First Look

December 15, 2009

In recent decades we have seen an explosion in the activities of multinational corporations: Just think of Silicon Valley subsidiaries residing in Bangalore ("the Silicon Valley of India") as well as Detroit firm subsidiaries based in Slovakia ("the Detroit of the East"). Yet scholars still understand little about the global patterns of multinational agglomeration. Why do these firms group together overseas? What do such clusters mean for foreign direct investment? Using new data detailing location, ownership, and activity information for establishments in more than 100 countries, HBS professor Laura Alfaro and George Washington University professor Maggie Chen examined the global network of multinationals. Among their findings described in a working paper, "The Global Networks of Multinational Firms" [PDF]: Multinational subsidiaries with knowledge spillovers, among other factors, "tend to agglomerate to one another. The importance of these agglomeration economies is, however, different across headquarters, subsidiary, and employment networks." Policymakers, they write, should weigh the interdependence of multinational firms when making decisions about FDI. Case studies this week examine Nanosolar, Inc., a start-up in the clean technology sector, and Tengion, a biotech company faced with critical choices in the wake of the global financial crisis.
— Martha Lagace

Working Papers

The Global Networks of Multinational Firms


In this paper we characterize the topology of global multinational networks and examine the macro and micro patterns of multinational activity. We construct indices of network density at both pairwise industry and establishment level and measure agglomeration in a global and continuous metric space. These indices exhibit distinct advantages compared to traditional measures of agglomeration including the independence on the level of geographic aggregation. Estimating the indices using a new worldwide establishment dataset, we investigate both the significance and causes of multinational firm co-agglomeration. In contrast to the conventional emphasis of the literature on the role of input-output linkages, we assess the effect of various agglomeration economies. We find that, relative to counterfactuals, multinationals with greater factor-market externalities, knowledge spillovers, and vertical linkages exhibit significant co-agglomeration. The importance of these factors differs across headquarters, subsidiary, and employment networks, but knowledge spillovers and capital-market externalities, two traditionally under-emphasized forces, exert consistently strong effects. Within each macro network, there is a large heterogeneity across subsidiaries. Subsidiaries with greater size and higher productivity attract significantly more agglomeration than their counterfactuals and become the hubs of the network.

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Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative Outcomes (revised)


Policies that would create net benefits for society but would also involve costs frequently lack the necessary support to be enacted because losses loom larger than gains psychologically. To reduce the harmful consequence of loss aversion, we propose a new type of policy bundling technique in which related bills that have both costs and benefits are combined. In our first laboratory study, we confirm across a set of four legislative domains that this bundling technique increases support for bills that have both costs and benefits. We also show in a second study that this effect stems from a diminished focus on losses and heightened focus on gains when policies are evaluated in bundled form.

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Assessing the Cost and Benefits of Brokers: A Preliminary Analysis of the Mutual Fund Industry


Many investors purchase their mutual funds through intermediated channels, engaging and paying brokers or financial advisors for fund selection and advice. We analyze five possible benefits to consumers of brokered fund distribution: (1) assistance selecting funds that are harder to find or harder to evaluate, (2) access to funds with lower costs excluding distribution costs, (3) access to higher performing funds, (4) superior asset allocation, and (5) attenuation of behavioral investor biases. Along these dimensions, we find it difficult to identify the tangible benefits delivered by brokers. While brokerage customers are directed toward funds that are harder to find and evaluate, they pay substantially higher fees and the funds they buy have lower risk-adjusted returns than directly placed funds. Brokered funds exhibit no better skill at asset allocation. Furthermore, funds sold through brokers demonstrate more performance sensitivity than funds sold through the direct channel. While the costs of brokers' services are relatively clear, their benefits are not easily captured by the tangible measures explored in this paper.

Restructuring Within an Academic Health Center to Support Quality and Safety: The Development of the Center for Quality and Safety at the Massachusetts General Hospital


Recent focus on the need to improve the quality and safety of health care has created new challenges for academic health centers (AHCs). Whereas previously quality was largely assumed, today it is increasingly quantifiable and requires organized systems for improvement. Traditional structures and cultures within AHCs, although well suited to the tripartite missions of teaching, research, and clinical care, are not easily adaptable to the tasks of measuring, reporting, and improving quality. Here, the authors use a case study of Massachusetts General Hospital's efforts to restructure quality and safety to illustrate the value of beginning with a focus on organizational culture, using a systematic process of engaging clinical leadership, developing an organizational framework dependent on proven business principles, leveraging focus events, and maintaining executive dedication to execute the initiative. The case provides a generalizable example for AHCs of how applying explicit management design can foster robust organizational change with relatively modest incremental financial resources.

