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Doux Commerce Bleg

| Nicolai Foss |

Andrew Smith, University of Liverpool Management School asks for the help of the readers of O&M:

I’m currently exploring the literature on the theory of the capitalist peace. I’m very familiar with the vast literature by IR scholars and political economists on the theory of the capitalist peace/commercial peace (i.e., the idea that commercial interdependence among nations reduces the likelihood of warfare). This literature is dominated by works using panel data (e.g., Gartzke, 2007).

What I need to find out more about is the literature on the possible microfoundations of the capitalist peace—i.e., work by psychologists and experimental economists on whether repeated participation in inter-ethnic and international trade actually influences the cognitive processes of the individuals involved and makes them less warlike. Does experience with economic exchange with non-members of the group (family, clan, tribe, nation, etc) make people more pacific? Does it make individuals less violent? Montesquieu speculated that this would be the case a long time ago when he advanced his “doux commerce” thesis. Albert Hirschman said that Montesquieu’s theory was the conventional wisdom in the Enlightenment. However, I’m interested in what modern social scientists have said about this theory. Francois and van Ypersele (2009) found that level of trust reported by adults in the US is positively correlated with the competitiveness of the sector in which they work. Their research was not about international economic relations and diplomacy. However, it does tend to support the thesis that a competitive market economy has a civilizing influence. I would be interested in knowing if there is other research by psychologists, experimental economists, and others that is relevant to the doux commerce thesis.

28 March 2014 at 12:41 pm 2 comments

Entrepreneurship and Networks Workshop at CBS

| Nicolai Foss |

My colleagues at the Dept of Strategic Management and Globalization at the Copenhagen Business School, Louise Mors, Mia Reinholdt Fosgaard and Lisa Gärber are arranging an exciting workshop, “Micro Foundations of Social Networks and the Implications for Strategy and Entrepreneurship Research,” on June 12-13. The workshop takes place at CBS and has luminaries like Ron Burt and Martin Kilduff as keynote speakers. (The SMS special conference on “Microfoundations of Strategic Management Research: Embracing Individuals“, begins when the workshop ends, so you may combine the two).  This may be of interest to, say, Austrians who seek to add some theoretical and empirical meat to the skeleton of Kirznerian alertness and discovery and who recognize links between these notions and, for example, notions of brokerage in networks.

22 February 2014 at 4:43 am Leave a comment

The Theory of Mind in Agency Theory

| Nicolai Foss |

Agency theory is a highly important foundational theory in management research. It has been of great assistance with respect to conceptualizing and framing key problems in the design and management of reward systems, and it yields sharp and clear predictions. However, it does not provide a realistic treatment of a key psychological aspects of interpersonal relations. Specifically, agency theory does not adequately account for the principal’s ability to develop, hold and adjust a “theory of the agent’s mind”. The theory in fact contains a very lopsided account of the principal’s ability to read the agent’s desires, intentions, knowledge, and beliefs. Thus, in many models in agency theory, the principal’s knowledge of much of what is “inside the head” of the agent (e.g., the agent’s taste for risk, opportunity costs, and disutility of work) is assumed to be perfect, while he is assumed to be entirely ignorant of other aspects of what the agent intends, knows and believes. Such “asymmetrical” assumptions  allow for analytical tractability and clean predictions regarding how incentives and monitoring influences the behavior of agents, such as employees, managers, and suppliers. However, extreme and asymmetrical assumptions can also lead more applied research astray and lead to misapplications of theory in managerial practice. Thus, the assumption that a principal is capable of perfectly grasping, for example, an agent’s motivations seems highly, and increasingly, tenuous: High personnel turnover and the increasing use of fleeting project organization in many industries, as well as the increasing prevalence of cross-national and cross-cultural management teams and networks, make an assumption of a perfect ToM unrealistic.

