Posts filed under ‘Recommended Reading’
C. K. Prahalad Interview
| Nicolai Foss |
The late über-influential management thinker C K Prahalad would have been 70 this August. booz&co’s strategy+business magazine features an interesting interview with CK, “The Life’s Work of a Thought Leader.” It may surprise some that Prahalad was trained as a physicist, and in the beginning of his career worked as an industrial engineer. And for someone, like myself, who has criticized the absence of microfoundations for notions such as “core competence” (e.g., here), it certainly came as a surprise to find Prahalad stating that
If I had to characterize my deepest belief, I would say it’s the centrality of the individual…. Institutions are not central. Institutions are different ways of combining skills and capabilities of the moment. That, of course, is the opposite of the traditional way of thinking, starting from Max Weber and Frederick Taylor in the early 20th century. They posited that institutions were central to society, not individuals. I believe the contrary is true.
Another notable feature in the interview is Prahalad’s view of scientific progress in strategic management which does not come from the kind of cross-sectional studies that take up 93 % of the pages of the Strategic Management Journal, but, he says, from in-depth small-N research:
If you look historically at the strategy literature, starting with Alfred D. Chandler Jr.’s Strategy and Structure: Chapters in the History of the Industrial Enterprise [MIT Press, 1962], the most powerful ideas did not come out of multiple examples. They came out of single-industry studies and single case studies. Big impactful ideas are conceptual breakthroughs, not descriptions of common patterns. You can’t define the “next practice” with lots of examples. Because, by definition, it is not yet happening.
Leijonhufvud on the Current Crisis
| Nicolai Foss |
We have often blogged on the work of Axel Leijonhufvud on O&M (here). Here is a 2008 talk which was given in Denmark (and which, unfortunately, somehow missed my attention at that time) on “Keynes and the Crisis.” The talk contains many characteristic Leijonhufvudian themes (smashing of Ricardian equivalence, representative agent modeling, and the foundations of financial theory), little on Keynes (luckily!), and much critique of monetarism, in particular the choice of the CPI as the unique target of central bank policies and the notion of the independence of central banks from the political system. Here is Leijonhufvud’s overall diagnosis of the root causes of the current crisis:
The process leading up to today’s American financial crisis had the dollar exchange rate supported by foreign central banks exporting capital to the United States. This capital inflow was not even to be discouraged by a Federal Reserve policy of extremely low interest rates. The price elasticity of exports from the countries that prevented the appreciation of their own currencies in this way kept US consumer goods prices from rising. Operating an interest-targeting regime keying on the CPI, the Fed was lured into keeping rates far too low far too long. The result was inflation of asset prices combined with a general deterioration of credit quality (Leijonhufvud 2007a). This, of course, does not make a Keynesian story. It is rather a variation on the Austrian overinvestment theme.
Two New Papers …
| Nicolai Foss |
… by Yours Truly. The Academy of Management Review just published my paper with Siegwart Lindenberg, “Managing Joint Production Motivation: The Role of Goal Framing and Governance Mechanisms,” and Organization Science just published “Linking Customer Interaction and Innovation: The Mediating Role of New Organizational Practices,” by me, Keld Laursen and Torben Pedersen. Here are the abstracts: (more…)
2011 Oliver E. Williamson Prize
| Peter Klein |
The Journal of Law, Economics, and Organization, co-founded by Oliver Williamson in 1985, has created a new best article prize in his name. The first winner is “Juvenile Delinquency and Conformism” by Eleonora Patacchini and Yves Zenou. Details about the award and this year’s winner and runners-up are available at Oxford’s JLEO site. Congrats!
Gans on Google+
| Nicolai Foss |
I have been using Google + for about a week now. I am unimpressed, and I think I will remain unimpressed. Quite simply, it doesn’t do a lot for me. On his HBR blog, the always thoughtful Joshua Gans points out that because Google+ is a network technology it must build sufficient installed base. However, G+ may face difficulties doing just that, because it offers users rather little extra problem-solving value compared to the existing alternatives:
Facebook provides “hyper-local news,” allowing people to broadcast news, opinions, and interests to their social circle in a way that feels authentic. Twitter, because it is essentially public and open, delivers news fast and also permits users to follow famous or interesting individuals.
Google+ does both of these things in one. But because the problems are already solved separately, then Google+ only solves the increment: you can view private and public content on the one “page.” To be sure, some harmonization across content platforms can be valuable to consumers. But Google+ is only adding the increment and not the whole lot. So while it might be argued that if Google+ happened five years ago, its technical implementation might have made it a clear winner, that is not the world we find ourselves in now.
