Along with Don Siegel, Nick Wilson, and Mike Wright, I am guest editing a special issue of Managerial and Decision Economics on the “Effects of Alternative Investments on Entrepreneurship, Innovation, and Growth.” Proposals are due 15 June 2011. A special issue conference for developing the papers is planned for 29 October 2011 at the SUNY Global Center in Manhattan. The conference is jointly sponsored by the SUNY-Albany School of Business, the Centre for Private Equity Research at Imperial College Business School, and the McQuinn Center for Entrepreneurial Leadership. Further details and submission guidelines are below the fold.

Call for Papers: 
Special Issue of Managerial and Decision Economics

EFFECTS OF ALTERNATIVE INVESTMENTS
ON ENTREPRENEURSHIP, INNOVATION, AND GROWTH

Submission Due Date: June 15, 2012
Special Issue Conference: October 29, 2012

Guest Editors:
Peter Klein, University of Missouri
Donald Siegel, University at Albany, SUNY
Nick Wilson, Leeds University Business School
Mike Wright, Imperial College Business School

Special Issue Conference sponsored by
School of Business, University at Albany, SUNY
Centre for Private Equity Research, Imperial College Business School
McQuinn Center for Entrepreneurial Leadership, University of Missouri

Introduction

The past decade has brought rapid growth in a variety of specialist alternative investment vehicles, including venture capital, business angel funds, later-stage private equity, hedge funds, sovereign wealth funds, infrastructure funds, and real estate funds. The importance of venture capital and angel investment for new firms, particularly in high-growth, high-technology sectors, is well known. But alternative investments span a wide range of company types, from small, early-stage ventures with high growth rates but little cash flow to large firms in mature industries that generate substantial cash flow.

Alternative investment vehicles introduce new forms of financing with different objectives and diverse forms of involvement by investors in portfolio firms. Alternative investors differ widely in skills, goals, experience, and investment time horizons. They often invest across a variety of institutional environments, transferring standard investment approaches from one sector or country to another. Because these alternative equity stakes are generally less liquid than shares in publicly traded enterprises, their growth raises a host of important issues for the organization and governance of portfolio companies, for the structure of industries heavily dependent on alternative investment pools, and for entrepreneurship, innovation, and economic growth more generally.

This special issue of Managerial and Decision Economics focuses on the effects of alternative investments on entrepreneurship, innovation, and economic growth. These issues are especially timely given current debates about the role of alternative investments in stimulating economic outcomes and the need for diverse sources of capital to stimulate economic growth in conditions of severe recession. We welcome theoretical papers, large scale quantitative analyses, and focused case studies.

Research Questions

Research questions that contributors to the special issue might address include:

• How does the nature of deals vary by different types of alternative investor? What factors are influential in determining these differences?
• What are the relationships between financial structuring of deals and the nature and extent of entrepreneurship and innovation in portfolio firms?
• How does financial structure affect entrepreneurial alertness, judgment, and innovation not only in new firms, but in established organizations as well?
• To what extent do alternative investors engage in funding both restructuring and innovative activities? What are the effects of alternative investments on growth at the level of the firm, sector, region, and economy?
• How do buyout firms attempt to increase innovation within public companies that are taken private?
• How have the roles of alternative investment vehicles changed over time, as in the changing roles of venture capital firms and business angels in Silicon Valley?
• How do venture capital and angel investors organize themselves into networks? How do these affect venture performance?
• What is the nature of the contractual relationships between alternative investors and founders or operators of startup companies?
• What explains the clustering of alternative investments across industries? Across time and place?
• To what extent can alternative investors, as “active” participants in their portfolio companies, themselves be modeled as entrepreneurs?

Papers on related issues not explicitly listed above are also welcome.

Submission and Review Process

Submissions must be made on or before June 15, 2012. All papers will be externally reviewed according to standard policies of Managerial and Decision Economics.

Conference Details and Time Line

To aid in the development of papers, a special issue conference will be held at the SUNY Global Center in Midtown Manhattan October 29, 2012.

Accommodation and meals will be provided for all authors and discussants attending the conference. Financial support is provided by the School of Business and the Center for Institutional Investment Management at the University at Albany, SUNY, the Centre for Private Equity Research at Nottingham University Business School, and the McQuinn Center for Entrepreneurial Leadership at the University of Missouri.