In a new paper, “Putting a Realistic Theory of Mind Into Agency Theory: Implications for Reward Design and Management in Principal Agent Relations,” my CBS colleague Diego Stea and I take some initial and  highly exploratory steps towards working with a more realistic theory of mind in the context of agency relationships within firms (in an as yet unpublished modelling paper, we work these ideas into an adverse selection model). We argue that novel insights into the design and management of rewards follow from explicitly incorporating a realistic theory of mind into agency theory. Thus, a principal with a good theory of mind can better learn the type of the agent, read the signals related to the agent’s effort, signal to the agent, and adjust rewards to the agent.  A ToM creates value because it results in lower-variance estimates of the agent’s effort and type, and eases the matching of agents with contracts.

20 February 2014 at 1:54 pm 1 comment

Micro-foundations Happening: Strategic Human Capital

| Nicolai Foss |

After about a decade of methodological discussion (involving some preaching on both sides of the debate), the micro-foundations project in macro-management research is now beginning to take off in the “doing” dimension. Specifically, scholars are building micro-foundational theory and they are wrestling with the empirical challenges in the micro-foundations. The theoretical and empirical challenges largely derive from the inherent multi-level nature of the micro-foundations project.  Theory-building cannot just be somehow moving, say, individual-level organizational behavior insights to the organizational level, but must be genuinely multi-level which raises tricky issues of aggregation and downward causation. Data sampling will necessarily have to take place at at least two levels. This  is complicated and usually expensive. Access to good micro-level data is particularly troublesome (one of the advantages of living in a socialist country like Denmark is that the Big Nanny literally looks after her children: We have register data that is incredibly detailed regarding human capital dimensions (i.e., not just gender, age, education, etc., but also complete job history, school and university grades , criminal record, household income, history of medication, etc. — and this is for each and every employee in the DK economy)).

One of the areasis in which the micro-foundations project is being realized in the theoretical and empirical dimensions is what is increasingly often referred to as “strategic human capital.” This is an emerging field (it has its own interest group at the Strategic Management Society) that is quite overlapping with “strategic human resource management,” and which links strategic management, traditional SHR and HR, and human capital theory.  The February special issue of Journal of Management, expertly edited by Patrick Wright, Russ Coff and Thomas Moliterno, three key drivers in the SHRM/SHC field, contains ten fine papers on SHC.  The introductory essay by the editors nicely lays out the main challenges and issues. Many of the challenges are quite “low-practical” — e.g., people trained in strategy focus a lot on endogeneity, where HR and OB people focus a lot on construct validity issues that strategy folks care less about. Yet, such differences may be quite decisive–as the editors learned while handling the review process!  The editors also deal with key issues, such as what are the important dimensions of human capital for the purposes of the SHM field, how can human capital be characterized at different analytical levels, and what are the antecedents and consequences of human capital. I look forward to sinking my teeth into the research articles in the coming week.

16 February 2014 at 5:19 am 1 comment

More on Business Model Innovation

| Nicolai Foss |

I am intrigued by notions of “business models” and “business model innovation.” Many academics dismiss these notions, arguing that they are too fluffy or too much overlapping with established thinking in strategic management. I understand both objections, but still think there is something to these notions. Specifically, they capture  the need for integration of and coherence among strategic choices related to value proposition, segments, value appropriation models, and value chain organization in a way that I don’t see clearly reflected in mainstream strategy thinking. And yet, it is also clear that the basic unit of analysis, the busines model, remains un-dimensionalized, even though business models and the innovation thereof clearly differ–and therefore pose different leadership, management and organizational design challenges. In other words, extant research does not adequately represent the heterogeneity of business models (innovation), and therefore does not dimensionalize them.

In a new paper,  Nils Stieglitz and I  argue that a key dimension along which business models (and hence the innovation thereof) differ is the strength of the interdependences, or, complementarities, between their constituent components. Thus, some business model innovations are more modular, while others are more architectural. Also, business model innovations can be dimensionalized in terms how radical they are. We argue that leadership challenges systematically depend on the nature of the relevant business model innovation. To our knowledge this is the first dimensionalization exercise in the literature and the first attempt at building a contingency theory of business model innovation.

