First Look

October 2, 2018

Of special interest among new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Consumers buy more products to get free shipping

Online shoppers who are required to spend a certain amount of money in order to qualify for free shipping will increase their basket sizes in order to meet the minimum order threshold, according to a new working paper by Donald Ngwe and Chaoqun Chen. These consumers also shift their purchases toward more popular products, the research finds. Shipping Fees and Product Assortment in Online Retail.

Boards say innovation isn’t a top priority

Many business leaders believe firms must innovate to stay ahead, yet boards may be falling short in their ability to foster innovation. A survey of more than 5,000 board members shows fewer than a third consider innovation one of the top three challenges their companies face in achieving their strategic objectives, according to Boris Groysberg and J. Yo-Jud Cheng in a recent Harvard Business Review article. Innovation Should Be a Top Priority for Boards. So Why Isn’t It?

Sentiments about the EU appear brighter

The European sovereign debt crisis, followed by the British referendum on leaving the European Union, sent shockwaves through Europe. But research by Christian Ketels and Michael E. Porter finds that a majority of citizens in all but three EU member countries now view membership in the EU as beneficial. Towards a New Approach for Upgrading Europe’s Competitiveness.

A complete list of new research and publications from Harvard Business School faculty follows.

— Dina Gerdeman
 
  • forthcoming
  • Annual Review of Economics

History, Micro Data and Endogenous Growth

By: Akcigit, Ufuk, and Tom Nicholas

Abstract—Economic growth is concerned with long-run changes, and as a result historical data should be especially influential in informing the development of new theories. In this paper we draw on the recent literature to highlight areas in which history has played a particularly prominent role in improving our understanding of growth dynamics. Research at the intersection of historical data, theory, and empirics has the potential to reframe how we think about economic growth in much the same way that historical perspectives helped to shape the first generation of endogenous growth theories.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=55039

  • September 21, 2018
  • Harvard Business Review

Innovation Should Be a Top Priority for Boards. So Why Isn’t It?

By: Cheng, J. Yo-Jud, and Boris Groysberg

Abstract—: Corporate directors and executives alike recognize that today’s pace of change continues to accelerate and that firms need to innovate to stay ahead. But are boards doing enough to support innovation, as they should? We conducted a survey of over 5,000 board members from around the world to find out. We found that, overall, innovation does not rank as a top strategic challenge for the majority of boards. Although directors in certain industries are more cognizant of the threat of disruption, the widespread lack of board-level engagement in innovation processes could be a major blind spot and a potential liability. Fewer than one-third (30%) of respondents see innovation as one of the top three challenges their company faces in achieving its strategic objectives, and just 21% think that technology trends are a major strategic challenge. Innovation ranks fifth, after more conventional concerns such as attracting and retaining top talent and the regulatory environment. Boards’ abilities to foster innovation clearly fall short when compared with their other activities.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=55053

  • 2018
  • Journal of the Economic and Social History of the Orient

Revenue Farming Reconsidered: Tenurial Rights and Tenurial Duties in Early Modern India, ca. 1556–1818

By: Sheth, Sudev J

Abstract—The meaning of land revenue farming in Indian history has eluded consensus. Some view it as an administrative aberration indicating weak state control, while others see it as a strategy for consolidating authority. This essay traces the historical development of iqṭāʻ and ijārah, two Perso-Arabic terms frequently translated from the sources as “revenue farming estate.” I then suggest that existing perspectives do not capture the broader structure and significance of various entitlements to land revenue. Instead, I suggest that entitlements be schematized according to how regularized the right was, whether it was permanent, and how duty-bound the right holder was. In this formulation, revenue farm refers to a complex of rights and duties secured by contract in which a sovereign transferred the temporary exploitation of a holding for rent in advance. It was one of four tenurial complexes under which entitlements fell, the others being estates from bureaucratic assignment, hereditary occupation or possession by grant/gift, and tributary or chieftaincy.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54766

Abstract—We investigate how dynamic pricing can lead to more product returns in the online retail industry. Using detailed sales data of more than two million transactions from the Indian online retail market, where price promotions are very common, we document two types of strategic customer behavior that have not been considered in previous research. First, customers who monitor product prices after purchase may initiate opportunistic returns because of price drops. Second, customers who anticipate a future return may strategically choose a payment method that facilitates product returns. Our logistic regression models indicate that (1) realized post-purchase price drops lead to a higher probability of return, and (2) anticipated price drops after purchase lead to a higher probability of using cash on delivery, a payment method with a lower return cost for consumers. Our findings are robust to alternative model specifications and sample selection procedures. We demonstrate that an optimal pricing policy should take into consideration the potential costs of two types of strategic customer behavior: opportunistic returns and strategic choice of payment method.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=55030

Governance Through Shame and Aspiration: Index Creation and Corporate Behavior

By: Chattopadhyay, Akash, Matthew D. Shaffer, and Charles C.Y. Wang

Abstract—After decades of both de-prioritizing shareholders' economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country's “best-run” companies by annually selecting the 400 most profitable among Japan's large and liquid firms. We find that managers competed to be included in the index by significantly increasing ROE, at least in part due to managers' reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which was partially driven by cutting R&D intensity—a potentially unintended consequence. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=53030

