also more likely than centralized banks to cherry-pick the best firms, give smaller loans, and charge higher interest rates in concentrated banking markets. The relative benefit of decentralized bank structures for small business lending may therefore depend critically on the institutional and competitive environment in which banks are located. Public policy should consider promoting competition between decentralized banks in order to truly achieve the benefits associated with credit access for small businesses or those with more "soft information." Closed for comment; 0 Comments.
- 23 Jun 2008
- Working Paper Summaries
Using Financial Innovation to Support Savers: From Coercion to Excitement
This paper acknowledges the wide range of solutions to the problem of low family savings. Families, and of particular interest to the authors, low-income families, save for a wide variety of purposes, including identifiable reasons such as education and retirement and others that are more broad, like rainy days or emergencies. Given societal pressures to consume, and given the diversity among people, it is unlikely that there is a single solution to the savings problem. Yet a number of programs described by Tufano and Schneider have great promise in supporting household savings. Tufano and Schneider discuss each program from the perspectives of would-be savers as well as from that of other key stakeholders. Key concepts include: Researchers must be sensitive to the needs of low- and moderate-income families, whose concerns about having the resources to cope with short-term emergencies are just as legitimate as needs to plan for a retirement that may be decades away. The continuum of solutions highlighted in this paper ranges from those that force families to save (coercion) to others that seek to work consumers into a frenzy about savings (excitement). These varied solutions emphasize different elements of human behavior or impediments to savings. Some solutions to low savings require massive government policy, some require small changes in existing regulations, and still others are completely market oriented. Some require large subsidies, while others might be profitable on their own. Closed for comment; 0 Comments.
- 19 Jun 2008
- Working Paper Summaries
Accounting Information as Political Currency
The study of accounting and the political process has long been viewed through the political cost hypothesis, the basic premise of which is that firms manage earnings in order to extract first-order benefits (or avoid first-order costs) from regulators. This paper develops and tests a distinct, yet likely, complementary hypothesis: Firms manage reported earnings in order to supply first-order benefits to regulators. Focusing on Democratic and Republican candidates in congressional races in 2004, Ramanna and Roychowdhury test whether the management of accounting information is in some circumstances akin to a political contribution from firms to politicians: in other words, whether accounting information can be used as political currency. The authors predict and find that identified corporate donors to candidates in closely watched races in 2004 managed information related to outsourcing, a hot-button issue in those races. Key concepts include: While corporate donors in general do not exhibit evidence of downward earnings management, corporate donors to candidates in closely watched congressional races exhibit significant evidence of downward earnings management in the second and third quarters of 2004. The evidence of downward earnings management is stronger for firms likely to have greater outsourcing activities. These findings are consistent with firms managing accounting information in circumstances where this is likely to benefit allied politicians, thus supporting the idea of a "political currency" hypothesis. Closed for comment; 0 Comments.
- 18 Jun 2008
- Working Paper Summaries
Evaluating the Impact of SA 8000 Certification
The Social Accountability 8000 Standard (SA 8000), along with other types of certification standards and corporate codes of conduct, represents a new form of voluntary "private-governance" of working conditions in the private sector, initiated and implemented by companies, labor unions, and nongovernmental activist groups cooperating together. There is an ongoing debate about whether this type of governance represents real and substantial progress or mere symbolism. This paper reviews prior evaluations of private codes of conduct governing workplace conditions, including Ethical Trading Initiative's Base Code, Nike's Code of Conduct, and Fair Trade certification. The authors then discuss several best practices that should be employed in future evaluations of such codes of conduct. Key concepts include: An ongoing debate is raging about whether such codes represent substantive efforts to improve working conditions or are merely symbolic efforts that allow organizations to score marketing points and counteract stakeholder pressure by merely filing some paperwork. Evaluations designed with the features described in this paper will help introduce systematic evidence to these important debates. This could help identify which particular codes are best able to distinguish organizations possessing superior working conditions. Such evaluations may shed light on which elements of the codes are most effective, which types of monitoring systems represent best practices, and which areas are most in need of improvement. Closed for comment; 0 Comments.
