Global Reach. Global Knowledge.

2011

Finding the Right Mix: How the Composition of Self-managing Multicultural Teams' Cultural Value Orientation Influences Performance Over Time

Cheng, Chi-Ying, Roy Y.J. Chua, Michael W. Morris, and Leonard Lee
December 2011

This research investigates a new type of team that is becoming prevalent in global work settings, namely, self-managing multicultural teams. We argue that challenges that arise from cultural diversity in teams are exacerbated when teams are leaderless, undermining performance. A longitudinal study of multicultural MBA study teams found that in the early stage of team formation, teams with a low average level of, but moderate degree of variance in, uncertainty avoidance performed best. Four months post formation, however, teams with a high average level of relationship orientation performed better than teams with a low average level of relationship orientation. Furthermore, a moderate degree of variance in relationship orientation among team members produced better team performance than a low or high degree of variance. These findings suggest that different cultural value orientations exert different patterns of effects on the performance of self-managing multicultural teams, depending on the stage of team formation. Implications for the composition of self-managing multicultural teams and its influence on team processes and performance are discussed.

Journal of Organizational Behavior

Globalization and Beauty: A Historical and Firm Perspective

Jones, Geoffrey
December 2011

This paper uses the beauty industry to explore the impact of globalization over the very long run. As the first wave of modern globalization started in the nineteenth century, there began a massive homogenization of beauty ideals around the world that has, to some extent, continued until the present day. This had enormous societal and cultural consequences. Business enterprises were at the heart of this process. The paper explores how entrepreneurs and firms translated societal values into brands, globalized them, and changed societal perceptions of beauty as a result. It also shows the limitations of the homogenization achieved by firms even at its high point, before making the case that contemporary globalization is working to facilitate greater diversity in beauty ideals again.

EurAmerica 41, no. 4 (December 2011): 885-916

The Evolving Basis for Legitimacy of the World Trade Organization: Dispute Settlement and the Rebalancing of Global Interests

Daemmrich, Arthur
December 2011

The World Trade Organization (WTO) features prominently in studies of international institutions, although it is often over-simplified either as a tool of rich world domination over the global South or as the only stop-gap preventing a breakdown in the international system. This article analyzes how the WTO has sought legitimacy for itself and for the underlying institution of free trade in the midst of questions regarding its organizational mandate and the management of international trade negotiations. Initially, legitimacy appeared to derive from an expanding membership and the lowering of tariffs in progressively more categories of goods and services. More recently, legitimacy comes from institutional deepening by means of dispute resolution procedures and rulings by the dispute settlement body. This shift, it is argued, raises foundational questions of expertise, the relationship of models to real-world outcomes, and methods for bounding disputes over scientific and economic facts. Based on a case study of Brazil's interaction with the WTO-especially in a decade-long claim against U.S. cotton subsidies-and a trend analysis of over 400 total WTO disputes, I argue that the WTO dispute process is helping to legitimize the institution of free trade through its public display of rational authority and neutral expertise. At the same time, dispute panels have begun to pass judgment on issues of scientific and econometric uncertainty. As a result, the basis for dispute judgment and the broader legitimacy of the WTO is shifting from questions of representation that have long drawn the attention of critics and WTO leaders to epistemological issues, especially concerning the basis of expertise and the design of econometric models. This article provides insights on the resolution of disputes in global trade while contributing to our understanding of the evolving role of scientific and econometric modeling at international organizations.

Harvard Business School Working Paper, No. 12-041, December 2011

The Role of Finance and Private Investment in Developing Sustainable Cities

Macomber, John D.
November 2011

Three trends will drive urban investment, development, and entrepreneurship in the next two decades. This article provides tools to identify the situations and circumstances that will be most favorable for private sector involvement in consideration of these trends. The first trend is urbanization. Over the next twenty years, the number of people living in cities will double, with three billion additional urban dwellers. Second, shared resources like clean water, clean air, energy, and places to put solid waste are already scarce and constrained. Urbanization will only exacerbate these pressures. Third, almost no local or national government can mobilize both the capital and the political consensus to make investments in the infrastructure that will lead to more effective use of these resources. There is a largely unrecognized opportunity for the private sector to engage in selective investments that consider these trends. Investors and entrepreneurs can make money by extending these "common good" kinds of items, which use resources more productively. In the winning situations, this makes these cities more economically competitive at the same time. This article further argues for investments grounded in the basics of smart physical configuration. Examples are the compact arrangement of buildings, efficient use of water and power, and deployment of transit that reduces congestion. Investment and urban planning in three Asian cities are profiled as illustrations. Two sample proformas featuring multiple classes of securities illustrate the concepts.

Bias in Search Results?: Diagnosis and Response

Edelman, Benjamin
November 2011

I explore allegations of search engine bias, including understanding a search engine's incentives to bias results, identifying possible forms of bias, and evaluating methods of verifying whether bias in fact occurs. I then consider possible legal and policy responses, and I assess search engines' likely defenses. I conclude that regulatory intervention is justified in light of the importance of search engines in referring users to all manner of other sites, and in light of striking market concentration among search engines.

The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance

Eccles, Robert G., Ioannis Ioannou, and George Serafeim
November 2011

We investigate the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes. Using a matched sample of 180 companies, we find that corporations that voluntarily adopted environmental and social policies many years ago-termed "high sustainability" companies-exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies- termed "low sustainability" companies. In particular, we find that the boards of directors of these companies are more likely to be responsible for sustainability, and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit better measurement and disclosure of nonfinancial information. Finally, we provide evidence that high sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.

Capitalism at Risk: Rethinking the Role of Business

Bower, Joseph, Herman B. Leonard, and Lynn S. Paine
October 2011

No abstract available

Harvard Business Review Press, 2011

Translating Empire: Emulation and the Origins of Political Economy

Reinert, Sophus A.
October 2011

No abstract available

The Rise and Consequences of Corporate Sustainability Reporting

Ioannou, Ioannis, and George Serafeim
October 2011

For many decades the cornerstone of corporate reporting has been financial information that is presented in a company's annual, semi-annual, and quarterly reports. These comprehensive financial reports-required by law for public companies in most countries worldwide-have provided shareholders as well as other interested stakeholders with rather elaborate information on the company's operations and strategic activities during the preceding fiscal year. However, in the last two decades and in addition to these financial reports, a growing number of companies across sectors and geographies are communicating to their stakeholders their initiatives and performance within the environmental, social, and governance (ESG) domains. Disclosure of non-financial reports has generated heated debates about whether such information is useful for stakeholders, whether disclosure along ESG dimensions should be mandated by regulation, and if yes, what form such regulation should take. The underlying debate, of course, relates to the broader issue of the role of the business organization within civil society and whether it may contribute toward the world's acute problems via some form of corporate social responsibility (CSR) through a sustainable business model that also generates superior financial performance.

European Business Review (September-October 2011)

Free to Punish? The American Dream and the Harsh Treatment of Criminals

Di Tella, Rafael, and Juan Dubra
October 2011

We describe the evolution of selective aspects of punishment in the U.S. over the period 1980-2004. We note that imprisonment increased around 1980, a period that coincides with the "Reagan revolution" in economic matters. We build an economic model where beliefs about economic opportunities and beliefs about punishment are correlated. We present three pieces of evidence (across countries, within the U.S., and an experimental exercise) that are consistent with the model.

NBER Working Paper Series, No. 17309, August 2011

Multi-Sided Platforms

Hagiu, Andrei, and Julian Wright
October 2011

The economics of two-sided markets or multi-sided platforms has emerged over the past decade as one of the most active areas of research in economics and strategy. The literature has constantly struggled, however, with a lack of agreement on a proper definition; for instance, some existing definitions imply that retail firms such as grocers, supermarkets, and department stores are multi-sided platforms (MSPs). We propose a definition that provides a more precise notion of MSPs by requiring that they enable direct interactions between the multiple customer types that are affiliated with them. Several important implications of this new definition are derived. First, cross-group network effects are neither necessary nor sufficient for an organization to be a MSP. Second, our definition emphasizes the difference between MSPs and alternative forms of intermediation such as "re-sellers," which take control over the interactions between the various sides, or input suppliers, which have only one customer group affiliated as opposed to multiple. We discuss a number of examples that illustrate the insights that can be derived by applying our definition. Third, we point to the economic considerations that determine where firms choose to position themselves on the continuum between MSPs and resellers, or MSPs and input suppliers.

Harvard Business School Working Paper, No. 12-024, October 2011

Tax Policy and the Efficiency of U.S. Direct Investment Abroad

Desai, Mihir A., C. Fritz Foley, and James R. Hines Jr
October 2011

Deferral of U.S. taxes on foreign source income is commonly characterized as a subsidy to foreign investment, as reflected in its inclusion among "tax expenditures" and occasional calls for its repeal. This paper analyzes the extent to which tax deferral and other policies inefficiently subsidize U.S. direct investment abroad. Investments are dynamically inefficient if they consistently generate fewer returns to investors than they absorb in new investment funds. From 1982 to 2010, repatriated earnings from foreign affiliates exceeded net capital investments by $1.1 trillion in 2010 dollars; and from 1950 to 2010, repatriated earnings and net interest from foreign affiliates exceeded net equity investments and loans by $2.1 trillion in 2010 dollars. By either measure, cash flows received from abroad exceeded 160% of net investments, implying that foreign investment over these periods was dynamically efficient.

National Tax Journal

How Great Companies Think Differently

Kanter, Rosabeth Moss
October 2011

Corporate leaders have long subscribed to the belief that the sole purpose of business is to make money. That narrow view, deeply embedded in the American capitalist system, molds the actions of most corporations, constraining them to focus on maximizing short-term profits and returns to shareholders at the expense of worker safety and health, the environment, and society in general. In this article, I argue that a very different logic informs the practices of most high-performing and sustainable companies: institutional logic. These companies believe that they are more than money-making machines: they are a vehicle for advancing societal goals. They deliver more than just financial returns; they also build enduring institutions. At great companies researched for this article, institutional logic takes its place beside financial logic in managerial decision making. Six facets of institutional logic-a common purpose, a long-term focus, emotional engagement, partnering with the public, innovation, and self-organization-radically alter leadership and corporate behavior and form the building blocks of a more sustainable competitive advantage.

Harvard Business Review 89, no. 11 (November 2011

Social Strategies That Work

Piskorski, Mikołaj Jan
October 2011

No abstract available

Harvard Business Review 89, no. 11 (November 2011): 116-122

Carbon Tariffs: Impacts on Technology Choice, Regional Competitiveness, and Global Emissions

Drake, David F.
October 2011

Carbon regulation is intended to reduce global emissions, but there is growing concern that such regulation may simply shift production to unregulated regions, potentially increasing overall carbon emissions in the process. Carbon tariffs have emerged as a possible mechanism to address this concern by imposing carbon costs on imports at the regulated region's border. Advocates claim that such a mechanism would level the playing field, whereas opponents argue that such a tariff is anti-competitive. This paper analyzes how carbon tariffs affect technology choice, regional competitiveness, and global emissions through a model of imperfect competition between "domestic" (i.e., carbon-regulated) firms and "foreign" (i.e., unregulated) firms, where domestic firms have the option to offshore production and the number of foreign entrants is endogenous. Under a carbon tariff, results indicate that foreign firms would adopt clean technology at a lower emissions price than domestic producers, with the number of foreign entrants increasing in emissions price only over intervals where foreign firms hold this technology advantage. Further, domestic firms would only offshore production under a carbon tariff to adopt technology strictly cleaner than technology utilized domestically. As a consequence, under a carbon tariff, foreign market share is non-monotonic in emissions price, and global emissions conditionally decrease. Without a carbon tariff, foreign share monotonically increases in emissions price, and a shift to offshore production results in a strict increase in global emissions.

Harvard Business School Working Paper, No. 12-029, October 2011

Global Capitalism at Risk: What Are You Doing About It?

Bower, Joseph , Herman B. Leonard, and Lynn S. Paine
September 2011

Market capitalism, a system that has proven to be a remarkable engine of wealth creation, is poised for a breakdown. That sounds dire, and it is. Increasing income inequality, migration, weaknesses in the global financial system, environmental degradation, and inadequate government and international institutions are just a few of the forces that threaten to disrupt global market capitalism in the decades ahead. In conversations with business leaders around the world, the authors found that virtually all of them shared a deep concern for the sustainability of the market system, but their beliefs about how to respond varied widely. Some said that changing their behavior would be unnecessary or even inappropriate. Others were unsure how to deal with issues seldom thought to be the responsibility of individual firms. The authors call for business to be both innovator and activist in protecting and strengthening market capitalism. Instead of seeing themselves as narrowly self-interested players in a system that is overseen by others, business leaders must spearhead entrepreneurial activity on a massive scale-devising strategies that provide employment for the billions now outside the system, inventing business models that make better use of scarce resources, and creating institutional arrangements for coordinating and governing neglected and dysfunctional aspects of market capitalism.

Harvard Business Review 89, no. 9 (September 2011)

The Current Crisis and the Essence of Capitalism

McCraw, Thomas K
September 2011

No abstract available

The Montréal Review (August 2011)

Sovereigns, Upstream Capital Flows and Global Imbalances

Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych
September 2011

We decompose capital flows-both debt and equity-into public and private components and study their relationship with productivity growth. This exercise reveals that international capital flows are mainly shaped by government decisions and sovereign to sovereign transactions. Specifically, we show (1) international capital flows net of government debt are positively correlated with growth and allocated according to the neoclassical predictions; (2) international capital flows net of official aid flows, which are mostly accounted as debt, are also positively correlated with productivity growth consistent with the predictions of the neoclassical model; and (3) public debt flows are negatively correlated with growth only if government debt is financed by another sovereign and not by private lenders. Our results show that the failure to consider official flows as the main driver of uphill flows and global imbalances is an important shortcoming of the recent literature.

Harvard Business School Working Paper, No. 12-009, August 2011

Market Competition, Government Efficiency, and Profitability Around the World

Healy, Paul M., George Serafeim, Suraj Srinivasan, and Gwen Yu
September 2011

We examine how cross-country differences in product, capital, labor market competition, and government efficiency affect the rate of mean reversion of corporate profitability. Using a sample of 42,337 unique firms from 49 countries, we find that corporate profitability mean reverts faster in countries where product and capital markets are more competitive. Moreover, holding constant product, capital, and labor market competition we find that profitability mean reverts faster in countries with less efficient governments. The findings suggest that country-level factors have an economically significant impact on the rate of corporate profitability mean reversion. The study has implications for forecasting profitability and equity valuation in a global context.

Harvard Business School Working Paper, No. 12-010, May 2011

Doing What the Parents Want? The Effect of the Local Information Environment on the Investment Decisions of Multinational Corporations

Shroff, Nemit O., Rodrigo S. Verdi, and Gwen Yu
September 2011

This paper examines how the external information environment in which foreign subsidiaries operate affects investment decisions in multinational corporations (MNCs). We hypothesize and find that foreign subsidiaries in country-industries with more transparent information environments better translate the local growth opportunities into investments. This result is consistent with the information environment helping MNCs monitor the subsidiary's investment decision. Cross-sectional tests show that the effect is larger when there is greater "distance" between the parent and the subsidiary. Our results suggest that the external information environment helps mitigate agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.

Harvard Business School Working Paper, No. 12-011, September 2011

Benefiting from Location: Knowledge Seeking

Alcácer, Juan, and Wilbur Chung
September 2011

No abstract available

Global Strategy Journal 1, nos. 1-2 (May 2011): 132-134

Spanning the Institutional Abyss: The Intergovernmental Network and the Governance of Foreign Direct Investment

Alcácer, Juan, and Paul Ingram
September 2011

Global economic transactions such as foreign direct investment must extend over an institutional abyss between the jurisdiction, and therefore protection, of the states involved. Intergovernmental organizations (IGOs), whose members are states, represent an important attempt to span this abyss. IGOs are mandated variously to smooth economic transactions, facilitate global cooperation, and promote cultural contact and awareness. We use a network approach to demonstrate that the connections between two countries through joint-membership in the same IGOs are associated with a large positive influence on the foreign direct investment that flows between them. Moreover, we show that this effect occurs not only in the case of IGOs that focus on economic issues, but also on those with social and cultural mandates. This demonstrates that relational governance is important and feasible in the global context and for the most risky transactions. Finally we examine the interdependence between the IGO network and the domestic institutions of states. The interdependence between these global and domestic institutional forms is complex, with target-country democracy being a substitute for economic IGOs, but a complement for social and cultural IGOs.

American Journal of Sociology

Local R&D Strategies and Multi-location Firms: The Role of Internal Linkages

Alcácer, Juan, and Minyuan Zhao
September 2011

This study looks at the role of firms' internal linkages in highly competitive technology clusters, where much of the world's R&D takes place. The leading players in these clusters are multilocation firms that organize and integrate knowledge across sites worldwide. Strong internal links across locations allow these firms to leverage knowledge for competitive advantage without risking critical knowledge outflow to competitors. We examine whether multi-location firms increase internal ties when they face appropriability risks from direct competitors. Our empirical analysis of the global semiconductor industry shows that when leading firms co-locate with direct market competitors, innovations tend to be quickly internalized and are more likely to involve collaboration across locations, particularly with inventors from the firm's primary R&D site. Our results suggest that R&D dynamics in clusters are heavily influenced by multi-location firms with innovative links across locations and that future research on technology innovation in clusters should account for these links.

Management Science

A Global Leader's Guide to Managing Business Conduct

Paine, Lynn S., Rohit Deshpandé, Joshua D. Margolis
September 2011

No abstract available

Harvard Business Review 89, no. 9 (September 2011)

Toward a Theory of Extended Contact: The Incentives and Opportunities for Bridging across Network Communities

Sytch, Maxim, Adam Tatarynowicz, Ranjay Gulati
September 2011

This study investigates the determinants of bridging ties within networks of interconnected firms. Bridging ties are defined as non-redundant connections between firms located in different network communities. We highlight how firms can enter into these relationships due to the incentives and opportunities for action that are embedded in the existing network structure. Specifically, we propose that the dynamics of proximate network structures, which reflect firms' and their partners' direct connections, affect the formation of bridging ties by shaping the value-creation and value-distribution incentives for bridging. We also argue that the evolving global network structure affects firms' propensity to form bridging ties by shaping the structural opportunities for bridging. We test our theory using the network of partnership ties among firms in the global computer industry from 1991 to 2005. We find support for structural incentives and opportunities as influential precursors of bridging ties.

Organization Science

Economic Impacts of Immigration: A Survey

Pekkala Kerr, Sari, and William R. Kerr
August 2011

This paper surveys recent empirical studies on the economic impacts of immigration. The survey first examines the magnitude of immigration as an economic phenomenon in various host countries. The second part deals with the assimilation of immigrant workers into host-country labor markets and concomitant effects for natives. The paper then turns to immigration's impact for the public finances of host countries. The final section considers emerging topics in the study of immigration. The survey particularly emphasizes the recent experiences of Northern Europe and Scandinavia and relevant lessons from traditional destination countries like the U.S.

Finnish Economics Papers 24, no. 1 (spring 2011)

The Organization of Firms Across Countries

Bloom, Nicholas, Raffaella Sadun, and John Van Reenen
August 2011

We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. To help identify causal effects, we look within multinational firms, and show that higher levels of bilateral trust between the multinational's country of origin and subsidiary's country of location increases decentralization, even after instrumenting trust using religious and ethnic similarities between the countries. Trust raises aggregate productivity through two channels: (1) trust facilitates reallocation between firms by allowing more efficient firms to grow as CEOs can decentralize more decisions and (2) trust complements the adoption of new technologies, thereby increasing productivity within firms during times of rapid technological change.

Harvard Business School Working Paper, No. 12-005, August 2011

Advertising, the Matchmaker

Anand, Bharat N., and Ron Shachar
August 2011

We empirically study the informational role of advertising in matching consumers with products when consumers are uncertain about both observable and unobserved program attributes. Our focus is on the network television industry, in which the products are television shows. We estimate a model that allows us to distinguish between the direct effect of advertising on utility and its effect through the information set. A notable behavioral implication is that exposure to informational advertising can decrease the consumer's tendency to purchase the promoted product. The structural estimates imply that an exposure to a single advertisement decreases the consumer's probability of not choosing her best alternative by approximately 10%. Our results are relevant for industries characterized by product proliferation and horizontal differentiation.

RAND Journal of Economics 42

Achieving Sustainability Through Integrated Reporting

Eccles, Robert G., and Daniela Saltzman
July 2011

No abstract available

Stanford Social Innovation Review (summer 2011): 56-61

Tax Policy and the Efficiency of U.S. Direct Investment Abroad

Desai, Mihir A., C. Fritz Foley, and James R. Hines Jr
July 2011

Deferral of U.S. taxes on foreign source income is commonly characterized as a subsidy to foreign investment, as reflected in its inclusion among "tax expenditures" and occasional calls for its repeal. This paper analyzes the extent to which tax deferral and other policies inefficiently subsidize U.S. direct investment abroad. Investments are dynamically inefficient if they consistently generate fewer returns to investors than they absorb in new investment funds. From 1982-2010, repatriated earnings from foreign affiliates exceeded net capital investments by $1.1 trillion in 2010 dollars; and from 1950-2010, repatriated earnings and net interest from foreign affiliates exceeded net equity investments and loans by $2.1 trillion in 2010 dollars. By either measure, cash flows received from abroad exceeded 160% of net investments, implying that foreign investment over these periods was dynamically efficient.

NBER Working Paper Series, No. 17202, July 2011

"Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance."

Alfaro, Laura, and Maggie Chen
July 2011

We examine the differential response of establishments to the recent global financial crisis with particular emphasis on the role of foreign ownership. Using a worldwide establishment panel dataset, we investigate how multinational subsidiaries around the world responded to the crisis relative to local establishments. We find that first, multinational subsidiaries fared on average better than local counterfactuals with similar economic characteristics. Second, among multinational subsidiaries, establishments sharing stronger vertical production and financial linkages with parents exhibited greater resilience. Finally, in contrast to the crisis period, the effect of foreign ownership and linkages on establishment performance was insignificant in non-crisis years.

American Economic Journal: Economic Policy

Picking Green Tech's Winners and Losers

Christensen, Clayton M., Shuman Talukdar, Richard Alton, and Michael B. Horn
July 2011

No abstract available

Stanford Social Innovation Review

The International Politics of IFRS Harmonization

Ramanna, Karthik
July 2011

The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of the international political dynamics of countries' IFRS harmonization decisions. The analysis is based on a field study of three jurisdictions in particular: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize these jurisdictions' IFRS responses: proximity to existing political powers at the IASB; and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.

Harvard Business School Working Paper, No. 11-132, June 2011

The Paradox of Samsung's Rise

Khanna, Tarun, Jaeyong Song, and Kyungmook Lee
July 2011

Twenty years ago, few people would have predicted that Samsung could transform itself from a low-cost original equipment manufacturer to a world leader in R&D, marketing, and design, with a brand more valuable than Pepsi, Nike, or American Express. Fewer still would have predicted the success of the path it has taken. For two decades now, Samsung has been grafting Western business practices onto its essentially Japanese system, combining its traditional low-cost manufacturing prowess with an ability to bring high-quality, high-margin branded products swiftly to market. Like Samsung, today's emerging giants-Haier in China, Infosys in India, and Koç in Turkey, for instance-face a paradox: their continued success requires turning away from what made them successful. The tightly integrated business systems that have worked in their home markets are unlikely to secure their future in global markets. Samsung has steadily navigated this paradox to transcend its initial success in its home markets and move onto the world stage. It is a story that holds many important lessons for the current generation of emerging giants seeking to do the same.

