First Look

February 13, 2007

Let's say you're a retailer who operates physical stores as well as direct channels such as an Internet web site and direct mail catalogs. You are eyeing the possibility of opening a store in an area that knows only your catalogs and web presence. But what would this decision mean for your direct channel sales in the same area? This and other questions are probed in a new working paper available for download, "Adding Bricks to Clicks: The Effects of Store Openings on Sales through Direct Channels." One takeaway from the HBS authors: Adding channels produces both cannibalizing and complementary effects which operate in tandem and vary over time. Also new this week: how weak investor protections affect multinational firm activity and foreign direct investment flows; a note on doing industry research for better investment decisions; and a Science article on why our minds tend to roam.
— Martha Lagace

Working Papers

Adding Bricks to Clicks: The Effects of Store Openings on Sales through Direct Channels


We assess the effect of opening physical retail stores on direct channel sales. Our data come from a leading U.S. retailer which opened four new stores; two openings occur in retail trading areas which had been previously served by direct channels alone and two openings occur in retail trading areas which had been served by both direct channels and existing physical stores. We hypothesize two effects, cannibalization and complementarity, and conjecture that the magnitude of these effects may be different at different points in time. We find that retail store openings initially cannibalize direct channel sales in the short term if physical stores do not already exist in the retail trading area, but then contribute to longer term complementary effects which work to overcome the losses from cannibalization. Our results are based on both interrupted time series analysis and a difference-in-differences analysis of six years of proprietary sales data and we use a novel zip code matching method to better isolate the effects of channel expansion. We argue for advantages to using zip code level data for methodological and consumer data privacy reasons.

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Multinational Firms, FDI Flows and Imperfect Capital Markets


This paper examines how costly financial contracting and weak investor protection influence the cross-border operational, financing and investment decisions of firms. We develop a model in which product developers have a comparative advantage in monitoring the deployment of their technology abroad. The paper demonstrates that when firms want to exploit technologies abroad, multinational firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously when monitoring is nonverifiable and financial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational firm activity, increase the reliance on FDI flows and alter the decision to deploy technology through FDI as opposed to arm's length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI flows are tested and confirmed using firm-level data.


Cases & Course Materials

Furman Selz LLC (A): A Tale of Two Acquisitions

Harvard Business School Case 905-066

Profiles a firm that was reacquired by two companies with different degrees of success. Highlights integration challenges present in acquisition deals when the primary assets of the target are human capital. Focuses on Furman Selz's acquisition by Xerox in 1987; its return to a private company in 1993; and a second acquisition, by ING, in 1997. In particular, provides the opportunity to evaluate five major corporate transitions: the initial launching as an independent firm, Furman Selz, in 1973; the shift to professional management in 1983-1986; the Xerox acquisition in 1987; the MBO in 1993; and the ING acquisition in 1997. Presents the transactions from multiple points of view: the founders and their associates; the professional managers brought in to advance the firm to the next level; the acquired firm under both Xerox and ING; and Xerox and ING themselves.

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Furman Selz LLC (B)

Harvard Business Supplement 905-067

Supplements the (A) case.

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Performing Industry Research to Inform Investment Decisions

Harvard Business Note 207-069

Conducting thorough research about an industry is often an important component of investment analysis. Written specifically for HBS MBA students, provides guidance on how to perform industry research to inform investment decisions. Provides detailed information about the recommended resources available for this type of research, focusing primarily on what is available from Harvard Business School's Baker Library. Focusing on how companies operate in the context of their industry, commences with an overview of why industry research is relevant, then offers detailed guidelines on how to approach and what to consider when investigating an industry as part of the analysis necessary to make a decision about investing in a company.

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America the Principled: 6 Opportunities for Becoming a Can-Do Nation Once Again


This book draws on the author's multiple research projects and field observations to analyze problems facing the United States in recent years and to create an agenda for renewing American strengths through returning to core American principles—but in new ways suitable to 21st century conditions. On the agenda are six opportunities for action by citizens and policy-makers alike: (1) securing the future through innovation strategies suitable for an emerging "white coat economy" that is discovery-based; (2) pursuing happiness by addressing the connection between work and family life and reinventing work to help women in particular use their talents flexibly; (3) encouraging the growth of good companies that can replace imperial excess with values-based capitalism; (4) restoring respect for government by ending decades of contempt for the public sector and ensuring competence in that vital sector; (5) connecting with the world in a way that fits the new realities of the global economy, fosters leadership, and uses citizen-diplomats to befriend moderates in troubled regions and business networks to ensure success in the major emerging economies; and (6) building community by stressing national and community service for all age groups to bridge social divides and unite citizens in a sense of common purpose. The book offers examples of solutions to address each opportunity and concludes with a call to action.

Exploring the Tail of Creativity: An Evolutionary Model of Breakthrough Invention, edited by J. Baum, S. Dobrev, and A. van Witteloostuijn


Where are the ultimate sources of technological breakthroughs? What makes a firm more likely to invent a breakthrough or to exploit external breakthroughs? We develop an evolutionary model of invention as a process of recombinant variation and selection. Our contributions are to highlight the skewed outcome distributions resulting from evolutionary search and to develop theory that can be tested by modeling the higher moments of search processes. Recent methodological and data collection advances make sure such testing is possible. We motivate further research, develop our model's strategic implications, and discuss how managers might create and respond to breakthroughs.

Wandering Minds: The Default Network and Stimulus-Independent Thought


Despite evidence pointing to a ubiquitous tendency of human minds to wander, little is known about the neural operations that support this core component of human cognition. Using both thought sampling and brain imaging, the current investigation demonstrated that mind-wandering is associated with activity in a default network of cortical regions that are active when the brain is "at rest." In addition, individuals' reports of the tendency of their minds to wander were correlated with activity in this network.

The Persistence of Inflation versus that of Real Marginal Cost in the New Keynesian Model


This note provides an example where the New Keynesian Phillips Curve leads inflation to be substantially more persistent than the output gap.