First Look

May 1, 2007

Credited as the first self-made African American woman millionaire, Madam C. J. Walker rose from laundress to head of her own hair-care empire. A new case study illustrates Walker's story and how she used her position as a successful entrepreneur "to promote philanthropy and self-advancement in the African American community." Other HBS faculty publications announced this week include several working papers on the subject of foreign investment, a journal article on emotions in teams, and a case study on how city officials are grappling with potentially divisive social issues before the 2010 Winter Olympics.
— Sean Silverthorne

Working Papers

Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?


In this paper we distinguish different "qualities" of FDI to re-examine the relationship between FDI and growth. We use "quality" to mean the effect of a unit of FDI on economic growth. However, this is difficult to establish because it is a function of many different country and project characteristics which are often hard to measure. Hence, we differentiate "quality FDI" in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry-level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.

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The Price of Capital: Evidence from Trade Data


In this paper we use highly disaggregated data on trade in capital goods to study differences in the price of capital across countries. Our strategy is motivated by the fact that most countries import the bulk of machinery equipment (from a small number of industrialized countries). We find the price of imported capital goods to be negatively and significantly correlated with the income of the importing country. Because most low-income countries import the bulk of capital goods, our results provide suggestive evidence that capital goods are more expensive in poor countries, consistent with the conventional explanation regarding the low real investment rates in poor countries.

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Open vs. Integrated Innovation: A Model of Discovery and Confinement


We present a simple formal model to address the question: When is open innovation superior to integrated innovation? Our model has firms with limited visibility that either control all aspects of product innovation (integrated innovation) or open their designs to components developed by other players (open innovation). We show that the desirability of each development method depends on the complexity of product development. With low complexity, both approaches fare similarly. As complexity grows, open innovation becomes increasingly attractive. When complexity is very large, integrated innovation tends to deliver better returns. We show that an open innovation strategy allows the firm to discover combinations of product features that would be hard to envision under integration. Open innovation, however, confines the ability of the firm to establish the product's technological trajectory. The resolution of the trade-off between discovery and confinement determines the best approach to innovation.

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Intellectual Property Rights, Imitation, and Foreign Direct Investment: Theory and Evidence


This paper theoretically and empirically analyzes the effect of strengthening intellectual property rights in developing countries on the level and composition of industrial development. We develop a North-South product cycle model in which Northern innovation, Southern imitation, and FDI are all endogenous. Our model predicts that IPR reform in the South leads to increased FDI in the North, as Northern firms shift production to Southern affiliates. This FDI accelerates Southern industrial development. The South's share of global manufacturing and the pace at which production of recently invented goods shifts to the South both increase. Additionally, the model also predicts that as production shifts to the South, Northern resources will be reallocated to R&D, driving an increase in the global rate of innovation. We test the model's predictions by analyzing responses of U.S.-based multinationals and domestic industrial production to IPR reforms in the 1980s and 1990s. First, we find that MNCs expand the scale of their activities in reforming countries after IPR reform. MNCs that make extensive use of intellectual property disproportionately increase their use of inputs. There is an overall expansion of industrial activity after IPR reform, and highly disaggregated trade data indicate an increase in the number of initial export episodes in response to reform. These results suggest that the expansion of multinational activity more than offsets any decline in the imitative activity of indigenous firms.

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Bandwidth Allocation in Peer-to-Peer Filesharing Networks


We present a model of bandwidth allocation in a stylized peer-to-peer file sharing network with s peers (sharers) who share files and download from each other and f peers (freeriders) who download from sharers but do not contribute files. Assuming that upload bandwidth is scarcer than download bandwidth and efficient allocation, we compute the expected bandwidth obtained by each peer. We show that (i) while the exact formula is complex, s/(s + f) is a good approximation and (ii) sharers (freeriders) obtain bandwidth larger (smaller) than s/(s+f). The paper constitutes a first step towards a general analytical foundation for scarce resource allocation in peer-to-peer file sharing networks.