Harvard Business Review 89, nos. 7-8 (July-August 2011): 142-147

Managing Political Risk in Global Business: Beiersdorf 1914-1990

Jones, Geoffrey, and Christina Lubinski
July 2011

This working paper examines corporate strategies of political risk management during the twentieth century. It focuses especially on Beiersdorf, a German-based pharmaceutical and skin care company. During World War I the expropriation of its brands and trademarks revealed its vulnerability to political risk. Following the advent of the Nazi regime in 1933, the largely Jewish owned and managed company faced a uniquely challenging combination of home and host country political risk. The paper reviews the firm's responses to these adverse circumstances, challenging the prevailing literature which interprets so-called "cloaking" activities as one element of businesses' cooperation with the Nazis. The paper departs from previous literature in assessing the outcomes of the company's strategies after 1945. It examines the challenges and costs faced by the company in recovering the ownership of its brands. While the management of distance became much easier over the course of the twentieth century because of communications improvements, this working paper shows that the costs faced by multinational corporations in managing governments and political risk grew sharply.

Harvard Business School Working Paper, No. 12-003, July 2011

The Ambidextrous CEO

Tushman, Michael L., Wendy K. Smith, and Andy Binns
June 2011

Although most managers publicly acknowledge the need to explore new businesses and markets, the claims of established businesses on company resources almost always come first, especially when times are hard. When top teams allow the tension between core and speculative units to play out at lower levels of management, innovation loses out. At best, leaders of core business units dismiss innovation initiatives as irrelevancies. At worst, they see the new businesses as threats to the firm's core identity and values. Many CEOs take a backseat in debates over resources, ceding much of their power to middle managers, and the company ends up as a collection of feudal baronies. This is a recipe for long-term failure, say the authors. Their research of 12 top management teams at major companies suggests that firms thrive only when senior teams lead ambidextrously-when they foster a state of constant creative conflict between the old and the new. Successful CEOs first develop a broad, forward-looking strategic aspiration that sets ambitious targets both for innovation and core business growth. They then hold the tension between innovation unit demands and core business demands at the very top of the organization. And finally they embrace inconsistency, allowing themselves the latitude to pursue multiple and often conflicting agendas.

Too Big to Live: Why We Must Stamp Out State Monopoly Capitalism

Ferguson, Niall
June 2011

The problems of excessive economic concentration, so lucidly and incisively analysed here, are not limited to the financial services industry. For the problem is now widespread: while five firms control 80% of the banking industry, a similar or greater concentration is found in industries ranging from energy and telecommunications to tobacco and soft drinks. The dangers of excessive market concentration are greater in finance, however, because of the systemic importance of credit to the economy and the now widely held belief that governments must intervene to prevent the failure of big banks. But what is to be done? If we are to break up the institutions that are "too big to fail," does that contradict the benefits of economies of scale, the driving force of globalization? Or, if these huge firms are to be left as they are, and we are to rely on tighter, better regulation to control them, will not human creativity and ingenuity always find a way around any new rules, as it did in this last crisis? And finally, how can-in practical terms-we get rid of the "too big to fails," without increasing state intervention further?
Adam Smith Review, no. 6 (2011): 327-340

The End of Chimerica

Ferguson, Niall, and Moritz Schularick
June 2011

For the better part of the past decade, the world economy has been marked by an economic order that combined Chinese export-led development with U.S. over-consumption. The financial crisis of 2007-09 likely marks the beginning of the end of the Chimerican relationship. In this paper, we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways, China's economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the United States played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. The token adjustment proposed recently by Beijing is unlikely to suffice.

International Finance 14, no. 1 (2011): 1-26

Segmenting the Base of the Pyramid

Rangan, V. Kasturi, Michael Chu, and Djorjiji Petkoski
June 2011

The bottom of the economic pyramid is a risky place for business, but decent profits can be made there if companies link their financial success with their constituencies' well-being. To do that effectively, you must understand the nuances of people's daily lives, say Rangan and Chu of Harvard Business School and Petkoski of the World Bank. Start by dividing the base of the pyramid into three segments according to people's earnings and related personal needs: 1) Low income: 1.4 billion people, $3 to $5 a day; 2) Subsistence: 1.6 billion people, $1 to $3 a day; and 3) Extreme poverty: 1 billion people, less than $1 a day. Next, consider the roles of various groups in the value-creation relationship: consumers, coproducers, and clients. Specific strategies work best with people in certain roles and at particular income levels. Success requires appreciating the diversity at the base of the pyramid and the importance of scale in undertaking ventures there. Witness Manila Water's success in the Philippines and Hindustan Unilever's in South Asia. Failure to appreciate those elements can foil base-of-the-pyramid ventures, as Microsoft and Procter & Gamble each discovered.

Harvard Business Review 89, no. 6 (June 2011).

Poultry in Motion: A Study of International Trade Finance Practices.

Antras, Pol, and C. Fritz Foley
June 2011

This paper analyzes the financing terms that support international trade and sheds light on how and why these arrangements affect trade. Using detailed transaction-level data from a U.S.-based exporter of frozen and refrigerated food products, primarily poultry, it begins by describing broad patterns about the use of alternative financing terms. These patterns help discipline a model in which the trade finance mode is shaped by the risk that an importer defaults on an exporter and by the possibility that an exporter does not deliver goods as specified in the contract. The empirical results indicate that transactions are more likely to occur on cash in advance or letter of credit terms when the importer is located in a country with weak contractual enforcement and in a country that is farther from the exporter. Letters of credit, however, are rarely used by the exporter. As an importer develops a relationship with the exporter, transactions are less likely to occur on terms that require prepayment. During the recent crisis, the exporter was more likely to demand cash in advance terms when transacting with new customers, and customers that traded on cash in advance terms prior to the crisis disproportionately reduced their purchases. These results can be rationalized by the model whenever 1) misbehavior on the part of the exporter is of little concern to importers and 2) local banks in importing countries are typically more effective than the exporter in pursuing financial claims against importers.

NBER Working Paper Working Paper Series, No. 17091, May 2011.

Collaborating across Cultures: Cultural Metacognition & Affect-Based Trust in Creative Collaboration

Chua, Roy Y.J., Michael W. Morris, and Shira Mor
June 2011

We propose that managers' awareness of their own and others' cultural assumptions (cultural metacognition) enables them to develop affect-based trust with associates from different cultures, promoting creative collaboration. Study 1, a multi-rater assessment of managerial performance, found that managers higher in metacognitive cultural intelligence (CQ) were rated as more effective in intercultural creative collaboration by managers from other cultures. Study 2, a social network survey, found that managers lower in metacognitive CQ reported a deficit of new idea sharing in their intercultural but not intracultural ties. In Study 3, a laboratory experiment involving a collaborative task, higher metacognitive CQ engendered greater idea sharing and creative performance only when participants shared personal experiences prior to the task. The effects of metacognitive CQ in enhancing collaboration were mediated by affect-based trust. We discuss the theoretical and practical implications for understanding and promoting creativity and problem solving in multicultural global contexts.

Harvard Business School Working Paper, No. 11-127, June 2011.

The Growing Power of Non-financial Reports

Ioannou, Ioannis, and George Serafeim
June 2011

We are exploring the value of forcing corporations to issue sustainability reports, which provide information about corporate performance in terms of social, environmental and governance issues. In a breakthrough study they asked, what is the effect of mandatory sustainability reporting on management practices across the world?

Corporate Social Responsibility and Access to Finance

Cheng, Beiting, Ioannou, Ioannis, and George Serafeim
June 2011

In this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to reduced agency costs, due to enhanced stakeholder engagement through CSR, and reduced informational asymmetries, due to increased transparency through non-financial reporting. Using a large cross-section of firms, we show that firms with better CSR performance face significantly lower capital constraints. The results are confirmed using an instrumental variables and a simultaneous equations approach. Finally, we find that the relation is primarily driven by social and environmental performance, rather than corporate governance.

Harvard Business School Working Paper, No. 11-130, June 2011

The Institutional Logic of Great Global Firms

Kanter, Rosabeth Moss
May 2011

Theories of the firm have been dominated by a legacy of ideas from early industrialization that pose zero-sum opposition between capital and labor (or capital and nearly everything else), differentiating the economy from society and often posing irreconcilable conflicts. The search for mathematical models has turned the negotiated order of organizational activities, which necessarily include particularistic elements, into abstract generalizations that favor quantifiable variables. This paper offers another logic, a social or institutional logic, to let practice provoke the creation of new theory. It provides examples that show how social logic guides the practices of widely admired, high-performing companies, and why people and society are not an after-thought to be used or discarded, but core to the purpose and definition of the firm. It builds on in-depth, ongoing global field research on admired companies from four continents, followed in over 20 countries, to derive six propositions about the role of humanistic institutional logic.
Harvard Business School Working Paper, No. 11-119, May 2011

Winning in Emerging Markets: Spotting and Responding to Institutional Voids

Khanna, Tarun, and Krishna G. Palepu
May 2011

The World Financial Review (May-June 2011): 18-20

The Globalization of Corporate Environmental Disclosure: Accountability or Greenwashing?

Marquis, Christopher, and Michael W. Toffel
May 2011

Despite the increase in corporate environmental disclosure, there remains substantial heterogeneity in the extent to which corporations reveal their environmental impacts. To better understand this heterogeneity, we identify key country- and organization-level determinants of corporate environmental disclosure. We focus on institutional factors related to firms' global embeddedness to describe how external environmental pressures emanating from governments and civil society influence corporations' environmental transparency. We also focus on the extent to which corporate environmental disclosure is symbolic and, in particular, what leads corporations to selectively disclose relatively benign environmental impacts to create an impression of transparency while masking their true environmental performance. We hypothesize that key organizational characteristics reflecting visibility, such as size and environmental impact, shape this type of symbolic compliance and that these relationships are moderated by institutional pressures. We test our hypotheses using a novel panel dataset of 4,646 public companies in many industries, headquartered in 46 countries during 2005-2008, when environmental disclosure increased among many global corporations. Controlling for a host of organizational, industry, and national characteristics, we find evidence to support most of our hypothesized relationships. Contributions to understanding the decoupling of globalization processes and how organizations respond to institutional change are discussed.

Harvard Business School Working Paper, No. 11-115, May 2011

Inducement Prizes and Innovation

Brunt, Liam, Josh Lerner, and Tom Nicholas
May 2011

We examine the effect of prizes on innovation using data on awards for technological development offered by the Royal Agricultural Society of England at annual competitions between 1839 and 1939. We find large effects of the prizes on competitive entry and the quality of contemporaneous patents, especially when prize categories were set by a strict rotation scheme, thereby mitigating the potentially confounding effect that they targeted only "hot" technology sectors. The prizes encouraged competition and medals were particularly effective. The boost to innovation we observe can only be partly explained by the re-direction of existing inventive activity.

Harvard Business School Working Paper, No. 11-118, May 2011

Historical Trajectories and Corporate Competences in Wind Energy

Jones, Geoffrey, and Loubna Bouamane
May 2011

This working paper surveys the business history of the global wind energy turbine industry between the late nineteenth century and the present day. It examines the long-term prominence of firms headquartered in Denmark, the more fluctuating role of U.S.-based firms, and the more recent growth of German, Spanish, Indian, and Chinese firms. While natural resource endowment in wind has not been very significant in explaining the country of origin of leading firms, the existence of rural areas not supplied by grid electricity was an important motivation for early movers in both the U.S. and Denmark. Public policy was the problem rather than the opportunity for wind entrepreneurs before 1980, but beginning with feed-in tariffs and other policy measures taken in California, policy mattered a great deal. However, Danish firms, building on inherited technological capabilities and benefitting from a small-scale and decentralized industrial structure, benefitted more from Californian public policies. The more recent growth of German, Spanish, and Chinese firms reflected both home country subsidies for wind energy and strong local content policies, while successful firms pursued successful strategies to acquire technologies and develop their own capabilities.

Harvard Business School Working Paper, No. 11-112, May 2011

Accounting for Crises

Nagar, Venky, andGwen Yu
April 2011

We provide one of the first tests of recent macro global-game crisis models that show that the precision of public signals can coordinate crises (e.g., Angeletos and Werning 2006; Morris and Shin 2002, 2003). In these models, self-fulfilling crises (independent of fundamentals) can occur only when publicly disclosed fundamental signals have high precision; fundamentals are thus the sole driver of crises in low-precision settings. We affirm this proposition on 39 currency crises by exploiting a key publicly disclosed fundamental driving financial markets, namely accounting data. We find that fundamental accounting signals are stronger in-sample predictors of crises in low-precision countries.

Harvard Business School Working Paper, No. 11-103, April 2011

The Consequences of Mandatory Corporate Sustainability Reporting

Ioannou, Ioannis, and George Serafeim
April 2011

We examine the effect of mandatory sustainability reporting on several measures of socially responsible management practices. Using data for 58 countries, we show that after the adoption of mandatory sustainability reporting laws and regulations, the social responsibility of business leaders increases. We also document that both sustainable development and employee training become a higher priority for companies and that corporate governance improves. Furthermore, we find that companies implement more ethical practices, including reducing bribery and corruption, which increases managerial credibility. These effects are larger for countries with stronger law enforcement and more widespread assurance of sustainability reports. We conclude with thoughts about mandatory sustainability and integrated reporting.

Harvard Business School Working Paper, No. 11-100, March 2011

The Hollow Science

Kaplan, Robert S.
April 2011

The financial meltdown made clear that the executives of many major financial institutions were operating with inadequate or distorted information about the values and risks of their firms' assets. It's fair to say that business scholars bear some responsibility for that. Most of them are neither studying nor teaching emerging best practices in asset valuation and risk management. They need to begin exploring the interior of leading-edge companies to provide detailed, qualitative case studies.

Harvard Business Review 89, no. 5 (May 2011)

Organizing the In-between: The Population Dynamics of Network-weaving Organizations in the Global Interstate Network

Ingram, Paul, and Magnus Thor Torfason
April 2011

This article examines the population dynamics and viability of network weavers, which are organizations that provide network relations for others. An analysis of the population dynamics of the intergovernmental organizations (IGOs) that are the basis of the interstate networks that influenced global economic relations, peace, and democracy in the 1815-2000 period shows that IGO founding and failure depends on the ease and value of specific interstate relations. Results indicate that network-weaving organizations are easier to operate when they encompass proximate and similar actors, yet they also reap rewards for bringing together otherwise disconnected actors, in particular, actors with conflicts. Combined, these organizational processes can account for the high clustering and short-path distance between nodes that are characteristic of the endemic small-world network structure. Furthermore, the study shows that the concepts of legitimacy and competition can be applied to identify particular spaces in the network of bilateral relations that are more or less hospitable for IGOs.

Administrative Science Quarterly

Corporate Ownership Structure and Bank Loan Syndicate Structure

Lin, Chen, Yue Ma, Paul Malatesta, and Yuhai Xuan
April 2011

This paper examines the relation between corporate ownership structure and bank loan syndicate structure using a novel, hand-collected data set on corporate ownership and control of 3,056 firms in 22 countries from 1996 to 2008. We find that the divergence between control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the concentration and composition of the firm's loan syndicate. A one-standard-deviation increase in the divergence increases the syndicate concentration by approximately 18%. With respect to the syndicate composition, a one-standard-deviation increase in the divergence is associated with a 20% decrease in foreign bank participation and an 18% increase in the overall syndicate lending expertise related to the borrowing firm's industry. The effect of the excess control rights on the syndicate structure is more pronounced for firms that are informationally opaque, firms that have higher cash-flow rights dispersion across large owners, and firms in countries undergoing financial crises. On the other hand, the relation between control-ownership divergence and syndicate structure is mitigated by the lead arranger's reputation and lending relationship with the borrowing firm as well as by strong shareholder rights and good credit information sharing systems. Overall, our results are consistent with the hypothesis that the deviation of control rights and cash-flow rights in the borrowing firms exacerbates potential tunneling and other moral hazard activities by large shareholders, thereby increasing credit risk and monitoring needs. Consequently, lenders form syndicates with structures that facilitate enhanced due diligence and monitoring efforts as well as the syndication process.

Journal of Financial Economics

The Empire Struck Back: Sanctions and Compensation in the Mexican Oil Expropriation of 1938

Maurer, Noel
March 2011

The Mexican expropriation of 1938 was the first large-scale non-Communist expropriation of foreign-owned natural resource assets. The literature makes three assertions: the U.S. did not fully back the companies, Mexico did not fully compensate them for the value of their assets, and the oil workers benefited from the expropriation. This paper finds that none of those assertions hold. The companies devised political strategies that maneuvered a reluctant President Roosevelt into supporting their interests, and the Mexican government more than fully compensated them as a result. Neither wages for oil workers nor Mexican government oil revenue rose after the expropriation.

Journal of Economic History

Immigrant Entrepreneurs in U.S. Financial History, 1775-1914

McCraw, T.K.
March 2011

Throughout its history, the U.S. has been the beneficiary of a worldwide in-migration of entrepreneurial talent. This article surveys finance, one of the many sectors in which immigrants made a conspicuous impact. Part I demonstrates the dominant role of immigrants in forming public financial policies from 1775 to 1817. Part II surveys 12 merchant and investment banking firms founded during the nineteenth century by individual immigrants or family groups and traces their histories until 1914. Part III suggests, from this small sample, a series of hypotheses and tentative conclusions about their experiences and influence. Part IV compares the financial environment of the nineteenth century with that of the late twentieth and early twenty-first centuries. The article ends with a supporting appendix that describes 19 additional immigrants or immigrant families and their firms.

Capitalism and Society 5

Do Strong Fences Make Strong Neighbors?

Desai, Mihir, and Dhammika Dharmapala
March 2011

Many features of U.S. tax policy towards multinational firms-including the governing principle of capital export neutrality, the byzantine system of expense allocation, and anti-inversion legislation-reflect the intuition that building "strong fences" around the United States advances American interests. This paper examines the interaction of a strong fences policy with the increasingly important global markets for corporate residence, corporate control, and corporate equities. These markets provide opportunities for entrepreneurs, managers, and investors to circumvent a strong fences policy. The paper provides simple descriptive evidence of the growing importance of these markets and considers the implications for U.S. tax policy.

National Tax Journal 63

An Empirical Decomposition of Risk and Liquidity in Nominal and Inflation-Indexed Government Bonds

Pflueger, Carolin E., and Luis M. Viceira
March 2011

This paper decomposes the excess return predictability in inflation-indexed and nominal government bonds into effects from liquidity, market segmentation, real interest rate risk, and inflation risk. We estimate a large and variable liquidity premium in U.S. Treasury Inflation Protected Securities (TIPS) from the co-movement of breakeven inflation with liquidity proxies. The liquidity premium is around 70 basis points in normal times, but much larger during the early years of TIPS issuance and during the height of the financial crisis in 2008-2009. The liquidity premium explains the high excess returns on TIPS as compared to nominal Treasuries over the period 1999-2009. Liquidity-adjusted breakeven inflation appears stable, suggesting stable inflation expectations over our sample period. We find predictability in both inflation-indexed bond excess returns and in the spread between nominal and inflation-indexed bond excess returns even after adjusting for liquidity, providing evidence for both time-varying real interest rate risk premia and time-varying inflation risk premia. Liquidity appears uncorrelated with real interest rate and inflation risk premia. We test whether bond return predictability is due to segmentation between nominal and inflation-indexed bond markets but find no evidence in either the U.S. or in the U.K.

Harvard Business School Working Paper, No. 11-094, March 2011

Inflation-Indexed Bonds and the Expectations Hypothesis

Pflueger, Carolin E., and Luis M. Viceira
March 2011

This paper empirically analyzes the Expectations Hypothesis (EH) in inflation-indexed (or real) bonds and in nominal bonds in the U.S. and in the U.K. We strongly reject the EH in inflation-indexed bonds and also confirm and update the existing evidence rejecting the EH in nominal bonds. This rejection implies that the risk premium on both real and nominal bonds varies predictably over time. We also find strong evidence that the spread between the nominal and the real bond risk premium, or the breakeven inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia most likely reflects both a changing real interest rate risk premium and a changing liquidity risk premium, and that the variability in the nominal bond risk premia reflects a changing inflation risk premium. We estimate significant time series variability in the magnitude and sign of bond risk premia.

Harvard Business School Working Paper, No. 11-095, March 2011

Sustainability and Capital Markets: How Firms Can Manage the Crucial Link

Ioannou, Ioannis, and George Serafeim
March 2011

No abstract available

European Business Review

Organising Response to Extreme Emergencies: The Victorian Bushfires of 2009

Leonard, Herman B., and Arnold M. Howitt
February 2011

How can people and organisations best respond to emergency events that are significantly beyond the boundaries of what they had generally anticipated, expected, prepared for-or even imagined? What forms of organisations are likely to be best able to cope with such events-and what procedures and practices will aid in their ability to do so? Obviously, extreme events-events that are in scope or scale or type beyond the range of our ordinary experience and expectations-by definition will occur only relatively rarely (and very rarely to any given emergency organisation). Nonetheless, when they do occur they tend to be of defining importance to the people and institutions that are thrust into them and that must find their way through them. September 11, 2001 in Manhattan and at the Pentagon in Arlington, Virginia; the Indian Ocean Tsunami in 2004; Hurricane Katrina on the Gulf Coast of the United States in 2005; major earthquakes like the ones in Pakistan in 2005, Wenchuan in 2008, Haiti in 2010, Chile in 2010, and Christchurch in 2010-these and other catastrophic events catapult people and response agencies into a new, unfamiliar, and largely unexplored dimension

Australian Journal of Public Administration 69, no. 4

Breakthrough Inventions and the Growth of Innovation Clusters

Kerr, William R.
February 2011

This report provides a comprehensive look at the role of innovation in promoting economic and social development. It examines the impact of innovation on the economic growth of developing countries and the future role of technological innovation in international efforts to mitigate the effects of climate change, amongst many other issues.

The Innovation for Development Report 2010-2011

Deposit Insurance and Subsidized Recapitalizations

White, Lucy, and Alan Morrison
February 2011

The 2007-2009 financial crisis saw a vast expansion in deposit insurance guarantees around the world, and yet our understanding of the design and consequences of deposit insurance schemes is in its infancy. We provide a new rationale for the provision of deposit insurance. In our model the banking sector exhibits both adverse selection and moral hazard, which implies that the social benefits of bank monitoring must for incentive reasons be shared between depositors and banks. Consequently, socially too few deposits are made in equilibrium. Deposit insurance-or, equivalently, bank recapitalization-corrects this market failure. We find that deposit insurance should be funded not by banks or depositors but out of general taxation. The optimal level of deposit insurance varies inversely with the quality of the banking system. Hence, when the soundness of the financial sector is uncertain, governments should consider supporting deposit insurance schemes and undertaking subsidised recapitalisations.

