- 03 Apr 2012
- Working Paper Summaries
Clear and Present Danger: Planning and New Venture Survival Amid Political and Civil Violence
Strategy theory often takes for granted the role of state institutions in providing stable, predictable environments in which new firms are founded. Yet, many states around the world (such as Iraq, Sudan, South Sudan, Syria, and the Democratic Republic of Congo) lack political institutions of sufficient strength to ensure personal safety and public order, thereby creating environments where civil and political violence can ferment. This paper explores the impact of such violence on new venture processes. Results show that comprehensive planning was negatively correlated with venture survival in such environments. While there are implications for strategy theory, the study is also relevant to entrepreneurs and organizations promoting new venture planning in less-developed countries, particularly those experiencing political and civil turmoil. Currently, prospective entrepreneurs are taught the importance of business planning by both universities and non-governmental organizations that offer entrepreneurial training. But this study suggests that such training will have mixed effects on new venture survival, depending on the extent to which these entrepreneurs pursue ventures in violent and uncertain environments. In such contexts where governments fail to maintain public safety and order, these training programs may actually increase the likelihood of new venture failure. Key concepts include: This paper theorizes and tests how contexts characterized by weak political institutions and ensuing high levels of violence create uncertain and unpredictable environments that alter entrepreneurial behavior and disrupt resource flows and organizational routines, thereby increasing new venture failure rates. In contexts of high uncertainty as a result of violence, the benefits of comprehensive planning vanish as prior predictions become obsolete and even harmful to venture survival. Strategy theories often assume specific types of environments. But it is important to consider carefully the macro institutional factors. Closed for comment; 0 Comments.
- 06 Mar 2012
- Working Paper Summaries
Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China
Economists have argued that the "Great Divergence" between the developed and underdeveloped world in the nineteenth century was reinforced—if not caused—by rapid improvements in schooling that occurred in the advanced economies. Explaining differences in economic development today may hinge on understanding why most societies failed to develop adequate primary education in the late nineteenth and early twentieth centuries. This study sheds new light on the comparative experiences of Brazil, Russia, India, and China (BRIC) during the formative years of their primary education systems. Key concepts include: Extreme decentralization in environments without democracy or accountability for local officials may lead to unequal educational outcomes within countries, as elites in certain provinces may choose to spend less on public goods, such as education. Brazil, Russia, India, and China were among the largest and poorest states in the world in the early twentieth century, and their low level of development limited investments in mass schooling. Brazil and Russia—marginally richer and possessing slightly broader forms of elite democracy—saw greater investments in public primary schooling than India and China. Central authorities in each BRIC country mostly absolved themselves of the responsibility of providing primary education. The provision of education was frequently decentralized to lower levels of government, where the absence of accountable and representative democracy allowed local elites to capture political institutions, limit redistributive taxation, and dictate how public resources were allocated. Variation among elites or in the political and economics conditions they faced (whether across space or over time) generated multiple schooling equilibriums across and within BRIC. Closed for comment; 0 Comments.
- 24 Jan 2012
- Working Paper Summaries
What Do Development Banks Do? Evidence from Brazil, 2002-2009
Private firms in developed and developing markets find themselves competing with the so-called "national champions"—private and state-owned enterprises that receive entitlements, mostly trade protections and/or subsidized credit from the government. Most of these national champions get support by proposing long-term projects with large capital investment that would usually not be easy to fund using private capital. This paper, written by Research by Sergio G. Lazzarini, Aldo Musacchio, Rodrigo Bandeira-de-Mello, and Rosilene Marcon, uses evidence from Brazil to look at what happens to firm performance, investment, and financial expenditures when companies get subsidized credit from the Brazilian National Bank of Economic and Social Development, known as BNDES. Key concepts include: BNDES is one of the largest development banks in the world, but there was no previous comprehensive study tracking the effects of its loans and equity investments. This study finds that BNDES' loans and equity do not seem to affect firm-level operational performance and investment decisions, although the loans and equity do reduce firm-level cost of capital due to the governmental subsidies accompanying loans. Examining the selection process through which BNDES' capital is allocated to firms, the authors find that BNDES apparently selects firms with good operational performance but also provides more capital to firms with political connections (measured as campaign donations to politicians who won an election). Even so, there is no evidence that BNDES is systematically bailing out firms. In general, BNDES appears to be selecting firms with capacity to repay their loans, as regular commercial banks would do. Closed for comment; 0 Comments.
