Posts filed under ‘Business/Economic History’
| Peter Klein |
A common myth is that successful technology companies are founded by people in their 20s (Scott Shane reports a median age of 39). Entrepreneurial creativity, in this particular sense, may peak at middle age.
We’ve previously noted interesting links between the literatures on artistic, scientific, and entrepreneurial creativity, organization, and success, with particular reference to recent work by David Galenson. A new survey paper by Benjamin Jones, E.J. Reedy, and Bruce Weinberg on age and scientific creativity is also relevant to this discussion. They discuss the widely accepted empirical finding that scientific creativity — measured by high-profile scientific contributions such as Nobel Prizes — tends to peak in middle age. They also review more recent research on variation in creativity life cycles across fields and over time. Jones, for example, has observed that the median age of Nobel laureates has increased over the 20th century, which he attributes to the rapid growth in the body of accumulated knowledge one must master before making a breakthrough scientific contribution (the “burden of knowledge” thesis). Could the same hold through for founders of technology companies?
| Peter Klein |
A renewed interest in conglomerates has brought forth a HBR blog post from Herman Vantrappen and Daniel Deneffe, “Don’t Write Off the (Western) Focused Firm Yet.” As they rightly point out, the choice between a focus and diversity “depends on the context in which the business operates. Specifically, focused firms fare better in countries where society expects and gets public accountability of both firms and governments, while conglomerates succeed in nations with high public accountability deficits.” I would put it slightly differently: the choice between focused, single-business firms and diversified, multi-business enterprises depends on the relative performance of internal and external capital and labor markets. The institutional environment — the legal system, regulatory practices, accounting rules — plays a huge rule here, but social norms, technology, and the competitive environment also affect the efficient margin between between intra-firm and inter-firm resource allocation.
The point is that all forms of organization have costs and benefits. There is no uniquely “optimal” degree of diversification or hierarchy or vertical integration or any other aspect of firm structure; the choice depends on the circumstances. Instead of favoring one particular organizational form we should be promoting an environment in which entrepreneurs can experiment with different approaches, with competition determining the right choice in each context. Let a thousand flowers bloom!
Update: From Joe Mahoney I learn that not only was Chairman Mao’s actual exhortation “Let a hundred flowers blossom,” but also he may have meant it sarcastically: “It is sometimes suggested that the initiative was a deliberate attempt to flush out dissidents by encouraging them to show themselves as critical of the regime.” My usage was of course sincere. :)
| Dick Langlois |
I recently ran across this interesting paper on vertical integration and subcontracting in the Japanese kimono industry of the late nineteenth and early twentieth centuries. By this period, most of the Japanese silk (and cotton) industries had adopted the factory system. But there remained a few industrial districts that relied on the putting-out system. This paper is most interested in presenting a risk-aversion model that explains why “premier subcontractors” got relational contracts in the putting-out system. I’m not sure I buy it, but in any case what caught my eye was something else — a modularity story:
In the weaving industry of Kiryu, the factory system equipped with hand looms had been chosen to weave the luxury fabrics, while the putting-out system had been used for most other fabrics, until the factory system equipped with power looms became dominant for most kinds of fabrics in the 1910s and later. Instead of being replaced, the putting-out system developed and dispersed within Kiryu, especially from the 1860s to the 1900s, when the main products of Kiryu were yarn-dyed silk fabrics. “Yarn dying” means material yarn is dyed before weaving. For the luxury fabrics that were dyed after weaving, the cleaning and finishing processes undertaken after weaving were important, and those processes were conducted inside the manufacturers’ workshops. In contrast, in the production of the yarn-dyed fabrics, dying, arranging warps, cleaning yarn, throwing, re-reeling, and other preparation processes were essential. Because those processes needed special skills, the craftsmen who specialized in each process were organized as subcontractors by manufacturers. … With the moving weight from production of traditional piece-dyed (dyed-after-weaving) fabrics to production of yarn-dyed (dyed-before-weaving) silk fabrics, the throwing process, the finishing process, and the designing process, as well as the weaving process, came to be put-out. Manufacturers decreased the production inside of their workshops and established subcontracting relations with independent artisans. This case suggests that the technological change induced by the change of products from piece-dyed fabrics to the yarn-dyed fabrics affected production organization.
