- 20 Apr 2009
- Research & Ideas
Misgovernance at the World Bank
Board members may be inclined to advance their own interests at voting time. This appears true for the World Bank's Board of Executive Directors, too. The problem? Many countries are being shut out of development funding. New research by Harvard Law School student Ashwin Kaja and HBS professor Eric Werker tells why misgovernance at the World Bank should be corrected. Key concepts include: A majority of the 185 World Bank member countries never or rarely get a seat on the Board of Executive Directors. Kaja and Werker's research shows that a developing country sitting on the board may see its normal funding levels doubled during its service on the board. Appropriations committees at other large international organizations should be scrutinized for similar conflicts of interest. Closed for comment; 0 Comments.
- 20 Apr 2009
- Working Paper Summaries
Corporate Misgovernance at the World Bank
This paper examines the politics of corporate governance at the world's largest appropriations committee, the World Bank's Board of Executive Directors, and exposes a weakness in the design of the World Bank's decision-making structure. Any large public organization faces a challenge of representation and management. Since all decisions cannot be made by all members, founders often grant a more nimble body with decision-making powers. But representatives on the decision-making body may face a temptation to govern in the interests of their own wallet or narrow constituency rather than in the interests of the larger body. In 2008, the Bank's two primary component institutions—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)—committed nearly $25 billion in loans and grants through some 300 development projects around the globe. Where did it go? By exploring the political dynamics and corporate governance of an international appropriations committee, we not only learn about international organizations but also the nature of the international system itself. Key concepts include: A majority of World Bank member countries never or rarely get a seat at the table. The Executive Board is used as a platform to channel more or greater Bank loans and grants to the home countries of the directors. Countries receive a large increase in Bank loans and grants during years when they have a seat on the board. On average, a developing country serving on the board can expect a doubling of its normal funding levels. In absolute terms, board membership is rewarded with a nearly $60 million bonus, on average. Finding that countries can take advantage of their position of power has implications for other international appropriations committees like the European Union, International Monetary Fund, regional development banks, and United Nations agencies. Closed for comment; 0 Comments.
- 17 Apr 2009
- Working Paper Summaries
The Investment Strategies of Sovereign Wealth Funds
The role of sovereign wealth funds (SWFs) in the global financial system has been increasingly recognized in recent years, and many reports suggest that SWFs are often employed to further the geopolitical and strategic economic interests of their governments. The resources controlled by these funds—estimated to be $3.5 trillion in 2008—have grown sharply over the past decade. Projections, while inherently tentative due to the uncertainties about the future path of economic growth and commodity prices, suggest that they will be increasingly important actors in the years to come. Despite this significant and growing role, financial economists have devoted remarkably little attention to these funds. The lack of scrutiny must be largely attributed to the deliberately low profile adopted by many SWFs, which makes systematic analysis challenging. Bernstein, Lerner, and Schoar analyze how SWFs vary in their investment styles and performance across various geographies and governance structures. Taken as a whole, results suggest that high levels of home investments by SWFs, particularly those with the active involvement of political leaders, are associated with trend chasing and worse performance. Key concepts include: Sovereign wealth funds (SWFs) present an ideal object of investigation to understand the interaction between finance and political economy. The direct private equity investments analyzed here are one of the few dimensions of SWF investments on which it is possible to obtain comprehensive information. SWFs seem to engage in a form of trend chasing, since they are more likely to invest at home when domestic equity prices are higher, and invest abroad when foreign prices are higher. SWFs where politicians are involved have a much greater likelihood of investing at home than those where external managers are involved. Funds with politicians involved invest in higher P/E (price earnings ratio) industries, which have a negative valuation change in the year after the investment. Much research remains to better understand the underlying investment objectives of SWFs, their investment strategies, and their organizational differences, as well as the constraints they face due to internal and external pressures. Closed for comment; 0 Comments.