- 03 May 2011
- Working Paper Summaries
Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China, 1880-1930
In deducing why some nations are more developed than others, it makes sense to look at their educational systems. While comparative studies on the subject focus either on developed nations or on differences between developed and developing economies, this paper hones in four of the largest developing nations at the turn of the twentieth century: Brazil, Russia, India, and China (BRIC). Research was conducted by Aldo Musacchio of Harvard Business School, Laktika Chaundhary of Scripps College, Steven Nafziger of Williams College, and Se Yan of Peking University. Key concepts include: BRIC comprised half of the world's population in 1900, but only 14, 21, 9, and 4 percent of school-age children in Brazil, Russia, India, and China, respectively, were enrolled in primary school, compared with more than 75 percent in Germany, the United Kingdom, and the United States. In BRIC, decentralized political structures and lack of accountability led to situations in which public resources were funneled to educate the elites. Meanwhile, poor communities had to rely on insufficient private contributions to fund their schools. However, in many areas, the elites supported the expansion of mass education, either because they wanted to produce skilled labor for their companies or because they perceived political benefits from an educated population. Their results explain why it has been so hard for BRIC countries to catch up with the education levels developed countries in the twentieth century. While the United States, Germany, and the United Kingdom had two hundred years to get to their current levels of education, BRIC countries had a late start. Additionally, the paper highlights the importance of having centralized education balancing education deficiencies in distant localities or in provinces in which elites that are not interested in educating the masses capture the government. Closed for comment; 0 Comments.
- 11 Feb 2011
- Working Paper Summaries
Leviathan as a Minority Shareholder: A Study of Equity Purchases by the Brazilian National Development Bank (BNDES), 1995-2003
There is a trend in many developing countries toward governments buying minority stakes in private companies. While there has been ample discussion on the wisdom of such actions, little has been said about how governments can make such interventions work better. This paper aims to fill that void, using data from the Brazilian National Development Bank (BNDES). Research was conducted by Sergio G. Lazzarini of the Insper Institute of Education and Research, and Aldo Musacchio of Harvard Business School. Key concepts include: Having a development bank as a shareholder alleviates the capital constraints that publicly traded companies face. Having a minority rather than a majority stake reduces the likelihood of political interference on the part of the development bank. However, this benefit may be thwarted when the bank targets companies in which the government already has close ties, such as relationships with state-owned business groups. Having BNDES as a minority shareholder does not appear to improve a company's access to loans. Governments considering minority equity stakes as an industrial policy tool should avoid pyramidal groups with poor governance. Closed for comment; 0 Comments.
- 20 Dec 2010
- Research & Ideas
Panama Canal: Troubled History, Astounding Turnaround
In their new book, The Big Ditch, Harvard Business School professor Noel Maurer and economic historian Carlos Yu discuss the complicated history of the Panama Canal and its remarkable turnaround after Panama took control in 1999. Q&A with Maurer, plus book excerpt. Closed for comment; 0 Comments.
- 29 Sep 2010
- Working Paper Summaries
Medium Term Business Cycles in Developing Countries
Business cycle fluctuations in developed economies tend to have very strong effects on developing countries, says a new study by Harvard Business School professor Diego Comin, Norman Loayza and Luis Serven of the World Bank, and Farooq Pasha of Boston College. The researchers have developed a quantitative model capable of explaining the amplitude and persistence of the effect that U.S. shocks have on Mexico's macroeconomic variables. The model is then used to provide an account of the drivers of business fluctuations in developing economies. Key concepts include: U.S. shocks have a larger effect on Mexico than on the U.S. in terms of GDP. The slow diffusion of technologies to Mexico generates a hump-shaped response in Mexican output to U.S. shocks. Mexico's consumption is more volatile than its output. The model can be a useful starting point for obtaining a better understanding of business cycle fluctuations in developing countries in general, and may be helpful for researchers wishing to introduce other relevant linkages, such as remittances or international capital flows other than FDI. Closed for comment; 0 Comments.
