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    First Look: September 16

    First Look

    16 Sep 2014

    Molycorp's 'happy Meal' And Other Funding Strategies

    Molycorp is the western hemisphere's only producer of rare earth minerals but is undergoing a reversal of fortune in a new series of case studies. The cases explore Molycorp's attempts to raise funding, including a "happy meal" share lending agreement with Morgan Stanley.

    The M&a Approach To Innovation

    The connections between mergers and innovation are increasing as companies acquire other firms and competitors to boost their own innovative capacity, to command products they couldn't create on their own, and to remove innovators from the competitive landscape. In their book chapter "Mergers and Acquisitions and Innovation," in The Oxford Handbook of Innovation Management, Gautam Ahuja and Elena Novelli review the dynamics of why and how these mergers occur.

    How Social Identity Affects Worker Competition

    Researchers Takao Kato and Pian Shu study the concept of social identity and worker competition in urban Chinese textile firms. The research, according to the authors, "highlight the important role of social identity in overcoming self-interest and enhancing intergroup competitions."

    —Sean Silverthorne
    LinkedIn
    Email
     

    Publications

    • September 2014
    • The Oxford Handbook of Innovation Management

    Mergers and Acquisitions and Innovation

    By: Ahuja, Gautam, and Elena Novelli

    Abstract—This article (a) identifies the different theoretical perspectives and abstractions used to conceptualize the M&A-Innovation relationship; (b) reviews the literature on antecedents, consequences, and integration of M&A in the context of innovation; and (c) identifies potential directions of further research on this topic that have both theoretical and practical implications. Among the important research directions identified are (a) "strategic" mergers that are potentially used as mechanisms for competitor pre-emption, (b) systems effects of mergers including the impact of mergers on sector-wide diffusion of technologies, (c) "consequential" effects of mergers on more "final" measures of innovation performance such as firm productivity and profitability, (d) mergers, and (e) divestments as providing context or "shocks" to an activity system and their value as an empirical source of exogenous variation.

    Publisher's link: http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199694945.001.0001/oxfordhb-9780199694945-e-026

    • September 2014
    • Journal of Financial Economics

    The Disintermediation of Financial Markets: Direct Investing in Private Equity

    By: Fang, Lily H., Victoria Ivashina, and Josh Lerner

    Abstract—We examine twenty years of direct private equity investments by seven large institutions. These direct investments perform better than public market indices, especially buyout investments and those made in the 1990s. Outperformance by the direct investments, however, relative to the corresponding private equity fund benchmarks is limited and concentrated among buyout transactions. Co-investments underperform the corresponding funds with which they co-invest, due to an apparent adverse selection of transactions available to these investors, while solo transactions outperform fund benchmarks. Investors' ability to resolve information problems appears to be an important driver of solo deal outcomes.

    Publisher's link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2159229

    • September 2014
    • Multidisciplinary Insights from New AIB Fellows

    Business History and the Impact of MNEs on Host Economies

    By: Jones, Geoffrey

    Abstract—Business history has long been recognized as providing an important dimension in international business studies. Much of this historical work has focused on mapping historical growth patterns of multinationals and exploring the determinants of their growth. However, there is also growing literature on the long-term impact of multinational investment in host economies, and this chapter reviews this research. The focus is primarily on developing country host economies and more broadly on the global distribution of wealth and poverty. This chapter suggests three major arguments. First, it is necessary to take a long-time horizon when assessing impact on host economies. Second, it is necessary to incorporate societal and cultural impacts alongside more traditional measures of economic impact. Third, there is weak historical evidence that multinationals have had a substantial positive impact over the long run on the development of host developing countries. A hypothesis is suggested that, given adequate domestic growth-supporting institutions and human capital development, developing countries achieve more sustained development from excluding foreign-owned multinationals rather than hosting them.

    Publisher's link: http://www.emeraldinsight.com/doi/abs/10.1108/S1064-4857_2014_0000016007

     

    Working Papers

    Poverty and Crime: Evidence from Rainfall and Trade Shocks in India

    By: Iyer, Lakshmi, and Petia B. Topalova

    Abstract—Does poverty lead to crime? We shed light on this question using two independent and exogenous shocks to household income in rural India: the dramatic reduction in import tariffs in the early 1990s and rainfall variations. We find that trade shocks, previously shown to raise relative poverty, also increased the incidence of violent crimes and property crimes. The relationship between trade shocks and crime is similar to the observed relationship between rainfall shocks and crime. Our results thus identify a causal effect of poverty on crime. They also lend credence to a large literature on the effects of weather shocks on crime and conflict, which has usually assumed that the income channel is the most relevant one.