11 February 2014 at 11:57 am 3 comments

Property Rights Economics — Mark I and Mark II

| Nicolai Foss |

In modern standard economics, property rights as an analytical category are mainly associated with the work of Oliver Hart, largely because of his important work, with Sanford Grossman, John Moore and others, on asset ownership in the context of the boundaries of the firm (the pioneering paper is here).  Many modern (younger) economists don’t seem to know of the older property rights tradition, associated with Coase, Alchian, Demsetz, Cheung, Barzel, Furubotn, Umbeck, Alston, Libecap, Eggertson et al.  Given the prevalent Whig interpretation of the evolution of economic theory, one may be led to the belief that the modern approach superseded or incorporated everything that was sound in the older, verbal approach, while advancing property rights thinking in rigorous game-theoretical terms.

With a frequent co-author, I have penned a paper, “Coasian and Modern Property Rights Economics: A Case of Kuhnian Lost Content,” that argues that such a view is false. In fact, we argue  that there has been something akin to a Kuhnian “loss of content” (Kuhn, 1996)  in the move from Mark I to Mark II property rights economics. What we call “property rights economics Mark II” is a more narrow approach in terms of the phenomena that are investigated, namely why it matters who owns the asset(s) in a relation that spans at least two stage of production in a value chain. In contrast, “property rights economics Mark I” was taken up with the complex and contingent nature of real ownership arrangements, and pointed to the many margins on which individual can exercise capture of rights, how they seek to protect their rights, the resources consumed in this process, and the role of institutions in facilitating and constraining such processes. This institutional research program is considerably richer than the one implied by Mark II property rights economics.

10 February 2014 at 9:46 am 1 comment

Relational Contracts and the Decline of General Motors

| Nicolai Foss |

The shifting fortunes in the international automobile industry over the last four decades have, for obvious reasons, been endlessly commented upon.  Usually, the two leading protagonists in the various accounts of the dynamics of the industry are General Motors and Toyota, the former because of its conspicuous decline (GM’s share of the US market dropped from about 60 to about 20% over a 30 years period), the latter because it has been steadily growing and is now the world’s largest automaker.

Discussions of the relative performance of these two industrial giants sometimes focus on vacuous categories like “culture” and “capabilities.” More detailed accounts stress the short-termism of General Motor’s investment decisions, its arms-length supplier relations, and its obsession with narrowly defined, easily-measurable jobs. Toyota’s relative success is often explained in terms of the Toyota Management Model with its emphasis on broadly defined jobs, intensive lateral and vertical information flows, and emphasis on problem-solving on the shop floor.  However, it is not immediately clear that GM did something very badly that Toyota did very well. The liabilities that led to the decline of GM were apparently were different from the assets that brought Toyota success.

In a new NBER paper, “Management Practices, Relational Contracts, and the Decline of General Motors“, Susan Helper and Rebecca Henderson argue, however, that GM and Toyota are directly comparable in terms of the relational contracts existing inside their corporate hieararchies and across the boundaries of these two companies, and that their differential performance is explainable in terms of the differences between the contracts. Relying on recent contract theory research on relational contracts (rather than the older, but neglected work of Harvey Leibenstein), Helper and Henderson reject a number of conventional explanations (e.g., that GM’s investment policy was oriented towards the short term), and convincingly argue that GM had difficulties understanding the nature and important role of relational contracts behind Toyota’s success and therefores truggled to implement similar relational contracts. They point to a number of reasons why relational contracts may be difficult to build, centering on problems of creating credible commitments and communicating clearly and suggest that these problems were rampant in GM.  In all, a very nice read that can be used in a number of different classes (org theory, economics of the firm, strategic management). Highly recommended! 

UPDATE: My colleague Henrik Lando draws my attention to Ben-Shahar and White’s 2005 paper on manufacturing contracts in the auto industry which tells a story that is consistent with the Helper and Henderson story. Here.

8 February 2014 at 2:29 pm 1 comment

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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