Findings

On Business Savviness

Kevin Lewis

November 10, 2009

"If Peter Drucker were here today, what would he have to say about such pressing matters? His first comment might be 'I told you so' - and he would have every right to say that. In remarkably prescient writings, he pointed to important trends and looming disasters. He took a broad look at the context surrounding organizations, noting jarring events he called discontinuities. Next, since the signs of difficulties ahead were there all along, he might follow up by telling us, 'Look at the underlying systems.' Drucker rarely named or blamed individuals; he saw root causes in the design of organizations - in their structures, processes, norms, and routines." ["What Would Peter Say?" Rosabeth Moss Kanter, Harvard Business Review, November 2009]

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"Put most simply: The Base of the Pyramid is not actually a market. True, those billions of low-income people have a lot in common. But they don't have two of the vital characteristics you need to have a consumer market. They haven't been conditioned to think that the products being offered are something one would even buy. And they haven't adapted their behaviors and budgets to fit the products into their lives. A consumer market is nothing less than a lifestyle built around a product...The answer? Companies must create markets - new lifestyles - among poor consumers. They must make the idea of paying money for the products seem natural, and they must induce consumers to fit those goods into their long-held routines." ["At the Base of the Pyramid," Erik Simanis, MIT Sloan Management Review]

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Age of acquisition and the recognition of brand names: On the importance of being early

Andrew Ellis, Selina Holmes & Richard Wright
Journal of Consumer Psychology, forthcoming

Abstract:
Research in cognitive psychology has shown that words, objects and faces learned early in life are recognized more fluently than similar items learned later. Experiment 1 shows that early acquired brand names are recognized more quickly than later acquired brands. Experiment 2 shows that the age of acquisition effect extends to accessing semantic knowledge about brands. In Experiment 3, older participants were faster at recognizing early learned brands that are now extinct than more recent, active brand names. Early surviving brands were recognized quickest of all. The significance of these effects for manufacturers and marketing are discussed.

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Incentives and Creativity: Evidence from the Academic Life Sciences

Pierre Azoulay, Joshua Graff Zivin & Gustavo Manso
NBER Working Paper, October 2009

Abstract:
Despite its presumed role as an engine of economic growth, we know surprisingly little about the drivers of scientific creativity. In this paper, we exploit key differences across funding streams within the academic life sciences to estimate the impact of incentives on the rate and direction of scientific exploration. Specifically, we study the careers of investigators of the Howard Hughes Medical Institute (HHMI), which tolerates early failure, rewards long-term success, and gives its appointees great freedom to experiment; and grantees from the National Institute of Health, which are subject to short review cycles, pre-defined deliverables, and renewal policies unforgiving of failure. Using a combination of propensity-score weighting and difference-in-differences estimation strategies, we find that HHMI investigators produce high-impact papers at a much higher rate than two control groups of similarly-accomplished NIH-funded scientists. Moreover, the direction of their research changes in ways that suggest the program induces them to explore novel lines of inquiry.

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Financial Integration, Investment, and Economic Growth: Evidence from Two Eras of Financial Globalization

Moritz Schularick & Thomas Steger
Review of Economics and Statistics, forthcoming

Abstract:
Does international financial integration boost economic growth? The empirical literature has not yet established a robust link between openness to the international capital market and economic growth. In this paper we turn to the economic history of the first era of financial globalization (1880-1914) for new insights. Based on a newly compiled comprehensive data set, we test if capital market integration had a positive impact on economic growth in the first era of global finance. Using identical empirical models and techniques as contemporary studies, we find a significant growth effect which remains robust to a number of alternative specifications. To account for this finding, we show that a key difference between now and then is that opening up to the international market led to massive net capital movements and higher investment in the historical period, but no longer does so today. Unlike its historical predecessor, the current wave of financial globalization has not incited large investment augmenting flows of capital from rich to poor economies.

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Do Switching Costs Make Markets Less Competitive?