Journal of Banking and Finance

Political Instability: Effects on Financial Development, Roots in the Severity of Economic Inequality

Roe, Mark J., and Jordan I. Siegel
February 2011

We here bring forward strong evidence that political instability impedes financial development, with its variation a primary determinant of differences in financial development around the world. As such, it needs to be added to the short list of major determinants of financial development. First, structural conditions first postulated by Engerman and Sokoloff (2002) as generating long-term inequality are shown here empirically to be exogenous determinants of political instability. Second, that exogenously determined political instability in turn holds back financial development, even when we control for factors prominent in the last decade's cross-country studies of financial development. The findings indicate that inequality-perpetuating conditions that result in political instability are fundamental roadblocks for international organizations like the World Bank that seek to promote financial development. The evidence here includes country fixed effect regressions and an instrumental model inspired by Engerman and Sokoloff's (2002) work, which to our knowledge has not yet been used in finance and which passes prevailing tests as valid instruments. Four conventional measures of national political instability-Alesina and Perotti's (1996) well-known index of instability, a subsequent index derived from Banks' (2005) work, and two indices of managerial perceptions of nation-by-nation political instability-persistently predict a wide range of national financial development outcomes for recent decades. Political instability's significance is time consistent in cross-sectional regressions back to the 1960s, the period when the key data becomes available; robust in both country fixed-effects and instrumental variable regressions; and consistent across multiple measures of instability and of financial development. Overall, the results indicate the existence of an important channel running from structural inequality to political instability, principally in nondemocratic settings, and then to financial backwardness. The robust significance of that channel extends existing work demonstrating the importance of political economy explanations for financial development and financial backwardness. It should help to better understand which policies will work for financial development, because political instability has causes, cures, and effects quite distinct from those of many of the key institutions most studied in the past decade as explaining financial backwardness.

Do U.S. Market Interactions Affect CEO Pay? Evidence from U.K. Companies

Gerakos, Joseph J., Joseph D. Piotroski, and Suraj Srinivasan
February 2011

This paper examines the extent that interactions with U.S. markets impact the compensation practices of non-U.S. firms. Using a sample of large U.K. companies, we find that the total compensation of U.K. CEOs is positively related to the extent of the firm's interactions with U.S. markets, as captured by the percentage of total sales generated in the U.S., the presence of prior U.S. acquisition activity, the presence of a U.S. exchange listing, and CEO and director-level U.S. board experience. More importantly, we find that exposure to U.S. product markets is associated with the adoption of U.S.-style compensation arrangements (i.e., incentive-based pay packages). In contrast, we find no such association with exposures to other (non-U.S.) foreign product markets. Together, our evidence is consistent with U.S. market interactions impacting U.K. compensation practices through two mechanisms: 1) to alleviate internal and external pay disparities arising from the presence of U.S. operations and businesses (proxied by the percent U.S. sales and prior U.S. acquisitions) and 2) to compensate CEOs for bearing the additional risk and responsibility associated with exposure to foreign securities laws and legal environments (proxied by both U.S. and non-U.S. exchange listings).

Harvard Business School Working Paper, No. 11-075, January 2011

Innovating at the World's Crossroads: How Multicultural Networks Promote Creativity

Chua, Roy Y. J.
February 2011

This research examines the effects of multicultural social networks on individuals' creative performance. Combining network analysis with experimental methods, two studies using different samples found that networks' degree of cultural heterogeneity positively predicts creativity on tasks that draw on varied cultural-knowledge resources but not on other tasks. The results also indicate that a culturally heterogeneous network increases the likelihood of receiving culture-related novel ideas from others in the network whether or not they share one's culture of origin. This finding sheds light on the mechanisms that underlie multicultural networks' effects on creativity. Theoretical and practical implications for creativity and networking are discussed.

Harvard Business School Working Paper, No. 11-085, February 2011.

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China, 1880-1930

Chaudhary, Latika, Aldo Musacchio, Steven Nafziger, and Se Yan
February 2011

Our paper provides a comparative perspective on the development of public primary education in four of the largest developing economies circa 1910, BRIC-Brazil, Russia, India, and China. These four countries encompassed almost 50% of the world's population in 1910, but remarkably few of their citizens attended any school in the early 20th century. We present new, comparable data on school inputs and outputs for BRIC that are drawn from a variety of archival and published sources. Similar to recent studies that emphasize the importance of income, political decentralization, and the level of political voice to the spread of primary education in developed economies, we also find these factors to be important in the context of BRIC. We also outline other factors such as local ethnic and religious heterogeneity, the institutional legacies of colonialism and serfdom, and, especially, the characteristics of the political and economic elite that help explain the low achievement levels of these countries and the incredible amount of heterogeneity within each BRIC.

Harvard Business School Working Paper, No. 11-083, February 2011

Zoom In, Zoom Out

Kanter, Rosabeth Moss
February 2011

Zoom buttons on digital devices let us examine images from many viewpoints. They also provide an apt metaphor for modes of strategic thinking. Some people prefer to see things up close, others from afar. Both perspectives have virtues. But they should not be fixed positions, says Harvard Business School's Kanter. To get a complete picture, leaders need to zoom in and zoom out. A close-in perspective is often found in relationship-intensive settings. It brings details into sharp focus and makes opportunities look large and compelling. But it can have significant downsides. Leaders who prefer to zoom in tend to create policies and systems that depend too much on politics and favors. They can focus too closely on personal status and on turf protection. And they often miss the big picture. When leaders zoom out, they can see events in context and as examples of general trends. They are able to make decisions based on principles. Yet a far-out perspective also has traps. Leaders can be so high above the fray that they don't recognize emerging threats. Having zoomed out to examine all possible routes, they may fail to notice when the moment is right for action on one path. They may also seem too remote and aloof to their staffs. The best leaders can zoom in to examine problems and then zoom out to look for patterns and causes. They don't divide the world into extremes-idiosyncratic or structural, situational or strategic, emotional or contextual. The point is not to choose one over the other but to learn to move across a continuum of perspectives.

Harvard Business Review 89, no. 3 (March 2011)

Stop Holding Yourself Back

Morriss, Anne, Robin J. Ely, and Frances X. Frei
January 2011

After working with hundreds of leaders in a wide variety of organizations and in countries all over the globe, the authors found one very clear pattern: when it comes to meeting their leadership potential, many people unintentionally get in their own way. Five barriers in particular tend to keep promising managers from becoming exceptional leaders: people overemphasize personal goals, protect their public image, turn their competitors into two-dimensional enemies, go it alone instead of soliciting support and advice, and wait for permission to lead. Troy, a customer service manager, endangered his job and his company's reputation by focusing on protecting his position, not helping his team; when a trusted friend advised him to change his behavior, the results were striking. Anita's insistence on sticking to the tough persona she'd created for herself caused her to ignore the more intuitive part of the leadership equation, with disastrous results-until she let go of the need to appear invulnerable and reached out to another manager. Jon, a personal trainer who had virtually no experience with either youth development programs or urban life, opened a highly successful gym for inner-city kids at risk; he refused to be daunted by his lack of expertise and decided to simply "go for it." As these and other examples from the authors' research demonstrate, being a leader means making an active decision to lead. Only then will the workforce-and society-benefit from the enormous amount of talent currently sitting on the bench.

Harvard Business Review 89, nos. 1-2 (January-February 2011).

The Intensive Margin of Technology Adoption

Comin, Diego A
January 2011

We present a tractable model for analyzing the relationship between economic growth and the intensive and extensive margins of technology adoption. The "extensive" margin refers to the timing of a country's adoption of a new technology; the "intensive" margin refers to how many units are adopted (for a given size economy). At the aggregate level, our model is isomorphic to a neoclassical growth model, while at the microeconomic level it features adoption of firms at the extensive and the intensive margin. Based on a data set of 15 technologies and 166 countries our estimations of the model yield four main findings: (1) there are large cross-country differences in the intensive margin of adoption; (2) differences in the intensive margin vary substantially across technologies; (3) the cross-country dispersion of adoption lags has declined over time while the cross-country dispersion in the intensive margin has not; and (4) the cross-country variation in the intensive margin of adoption accounts for more than 40% of the variation in income per capita.

Handbook of Economic Growth

Egalitarianism and International Investment

Siegel, Jordan I., Amir N. Licht, and Shalom H. Schwartz
January 2011

This study identifies the effect of a key cultural dimension-egalitarianism-on a set of international investment outcomes. Egalitarianism expresses a society's cultural orientation with respect to intolerance for abuses of market and political power. We show egalitarianism to be based on exogenous factors including social fractionalization, religion, and war experience. Controlling for a large set of competing explanations, we find a robust influence of egalitarianism distance on cross-border investment flows of equity, debt, and mergers and acquisitions. An informal cultural institution largely determined a century or more ago, egalitarianism influences international investment via an associated set of consistent policy choices made in recent years. But even after controlling for these associated policy choices, egalitarianism continues to exercise a direct effect on cross-border investment flows, likely through its direct influence on managers' daily business conduct.

Journal of Financial Economics (forthcoming).

The Mistaken Attack on Outsourcing

Desai, Mihir
January 2011

No abstract available

The Wall Street Journal

The Euro as a Reserve Currency for Global Investors

Viceira, Luis M., and Ricardo Gimeno
January 2011

This article explores the demand for the euro for risk management purposes and the evidence of stock market integration in the euro area. We define a reserve currency as one that investors demand either because it helps them hedge real interest risk and inflation risk, or because it helps them reduce the volatility of their portfolio of stocks and bonds because its return is negatively correlated with the returns on those assets. This article re-examines the role of the euro as a reserve currency in the sense of Campbell, Viceira, and White (2003), updating their evidence, and reviews the evidence of Campbell, Serfaty-de Medeiros, and Viceira (2010) in detail. Consistent with the intuition that an integrated capital market is one in which there is a common discount factor pricing securities, we also investigate whether stocks in the euro area have moved from a regime in which national stock markets were priced with discount rates that were predominantly country specific, to a regime in which national stock markets are predominantly priced by a euro area-wide common discount rate. We adopt the beta decomposition approach of Campbell and Vuolteenaho (2004) and Campbell, Polk, and Vuolteenaho (2010) to test for capital market integration and find robust evidence of increased capital market integration in the euro zone and, consequently, improved risk sharing among euro zone economies.

Bashing Beijing Will Not Help Our Trade Deficit

Pozen, Robert
January 2011

No abstract available

The Wall Street Journal, August 20, 2010

What Makes the Bonding Stick? A Natural Experiment Involving the Supreme Court and Cross-Listed Firms

Licht, Amir N., Xi Li, and Jordan I. Siegel
January 2011

Using a natural experiment to overcome the empirical challenges facing the debate over the bonding hypothesis, we analyze markets' reaction to a sudden radical change in the world of U.S.-listed foreign firms. In March 2010, the U.S. Supreme Court signaled its intention to geographically limit the reach of the U.S. antifraud regime. The Court thus excluded the overwhelming majority of investors in U.S.-listed foreign firms from the protection of the U.S. civil liability regime and cast at least partial limitations on the SEC's regulatory authority. This event nonetheless was met with positive abnormal returns of U.S.-listed foreign firms all over the world. These abnormal returns are actually higher the greater the percentage of a firm's capital listed on non-U.S. exchanges. We find no evidence that markets' reaction to this event related to the corporate governance and legal environment in foreign issuers' home country. These results challenge the legal bonding hypothesis while suggesting that the U.S. regime of civil liability as currently designed may not have been seen as a source of economic value for outside investors.

Harvard Business School Working Paper, No. 11-072, January 2011

Why You Aren't Buying Venezuelan Chocolate

Deshpandé, Rohit
January 2011

The article discusses the "provenance paradox," wherein consumers are unwilling to buy high-quality products from regions not commonly associated with excellence in certain product categories. Venezuelan chocolate maker Chocolates El Rey does little international business because consumers associate premium chocolate more with Belgium or Switzerland than with Venezuela. Companies in this position have difficulty charging prices sufficient to fuel international expansion. The author presents advice on overcoming the paradox but warns it can be a lengthy process.

Harvard Business Review 88, no. 12 (December 2010).

2010

Consequences and Institutional Determinants of Unregulated Corporate Financial Statements: Evidence from Embedded Value Reporting

Serafeim, George
December 2010

I analyze Embedded Value (EV) reporting by firms with life insurance operations to assess the impact of unregulated financial reporting on transparency and to examine the institutional characteristics that promote unregulated reporting. Under EV accounting the present value of future cash flows from in-force contracts is included in shareholders' equity, and profit is calculated as the change in equity between two periods. In contrast to Generally Accepted Accounting Principles (GAAP), this approach produces higher shareholder's equity and recognizes income at contract inception. I find firms that adopt EV reporting exhibit a decline in information asymmetry, with the decline increasing as EV reporting evolves to address methodological deficiencies and to permit more comparability across firms. The decrease in information asymmetry is contingent on providing an audit certification, and larger for firms that commit to providing EV reports. Moreover, I document that EV reporting is more widespread in countries with more hostile takeovers, managers that do not avoid volatile income measures, regulators that are less likely to intervene in the product market, and analysts that believe EV disclosure to increase the value of their information intermediation function.

Journal of Accounting Research

Has the Shift to Stronger Intellectual Property Rights Promoted Technology Transfer, FDI, and Industrial Development?

Branstetter, Lee, C. Fritz Foley, and Kamal Saggi
December 2010

This article reviews recent research conducted by the authors that finds that intellectual property rights reform increases technology transfers, foreign direct investment inflows, and industrial development. It also places the findings of this work in the broader context of the literature.

The WIPO Journal: Analysis and Debate of Intellectual Property Issues

The Dynamics of Social Structure: The Emergence and Decline of Small Worlds

Ranjay Gulati, Sytch, Maxim, Adam Tatarynowicz
December 2010

This paper explores the interplay between social structure and economic action by examining some of the evolutionary dynamics of an emergent network that coalesces into a small-world system. The study highlights the small-world system's evolutionary dynamics at both the macro level of the network and the micro level of an individual actor. This dual analytical lens helps establish that, in competitive and information-intensive settings, a small-world system could be a highly dynamic structure that follows an inverted U-shaped evolutionary pattern, wherein an increase in the small-worldliness of the system is followed by its later decline as a result of three factors: (1) the recursive relationship between the evolving social structure and individual actors' formation of bridging ties, which eventually homogenizes the information space and decreases actors' propensity to form bridging ties, creating a globally separated network; (2) self-containment of the small-world network, or increasing homogenization of the social system, which makes the small world less accepting of and less attractive to new actors, thereby limiting formation of bridging ties to outside clusters; and (3) fragmentation of the small-world network, or the small-world system's inability to retain current clusters. The study uses data on interorganizational tie formation in the global computer industry in the period from 1996 to 2005 to test the hypothesized relationships.

Organization Science

A Note on Fairness and Redistribution

Di Tella, Rafael, and Juan Dubra
December 2010

We note some problems in Alesina and Angeletos (2005) and suggest a way to maintain the key insight of that paper, which is that a demand for fairness could lead to different economic systems such as those observed in France versus the U.S. (multiple equilibria).

Harvard Business School Working Paper, No. 11-059, December 2010

Truth in Giving: Experimental Evidence on the Welfare Effects of Informed Giving to the Poor

Fong, Christina, and Felix Oberholzer-Gee
November 2010

It is often difficult for donors to predict the value of charitable giving because they know little about the persons who receive their help. This concern is particularly acute when making contributions to organizations that serve heterogeneous populations. While we have considerable evidence that donors are more generous if they know their assistance benefits a preferred group, we know little about the demand for such information. To start closing this gap, we study transfers of income to real-world poor people in the context of dictator games. Our dictators can purchase signals about why the recipients are poor. We find that a third of the dictators are willing to pay a dollar to learn more about their recipient. Dictators who devote resources to acquiring information are individuals whose giving is particularly responsive to recipient type. They use the information mainly to withhold resources from "undeserving" types, leading to a drastic decline in aggregate transfers. With endogenous information about recipients, we find that all types of poor subjects are worse off. Our results suggest that the effects of "truth in giving" policies are highly responsive to recipient heterogeneity and biased against more generous giving.

Regulating for Legitimacy: Consumer Credit Access in France and America

Trumbull, Gunnar
November 2010

Theories of legitimate regulation have emphasized the role of governments either in fixing market failures to promote greater efficiency or in restricting the efficient functioning of markets in order to pursue public welfare goals. In either case, features of markets serve to justify regulatory intervention. I argue that this causal logic must sometimes be reversed. For certain areas of regulation, its function must be understood as making markets legitimate. Based on a comparative historical analysis of consumer lending in the United States and France, I argue that national differences in the regulation of consumer credit had their roots in the historical conditions by which the small loan sector came to be legitimized. Americans have supported a liberal regulation of credit because they have been taught that access to credit is welfare promoting. This perception emerged from a historical coalition between commercial banks and NGOs that promoted credit as the solution to a range of social ills. The French regulate credit tightly because they came to see credit as both economically risky and a source of reduced purchasing power. This attitude has its roots in the early postwar lending environment, in which loans were seen to be beneficial only if they were accompanied by strong government protections. These cases suggest that national differences in regulation may trace to historically contingent conditions under which markets are constructed as legitimate.

Harvard Business School Working Paper, No. 11-047, November 2010.

From the Outside In: The Negative Spillover Effects of Boundary Spanners' Relations with Members of Other Organizations

Ramarajan, Lakshmi, Katerina Bezrukova, Karen A. Jehn, and Martin Euwema
October 2010

Contrary to much boundary spanning research, we examined the negative consequences of boundary spanning contact in multi-organizational contexts. Results from a sample of 833 Dutch peacekeepers show that employees' boundary spanning contact with members of other organizations was associated with reports of negative relationships with external parties (e.g., work-specific problems, culture-specific problems). These negative relationships also had a spillover effect such that they mediated the effect of boundary spanning contact on boundary spanners' negative attitudes toward their own jobs and organization (e.g., job attractiveness and confidence in the organization).

Journal of Organizational Behavior (forthcoming)

Payout Taxes and the Allocation of Investment

Becker, Bo, Marcus Jacob, and Martin Jacob
October 2010

When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). If there are no perfect substitutes for equity finance, payout taxes may have an effect on the investment of firms. High taxes will favor investment by firms that can finance internally. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is "locked in" to profitable firms when payout is heavily taxed. Thus, apart from any level effects, payout taxes change the allocation of capital.

Harvard Business School Working Paper, No. 11-040, October 2010

Prosocial Spending and Well-Being: Cross-Cultural Evidence for a Psychological Universal

Aknin, Lara B., Christopher P. Barrington-Leigh, Elizabeth W. Dunn, John F. Helliwell, Robert Biswas-Diener, Imelda Kemeza, Paul Nyende, Claire Ashton-James, Michael I. Norton
October 2010

This research provides the first support for a possible psychological universal: human beings around the world derive emotional benefits from using their financial resources to help others (prosocial spending). Analyzing survey data from 136 countries, we show that prosocial spending is consistently associated with greater happiness. To test for causality, we conduct experiments within two very different countries (Canada and Uganda) and show that spending money on others has a consistent, causal impact on happiness. In contrast to traditional economic thought-which places self-interest as the guiding principle of human motivation-our findings suggest that the reward experienced from helping others may be deeply ingrained in human nature, emerging in diverse cultural and economic contexts.

Harvard Business School Working Paper, No. 11-038, September 2010

Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?

Cole, Shawn A., Thomas Sampson, and Bilal Zia
October 2010

Financial development is critical for growth, but its micro-determinants are not well understood. We test leading theories of low demand for financial services in emerging markets, combining novel survey evidence from Indonesia and India with a field experiment. We find a strong correlation between financial literacy and behavior. However, a financial education program has modest effects, increasing demand for bank accounts only for those with low levels of education or financial literacy. In contrast, small subsidies greatly increase demand. A follow-up survey confirms these findings, demonstrating that the newly opened accounts remain open and in use two years after the intervention.

Journal of Finance (forthcoming).

Americans Do I.T. Better: U.S. Multinationals and the Productivity Miracle

Bloom, Nicholas, Raffaella Sadun, and John Van Reenen
October 2010

The U.S. has experienced a sustained increase in productivity growth since the mid-1990s, particularly in sectors that intensively use information technologies (IT). This has not occurred in Europe. If the U.S. "productivity miracle" is due to a natural advantage of being located in the U.S., then we would not expect to see any evidence of it for U.S. establishments located abroad. This paper shows in fact that U.S. multinationals operating in the U.K. do have higher productivity than non-U.S. multinationals in the U.K., and this is primarily due to the higher productivity of their IT. Furthermore, establishments that are taken over by U.S. multinationals increase the productivity of their IT, whereas observationally identical establishments taken over by non-U.S. multinationals do not. One explanation for these patterns is that U.S. firms are organized in a way that allows them to use new technologies more efficiently. A model of endogenously chosen organizational form and IT is developed to explain these new micro and macro findings.

American Economic Review (forthcoming).

Report on the State of Available Data for the Study of International Trade and Foreign Direct Investment

Robert C. Feenstra, Robert E. Lipsey, Lee G. Branstetter, C. Fritz Foley, James Harrigan, J. Bradford Jensen, Lori Kletzer, Catherine Mann, Peter K. Schott, and Greg C. Wright
September 2010

This report, prepared for the Committee on Economic Statistics of the American Economic Association, examines the state of available data for the study of international trade and foreign direct investment. Data on values of imports and exports of goods are of high quality and coverage, but price data suffer from insufficient detail. It would be desirable to have more data measuring value-added in trade as well as prices of comparable domestic and imported inputs. Value data for imports and exports of services are too aggregated and valuations are questionable, while price data for service exports and imports are almost non-existent. Foreign direct investment data are of high quality, but quality has suffered from budget cuts. Data on trade in intellectual property are fragmentary. The intangibility of the trade makes measurement difficult, but budget cuts have added to the difficulties. Modest funding increases would result in data more useful for research and policy analysis.

NBER Working Paper Series, No. 16254, August 2010

The Intensive Margin of Technology Adoption

Diego Comin, Martí Mestieri
September 2010

No abstract available

Harvard Business School Working Paper, No. 11-026, September 2010.

Does Mandatory IFRS Adoption Improve the Information Environment

Joanne Horton, George Serafeim, Ioanna Serafeim
September 2010

We examine the effect of mandatory International Financial Reporting Standards (IFRS) adoption on firms' information environment. We find that after mandatory IFRS adoption, consensus forecast errors decrease for firms that mandatorily adopt IFRS relative to forecast errors of other firms. We also find decreasing forecast errors for voluntary adopters, but this effect is smaller and not robust. Moreover, we show that the magnitude of the forecast errors decrease is associated with the firm-specific differences between local GAAP and IFRS. Exploiting individual analyst level data and isolating settings where investors would benefit more from either increased comparability or higher quality information, we document that the improvement in the information environment is driven both by information and comparability effects. These results are robust to variations in the measurement of information environment quality, forecast horizon, sample composition, and tests of earnings management.