From Strategy to Business Models and to Tactics


The notion of business model has been used by strategy scholars to refer to "the logic of the firm, the way it operates, and how it creates value for its stakeholders." On the surface, this notion appears to be similar to that of strategy. We present a conceptual framework to separate and relate business model and strategy. Business model, we argue, is a reflection of the firm's realized strategy. We find that in simple competitive situations there is a one-to-one mapping between strategy and business model, which makes it difficult to separate the two notions. We show that the concepts of strategy and business model differ when there are important contingencies upon which a well-designed strategy must be based. Our framework also delivers a clear separation between tactics and strategy. This distinction is possible because strategy and business model are different constructs.

Managing Know-How


We study how firms can use a knowledge management system to optimally leverage employee-generated know-how. In particular, we consider the following practical strategic questions for the manager of a knowledge-intensive firm: should her firm develop a formal knowledge system? And if so, how should it be managed, particularly in terms of what information to record? We find that firms benefit more from a knowledge system when they are larger, face the same issues more frequently, have higher turnover, and face problems about which there is less general knowledge. In terms of what information to record, a key insight is that recording moderately successful practices can be counter-productive, since doing so may inefficiently reduce employees' incentives to experiment. This "strong-form competency trap" forces firms into an exploration-exploitation trade-off. Firms that value a knowledge system most should also be most selective in recording information. We further find that recording successes is more valuable than recording failures, which supports firms' focus on best practice. Beyond these main principles, we also show that it may be optimal to disseminate know-how on a plant-level but not on a firm-level, and that recording back-up solutions is most valuable at medium levels of environmental change.

Optimal Taxation in Theory and Practice


We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.

Neural Mechanisms of Social Influence


The present investigation explores the neural mechanisms underlying the impact of social influence on preferences. We socially tagged symbols as valued or not—by exposing participants to the preferences of their peers—and assessed subsequent brain activity during an incidental processing task in which participants viewed popular, unpopular, and novel symbols. The medial prefrontal cortex (mPFC) differentiated between symbols that were and were not socially tagged—a possible index of normative influence—while aspects of the striatum (the caudate) differentiated between popular and unpopular symbols—a possible index of informational influence. These results suggest that integrating activity in these two brain regions may differentiate objects that have become valued as a result of social influence from those valued for non-social reasons.

The Effects of a Central Clearinghouse on Job Placement, Wages, and Hiring Practices


New gastroenterologists participated in a labor market clearinghouse (a "match") from 1986 through the late 1990s, after which the match was abandoned. This provides an opportunity to study the effects of a match by observing the differences in the outcomes and organization of the market when a match was operating and when it was not. After the GI match ended, the market unraveled. Contracts were signed earlier each year, at diffuse times, often with exploding offers. The market became less national, more local. This allows us to discern the effect of the clearinghouse: it coordinated the timing of the market in a way that increased its thickness and scope. The clearinghouse does not seem to have had an effect on wages. As this became known among gastroenterologists, an opportunity arose to reorganize the market to once again use a centralized clearinghouse. However it proved necessary to adopt policies that would allow employers to safely delay hiring and coordinate on using the clearinghouse. The market for gastroenterologists provides a case study of market failures, the way a centralized clearinghouse can fix them, and the effects on market outcomes. In the conclusion we discuss aspects of the experience of the gastroenterology labor market that seem to generalize fairly widely.


Deferred Acceptance Algorithms: History, Theory, Practice


The deferred acceptance algorithm proposed by Gale and Shapley (1962) has had a profound influence on market design, both directly, by being adapted into practical matching mechanisms, and indirectly, by raising new theoretical questions. Deferred acceptance algorithms are at the basis of a number of labor market clearinghouses around the world and have recently been implemented in school choice systems in Boston and New York City. In addition, the study of markets that have failed in ways that can be fixed with centralized mechanisms has led to a deeper understanding of some of the tasks a marketplace needs to accomplish to perform well. In particular, marketplaces work well when they provide thickness to the market, help it deal with the congestion that thickness can bring, and make it safe for participants to act effectively on their preferences. Centralized clearinghouses organized around the deferred acceptance algorithm can have these properties, and this has sometimes allowed failed markets to be reorganized.