Key dates:
June 15, 2012: Deadline for electronic submission of papers to the conference and special issues
August 15, 2012: Notification to authors regarding acceptance for conference
October 29, 2012 : Special Issue Conference at the SUNY Global Center

More Information

For additional information, please contact see http://mcquinn.missouri.edu/cfp2012June15.htm or contact the special issue editors:
Peter Klein, University of Missouri, pklein@missouri.edu
Donald Siegel, University at Albany, SUNY, dsiegel@uamail.albany.edu
Mike Wright, Imperial College, London, mike.wright@imperial.ac.uk
Nick Wilson, Leeds University Business School, nw@lubs.leeds.ac.uk

If you’re in New York on February 6, you might want to go hear the always-interesting Henry Hansmann talk about work he is doing with Nicolai’s CBS colleague Steen Thomsen. The talk is at 4:20 in Room 701 Jerome Greene Hall at Columbia. This is part of the Columbia Law and Economics Workshop. (I’m on their mailing list but seldom have the time to make the trip.) Here’s the abstract:

Industrial foundations are nonprofit holding companies that own business firms. These entities are common in Northern Europe, and many successful international companies are owned in thus fashion. Because of their strong economic performance and unusual combination of nonprofit and for-profit entities, they present interesting challenges to theories of the firm. In this paper, we present the first study of the manner in which the foundations govern the companies that they own. We work with a rich data set comprising 121 foundation-owned Danish companies over the period 2003-2008.

We focus in particular on a composite structural factor that we term “managerial distance.” We interpret this as a measure of the clarity and objectivity with which a foundation-owned company’s top managers are induced to focus on the company’s profitability. More particularly, managerial distance seems best interpreted as a factor, or aggregate of component factors, that put the foundation board in the position of “virtual owners,” in the sense that the information and decisions facing the managers are framed for them in roughly the way they would be framed for profit-seeking outside owners of the company. Our empirical analysis shows a positive, significant, and robust association between managerial distance and company economic performance. The findings appear to illuminate not just foundation governance, but corporate governance and fiduciary behavior more generally.

Speaking of football. I just now received an email newsletter from the American Association of University Professors (AAUP), the union of which I am necessarily a member. The newsletter calls attention to a New York Times op-ed by Michael Bérubé, an AAUP activist who happens to be the Paterno Family Professor of Literature at Penn State. For Bérubé and the AAUP, the Penn State sex-abuse scandal “coincided with the steady erosion of faculty governance.” Peter has written critically about shared governance, which is a central and long-standing platform of the AAUP; and we can argue about whether shared governance is likely to be efficient in general. But it seems to me dubious that faculty oversight of athletics would have meant quicker detection of the offense and the cover-up at Penn State: the problem is less one of incentives than of impacted knowledge in a large bureaucracy. In yesterday’s news came the announcement that a history professor at Utah had been arrested for viewing child pornography on his laptop during a plane flight. How could this be? Isn’t the History Department under faculty governance?

What struck me most about the AAUP newsletter was the extent to which it reflected the academic coattail effect: issues of great popular interest or concern sweeping up in their wake lots of long-existing and dubiously related academic hobby-horses. Global warming is another, more obvious, example. At a university function a while back, I heard a retired faculty member bemoan the inexplicable lack of research and funding into the role of the family in global warming. Needless to say, she was a historian of the family.

The October 2011 issue of the Journal of Economic Behavior & Organization is a special issue on the work of James Buchanan, guest edited by Pete Boettke, arising out of a recent FFSO conference. In addition to Boettke, the contributors are Kliemt, Marciano, Munger, Leeson, G. Vanberg, Voigt, Horwitz, Besley, Coyne, and Horn on a variety of topics. Amartya Sen and Elinor Ostrom contributed short appreciations. This issue is full of good stuff on a variety of topics.

I focus here on the lead article by Pete Boettke somewhat clumsily entitled, “Teaching Economics, Appreciating Spontaneous Order, and Economics as a Public Science.” For my part, this article alone makes the issue worthwhile getting. Boettke presents an overview of the many facets of Buchanan’s work (and as they developed over his career) helpfully connecting and contrasting it with Hayek. Some of these ideas are directly relevant to the organization and management context.

At the risk of distorting oversimplification, we may say that whereas Hayek concentrated on the problem of rationalistic hubris, Buchanan concentrated on the problem of opportunistic behavior. Both are inevitable and related problems of social systems, and each of their works thus complements the other. In a nutshell, each is an in-depth protracted examination of the knowledge problem and the incentive problem, respectively.

