First Look

March 24, 2009

Are more powerful countries less likely to welcome international financial reporting standards (IFRS)? Adoption of the standards, mandated since 2003 by almost 70 countries for listed companies, is part of an ongoing policy debate. Large countries—among them the United States, Japan, and Brazil—require domestic standards over the IFRS. Results of new research from over 100 non-European Union countries between the years 2002 and 2007 suggest the power of network effects: Countries in a given region are more likely to adopt the IFRS if neighboring countries do the same. The working paper, "Why do countries adopt International Financial Reporting Standards?" [PDF] is by HBS professor Karthik Ramanna and MIT's Ewa Sletten. "As more countries adopt the international standards, the network benefits from IFRS adoption are likely to increase," they write. Two cases this week focus on different aspects of the volatile business environment in the Middle East: "Dubai: Global Economy" examines the relatively Westernized business hub of the United Arab Emirates, and "Saudi Arabia: Modern Reform, Enduring Stability" reflects efforts to modernize without Westernizing, against the backdrop of uncertainty in the oil market and serious political problems.
— Martha Lagace

Working Papers

Running Out of Numbers: Scarcity of IP Addresses and What to Do About It (revised)


The Internet's current numbering system is nearing exhaustion: existing protocols allow only a finite set of computer numbers ("IP addresses"), and central authorities will soon deplete their supply. I evaluate a series of possible responses to this shortage: sharing addresses impedes new Internet applications and does not seem to be scalable. A new numbering system ("IPv6") offers greater capacity, but network incentives impede transition. Paid transfers of IP addresses would better allocate resources to those who need them most, but unrestricted transfers might threaten the Internet's routing system. I suggest policies to facilitate an IP address "market" while avoiding major negative externalities—mitigating the worst effects of v4 scarcity, while obtaining price discovery and allocative efficiency benefits of market transactions.

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Why Do Countries Adopt International Financial Reporting Standards?


In a sample of 102 non-European Union countries, we study variations in the decision to adopt International Financial Reporting Standards (IFRS). There is evidence that more powerful countries are less likely to adopt IFRS, consistent with more powerful countries being less willing to surrender standard-setting authority to an international body. There is also evidence that the likelihood of IFRS adoption at first increases and then decreases in the quality of countries' domestic governance institutions, consistent with IFRS being adopted when governments are capable of timely decision making and when the opportunity and switching cost of domestic standards are relatively low. We do not find evidence that levels of and expected changes in foreign trade and investment flows in a country affect its adoption decision; thus, we cannot confirm that IFRS lowers information costs in more globalized economies. Consistent with the presence of network effects in IFRS adoption, we find that a country is more likely to adopt IFRS if other countries in its geographical region are IFRS adopters. (No PDF is available.)


Cases & Course Materials

Basic Techniques for the Analysis of Customer Information Using Excel 2007: A Step-by-Step Approach

Harvard Business School Note 109-052

The objective of this note is to provide a set of easy, step-by-step guides for some analytical techniques that are useful in the analysis of cases discussed in the course "Competing and Winning through Customer Information" (CWCI). The instructions that follow use datasets from three of the cases in the course: "Slots, Tables, and All That Jazz: Managing Customer Profitability at the MGM Grand Hotel," HBS No. 106-029; "," HBS No. 106-057; and "Bancaja: Developing Customer Intelligence (A)," HBS No. 107-055. These datasets are available upon request from the author.

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DermaCare: Zapping Zits Directly

Harvard Business School Case 808-064

DermaCare has developed an innovative new product for the treatment of acne that they hope to sell to consumers via direct-response television. The unconventional nature of the product and its distribution has led the company to seek angel financing. The Silicon Valley Band of Angels has agreed to finance the company and has submitted a proposed term sheet. Recently, however, a venture capital (VC) group has submitted a competing term sheet. The company must decide whether to accept financing from the Angels or the VC group.

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Dubai: Global Economy

Harvard Business School Case 709-043

This case, along with Saudi Arabia: "Modern Reform, Enduring Stability" (709-042), provides an opportunity to discuss Saudi Arabia's efforts to modernize, without really Westernizing, in sharp contrast to Dubai, a nearby Arab Emirate. As Saudi Arabia's development strategy unfolds in the past six years, it is contrasted to social and political pressures within the country, volatility in global oil markets, and severe political problems in the Middle East.

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One Firm One Future at Davis Langdon

Harvard Business School Case 409-044

Rob Smith, senior partner of construction consultancy Davis Langdon, has just led the firm through a major organizational change in Europe and the Middle East. In the past, the firm's compensation arrangements did not encourage partners to collaborate across the firm to serve clients' increasingly global and complex needs. In 2007, under Smith's leadership, the partnership agreed to implement holistic change, which included shifting from geographical to sector structure and creating a profit-sharing system that rewarded more than just financial contribution and encouraged partners to work together for the benefit of the firm as a whole. In the midst of the global economic crisis, Smith must decide whether and how to extend on a global basis the alignment the firm achieved in Europe and the Middle East.