Harvard Business School Working Paper, No. 11-029, September 2010

Law and Finance c. 1900

Musacchio, Aldo
September 2010

How persistent are the effects of legal institutions adopted or inherited in the distant past? A substantial literature argues that legal origins have persistent effects that explain clear differences in investor protections and financial development around the world today (La Porta et al., 1998, 1999 and passim). This paper examines the persistence of the effects of legal origins by examining new estimates of different indicators of financial development in more than 20 countries in 1900 and 1913. The evidence presented does not yield robust results that can sustain the hypothesis of persistence effects of legal origin, but it is not powerful enough to reject it either. Then the paper examines whether there were systematic differences in the extent of investor protections across countries, since that is the main channel through which legal origin affects financial development, and shows that all the evidence supports the idea of relative convergence in corporate governance practices across legal families circa 1900. The paper concludes that, if the evidence presented is representative, the variation observed in financial development around the world today is likely a product of events of the twentieth century rather than a consequence of long-term (and persistent) differences occasioned by legal traditions.

NBER Working Paper Series, No. 16216, July 2010

Recent Advances in the Empirics of Organizational Economics

Bloom, Nicholas, Raffaella Sadun, and John Van Reenen
September 2010

We present a survey of recent contributions in empirical organizational economics, focusing on management practices and decentralization. Productivity dispersion between firms and countries has motivated the improved measurement of firm organization across industries and countries. There appears to be substantial variation in management practices and decentralization not only between countries, but also especially within countries. Much of the poorer average management quality in countries like Brazil and India seems to result from a long tail of poorly managed firms, which barely exist in the United States. Some stylized facts include the following: (1) competition seems to foster improved management and decentralization; (2) larger firms, skill-intensive plants, and foreign multinationals appear better managed and are more decentralized; (3) firms that are both family owned and managed appear to have worse management and are more centralized; and (4) firms facing an environment of lighter labor market regulations and more human capital specialize relatively more in people management. There is evidence for complementarities between information and communication technology, decentralization, and management, but the relationship is complex, and identification of the productivity effects of organizational practices remains a challenge for future research.

Annual Review of Economics Vol. 2 (2010)

Does Intellectual Property Rights Reform Spur Industrial Development?

C. Fritz Foley, Branstetter, Lee, and Kamal Saggi
September 2010

An extensive theoretical literature generates ambiguous predictions concerning the effects of intellectual property rights (IPR) reform on industrial development. The impact depends on whether multinational enterprises (MNEs) expand production in reforming countries and the extent of decline in imitative activity. We examine the responses of U.S.-based MNEs and domestic industrial production to a set of IPR reforms in the 1980s and 1990s. Following reform, MNEs expand the scale of their activities. MNEs that make extensive use of intellectual property disproportionately increase their use of inputs. There is an overall expansion of industrial activity after reform, and highly disaggregated trade data indicate higher exports of new goods. These results suggest that the expansion of multinational activity more than offsets any decline in imitative activity.

Journal of International Economics

What Drives Corporate Social Performance? International Evidence from Social, Environmental and Governance Scores

Ioannou, Ioannis, and George Serafeim
September 2010

We investigate the institutional drivers of Corporate Social Performance (CSP) by focusing on its three fundamental components: social, environmental, and governance performance. Using a large cross section of firms from 42 countries over 7 years, we are able to explain 41%, 46%, and 63% of the variation in social performance, environmental performance, and corporate governance respectively, with observable firm, industry, and institutional factors. More specifically, we hypothesize that country institutions have a profound influence on CSP. We find that political institutions, followed by legal and labor market institutions are the most important country determinants of social and environmental performance. In contrast, legal institutions, followed by political institutions, are the most important country determinants of governance. Capital market institutions appear to be less important drivers of CSP. Our results provide insights on the demand and supply forces that determine CSP internationally.

Harvard Business School Working Paper, No. 11-016, August 2010

Technology Diffusion and Postwar Growth

Diego Comin, Bart Hobijn
September 2010

In the aftermath of World War II, the world's economies exhibited very different rates of economic recovery. We provide evidence that those countries that caught up the most with the U.S. in the postwar period are those that saw an acceleration in the speed of adopting new technologies. This acceleration is correlated with the incidence of U.S. economic aid and technical assistance in the same period. We interpret this as supportive of the interpretation that technology transfers from the U.S. to Western European countries and Japan were an important factor in driving growth in these recipient countries during the postwar decades.

NBER Macroeconomics Annual

Implicit Voice Theories: Taken-for-granted Rules of Self-censorship at Work

Detert, J.R., and Amy C. Edmondson
August 2010

This article examines, in a series of four studies, the nature and impact of implicit voice theories-largely taken-for-granted beliefs about when and why speaking up at work is risky or inappropriate. In Study 1, qualitative data from 190 interviews conducted in a knowledge-intensive multinational corporation suggest that reluctance to speak up, even with pro-organizational suggestions, is driven by specific implicit theories about speaking up in hierarchies. Study 2 uses open-ended survey responses, with data from 185 working adults, to examine the generalizability of the implicit voice theories identified in Study 1. Studies 3 and 4 develop and test survey measures for five implicit voice theories, using additional samples comprised of more than 300 adults. The analyses establish psychometric properties of the new measures, including showing their discriminant validity from voice-related individual and organizational factors and their incremental predictive validity on workplace silence. Collectively, the results from the four studies indicate the prevalence of implicit voice theories and suggest that they are an important addition to extant explanations of workplace silence. We discuss implications of these results for theory and practice and suggest directions for future research.

Lawsuits and Empire: On the Enforcement of Sovereign Debt in Latin America

Alfaro, Laura, Noel Maurer, and Faisal Ahmed
March 2010

The re-occurring phenomenon of sovereign default has prompted an enormous theoretical and empirical literature. Most of this research has focused on why countries ever chose to pay their debts (or why private creditors ever expected repayment). The problem originates from the fact that repayment incentives for sovereign debts are minimal since little can be used as collateral and the ability of a court to force a sovereign entity to comply has been extremely limited, especially given the lack of a supranational legal authority capable of enforcing contracts across borders. In this paper we contrast the market reaction to attempts to enforce sovereign debt contracts via U.S. "dollar diplomacy" in Latin America in the pre-World War II period and by legal action in the 1990s and early 2000s. We argue that dollar diplomacy created an effective and credible enforcement regime while legal actions by creditors, conversely, do not appear to have done so.

Law and Contemporary Problems (forthcoming)

Labor Regulations and European Private Equity

Bozkaya, Ant, and William R. Kerr
January 2010

European nations substitute between employment protection regulations and labor market expenditures (e.g., unemployment insurance benefits) for providing worker insurance. Employment regulations more directly tax firms making frequent labor adjustments than other labor insurance mechanisms. Venture capital and private equity investors are especially sensitive to these labor adjustment costs. Nations favoring labor expenditures as the mechanism for providing worker insurance developed stronger private equity markets in high volatility sectors over 1990-2004. These patterns are further evident in U.S. investments into Europe. In this context, policy mechanisms are more important than the overall insurance level provided.
Harvard Business School Working Paper, No. 08-043, December 2009

Assess, Don't Assume, Part II: Negotiating Implications of Cross-Border Differences in Decision Making, Governance, and Political Economy

Sebenius, James K.
January 2010

When facing a negotiation that crosses national borders and/or cultures, the standard preparatory assessments-of the parties, their interests, their no-deal options, opportunities for and barriers to creating and claiming value, the most promising sequence and process design, etc.-should be informed and modified by potentially relevant factors. Drawing on considerable literature in cross-border and cross-cultural negotiation, a two-paper series develops a four-level prescriptive framework for effectively carrying out such assessments. The first paper in this series ("Etiquette and National Culture in Negotiation") described 1) common expectations for surface behavior, and 2) some implications of deeper cultural characteristics for the negotiation process itself, as well as cross-border caveats such as stereotyping and overemphasizing national culture to the exclusion of other factors. The current paper carries this analysis further by systematically analyzing a third and fourth class of factors that often prove critical in cross-border dealmaking: 3. The decision-making and governance processes that are the targets of influence efforts. While negotiations take place with individuals, those individuals are typically enmeshed in organizational processes and cultures. Thus, a key assessment focuses on the organization's decision-making and governance processes. Several questions guide this analysis: Who has what decision rights? Is it a one-person authoritarian process? A simple consensus? A multi-stage consensus process? A key subgroup? How does the formal decision-making and governance process differ from the informal one? 4. The broader economic and political context for negotiation as well as salient "comparable" deals. Several questions guide this analysis: Is there a formal or informal government policy toward the kind of arrangements under negotiation such as the requirement that the majority of a joint venture be owned by a local partner? Are high-tech deals particularly sought after by the state? What recent deals by others, successful or not, will be salient in the minds of your local hosts and authorities when they contemplate yours? Does the political ethos favor state control or privatization? Does a wrenching political transition foster managerial uncertainty and decision paralysis? And so on.
Harvard Business School Working Paper, No. 10-050, December 2009

Price Pressure in the Government Bond Market

Greenwood, Robin, and Dimitri Vayanos
December 2009

American Economic Review Papers and Proceedings

Does Product Market Competition Lead Firms to Decentralize?

Bloom, Nicholas, Raffaella Sadun, and John Van Reenen
January 2010

There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address the empirical lacuna we have developed a research program to measure the internal organization of firms-including their decentralization decisions-across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local manager's information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital, information and communication technology, culture, and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few datasets that exist are either from a single industry or (at best) across many firms in a single country. We analyze data on almost 4,000 firms across 12 countries in Europe, North America, and Asia. We find that competition does indeed seem to foster greater decentralization.
Harvard Business School Working Paper, No. 10-052, January 2010.

Complex Business Models: Managing Strategic Paradoxes Simultaneously

Smith, Wendy K., Andrew Binns, and Michael Tushman
January 2010

As our world becomes more global, fast paced, and hypercompetitive, competitive advantage may increasingly depend on success in managing paradoxical strategies-strategies associated with contradictory, yet integrated tensions. We identify several types of the complex business models organizations will need to adopt if they are to host such paradoxical strategies. Managing complex business models effectively depends on leadership that can make dynamic decisions, build commitment to both overarching visions and agenda specific goals, actively learn at multiple levels, and engage conflict. Leaders can engage these functions through team-centric or leader-centric structures.
Long Range Planning (in press).

2009

Hidden Roadblocks in Cross-Border Talks

Sebenius, James K.
November 2009

While most analysts and dealmakers are aware of "cultural" differences in negotiations that cross national borders-different protocol and process expectations, differences in the role of the individual versus the group, differences in attitudes toward risk and time, etc.-they often overlook a key factor that can systematically vary across cultures that can carry profound implications for choice of negotiating approach. Specifically, failure to take into account different traditions in governance and decision making can doom an otherwise sophisticated set of strategies and tactics.

Medium Term Business Cycles in Developing Countries

Comin, Diego, Norman Loayza, Farooq Pasha, and Luis Serven
October 2009

We build a two-country asymmetric DSGE model with two features: (1) a product cycle structure determines the range of intermediate goods used to produce new capital in each country and (2) there are investment flow adjustment costs in the developing economy. We calibrate the model to match the Mexico-U.S. trade and FDI flows. The model is able to explain (1) why U.S. shocks have a larger effect on Mexico than in the U.S. and hence why the Mexican economy is more volatile than the U.S.; (2) why U.S. business cycles lead over medium-term fluctuations in Mexico; and (3) why Mexican consumption is not less volatile than output.

American Economic Review

An Exploration of Technology Diffusion

Comin, Diego A.
September 2009

We develop a model that, at the aggregate level, is similar to the one sector neoclassical growth model, while, at the disaggregate level, has implications for the path of observable measures of technology adoption. We estimate our model using data on the diffusion of 15 technologies in 166 countries over the last two centuries. We evaluate the implications of our estimates for aggregate TFP and per capita income. Our results reveal that, on average, countries have adopted technologies 47 years after their invention. There is substantial variation across technologies and countries. Over the past two centuries, newer technologies have been adopted faster than old ones. The cross-country variation in the adoption of technologies accounts for at least a quarter of per capita income differences.

American Economic Review

Dividend Taxes and International Portfolio Choice

Desai, Mihir, and Dhammika Dharmapala
September 2009

This paper investigates how dividend taxes influence portfolio choices, using the response to the distinctive treatment of a subset of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. An open-economy after-tax capital asset pricing model is used to derive the hypothesis that JGTRRA should lead to a portfolio reallocation by U.S. investors towards equities in tax-favored countries. A difference-in-difference analysis that compares U.S. equity holdings in affected and unaffected countries finds a substantial portfolio reallocation towards the former. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment, changed tax evasion behavior, or changes in stock prices associated (or contemporaneous) with JGTRRA.

The Review of Economics and Statistics (forthcoming)

Biomass Supply for Biofuel Production: Estimates for the United States and Canada

Kumarappan, Subbu, Satish V. Joshi, and Heather MacLean
July 2009

The potential supply of biomass feedstocks in the U.S. and Canada is estimated using a static supply function approach. Estimated total biomass available at a price of $100 per metric ton is 568 million metric tons in the U.S. and 123 million tons in Canada, which together can displace 23-45 billion gallons of gasoline. Sufficient biomass, mainly agricultural and mill residues, will be available at prices of around $50/ton to meet the advanced biofuel mandates of the U.S. Energy Independence and Security Act of 2007. The estimates of agricultural residue supply are very sensitive to the assumed fraction of residues that can be sustainably removed from the field, and the potential of municipal solid waste as a feedstock depends on which components can be economically converted into liquid biofuels.

Bioresources (forthcoming)

The Return of State-Owned Enterprises: Should We Be Afraid

Musacchio, Aldo, and Francisco Flores-Macias
July 2009

The global financial crisis of 2008-2009 has prompted many industrialized states worldwide to increase their stakes in private corporations. This wave of partial nationalizations has come amidst full-scale expropriations in developing countries such as Venezuela, Bolivia, and Ecuador. Does this signal a return of "state capitalism"? If so, what should we expect of the state-owned enterprises (SOEs) that spring back into economic life? Should we be afraid that this return to state capitalism will bring back the practices of the large, inefficient SOEs that countries privatized during the 1980s and 1990s? From a look at the popular press, one certainly gets the impression that there is a return of "state capitalism," as if state intervention in industrial activity actually went away for a significant period of time. Moreover, many observers of the recent wave of nationalizations and government-backed bank capitalizations are afraid that a return to the wasteful state-owned enterprises of the past is imminent. In this essay we propose two alternative views. First, we stress the resilience of state-owned enterprises, which have been around for more than one hundred years in the world's capitalist economies. In fact, state interventions similar to those of today were seen in the pre-World War I period, an era known by some economic historians as "the first big wave of globalization." Second, we argue that there is no reason to believe that the SOEs of the twenty-first century will be as inefficient as those of the 1970s and 1980s. The world has changed much since former British Prime Minister Margaret Thatcher first began implementing large-scale privatizations. In fact, we document some cases of present-day competitive SOEs and explain some of the conditions that made them efficient, even in comparison to their private counterparts. We do not argue that all SOEs are efficient or that it is optimal to have government ownership of banks and other companies. What we aim to show is that the return of state capitalism is likely to be different this time since, we believe, the environment is different and many SOEs have learned the lessons of the past.

Harvard International Review (March 2009)

"Backlash to Arbitration: Three Causes"

Wells, Louis T.
July 2009

There are at least three reasons for the current backlash among developing countries against the international regime that governs disputes between foreign investors and host governments. First is the inconsistency of the decisions rendered by arbitration panels established under bilateral investment treaties, investment provisions of regional trade agreements, clauses in investment contracts, and, occasionally, provisions of host countries' investment laws. Second, and perhaps most important, is the very rigid view of contracts that panels have tended to take, even when a host country acts as a result of an economic crisis. A third cause of backlash is closely related to the second: the seeming insensitivity of arbitration panels to signals that corruption or incompetency might have been involved in the original negotiations or subsequent renegotiations of agreements that gave rise to disputes. There are other reasons for reaction, but they pose less threat to the existing system. Although the ideal solution would be a multilateral agreement, past efforts to conclude one suggest that reaching agreement is unlikely in the near future. Building an appellate process, providing for symmetry in access to arbitration, and mid-point guidance might go some distance toward reducing the backlash.

The Backlash Against Investment Arbitration

What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns (pdf)

Kerr, William R., Glenn D. Ellison, and Edward L. Glaeser
May 2009

Why do firms cluster near one another? We test Marshall's (1920) theories of industrial agglomeration by examining which industries locate near one another, or coagglomerate. We construct pairwise coagglomeration indices for U.S. manufacturing industries from the Economic Census. We then relate coagglomeration levels to the degree to which industry pairs share goods, labor, or ideas. To reduce reverse causality, where co-location drives input-output linkages or hiring patterns, we use data from U.K. industries and from U.S. areas where the two industries are not co-located. All three of Marshall's theories of agglomeration are supported, with input-output linkages particularly important.

The American Economic Review (forthcoming)

The Definitive Guide to Recruiting in Good Times and Bad

Groysberg, Boris, Nohria, Nitin, Claudio Fernandez-Araoz
May 2009

Few companies are thinking about hiring right now, but that's a mistake. If history is any guide, staffing will become a front-burner issue once the economic upheaval eases. Even now, companies are running into staffing problems in emerging markets, and many will have to find talented replacements for baby-boom retirees. Will they be able to meet their needs? Not likely, say Fernández-Aráoz of Egon Zehnder and Harvard Business School professors Groysberg and Nohria. Their research, conducted with scores of CEOs, HR executives, and recruiters, found current hiring practices to be haphazard at best and inept at worst. And no wonder. Ignorant of their staffing needs, most companies treat hiring top-level executives as an emergency. That leaves them little choice. One study found that nearly a quarter of the time, the executive selected was the only candidate considered. Far too few companies conduct reference checks; far too many rely on gut reactions when judging qualifications and cultural fit. Hardly anyone considers whether candidates will be good team players. And, shockingly, only half of the top managers recruited by the companies studied were interviewed by anyone in the C-suite. The result: About a third of promising new hires depart within three years of being recruited. As a remedy, the authors offer their best thinking about state-of-the-art hiring practices for the top levels of the organization. Their recommendations cover the entire hiring cycle in seven steps: anticipating the need for new hires, specifying the job, developing a pool of candidates, assessing the candidates, closing the deal, integrating the newcomer, and reviewing hire-process effectiveness. Whatever the future brings, firms that follow these practices successfully will have a distinct advantage over their shortsighted competitors.

Harvard Business Review 87, no. 5 (May 2009).

Plant-Size Distribution and Cross-Country Income Differences

Alfaro, Laura, Andrew Charlton and Fabio Kanczuk
May 2009

We investigate, using plant-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous plants. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.

NBER International Seminar on Macroeconomics 2008

Innovation Communication in Multicultural Networks: Deficits in Inter-cultural Capability and Affect-based Trust as Barriers to New Idea Sharing in Inter-cultural Relationships (pdf)

Chua, Roy Y.J., Michael W. Morris
May 2009

Innovative solutions to pressing global problems require effective inter-cultural communication. We propose that a barrier to the sharing of ideas pertinent to innovation in inter-cultural relationships is low affect-based trust, which arises from individuals' deficits in inter-cultural capability. Results from a study of a sample of executives' professional networks indicate that individuals lower in inter-cultural capability are less likely to share new ideas in inter-cultural ties but not intra-cultural ties. This effect is mediated by tie-level affect-based trust but not cognition-based trust. Theoretical and practical implications of these findings are discussed.

Firsthand Experience and the Subsequent Role of Reflected Knowledge in Cultivating Trust in Global Collaboration (pdf)

Beyene, Tsedal, Mark Mortensen
May 2009

While scholars contend that firsthand experience-time spent onsite observing the people, places, and norms of a distant locale-is crucial in globally distributed collaboration, how such experience actually affects interpersonal dynamics is poorly understood. Based on 47 semi-structured interviews and 140 survey responses in a global chemical company, this paper explores the effects of firsthand experience on intersite trust. We find firsthand experience leads not just to direct knowledge of the other, but also knowledge of the self as seen through the eyes of the other-what we call "reflected knowledge." Reflected and direct knowledge, in turn, affect trust through identification, adaptation, and reduced misunderstandings.

Harvard Business School Working Paper, No. 09-131, May 2009

The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre

Hortacsu, Ali, Francisco de Asís Martínez-Jerez, and Jason Douglas
April 2009

We analyze geographic patterns of trade between individuals using transactions data from eBay and MercadoLibre, two large online auction sites. We find that distance continues to be an important deterrent to trade between geographically separated buyers and sellers, though to a lesser extent than has been observed in studies of non-Internet commerce between business counterparties. We also find a strong "home bias" for trading with counterparties located in the same city. Further analyses suggest that location-specific goods such as opera tickets, cultural factors, and the possibility of direct contract enforcement in case of breach may be the main reasons behind the same-city bias.

American Economic Journal: Microeconomics 1, no. 1 (February 2009): 53-74

Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry

Nanda, Ramana and Tarun Khanna
April 2009

This study explores the importance of cross-border social networks for entrepreneurs in developing countries by examining ties between the Indian expatriate community and local entrepreneurs in India's software industry. We find that local entrepreneurs who have previously lived outside India rely significantly more on diaspora networks for business leads and financing. This is especially true for entrepreneurs who are based outside software hubs-where getting leads to new businesses and accessing finance is more difficult. Our results provide micro-evidence consistent with a view that cross-border social networks play an important role in helping entrepreneurs to circumvent the barriers arising from imperfect domestic institutions in developing countries.

Journal of Economics and Management Strategy (forthcoming)

Labor Market Institutions and Global Strategic Adaptation: Evidence from Lincoln Electric

Siegel, Jordan I., and Barbara Zepp Larson
April 2009

Although one of the central questions in the global strategy field is how multinational firms successfully navigate multiple and often conflicting institutional environments, we know relatively little about the effect of conflicting labor market institutions on multinational firms' strategic choice and operating performance. With its decision to invest in manufacturing operations in nearly every one of the world's largest welding markets, Lincoln Electric offers us a quasi-experiment. We leverage a unique data set covering 1996-2006 that combines data on each host country's labor market institutions with data on each subsidiary's strategic choices and historical operating performance. We find that Lincoln Electric performed significantly better in countries with labor laws and regulations supporting manufacturers' interests and in countries that allowed the free use of both piecework and a discretionary bonus. Furthermore, we find that in countries with labor market institutions unfriendly to manufacturers, Lincoln Electric was still able to overcome most (although not all) of the institutional distance by what we term flexible intermediate adaptation.

Management Science (forthcoming).

Securing Jobs or the New Protectionism?: Taxing the Overseas Activities of Multinational Firms (pdf)

Desai, Mihir A.
April 2009

Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations-the so-called "end to tax breaks for companies that ship our jobs overseas." At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters-the U.K. and Japan-that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy. This paper addresses these questions by analyzing the available evidence on two related claims: (1) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and (2) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home. These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.

Harvard Business School Working Paper, No. 09-107, March 2009

Corporate Misgovernance at the World Bank (pdf)

Kaja, Ashwin, and Eric Werker
April 2009

We test for evidence of corporate misgovernance at the World Bank. Most major decisions at the World Bank are made by its Board of Executive Directors. However, in any given year the majority of the Bank's member countries do not get a chance to serve on this powerful body. In this paper, we empirically investigate whether board membership leads to higher funding from the World Bank's two main development financing institutions, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). We find that developing countries serving on the Board of Executive Directors can expect an approximate doubling of funding from the IBRD. In absolute terms, countries serving on the board are rewarded with an average $60 million "bonus" in IBRD loans. This is more likely driven by soft forces like boardroom culture rather than by the power of the vote itself. We find no significant effect in IDA funding.