As points of emphasis in their respective works, Hayek concentrated on the limits on man’s knowledge at the abstract level, and the contextual nature of the knowledge residing in the economy at the concrete level, while Buchanan stressed the institutional/organizational logic of politics and the systemic incentives that different rule environments generate. In both, however, the central message of same players, different rules, produce different games is seen throughout their work in comparative political economy. To Hayek the puzzle was how to limit the rationalistic hubris of men, to Buchanan the puzzle was how to limit the opportunistic impulse of men. Both found hope in what they called a “generality norm” embedded in a constitutional contract — no law shall be passed, or rule established which privileges one group of individuals in society.

Hayek uses an evolutionary approach and Buchanan a “veil of ignorance” contractarian approach. But both are surely applicable to organizations of all types.

I should also mention that Bill Easterly gave the distinguished guest lecture this year on “Does Development Economics Cause Economic Development?” I thought it was excellent — both entertaining and informative — especially for non-specialists. I hope he publishes it.

Just one instance — a story about controlled random experiments in a development context (perhaps some of you have heard this). An interesting study showed that teacher absenteeism declined when teacher attendance was monitored and rewarded (imagine that). But when the same idea was applied to health-care workers, health-care workers in the treatment group (the monitored group) declined! Apparently, as a result of being monitored, health-care workers started asking for excused absences and found out that their supervisors actually did not care one way or another. As a result excused absences increased dramatically. This illustrates the power of unintended consequences and the importance of local knowledge, and how a seemingly unobtrusive experiment actually ended up providing locals with valuable knowledge that made things worse.

The Call for Papers for the 2012 ISNIE conference, 14-16 June 2012 at the University of Southern California, is now posted. Proposals are due 30 January 2012, so start working on those abstracts!

I have been involved with ISNIE for many years and currently serve as the organization’s treasurer. The conferences are terrific, with a variety of papers, panels, and keynotes spanning the broad range of institutional and organizational social science research.

Trivia: I first met the good Professor Foss at the inaugural ISNIE conference in 1997 in St. Louis So if it weren’t for ISNIE, this blog might not exist. . . .

Interesting new monograph from the IEA (Institute of Economic Affairs) in the UK on: Self Employment, Small Firms and Enterprise. A pdf is available for free here. And here is the executive summary.

Summary 

• Self-employment is a form of contractual relationship which, in certain circumstances, will have greater benefits to the parties involved than an employer–employee relationship. Government intervention, however, may make selfemployment artificially more attractive by raising the costs of employment relationships.
• Certain ethnic minority groups, older people and those without English as a first language tend to be overrepresented among the self-employed. This is partly because of the flexibility the arrangement provides but also because self-employment offers a ‘safety valve’ for those who find it difficult to find employment in the formal labour market.
• It is vital that businesses are not impeded from moving from a situation where the owner is self-employed without employees to a situation where the business has employees. There is evidence that businesses are impeded in this way. In just nine years to 2009, the proportion of micro-businesses with employees fell by almost one fifth. At the same time the proportion of self-employed with no employees rose rapidly.
• Women, individuals from certain ethnic groups, those with young dependants, those with low or no qualifications, those for whom English is not a first language and those who have recently experienced unemployment make up a much greater proportion of the workforce of small firms. For example, whereas 11 per cent of employees of small firms had no qualifications, only 4 per cent of employees of large firms had no qualifications.
• Some workers will prefer to work for small firms because of the greater flexibility they offer in their working practices. In many cases, however, small firms will employ people who are talented but who are not able to negotiate the more formal recruitment processes of larger firms. Micro-businesses therefore perform an important economic and social function – employing people who might be overlooked by larger employers.
• Genuine entrepreneurial insight and discovery tends to come from small firms. Entrepreneurship is crucial for economic growth. The nature of entrepreneurial insight is such, however, that we have no idea where it will come from – not even in the most general terms. Probably only one in every thousand ‘start-up’ firms will become one of the large businesses of the future.
• Policies to promote entrepreneurship must come in the form of removing impediments to business and should not involve the promotion of particular business activities. It is simply not possible for government intervention to pick this tiny number of winners. All government can do is create a climate in which entrepreneurship can thrive.
• The smallest firms are a key driver of job creation. Businesses do not start big. One quarter of employees working in firms that were established ten years earlier are working for firms that started from a position of employing only one person.
• The cost of regulation has grown enormously over the last fifteen years. This particularly affects small firms with employees because regulatory costs act like a ‘poll tax’. Wide ranging exemptions from employment regulation and the minimum wage would be appropriate for small firms. Such exemptions would have the additional advantage of allowing the government to ‘experiment’ with deregulation. Standard terms and conditions of employment could be drawn up which would ensure that employees clearly understood the exemptions. Radical reforms of the tax system would also assist small firms which experience much greater compliance costs than large firms.
• Moves by the government to promote entrepreneurship through the state education system or provide specific tax exemptions and reliefs for particular forms of business activity are wasteful or counterproductive.