Productivity: The Mother of (Nearly) All Good Things
| Lasse Lien |
The mother of all good (material) things is productivity growth. Competitive advantage, firm level growth and survival, profits, economy-wide economic growth, job creation, and destruction, etc. are all outcomes that depend critically on relative productivity and productivity changes. So if you understood productivity really well, you would understand a lot about (material) outcomes across firms, industries and countries, too.
Also, if one wants to advance “the human condition” it is presumably better to advance the understanding of productivity than profits, since profits are contaminated by market power. Profit maximization is good because – or to the degree – it tends to raise productivity. So while profit maximization and competition are means, productivity growth is the goal.
Though few would argue against the fundamental importance of productivity, productivity is nevertheless quite rarely used as a dependent (or independent) variable in strategy, organizational economics, organization theory, leadership, innovation, etc. The reason is probably that the considerable problems associated with measuring productivity has scared us into focusing on more easily observable variables, such as accounting profits, Tobin’s Q, EVA, sales growth, survival, etc.
However, there is a large literature in economics that attacks productivity head on, and tries to elucidate its determinants. Though there is an unfortunate bias towards manufacturing in this literature (due to measurement issues), the findings from this research stream still makes extremely interesting reading (IMHO). Here is a recent review of the key findings from the past decade:
Economists have shown that large and persistent differences in productivity levels across businesses are ubiquitous. This finding has shaped research agendas in a number of fields, including (but not limited to) macroeconomics, industrial organization, labor, and trade. This paper surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels. The causes are manifold, and differ depending on the particular setting. They include elements sourced in production practices — and therefore over which producers have some direct control, at least in theory — as well as from producers’ external operating environments. After evaluating the current state of knowledge, I lay out what I see are the major questions that research in the area should address going forward. (JEL D24, G31, L11, M10, O30, O47)
Syverson, Chad. 2011. “What Determines Productivity?” Journal of Economic Literature 49(2): 326–65.
New Issue of Business History Review
| Peter Klein |
The March 2011 issue of Business History Review, just now online, contains several excellent papers, including “The Origin and Development of Markets: A Business History Perspective” by Mark Casson and John Lee, “Economics, History, and Causation” by Randall Morck and Bernard Yeung, “Globalization, Development, and History in the Work of Edith Penrose” by Christos Pitelis, and “Economic Theory and the Rise of Big Business in America, 1870–1910″ by Jack High.
Morck and Yeung take the (perhaps surprising, almost Misesian) position that “[i]nstrumental variables can lose value with repeated use because of an econometric tragedy of the commons: each successful use of an instrument creates an additional latent variable problem for all other uses of that instrument,” and that “[e]conomists should therefore”consider historians’ approach to inferring causality from detailed context, the plausibility of alternative narratives, external consistency, and recognition that free will makes human decisions intrinsically exogenous.”
High notes that “by 1910, the entrepreneur was an important figure in American economics. He appeared regularly in textbooks written by American economists and his influence in the economy, especially in large firms, was generally recognized.” Entrepreneurship at that time was not about startups, but coordination more generally: J. R. Commons called the entrepreneur “the speculating, progressive, organizing, inventive, economizing agent of industry.”
2011 Spengler Prize
| Peter Klein |
Congratulations to Robert Leonard for winning the 2011 Joseph J. Spengler Prize for the best book in the history of economics for Von Neumann, Morgenstern and the Creation of Game Theory: From Chess to Social Science 1900-1960 (Cambridge University Press, 2010). I’ve only skimmed the book but it looks exceptionally well done. Required reading for O&Mers interested in intellectual history, methodology, Austrian economics, strategy, and/or game theory. . . . (That’s pretty much all of you.)
What Do Resource- and Capability-Based Theories Propose?
| Peter Klein |
Check out Michael Leiblein’s Guest Editorial in the new Journal of Management:
What Do Resource- and Capability-Based Theories Propose?
Michael J. Leiblein
The Ohio State UniversityThe purpose of this editorial is to review the basic definitions, assumptions, and propositions offered by the resource-based, strategic factor market, and dynamic capability literature streams. Considering the underlying definitions and assumptions associated with these approaches leads directly to a set of refutable propositions that highlight the distinct insights offered by each of these literatures. It is hoped that accentuating these distinctions may stimulate dialogue regarding the underlying causal mechanisms associated with these approaches and foster future empirical work testing these related perspectives.
A very useful reference, both for specialists and those new to the RBV and capabilities approaches. Highly recommended! (And not just because the author’s name ends in “-lein.”)