Harvard Business School Working Paper, No. 09-108, March 2009

Financial Literacy, Financial Decisions, and the Demand for Financial Services: Evidence from India and Indonesia (pdf)

Cole, Shawn, Thomas Sampson, and Bilal Zia
April 2009

Why is demand for formal financial services low in emerging markets? One view argues that limited cognitive ability and financial literacy stifle demand. A second view argues that demand is rationally low, because formal financial services are expensive and of relatively low value to the poor. This paper uses original surveys and a field experiment to distinguish between two competing answers to this question. Using original survey data from India and Indonesia, we first show that financial literacy is a powerful predictor of demand for financial services. To test the relative importance of literacy and price, we implement a field experiment, offering randomly selected unbanked households financial literacy education, crossed with small incentive (ranging from U.S. $3 to $14) to open a bank savings account. We find that the financial literacy program has no effect on the likelihood of opening a bank savings account in the full sample but do find modest effects for uneducated and financially illiterate households. In contrast, small subsidy payments have a large effect on the likelihood of opening a savings account. These payments are more than two times more cost-effective than the financial literacy training, though this calculation does not take into account any ancillary benefits of financial education.

The Review of Economics and Statistics (forthcoming)

Where Is the Pharmacy to the World? International Regulatory Variation and Pharmaceutical Industry Location (pdf)

Daemmrich, Arthur A.
April 2009

A consumer-oriented model for drug development and use has attracted attention in recent years as an alternative to the much-maligned approach of mass-marketing blockbuster drugs. In a parallel development, patients and disease-based organizations have assumed greater roles in defining disease categories than in the past and now influence clinical trials and participate in regulatory decision making. Yet these developments are far from universal and are taking very different forms around the world. Building on data showing that pharmaceutical firms headquartered in the United States have performed well since 1980 when compared to firms in Europe or Asia (measured both by sales and by numbers of new product introductions), this essay explores the interplay of regulation, definitions of "patient" and "consumer," and centers of power for the pharmaceutical industry. A comparison of the United States and Germany in particular, and the United States and European Union more generally, suggests that how countries resolve tensions between protecting patients and empowering consumers will impact the international competitive standing of their domestic pharmaceutical industries.

Harvard Business School Working Paper, No. 09-116, April 2009.

Putting Patients First: Social Marketing Strategies for Treating HIV in Developing Nations

Chance, Zoe and Rohit Deshpandé
April 2009

It is more than mere coincidence that the highest rates of HIV occur in the world's poorest countries. Of the over 40 million people currently living with HIV, 95 percent are in the developing world. The first part of this paper explores the economics of HIV and treatment from a social marketing perspective. The second part of the paper uses three specific case histories of successful social marketing organizations in Africa, Asia, and South America to inductively generate a consumer (patient)-centric marketing model. The focal organizations are unique in that they all identify patient needs first, then work backwards to develop economically viable solutions. These solutions are not without flaws, and the future of these programs remains uncertain, but we hope that illuminating these particular cases within the consumer-centric marketing paradigm will shed light on ways in which other organizations may be able to serve the poor profitably.

Natural Experiments in History, edited by Jared Diamond and James Robinson. Harvard University Press, forthcoming

Regional Trade Integration and Multinational Firm Strategies

Antrás, Pol, and C. Fritz Foley
April 2009

This paper analyzes the effects of the formation of a regional trade agreement on the level and nature of multinational firm activity. We examine aggregate data that captures the response of U.S. multinational firms to the formation of the ASEAN free trade agreement. Observed patterns guide the development of a model in which heterogeneous firms from a source country decide how to serve two foreign markets. Following a reduction in tariffs on trade between the two foreign countries, the model predicts growth in the number of source-country firms engaging in foreign direct investment, growth in the size of affiliates that are active in reforming countries both before and after the tariff reduction, and an increase in the extent to which the sales of affiliates in reforming countries are directed towards other reforming countries. Analysis of firm-level responses to the creation of the ASEAN free trade agreement yields results that are consistent with these predictions.

Journal of Macromarketing 29, no. 3 (2009).

What T. R. Took: The Economic Impact of the Panama Canal, 1903-1937

Mauer, Noel, Carlos Yu
March 2009

The Panama Canal was one of the largest public investments of its time. In the first decade of its operation, the canal produced significant social returns for the United States. Most of these returns were due to the transportation of petroleum from California to the East Coast. The United States also succeeded in leveraging the threat of military force to obtain a much better deal from the Panamanian government than it could have negotiated otherwise.

Journal of Economic History 68, no. 3 (September 2008)

Holding a Mirror up to Marketing

Quelch, John A., Katherine Jocz
March 2009

The Dove campaign addressed a common concern that crossed cultural boundaries. Confronted by standard visual stereotypes of beauty in the global media, many young women develop self-image and self-esteem problems. The Dove Real Beauty campaign rejected these narrow stereotypes in favor of celebrating the diversity of beauty, supplementing functional benefit claims with an important emotional appeal that was inclusive rather than elitist. Inclusiveness is one of six key benefits that good marketing delivers to consumers, the others being information, choice, engagement, exchange, and consumption. Here we show how political democracies aim to deliver these same six benefits to citizens. Marketing campaigns that focus on delivering all six "democratic" benefits, such as the Dove campaign, achieve a higher standard and more substantial, sustainable results.

Marketing Management 17, no. 6 (November-December 2008): 16-21

Global Currency Hedging

Viceira, Luis M., John Y. Campbell, Karine Serfaty-de Medeiros
March 2009

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar) and the euro and Swiss franc (particularly in the second half of the period) have moved against world equity markets. Thus, these currencies should be attractive to risk-minimizing global equity investors despite their low average returns. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk-minimizing investors should adjust their currency positions in response to movements in interest differentials.

Journal of Finance (forthcoming).

Taxes, Institutions and Foreign Diversification Opportunities

Desai, Mihir, Dhammika, Dharmapala
March 2009

Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). The worldwide tax regime employed by the U.S. potentially distorts this choice by penalizing FDI, relative to FPI, in low-tax countries. On the other hand, weak investor protections in foreign countries may increase the value of control, creating an incentive to use FDI rather than FPI. By combining data on U.S. outbound FPI and FDI, this paper analyzes whether the composition of U.S. outbound capital flows reflects these incentives to bypass home and host country institutional regimes. The results suggest that the residual tax on U.S. multinational firms' foreign earnings skews the composition of outbound capital flows-a 10% decrease in a foreign country's corporate tax rate increases U.S. investors' equity FPI holdings by approximately 10%, controlling for effects on FDI. Investor protections also seem to shape portfolio choices, though these results are not robust when only within-country variation is employed.

Journal of Public Economics (forthcoming)

Gray Markets and Multinational Transfer Pricing (pdf)

Autrey, Romana, Francesco Bova
March 2009

Gray markets arise when a manufacturer's products are sold outside of its authorized channels; for instance, when goods designated for a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase internal transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that when a gray market competitor is present, the optimal price for internal transfers exceeds marginal cost but decreases in the competitiveness of the domestic economy. Moreover, we illustrate that gray markets may cause unintended social welfare consequences when domestic governments mandate the use of arm's length transfer prices between international subsidiaries. Specifically, a shift to arm's length transfer pricing erodes domestic consumer surplus by making the gray market less competitive domestically. Under certain circumstances, the domestic welfare destruction arising from this erosion dominates the domestic welfare gains that accompany a shift to arm's length transfer pricing. Finally, the analysis illustrates that in a gray market setting, the transfer price that maximizes a multinational's profits may also be the same one that maximizes the social welfare of the domestic economy that houses it.

Harvard Business School Working Paper, No. 09-098, February 2009

Why Do Countries Adopt International Financial Reporting Standards?(pdf)

Rammana, Karthik, Ewa Sletten
March 2009

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.

Harvard Business School Working Paper, No. 09-102, March 2009

The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection

Ferguson, Niall
March 2009

We are living through a paradox-or so it seems. Since September 11, 2001, according to a number of neo-conservative commentators, America has been fighting World War III (or IV, if you like to give the Cold War a number). For more than six years, these commentators have repeatedly drawn parallels between the "War on Terror" that is said to have begun in September 2001 and World War II. Immediately after 9/11, Al Qaeda and other radical Islamist groups were branded "Islamofascists." Their attack on the World Trade Center was said to be our generation's Pearl Harbor. In addition to coveting weapons of mass destruction and covertly sponsoring terrorism, Saddam Hussein was denounced as an Arab Hitler. The fall of Baghdad was supposed to be like the liberation of Paris. Anyone who opposed the policy of preemption was an appeaser. And so on. Yet throughout this period of heightened terrorist threats and overseas military interventions, financial markets have displayed a remarkable insouciance.

Brookings Papers on Economic Activity (forthcoming)

The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection

Foley, C. Fritz, Greenwood, Robin
March 2009

We use firm-level data from 34 countries covering the 1995-2006 period to analyze how the characteristics of public markets shape the process by which firms become widely held. Firms in all countries in the sample tend to have concentrated ownership at the time they go public. Decreases in ownership concentration are more likely for firms in countries with stronger protections for minority shareholders, lower block premia, and more liquid stock markets. In these countries, firms are more likely to issue equity when investment opportunities are high, becoming widely held in the process. We find scant evidence, however, that changes in percentage blockholding forecast future returns, inconsistent with market-timing theories. Our results suggest that liquidity-based theories of corporate ownership may have been underemphasized in previous cross-country studies.

Review of Financial Studies (forthcoming)

Milestones in Marketing

Quelch, John A., Katherine Jocz
March 2009

Marketing flourished in U.S. business schools in the prosperous years following World War II. Students preparing for assistant-product-manager positions at the likes of Procter & Gamble, Lever, and General Foods enrolled in courses in marketing management, management of promotion, marketing research, sales management, distribution, and cost accounting. As the marketing field matured in the 1950s and 1960s, it articulated a set of foundational concepts. As early as 1900, some firms chose to differentiate their products in order to do a better job of satisfying customers' diverse needs. In subsequent years, the marketing discipline developed increasingly sophisticated tools for competitive positioning, target-market segmentation, and product-line strategy. Within firms, the boundaries of marketing proved to be fuzzy, in large part because customer issues cut across many different aspects of a firm's activities. The concepts of Smith, Borden, Kotler, Green, and Levitt continue to inform marketing education and research. Their ideas about market segmentation, the marketing mix, marketing for nonbusinesses, market research, and globalization are embedded in business practice.

When Dreaming Is Believing: The (Motivated) Interpretation of Dreams

Morewedge, Carey K., and Michael I. Norton
February 2009

This research investigated laypeople's interpretation of their dreams. Participants from both Eastern and Western cultures believed that dreams contain hidden truths (Study 1) and considered dreams to provide more meaningful information about the world than similar waking thoughts (Studies 2 and 3). The meaningfulness attributed to specific dreams, however, was moderated by the extent to which the content of those dreams accorded with participants' preexisting beliefs-from the theories they endorsed to attitudes toward acquaintances, relationships with friends, and faith in God (Studies 3-6). Finally, dream content influenced judgment: Participants reported greater affection for a friend after considering a dream in which a friend protected rather than betrayed them (Study 5) and were equally reluctant to fly after dreaming or learning of a plane crash (Studies 2 and 3). Together, these results suggest that people engage in motivated interpretation of their dreams and that these interpretations impact their everyday lives.

Journal of Personality and Social Psychology

Global Currency Hedging

Campbell, John Y., Karine Serfaty-de Medeiros, and Luis M. Viceira
February 2009

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar) and the euro and Swiss franc (particularly in the second half of the period) have moved against world equity markets. Thus these currencies should be attractive to risk-minimizing global equity investors despite their low average returns. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk-minimizing investors should adjust their currency positions in response to movements in interest differentials.

Harvard Business School Working Paper, No. 09-089, January 2009

Level Playing Fields in International Financial Regulation

White, Lucy, and Alan Morrison
February 2009

We analyze the desirability of level playing fields in international financial regulation. In general, level playing fields impose the standards of the weakest regulator upon the best-regulated economies. However, they may be desirable when capital is mobile because they counter a cherry-picking effect that lowers the size and efficiency of banks in weaker economies. Hence, while a laissez faire policy favors the better-regulated economy, level playing fields are good for weaker regulators. We show that multinational banking mitigates the cherry-picking effect and reduces the damage that a level playing field causes in the better-regulated economy.

Journal of Finance

Winning the Race for Talent in Emerging Markets

Ready, Douglas A., Linda A. Hill, and Jay A. Conger
February 2009

This war for talent is like nothing we've ever seen before, write the authors, who have spent decades studying talent management and leadership development. Recently they interviewed executives at more than 20 global companies to identify strategies for attracting talent in developing economies-where, they learned, brand, opportunity, purpose, and culture play out in particular ways. A desirable brand affiliation in conjunction with inspirational leadership appeals to eager young high potentials suddenly awash in possibilities. Opportunity should imply an accelerated career track-or at least a fast-paced acquisition of skills and experience. Purpose ought to benefit a job candidate's home country and express the value of global citizenship. A company's culture should be meritocratic, value both individual and team accomplishments, and follow through on promises implied in recruitment. The authors claim that emerging markets pose special challenges for foreign multinationals. For instance, talent strategies that work at home will probably need extensive tailoring to succeed in the developing world, and an overreliance on fluency in English may impede spotting talent. It's critical to develop a core of local talent and to embrace and leverage diversity. In the talent race, a local company that creates genuine opportunities and exhibits the desired cultural conditions will often win out over a Western multinational offering higher pay.

Harvard Business Review 86, no. 11 (November 2008).

Applying the Care Delivery Value Chain: HIV/AIDS Care in Resource Poor Settings"

Rhatigan, Joseph, Sachin H. Jain, Joia S. Mukherjee, and Michael E. Porter
February 2009

The care delivery value chain is a framework that can help conceptualize the organization and structure of care delivery for medical conditions. We apply this framework to HIV/AIDS care in resource-limited settings. Several conclusions arise than can help inform the design of care delivery platforms for HIV/AIDS.

Harvard Business School Working Paper, No. 09-093

When Does Domestic Saving Matter for Economic Growth? (pdf)

Comin, Diego, Philippe Aghion, Peter Howitt, and Isabel Tecu
January 2009

Can a country grow faster by saving more? We address this question both theoretically and empirically. In our theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic saving matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic saving does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries. The same result is found when the regression is run on data generated by a calibrated version of our theoretical model.

Harvard Business School Working Paper, No. 09-080, January 2009

The Credit Crisis of 2008: Causes, Consequences and Implications for India

Narayanan, V.G., and Lisa Brem
January 2009

This article gives a brief overview of the causes and consequences of the current global credit crisis. The article then discusses the benefits and potential drawbacks of real estate loan securitization in India, and what India can do to realize those benefits while avoiding some of the pitfalls.

The Chartered Accountant 57, no. 6, December 2008

From Regional Star to Global Leader

Nohria, Nitin
January 2009

Yang Jianguo was recently promoted from country manager for China to global head of product development at a staid French perfume maker. He was chosen for his technical smarts and his knowledge of emerging markets-a critical avenue for growth, given that sales in the company's core markets have stalled. Eager to succeed in his new role in Paris, Jianguo has lots of fresh ideas, but they seem to be falling on deaf ears. Members of the executive team, for their part, find Jianguo to be largely indifferent to their input. Can Jianguo adjust to this new culture? And can he succeed without sacrificing his identity? Three experts comment on this fictional case study in R0901A and R0901Z. Katherine Tsang, the CEO of Standard Chartered Bank in Shanghai, explains the cultural differences between China and France and recommends that Jianguo push his thinking beyond the Chinese market. She also suggests that the company give all its executive team members multicultural training so they have the tools to understand one another and work together effectively. Mansour Javidan, the dean of research and a professor at Thunderbird School of Global Management, acknowledges that Jianguo's transition would be easier if he had the full support of the CEO, Alain Deronde. But since that isn't forthcoming, he advises Jianguo to work with Alain to develop targets for growth in emerging and traditional markets and a plan for building an infrastructure to achieve those goals. James Champy, the chairman of consulting for Perot Systems, is surprised that a family business would choose an "outsider" for this important post, but he recognizes it as a wise strategic move. He says that Jianguo needs a coach and should focus on learning the home market first, before trying to make inroads further afield.

Harvard Business Review 87, no. 1, January 2009

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2008

Is There a Better Commitment Mechanism than Cross-Listings for Emerging Economy Firms? Evidence from Mexico

Siegel, Jordan I.
December 2008

The last decade of work in corporate governance has shown that weak legal institutions at the country level hinder firms in emerging economies from accessing finance and technology affordably. To attract outside resources, these firms must often use external commitments for repayment. Research suggests that a common commitment mechanism is to borrow U.S. securities laws, which involves listing the emerging economy firm's shares on a U.S. exchange. This paper uses a quasi-natural experiment from Mexico to examine the conditions under which forming a strategic alliance with a foreign multinational firm is actually a superior mechanism for ensuring good corporate governance.

Journal of International Business Studies (forthcoming)

Happiness Adaptation to Income beyond 'Basic Needs'

Di Tella, Rafael, and Robert MacCulloch
December 2008

We test for whether, once "basic needs" are satisfied, there is happiness adaptation to further gains in income using three data sets. Individual German Panel Data from 1985 to 2000, and data on the well-being of over 600,000 people in a panel of European countries from 1975 to 2002, shows different patterns of adaptation to income across the rich and poor. We find evidence that for wealthy Germans, and for the rich half of European nations, higher levels of per capita income don't buy greater happiness. The reason appears to be adaptation. However even for the rich half of European nations such habituation may take more than five years so the happiness gains that they experience, whilst not permanent, can still be relatively long-lasting. Finally we study a cross section of nations in 2005 from the World Gallup Poll and find that the past 45 years of economic growth (from 1960 to 2005) in the rich half of nations has not brought happiness gains above those that were already in place once the 1960s' standard of living had been achieved. However in the poorest half of nations we cannot reject the null hypothesis that the happiness gains they have experienced from the past 45 years of growth have been the same as the gains that they experienced from growth prior to the 1960s.

NBER Working Paper Series, No. 14539, December 2009

The Supply Side of Innovation: H-1B Visa Reforms and U.S. Ethnic Invention

Kerr, William R., and William F. Lincoln
December 2008

This study evaluates the impact of high-skilled immigrants on U.S. technology formation. Specifically, we use reduced-form specifications that exploit large changes in the H-1B visa program. Fluctuations in H-1B admissions levels significantly influence the rate of Indian and Chinese patenting in cities and firms dependent upon the program relative to their peers. Most specifications find weak crowding-in effects or no effect at all for native patenting. Total invention increases with higher admission levels primarily through the direct contributions of ethnic inventors.

Harvard Business School Working Paper, No. 09-005, December 2008

A Review of U.S. and Canadian Biomass Supply Studies

Gronowska, Magdelena, Satish V. Joshi, and Heather MacLean
December 2008

An improved understanding of lignocellulosic biomass availability is needed to support proposed expansion in biofuel production. Fifteen studies that estimate availability of lignocellulosic biomass quantities in the U.S. and/or Canada are reviewed. Sources of differences in study methods and assumptions and resulting biomass quantities are elucidated. We differentiate between inventory studies, in which quantities of biomass potentially available are estimated without rigorous consideration of the costs of supply, versus economic studies, which take into consideration various opportunity costs and competition. The U.S. economic studies, which included reasonably comprehensive sets of biomass categories, estimate annual biomass availability to range from 6 million to 577 million dry metric tonnes (dry t), depending on offered price, while estimates from inventory studies range from 190 million to 3,849 million dry t. The Canadian inventory studies, which included reasonably comprehensive sets of biomass categories, estimate availability to range from 64 million green t to 561 million dry t. The largest biomass categories for the U.S. are energy crops and agricultural residues, while for Canada they are expected to be energy crops and logging residues. The significant differences in study estimates are due in large part to the number of biomass categories included, whether economic considerations are incorporated, assumptions about energy crop yields and land areas, and level of optimism of assumptions of the study.

Bioresources 4, no. 1, February 2009

The Global Entrepreneur

Isenberg, Daniel J.
December 2008

For over a century, start-ups began by focusing on their home markets. More and more, however, are now being born globally-chasing opportunities created by distance, learning to manage faraway operations, and hunting for the planet's best manufacturing locations, brightest talent, most willing investors, and most profitable customers wherever they may be-from day one. That's not easy. In his research, Harvard professor Isenberg has found that global start-ups face three challenges. First are the logistical problems and psychic barriers created by distance and by differences in culture, language, education systems, religion, and economic development levels. Even something so basic as accommodating the world's various workweek schedules can put a strain on a small start-up's staff. Second is managing the challenges (and opportunities) of context-that is, the different nations' political, regulatory, judicial, tax, and labor environments. Third, like all new ventures, global start-ups must find a way to compete with bigger incumbents while using far fewer resources. To succeed, Isenberg has found, global entrepreneurs must cultivate four competencies: They must clearly articulate their reasons for going global, learn to build alliances with more powerful partners, excel at international supply chain management, and create a multinational culture within their organization. Entrepreneurs shouldn't fear the fact that the world isn't flat. Being global may not be a pursuit for the fainthearted, but even start-ups can thrive by using distance to gain competitive advantage.

Harvard Business Review 86, no. 12, December 2008

Reinventing Your Business Model

Johnson, Mark W., Clayton M. Christensen, and Henning Kagermann
December 2008

Why is it so difficult for established companies to pull off the new growth that business model innovation can bring? Here's why: They don't understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don't know how to build a new model when they need it. Drawing on their vast knowledge of disruptive innovation and experience in helping established companies capture game-changing opportunities, consultant Johnson, Harvard Business School professor Christensen, and SAP co-CEO Kagermann set out the tools that executives need to do both. Successful companies already operate according to a business model that can be broken down into four elements: a customer value proposition that fulfills an important job for the customer in a better way than anything competitors offer; a profit formula that lays out how the company makes money delivering the value proposition; and the key resources and key processes needed to deliver that proposition. Game-changing opportunities deliver radically new customer value propositions: They fulfill a job to be done in a dramatically better way (as P&G did with its Swiffer mops), solve a problem that's never been solved before (as Apple did with its iPod and iTunes electronic entertainment delivery system), or serve an entirely unaddressed customer base (as Tata Motors is doing with its Nano-the $2,500 car aimed at Indian families who can't afford any other type of car and usually use motorcycles to get around). Doing so doesn't always require a new business model, but a new model is called for under certain conditions. It is often needed to leverage a new technology (as in Apple's case); is generally required when the opportunity addresses an entirely new group of customers (as with the Nano); and is surely in order when an established company needs to fend off a successful disruptor (as the Nano's competitors will now need to do).

Harvard Business Review 86, no. 12, December 2008

Which Kind of Collaboration Is Right for You?