- 16 Apr 2009
- Working Paper Summaries
Phenomenological Assumptions and Knowledge Dissemination within Organizational Studies
Field-wide integration of knowledge generated by subfield specialists is critical for new discoveries and for a more comprehensive and accurate understanding of complex phenomena. In spite of the value of broadly disseminating knowledge within the social and physical sciences, scholarly discourse tends to be contained within subfields of research. Further constraining innovation and understanding, knowledge dissemination between academics and practitioners or clinicians is often limited and inaccurate. In this article, UCLA professor Corinne Bendersky and HBS professor Kathleen L. McGinn introduce "phenomenological assumptions"—revealed beliefs about the fundamental qualities of the phenomenon under investigation and its relationship to the environment in which it occurs—as barriers limiting the integration of knowledge generated within a subfield into the broader intellectual discourse of its field. Key concepts include: Explicating assumptions underlying academic research may make new information more transparent and easily adopted. Assumptions can pose a barrier limiting the integration of knowledge generated within a subfield into the broader intellectual discourse of its field. Specifically, assumptions that negotiations are one-shot "at the table" interactions make it more difficult for non-negotiations organizational scholars to recognize and appreciate the relevance of the findings to broader organizational research. The negotiation studies in this data set, spanning 15 years of published research in top-tier journals, seldom were explicit about the assumptions made and seldom acknowledged reasonable boundary conditions for their findings. Closed for comment; 0 Comments.
- 16 Apr 2009
- Working Paper Summaries
Gray Markets and Multinational Transfer Pricing
Gray market goods are brand-name products that are initially sold into a designated market but then resold through unofficial channels into a different market. Gray markets can arise when transaction and search costs are low enough to allow products to "leak" from one market segment back into another. Examples of industries with active gray markets include pharmaceuticals, automobiles, and electronics. Understandably, reactions to gray market encroachment are mixed. On the one hand, consumer advocates and governments have applauded the increasing role that gray markets have played in improving competition for domestic goods. On the other hand, multinationals have decried the increasing role of gray markets in the economy, with an estimated $40 billion in cannibalized sales resulting from gray markets in the information technology sector alone. This study investigates the optimal price of a multinational's internal transfers and the consequences of regulations mandating arm's-length transfer pricing. Key concepts include: A shift to arm's-length transfer pricing erodes domestic consumer surplus by making the gray market less competitive domestically. In the presence of a gray market, the transfer price that maximizes a multinational's profits may also be the same one that maximizes the social welfare of the domestic economy that houses it. Arm's-length standard enforcement efforts targeting multinationals that observe little product leakage from foreign markets or that operate in domestic markets that are sufficiently competitive may lead to net welfare gains for the domestic economy. At the same time, focusing arm's-length standard enforcement efforts on multinationals that work in industries where gray markets provide the only means of domestic competition may make the domestic economy worse off. Closed for comment; 0 Comments.
- 14 Apr 2009
- First Look
- 13 Apr 2009
- Research & Ideas
Kind of Blue: Pushing Boundaries with Miles Davis
Since it hit the airwaves half a century ago, Kind of Blue by Miles Davis has influenced the hearts and minds of jazz fans everywhere. Its songs became instant classics, and it has also converted many a nonfan to appreciate the music's subtlety and complexity. In a new business case, HBS professor Robert D. Austin and Carl Størmer highlight the takeaways for thoughtful managers and executives from this story of creation and innovation. Closed for comment; 0 Comments.
- 09 Apr 2009
- Working Paper Summaries
The Economics of Structured Finance
This paper investigates the spectacular rise and fall of structured finance. HBS professor Joshua Coval, Princeton professor Jakub Jurek, and HBS professor Erik Stafford begin by examining how the structured finance machinery works. They construct simple examples of collateralized debt obligations (CDOs) that show how pooling and tranching a collection of assets permits credit enhancement of the senior claims. They then explore the challenge faced by rating agencies, examining, in particular, the parameter and modeling assumptions that are required to arrive at accurate ratings of structured finance products. They conclude with an assessment of what went wrong and the relative importance of rating agency errors, investor credulity, and perverse incentives and suspect behavior on the part of issuers, rating agencies, and borrowers. Key concepts include: Small errors that would not be costly in the single-name market are significantly magnified by the collateralized debt obligation structure, and can be further magnified when CDOs are created from the tranches of other collateralized debt obligations, as was common in mortgage-backed securitizations. Explicitly acknowledging that parameters are uncertain would go a long way towards solving this problem. However, adopting this perspective on parameter uncertainty means far fewer AAA-rated securities can be issued and therefore present fewer opportunities to offer investors attractive yields. Investors need to recognize the fundamental difference between single name and structured securities in terms of exposure to systematic risk. Unlike traditional corporate bonds, whose fortunes are primarily driven by firm-specific considerations, the performance of securities created by tranching large asset pools is strongly affected by the performance of the economy as a whole. Senior structured finance claims have the features of economic catastrophe bonds, in that they are designed to default only in the event of extreme economic duress. Because credit ratings do not indicate conditions in which default is likely to happen, they do not capture exposure to systematic risks. The lack of consideration for certain types of exposure reduces the usefulness of ratings, no matter how precise they are made to be. Closed for comment; 0 Comments.