Against (Karl) Polanyi
| Peter Klein |
I mentioned Karl Polanyi (not to be confused with Michael) in yesterday’s post on anonymity. Gavin Kennedy points us today to Mark Pennington, who writes that Polanyi’s claims “are either historically inaccurate or based on a crude misrepresentation of classical liberalism.” Specifically,
classical liberalism has never claimed that narrowly selfish behaviour is all that is required to sustain the social fabric. Of course markets are always “embedded” in a broader nexus of institutions, but the question we need to ask is precisely what sort of institutional and social norms are required to facilitate social cooperation on the widest possible scale. Polanyi and his followers prefer to rely on hackneyed accounts of the Wealth of Nations rather than recognise that Smith’s support for markets and “self interest” constituted part of a broader ethical system set out in the Theory of Moral Sentiments. Specifically, Smith was concerned to elucidate the balance between the social norms appropriate to contexts of commercial exchange and those appropriate in more intimate environments. From Smith’s point of view feelings of sympathy which include love, friendship and reciprocity are reserved for people of whom we have detailed personal knowledge. The morals expected in commercial relations which are often between relative strangers, however, tend to be more impersonal, focussed on principles such as the observance of contracts and are oriented more towards the “self interest” of the parties involved rather than the direct benefit of “others.” The great mistake is to suppose that the type of ethos that pervades family life or that in tight knit communities can operate on a much wider scale. The development of inclusive markets requires a more impersonal ethos which enables people to engage with diverse actors who may not share the same moral outlook. If people deal only with those who share the same moral outlook or trade only with “locals” rather than engage in transactions with “foreigners” then the sphere of potentially cooperative relationships will be reduced. The alternative to self-interest is not solidarity, but suspicion if not outright conflict.
Do Senior Managers Make Better Decisions Than Students?
| Nicolai Foss |
Even management students may occasionally suffer from confidence and self-esteem problems. I have had many students confide that they were more than a little scared at the prospect of landing a real job where their decision-making skills would be compared to older, wiser, smarter, etc. colleagues. Rather than directing them to this site, in the future I am going to give such students a copy of Gary E. Bolton, Axel Ockenfels and Ulrich Thonemann’s “Who Is the Best at Making Decisions? Managers or Students?” They set up a simple experiment based on a simple profit maximizing problem, and find that practitioner performance isn’t as good as graduate business students’. Moreover, the learning curve of the latter is steeper than that of practicioners. (more…)
Incomplete Contracts and the Theory of the Firm
| Peter Klein |
A very useful survey article from the Spring 2011 Journal of Economic Perspectives: “Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?” by Philippe Aghion and Richard Holden. From the introduction:
In the first section of this paper, we spell out Grossman and Hart’s argument using a simple numerical example, then then we show how the incomplete contracts approach can be extended beyond the firms’ boundaries issue to analyze firms’ internal organization; firms’ financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. In the second section, we discuss several criticisms of the incomplete contracts/property rights methodology, especially what we call the “implementation criticism,” and then we briefly review some recent developments of the incomplete contracts approach.
I plan to use it in “Economics of Institutions and Organizations” this fall.
Update: Thanks to Stéphane Saussier for the pointer to the upcoming conference, Grossman and Hart at 25, June 24-26 in Brussels.
New Survey Paper on Firm Boundaries
| Peter Klein |
It’s “Theories of the Firm-Market Boundary” from our friends Todd Zenger, Teppo Felin, and Lyda Bigelow, and forthcoming in the Academy of Management Annals. Here’s the abstract:
A central role of the entrepreneur-manager is assembling a strategic bundle of complementary assets and activities, either existing or foreseen, which when combined create value for the firm. This process of creating value however requires managers to assess which activities should be handled by the market and which should be handled within hierarchy. Indeed, for more than forty years, economists, sociologists and organizational scholars have extensively examined the theory of the firm’s central question: what determines the boundaries of the firm? Many alternative theories have emerged and are frequently positioned as competing explanations, often with no shortage of critique for one another. In this paper, we review these theories and suggest that the core theories that have emerged to explain the boundary of the firm commonly address distinctly different directional forces on the firm boundary – forces that are tightly interrelated. We specifically address these divergent, directional forces – as they relate to organizational boundaries – by focusing on four central questions. First, what are the virtues of markets in organizing assets and activities? Second, what factors drive markets to fail? Third, what are the virtues of integration in organizing assets and activities? Fourth, what factors drive organizations to fail? We argue that a complete theory of the firm must address these four questions and we review the relevant literature regarding each of these questions and discuss extant debates and the associated implications for future research.