- 11 Jun 2008
- Working Paper Summaries
Gender in Job Negotiations: A Two-Level Game
The traditional division of labor between the sexes—women managing the private realm and men the public—continues to have an indirect influence on job negotiation outcomes through links between private realm and public realm negotiations. Women's negotiations at work are often constrained by agreements in negotiations at home. There still remains a significant "unexplained" difference in male and female compensation that, according to research in the past several years, cannot be accounted for by gender differences in work commitment, education, and experience, or other considerations such as unionization. The literature on gender in negotiation may offer insights with regard to how negotiation contributes to or could help diminish gender differences in compensation. Bowles and McGinn review two bodies of literature on gender in negotiation—one from psychology and organizational behavior on candidate-employer negotiations, and another from economics and sociology on household bargaining over chores and child care. Key concepts include: The traditional division of labor between the sexes—in which women managed the private realm and men the public—continues to have an indirect influence on job negotiation outcomes through gendered stereotypes feeding into gendered pay expectations. The effects of gender on job negotiations are best understood if negotiations at work are viewed as a two-level phenomenon in which candidates' job outcomes are the product of negotiations with domestic partners as well as prospective employers. Separate bodies of research on gender in candidate-employer negotiations and on gender in intra-household bargaining offer complementary insights into these two levels of negotiation. Taking stock of the practical implications of this literature may help candidates overcome disadvantageous effects of gender on job negotiations and facilitate the creation of greater value for their employers, their domestic partners, and themselves. Closed for comment; 0 Comments.
- 04 Jun 2008
- Working Paper Summaries
Accountability and Inequality in Single-Party Regimes: A Comparative Analysis of Vietnam and China
While both China and Vietnam have experienced rapid annual growth over the past two decades, income inequality has risen more rapidly in China than in Vietnam during the same period. Structural and socio-cultural determinants fail to account for these divergent paths, as nearly every variable predicts higher inequality in Vietnam. This paper by Regina Abrami and colleagues focuses on differences in political institutions to explain these divergent paths. In so doing, it contributes to a growing body of literature describing variation in authoritarian regimes, but focuses on variation within one authoritarian regime type. Key concepts include: Compared with China, Vietnam's institutions empower a larger group of insiders and place far more constraints on the party leadership, both through vertical checks and through semi-competitive elections. As a result, Vietnamese economic policies must consider a larger cross section of society. Vietnam spends a far larger portion of its revenue on transfers, and has been able to engender greater equalization among provinces and individuals. It is still too early to tell whether the development paths in China and Vietnam will converge or diverge. Growing income inequality has pressured the Chinese government to shift its focus from promoting all-out economic growth to solving social tensions. Closed for comment; 0 Comments.
- 04 Jun 2008
- Working Paper Summaries
Coming Clean and Cleaning Up: Is Voluntary Disclosure a Signal of Effective Self-Policing?
This paper demonstrates some of the benefits and limitations of industry self-policing programs. Many self-regulation programs are operated exclusively by the private sector, often in the hope of garnering goodwill with consumers or staving off more stringent government regulation. Less well known are voluntary self-regulation programs operated by government regulators seeking innovative approaches to further regulatory objectives and to stretch shrinking agency budgets. Little is known about the effects of these programs, or how they might contribute to the overall effectiveness of a regulatory regime. Michael Toffel and Jodi Short seek to determine whether the self-policing required under the U.S. Environmental Protection Agency's Audit Policy affects the behavior of regulators and participating facilities and the relationship between them. Specifically, the researchers examine whether self-policing is associated with improved environmental performance at these facilities and whether regulators reduce their scrutiny over self-policing facilities. Key concepts include: Among the facilities that participated in this self-policing program, only those with superior compliance records actually improved their environmental performance. Regulators rewarded self-policing facilities that already had clean past compliance records with an inspection holiday, but they did not significantly decrease scrutiny of self-policing facilities that had poor past compliers. Closed for comment; 0 Comments.
- 29 May 2008
- Working Paper Summaries
Some Neglected Axioms in Fair Division
This paper considers allocation and bargaining problems, and introduces conditions that one might expect fair procedures to satisfy. However, not all conditions one might hope for can be satisfied simultaneously. Furthermore, some apparently plausible and widely proposed axioms and procedures have consequences whose undesirability clearly goes far beyond what can be excused in this way. Thus pitfalls lurk in the field of fair division. Key concepts include: The first condition, "nondiscrimination," asserts that, in an allocation problem, if two agents receive probability shares of the same item and no chance of any other, then their shares should be proportional to their entitlements. The remaining, "monotonicity" conditions apply to two agents and assert that a change in the feasible set that increases the utility cost to one agent of providing any given utility gain to the other should not hurt the first agent, or at least the solution should not change. Closed for comment; 0 Comments.
