Archive for October, 2009

Governing Firm-Specific Knowledge Assets

| Nicolai Foss |

In spite of book titles such as Competitive Advantage Through People, a whole subfield dedicated to linking human resources and firm-level performance outcomes (i.e., strategic HRM), and a general recognition that many knowledge-based competitive advantages are ultimately rooted in a web of complementary and firm-specific human capital, surprisingly little serious quantitative research exists that links firm-specific knowledge, employee governance mechanisms, and firm-level performance. In fact, there are few theoretical contributions that accomplish this. Work by Russ Coff as well as Gottschalg and Zollo come to mind (as well as this paper).

In “Firm-Specific Knowledge Resources and Competitive Advantage: The Roles of Economic- and Relationship-based Employee Governance Mechanisms,” in the December issue of the Strategic Management Journal (I received my copy October 28!), Heli Wang, Jinuy He, and former O&M guest blogger Joe Mahoney explore the economic- and relationship-based governance mechanisms that mitigate the latent underinvestment problem of employees making firm-specific human-capital investments. Overall, their results suggest that firms with more firm-specific knowledge resources are more likely to adopt those governance mechanisms that can reduce key employees’ concerns about potential hold-up.

The paper is very neat and clear, and my personal candidate for the best research paper in SMJ in 2009. Here is the abstract:

The resource-based view of the firm emphasizes the role of firm-specific resources, especially firm-specific knowledge resources, in helping a firm to achieve sustainable competitive advantage. However, the deployment of firm-specific knowledge often requires key employees to make specialized human capital investments that are not easily redeployable to other settings. Thus, in the absence of effective safeguards and trust building devices, employees with foresight may be reluctant to make such specialized investments. This study explores both economic- and relationship-based governance mechanisms that might mitigate this underinvestment problem. Effective use of these governance mechanisms enables a firm to obtain greater performance from its efforts to deploy firm-specific knowledge resources. Empirical results further support these key arguments.

31 October 2009 at 6:25 am 1 comment


| Peter Klein |

I was flipping channels last night and came across a Jimi Hendrix biopic. Lots of concert footage, with Hendrix doing his usual amazing Hendrix things — singing, crazy guitar riffs, playing with his teeth. Then I noticed something I hadn’t seen before: He’s doing all this while chewing gum. How can he sing without choking or spitting it out? How does he pluck guitar strings with his teeth and not leave a big wad on the pickups? Some people have trouble walking and chewing gum at the same time. How is he doing this?

Naturally, this got me thinking about multitask principal-agent problems. I liked one article that appeared in 2005 but didn’t generate much attention: Besanko, Regibeau, and Rockett’s “A Multi-Task Principal-Agent Approach to Organizational Form” (Journal of Industrial Economics, December 2005). Multitasking has often been applied performance evaluation, specifically the use of objective versus subjective performance measures. (If the agent is assigned multiple tasks, only some of which are measurable, than a quantitative evaluation scheme biases the agent’s effort toward more easily measurable tasks.) Besanko et al. apply this logic to divisionalization, examining the choice between product-line and functional organization:

This paper studies the choice of organizational forms in a multi-task principal-agent model. We compare a functional organization in which the firm is organized into functional departments such as marketing and R&D to a product-based organization in which the firm is organized into product lines. Managers’ compensation can be based on noisy measures of product-line profits. Measures of a functional area’s contribution to total profits are not available, however. This effect favors the product organization. However, if there are significant asymmetries between functional area contributions to organizational success and cross-product externalities within functions, organizing along functional lines may dominate the product organization. The functional organization can also dominate when a function is characterized by strong externalities while the other is not.

An obvious example: university faculty who are tasked with research, teaching, and service. Research is (in principle) easy to measure: publications, citation counts, grants, speaking invitations, etc. Teaching and service outputs are fuzzier. Even well-intentioned administrators tend to reward what they can count, which means refereed journal articles (and, in some fields, grant dollars) end up being the primary performance metric. Need I point out what this does to teaching?

The same issue is explored in Williamson (1975, pp. 155-75), where the ability to reward division managers based on standalone, divisional profit figures is cited as an advantage of the M-form structure.