    Download working paper: http://ssrn.com/abstract=2419522

    Competition and Social Identity in the Workplace: Evidence from a Chinese Textile Firm

    By: Kato, Takao, and Pian Shu

    Abstract—We study the impact of social identity on worker competition by exploiting the exogenous variations in workers' origins and the well-documented social divide between urban resident workers and rural migrant workers in large urban Chinese firms. We analyze data on weekly output, individual characteristics, and co-worker composition for all weavers in an urban Chinese textile firm between April 2003 and March 2004. The firm's relative performance incentive scheme rewards a worker for outperforming her co-workers. We find that a worker does not act on the monetary incentives to outperform co-workers who share the same social identity but does aggressively compete against coworkers with a different social identity. Our results highlight the important role of social identity in overcoming self-interest and enhancing intergroup competitions.

    Download working paper: http://ssrn.com/abstract=2303862

    Competition and Social Identity in the Workplace: Evidence from a Chinese Textile Firm

    By: Kato, Takao, and Pian Shu

    Abstract—We study the impact of social identity on worker competition by exploiting the exogenous variations in workers' origins and the well-documented social divide between urban resident workers and rural migrant workers in large urban Chinese firms. We analyze data on weekly output, individual characteristics, and co-worker composition for all weavers in an urban Chinese textile firm between April 2003 and March 2004. The firm's relative performance incentive scheme rewards a worker for outperforming her co-workers. We find that a worker does not act on the monetary incentives to outperform co-workers who share the same social identity but does aggressively compete against coworkers with a different social identity. Our results highlight the important role of social identity in overcoming self-interest and enhancing intergroup competitions.

    Download working paper: http://ssrn.com/abstract=2303862

    Institutional Strategies in Emerging Markets

    By: Marquis, Christopher, and Mia Raynard

    Abstract—We review and integrate a wide range of literature that has examined the strategies by which organizations navigate institutionally diverse settings and capture rents outside of the marketplace. We synthesize this body of research under the umbrella term institutional strategies, which we define as the comprehensive set of plans and actions directed at strategically leveraging and shaping the socio-political and cultural institutions within an organization's external environment. Our review of institutional strategies is focused on emerging market contexts, settings that are characterized by weak capital market and regulatory infrastructures and fast-paced turbulent change. Under such challenging conditions, strategies aimed at shaping the institutional environment may be especially critical to an organization's performance and long-term survival. Our review reveals that organizations engage in three specific and identifiable sets of institutional strategies, which we term relational, infrastructure-building, and socio-cultural bridging. We conclude by highlighting fruitful avenues for cross-disciplinary dialogue in the hope of promoting future research on emerging markets and defining the next frontier of institutional theory in organizational analysis.

    Download working paper: http://ssrn.com/abstract=2490417

    Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors

    By: Short, Jodi L., Michael W. Toffel, and Andrea Hugill

    Abstract—Outsourcing firms increasingly rely on social auditors to provide strategic information about the conduct of their suppliers to manage the reputational risks that can arise from dangerous, illegal, and unethical behavior at supply chain factories. But little is known about what influences auditors' ability to identify and report poor supplier conduct. We find evidence that private supply chain auditors' reporting practices are shaped by several social factors including their experience, gender, and professional training; their ongoing relationships with suppliers; and the gender diversity of their audit teams. By providing the first comprehensive and systematic findings on supply chain auditing practices, our study suggests strategies companies can pursue to develop more credible monitoring regimes to reduce information asymmetries between themselves and their suppliers.

    Download working paper: http://ssrn.com/abstract=2343802

     

    Cases & Course Materials

    • Harvard Business School Case 514-064

    Outotec (A): Project Capture

    No abstract available.

    Purchase this case:
    http://hbr.org/product/outotec-a-project-capture/an/514064-PDF-ENG

    • Harvard Business School Case 514-065

    Outotec (B): Action Plan

    No abstract available.

    Purchase this case:
    http://hbr.org/product/outotec-b-action-plan/an/514065-PDF-ENG

    • Harvard Business School Case 214-054

    Molycorp: Financing the Production of Rare Earth Minerals (A)

    Molycorp, the western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expenditure project in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. Yet it had just reported lower than expected revenues and earnings for the second quarter of 2012. In response to the announcement, its stock price fell 29% (its stock price had fallen from $77 to $11 in the past 18 months). The weakening financial performance was due in large part to falling prices for rare earth minerals. With less internally generated cash flow available to fund the project, management had to decide how much capital to raise, what kind to raise, and when to raise it. These decisions would determine its capital structure, at least in the short-term, as well as its ability to implement its business strategy.