Pisano, Gary P., and Roberto Verganti
December 2008

Nowadays, virtually no companies innovate alone. Firms team up with a variety of partners, in a wide number of ways, to create new technologies, products, and services. But what is the best way to leverage the power of outsiders? To help executives answer that question, Pisano, of Harvard Business School, and Verganti, of Politecnico di Milano, developed a simple framework focused on two questions: Given your strategy, how open or closed should your network of collaborators be? And who should decide which problems to tackle and which solutions to adopt? There are four basic modes of collaboration, say the authors. An elite circle is a closed network with a hierarchical governance: One company selects the participants, defines the problem, and chooses the solution. For instance, Alessi, an Italian home-products company, invited 200 outside experts in postmodern architecture to contribute ideas for new home-product designs. An innovation mall is hierarchical but open: Anyone can post a problem or propose solutions in it, but the company posting the problem chooses the solution. An example is InnoCentive.com, an eBay-like site where companies post scientific challenges. An innovation community is open and decentralized: Anyone can propose problems, offer solutions, and decide which ideas to use-as happens in the open-source software community Linux. A consortium is a private group of participants that operate as equals and jointly select problems, decide how to conduct work, and choose solutions. IBM has set up a number of consortia with other companies to develop next-generation semiconductor technologies. No one approach is superior; each involves strategic trade-offs. When choosing among modes, firms must weigh their advantages and challenges and assess which will work best with their strategy, capabilities, structure, and assets.

Harvard Business Review 86, no. 12, December 2008

Power to the People

Werker, Eric
December 2008

One of the most confounding global problems today is the skyrocketing cost of food. Prices for staple crops such as rice and wheat have more than doubled since 2006, putting an enormous strain on the 1.2 billion people living on a dollar a day or less. Non-governmental organizations (NGOs) and relief agencies are on the front lines of this global crisis, distributing food and other forms of assistance to the hardest-hit victims. But food handouts may be the last thing that poor countries need right now. Instead of more advice or another bag of rice, the poor should be given relief vouchers, says Eric Werker, assistant professor at Harvard University Business School.

Foreign Policy, November/December 2008

The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization (pdf)

Guadalupe, Maria, and Julie M. Wulf
November 2008

This paper establishes a causal effect of competition from trade liberalization on various characteristics of organizational design. We exploit a unique panel dataset on firm hierarchies (1986-1999) of large U.S. firms and find that increasing competition leads firms to become flatter, i.e., (i) reduce the number of positions between the CEO and division managers (DM), (ii) increase the number of positions reporting directly to the CEO (span of control), (iii) increase DM total and performance-based pay. The results are generally consistent with the explanation that firms redesign their organizations through a set of complementary choices in response to changes in their environment.

Harvard Business School Working Paper, No. 09-067, November 2008

Platform Rules: Multi-Sided Platforms as Regulators (pdf)

Boudreau, Kevin J., and Andrei Hagiu
October 2008

This paper provides a basic conceptual framework for interpreting non-price instruments used by multi-sided platforms (MSPs) by analogizing MSPs as "private regulators" who regulate access to, and interactions around, the platform. We present evidence on Facebook, TopCoder, Roppongi Hills, and Harvard Business School to document the "regulatory" role played by MSPs. We find MSPs use nuanced combinations of legal, technological, informational, and other instruments (including price-setting) to implement desired outcomes. Non-price instruments were very much at the core of MSP strategies.

Harvard Business School Working Paper, No. 09-061, October 2008

The Cost of Property Rights: Establishing Institutions on the Philippine Frontier Under American Rule, 1898-1918 (pdf)

Iyer, Lakshmi, Noel Maurer
August 2008

We examine three reforms to property rights introduced by the United States in the Philippines in the early 20th century: the redistribution of large estates to their tenants, the creation of a system of secure land titles, and a homestead program to encourage cultivation of public lands. During the first phase of American occupation (1898-1918), we find that the progress of implementing these reforms was very slow. As a consequence, tenure insecurity increased over this period, and the distribution of farm sizes remained extremely unequal. We identify two primary causes for the slow progress of reform: first, the high cost of implementing these programs was a major factor in reducing take-up. On the other hand, the government was reluctant to evict delinquent or informal cultivators, especially on public lands. This reduced the costs of tenure insecurity. Political constraints prevented the government from subsidizing land reforms to a greater degree.

Harvard Business School Working Paper, No. 09-023, August 2008

Responding to Public and Private Politics: Corporate Disclosure of Climate Change Strategies (pdf)

Reid, Erin M., and Michael W. Toffel
August 2008

The challenges associated with climate change will require governments, citizens, and corporations to work collaboratively to reduce greenhouse gas emissions, a task that requires information on companies' emissions levels, risks, and reduction opportunities. This paper explores the conditions under which firms respond to shareholders' requests for this information. Building on previous theories of how social activists inspire field-level change, we hypothesize that shareholder actions and regulatory threats are likely to prime firms to cooperate with shareholder requests for information disclosure. Using a unique dataset, we find evidence of both direct and spillover effects. In the domain of private politics, shareholder resolutions filed against a firm, and against others in its industry, increase its propensity to acquiesce to these shareholder requests. Similarly, in the realm of public politics, the threat of state regulations that target a firm's industry-as well as those that target other industries-increases the likelihood that the firm will acquiesce to shareholder requests to disclose related information. These findings extend existing theory by showing how organizational change can be sparked by both activist groups and government policymakers and that challenges mounted against a single firm (and industry) can inspire field-level (and state-level) changes.

Harvard Business School Working Paper, No. 09-019, August 2008

Liquidity Needs in Economies with Interconnected Financial Obligations

Rotemberg, Julio J.
August 2008

A model is developed where firms in a financial system have to settle their debts to each other by using a liquid asset. The question that is studied is how many firms must obtain how much of this asset from outside the financial system to make sure that all debts within the system are settled. The main result is that these liquidity needs are larger when these firms are more interconnected through their debts, i.e., when they borrow from and lend to more firms. Two pecuniary externalities are discussed. One involves the choice of paying one creditor first rather than another. The second involves the extent to which firms borrow and acquire claims on other firms with the proceeds. When a group of firms raises their involvement in this activity, firms outside the group may face more difficulties in settling their debts.

NBER Working Paper Series, No. 14222, August 2008

Economic Impacts of Immigration: A Survey

Pekkala Kerr, Sari, and William R. Kerr
August 2008

This paper surveys recent empirical studies on the economic impacts of immigration. Particular emphasis is given to the experiences of Northern Europe and Scandinavia. The survey first examines the magnitude of immigration as an economic phenomenon in various host countries. The second part deals with the assimilation of immigrant workers in host-country labor markets and the use of social benefits by immigrants. The survey then considers the effect of immigration on the labor market outcomes of natives. The paper concludes with studies of immigration's impact for the public sector of host countries.

Harvard Business School Working Paper, No. 09-013, July 2008

Wellsprings of Creation: Perturbation and the Paradox of the Highly Disciplined Organization (pdf)

Plant-Size Distribution and Cross-Country Income Differences

Alfaro, Laura, Fabio Kanczuk, and Andrew Charlton
August 2008

We investigate, using plant-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous plants. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.

NBER International Seminar on Macroeconomics (forthcoming); NBER Working Paper Series, No. 14060.

Debt Maturity: Is Long-Term Debt Optimal?

Alfaro, Laura, and Fabio Kanczuk
August 2008

We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.

Review of International Economics (forthcoming); Harvard Business School Working Paper, No. 06-005; NBER Working Paper No. 13119.

Guanxi versus Networking: Distinctive Configurations of Affect- and Cognition-based Trust in the Networks of Chinese and American Managers

Chua, Roy Y.J., M.W. Morris, and P. Ingram
August 2008

This research investigates hypotheses about differences between Chinese and American managers in the configuration of trusting relationships within their professional networks. Consistent with hypotheses about Chinese familial collectivism, an egocentric network survey found that affect- and cognition-based trust were more intertwined for Chinese than for American managers. In addition, the effect of economic exchange on affect-based trust was more positive for Chinese than for Americans, whereas the effect of friendship was more positive for Americans than for Chinese. Finally, the extent to which a given relationship was highly embedded in ties to third parties increased cognition-based trust for Chinese but not for Americans. Implications for cultural research and international business practices are discussed.

Journal of International Business Studies (forthcoming)

Style Investing and Institutional Investors

Froot, Kenneth A., and Melvyn Teo
August 2008

This paper explores institutional investors' trades in stocks grouped by style and the relationship of these trades with equity market returns. It aggregates transactions drawn from a large universe of approximately $6 trillion of institutional funds. To analyze style behavior, we assign equities to deciles in each of five style dimensions: size, value/growth, cyclical/defensive, sector, and country. We find, first, strong evidence that investors organize and trade stocks across style-driven lines. This appears true for groupings both strongly and weakly related to fundamentals (e.g., industry or country groupings versus size or value/growth deciles). Second, the positive linkage between flows and returns emerges at daily frequencies, yet becomes even more important at lower frequencies. We show that quarterly decile flows and returns are even more strongly positively correlated than are daily flows and returns. However, as the horizon increases beyond a year, we find that the flow/return correlation declines. Third, style flows and returns are important components of individual stock expected returns. We find that nearby style inflows and returns positively forecast future returns while distant style inflows and returns forecast negatively. Fourth, we find strong correlations between style flows and temporary components of return. This suggests that behavioral theories may play a role in explaining the popularity and price impact of flow-related trading.

Journal of Financial and Quantitative Analysis (forthcoming)

Delivering Global Health

Jain, Sachin H., Rebecca Weintraub, Joseph Rhatigan, Michael E. Porter, and Jim Yong Kim
August 2008

Editorials. Student British Medical Journal 16, no. 227, June 2008

Brunner, David James, Bradley R. Staats, David M. Upton, Michael L. Tushman and David M. Upton
July 2008

Organizations face simultaneous imperatives to exploit and explore. Paradoxically, exploitation tends to drive out exploration, rendering organizations rigid and vulnerable to environmental change. Drawing on the Carnegie School, we propose a model where perturbation moderates the relationship between exploitation and exploration. We posit that highly disciplined organizations can sustain virtuous cycles of exploitation and exploration by deliberately perturbing their own processes. We provide illustrations from Toyota and formulate testable hypotheses about the mechanisms of perturbation.

Harvard Business School Working Paper, No. 09-011, July 2008

Fight or Flight? Portfolio Rebalancing by Individual Investors

Calvet, Laurent E., John Y. Campbell, and Paolo Sodini
July 2008

This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We find some evidence that households rebalance towards a higher risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern which is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.

NBER Working Paper Series, No. 14177, July 2008

The Agglomeration of U.S. Ethnic Inventors

Kerr, William R.,
July 2008

The ethnic composition of U.S. inventors is undergoing a significant transformation-with deep impacts for the overall agglomeration of U.S. innovation. This study applies an ethnic-name database to individual U.S. patent records to explore these trends with greater detail. The contributions of Chinese and Indian scientists and engineers to U.S. technology formation increase dramatically in the 1990s. At the same time, these ethnic inventors became more spatially concentrated across U.S. cities. The combination of these two factors helps stop and reverse long-term declines in overall inventor agglomeration evident in the 1970s and 1980s. The heightened ethnic agglomeration is particularly evident in industry patents for high-tech sectors, and similar trends are not found in institutions constrained from agglomerating (e.g., universities, government).

Harvard Business School Working Paper, No. 09-003, July 2008

Domestic Effects of the Foreign Activities of U.S. Multinationals

Desai, Mihir A., C. Fritz Foley, and James R. Hines Jr.
July 2008

Do firms investing abroad simultaneously reduce their domestic activity? This paper analyzes the relationship between the domestic and foreign operations of American manufacturing firms between 1982 and 2004 by instrumenting for changes in foreign operations with GDP growth rates of the foreign countries in which they invest. Estimates produced using this instrument indicate that 10% greater foreign investment is associated with 2.6% greater domestic investment, and 10% greater foreign employee compensation is associated with 3.7% greater domestic employee compensation. These results do not support the popular notion that expansions abroad reduce a firm's domestic activity, instead suggesting the opposite.

American Economic Journal: Economic Policy (forthcoming)

The Finance Function in a Global Corporation

Desai, Mihir A.
July 2008

As corporations globalize, capital markets open up within them, giving companies a powerful mechanism for arbitrage across national financial markets. Managing these internal markets to build an advantage requires that CFOs must balance new financial opportunities with the managerial and institutional challenges of operating in multiple environments

Harvard Business Review 86, nos. 7/8, July/August 2008

Should You Invest in the Long Tail?

Elberse, Anita
July 2008

The blockbuster strategy is a time-honored approach, particularly in media and entertainment. When space is limited on store shelves and in traditional distribution channels, producers tend to focus on a few likely best sellers, hoping that one or two big hits will carry the rest of their lists. But online retailing and the digitization of information goods have changed the commercial landscape: Virtual shelf space is infinite, consumers can search through innumerable options, and the marginal cost of reproducing and distributing products is low. What does that mean for the blockbuster strategy? In his 2006 book, The Long Tail: Why the Future of Business Is Selling Less of More, Chris Anderson, editor of Wired magazine, argues that the sudden availability of niche offerings more closely tailored to their tastes will lure consumers away from homogenized hits. The "tail" of the sales distribution curve, he says, will become longer, fatter, and more profitable. Elberse set out to investigate whether Anderson's long-tail theory is actually playing out in today's markets. She focused on the music and home-video industries-two markets that Anderson and others frequently hold up as examples of the long tail in action-reviewing sales data from Nielsen SoundScan, Nielsen VideoScan, the online music service Rhapsody, and the Australian DVD-by-mail service Quickflix. What she found may surprise you: Blockbusters are capturing even more of the market than they used to, and consumers in the tail don't really like niche products much. Elberse outlines the implications of her research for producers and retailers, and offers strategic advice to both groups.

Harvard Business Review 86, nos. 7/8, July/August 2008: 88-96

On Chinese, European and American Universities

Kirby, William C.
July 2008

In North America and in Europe, the past three decades have seen an unprecedented expansion of higher education and, in the most recent time, efforts at reform and restructuring. Harvard has overhauled its undergraduate curriculum in a comprehensive fashion for the first time in 30 years. European universities have witnessed even more thoroughgoing changes in the structure of undergraduate education. But perhaps nowhere on earth have recent decades seen more revolutionary change in higher education than in the People's Republic of China. Thirty years ago, Chinese universities were just reopening after the catastrophe of the Cultural Revolution. Today they are poised for positions of international leadership in research and education.

Daedalus: Journal of the American Academy of Arts and Sciences 137, no. 3, Summer 2008

Governance in Global Information Economy

McFarlan, F. Warren
July 2008

In the early 21st century, IT has become more important than ever. Technology evolution, the creation of new channels to global resource pools, increased corporate operational dependence on IT, and enhanced application opportunities have combined to drive this topic much higher on many companies' agendas. Different companies are impacted in different ways. Embedded in this chapter are two analytical frameworks often used by managers to understand this different impact; namely, the strategic grid and technological learning. Some aspects of IT have remained unchanged over a 40-year period. These include the constant emergence of new technologies, the obsolescence of technical skills, and the need for strong leadership. For many firms, however, this technology now has a much deeper impact on the transformation of their operations than could have been conceived several decades ago. The chapter successively describes how Otis, World Bank, COSCO and Cathay Pacific have each been utterly transformed by IT.

China Journal of Information Systems 1, no. 1, October 2007: 8-15.

What Do Nongovernmental Organizations Do?

Werker, Eric D., and Faisal Z. Ahmand
July 2008

Nongovernmental organizations are one group of players who are active in the efforts of international development and increasing the welfare of poor people in poor countries. Nongovernmental organizations are largely staffed by altruistic employees and volunteers working towards ideological, rather than financial, ends. Their founders are often intense, creative individuals who sometimes come up with a new product to deliver or a better way to deliver existing goods and services. They are funded by donors, many of them poor or anonymous. Yet these attributes should not be unfamiliar to economists. Development NGOs, like domestic nonprofits, can be understood in the framework of not-for-profit contracting. It is easy to conjure up a glowing vision of how the efforts of NGOs could focus on problem solving without getting bogged down in corruption or bureaucracy. But the strengths of the NGO model have some corresponding weaknesses-in agenda setting, decision making, and resource allocation. We highlight three factors in explaining the increased presence of NGOs in the last few decades: a trend towards more outsourcing of government services; new ventures by would-be not-for-profit "entrepreneurs"; and the increasing professionalization of existing NGOs.

Journal of Economic Perspectives 22, no. 2, Spring 2008

Firm-Size Distribution and Cross-Country Income Differences

Alfaro, Laura, Andrew Charlton, and Fabio Kanczuk
June 2008

We investigate, using firm-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous firms. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.

NBER Working Paper Series, No. 14060, June 2008

A Better Approach to Foreign Aid

Muzinich, Justin, Eric Werker
June 2008

Frustration with U.S. foreign aid is widespread. At the same time, flows of private development finance-including foreign direct investment and remittances-have begun to dwarf official aid. We suggest a new approach that harnesses the power of private development finance to direct it towards developmental and foreign policy goals. Specifically, we argue that tax credits for companies, and tax breaks for individuals, can be used to incentivize productive investments while being a positive force for meaningful reform in the developing world.

Policy Review 149, June/July 2008

Where Oil-Rich Nations Are Placing Their Global Bets

Abdelal, Rawi, Ayesha Khan, and Tarun Khanna

The combination of the gigantic American trade deficit and the price of oil at more than $130 per barrel (at press time) have created an inevitable pool of financial liquidity among oil exporters in the Arabian Gulf. But this era of petrodollar surpluses is markedly different from the last one. In the 1970s, the member states of the Gulf Cooperation Council-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates-outsourced the management of their petrodollars to American and U.K. bankers. This time around, they have adopted active investment and development strategies: They are investing heavily in large Western organizations as well as in emerging markets in Africa and India. They are spending lavishly at home to establish institutional infrastructures, create free-trade zones for manufacturing and services, and build recreational facilities that will attract businesses, skilled knowledge workers, and tourists. All of this is destined to have long-run effects not just on their local economies but also on regional and international trading, argue the authors. In fact, the authors say, the actions of the GCC states are pulling the Gulf closer than it has ever been to the center of the international financial system. In this article, the authors consider how the economic landscape in the West will be affected by oil exporters' new investment strategies and interests over the next decades, how proximate emerging markets will be reshaped, and finally, how the GCC home environment itself will be dramatically reconfigured.

Harvard Business Review (forthcoming)

A Better Approach to Foreign Aid

Muzinich, Justin and Eric Werker
June 2008

Frustration with U.S. foreign aid is widespread. At the same time, flows of private development finance-including foreign direct investment and remittances-have begun to dwarf official aid. We suggest a new approach that harnesses the power of private development finance to direct it towards developmental and foreign policy goals. Specifically, we argue that tax credits for companies, and tax breaks for individuals, can be used to incentivize productive investments while being a positive force for meaningful reform in the developing world.

Policy Review 149 June/July 2008

Industrial Specialization and Regional Clusters in the Ten New EU Member States

Solvell, Orjan, Christian H.M. Ketels, and Goran Lindqvist
June 2008

The purpose of this paper is to provide an analysis of regional concentration patterns within ten new European Union (EU) member states, EU10, and make comparisons with EU15 and the U.S. economy.

Competitiveness Review: An International Business Journal Incorporating Journal of Global Competitiveness 18, nos. 1/2, 2008: 104-130

Firm-Size Distribution and Cross-Country Income Differences

Alfaro, Laura, and Andrew Charlton, and Fabio Kanczuk
June 2008

We investigate, using firm-level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous firms. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.

NBER Working Paper Series, No. 14060, June 2008

Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints

Ardagna, Silvia and Annamaria Lusardi
June 2008

We use a micro dataset that collects information across individuals, countries, and time to investigate the determinants of entrepreneurial activity in 37 developed and developing nations. We focus both on individual characteristics and on countries' regulatory differences. We show that individual characteristics, such as gender, age, and status in the workforce are important determinants of entrepreneurship, and we also highlight the relevance of social networks, self-assessed skills, and attitudes toward risk. Moreover, we find that regulation plays a critical role, particularly for those individuals who become entrepreneurs, to pursue a business opportunity. The individual characteristics that are impacted most by regulation are those measuring working status, social networks, business skills, and attitudes toward risk.

NBER Working Paper Series, No. 14012, May 2008

America the Difficult

Desai, Mihir
June 2008

The American (May - June 2008)

Accountability and Inequality in Single-Party Regimes: A Comparative Analysis of Vietnam and China (pdf)

Abrami, Regina, and Edmund Malesky, and Yu Zheng
May 2008

Over the past two decades, no two economies have averaged more rapid economic growth than China and Vietnam. But while China's income inequality has risen rapidly over that same time frame, Vietnam's has only grown moderately. Structural and socio-cultural determinants fail to account for these divergent pathways. Existing political variables are also unhelpful. China and Vietnam are coded in exactly the same way, even in the path-breaking work on authoritarian regimes. In this paper, we take a deeper look at political institutions in the two countries, demonstrating that profound differences between the polities directly impact distributional choices. In particular, we find that Vietnamese elite institutions require construction of broader coalitions of policymakers, place more constraints on executive decision making, and have more competitive selection processes. As a result, there are stronger political motivations for Vietnamese leaders to provide equalizing transfers that limit inequality growth.

Harvard Business School Working Paper, No. 08-099, May 2008

The 'Thin Film of Gold': Monetary Rules and Policy Credibility In Developing Countries

Ferguson, Niall, and Moritz Schularick
April 2008

This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold-standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery-where policy credibility is a particularly acute problem-the market looked behind "the thin film of gold." Our results point to a dichotomy: whereas country-risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors.

NBER Working Paper Series, No. 13918, April 2008

Learning to Live with Governments: Unilever in India and Turkey, 1950-1980

Jones, Geoffrey G.
March 2008

A noteworthy characteristic of the contemporary global economy is the uneven distribution of world foreign direct investment (FDI). In 2007 three-quarters of world FDI was located in developed countries. The residual was concentrated in a small number of emerging countries. Large countries with little inward FDI included India and Turkey. This is puzzling, given that both countries have greatly liberalized their regulations on inward FDI. After 1945 many developing governments pursued policies which restricted foreign-owned firms. India and Turkey were among the countries with particularly difficult policy environments. This paper explores why Unilever, the Anglo-Dutch consumer products company, was able to sustain large businesses in developing countries such as India and Turkey. The paper argues that the explanation is multi-causal. Unilever held first-mover advantages, but was also prepared to accept low dividend remittances for years. It pursued flexible business strategies beyond its "core" business, even distributing condoms. It maintained a high standard of corporate ethics. It was effective at building contacts with local business and government elites, primarily through localization of management.

Entreprises et Histoire 49, December 2007

Foreign Direct Investment, Productivity, and Financial Development: An Empirical Analysis of Complementarities and Channels

Alfaro, Laura , Sebnem Kalemli-Ozcan, and Selin Sayek
March 2008

This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI in flows and financial markets. In our earlier work, we find that FDI is beneficial for growth only if the host country has well-developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation-physical and human capital-does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross-country income differences.

The World Economy (forthcoming)

The Fiscal Impact of the Brain Drain: Indian Emigration to the U.S.