- 21 Jul 2010
- Working Paper Summaries
Foreign Entry and the Mexican Banking System, 1997-2007
What are the effects of foreign bank entry in developing economies? In recent years, governments around the world have been opening up their banking systems to foreign competition. In Mexico, for example, the market share of foreign ownership of banks increased fivefold between 1997 and 2007. In this paper, Stanford professor Stephen Haber and HBS professor Aldo Musacchio describe their detailed study of the impact of foreign entry in Mexico during that period. Overall, results suggest that while foreign entry in Mexico is associated with greater stability of the banking system, it has not increased the availability of credit, and foreign entry is not a solution to a property rights environment that makes contract enforcement costly. Key concepts include: Foreign entry in Mexico is associated with greater banking system stability. Foreign entry, however, has not increased the availability of credit. Mexican banks that were sold to foreign multinationals were invested in housing loans with a high risk of default and a low rate of interest. Foreign purchasers appear to have shifted the loan portfolio away from these investments. However, foreign entry, whether by mergers and acquisitions or by greenfield banks, has not led to an increase in financial intermediation. At the end of 1997, GDP was 18 percent, and 12 years later it had grown to only 23 percent, low by any comparative standard. In Mexico, foreign entry is not a solution to a property rights environment that makes contract enforcement costly. Closed for comment; 0 Comments.
- 30 Jun 2010
- Working Paper Summaries
The Empire Struck Back: The Mexican Oil Expropriation of 1938 Reconsidered
The Mexican petroleum expropriation of 1938 looms large as the beginning of Latin American resource nationalism and the apogee of America's "Good Neighbor" policy. In Mexico, the expropriation is viewed as a patriotic triumph, in which the federal government seized control of the country's most valuable natural resource. In the U.S., the temperate reaction of the Roosevelt Administration is seen as the decisive break with Washington's imperial relationship towards Latin America. Washington "curbed its finance capital," it is said, and downgraded the protection of American overseas private investments. In this paper, HBS professor Noel Maurer explains how the actual historical record diverges substantially from the accepted view. Key concepts include: The oil companies developed political strategies that maneuvered the very reluctant Roosevelt Administration into defending their interests. A detailed understanding of the key players in the executive branch was fundamental to these strategies. The U.S. government succeeded using sanctions and the threat of sanctions to force Mexico to compensate—in fact, overcompensate—American companies. The Mexican oil industry was in decline by the 1930s for geological (not political) reasons. As a result, the American oil companies with interests in Mexico were in financial distress during the same period. The oil companies deliberately provoked the expropriation, because they could not afford to give in to union demands to control all hiring and firing. The expropriation did not increase the Mexican government's petroleum revenues or the wages paid to Mexican oil workers. The key difference between the environment of the 1930s and today is that in the 1930s, domestic courts still refused to use their authority against foreign governments. Today, that is no longer the case. Closed for comment; 0 Comments.
- 17 May 2010
- Research & Ideas
What Brazil Teaches About Investor Protection
When Brazil entered the 20th century, its companies were a model of transparency and offered investor protections that government did not. Can our financial regulators learn a lesson from history? HBS professor Aldo Musacchio shares insights from his new book. Key concepts include: Companies can overcome the shortcomings of the legal system in which they operate by offering protections to investors. Corporate disclosure is perhaps the most important necessity for investor confidence. Policymakers should seek a balance between regulation, financial development, and economic growth. Closed for comment; 0 Comments.
- 29 Apr 2010
- Working Paper Summaries
The Great Leap Forward: The Political Economy of Education in Brazil, 1889-1930
In 1890, with only 15 percent of the population literate, Brazil had the lowest literacy rate among the large economies in the Americas. Yet between 1890 and 1940, Brazil had the most rapid increase in literacy rates in the Americas, catching up with and even surpassing some of its more educated peers such as Mexico, Colombia, and Venezuela. This jump in literacy was simultaneously accompanied by a brisk increase in the number of teachers, number of public schools, and enrollment rates. Why were political elites in Brazil willing to finance this expansion of public education for all? André Martínez-Fritscher of Banco de México, Aldo Musacchio of HBS, and Martina Viarengo of the London School of Economics explain how state governments secured funds to pay for education and examine the incentives of politicians to spend on education. They conclude that the progress made in education during these decades had mixed results in the long run. Key concepts include: Competition in national elections and a literacy requirement may have provided the right incentives for state political parties and state politicians to spend on education in a way that increased literacy rates in a significant way over the period studied. Brazil started from an extremely low base and ended in what today would be considered a low level of literacy as well (around 40 percent of the population). Between 1889 and 1930 there was significant progress in the provision of elementary education in Brazil. It was to a large extent a consequence of the fact that some states got more taxation powers and had the obligation to spend on public education. Positive trade shocks can be converted into long-term development if there is electoral competition, and economic assets are not concentrated in a few hands. Expenditures on education between 1889 and 1930 altered the development path of some states and changed their relative rankings compared to other states in a somewhat permanent way. Closed for comment; 0 Comments.