Coase is fond of telling this story about the economist and the horse:

Economics, over the years, has become more and more abstract and divorced from events in the real world. Economists, by and large, do not study the workings of the actual economic system. They theorize about it. As Ely Devons, an English economist, once said at a meeting, “If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’” And they would soon discover that they would maximize their utilities.

Coase, as O&M readers know, prefers direct, hands-on observation to abstract theorizing. As a Misesian [serious, hubba hubba], of course, I can’t endorse this view as a general prescription, though I recognize its value for empirical work. Sometimes it’s best to look at real examples, or to ask real practitioners. Kaplan and Strömberg read through real-world venture-capital contracts to see how control rights were allocated. Genesove and Mullin used the minutes of trade-association meetings, not modeling, to figure out how members of the US sugar cartel maintained compliance.

Here’s another interesting example: “What Do Boards Really Do?” by Miriam Schwartz-Ziv and Michael Weisbach.

We analyze a unique database from a sample of real-world boardrooms – minutes of board meetings and board-committee meetings of eleven business companies for which the Israeli government holds a substantial equity interest. We use these data to evaluate the underlying assumptions and predictions of models of boards of directors. These models generally fall into two categories: “managerial models” assume boards play a direct role in managing the firm, and “supervisory models” assume that boards’ monitor top management but do not make business decisions themselves. Consistent with the supervisory models, our minutes-based data suggest that boards spend most of their time monitoring management: 67% of the issues they discussed were of a supervisory nature, they were presented with only a single option in 99% of the issues discussed, and they disagreed with the CEO only 3.3% of the time. In addition, managerial models describe boards at times as well: Boards requested to receive further information or an update for 8% of the issues discussed, and they took an initiative with respect to 8.1% of them. In 63% of the meetings, boards took at least one of these actions or did not vote in line with the CEO.

I think Ronald would approve.

In case you wonder the author of this paper — Stefano Allesina — works in Chicago:

Abstract: Nepotistic practices are detrimental for academia. Here I show how disciplines with a high likelihood of nepotism can be detected using standard statistical techniques based on shared last names among professors. As an example, I analyze the set of all 61,340 Italian academics. I find that nepotism is prominent in Italy, with particular disciplinary sectors being detected as especially problematic. Out of 28 disciplines, 9 – accounting for more than half of Italian professors – display a significant paucity of last names. Moreover, in most disciplines a clear north-south trend emerges, with likelihood of nepotism increasing with latitude. Even accounting for the geographic clustering of last names, I find that for many disciplines the probability of name-sharing is boosted when professors work in the same institution or sub-discipline. Using these techniques policy makers can target cuts and funding in order to promote fair practices.

Allesina, S. (2011). “Measuring Nepotism through Shared Last Names: The Case of Italian Academia.” PLoS ONE 6(8): e21160. doi:10.1371/journal.pone.0021160

I am envious. My brother in law and my nephew are in the Serengeti National Park in Tanzania. He is sending short reports via his Blackberry. His descriptions are graphic — he is awe-struck. Sounds incredible, beyond imagination — to those of us veteran Africans used to having to search hard for game on our game park safaris. In the Serengeti there is game in exaggerated profusion. Lions, leopards, and cheetah virtually next to each other. Huge migrations of herds, hundreds of thousands strong. A trip for a lifetime. I should live so long.

It seems clear that this wonder of nature (a giant crater-bubble full of wild life) would not exist in the absence of the revenue from international tourism. Though government managed, it is subject to vigorous competition from other game parks in that part of Africa. The area is the traditional homeland of the legendary Masai tribe, who have a cattle-based economy. Population growth, technological change, and the pace of modernity threatened to destroy their world. Now they seem to be flourishing. The Masai have turned out to be successful entrepreneurs! I wonder if this is an instance of Ostrom’s successful local initiatives.

More generally, the preservation of wild-life in Africa has turned on the successful management of a plethora of wild-life game parks (many of them quite small relatively speaking), some having the status of super luxury hotels. There is an irony in there somewhere. (I wonder what it is like to have to manage a wild-life park as a business firm).

Of course most of the environmentalists never tell you about the preservation successes of market competition.