- 13 Jun 2014
- Op-Ed
World Cup Soccer: 770 Billion Minutes of Attention
FIFA stands to generate $23 billion in revenue from World Cup soccer over the next few weeks. Clearly the organization understands "Attention Economics," says marketing expert Thales Teixeira. Open for comment; 0 Comments.
- 28 May 2014
- Research & Ideas
Building Histories of Emerging Economies One Interview at a Time
Much of modern business history has been written on experiences in the United States, Europe, and Japan. Now, the unheard stories of emerging markets in Africa, Asia, and Latin America are being told on a new website by the Business History Initiative. Open for comment; 0 Comments.
- 25 Apr 2014
- Research & Ideas
To Pay or Not to Pay: Argentina and the International Debt Market
Argentina's escalating financial crisis seems rocketing toward disaster. The fix? Finance Professor Laura Alfaro, who served as Minister of National Planning and Economic Policy in Costa Rica, recommends a radical solution sure to anger banks and fund managers: absolute sovereign immunity, Open for comment; 0 Comments.
- 15 Apr 2014
- Research & Ideas
Calderón: Economic Arguments Needed to Fight Climate Change
Former President of Mexico Felipe Calderón says the United States Congress and Chinese coal plants are the biggest obstacles to fixing climate change. Open for comment; 0 Comments.
- 01 Apr 2014
- Research & Ideas
When Do Alliances Make Sense?
Analyzing drilling leases in the Gulf of Mexico, John Beshears explores a question as old as business itself: When does it pay to make an alliance? Open for comment; 0 Comments.
- 19 Mar 2013
- First Look
First Look: March 19
When daily deals misfire on merchants ... Lessons of war for negotiators ... The unexpected effect of electronic monitoring of criminals. Closed for comment; 0 Comments.
- 14 Mar 2013
- Working Paper Summaries
No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax
This research investigates the effectiveness of the Value Added Tax in facilitating tax enforcement and sheds light on the role of information and third-party reporting for taxation. Drawing on results from two field experiments with over 400,000 Chilean firms, it provides evidence for the self-enforcing power of the paper trail in the VAT and for spillovers in tax enforcement through firms' trading networks more generally. The findings also show that while the VAT paper trail seems to be highly effective in Chile overall, the mere existence of a VAT system, in the absence of credible deterrence, does not lead to self-enforcement. Results have implications for public finance in developing countries and for tax policy in general. Key concepts include: A significant part of the higher evasion among smaller firms may be driven by a weaker paper trail. Forms of taxation such as the VAT, which leave a stronger paper trail and thereby generate more information for the tax authority, provide an advantage for tax collection over other forms of taxation, such as a retail sales tax, where this is not the case. Increasing the audit probability of firms suspected of evasion generates spillovers up the VAT paper trail that lead to an increase of their suppliers' tax payments. This suggests that tax authorities should take spillovers into account, when choosing which firms to audit. Closed for comment; 0 Comments.
- 30 Jan 2013
- Working Paper Summaries
These Are the Good Old Days: Foreign Entry and the Mexican Banking System
In this paper, the authors take on an aspect of contract design that is fundamental to explain economic development and financial stability. They study the incentives contained in the "partnership" contract between bankers, the government, depositors, and bank shareholders, and examine how the incentives that come out of that contract explain the volatility of the banking system. The main insight is that bankers in developing countries with weak property rights demand rents (such as high barriers to entry) and lax regulation, as a way to compensate them for the political risk they face of being expropriated by the government or used for policy objectives (for example, if the government forces banks to buy its debt). Depositors, on the other hand, demand deposit insurance in case bankers are reckless, while minority shareholders demand high returns to compensate for the risk of insider lending or reckless behavior on the part of bankers. Then, the combination of high barriers to entry, lax regulation, and deposit insurance induces bankers to take on more risks to try to maximize their rents, and does not encourage depositors and minority shareholders to monitor bankers either (as the government limits downside risk for them). This dynamic, in the case of Mexico, led to frequent banking crises between the 1970s and the 1990s. This was the case until 1997, when the government allowed foreign bankers take over the largest domestic commercial banks and improved the monitoring of banks. This increased the stability of the system. There has not been a crisis since then, partly because of improvements in regulation and partly because foreign bankers have been more conservative, not only because they have standardized procedures to deal with risk but also because they are closely monitored by their parent banks abroad. Key concepts include: Stability in the Mexican banking from the 1920s through the 1960s came at a price: Commercial banks could shift risk to government-owned development banks and hence to taxpayers. From the 1970s until 1997, the Mexican banking system was extraordinarily unstable. This was due to the tenuous partnership between the Mexican government and Mexico's bankers. These days, Mexico's foreign bankers have much to lose and little to gain from being opportunistic partners. When the government opened the market, it reformed accounting standards. Mexico's foreign bankers are subject to much greater oversight. Foreign bankers have protections against the Mexican government that Mexican bankers do not have. Regardless of their national origin, Mexico's bankers can no longer be expropriated with the stroke of a pen. Closed for comment; 0 Comments.
- 28 Jun 2012
- Working Paper Summaries
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.
- 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.
The Real Effects of Capital Controls: Financial Constraints, Exporters, and Firm Investment
The massive surge of foreign capital to emerging markets in the aftermath of the global financial crisis of 2008-2009 has led to a renewed debate about the merits of international capital mobility. To stem the flow of capital and manage the attendant risks, several emerging markets have recently imposed taxes or controls to curb inflows of foreign capital. The case for capital controls usually rests on measures designed to mitigate the volatility of foreign capital inflows. However, controls also have an implicitly protectionist aspect aimed at maintaining persistent currency undervaluation. In this paper the authors investigate the effects of capital controls on firm-level stock returns and real investment using data from Brazil. Brazil is important because it has taken center stage as a country that has implemented extensive controls on capital flows between 2008 and 2012. Among the authors' key findings, real investment at the firm level falls significantly in the aftermath of controls. Overall, capital controls can increase market uncertainty and reduce the availability of external finance, which in turn can lower investment at the firm level. Capital controls disproportionately affect small, non-exporting firms, especially those more dependent on external finance. Key concepts include: Capital controls policy measures range from large-scale efforts to reduce the volatility of foreign capital inflows to a protectionist stance on maintaining the competitiveness of the external sector. The intended purpose of controls notwithstanding, evidence in this paper suggests that capital controls can increase market uncertainty and reduce the availability of external finance, which in turn can lower investment at the firm level. Controls affect small, non-exporting firms most, especially those more dependent on external finance. Closed for comment; 0 Comments.