- 19 Apr 2010
- Research & Ideas
The History of Beauty
Fragrance, eyeliner, toothpaste—the beauty business has permeated our lives like few other industries. But surprisingly little is known about its history, which over time has been shrouded in competitive secrecy. HBS history professor Geoffrey Jones offers one of the first authoritative accounts in Beauty Imagined: A History of the Global Beauty Industry. Closed for comment; 0 Comments.
- 10 Nov 2009
- Working Paper Summaries
Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930
Do endowments matter in determining the cost of capital for a country or state? Endowments, according to Banco de México's André C. Martínez Fritscher and HBS professor Aldo Musacchio, are the conditions that determine what kind of commodities can be produced and exported in a determined geographical region. Studying the determinants of the risk premium of the bonds issued by Brazilian states between 1891 and 1930—a period of extreme decentralization of fiscal revenues and expenditures in Brazil—the researchers find that risk premia are highly correlated with state public revenue per capita. Because these revenues came, to a large extent, from the taxes states levied on commodity exports, the researchers argue that endowments mattered to determine the cost of capital for states. Key concepts include: Between 1891 and 1930, the cost of capital for Brazilian states and the probability of issuing state debt in international capital markets were highly correlated with state revenues per capita. The relationship among endowments and the cost of capital for states or the capacity to issue debt may have led to marked differences in access to capital and in the capacity that states had to spend on public goods. Since differences in expenditures on public goods can lead to market differences in economic development among states, the setup of the 1891 Constitution promoted some of the regional inequality that is still observed today in Brazil. Closed for comment; 0 Comments.
- 05 Nov 2009
- Working Paper Summaries
Medium Term Business Cycles in Developing Countries
At the end of 2007, the U.S. economy entered a recession that, by the first quarter of 2009, had reduced U.S. GDP by 2.2 percent. The Mexican economy was showing no sign of distress until the U.S. recession began. Despite that, Mexican GDP declined by 7.8 percent during the same period. This and similar episodes from other developing countries motivate several questions: Why do shocks to developed economies affect developing countries to such an extent? Does the response of developing economies to shocks that originate in their developed neighbors account for the larger volatility of developing economies? More broadly, what ingredients do macroeconomic models need to incorporate in order to account for the unique features of economic fluctuations in developing economies? To investigate these questions, the researchers developed a two-country asymmetric model to study the business cycle in developing countries. The mechanisms introduced in the model should provide an accurate account of business cycles in other developing countries. Key concepts include: First, U.S. shocks have a larger effect on GDP in Mexico than in the United States. This result is driven by the larger amplitude of fluctuations in Mexican productivity and by the subsequent effects on investment. This finding has important implications for the sources of Mexican volatility. Second, the slow diffusion of technologies to Mexico results in U.S. shocks having more persistent effects on Mexico than in the United States. This result explains the observed lead of U.S. GDP over the medium-term component of Mexican output and the relative price of capital. Third, consumption is no less volatile than output in Mexico. The researchers' model accounts for this stylized fact because a Mexican recession slows down the diffusion of technologies to Mexico, generating a gradual increase in the price of installed capital. As a result, Mexican interest rates increase despite the lower marginal product of capital, and consumption drops precipitously. Closed for comment; 0 Comments.
- 19 Jun 2009
- Research Event
Business Summit: The Evolution of Agribusiness
Agribusiness has come to be seen not just as economically important, but as a critical part of society. The future for this massive industry will be both exciting and complex. 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.