    Purchase this case:
    http://hbr.org/product/molycorp-financing-the-production-of-rare-earth-minerals-a/an/214054-PDF-ENG

    • Harvard Business School Case 215-014

    Molycorp: Issuing the 'Happy Meal' Securities (B)

    Molycorp, the western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expansion in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. After reporting lower than expected revenues and earnings for the second quarter of 2012, management needed to design a new funding strategy for the firm. In August 2012, Molycorp announced it would issue $120 million of equity and $360 million of convertible debt. To facilitate the issuance of convertible debt, the firm entered a "share lending agreement" with Morgan Stanley whereby Morgan Stanley would borrow shares from Molycorp in a transaction referred to as a "Happy Meal." The goal was to help convertible debt investors "hedge their respective investments through short sales." The challenge of the case is to understand why Molycorp used this financing strategy and what impact it would likely have on the firm, its prospects, and its stock price.

    Purchase this case:
    http://hbr.org/product/molycorp-issuing-the-happy-meal-securities-b/an/215014-PDF-ENG

    • Harvard Business School Case 215-002

    Molycorp: Morgan Brother's Reverse Convertible Notes (C)

    In August 2011, Morgan Brothers Bank was issuing a $2.5 million reverse convertible note with payoffs linked to the price of Molycorp's common stock. These financially engineered securities were just one of many kinds of structured notes available in the retail market. Investors must decide whether the notes were fairly priced and whether they offered a favorable risk-return trade-off.

    Purchase this case:
    http://hbr.org/product/molycorp-morgan-brother-s-reverse-convertible-notes-c/an/215002-PDF-ENG

    • Harvard Business School Case 314-068

    Starbucks Coffee Company: Transformation and Renewal

    This case analyzes the turnaround and reconstruction of Starbucks Coffee Company from 2008 to 2014 as led by CEO and co-founder Howard Schultz. The case offers executives and students an opportunity to examine in depth how Schultz and his team saved Starbucks from near collapse, by both executing a deep, comprehensive return to its core values and, at the same time, investing in a range of new products, customer experiences, and organizational capabilities designed to make the company fit for enduring success in a turbulent global economy. Set against the backdrop of the Great Recession, the case also considers the impact of unprecedented important shifts in consumer spending and confidence as well as new competitive forces on Starbucks' transformation. The case concludes by examining Schultz's own leadership journey, the lessons he learned personally during Starbucks transformation, and how he is using these lessons-within Starbucks and on the national stage-to redefine the roles and responsibilities of a public corporation in the 21st century. Based on extensive interviews conducted with Schultz and other Starbucks executives from 2011 to 2014, the case offers a range of vital lessons on leadership, organizational transformation, restructuring, strategy, innovation, entrepreneurial vision, and customer service.

    Purchase this case:
    http://hbr.org/product/starbucks-coffee-company-transformation-and-renewal/an/314068-PDF-ENG

    • Harvard Business School Case 614-035

    3D Systems

    In late 2013, Rajeev Kulkarni needed to decide how best to facilitate the emergence of a broad base of users and content to promote the sale of 3D Systems' consumer-focused 3D printers. As yet, neither the company nor users had identified an indispensable application for 3D printing for consumers, despite a plethora of potential opportunities.

    Purchase this case:
    http://hbr.org/product/3d-systems/an/614035-PDF-ENG

    • Harvard Business School Case 714-010

    Cyprus (A)

    Cyprus is a small Mediterranean island located at the crossroads of Europe, Africa, and the Middle East. Since its 1974 split, Cyprus has grown real GDP more than fivefold-in large part because of its development as an "international business" center. The country developed a large network of double-taxation treaties (including some of the most robust agreements with Russia and other ex-Soviet Republics) that allowed it to serve as a tax-efficient conduit for international capital flows. In 2002 it acceded to the European Union and in 2008 to the Eurozone. However, in 2012, facing fiscal deficits and an insolvent banking sector, the island became the fourth EU country to formally request assistance from the EC-ECB-IMF Troika. The final assistance package required a "bail-in" from uninsured depositors in order to return the nation's largest banks to solvency. How had Cyprus's development model contributed to both the island's financial crisis as well as the structure of its ultimate assistance package? The case has four main teaching objectives (especially if taught with HBS Technical Note 713-090): 1. To describe what tax havens are and the mechanics of how these jurisdictions operate. 2. To evaluate tax havens as a model for country development. 3. To examine the economic and political benefits of the tax haven model, including answering the question of why tax havens exist. 4.To examine the economic and political risks of developing a tax haven model across nation-stakeholders, including discussing their role in the crisis and the sustainability of the tax haven model.

    Purchase this case:
    http://hbr.org/search/714010-PDF-ENG

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