Cases & Course Materials

Emotiv Systems Inc.: It's the Thoughts that Count

Elie Ofek, Jason Riis, and Paul Hamilton
Harvard Business School Case 510-050

Emotiv is getting ready to launch its innovative brain-computer interfacing (BCI) technology. The company has developed a special headset, called EPOC, and highly sophisticated software that can translate a person's emotions, cognitive thoughts, and facial expressions into digital outcomes. Emotiv wants the technology to be adopted by mainstream consumers and is leaning towards the video game market as its primary initial target. However, it needs to decide whether to continue efforts to convince one of the big three console makers (PS3, Xbox 360, Wii) to enable the EPOC on their platform or to settle for the PC gaming market. Alternatively, the company could have chosen a number of different markets to focus on (such as medical, military, market research). A host of additional marketing decisions need to be made (pricing, channels, bundling a demo game). The case allows students to grapple with the issues of selecting a target application for the launch of an innovation, determining the importance of having a big name partner for the launch by an unknown start-up, considering the wisdom of taking a B2C rather than B2B approach with a novel technology, and using analogous products to forecast demand and sales for a new technology.

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GE Money Bank: The M-Budget Card Initiative

Michael L. Tushman, Sebastian Raisch, and Christian Welling
Harvard Business School Case 410-052

The M-Budget Card case study is about mastering the challenges of an exploratory strategic initiative in a context marked by time pressure and frequent change. M-Budget was the first of a series of highly successful projects that established GE Money Bank as a leader in the Swiss credit card market. The business concept was to cooperate with the country's leading retailer MIGROS to develop an innovative credit card offering, the M-Budget card. The M-Budget card was launched a mere six months later and was an immediate success. The demand for the card exceeded expectations by far and the bank was inundated by more than 100,000 applications in the first weeks. The road to the successful market launch, however, was a rocky one and the team around Pierre had to master numerous challenges. Pierre, who took the lead in the initiative, had to select the right people to compose a team that had all the expertise and knowledge required to develop an entirely new market offering. A competitive move by the second largest retailer COOP forced the team to change its initial value proposition while working under intensive time pressure. Finally, the team had to overcome a series of operational problems after the initial market launch. The case study retraces the initiative's development over time and describes the leadership and organizational challenges faced by the team on its way to the successful creation of an entirely new business segment.

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Gillette Company (E): Procter & Gamble

Rosabeth Moss Kanter and Matthew Bird
Harvard Business School Supplement 309-033

After arriving in 2001 as the first outsider Chairman and CEO in Gillette history, Jim Kilts led a remarkable turnaround. But by late 2004 he had to make a difficult decision. To better position the 104-year-old, Boston-based company, he opted to sell it to Cincinnati-based Procter & Gamble. How should Kilts lead the transition?

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Introduction to Competitive Dynamics: Strategy and Tactics

Dennis Yao
Harvard Business School Course Overview 707-475

Provides an overview of the course Competitive Dynamics: Strategy and Tactics and discusses challenges facing those who wish to use game theory to assist in strategic and tactical decision making.

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Merger of Equals: The Integration of Mellon Financial and The Bank of New York (A)

Ryan D. Taliaferro, Clayton Rose, and David Lane
Harvard Business School Case 210-016

Less than a month after the close of the merger between The Bank of New York and Mellon Financial, managers at the two firms realized that plans for combining their asset servicing businesses—and realizing the $180 million of annual cost savings that they had promised Wall Street—were fraught with risk. Senior executives must evaluate the seriousness of the risks and identify alternative ways of integrating the two firms, while safeguarding the technologies that process and clear a substantial fraction of the world's financial transactions.

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Nanosolar, Inc.

Thomas Steenburgh and Alison Berkley Wagonfeld
Harvard Business School Case 510-037

Nanosolar is a start-up company in the clean tech sector. It expects to be one of the first manufacturers to produce thin-film solar panels using copper indium gallium (di)selenide (CIGS) technology. Although this technology is less efficient in producing electricity than polysilicone, it is much less costly too. As it is about to enter the market, Nanosolar is facing the decision on which market to enter. Should it attempt to go into the European market which has established feed-in tariffs? Or should it enter the nascent, but growing, U.S. market?

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Tengion: Bringing Regenerative Medicine to Life

Elie Ofek and Polly Ross Ribatt
Harvard Business School Case 510-031

Tengion is a young biotech company that is at the frontier of regenerative medicine—a nascent field that seeks to promote the creation of new cells and tissue to repair or replace tissue or organ function lost due to age, disease, damage, or congenital defects. In late 2008 Tengion management faces a difficult dilemma. In light of the financial crises, the company needs to manage cash burn by prioritizing its R&D efforts. CEO Nichtberger needs to recommend to the board which of two promising new medical treatments to keep developing while placing the other on hold. In comparing the two options, a host of factors need to be considered—these range from assessing the regulatory challenges, manufacturing challenges, marketing challenges (in particular pricing), and partnering challenges. Each of the treatments would target a unique patient population that differs in both size and composition. Tengion must also consider how quickly it might expect to bring each of the two treatments to market. The decision could have significant long-term implications for the company's ultimate survival and success.

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