- 14 Feb 2008
- Working Paper Summaries
Laws vs. Contracts: Legal Origins, Shareholder Protections, and Ownership Concentration in Brazil, 1890-1950
The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. The case of Brazil is particularly interesting because, in Latin America before World War I, it boasted the second-largest equity market and largest number of traded companies. As HBS professor Aldo Musacchio shows, the considerable variation of investor protections over time at the country level, and even at the company level, urges cautions against notions about the persistency of institutions, especially of legal traditions. Key concepts include: Many large Brazilian corporations at the turn of the 20th century induced small investors to buy equity by choosing bylaws that distributed power in a more democratic way among shareholders. Maximum vote provisions, and to a lesser degree graduated voting scales, were correlated with lower concentration of ownership and voting power. The shareholder protections in national laws that seem to have mattered most were those that facilitated the private monitoring of corporate activities by requiring corporations to publish important financial information. It is possible for companies to break with the institutional environment in which they operate. It is unlikely that the institutions relevant to the expansion of equity markets and development of large multidivisional corporations were determined hundreds of years ago, either at the time of colonization or when countries adopted their current legal systems. Closed for comment; 0 Comments.
- 09 Jan 2008
- Working Paper Summaries
A Resource Belief-Curse: Oil and Individualism
Capitalism is not as widespread as economists would hope. Data from surveys of public opinion, as well as on the distribution of political parties, confirm the idea that capitalism doesn't flow to poor countries. In some countries, anti-market sentiment has increased in recent years, a period where the price of oil and other primary commodities have soared. This combination of anti-market sentiment and high oil prices has led to renegotiations of oil contracts and even nationalizations in some countries such as Bolivia and Venezuela. It is tempting for economists trained in the theory of political capture to argue that this is just another instance where special interests exploit the circumstances to make an extra dollar. Given that these nationalizations are often popular with the majority of voters, however, the researchers resist this temptation and ask if there are explanations where a positive correlation emerges between voter anti-market sentiment and dependence on oil. Key concepts include: Antipathy toward markets has become particularly acute in Latin America. In Bolivia, Venezuela, Ecuador, and Argentina, policymakers have focused their anti-market energies and attention on natural resource companies, in several cases even renegotiating their contracts. A connection between dependence on oil and receptivity to populist rhetoric is both natural in economic models and has some support in the data. Closed for comment; 0 Comments.
- 28 May 2007
- Research & Ideas
How Property Ownership Changes Your World View
When Argentine squatters were granted property title it changed the way they viewed the world. HBS professor Rafael Di Tella discusses his research into how property ownership affects our beliefs and also our attitudes toward capitalism. Closed for comment; 0 Comments.
Leviathan in Business: Varieties of State Capitalism and their Implications for Economic Performance
State capitalism, the widespread influence of the government in the economy, still looms large in developed and developing countries after over two decades of extensive state reform and privatization. Research by Aldo Musacchio and Sergio G. Lazzarini documents the extent and reach of state capitalism around the world and explores the economic implications of these new forms of state capitalism. There are three key arguments: First, state capitalism in the twenty-first century combines majority ownership of state-owned enterprises with a hybrid form that includes minority equity investments as well as other forms of support for private firms (such as subsidized loans). Second, all of those forms are present around the world, both in rich and poor countries, and in most cases they co-exist. Although some countries appear to have a prevalence of the minority investor mode while other countries emphasize the majority mode, in most cases the two modes jointly occur. Third, the emergence of those modes is explained by a host of environmental, political, and historical factors; and the economic performance of each mode depends on certain contingencies that should affect their benefits and costs, such as the economic distortions that they may generate. Key concepts include: The form of state capitalism prevailing in the twenty-first century is different from that observed in the second half of the twentieth century. Governments, particularly in emerging markets, have justified the rise of such forms of hybrid capitalism as a way to solve market failures. Private companies, in contrast, see the rise of new state-owned enterprises, firms with minority government ownership, and private companies backed by loans of development banks as threats. Whether forms of state capitalism are regarded as benign or pernicious, very little has been known about these new forms of government intervention. Questions remain about the various institutional mechanisms by which states exercise control, why state capitalism reemerged and in which form, and its effects on both firm performance and state governance. Closed for comment; 0 Comments.