Jean-Pierre Dubé, Günter Hitsch & Peter Rossi
Journal of Marketing Research, August 2009, Pages 435-445

Abstract:
The conventional wisdom in economic theory holds that switching costs make markets less competitive. This article challenges this claim. The authors formulate an empirically realistic model of dynamic price competition that allows for differentiated products and imperfect lock-in. They calibrate this model with data from frequently purchased packaged goods markets. These data are ideal in the sense that they have the necessary variation to identify switching costs separately from consumer heterogeneity. Equally important, consumers exhibit inertia in their brand choices, a form of psychological switching cost. This makes the results applicable to the broad range of products that are distinctly identified (i.e., branded) rather than just to products for which there is a product adoption cost or explicit switching fee. In the simulations, prices are as much as 18% lower with than without switching costs. More important, equilibrium prices do not increase even in the presence of switching costs that are of the same order of magnitude as product price.

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The Reorganization of Inventive Activity in the United States during the Early Twentieth Century

Naomi Lamoreaux, Kenneth Sokoloff & Dhanoos Sutthiphisal
NBER Working Paper, October 2009

Abstract:
The standard view of U.S. technological history is that the locus of invention shifted during the early twentieth century to large firms whose in-house research laboratories were superior sites for advancing the complex technologies of the second industrial revolution. In recent years this view has been subject to increasing criticism. At the same time, new research on equity markets during the early twentieth century suggests that smaller, more entrepreneurial enterprises were finding it easier to gain financial backing for technological discovery. We use data on the assignment (sale or transfer) of patents to explore the extent to which, and how, inventive activity was reorganized during this period. We find that two alternative modes of technological discovery developed in parallel during the early twentieth century. The first, concentrated in the Middle Atlantic region, centered on large firms with in-house R&D labs and superior access to the region's rapidly growing equity markets. The other, located mainly in the East North Central region, consisted of smaller, more entrepreneurial enterprises that drew primarily on local sources of funds. Both modes seem to have made roughly equivalent contributions to technological change through the 1920s. The subsequent dominance of large firms seems to have been propelled by a differential access to capital during the Great Depression that was subsequently reinforced by the regulatory and military procurement policies of the federal government.

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Human capital and entrepreneurial success: A meta-analytical review

Jens Unger, Andreas Rauch, Michael Frese & Nina Rosenbusch
Journal of Business Venturing, forthcoming

Abstract:
The study meta-analytically integrates results from three decades of human capital research in entrepreneurship. Based on 70 independent samples (N = 24,733), we found a significant but small relationship between human capital and success (rc = .098). We examined theoretically derived moderators of this relationship referring to conceptualizations of human capital, to context, and to measurement of success. The relationship was higher for outcomes of human capital investments (knowledge/skills) than for human capital investments (education/experience), for human capital with high task-relatedness compared to low task-relatedness, for young businesses compared to old businesses, and for the dependent variable size compared to growth or profitability. Findings are relevant for practitioners (lenders, policy makers, educators) and for future research. Our findings show that future research should pursue moderator approaches to study the effects of human capital on success. Further, human capital is most important if it is task-related and if it consists of outcomes of human capital investments rather than human capital investments; this suggests that research should overcome a static view of human capital and should rather investigate the processes of learning, knowledge acquisition, and the transfer of knowledge to entrepreneurial tasks.

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Did US safeguards resuscitate Harley-Davidson in the 1980s?

Taiju Kitano & Hiroshi Ohashi
Journal of International Economics, November 2009, Pages 186-197

Abstract:
This paper examines US safeguards applied to the motorcycle market in the 1980s. After receiving temporary protection by means of a maximum tariff of over 45%, Harley-Davidson sales recovered dramatically. Simulations, based on structural demand and supply estimates, indicate that while safeguard tariffs did benefit Harley-Davidson, they only account for a fraction of its increased sales. This is primarily because consumers perceived that Harley-Davidson and Japanese large motorcycles were poorly matched substitutes for each other. Our results provide little evidence that safeguard provisions triggered restructuring in Harley-Davidson.

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Self-reinforcing market dominance

Daniel Halbheer, Ernst Fehr, Lorenz Goette & Armin Schmutzler
Games and Economic Behavior, November 2009, Pages 481-502

Abstract:
Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in marginal cost reductions than firms with higher initial costs. We find that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even strengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, mean-preserving spreads of the initial cost distribution have no effects on aggregate investments. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers.