Desai, Mihir, D. Kapur, and J. McHale
February 2008

Easing immigration restrictions for the highly skilled in developed countries portend a future of increased human capital outflows from developing countries. The myriad consequences of these developments for developing countries include the direct loss of the fiscal contributions of these highly skilled individuals. This paper analyzes the fiscal impact of this loss of talent for a developing country by examining human capital flows from India to the U.S. The escalation of the emigration of highly skilled professionals from India to the U.S is examined by surveying evidence on the changing nature of the Indian-born in the U.S. during the 1990s. The loss of talent to India during the 1990s was dramatic and highly concentrated amongst the prime-age work force, the highly educated and high earners. In order to estimate the fiscal losses associated with these emigrants, this paper first estimates what these emigrants would have earned in India, and then integrates the resulting counterfactual distributions with details of the Indian fiscal system to estimate fiscal impacts. Two distinct methods to estimate the counterfactual earnings distributions are implemented: a translation of actual U.S. incomes in purchasing power parity terms and an income simulation based on a jointly estimated model of Indian earnings and participation in the workforce. The PPP methods indicate that the foregone income tax revenues associated with the Indian-born residents of the U.S. comprise one-third of current Indian individual income tax receipts. Depending on the method for estimating expenditures saved by the absence of these emigrants, the net fiscal loss associated with the U.S. Indian-born resident population ranges from 0.24% to 0.58% of Indian GDP in 2001.

Journal of Development Economics (forthcoming)

Learning Processes in Environmental Policy Making and Implementation

Ebrahim, Alnoor S.
February 2008

This paper explores how "learning" occurs in the context of environmental policy formulation and implementation. Rather than viewing policy learning as a rational and technocratic process, the emphasis here is on the political and institutional contexts within which opportunities for policy learning emerge. In particular, opportunities for policy learning are examined with respect to (a) agenda or priority-setting on environmental issues, (b) stakeholder access and representation in policy formulation, and (c) accountability in implementation. Examples are drawn from the experiences of South Africa and Brazil. Several preliminary factors are identified that may enhance policy learning, while acknowledging the constraints of bounded rationality and relationships of power.

Harvard Business School Working Paper, No. 08-071, February 2008

Crime and Beliefs: Evidence from Latin America

Di Tella, Rafael, Javier Donna, and Robert MacCulloch
February 2008

Economics Letters (forthcoming)

Gross National Happiness as an Answer to the Easterlin Paradox?

Di Tella, Rafael, and Robert MacCulloch
February 2008

The Easterlin Paradox refers to the fact that happiness data are typically stationary in spite of considerable increases in income. This amounts to a rejection of the hypothesis that current income is the only argument in the utility function. We find that the happiness responses of around 350,000 people living in the OECD between 1975 and 1997 are positively correlated with the level of income, the welfare state and (weakly) with life expectancy; they are negatively correlated with the average number of hours worked, environmental degradation (measured by SOx emissions), crime, openness to trade, inflation and unemployment-all controlling for country and year dummies. These effects separate across groups in a pattern that appears broadly plausible (e.g., the rich suffer environmental degradation more than the poor). Based on actual changes from 1975 to 1997, small contributions to happiness can be attributed to the increase in income in our sample. Interestingly, the actual changes in several of the 'omitted variables' such as life expectancy, hours worked, inflation and unemployment also contribute to happiness over this time period since life expectancy has risen and the others have, on average, fallen. Consequently the unexplained trend in happiness is even bigger than would be predicted if income was the only argument in the utility function. In other words, introducing omitted variables worsens the income-without-happiness paradox.

Journal of Development Economics 16, no. 3, Fall 2007

'Chimerica' and Global Asset Markets

Ferguson, Niall, and Moritz Schularick
February 2008

In this essay we present a potential explanation for the persistent and, to some eyes, puzzling buoyancy of global asset markets in recent years. We argue that the current world economic conjuncture is the product of a large and unusual divergence or "wedge" between the returns on capital and the cost of capital. Globalization-in particular the integration of the massive Asian labor force into the world economy-has significantly increased the returns on capital. However, contrary to what economic theory might lead us to expect, the cost of capital as measured by long-term real interest rates has not increased, but actually fallen. We call this phenomenon "Chimerica" because it is a consequence of the symbiotic economic relationship that has developed between the People's Republic of China and the United States of America. The entry of Chinese labor into the world economy has significantly boosted the returns on capital relative to the returns on labor. At the same time, by accumulating large currency reserves and channeling them (until very recently) almost exclusively into U.S.government securities, China has kept nominal and real long-term interest rates artificially low. In our view, it is this wedge between returns on capital and the cost of capital, rather than excess liquidity or a shortage of financial assets, that explains the boom in global asset markets as well as the recent upsurge of leveraged buy-out activity.

International Finance 10, no. 3, winter 2007: 215-239

Transforming Giants

Kanter, Rosabeth M.
February 2008

Large corporations have long been seen as lumbering, inflexible, bureaucratic-and clueless about global developments. But recently some multinationals seem to be transforming themselves: They're engaging employees, moving quickly, and introducing innovations that show true connection with the world. Harvard Business School's Kanter ventured with a research team inside a dozen global giants-including IBM, Procter & Gamble, Omron, CEMEX, Cisco, and Banco Real-to discover what has been driving the change. After conducting more than 350 interviews on five continents, she and her colleagues came away with a strong sense that we are witnessing the dawn of a new model of corporate power: The coordination of actions and decisions on the front lines now appears to stem from widely shared values and a sturdy platform of common processes and technology, not from top-down decrees. In particular, the values that engage the passions of far-flung workforces stress openness, inclusion, and making the world a better place. Through this shift in what might be called their guidance systems, the companies have become as creative and nimble as much smaller ones, even while taking on social and environmental challenges of a scale that only large enterprises could attempt. IBM, for instance, has created a nonprofit partnership, World Community Grid, through which any organization or individual can donate unused computing power to research projects and see what is being done with the donation in real time. IBM has gained an inspiring showcase for its new technology, helped business partners connect with the company in a positive way, and offered individuals all over the globe the chance to contribute to something big.

Harvard Business Review, 86, no. 1, January 2008: 43-52

Embracing Commitment and Performance: CEOs and Practices Used to Manage Paradox (pdf)

Fredberg, Tobias, Michael Beer, Russell Eisenstat, Nathaniel Foote, and Flemming Norrgren.
January 2008

We tend to assume that great leaders must make difficult choices between two or more conflicting outcomes. In an interview study with 26 CEOs of top American and European companies (including IKEA, Campbell Soups, Nokia, H&M), we find that instead of choosing between conflicting outcomes such as long-term strategy or short-term performance drivers, top-tier managers argue that their role is to embrace such paradoxes to make both things happen simultaneously. The study identifies five groups of practices that make this possible. Together, they reveal a systematic approach to managerial work at the top, which is seldom found in the literature. By building on the engagement of many in the development of the organization, the practices are important for our understanding of how a CEO facilitates the partaking of many in strategy making. The paper contributes to theory by relating the current findings to the literature on the connection between commitment and performance and on the strategic management literature that focuses on the proliferation of strategy and strategy as practice.

Harvard Business School Working Paper, No. 08-052, January 2008

Do Legal Origins Have Persistent Effects Over Time? A Look at Law and Finance around the World c. 1900 (pdf)

Musacchio, Aldo
January 2008

How persistent are the effects of legal institutions adopted or inherited in the distant past? A substantial literature argues that legal origins have persistent effects that explain clear differences in investor protections and financial development around the world today (La Porta et al., 1998, 1999 and passim). This paper examines the persistence of the effects of legal origins by examining new estimates of different indicators of financial development in more than 20 countries in 1900 and 1913. The evidence presented does not yield robust results that can sustain the hypothesis of persistence effects of legal origin, but it is not powerful enough to reject it either. Then the paper examines if there were systematic differences in the extent of investor protections across countries, since that is the main channel through which legal origin affects financial development, and shows that all the evidence supports the idea of relative convergence in corporate governance practices across legal families circa 1900. The paper concludes that, if the evidence presented is representative, the variation observed in financial development around the world today is likely a product of events of the twentieth century rather than a consequence of long-term (and persistent) differences occasioned by legal traditions.

Harvard Business School Working Paper, No. 08-030, January 2008

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2007

Grist: A Strategic Approach to Climate

Porter, Michael E , and Forest L. Reinhardt
December 2007

Climate change will affect everything businesses do, as government efforts to mitigate carbon emissions cause their prices to rise steeply. This special edition of Forethought takes a hard-nosed look at the risks and opportunities of climate change. Michael E. Porter and Forest L. Reinhardt argue that the effects of climate change on companies' operations are now so tangible and certain that the issue is best addressed with the tools of the strategist, not the philanthropist.

Forethought. Harvard Business Review 85, no. 10, October 2007: 22-26

Opinion: Place Your Bets on the Future You Want

Reinhardt, Forest L.
December 2007

This piece posits that success in a carbon-constrained world will be determined by innovation and acumen, requiring companies to make bold moves.

Forethought. Harvard Business Review 85, no. 10, October 2007: 42-43

Happiness, Contentment and Other Emotions for Central Banks

Di Tella, Rafael , and Robert MacCulloch
December 2007

We show that data on satisfaction with life from over 600,000 Europeans are negatively correlated with the unemployment rate and the inflation rate. Our preferred interpretation is that this shows that emotions are affected by macroeconomic fluctuations. Contentment is, at a minimum, one of the important emotions that central banks should focus on. More ambitiously, contentment might be considered one of the components of utility. The results may help central banks understand the tradeoffs that the public is willing to accept in terms of unemployment for inflation, at least in terms of keeping the average level of one particular emotion (contentment) constant. An alternative use of these data is to study the particular channels through which macroeconomics affects emotions. Finally, work in economics on the design of monetary policy makes several assumptions (e.g., a representative agent, a summary measure of emotions akin to utility exists and that individuals only care about income and leisure) that can be used to interpret our results as weights in a social loss function.

NBER Working Paper Series, No. 13622, November 2007

China + India: The Power of Two

Khanna, Tarun
December 2007

China and India are burying the hatchet after four-plus decades of hostility. A few companies from both nations have been quick to gain competitive advantages by viewing the two as symbiotic. If Western corporations fail to do the same, they will lose their competitive edge-and not just in China and India but globally. The trouble is, most companies and consultants refuse to believe that the planet's most populous nations can mend fences. Not only do the neighbors annoy each other with their foreign policies, but they're also vying to dominate Asia. Moreover, the world's fastest-growing economies are archrivals for raw materials, technologies, capital, and overseas markets. Still, China and India are learning to cooperate, for three reasons. First, these ancient civilizations may have been at odds since 1962, but for 2,000 years before that, they enjoyed close economic, cultural, and religious ties. Second, neighbors trade more than non-neighbors do, research suggests. Third, China and India have evolved in very different ways since their economies opened up, reducing the competitiveness between them and enhancing the complementarities. Some companies have already developed strategies that make use of both countries' capabilities. India's Mahindra & Mahindra developed a tractor domestically but manufactures it in China. China's Huawei has recruited 1,500 engineers in India to develop software for its telecommunications products. Even the countries' state-owned oil companies, including Sinopec and ONGC, have teamed up to hunt for oil together. Multinational companies usually find that tapping synergies across countries is difficult. At least two American corporations, GE and Microsoft, have effectively combined their China and India strategies, allowing them to stay ahead of global rivals.

Harvard Business Review 85, no. 12, December 2007

An Interdisciplinary Model for Effective Software Requirements Engineering

Klendauer, Ruth, Richard Gelvin, and Daniel J. Isenberg
December 2007

In recent studies, the success rate of software development projects has been found to be low (about 29%). The majority of the challenges can be traced back to the requirements engineering workflow (RE). Although it is widely acknowledged that the difficulties faced in RE are multifarious, recent research has primarily focused on limited factors. This ongoing research project addresses this limitation by integrating the fields of social and organizational psychology, organizational behavior, and software engineering. The primary goals are to (a) develop and validate an interdisciplinary multidimensional model, which focuses on the complex interrelationships among requirements workflow related risk factors, individual, team and organizational competencies, software processes, techniques, tools, and requirements workflow success and (b) develop a set of instruments to assess RE risk factors and to design, evaluate, and apply effective measures to mitigate those risks. The data collection consists of interviews with RE experts and other experienced practitioners (e.g., managers, business and technical people) in eight major North American and European financial services companies as well as an international internet survey in collaboration with journals and organizations. The present paper gives an overview of the initial findings of 61 interviews and highlights some of the key factors.

Harvard Business School Working Paper, No. 08-033, November 2007

Acting Globally but Thinking Locally? The Influence of Local Communities on Organizations (pdf)

Marquis, Christopher, and Julie Battilana
December 2007

Acting Globally but Thinking Locally? The Influence of Local Communities on Organizations We develop an institutional theory of how local communities continue to matter for organizations, and why community factors are particularly important in a global age. Since globalization has taken center stage in both practitioner and academic circles, research has shifted away from understanding effects of local factors. In this paper, our aim is to redirect theoretical and empirical attention back to understanding the determinants and importance of local influences. We review classical and contemporary research from organizational theory, sociology and economics that have focused on geographic influences on organizations. We adapt Scott's (2001) influential three pillars model, including regulative, social-normative and cultural-cognitive features to conceptualize an overarching model of how communities influence organizations. We suggest that because organizations are simultaneously embedded in communities and organizational fields, by accounting for both of these different levels, researchers will better understand isomorphism and change dynamics. Our approach thus runs counter to the idea that globalization is a homogeneity-producing process and the view that society is moving from particularism to universalism. With globalization, not only has the local remained important, but in many ways local particularities have become more visible and salient, and so understanding these dynamics will be helpful for researchers addressing institutional isomorphism and change.

Harvard Business School Working Paper, No. 08-034, November 2007

A Global Tax Credit

Muzinich, Justin, and Eric D. Werker
December 2007

Op-ed. The New York Times, October 20, 2007

Pharmaceutical Regulation in the United States and Europe

Daemmrich, Arthur
November 2007

The Division for Public Education of the American Bar Association. Focus on Law Studies 23, no. 1, Fall 2007: 8-11

Design, Meanings, and Radical Innovation: A Meta-model and a Research Agenda

Verganti, Roberto
November 2007

Recent studies on design management have helped us to better comprehend how companies can apply design to get closer to users and better understand their needs; an approach usually referred to as "user-centered design". Yet, analysis of design-intensive manufacturers such as Alessi, Artemide and other leading Italian firms, show that their innovation process hardly starts from a close observation of user needs and requirements. Rather, they follow a different strategy that we call "design-driven innovation". This strategy aims at radically changing the emotional and symbolic content of products, i.e., their meanings and languages, through a deep understanding of broader changes in society, culture and technology. Rather than being pulled by user requirements, design-driven innovation is pushed by a firm's vision about possible new product meanings and languages that could diffuse in society. Design-driven innovation, that plays such a crucial role in the innovation strategy of design-intensive firms, has still remained largely unexplored. This article aims at providing a possible direction to fill this empty spot in innovation management literature. In particular, first we propose a meta-model for investigation of design-driven innovation. In this meta-model a manufacturer's ability to understand, anticipate and influence emergence of new product meanings is built by leveraging on external interpreters (designers, firms in other industries, suppliers, schools, artists, the media, etc…) who share its same problem: to understand the evolution of socio-cultural models, and propose new visions and meanings. Managing design-driven innovation therefore implies to manage the interaction with these interpreters, in order to access, share and internalize knowledge on product languages and influence shifts in socio-cultural models. Second, we propose a possible direction to scientifically investigate the management of this networked and collective research process. In particular we show that the process of creating breakthrough innovations of meanings partially mirrors the process of creating breakthrough technological innovations. Studies of design-driven innovation may therefore benefit significantly from the existing body of theories in the field of technology management. The analysis of the analogies between these two types of radical innovations (of meanings and technologies) allow to set a research agenda for exploration of design-driven innovation, a relevant as well as underinvestigated phenomenon.

Journal of Product Innovation Management (forthcoming)

The Country Effect: Leveraging the Origin of a Brand for the Global Markets (El efecto país: cuándo capitalizar el origen de una marca en los mercados globales)

Deshpandé, Rohit
November 2007

Entre los consumidores más jóvenes, la procedencia de una marca no hace tanta diferencia. De hecho, un estudio reciente de Samsung descubrió que la imagen país no exhibe ningún impacto significativo en la imagen de marca ni en la intención de compra, al menos cuando se trata de una marca establecida. ¿Pero qué pasa cuando la marca es nueva o relativamente desconocida en el mercado? El profesor de Harvard Business School Rohit Deshpandé responde que en esos casos el efecto país puede tener un impacto primario en la evaluación de la marca mientras se vuelve parte integrante de la imagen de marca. Por ello es que existen casos (como los que usa como ejemplo: Lan Airlines, Corona, Café Colombia, SIA, entre otros) en los que una empresa puede ganar acceso a los mercados globales si escoge la forma adecuada de lidiar con su origen: ya sea matizándolo, ocultándolo o realzándolo para crear la imagen con la que desea llegar a los consumidores del mundo. Para afrontar adecuadamente esta decisión, el autor hace cuatro recomendaciones:
• La mejor estrategia de ingreso no es necesariamente la mejor estrategia para el desarrollo de mercado.
• El desarrollo económico de un país no siempre se correlaciona con la etapa de desarrollo del mercado para los productos.
• Conocimiento del marketing (relacionado con el producto) y conocimiento del mercado (relacionado con el territorio) son dos cosas distintas.
• Pocos clientes se benefician del marketing globalizado, pero las empresas de marketing sí lo hacen. Si, como muchas empresas latinoamericanas, su empresa quiere dejar de vender productos de bajo costo y saltar a los productos premium en el mercado global, debe poner atención al afecto país.

Harvard Business Review - America Latina, August 2007: 2-6

Will Harmonizing Accounting Standards Really Harmonize Accounting? Evidence from Non-U.S. Firms Adopting US GAAP

Bradshaw, Mark T., and Gregory S. Miller
November 2007

International harmonization of accounting standards appears to be inevitable. However, little evidence exists regarding whether harmonizing accounting standards will result in actual harmonization of accounting practices. Using a sample of non-US firms that adopt US GAAP to provide evidence on this issue, we find that most firms that adopt US GAAP adjust their accounting methods to those required by US GAAP. Properties of the firms' accounting numbers also change significantly after adopting US GAAP, but do not fully converge towards that of U.S. firms. In the cross-section, regulatory oversight is associated with more successful implementation of US GAAP; firm-specific capital market incentives are not. These results suggest that harmonizing accounting standards may result in more comparable accounting methods and numbers, but that effective regulatory oversight will be important in reaching this outcome.

Journal of Accounting, Auditing and Finance (forthcoming)

Accountability in Complex Organizations: World Bank Responses to Civil Society (pdf)

Ebrahim, Alnoor, and Steve Herz
November 2007

Civil society actors have been pushing for greater accountability of the World Bank for at least three decades. This paper outlines the range of accountability mechanisms currently in place at the World Bank along four basic levels: (1) staff, (2) project, (3) policy, and (4) board governance. We argue that civil society organizations have been influential in pushing for greater accountability at the project and policy levels, particularly through the establishment and enforcement of social and environmental safeguards and complaint and response mechanisms. But they have been much less successful in changing staff incentives for accountability to affected communities, or in improving board accountability through greater transparency in decision making, more representative vote allocation, or better parliamentary scrutiny. In other words, although civil society efforts have led to some gains in accountability with respect to Bank policies and projects, the deeper structural features of the institution-the incentives staff face and how the institution is governed-remain largely unchanged.

Harvard Business School Working Paper, No. 08-027, October 2007

Facts and Fallacies about U.S. FDI in China

Branstetter, Lee, and Foley, C. Fritz
October 2007

Despite the rapid expansion of U.S.-China trade ties, the increase in U.S. FDI in China, and the expanding amount of economic research exploring these developments, a number of misconceptions distort the popular understanding of U.S. multinationals in China. In this paper, we seek to correct four common misunderstandings by providing a statistical portrait of several aspects of U.S. affiliate activity in the country and placing this activity in its appropriate economic context.

NBER Working Paper Series, No. 13470, October 2007

Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase versus Pooling

Martinez-Jerez, Francisco de Asis
September 2007

This paper examines the effect of corporate governance on investor reactions to accounting choice in the context of accounting for business combinations. Using a sample of 324 recent stock swap acquisitions I find that, contrary to practitioners' belief that capital markets penalize purchase accounting, the opposite appears to be true; there is a negative and significant differential market reaction of approximately 4 percent for acquiring firms that announce pooling transactions. This return differential declines to negative 8 percent for firms with ineffective corporate governance. These findings are consistent with capital markets interpreting the choice of purchase accounting as a signal of management's confidence in the likelihood of a successful merger. This signal is particularly relevant when corporate governance is considered ineffective.

European Accounting Review (forthcoming)

Digital Interactivity: Unanticipated Consequences for Markets, Marketing, and Consumers (pdf)

Deighton, John A., and Leora Kornfeld
September 2007

The digital interactive transformation in marketing is not unfolding, as many thought it would, on the model of direct marketing. That model anticipated that digital media using rich profiling data would intrude marketing messaging more deeply and more precisely into consumer lives than broadcast media had been able to do. But the technology that threatened intrusion is delivering seclusion. The transformation is unfolding on a model of consumer collaboration, in which consumers use digital media that lie beyond the control of marketers to communicate among one another, responding to marketing's intrusions by disseminating counterargument, information sharing, rebuttal, parody, reproach and, though more rarely, fandom. Globally the media of collaboration range from consumer review sites like Epinions and Trip Advisor, to collaborative networking sites like Bebo, Facebook, Orkut and Meetup, to trading sites like Craigslist and eBay, and user-generated content sites like YouTube, Cyworld, and blogs. This paper reviews five emerging paradigms governing marketing in this new media environment. It concludes that while meaning-making remains the central purpose of marketing communication, the shift from broadcasting to interaction within digital communities is moving the locus of control over meanings from marketer to consumer and rewarding more participatory, more sincere, and less directive marketing styles.

Harvard Business School Working Paper, No. 08-017, September 2007

Entrepreneurial Theory and the History of Globalization

Deighton, John A., Geoffrey G. Jones, and R. Daniel Wadhwani
September 2007

In this article, we build on the recent efforts of scholars to re-introduce entrepreneurship into the research agenda of business historians. We examine the value and limitations of adapting recent social scientific theories and methods on entrepreneurship to research on international business history. Specifically, we focus on three recent areas of social scientific work on entrepreneurship and weigh their value to business history research. First, we consider how scholars can employ research on entrepreneurial cognition to understand the historical ownership advantages of multinational firms. Second, we draw on concepts from entrepreneurial strategy and finance and examine their use in understanding the history of how firms allocated resources to uncertain international ventures. Finally, we look at the question of the diffusion of the benefits of globalization and their impact on entrepreneurship within host economies. We conclude that the cautious adoption of some of these recent conceptual developments offers fertile opportunities for further research in international business history.

Business and Economic History On-Line 5, 2007

Intra-Industry Foreign Direct Investment (pdf)

Alfaro, Laura, and Andrew Charlton
September 2007

We use a new firm-level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries-close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms' final good that they appear identical at the two-digit level. We call these proximate subsidiaries 'intra-industry' vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

Harvard Business School Working Paper, No. 08-018, September 2007

Optimal Reserve Management and Sovereign Debt (pdf)

Alfaro, Laura, and Fabio Kanczuk
September 2007

Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why don't sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitative important role in this model. In fact, we find the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.