- 22 May 2008
- Working Paper Summaries
Testing Strategy with Multiple Performance Measures Evidence from a Balanced Scorecard at Store24
To what extent do balanced scorecards provide useful information for testing and validating an organization's strategy? Numerous case studies of balanced scorecard implementations document their use in translating organizational strategies to objectives and measures, communicating strategic objectives to employees, evaluating the performance of business units, and aligning the incentives of employees across business units and functions. There has been comparatively little research, however, on the potential learning and feedback role of balanced scorecards. Analyzing balanced scorecard data from Store24—a privately held convenience store retailer in New England—during the implementation of an innovative but ultimately unsuccessful strategy, this study investigates whether, when, and how information about problems with the firm's strategy was captured in the multiple performance measures of its balanced scorecard. Key concepts include: Store24's balanced scorecard contained useful and timely information for detecting problems in its strategy. The results also suggest that Store24 executives eventually learned about problems with the strategy despite a lack of reliance on such formal analysis. Analysis of the balanced scorecard could have yielded more timely information as well as more detail on why the strategy was not working as planned. Multiple measures in a balanced scorecard might systematically be used to test how well different drivers of performance are working to achieve strategic objectives and superior financial performance. Closed for comment; 0 Comments.
- 08 May 2008
- Working Paper Summaries
Organizational Design and Control across Multiple Markets: The Case of Franchising in the Convenience Store Industry
Chain organizations operate units that are typically dispersed across different types of markets, and thus serve significantly different customer bases. Such "market-type dispersion" is likely to compromise the headquarters' ability to control its stores for two reasons: Relative differences in local conditions make it difficult to monitor a store manager's behavior, and a chain with wide-ranging customer bases will have a harder time serving its customers and will need to rely more heavily on store managers' ability to adapt to local needs. This study identifies market-type dispersion as a factor that is systematically related to firms' organizational design choices. The results may help managers and consultants who deal with control challenges related to a chain's geographic expansion into different markets. Key concepts include: Chains experiencing higher levels of variation in customer demands across different locations are more likely to increase delegation and the provision of incentives through the organizational design choice of franchising. Stores are more likely to be franchised when their location characteristics are more divergent from the most prevalent location characteristics of the chain as a whole. Non-franchisor chains with higher levels of such market-type dispersion tend to decentralize operations to a greater extent. It is also possible that they provide higher variable pay. Closed for comment; 0 Comments.
- 24 Apr 2008
- Working Paper Summaries
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. Key concepts include: Mexican bank accounting standards enjoyed special treatment during most of the 20th century because banking was an industry protected from foreign competition in a relatively closed economy. More transparent bank accounts and stricter accounting processes in Mexico are especially crucial today, in light of the predominantly foreign ownership of the Mexican banking system. The classification of financial operations still varies from country to country. National differences emerge despite the fact that financial instruments, products, and transactions are either very similar or the same worldwide. Legal and regulatory stipulations, accounting history, tax structure, and local business practices create differences in the way financial transactions are recorded in the financial statements. Closed for comment; 0 Comments.
- 22 Apr 2008
- Working Paper Summaries
An Exploration of Technology Diffusion
How long are technology adoption lags? Can cross-country differences in technology adoption lags account for a significant fraction of cross-country GDP disparities? Diego Comin of Harvard Business School and Bart Hobijn of the Federal Reserve Bank of New York develop a new benchmark to understand the diffusion process of individual technologies and the consequences that this has for aggregate growth. This benchmark provides a rationale for the evolution of diffusion measures that include how many units of technology each adopter has adopted in addition to the traditional extensive margin. The model is estimated to obtain measures of adoption lags for 15 technologies in 166 countries. Key concepts include: Adoption lags are large. On average, countries have adopted technologies 47 years after their invention. There is substantial variation across technologies and countries. Over the past two centuries, newer technologies have been adopted faster than old ones. The remarkable development records of Japan between 1870 and 1970 and of the so-called East Asian Tigers in the second half of the 20th century all coincided with a catch-up in the range of technologies used with respect to industrialized countries. Adoption lags account for at least 25 percent of cross-country per capita income differences. Closed for comment; 0 Comments.
- 17 Apr 2008
- Working Paper Summaries
Diffusing Management Practices within the Firm: The Role of Information Provision
Managers face a range of options to diffuse innovative practices within their organizations. This paper focuses on one such technique: providing practice-specific information through mechanisms such as internal seminars, demonstrations, knowledge management systems, and promotional brochures. In contrast to corporate mandates, this "information provision" approach empowers facility managers to decide which practices to actually implement. The authors examine how corporate managers diffused advanced environmental management practices within technology manufacturing firms in the United States. The study identifies several factors that encourage corporate managers to employ information provision, including subsidiaries' related expertise, the extent to which the subsidiaries were diversified or concentrated in similar businesses, and the geographic dispersion of their employees. Key concepts include: This research can help managers better understand when to employ an "information provision" approach to facilitate knowledge transfer within their organizations. Corporate managers in the information and communication technology sector were more likely to use information provision to diffuse advanced environmental management practices when their subsidiaries on average possessed modest levels of related expertise, and when the levels of expertise varied greatly between subsidiaries. An information provision diffusion strategy was used more heavily by corporate managers of firms that were more diversified and where employees dispersed across more facilities. Closed for comment; 0 Comments.