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Real and Financial Industry Booms and Busts

Gerard Hoberg & Gordon Phillips
Journal of Finance, forthcoming

Abstract:
We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. Our results show how real and financial factors interact in industry business cycles. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. Analyst estimates are positively biased and returns comove more in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results are consistent with firms and investors in competitive industries not fully internalizing the negative externality of industry competition on cash flows and stock returns.

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Is the division of labor limited by the extent of the market?: Evidence from the chemical industry

Ashish Arora, William Vogt & Ji Woong Yoon
Industrial and Corporate Change, October 2009, Pages 785-806

Abstract:
In the age of outsourcing, it is easy to forget that outsourcing is simply one manifestation of the division of labor. Adam Smith's dictum that the division of labor is limited by the extent of the market has created difficulties when applied to a division of labor among firms (rather than within a firm). The problems are both for analytical attempts to formalize it and for empirical attempts to test it. Bresnahan and Gambardella show that the Smith-Stigler theorem holds when the extent of the market is defined in terms of the number of users instead of simply the total size of demand; therefore, division of labor is increasing in the number of users and decreasing in the average size of users. This article provides an empirical test of Bresnahan and Gambardella's theoretical argument, using data from the chemical industry. The chemical industry shows systematic variation across technologies and countries in the extent of the division of labor in plant design and engineering. We develop an empirical model in which large firms decide whether to build plants using in-house resources or to contract out, and small chemical firms also decide whether to invest in a plant. The number of specialized suppliers of plant design and engineering services (SEFs) vary with the demand for their services. The empirical results support the predictions of Bresnahan and Gambardella. We find that the number of SEFs increases when the market expands through an increase in the number of potential buyers but not when the market expansion is due to an increase in the average size of buyers. Moreover, an increase in the share of large-firm investment decreases small-firm investment, which decreases the number of SEFs. In turn, this further depresses small firm investment.

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Propaganda, Public Information, and Prospecting: Explaining the Irrational Exuberance of Central Place Foragers During a Late Nineteenth Century Colorado Silver Rush

Susan Glover
Human Ecology, October 2009, Pages 519-531

Abstract:
Traditionally, models of resource extraction assume individuals act as if they form strategies based on complete information. In reality, gathering information about environmental parameters may be costly. An efficient information gathering strategy is to observe the foraging behavior of others, termed public information. However, media can exploit this strategy by appearing to supply accurate information while actually shaping information to manipulate people to behave in ways that benefit the media or their clients. Here, I use Central Place Foraging (CPF) models to investigate how newspaper propaganda shaped ore foraging strategies of late nineteenth-century Colorado silver prospectors. Data show that optimistic values of silver ore published in local newspapers led prospectors to place mines at a much greater distance than was profitable. Models assuming perfect information neglect the possibility of misinformation among investors, and may underestimate the extent and degree of human impacts on areas of resource extraction.

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Does Advertising Spending Influence Media Coverage of the Advertiser?

Diego Rinallo & Suman Basuroy
Journal of Marketing, November 2009, Pages 33-46

Abstract:
Recent studies have shown that consumers' product choices are significantly influenced by media coverage and recommendations in various media outlets. Unlike advertising, consumers perceive these sources as neutral and more credible because they usually presume that editorial content and product coverage in newspapers and magazines are independent and free from advertisers' influence. In this article, the authors show how advertising activities of firms may influence media coverage to the firms' advantage. They analyze a recent (2002-2003) large data set comprising 291 fashion companies based in Italy and their advertising and product coverage data published in newspapers and magazines of 123 publishers from Italy, France, Germany, the United Kingdom, and the United States. Controlling for firm heterogeneity, endogeneity, and the simultaneity of advertising and coverage, the authors find that, overall, (1) there is evidence of a strong positive influence of advertising on coverage, (2) publishers that depend more on a specific industry for their advertising revenues are prone to a higher degree of influence from their corporate advertisers than others, (3) peer pressures from competing publishers affect coverage decisions, (4) larger and more innovative companies are at an advantage for obtaining coverage for their products, and (5) the effects of corporate advertising influence exist in both Europe and the United States. These findings raise concerns about the independence of editorial content and coverage of magazines.


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