30 October 2009 at 10:30 am 3 comments

Economic Methodology in Erkenntnis

| Nicolai Foss |

Economic methodology, or, meta-theoretical discussion of (and in) economics, has gone significantly beyond with theme that many practicing economists associate with the field, namely the realism-of-assumptions theme prompted by Friedman’s famous 1953 essay, “The Methodology of Positive Economics.” Of course that theme is by no means unimportant, and it has, of course, resurfaced under the impact of the financial crisis.

However, the main themes of the current economic methodology discussion have shifted from the role of assumptions to economic models in their entirety. Two main perspectives are sometimes distinguished, namely the “isolationists” who literally see economic models as simplified redescriptions of the mechanisms and causal factors of the real world, and the “fictionalists” who, as the name indicate, ascribe much less realism to models and think of them as purely mental laboratories that may still, however, allow for certain inferences to the real world.

The January 2009 issue of Erkenntnis: An International Journal of Analytical Philosophy is a special issue, edited by Till Grüne-Yanoff, dedicated to exploring these two positions, and entitled “Economic Models as Credible Worlds or as Isolating Tools?” Among the heavyweight contributors are Robert Sugden, Uskali Mäki, and Nancy Cartwright. I particularly liked Mäki’s argument that the two positions are in actually very close rather than opposed. Highly recommended for those who want to acquaint themselves with frontier issues in economic methodology.

29 October 2009 at 11:30 am 3 comments

How Machiavellian Are You?

| Peter Klein |

machiavellianA test for university presidents, deans, department heads, center directors, etc. (via Anu).

(Yes, of course, there are management and leadership literatures on old Niccolò. Don’t act surprised!)

29 October 2009 at 8:59 am 1 comment

My Favorite New-Media Entrepreneur

| Peter Klein |

It’s Ben Huh, the brains behind FAIL Blog, Engrish Funny, and, of course, I Can Has Cheezburger. The best of the user-generated-content sites. Huh is profiled here in Fast Company. Interestingly, he’s a quant guy:

[W]e rely on the tools of the Internet — metrics and measurements and stuff like that — to help us decide what to post. We don’t have some guy somewhere deciding, “Oh, I think this it funny. I’m going to post it on the homepage.” That actually fails 50% of the time, because people are very bad at understanding what’s funny for other people. Everything we promote is there for a logical reason.

28 October 2009 at 9:10 am Leave a comment

Internal Capital Market Activeness

| Lasse Lien |

In these Williamsonian times, here is a nice new working paper relevant to his  internal capital market hypothesis. The paper measures, in various ways, how active a firm is in reallocating capital across its businesses. The paper finds that the more active a firm is, the lower the firm’s industry-adjusted profitability tends to be. This of course raises the question of whether active internal capital markets cause inferior performance, or whether inferior performance causes active internal capital markets. Using an impressive battery of robustness checks the authors conclude that internal capital markets are inefficient.

If the subject appeals to you, you have presumably already read this and this.

27 October 2009 at 9:22 am 3 comments

Sampling on the Dependent Variable: French Peasant Edition

| Peter Klein |

A useful example of the methodological flaw that plagues the “great companies” and “great leaders” literature in management, from Graham Robb’s excellent The Discovery of France (Norton, 2007):

[N]early every autobiographical account of ordinary life in eighteenth- and nineteenth-century France comes from the early chapters of memoirs written by exceptional men who rose through the ranks of the army or the Church, woo wrote their way to fame or who were  plucked from obscurity by a patron, a lover or, eventually, an electorate. Few men and even fewer women had the means or the desire to write a book on “How I failed to overcome my humble origins.” Apart from the countless riches-to-riches tales written by aristocrats, almost all the lives that we know about follow the same untypical upward trend: the farmer’s son Restif de la Bretonne, the cutler’s son Diderot, the watchmaker’s son Rousseau, the Corsican cadet Napoleone Buonaparte.

These spectacular success are more typical of long-term trends than of individual lives. Categorical terms like “peasants,” “artisans,” and “the poor” reduce the majority of the population to smudges in a crowd scene that no degree of magnification could resolve into a group of faces. They suggest a large and luckless contingent that filled in the background of important events and participated in the nation’s historical development by suffering and engaging in a semblance of economic activity.

Likewise, business and entrepreneurial strategies can be understood by studying not only firms that tried them and succeeded, but also those that used the same strategies and failed. Reducing the majority of companies to smudges in an industry-wide or economy-wide crowd scene tells us little about what does and doesn’t work.

25 October 2009 at 5:40 pm 4 comments

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Our Recent Books

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).