A nice synthesis that makes a number of important points. I can even forgive a few key omissions. :)
Inventors During the Industrial Revolution
| Peter Klein |
Following up an earlier post on apprenticeship: Ralf Meisenzahl and Joel Mokyr discuss the role of apprenticeship in the diffusion of innovation among skilled craftsmen during the British Industrial Revolution. “Using a sample of 759 of these mechanics and engineers, we study the incentives and institutions that facilitated the high rate of inventive activity during the Industrial Revolution. First, apprenticeship was the dominant form of skill formation. Formal education played only a minor role. Second, many skilled workmen relied on secrecy and first-mover advantages to reap the benefits of their innovations. Over 40 percent of the sample here never took out a patent. Third, skilled workmen in Britain often published their work and engaged in debates over contemporary technological and social questions. In short, they were affected by the Enlightenment culture.”
Who Benefits from Coups?
| Peter Klein |
Not surprisingly — private interests:
Coups, Corporations, and Classified Information
Arindrajit Dube, Ethan Kaplan, Suresh Naidu
NBER Working Paper No. 16952, April 2011We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves.There is no effect in the case of the widely publicized, poorly executed Cuban operations, consistent with abnormal returns to coup authorizations reflecting credible private information. We also introduce two new intuitive and easy to implement nonparametric tests that do not rely on asymptotic justifications.
In what can only be a pure coincidence, the following item appeared just below the NBER paper in my RSS reader: “Halliburton Profit More Than Doubles.”
Confusing Definitions of Entrepreneurship
| Peter Klein |
Some of you have heard me complain before about the confusing ways “entrepreneur” and its cognates are used in the literature. Sometimes entrepreneurship refers to an outcome or phenomenon (startups, self-employment, high-growth firms), other times to a behavior or attribute (creativity, alertness, innovation, judgment, adaptation). I find the occupational, structural, and functional taxonomy useful, but other organizing schemes may be useful too. In any case, reading the entrepreneurship literature can be a frustrating experience.
I’m glad I’m not the only one who thinks so:
[T]he book’s diversity of approaches and styles is both a strength and also an inherent weakness. Some chapters offer comprehensive descriptions over long periods of time (e.g., Hudson, Hau, Wengenroth, Chan), while others focus on narrow aspects of entrepreneurship (e.g., Yonekura and Shimizu, Mokyr, Wolcott). The first kind appears to be written for a broad audience of noneconomic historians, whereas the second type tends to be drier and more technical. Some authors follow Baumol and distinguish between productive and redistributive entrepreneurship (e.g., Hudson, Mokyr, Cain, Lamoreaux), while others use very broad definitions of entrepreneurship (e.g., Kuran, Casson and Godley, Gelderblom), and yet another group of authors associates entrepreneurship with innovation (e.g., Yonekura and Shimizu, Graham). This extreme diversity of definitions and approaches can overwhelm the reader. As a result, the volume’s ambition of tracing “the history of entrepreneurship throughout the world since antiquity” (p. vii) ends up being an interesting patchwork of insights drawn from different times and places rather than a unifying and synthetic history.
That’s from Michaël Bikard and Scott Stern’s Journal of Economic Literature review of The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times (ed. David S. Landes, Joel Mokyr, and William J. Baumol, Princeton, 2010), which we blogged about earlier. Obviously in a work of this scope, a common definition of entrepreneurship is likely to be elusive. But the wide variety of meanings in this lone volume give you a sense of the challenge in making sense of the wider literature.
Information versus Knowledge
| Peter Klein |
[T]here’s enough information coming at us from all sides to leave us feeling overwhelmed, just as people in earlier ages felt smothered by what Leibniz called “that horrible mass of books that keeps on growing.” In response, 17th-century writers compiled indexes, bibliographies, compendiums and encyclopedias to winnow out the chaff. Contemplating the problem of turning information into useful knowledge, Gleick sees a similar role for blogs and aggregators, syntheses like Wikipedia, and the “vast, collaborative filter” of our connectivity. Now, as at any moment of technological disruption, he writes, “the old ways of organizing knowledge no longer work.”
But knowledge isn’t simply information that has been vetted and made comprehensible. “Medical information,” for example, evokes the flood of hits that appear when you do a Google search for “back pain” or “vitamin D.” “Medical knowledge,” on the other hand, evokes the fabric of institutions and communities that are responsible for creating, curating and diffusing what is known. In fact, you could argue that the most important role of search engines is to locate the online outcroppings of “the old ways of organizing knowledge” that we still depend on, like the N.I.H., the S.E.C., the O.E.D., the BBC, the N.Y.P.L. and ESPN.