Abstract—Shipping fees are an important aspect of online retail for both consumers and sellers. A common fee structure is contingent free shipping, in which consumers are granted free shipping for basket sizes above a minimum value and are charged a flat fee for orders below this threshold. We seek to characterize how contingent free shipping influences purchase outcomes in a multi-category shopping environment. We build a demand model in which consumers choose how to allocate their spending over different product categories to maximize their direct utility under contingent free shipping. We estimate model parameters using transaction data from a pure online fashion retailer. We find that, relative to offering free shipping, offering contingent free shipping increases basket sizes by encouraging consumers to meet the minimum order threshold. Consumers incur search costs to meet this threshold exactly; sellers may benefit from maintaining high search costs to encourage overshooting. Moreover, we find that contingent free shipping shifts demand to more popular products and that the effects of category-level price changes on profits depends on the active shipping policy. Our findings demonstrate the importance of jointly determining product assortment attributes and shipping fee policies.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=55050

"Developing Theory Using Machine Learning Methods

By: Choudhury, Prithwiraj, Ryan Allen, and Michael G. Endres

Abstract—We describe how to employ machine learning (ML) methods in theory development. Compared to traditional causal inference methods, ML methods make far fewer a priori assumptions about the functional form of the underlying model that best represents the data. Given this, researchers could use such methods to explore novel and robust patterns in the data that could lead to inductive theory building. ML strengths include replicable identification of novel patterns in the data. Additionally, ML methods address several concerns (such as “p-hacking” and confounding local effects for global effects) raised by scholars relative to the norms of empirical research in the fields of strategy and management. We develop a step-by-step roadmap that illustrates how to use four ML methods (decision trees, random forests, K-nearest neighbors, and neural networks) to reveal patterns in data that could be used for theory building. We also illustrate how ML methods could better illuminate interactions and non-linear effects, relative to traditional methods. In summary, ML methods could act as a complementary tool to both existing inductive theory-creating methods such as multiple case inductive studies and traditional methods of causal inference.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=55043

Abstract—Machine learning process technologies usher new questions regarding potential complementarity with human capital. We examine productivity differentials between machine learning and older vintage technology based on interactions with two important human capital attributes: domain-specific expertise and vintage-specific human capital. Our experimental setting simulates the U.S. Patent and Trademark Office examination process. We randomize assignment of novice patent examiners to each process technology and provision of domain-specific expertise. Our analysis of examiner accuracy and speed in patent adjudication reveals, irrespective of process technology, expertise is necessary for identifying prior art that invalidates the patent being examined, and productivity in the machine learning process technology requires computer science and engineering (CS&E) skills. We discuss implications for artificial intelligence and strategic management of the pace of technological substitution.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=53855

"Machine Learning Approaches to Facial and Text Analysis: An Application to CEO Oral Communication

By: Choudhury, Prithwiraj, Dan Wang, Natalie A. Carlson, and Tarun Khanna

Abstract—The advent of machine learning (ML) tools presents researchers with the possibility of using large and new datasets related to text and image repositories. In this paper, we make a methodological contribution to strategy research by documenting a novel synthesis of two machine learning methods—the unsupervised topic modeling of textual data and the supervised ML coding of facial images with a neural network algorithm. We employ these novel methods to study CEO oral communication, using videos and corresponding transcripts of emerging market CEO interviews to conduct our analysis. Building on Helfat and Peteraf (2015) who document the importance of “oral language” as an important managerial cognitive capability, we code the topics and sentiments expressed in the text of what the CEOs say (verbal language) and separately code the facial expressions of the CEOs (non-verbal communication). Using the interview text sentiment scores as well as our video-based facial expression sentiment variables, we conducted factor analysis to construct four distinct CEO oral communication “styles,” which we label Expressive, Stern, Dour, and Contented. We also reveal that CEOs who communicate with certain styles also tend to focus on specific topics, even controlling for their country of origin and gender. For example, CEOs who tend to be more expressive devote more attention to topics related to society at large and avoid topics related to the government. By contrast, dour CEOs are more likely to dwell on topics related to both the government and society. These results suggest that a CEO’s communication style reveals a substantial amount of information about their attention to certain aspects of their businesses.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=53858

Corruption, Government Subsidies, and Innovation: Evidence from China

By: Fang, Lily, Josh Lerner, Chaopeng Wu, and Qi Zhang

Abstract—: Governments are important financiers of private sector innovation. While these public funds can ease capital constraints and information asymmetries, they can also introduce political distortions. We empirically explore these issues for China, where a quarter of firms’ R&D expenditures come from government subsidies. Using a difference-in-differences approach, we find that the anti-corruption campaign that began in 2012 and the departures of local government officials responsible for innovation programs strengthened the relationship between firms’ historical innovative efficiency and subsequent subsidy awards and depressed the influence of their corruption-related expenditures. We also examine the impact of these changes: subsidies became significantly positively associated with future innovation after the anti-corruption campaign and the departure of government innovation officials.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=55038