NBER Working Paper Series, No. 13216, July 2007

Local Company Politics: A Proposal (pdf)

Fisman, Ray, and Eric D. Werker
September 2007

Corrupt politicians, and poor government more generally, are commonly viewed as a primary barrier to economic progress. The roots to these problems run deep in many political systems across the developing world, and attempts at reform have rarely found much success. To combat this impasse, we suggest a radical new approach to local politics that, instead of proposing reforms to the electoral process, focuses on the political actors that might enter into this process. Specifically, we suggest that private firms be allowed to compete in elections to hold public office. That is, a corporate entity (e.g., Ernst and Young), rather than an individual representative of the firm, would be permitted to contest a local election. We argue that this is feasible: sufficient economic incentives could be put in place to induce firms to run for office, particularly if company officeholders prove to be competent in revenue collection. More importantly, we claim that there are many channels through which company politics should improve government, from breaking up entrenched old boys' networks to leveraging a company's existing organizational expertise. Private firms have realized efficiency and performance gains in areas such as infrastructure and many bureaucratic functions; we argue that the private sector can also attain results in politics, the most public of all realms.

Capitalism and Society 2, no. 1, March 2007

The Baltic Sea Region: Prepared for the Next Stage?

Ketels, Christian H.M.
September 2007

Baltinfo 86, May/June 2007

The Baltic Tigers: An End in Sight for the Growth Story?

Ketels, Christian H.M.
September 2007

Baltic Rim Economies, no. 5, 2006

Investigative Negotiation

Malhotra, Deepak, and Max H. Bazerman
August 2007

Negotiators often fail to achieve results because they channel too much effort into selling their own position and too little into understanding the other party's perspective. To get the best deal-or, sometimes, any deal at all-negotiators need to think like detectives, digging for information about why the other side wants what it does. This investigative approach entails a mind-set and a methodology, say Harvard Business School professors Malhotra and Bazerman. Inaccurate assumptions about the other side's motivations can lead negotiators to propose solutions to the wrong problems, needlessly give away value, or derail deals altogether. Consider, for example, the pharmaceutical company that deadlocked with a supplier over the issue of exclusivity in an ingredient purchase. Believing it was a ploy to raise the price, the drug maker upped its offer-unsuccessfully. In fact, the supplier was balking because a relative's company needed a small amount of the ingredient to make a local product. Once the real motivation surfaced, a compromise quickly followed. Understanding the other side's motives and goals is the first principle of investigative negotiation. The second is to figure out what constraints the other party faces. Often when your counterpart's behavior appears unreasonable, his hands are tied somehow, and you can reach agreement by helping overcome those limitations. The third is to view onerous demands as a window into what the other party prizes most-and use that information to create opportunities. The fourth is to look for common ground; even fierce competitors may have complementary interests that lead to creative agreements. Finally, if a deal appears lost, stay at the table and keep trying to learn more. Even if you don't win, you can gain insights into a customer's future needs, the interests of similar customers, or the strategies of competitors.

Harvard Business Review 85, no. 9, September 2007

The Ethnic Composition of U.S. Inventors (pdf)

Kerr, William R.
August 2007

The ethnic composition of U.S. scientists and engineers is undergoing a significant transformation. This study applies an ethnic-name database to individual patent records granted by the United States Patent and Trademark Office to document these trends with greater detail than previously available. Most notably, the contributions of Chinese and Indian scientists to U.S. technology formation increased dramatically in the 1990s, before noticeably leveling off after 2000 and declining in the case of India. Growth in ethnic innovation is concentrated in high-tech sectors; the institutional and geographic dimensions are further characterized.

Harvard Business School Working Paper, No. 08-006, May 2007

Business and Low-Income Sectors: Finding a New Weapon to Attack Poverty

Austin, James E., and Michael Chu
August 2007

Art. 1. Social Enterprise: Making a Difference. ReVista 6, no. 1, Fall 2006: 3-5

Diversification of Chinese Companies - An International Comparison (pdf)

Fan, Joseph P.H., Jun Huang, Felix Oberholzer-Gee, Troy D. Smith, and Mengxin Zhao
August 2007

This paper provides a systematic comparison of the level of business diversification in China and eight other large economies for the 2001 to 2005 period. We investigate reasons why Chinese firms are more diversified than companies elsewhere. Design/methodology/approach - We collect data on the number of business segments in which publicly traded companies operate from the Thomson One Banker database. We analyze the data using nonparametric tests and regression analysis.

Harvard Business School Working Paper, No. 08-007, August 2007

Corporate Legitimacy and Advertising: British Companies and the Rhetoric of Deveolpment in West Africa, 1950 - 1970

Decker, Stephanie
August 2007

Development, modernity, and industrialization became dominant themes in corporate advertising in Africa in the 1950s and remained prevalent through the following two decades while many African nations were gaining independence. British businesses operating there created a publicity strategy that couched their presence in less developed countries in terms of a commitment and a positive contribution to the progress of the new states. Eventually, British companies tried to "Africanize" their corporate image through these campaigns.

Business History Review 81, Spring 2007: 59-86

Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk (pdf)

Dale F. Gray, Merton, Robert C., and Zvi Bodie
August 2007

This paper proposes a new approach to measure, analyze, and manage sovereign risk based on the theory and practice of modern contingent claims analysis (CCA). The paper provides a new framework for adapting the CCA model to the sovereign balance sheet in a way that can help forecast credit spreads and evaluate the impact of market risks and risks transferred from other sectors. This new framework is useful for assessing vulnerability, policy analysis, sovereign credit risk analysis, and design of sovereign risk mitigation and control strategies. Applications for investors in three areas are discussed. First, CCA provides a new framework for valuing, investing, and trading sovereign securities, including sovereign capital structure arbitrage. Second, it provides a new framework for analysis and management of sovereign wealth funds being created by many emerging market and resource-rich countries. Third, the framework provides quantitative measures of sovereign risk exposures which facilitates the design of new instruments and contracts to control or transfer sovereign risk.

Journal of Investment Management (forthcoming)

Commerical Returns at the Base of the Pyramid

Chu, Michael
August 2007

Innovations, Winter/Spring 2007: 115-146

Incubating Social Change

Chu, Michael
August 2007

Viewpoints, 2007: 25-29

Institutional Tax Clienteles and Payout Policy

Desai, Mihir A., and Li Jin
August 2007

This paper employs heterogeneity in institutional shareholder tax characteristics to identify the relationship between firm payout policy and tax incentives. Analysis of a panel of firms matched with the tax characteristics of the clients of their institutional shareholders indicates that "dividend-averse" institutions are significantly less likely to hold shares in firms with larger dividend payouts. This relationship between the tax preferences of institutional shareholders and firm payout policy could reflect dividend-averse institutions gravitating to low-dividend paying-firms or managers adapting their payout policies to the interests of their institutional shareholders. Evidence is provided that both effects are operative. Instrumental variables analysis indicates that plausibly exogenous changes in payout policy result in shifting institutional ownership patterns. Similarly, exogenous changes in the tax code indicate that as the tax cost of paying dividends changes, managers alter their dividend policy to serve their institutional shareholders.

NBER Working Paper Series, No. 13283, July 2007

Taxes and Portfolio Choice: Evidence from JGTRRA's Treatment of International Dividends

Desai, Mihir A., and Dhammika Dharmapala
August 2007

This paper investigates how taxes influence portfolio choices by exploring the response to the distinctive treatment of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). JGTRRA lowered the dividend tax rate to 15% for American equities and extended this tax relief only to foreign corporations from a subset of countries. This paper uses a difference-in-difference analysis that compares US equity holdings in affected and unaffected countries. The international investment responses to JGTRRA were substantial and imply an elasticity of asset holdings with respect to taxes of -1.6. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment or changed tax-evasion behavior.

NBER Working Paper Series, No. 13281, July 2007

Innovation Through Global Collaboration: A New Source of Competitive Advantage (pdf)

MacCormack, ALan, Theodore Forbath, Peter Brooks, and Patrick Kalaher
July 2007

Many recent studies highlight the need to rethink the way we manage innovation. Traditional approaches, based on the assumption that the creation and pursuit of new ideas is best accomplished by a centralized and collocated R&D team, are rapidly becoming outdated. Instead, innovations are increasingly brought to the market by networks of firms, selected for their unique capabilities, and operating in a coordinated manner. This new model demands that firms develop different skills, in particular, the ability to collaborate with partners to achieve superior innovation performance. Yet despite this need, there is little guidance on how to develop or deploy this ability.

Harvard Business School Working Paper, No. 07-079, July 2007 (revised August 2007)

Business Groups in Emerging Markets: Paragons or Parasites?

Khanna, Tarun, and Yishay Yafeh
July 2007

Diversified business groups, consisting of legally independent firms operating across diverse industries, are ubiquitous in emerging markets. Groups around the world share certain attributes but also vary substantially in structure, ownership, and other dimensions. This paper proposes a business group taxonomy, which is used to formulate hypotheses and present evidence about the reasons for the formation, prevalence, and evolution of groups in different environments. In interpreting the evidence, the authors pay particular attention to two aspects neglected in much of the literature: the circumstances under which groups emerge and the historical evidence on some of the questions addressed by recent studies. They argue that business groups are responses to different economic conditions and that, from a welfare standpoint, they can sometimes be "paragons" and, at other times, "parasites." The authors conclude with an agenda for future research.

Journal of Economic Literature 45, no. 2

Ethnic Scientific Communities and International Technology Diffusion

Kerr, William R.
July 2007

This study explores the importance of knowledge transfer for international technology diffusion by examining ethnic scientific and entrepreneurial communities in the US and their ties to their home countries. US ethnic research communities are quantified by applying an ethnic-name database to individual patent records. International patent citations confirm knowledge diffuses through ethnic networks, and manufacturing output in foreign countries increases with an elasticity of 0.1-0.3 to stronger scientific integration with the US frontier. To address reverse-causality concerns, reduced-form specifications exploit exogenous changes in US immigration quotas. Consistent with a model of sector reallocation, output growth in less developed economies is facilitated by employment gains, while more advanced economies experience sharper increases in labor productivity. The ethnic transfer mechanism is especially strong in high-tech industries and among Chinese economies. The findings suggest channels for transferring codified and tacit knowledge partly shape the effective technology frontiers of developing and emerging economies.

Review of Economics and Statistics (forthcoming)

Risk Management, Capital Budgeting and Capital Structure Policy for Insurers and Reinsurers

Froot, Kenneth A.
June 2007

This paper builds on Froot and Stein (1998) in developing a framework for analyzing the risk allocation, capital budgeting, and capital structure decisions facing insurers and reinsurers. The model incorporates three key features: i) value-maximizing insurers and reinsurers face product-market as well as capital market imperfections that give rise to well-founded concerns with risk management and capital allocation; ii) some, but not all, of the risks they face can be frictionlessly hedged in the capital market; iii) the distribution of their cashflows may be asymmetric, which alters the demand for underwriting and hedging. We show that these features result in a three-factor model that determines the pricing and allocation of risk and the optimal capital structure of the firm. This approach allows us to integrate these features into: i) the pricing of risky investment, underwriting, reinsurance, and hedging; and ii) the allocation of risk across all of these opportunities, and the optimal amount of surplus capital held by the firm.

Journal of Risk and Insurance 74, no. 2, June 2007: 273-299

Market Reactions to Export Subsidies

Desai, Mihir A., and James R. Hines Jr
June 2007

This paper analyzes the economic impact of export subsidies by investigating stock price reactions to a critical event in 1997. On November 18, 1997, the European Union announced its intention to file a complaint before the World Trade Organization (WTO), arguing that the United States provided American exporters illegal subsidies by permitting them to use Foreign Sales Corporations to exempt a fraction of export profits from taxation. Share prices of American exporters fell sharply on this news, and its implication that the WTO might force the United States to eliminate the subsidy. The share price declines were largest for exporters whose tax situations made the threatened export subsidy particularly valuable. Share prices of exporters with high profit margins also declined markedly on November 18, 1997, suggesting that the export subsidies were most valuable to firms earning market rents. This last evidence is consistent with strategic trade models in which export subsidies improve the competitive positions of firms in imperfectly competitive markets.

Journal of International Economics (forthcoming)

Taxes, Institutions and Foreign Diversification Opportunities

Desai, Mihir A., and Dhammika Dharmapala
June 2007

Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). By combining data on US outbound FPI and FDI, this paper analyzes whether the composition of US outbound capital flows reflect efforts to bypass home country tax regimes and weak host country investor protections. The cross-country analysis indicates that a 10% decrease in a foreign country's corporate tax rate increases US investors' equity FPI holdings by 21%, controlling for effects on FDI. This suggests that the residual tax on foreign multinational firm earnings biases capital flows to low corporate tax countries toward FPI. A one standard deviation increase in a foreign country's investor protections is shown to be associated with a 24% increase in US investors' equity FPI holdings. These results are robust to various controls, are not evident for debt capital flows, and are confirmed using an instrumental variables analysis. The use of FPI to bypass home country taxation of multinational firms is also apparent using only portfolio investment responses to within-country corporate tax rate changes in a panel from 1994 to 2005. Investors appear to alter their portfolio choices to circumvent home and host country institutional regimes.

NBER Working Paper Series, No. 13132, 2007

Capital Structure with Risky Foreign Investment

Desair, Mihir A., C. Fritz Foley, and James R. Hines Jr
June 2007

Political risks increase the volatility of multinational firm operating returns, prompting firms to adjust their capital structures. Politically risky countries feature more volatile returns, and the volatility of a parent company's aggregate foreign returns also increases with the extent of the firm's political risk exposure. Parent companies mitigate the cost of return volatility by adjusting their capital structures: a one standard deviation increase in exposure to political risks reduces domestic leverage by 4.4% of its mean level. Foreign political risks most strongly influence the capital structures of firms in industries that are particularly susceptible to political risks. These results suggest that other business risks may similarly affect capital structures.

Journal of Financial Economics (forthcoming)

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

Alfaro, Laura, and Andrew Charlton
June 2007

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.

Harvard Business School Working Paper, No. 07-072, 2007 (revised May 2007)

Global Currency Hedging (pdf)

Campbell, John Y., Karine Serfaty-de Medeiros, and Luis M. Viceira
May 2007

This paper considers the risk management problem of an investor who holds a diversified portfolio of global equities or bonds and chooses long or short positions in currencies to manage the risk of the total portfolio. Over the period 1975-2005, we find that a risk-minimizing global equity investor should short the Australian dollar, Canadian dollar, Japanese yen, and British pound but should hold long positions in the US dollar, the euro, and the Swiss franc. The resulting currency position tends to rise in value when equity markets fall. This strategy works well for investment horizons of one month to one year. In the past 15 years the risk-minimizing demand for the dollar appears to have weakened slightly, while demands for the euro and Swiss franc have strengthened. These changes may reflect the growing role for the euro as a reserve currency in the international financial system. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the US dollar. Risk-reducing currencies have had lower average returns during our sample period, but the difference in average returns is smaller than would be implied by the global CAPM given the historical equity premium.

Harvard Business School Working Paper, No. 07-084, May 2007

From Outsourcing to Global Collaboration: New Ways to Build Competitiveness

MacCormack, Alan D., Theodore Forbath, Peter Brooks, and Patrick Kalaher
May 2007

Many companies have successfully used outsourcing to lower costs. But, unless the company's efforts are unusually good, true competitive advantage is fleeting when competitors begin outsourcing and achieve similar results. To build sustainable competitive advantage, leading companies are now using an advanced form of outsourcing, called global collaboration, to drive new revenue, quicken time-to-market, and increase innovation. Global collaboration impacts their top as well as bottom lines. But effectively adopting this approach requires adjustments to traditional outsourcing strategy, organization and processes. In a recent research project, we interviewed managers from 45 projects in over 20 firms to understand the practices that differentiated those firms that reported greater success with the use of collaboration. We found that the competencies required for achieving top-line growth through global partners are different than the competencies required to be successful in reducing costs via outsourcing. Yet, many companies continue to manage global collaboration projects in the same ways they managed cost-reduction projects and thus do not obtain the full value from these projects. Our work led us to propose several frameworks for how firms should think about their collaboration efforts (reported in a separate working paper) as well as to codify a set of organizational "best practices" that were common to companies who reported greater success in the use of collaboration (reported in this paper).

Harvard Business School Working Paper, No. 07-080, May 2007

Why the World Isn't Flat

Ghemawat, Pankaj
May 2007

The article discusses what the author sees as a misperception that globalization has made national boundaries nearly obsolete. Statistics are cited that over 90% of phone calls, Internet traffic, and investment is local. The author contends global interconnectedness and integration have barely occurred, and globalization's future is fragile. Cross-border mergers are running up against protectionism, and local economic stagnation may lead to a reversal of globalization that may persist for decades.

Foreign Policy, no. 159, March/April 2007: 54-60

How Is Foreign Aid Spent? Evidence from a Compelling Natural Experiment (pdf)

Werker, Eric D., Faisal Z. Ahmed, and Charles Cohen
May 2007

We use yearly variations in the price of oil to construct a powerful new instrument to test the impact of an important but often-overlooked foreign aid channel: money given by wealthy OPEC nations to their poorer Muslim allies. The instrument identifies plausibly exogenous variation in foreign aid. We investigate how aid is spent by tracking its short-run effect on aggregate demand, prices, the national accounts, savings, and the balance of payments. We find that aid is mostly consumed, primarily in the form of higher imports of non-capital goods. Some aid is invested and aid has a small but insignificant effect on growth. Aid has no effect on the financial account, but does raise holdings of foreign reserves.
Harvard Business School Working Paper No. 07-074, April 2007

The Price of Capital: Evidence from Trade Data (pdf)

Alfaro, Laura, and Faisal Z. Ahmed
April 2007

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.

Harvard Business School Working Paper, No. 07-073, April 2007

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

Branstetter, Lee, Raymond Fisman, Foley, C. Fritz, and Kamal Saggi
April 2007

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.

No. 13033, NBER Working Paper Series, 2007

Multinationals as Arbitrageurs? The Effect of Stock Market Valuations on Foreign Direct Investment

Baker, Malcolm P., C. Fritz Foley, and Jeffrey Wurgler
April 2007

Empirical evidence of imperfect integration across world capital markets suggests a role for cross-border arbitrage by multinationals. Consistent with the hypothesis that multinational arbitrage is a determinant of FDI patterns, we find that FDI flows increase sharply with source-country stock market valuations-particularly the component of valuations that is predicted to revert the next year, and particularly in the presence of capital account restrictions that limit other mechanisms of cross-country arbitrage. The results suggest the existence of a cheap financial capital channel in which FDI flows reflect, in part, the use of relatively low-cost capital available to overvalued parents in the source country.

Review of Financial Studies (forthcoming)

Merchant or Two-Sided Platform

Hagiu, Andrei
April 2007

This paper provides a first pass at clarifying the economic tradeoffs between two polar strategies for market intermediation: the "merchant" mode, in which the intermediary buys from sellers and resells to buyers; and the "two-sided platform" mode, under which the intermediary enables affiliated sellers to sell directly to affiliated buyers. The merchant mode yields higher profits than the two-sided platform mode when the chicken-and-egg problem due to indirect network effects for the two-sided platform mode is more severe and when the degree of complementarity/substitutability among sellers' products is higher. Conversely, the platform mode is preferred when seller investment incentives are important or when there is asymmetric information regarding seller product quality. We discuss these tradeoffs in the context of several prominent digital intermediaries.

Review of Network Economics (forthcoming)

Public Action for Public Goods (pdf)

Abhijit Banerjee, Iyer, Lakshmi, and Rohini Somanathan
April 2007

This paper focuses on the relationship between public action and access to public goods. It begins by developing a simple model of collective action which is intended to capture the various mechanisms that are discussed in the theoretical literature on collective action. We argue that several of these intuitive theoretical arguments rely on special additional assumptions that are often not made clear. We then review the empirical work based on the predictions of these models of collective action. While the available evidence is generally consistent with these theories, there is a dearth of quality evidence. Moreover, a large part of the variation in access to public goods seems to have nothing to do with the "bottom-up" forces highlighted in these models and instead reflect more "top-down" interventions. We conclude with a discussion of some of the historical evidence on top-down interventions.

Harvard Business School Working Paper No. 07-061, April 2007

The Internal Markets of Multinational Firms

Desai, Mihir A., C. Fritz Foley, and James R. Hines Jr.
April 2007

Survey of Current Business 87, no. 3, March 2007

Dealing with Global Fluidity

El-Erian, Mohamed A.
March 2007

IMF. Finance and Development 44, no. 1, March 2007

International Financial Integration and Entrepreneurial Firm Dynamics (pdf)

Alfaro, Laura, and Andrew Charlton
March 2007

We explore the relation between international financial integration and the level of entrepreneurial activity in a country. We use a unique firm level data set of approximately 24 million firms in nearly 100 countries in 2004 and 1999, which enables us to present both cross-country and industry level evidence. We establish robust cross-country correlations between increased international financial integration and the activity of entrepreneurs using various proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution and de jure and de facto measures of international capital integration. We then explore causal channels through which foreign capital may encourage entrepreneurship. We find evidence that entrepreneurial activity in industries which are more reliant on external finance is disproportionately affected by international financial integration, suggesting that foreign capital may improve access to capital either directly or through improved domestic financial intermediation. Second we find that entrepreneurial activity is higher in industries which have a large share of foreign firms or in vertically linked industries.

Harvard Business School Working Paper No. 07-012, 2006 (revised March 2007); NBER Working Paper No. 13216

Managing Differences: The Central Challenge of Global Strategy

Ghemawat, Pankaj
March 2007

The main goal of any international strategy should be to manage the large differences that arise at the borders of markets. Yet executives often fail to exploit market and production discrepancies, focusing instead on the tensions between standardization and localization. In this article, Pankaj Ghemawat presents a new framework that encompasses all three effective responses to the challenges of globalization. He calls it the AAA Triangle. The As stand for the three distinct types of international strategy. Through Adaptation, companies seek to boost revenues and market share by maximizing their local relevance. Through Aggregation, they attempt to deliver economies of scale by creating regional, or sometimes global, operations. And through Arbitrage, they exploit disparities between national or regional markets, often by locating different parts of the supply chain in different places--for instance, call centers in India, factories in China, and retail shops in Western Europe. Ghemawat draws on several examples that illustrate how organizations use and balance these strategies and describes the trade-offs they make as they do so. Because most enterprises should draw from all three As to some extent, the framework can be used to develop a summary scorecard indicating how well the company is globalizing. However, given the tensions among the strategies, it's not enough simply to tick off the corresponding boxes. Strategic choice requires some degree of prioritization--and the framework can help with that as well. While it is possible to make progress on all three strategies, companies usually must focus on one or two when trying to build competitive advantage.

Harvard Business Review 85, no. 3, March 2007

Institutional Portfolio Flows and International Investments

Froot, Kenneth A., and T. Ramadorai
February 2007

Review of Financial Studies

Trends in Executive Education in Business Marketing

Narayandas, Das
February 2007

Journal of Business-to-Business Marketing 14, no. 1, 2007

Multinational Firms, FDI Flows and Imperfect Capital Markets (pdf)

Pol Antras, Desai, Mihir A., and C. Fritz Foley
February 2007

National Bureau of Economic Research Series, No. 12855, 2007

Acquisitions and Firm Growth: Creating Unilever's Ice Cream and Tea Business

Jones, Geoffrey, and Peter Miskell
January 2007

Business History 49, no. 1, January 2007

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