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Peer-to-Peer File Sharing and the Market for Digital Information Goods


We study competitive interaction between two alternative models of digital content distribution over the Internet: peer-to-peer (p2p) file sharing and centralized client-server distribution. We present microfoundations for a stylized model of p2p file sharing where all peers are endowed with standard preferences and show that the endogenous structure of the network is conducive to sharing by a significant number of peers, even if sharing is costlier than freeriding. We build on this model of p2p to analyze the optimal strategy of a profit-maximizing firm, such as Apple, that offers content available at positive prices. We characterize the size of the p2p network as a function of the firm's pricing strategy, and show that the firm may be better off setting high prices, allowing the network to survive, and that the p2p network may work more efficiently in the presence of the firm than in its absence.

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Cases & Course Materials


Harvard Business School Note 507-070

Describes the dominant firm in the Korean cosmetics market up to the mid-2000s. Gives background on AmorePacific's historical evolution, its current brands, and the competition it faces from local and international players. Also provides information on the market structure and prominent channels of distribution.

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Chiaphua Group Vietnam

Harvard Business School Case 207-090

As part of its expansion and diversification strategy, the Chiaphua Group explored real estate investments in emerging markets. The Group was one of the largest privately held company groups based in Hong Kong, with international investments in a variety of manufacturing and property development. A family member, Raymond Cheng, had narrowed the list of potential markets to Singapore, Malaysia, Indonesia, and Vietnam. Notwithstanding a history of instability and conflict and substantial government control of markets, Raymond concluded that Vietnam was the best option. Revolves around how to assess the market in the absence of hard data, and what would be the appropriate entry points. Illuminates how relationship-driven investments can be the foundation of a long-term investment strategy. Issues also involve how, by working with government through a structured forum (along with personal relations), laws and regulations can evolve to facilitate real estate investments.

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The Convention on Biological Diversity: Engaging the Private Sector

Harvard Business School Case 507-020

The Convention on Biological Diversity (CBD) was a U.N. treaty that by 2006 had been signed by virtually every country in the world except for the United States. The treaty established three main goals: the conservation of biological diversity, the sustainable use of its components, and the fair and equitable sharing of the benefits arising from the use of genetic resources. Although the treaty had been in effect for almost 15 years, progress was slow. CBD Executive Secretary Ahmed Djoghlaf needed to increase the participation of the private sector in order to meet the treaty's "2010 Target," which called for a significant reduction in the loss of biodiversity at all levels (global, regional, and national). Provides background on the relationship between biodiversity and agriculture.

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Green Dot Public Schools: To Collaborate or Compete?

Harvard Business School Case 307-086

In order to execute a strategy to transform the entire 768-school Los Angeles public school district, Green Dot Public Schools, a nonprofit charter school management organization with 10 high-performing high schools around Los Angeles, is faced with a crucial choice about how to open its next several schools. Should it pursue an opportunity to collaborate with the public school district, or act on an equally attractive opportunity to compete head-on with the district by working in a neighborhood that has been dramatically underserved for decades?

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Korea: After the 1997 Financial Crisis

Harvard Business School Case 707-042

Examines what happened to Korea after the 1997 financial crisis and the implementation of the IMF-mandated reforms imposed on Korea as conditionalities to the country's emergency loan package.

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Madam C.J. Walker: Entrepreneur, Leader, and Philanthropist

Harvard Business School Case 807-145

Madam C. J. Walker, who has been credited as the first self-made African-American woman millionaire, created a hair-care empire after years spent as a laundress in St. Louis, Missouri. Decades before the Civil Rights movement, her company gave employment to thousands of African-American women and marketed its products around the world. Madam Walker was active in the social and political causes of her day, and used her position as a successful entrepreneur to promote philanthropy and self-advancement in the African-American community.