- 08 Apr 2009
- Research & Ideas
Clayton Christensen on Disrupting Health Care
In The Innovator's Prescription, Clayton Christensen and his coauthors target disruptive innovations that will make health care both more affordable and more effective. From the HBS Alumni Bulletin. Closed for comment; 0 Comments.
- 07 Apr 2009
- First Look
- 06 Apr 2009
- Research & Ideas
Cheers to the American Consumer
The willingness by American consumers to adopt new products, processes, and services more rapidly than those in other countries may be the most important enabler of entrepreneurship and innovation in America, says marketing professor John Quelch. Key concepts include: America's "venturesome consumer" may be the most important enabler of entrepreneurship and innovation in the United States. Six characteristics separate consumers and entrepreneurs in America from those in other countries. Closed for comment; 0 Comments.
- 03 Apr 2009
- What Do You Think?
How Much Obsolescence Can Business and Society Absorb?
This month's question brought out both the poets and the engineers among respondents. The rapid pace of new technology adoption within organizations implies change for management and society, says HBS professor Jim Heskett. How does change affect the open sharing of information? (Forum now closed; next forum begins May 1.) Closed for comment; 0 Comments.
- 03 Apr 2009
- Working Paper Summaries
Applying the Care Delivery Value Chain: HIV/AIDS Care in Resource Poor Settings
The prevention and treatment of a complex disease such as HIV/AIDS in resource‐poor settings presents enormous challenges. Many of the social and economic factors that make populations living in these settings vulnerable to HIV/AIDS such as poverty, malnutrition, and political instability conspire to create barriers to effective care delivery. Understanding how interventions are related to each other and how local socioeconomic factors influence them is critical to effective program design. The Care Delivery Value Chain (CDVC) looks at care as an overall system, not as a series of discrete interventions, and describes the activities required to deliver care, illustrating their sequence and organization. Government agencies, philanthropic organizations, and non‐governmental organizations can use the framework to improve HIV/AIDS care delivery. Key concepts include: The CDVC framework allows one to outline and analyze the process of care delivery for a medical condition and provide maximize value for patients. The CDVC framework can map the activities associated with HIV/AIDS care delivery in resource-poor settings to illuminate effective linkage and coordination. The CDVC framework allows synthesis of knowledge about the overall system of care delivery and provides a common language for improving it. Closed for comment; 0 Comments.
- 02 Apr 2009
- Working Paper Summaries
The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization
Corporate hierarchies are becoming flatter: Spans of control have broadened, and the number of levels within firms has declined. But why? Maria Guadalupe of Columbia University and HBS professor Julie M. Wulf investigate how increased competition in product markets—and, in particular, product market competition resulting from trade liberalization—may be fundamentally altering how decisions are being made. Guadalupe and Wulf also shed light on the possible reasons behind certain organizational choices and on the importance of communication and decision-making processes inside firms. Key concepts include: As firms become flatter, they also fundamentally alter how decisions are made. Greater international competition following trade liberalization leads to flatter firms. When competition increases the value of quick and responsive decision-making, firms eliminate layers to improve the quality and speed of the transmission of information or increase the authority of division managers to become more adaptive to local information. U.S. firms in manufacturing industries more exposed to the trade liberalization reduce the number of hierarchical levels, broaden the span of control for the chief executive, and increase total pay and incentive-based pay for division managers. Closed for comment; 0 Comments.