This has a bit of a Christensen flavor to it. When “performance” needs were high — high-end kimonos — the industry used a non-modular technology (dyed-after-weaving) and an integrated organization. When performance needs were lower — lower-quality kimonos — it used a modular technology (dyed-before-weaving) and a vertically disintegrated structure.
| Peter Klein |
It’s been another fine year at O&M. 2013 witnessed 129 new posts, 197,531 page views, and 114,921 unique visitors. Here are the most popular posts published in 2013. Read them again for entertainment and enlightenment!
- Rise of the Three-Essays Dissertation
- Ronald Coase (1910-2013)
- Sequestration and the Death of Mainstream Journalism
- Post AoM: Are Management Types Too Spoiled?
- Nobel Miscellany
- The Myth of the Flattening Hierarchy
- Climate Science and the Scientific Method
- Bulletin: Brian Arthur Has Just Invented Austrian Economics
- Solution to the Economic Crisis? More Keynes and Marx
- Armen Alchian (1914-2013)
- My Response to Shane (2012)
- Your Favorite Books, in One Sentence
- Does Boeing Have an Outsourcing Problem?
- Doug Allen on Alchian
- New Paper on Austrian Capital Theory
- Hard and Soft Obscurantism
- Mokyr on Cultural Entrepreneurship
- Microfoundations Conference in Copenhagen, June 13-15, 2014
- On Academic Writing
- Steven Klepper
- Entrepreneurship and Knowledge
- Easy Money and Asset Bubbles
- Blind Review Blindly Reviewing Itself
- Reflections on the Explanation of Heterogeneous Firm Capability
- Do Markets “React” to Economic News?
Thanks to all of you for your patronage, commentary, and support!
| Peter Klein |
Diversification continues to be a central issue for strategic management, industrial organization, and corporate finance. There are huge research and practitioner literatures on why firms diversify, how diversification affects financial, operating, and innovative performance, what underlies inter-industry relatedness, how diversification ties into other aspects of firm strategy and organization, whether diversification is driven by regulation or other policy choices, and so on. There are many surveys of these literatures (Lasse and I contributed this one).
Some of the most interesting research deals with the institutional environment. For example, many US corporations were widely diversified in the 1960s and 1970s when the brokerage industry was small and protected by tough legal restrictions on entry, antitrust policy frowned on vertical and horizontal growth (maybe), and a volatile macroeconomic environment encouraged internalization of inter-firm transactions (also maybe). After the brokerage industry was deregulated in 1975, the antitrust environment became more relaxed, and the market for corporate control heated up, many conglomerates were restructured into more efficient, specialized firms. To quote myself:
The investment community in the 1960s has been described as a small, close-knit group wherein competition was minimal and peer influence strong (Bernstein, 1992). As Bhide (1990, p. 76) puts it, “internal capital markets … may well have possessed a signiﬁcant edge because the external markets were not highly developed. In those days, one’s success on Wall Street reportedly depended far more on personal connections than analytical prowess.” When capital markets became more competitive in the 1970s, the relative importance of internal capital markets fell. “This competitive process has resulted in a signiﬁcant increase in the ability of our external capital markets to monitor corporate performance and allocate resources” (Bhide, 1990, p. 77). As the cost of external ﬁnance has fallen, ﬁrms have tended to rely less on internal ﬁnance, and thus the value added from internal-capital-market allocation has fallen. . . .
Similarly, corporate refocusing can be explained as a consequence of the rise of takeover by tender offer rather than proxy contest, the emergence of new ﬁnancial techniques and instruments like leveraged buyouts and high-yield bonds, and the appearance of takeover and breakup specialists like Kohlberg Kravis Roberts, which themselves performed many functions of the conglomerate headquarters (Williamson, 1992). A related literature looks at the relative importance of internal capital markets in developing economies, where external capital markets are limited (Khanna and Palepu 1999, 2000).
The key reference is to Amar Bhide’s 1990 article “Reversing Corporate Diversification,” which deserves to be better known. But note also the pointer to Khanna and Palepu’s important work on diversified business groups in emerging markets, which has also led to a vibrant empirical literature. The idea there is that weak institutions lead to poorly performing capital and labor markets, leading firms to internalize functions that would otherwise be performed between firms. More generally, firm strategy and organization varies systematically with the institutional environment, both over time and across countries and regions.