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Micro Insurance Agency: Helping the Poor Manage Risk

Harvard Business School Case 307-089

The notable success of insurance products for low-income clients of its microfinance network leads Opportunity International to launch the first global specialized microinsurance company, the Micro Insurance Agency (MIA). Building on the experience in 10 countries across Africa, Asia, and Latin America of developing products appropriate to the sector and acceptable to risk carriers, and minimizing distribution and administration costs by going through Opportunity International (OI) partner microfinance institutions (MFIs), MIA must now define the strategy for its future growth. Facing both the need to achieve scale and profitability as quickly as possible, and increasing competition from international and local providers with few barriers to entry, MIA must grapple with a series of strategic choices: geographic expansion, continued product innovation, serving MFIs outside of the OI network, and new distribution mechanisms to reach market segments beyond MFIs. Wholly owned by faith-based nonprofit OI, MIA must also factor in OI's desired mission impact with commercial viability. Illustrates the challenges and tradeoffs inherent in pioneering efforts at the edge of microfinance, the emerging industry to serve the financial needs of low-income sectors in the developing world.

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Microfinance in Bolivia: A Meeting with the President of the Republic

Harvard Business School Case 307-107

Herbert Muller, chair of leading microfinance bank BancoSol, has met with Evo Morales one year after the populist leader's inauguration as president of Bolivia and proceeds to write an email to his fellow board directors. The bank is world famous for pioneering microfinance while delivering superior financial performance. Evo Morales is an Amerindian who supporters see as a response to the white oligarchy that has long dominated Bolivia and as a champion of the downtrodden, in the poorest country in South America. In the first year of his administration, he has nationalized the oil and gas industry, created a constituent assembly to rewrite the constitution, and launched agrarian reform. The meeting between Muller and Morales takes place at the Bolivian banking association where the government officials, while committing not to mandate the reduction of interest rates in microcredit, express their expectation that rates will drop as quickly as possible. A week earlier, senior cabinet officials had met with the president of the banking association and expressed their wish that interest rates for loans in the banking system would decline to single digits.

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Multifactor Models

Harvard Business School Exercise 207-056

Students evaluate the performance of four mutual funds and compute the cost of capital for two companies using fixed benchmarks, the CAPM, and a multifactor model of returns.

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Negotiating Effectively in Family Business Systems

Harvard Business School Note 807-144

Explores how families in business can apply five principles of negotiation that are used effectively by non-family members. The distinctive characteristics of family relationships and of family business systems—which affect the use of these principles—are described.

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The New York Times Co.

Harvard Business School Case 207-113

The Sulzberger family owns 20 percent of the New York Times Co. (NYT) but controls 70 percent of the board through a dual-class share structure. At the company's April 2006 annual shareholder meeting, Morgan Stanley Investment Management (MSIM) and other investors, holding 28 percent of the company's stock altogether, withheld their votes for the 30 percent of directors that they could vote on as a sign of protest against the management of Arthur Sulzberger, Jr. and the dual-class structure that protects him. MSIM later submitted a proposal urging the NYT to subject the dual-class structure to a vote. In evaluating the proposal, Sulzberger feels torn by his responsibilities to three different constituencies: his readers, his family, and all other NYT shareholders.

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Strategy in the 21st Century Pharmaceutical Industry: Merck & Co. and Pfizer Inc.

Harvard Business School Case 707-509

The global pharmaceutical industry has gone through substantial changes in the last few decades and pharmaceutical firms face major challenges including headline-grabbing litigation, imminent patent expirations, new technologies, rising drug development costs, generic drug substitution, international competitors, and complex public policy issues. This case describes the pharmaceutical industry in 2006 including: the drug development process; threats from biotech and generics competitors; pharmaceutical manufacturing, selling, and marketing; and pharmaceutical consumption in Europe, the third world, and the U.S. Merck and Pfizer are analyzed in-depth and a contrast between Merck as a research-based firm opposed to mergers and Pfizer as a marketing powerhouse growing through acquisitions is developed. Thirteen exhibits give concrete focus to the issues of the case.

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The Tale of the Lynx (A)

Harvard Business School Case 807-151

The founders of Lynx Solutions have survived major challenges within their board of directors, the firing of Lynx's founder-CEO and departure of its successor CEO, and a crisis sparked by media allegations that it had been spying on its users. Now that the company is finally becoming profitable, the two remaining founders are embroiled in exhausting fights over how aggressively the company should try to grow, and those fights are threatening to derail Lynx's recent success.