- 10 Apr 2008
- Working Paper Summaries
Where Does it Go? Spending by the Financially Constrained
Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates. Key concepts include: The conclusion that a material fraction of funds was used to pay for necessities suggests that the federal Earned Income Tax Credit program is central to the lives of the poor. Loans tended to be used to obtain necessities, especially funds spent in the first few days of the loans. Consumer advocates who seek to ban settlement products should consider how a ban would affect households' ability to smooth consumption. Similarly, businesses that are pricing and marketing these products should be mindful that the products are not a luxury for the users. These findings document the fairly rapid speed of spending of refunds, which may help policymakers think about the economic stimulus impact of tax refunds and rebates. Closed for comment; 0 Comments.
- 03 Apr 2008
- Working Paper Summaries
Bridge Building in Venture Capital-Backed Acquisitions
The acquisition of new capabilities through the purchase of small venture capital-backed start-ups is a strategy that has been employed by many large technology firms including Cisco, Microsoft, Google, and EMC. Young venture capital-backed companies, for their part, often develop innovative technologies that can be exploited by existing technology companies. The value inherent in these start-ups is typically tied up in the intellectual property or human capital that has been developed during the early stages of the company's life. The opportunity to acquire valuable intangible assets, however, is balanced by the difficulty in assessing the value of the underlying assets. Unlike purchasing companies with substantial operating profits and a long track record of sales, the ability to fully assess the prospects of intangible assets is subject to substantial asymmetric information and uncertainty. This paper explores mechanisms for limiting the asymmetric information that potentially plagues the acquisition of young venture capital-backed companies. The results also shed light on the value that venture capitalists add to their portfolio companies as well as to companies in their venture capital network. Key concepts include: In the bridge-building alternative presented here, the personal relationship between the two firms is critical to conveying value-relevant information about both the target and the acquiring firm. The venture capital investor link between the acquirer and the target has a strong effect on how the purchase transaction is structured, how the market reacts to the announcement of the acquisition, and how the acquirer performs in the stock market in the long run. Recruitment of management and the identification of first-time customers may be improved through bridge building networks that the venture capitalist creates. Bridge building may be important in relationships with service providers and strategic partners. Closed for comment; 0 Comments.
- 01 Apr 2008
- Working Paper Summaries
No Harm, No Foul: The Outcome Bias in Ethical Judgments
Too often, workers are evaluated based on results rather than on the quality of the decision. Given that most consequential business decisions involve some uncertainty, the upshot is that organizations wind up rewarding luck rather than wisdom. From a rational decision-making perspective, people's decisions should be evaluated based on the information the decision maker had available to him or her at the time, and not based on the ultimate results. This paper tests predictions about this effect, known as the outcome bias, in two studies in which participants were asked to consider various ethically questionable behaviors. Participants were also given information about the outcome of such behaviors and were asked to rate the ethicality of the described actions with or without the outcome information. The findings extend prior research in psychology and ethics. Key concepts include: The tendency demonstrated in these two studies might lead people to blame others too harshly for making sensible decisions that have unlucky outcomes. The outcome bias could also partly explain the slow reactions that people tend to have when they observe others' unethical behavior. It is worth trying to understand a decision maker's state of mind. Judging decisions based on their outcomes will wind up condemning too many unlucky people and acquitting too many scoundrels. Closed for comment; 0 Comments.
Communication (and Coordination?) in a Modern, Complex Organization
Coordination, and the communication it implies, is central to the very existence of organizations. Despite their fundamental role in the purpose of organizations, scholars have little understanding of actual interaction patterns in modern, complex, multiunit firms. To open the proverbial "black box" and begin to reveal the internal wiring of the firm, this paper presents a detailed, descriptive analysis of the network of communications among members of a large, structurally, functionally, geographically, and strategically diverse firm. The full data set comprises more than 100 million electronic mail messages and over 60 million electronic calendar entries for a sample of more 30,000 employees over a three-month period in 2006. Key concepts include: Communication is heavily constrained by formal organizational structure: the vast majority of communication occurs within business unit and functional boundaries, not across them. This points to the importance of drawing the right organizational boundaries. Women, mid- to high-level executives, and members of the executive management, sales, and marketing functions are most likely to participate in cross-group communications. These individuals provide a bridge for distant groups in a company's social structure. Closed for comment; 0 Comments.