That’s Geoffrey Nunberg reviewing James Gleick’s new book, The Information (Random House, 2011). Gleick burst onto the scene with 1987′s Chaos: The Making of New Science, which introduced the butterfly effect, Mandelbrot sets, fractal geometry, and the like into popular culture. (Don’t blame Gleick for the silly Ian Malcolm character in Jurassic Park, or the even sillier Ashton Kutcher movie.) I haven’t gotten my hands on a copy of The Information (gotta love the definite article, as in “the calculus”) but, as best as I can tell from the Google books version, Gleick doesn’t get into the Hayekian-Polanyian distinctions between parameterizable “information” and tacit knowledge that particularly interest O&M readers. (Another good quote from the review: “[T]here’s no road back from bits to meaning. For one thing, the units don’t correspond: the text of ‘War and Peace’ takes up less disk space than a Madonna music video.”) Still, the book should be worth a read.
Interesting New NBER Papers
| Peter Klein |
Matching Firms, Managers, and Incentives
Oriana Bandiera, Andrea Prat, Luigi Guiso, Raffaella Sadun
January 2011
We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.
Business Failures by Industry in the United States, 1895 to 1939: A Statistical History
Gary Richardson, Michael Gou
March 2011
Dun’s Review began publishing monthly data on bankruptcies by branch of business during the 1890s. This essay reconstructs that series, links it to its successors, and discusses how it can be used for economic analysis.
The Consequences of Financial Innovation: A Counterfactual Research Agenda
Josh Lerner, Peter Tufano
February 2011
Financial innovation has been both praised as the engine of growth of society and castigated for being the source of the weakness of the economy. In this paper, we review the literature on financial innovation and highlight the similarities and differences between financial innovation and other forms of innovation. We also propose a research agenda to systematically address the social welfare implications of financial innovation. To complement existing empirical and theoretical methods, we propose that scholars examine case studies of systemic (widely adopted) innovations, explicitly considering counterfactual histories had the innovations never been invented or adopted.
Oxford Handbook of Human Capital
| Peter Klein |
I just received a copy of the Oxford Handbook of Human Capital, edited by Alan Burton-Jones and J.-C. Spender, and it looks terrific. The concept of “human capital” came from developments in macroeconomics and labor economics (and, it is often forgotten, entrepreneurship) but is increasingly influential in organization and strategy research. (Witness, for example, the new SMS Strategic Human Capital Interest Group.) These Handbook chapters “reveal the importance of human capital for contemporary organizations, exploring its conceptual underpinnings, relevance to theories of the firm, implications for organizational effectiveness, interdependencies with other resources, and role in the future economy,” says the cover blurb. O&M readers may especially like the section on “Human Capital and the Firm,” with chapters on TCE (by Foss), agency theory (Spender), the RBV (Jeroen Kraaijenbrink), entrepreneurship and the theory of the firm (Brian Loasby), and the knowledge-based theory of the firm (Georg von Krogh and Martin Wallin). Check it out!
Is Counterfeiting Good for Business?
| Peter Klein |
Sometimes, according to Yi Qian in a new NBER Working Paper, “Counterfeiters: Foes or Friends?” In some cases, counterfeiting constitutes advertising that increases sales of the original product. It makes sense; how many buyers of faux Rolex watches or Gucci purses would have bought the authentic items if the fakes were banned? I suppose there’s a negative externality (more fakes means less exclusivity means a lower equilibrium price) that must be taken into account as well. An interesting analysis, in any case. Applications to digital media are left as an exercise for the reader.
Counterfeiters: Foes or Friends?
Yi Qian
NBER Working Paper No. 16785
Issued in February 2011This paper combines a natural policy experiment and randomized lab experiments to estimate the differential impacts of counterfeiting on the sales and purchase intent of branded products of various quality levels. I collect new product-line level panel data from Chinese shoe companies from 1993-2004. Exploiting the discontinuity of government enforcement efforts for the footwear sector in 1995 and the differences in authentic companies’ relationships with the government, I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales. The positive effect of counterfeits is most pronounced for the high-fashion products (such as women’s high-leg boots) and for the high-end shoes of the brands that were not yet well-known at the time of the entry by counterfeiters. I provide a theoretical framework to generalize such impacts due to counterfeits. Analogous heterogeneous effects of counterfeiting on consumer purchase intent for branded products of three quality tiers are also discovered in lab experiments. Responses in the lab allude to the fact that counterfeits could increase brand awareness as well as steal business.
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