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The University of Utah and the Computer Graphics Revolution

Harvard Business School Case 607-036

Computer science departments were new to universities in the 1960s, and the one created at the University of Utah by David Evans and Ivan Sutherland had a research mission to invent the field of computer graphics. Details the research process that led to many of the critical breakthrough concepts and algorithms for the field and the training of PhDs, who then created companies that brought the new technology to the marketplace.

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The Vancouver 2010 Olympics

Harvard Business School Case 507-049

It is February 2007, exactly three years before Vancouver hosts the 2010 Winter Olympics. Judy Rogers, City Manager for the City of Vancouver and a member of the Board of Directors for Vancouver's Organizing Committee (VANOC), is keen to ensure the Games will have a lasting positive impact on the city and on Canada. However, a recent event reveals that significant social tensions could negatively effect the event and Vancouver's image across the globe, and Rogers will have to find a way to address the growing concerns. More pressingly, Rogers and her team are faced with the task of creating an Olympic Legacy Reserve Fund that could enable the city to achieve its sustainability goals, but involves a significant tax increase for Vancouver's residents and businesses. With the world watching and the clock ticking, there is a lot at stake. How should Rogers respond to these challenges? Allows for an in-depth examination of critical social marketing issues in the context of one of the world's biggest sports events. Provides rich data on the possible benefits and drawbacks for a variety of constituents, including the International Olympic Committee, the host country and city, its businesses, and local residents, and can serve to illustrate the key tensions as well as best practices in social marketing initiatives.

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Focusing on Lone Trees in the Forest: Members' Experience of a Multiple Identity Organization


In this paper we examine the impact of multiple organizational identities on lower-level organization members. Building on existing research about the management of multiple identity organizations, we report results from a longitudinal field study of lower-level members of a multiple identity organization and develop a perspective on the identification patterns that shape the experience of lower-level employees of a multiple identity organization. Using interview data, archival data, and longitudinal survey data, we detail the interplay between identities and identification in a non-profit organization, showing that lower-level members tend to limit their focus and connection to a single identity of the organization, potentially derailing the outcomes that the organization aims to achieve. The distinct experience of lower-level members—focused identification—suggests new boundary conditions for the validity of the multiple identity construct. More broadly, our research implies that multiple identity organizations may not be perceived as such by lower-level organizational members, who instead are likely to recognize a single identity to the exclusion of others.

Team Emotion Recognition Accuracy and Team Performance


Teams' emotional skills can be more than the sum of their individual parts. Although theory emphasizes emotion as an interpersonal adaptation, emotion recognition skill has long been conceptualized as an individual-level intelligence. We introduce the construct of team emotion recognition accuracy (TERA)—the ability of members to recognize teammates' emotions—and present preliminary evidence for its predictive validity. In a field study of public service interns working full-time in randomly assigned teams, taken together positive and negative TERA measured at the time of team formation accounted for 28.1 percent of the variance in team performance ratings nearly a year later.

Does Focus Improve Operational Performance? Lessons from the Management of Clinical Trials


For over three decades, the benefits of focus have been touted under the guiding principle that dedicated attention to a small set of linked tasks improves operating performance. Numerous studies have suggested that the performance of a division, plant, or business unit is improved to the extent that it remains focused on a narrow range of activities. Others have found similar benefits associated with focus at the level of the entire firm. A question that has received less attention, however, is whether focus at the divisional level is complementary with, or a substitute for, focus at the firm level. We explore this question by considering the performance of investigative sites in biopharmaceutical clinical trials. First, we establish that firms focusing on a particular task—at either a divisional or firm level—experience higher output and productivity with respect to that task than unfocused firms. After controlling for selection, scale, and learning effects, we find that sites that focus on conducting clinical trials significantly outperform those that mix trial activity with the provision of traditional patient care. Second, we find evidence that focus at the divisional level and firm level are substitutes. That is, organizations characterized by divisional focus alone achieve statistically similar performance to sites that are characterized by both divisional and firm focus.