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Perfect Storm over Zurich Airport (A)

Harvard Business School Case 408-023

Josef Felder, CEO of Zurich Airport, faces several crises as he tries to transform the Airport from a slow-moving, conflict-ridden, government-owned entity into a privatized, world-class airport.

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Saudi Arabia: Modern Reform, Enduring Stability

Harvard Business School Case 709-042

This case, along with "Dubai: Global Economy" (709-043), provides an opportunity to discuss Saudi Arabia's efforts to modernize, without really Westernizing, in sharp contrast to Dubai, a nearby Arab Emirate. As Saudi Arabia's development strategy unfolds in the past six years, it is contrasted to social and political pressures within the country, volatility in global oil markets, and severe political problems in the Middle East.

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Shanghai Diligence Law Firm

Harvard Business School Case 409-065

Shanghai Diligence Law Firm, started in January 2006, is a rapidly growing law firm in China's burgeoning legal services market. In addition to the usual challenges facing all professional service firms (picking and retaining talent and building a desired client portfolio), the firm faces some challenges and opportunities that are unique to its setting in China and the fact that the firm is not yet three years old. The legal profession in China is a new and rapidly growing one with a large number of small firms all trying to carve out a distinctive niche for themselves. One of the partners in the firm, Joseph Shang, has created an innovative compensation system he calls the "A-B-C-D Model" which enables even the most junior associates to earn compensation for bringing in new business. This model is a kind of hybrid between the typical compensation system found in a Chinese law firm and those found in UK and U.S. law firms. The goal of this approach to compensation is to enable the firm to get and keep promising lawyers while also giving them an incentive to help grow the business. Somewhat unusual for a typical law firm, or any type of professional service firm, this compensation model is only used in Shang's practice. The founder and CEO, Chenyao Wu, has his own version of an "A-B-C-D Model," and discussions are taking place about what the firm should be doing about compensation. In addition to compensation, the firm is grappling with issues regarding divergent views amongst the partners, building a brand in a very competitive marketplace, and the stability of the core team. Finally, the firm has been presented with an opportunity to join two other firms in a three-way merger and the partners are debating the risks and opportunities in going forward with this.

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Solvay Group: International Mobility and Managing Expatriates

Harvard Business School Case 409-079

Marcel Lorent, head of International Mobility at Brussels-based Solvay Group, faces decisions on the expatriation status of four of his firm's talented executives. Each decision will impact the candidate's professional and personal life and will have implications for effective management and growth in Solvay's global markets. The case explores these issues, with a close look at Solvay's attempts to develop talent management and mobility processes that allow the firm to align its strategic needs with the complexities of its individual employees' needs and lives.

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Exploring Positive Identities and Organizations: Building a Theoretical and Research Foundation


No abstract is available at this time.

Publisher's Abstract:

Negotiauctions: New Dealmaking Strategies for a Competitive Marketplace


No abstract is available at this time.

American Democracy: The Perils of Imperialism


Chapter excerpt: "Most American occupations of foreign countries have been of relatively short duration, which may well account for their relative lack of success in fundamentally altering the political institutions of the countries in question...this is the real problem—not the 'hegemonic pretensions' of the United States, but its chronic lack of imperial stamina."

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The Nature of Partnering Experience and the Gains from Alliances


We examine the conditions under which the prior partnering experience of firms contributes to value creation in their new alliances. We propose that prior experience with the same partners, i.e., "partner-specific experience," provides greater benefits than "general partnering experience" that encompasses all prior alliances with any partner. We further explore some of the boundary conditions for the effects of partner-specific experience. We suggest that the effect of partner-specific experience on value creation in alliances is moderated by the extent to which the assets of the new partner differ from those of the firm's prior partners. We also propose that the firm's own technological and financial resources increase the benefits of partner-specific experience. Finally, we predict that the value of partner-specific experience will increase under high levels of firm-specific uncertainty. We test these hypotheses with comprehensive longitudinal multi-industry data on joint ventures formed among Fortune 300 firms between 1987 and 1996. Based on stock market returns to joint-venture announcements, the results provide support for the contingent value of partnering experience. The implications for managing alliances and advancing organizational learning are discussed.

Long-Run Stockholder Consumption Risk and Asset Returns


We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting micro-level household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or non-stockholder consumption risk and provides more plausible economic magnitudes. We find that risk aversion estimates around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French size and value portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks.

A Nonsimultaneous, Extended, Altruistic-Donor Chain


No abstract is available at this time.

Attitude Dependent Altruism, Turnout and Voting


This paper presents a goal-oriented model of political participation based on two psychological assumptions. The first is that people are more altruistic towards individuals who agree with them and the second is that people's well-being rises when other people share their personal opinions. The act of voting is then a source of vicarious utility because it raises the well-being of individuals who agree with the voter. Substantial equilibrium turnout emerges with nontrivial voting costs and modest altruism. The model can explain higher turnout in close elections as well as votes for third-party candidates with no prospect of victory. For certain parameters, these third-party candidates lose votes to more popular candidates, a phenomenon often called strategic voting. For other parameters, the model predicts "vote-stealing" where the addition of a third candidate robs a viable major candidate of electoral support.