Surprisingly, diversified business groups were also common in the US, in the early 20th century, which brings me (finally) to the point of this post. A new NBER paper by Eugene Kandel, Konstantin Kosenko, Randall Morck, and Yishay Yafeh studies these groups and reaches some interesting and provocative conclusions. Check it out:
Eugene Kandel, Konstantin Kosenko, Randall Morck, Yishay Yafeh
NBER Working Paper No. 19691, December 2013
The extent to which business groups ever existed in the United States and, if they did exist, the reasons for their disappearance are poorly understood. In this paper we use hitherto unexplored historical sources to construct a comprehensive data set to address this issue. We find that (1) business groups, often organized as pyramids, existed at least as early as the turn of the twentieth century and became a common corporate form in the 1930s and 1940s, mostly in public utilities (e.g., electricity, gas and transportation) but also in manufacturing; (2) In contrast with modern business groups in emerging markets that are typically diversified and tightly controlled, many US groups were focused in a single sector and controlled by apex firms with dispersed ownership; (3) The disappearance of US business groups was largely complete only in 1950, about 15 years after the major anti-group policy measures of the mid-1930s; (4) Chronologically, the demise of business groups preceded the emergence of conglomerates in the United States by about two decades and the sharp increase in stock market valuation by about a decade, so that a causal link between these events is hard to establish, although there may well be a connection between them. We conclude that the prevalence of business groups is not inconsistent with high levels of investor protection; that US corporate ownership as we know it today evolved gradually over several decades; and that policy makers should not expect policies that restrict business groups to have an immediate effect on corporate ownership.
| Peter Klein |
Central to the “Austrian” understanding of business cycles is the idea that monetary expansion — in Wicksellian terms, money printing that pushes interest rates below their “natural” levels — leads to overinvestment in long-term, capital-intensive projects and long-lived, durable assets (and underinvestment in other types of projects, hence the more general term “malinvestment”). As one example, Austrians interpret asset price bubbles — such as the US housing price bubble of the 1990s and 2000s, the tech bubble of the 1990s, the farmland bubble that may now be going on — as the result, at least partly, of loose monetary policy coming from the central bank. In contrast, some financial economists, such as Laureate Fama, deny that bubbles exist (or can even be defined), while others, such as Laureate Shiller, see bubbles as endemic but unrelated to government policy, resulting simply from irrationality on the part of market participants.
Michael Bordo and John Landon-Lane have released two new working papers on monetary policy and asset price bubbles, “Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence,” and “What Explains House Price Booms?: History and Empirical Evidence.” (Both are gated by NBER, unfortunately, but there may be ungated copies floating around.) These are technical, time-series econometrics papers, but in both cases, the conclusions are straightforward: easy money is a main cause of asset price bubbles. Other factors are also important, particularly regarding the recent US housing bubble (I suspect that housing regulation shows up in their residual terms), but the link between monetary policy and bubbles is very clear. To be sure, Bordo and Landon-Lane don’t define easy money in exactly the Austrian-Wicksellian way, which references natural rates (the rates that reflect the time preferences of borrowers and savers), but as interest rates below (or money growth rates above) the targets set by policymakers. Still, the general recognition that bubbles are not random, or endogenous to financial markets, but connected to specific government policies designed to stimulate the economy, is a very important result that will hopefully influence current economic policy debates.
| Peter Klein |
Here is a symposium on Doug Allen’s very important book The Institutional Revolution (Chicago, 2011). The symposium features essays by Deirdre McCloskey, Joel Mokyr and José-Antonio Espín-Sánchez, and our own Dick Langlois, along with a reply by Doug. The issue revolves around the role of measurement, and Doug’s thesis that reductions in measurement costs are central to improved economic performance.
My favorite line, from Doug’s reply:
I have read “The Problem of Social Cost” more times than I can recall, and study as I may, I have never found a logical error in it. But here is the point: if the author, both at the time and 30 years later, still failed to fully grasp his own perfect work, then it is an understatement to note that the ideas are subtle.