Abstract—Liability laws designed to compensate for harms caused by defective products may also affect innovation. We examine this issue by exploiting a major quasi-exogenous increase in liability risk faced by U.S. suppliers of polymers used to manufacture medical implants. Difference-in-differences analyses show that this surge in suppliers’ liability risk had a large and negative impact on downstream innovation in medical implants, but it had no significant effect on upstream polymer patenting. Our findings suggest that liability risk can percolate throughout a vertical chain and may have a significant chilling effect on downstream innovation.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54706

Towards a New Approach for Upgrading Europe’s Competitiveness

By: Ketels, Christian, and Michael E. Porter

Abstract—The traumatic experience of the European sovereign debt crisis, followed by the outcome of the British referendum on leaving the European Union, has sent shockwaves through Europe. For the first time since the signing of the Treaties of Rome six decades ago, the very notion of European integration as embodied in the institutions of the European Union was being questioned. A substantial improvement in economic conditions and the messy reality of the Brexit process in the UK have since then led to a significant recovery in sentiments about the EU’s future. A majority of citizens in all but three EU member countries view membership in the EU as beneficial. EU Commission President Juncker sees “the wind […] back in Europe's sails.”

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=55046

  • Harvard Business School Case 518-034

International Institute of Tropical Agriculture

: It is July 2017, and Dr. Nteranya Sanginga, the director general of the Nigeria-based International Institute of Tropical Agriculture (IITA), is making progress toward two of his primary strategic objectives for the nonprofit research Institute: 1) to scale the impact and reach of some of the IITA’s most commercially viable products and technologies by working with the private sector, and 2) to address Nigeria’s massive youth unemployment problem by engaging young people in agribusiness. To achieve his first goal, Sanginga in 2013 established a business incubation platform (BIP), which was tasked with establishing pilot production facilities to illustrate that a select number of IITA products could be profitably manufactured and sold to an existing market. Sanginga hoped that the BIP would attract interest from private sector companies compelled by the business case for taking a particular technology to scale. To achieve his second goal, Sanginga had founded a youth “agripreneurs” program, which would train young university graduates on improved agricultural practices, food processing, and strategies for starting an agribusiness. Since its establishment in 2012, the program had enrolled four cohorts of young people in Ibadan (a total of 70 people) and expanded to four other states in Nigeria and five additional African countries. While both programs were making progress, challenges remained. Sanginga had originally hoped that the agripreneurs program would launch dozens of small businesses, but as of mid-2017, it had produced just four independent start-ups. Most of the program’s agripreneurs in Ibadan (53 of the 70) remained affiliated with the IITA. Poor access to commercial loans, which carried interest rates up to 30%, was the primary issue preventing them from starting businesses. The BIP, too, faced challenges. Chief among them was a severe cash flow constraint that prevented Frederic Schreurs from properly forecasting and investing resources to maximize the BIP’s impact. As traffic inched along, Sanginga contemplated how he could steer both the BIP and the agripreneurs program toward long-term success in his remaining four years at the IITA’s helm.

Purchase this case:
https://hbsp.harvard.edu/product/518034-PDF-ENG

  • Harvard Business School Case 213-035

"BASIX (Abridged)

BASIX, an Indian microfinance corporation, must decide whether to continue to sell weather insurance to its clients. A brand-new financial product, weather insurance pays if measured rainfall during the growing season falls below a pre-specified limit. Mr. Sattaiah, managing director of the BASIX's bank, considers a revised insurance policy for the coming season, weighing the costs and potential risks of expanding the product against the potential benefits.

Purchase this case:
https://hbsp.harvard.edu/product/213035-PDF-ENG

No abstract available

Purchase this case:
https://hbsp.harvard.edu/product/218083-PDF-ENG

  • Harvard Business School Case 719-002

Donald Trump and the Tax Cuts and Jobs Act

In January 2018, President Donald Trump was full of optimism. He had just signed the most substantial legislation of his young presidency, the Tax Cuts and Jobs Act (TCJA), making major changes to the tax code. Echoing his campaign slogan—Make America Great Again—Trump emphasized the power of tax cuts to drive economic growth. TCJA divided the U.S. Congress. The Republican Speaker of the House Paul Ryan (R-WI) celebrated it as "something I have been working on for my entire adult life,” and Senate Majority Leader Mitch McConnell (R-KY) cheered: “2017 was the best year for conservatives in the 30 years that I’ve been here. The best year on all fronts.” But Democrats attacked the bill from several angles. House Minority Leader (and former Speaker) Nancy Pelosi (D-CA) said: "This GOP tax scam is simply theft, monumental, brazen theft from the American middle class and from every person who aspires to reach it… The GOP tax scam is not a vote for an investment in growth or jobs. It is a vote to install a permanent plutocracy in our nation.… And it betrays the future and betrays the aspirations of our children." As in Congress, U.S. public opinion at the time of the bill’s passage was mixed but sharply split along party lines. Which appraisal of TCJA would prove to be right? Would TCJA's changes last, or would the American public end up rejecting them and vote in a government to reverse them? Were Trump and the Republicans charting a course toward prosperity, or had they taken a wrong turn?

Purchase this case:
https://hbsp.harvard.edu/product/719002-PDF-ENG