- 01 Apr 2009
- Working Paper Summaries
The Contingent Nature of Public Policy and Growth Strategies in the Early Twentieth-Century U.S. Banking Industry
The effects of public policy on organizations and economic activities have been widely observed. This line of research has contributed to organizational theory by showing the importance of state action for constructing economic systems, as well as firm structures and strategies. But there are a number of reasons why this perspective may in fact overemphasize the importance of public policy. This working paper, forthcoming as an article in the Academy of Management Journal, more fully investigates the contingent nature of the effects of policy on organizations, with the orienting premise that policy is just one of the external conditions that organizations face, and policy effects are more or less powerful to the extent that they are interactive with other elements of the environment. Specifically, the authors focus on how policy that regulated bank branching and other environmental factors affected—independently as well as interactively—the emergence and growth of large-scale firms in U.S. commercial banking from 1896 to 1978. Key concepts include: The histories of firms' external environments may be essential to an understanding of their structure and current success, with implications for organizational theory. Closed for comment; 0 Comments.
- 31 Mar 2009
- First Look
- 30 Mar 2009
- Research & Ideas
Professional Networks in China and America
While American managers prefer to separate work and personal relationships, Chinese counterparts are much more likely to intermingle the two. One result: Doing business in China takes lots of time, says HBS professor Roy Y.J. Chua. Key concepts include: It generally takes much longer to build trusting business relationships in China than in the United States. When cultivating business relationships in China, American managers may want to know as many people in the Chinese counterpart's network as possible. Closed for comment; 0 Comments.
- 26 Mar 2009
- Working Paper Summaries
The Bloody Millennium: Internal Conflict in South Asia
What accounts for the disturbing trend of increasing terrorism and associated fatalities in South Asia? In 2007, a quarter of all terrorist attacks worldwide were committed in South Asia, second only to Iraq. HBS professor Lakshmi Iyer presents the first comprehensive analysis of internal conflict in South Asia using multiple data sources and incorporating a long-run time frame. She finds that the intensity of internal conflict in the post-2001 period is strongly associated with poverty, both in a cross-country comparison and in a comparison of districts within India and Nepal. Measures implemented by regional and national governments to combat internal violence vary considerably across countries and over time. Typically, the use of military force or relying on unofficial militias has not proved to be a successful counterinsurgency tactic in South Asia; strengthening police activity and using a political accommodation approach has led to some successes in the past. Key concepts include: Since 2001, incidents of terrorism and associated fatalities have been rising steadily in South Asia. The increasing trend in incidents of terrorism and associated fatalities is observed primarily in the economically lagging regions of South Asia. There is a clear difference in conflict trends in leading and lagging regions. Economic backwardness can have adverse security consequences in the long run. Global events are likely to increase conflict within individual countries. Closed for comment; 0 Comments.
- 25 Mar 2009
- Working Paper Summaries
Demographics, Career Concerns or Social Comparison: Who Games SSRN Download Counts?
Why do certain individuals commit fraudulent acts—in this case repeatedly downloading their own working papers from the Social Science Research Network (SSRN) repository to increase the papers' reported download counts? HBS professors Benjamin G. Edelman and Ian I. Larkin study the relative importance of demographic, economic, and psychological factors leading individuals to commit this kind of gaming. Authors engage in deceptive self-downloading to improve a paper's visibility on SSRN, to obtain more favorable assessments of paper quality, and to obtain possible benefits for promotion and tenure decisions at those schools that consider download counts in tenure decisions. Data indicates that authors are more likely to inflate their papers' download counts when a higher count greatly improves the visibility of a paper on the SSRN network. Authors are also more likely to inflate their papers' download counts when their peers recently had successful papers—suggesting an "envy" effect in download gaming. Download inflations are also affected somewhat by career concerns (e.g. just before changing jobs) and by demographic factors, though these effects are smaller. On the whole, analysis suggests a heightened risk of fraudulent acts not only where economic returns are high, but also where prestige, status, or reputation are important. Key concepts include: Envy and social comparisons play a strong role in predicting deceptive downloads. Discontinuities and other incentive anomalies invite gaming. At SSRN, gaming increases when it will increase a paper's visibility on SSRN by putting the paper (or keeping it) on a "Top 10 list." Some groups seem to be less likely to engage in download gaming. Females and researchers at low-ranked institutions seem to be somewhat less likely to engage in gaming. Closed for comment; 0 Comments.
First Look: April 21, 2009
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