Tuesday, April 1, 2014

Where will China’s firms establish subsidiaries? Where there are Chinese

Europe and China are currently negotiating a raft of trade issues, with wishes to increase exports and investments from abroad. It is not necessary to distinguish who wants what; both want to export more and receive more investments. Basically the governments would like to receive more money from the other party, as governments often do. But one part of this story is new and interesting: Europe is still suffering from an economic crisis and many Chinese firms have reached considerable size, so European nations are very eager to become targets of Chinese investment. While EU negotiates on behalf of all, each nation competes with the others.

So where will China’s large firms place their subsidiaries? Well, they might behave like other multinational firms, which would be interesting news for Europe. In research published in Administrative Science Quarterly, Exequiel Hernandez found that foreign firms entering followed a very clear pattern: they preferred locations in which immigrants from their nation were numerous. It is easy to think of an example. Honda became famous for their early and successful entry into the US, which started in Los Angeles – a city with a large Japanese-American contingent. But this research is more than a set of examples, it is a clear pattern that can be shown by studying many firm entries.

The pattern makes sense too, because immigrants from the same country are ideal for firms that establish a subsidiary. They are in between. They understand the origin country, and they understand the new one. They can be employees, contractors, trading partners, teachers: in all roles they benefit the company more.So, the choice of locations with many immigrants is not a simple reaction to liking, it makes sense for the firms. In fact, the research also showed that the new establishments survived better in locations with more immigrants from the same country.

So what does that mean for Europe? Well, one thing that is obvious from looking around is how few Chinese immigrants there are, many fewer than in the US or Canada. And a bit of knowledge of politics is enough to learn that many European nations have political groupings that see immigration as problematic and are trying to seal themselves off. There is variation in how much of this happens, of course. And probably the people campaigning for fewer immigrants are unaware that they may be campaigning against companies and jobs too, not just people who look different from themselves.

Tuesday, March 18, 2014

Going Abroad to Fail, or to Succeed? Experience Matters

The current news is that the negotiations of a merger between apparel chains Fast Retailing and J Crew Group have stopped, at least for the time being. Fast Retailing is the owner of the large Uniqlo chain of clothing stores, while J Crew has staged a recovery after being taken private in 2011. Despite J Crew’s recovery, there is no doubt that the merger would be a takeover of J Crew by the much larger Fast Retailing, which is now expanding from a solid base in Asia and has stated ambitions to become the largest chain in the US, and in the world overall.

Would the merger have succeeded? Well, any merger can fail simply because it becomes too expensive, and there is no doubt that J Crew’s owners want to be paid well. But more importantly, does Fast Retailing, which started in Japan and has now spread mostly across Asia, know how to do business in the USA? The question may seem strange from the viewpoint of US retailers, which find the USA to be easy and many Asian countries (especially Japan) to be very complicated places to do business. What they overlook is that the US is not easier, just different.

Any place where business happens there are set customs of doing business and set rules for doing business that could easily have been different, and in many places are different. Firms that go abroad try to follow the rules, and adapt to the set customs to the extent they agree that they make sense. The rules and customs are often called institutions, and a big topic in research is just how complicated changes in institutions are in one nation, one industry. But for firms that go abroad, the complications are worse. They change institutions whenever they enter a new nation. They end up competing with firms that don’t experience any changes, because they were already there. Institutions are a major reason expansion abroad is difficult.

So what about Fast Retailing then? Well, research by Susan Perkins recently published in Administrative Science Quarterly shows that firms learn institutions and institutional change. Already being in the US is obviously going to help Fast Retailing. And, having entered many different nations, even in Asia far away from the US, has the potential to teach Fast Retailing how to enter one more nation. This is less obvious because these prior entries give breadth of learning, but they do not give learning that is specifically useful for the US. But breadth also matters, as Perkins discovered. 

The CEO of Fast Retailing, Tadashi Yanai, is known to be confident about his decisions. In the case of a US expansion, he may have reason to do so based on the learning that Fast Retailing has picked up from prior entries.

Spector, M. 2014. Merger Talks Between J. Crew, Fast Retailing Break Down. Wall Street Journal, March 18 2014.

Friday, March 7, 2014

Punishment for Past Sins: Adults Losing Jobs Because of their Junior High Misbehavior

Suppose you have known a coworker for some time, and you have a good idea of how well he (or she) can perform work tasks and behave nicely. Then you hear something about the past: for example, he tried out illegal drugs in seventh grade, just when starting junior high school freshman. Would your opinion of him as a coworker change? Would your assessment of his job skills change? If you were his supervisor, would you be more likely to let him lose the job if cuts were needed?

The questions look a little artificial because we understand that it is current job performance that should decide what happens to someone at work, and that past behaviors are just that – past. Drug use would matter if it continued, but if it has happened and stopped it is just history. At the same time, the questions should look worrisome because we have an intuition that things are not quite so clean. People are seen differently and treated differently for many reasons unrelated to what they do in an organization. These views can be discriminatory and consequential: less pay for women, less job security for African American men. Can past sins such as drug use be one more factor that leads people to be seen differently at work?  

The answer is yes. In a chapter in the volume of Research in the Sociology of Work on Adolescent Experiences and Adult Job Outcomes, I studied how "past sins" affected job changes. Having used illegal drugs before the age of 14 makes adults more likely to lose their jobs. Sex before the age of 14 has the same effect. It did not matter what level of job skills people had, or whether they used drugs during the work period. It did matter why the left the job, because early drugs and sex had no relation to leaving the job voluntarily, only to losing it. Past sins are punished.

How do these effects compare with the discrimination we are familiar with? It turns out that the effect of past sins is the same for men and women (including the effect of early sex). But it is not the same across races: Hispanic and African American individuals are harder hit by their past sins than White individuals.  

What this research means for parents is simple and clear: Keep raising your children to stay away from behaviors that will stigmatize them in the future. What it means for organizations is less clear: Something unfair and wasteful is happening because individuals who are perfectly good workers get pushed out because of things they did in the past. But who is pushing them out, and why? It is likely that those who make them lose their jobs are unaware of the link to news they heard about past sins; just as those losing their jobs were unaware that the drugs or sex would hurt them in the future. We have learnt that it is difficult to make organizations fair, but we are not sure how to improve that.

The paper is free for downloads for a limited time:

Wednesday, March 5, 2014

Ellen DeGeneres’s Oscar Selfie: Collaboration Results

If you read any newspapers or watched any TV this week, there is a good chance you know that Ellen DeGeneres took a “selfie” photo with many stars (and one non-star) at the Academy Awards ceremony. Probably you also know that it hit a record number of views on Twitter, and that she used a Samsung phone. In fact, the picture was taken by a Samsung Galaxy Note 3, a so-called phablet because it is a phone so big that it is just a little smaller than a Tablet. As an article in Wall Street Journal pointed out, this was a product placement. Samsung had bought advertising time in the broadcast and a placement event (not hers, actually), and when she planned taking selfies the broadcaster ABC suggested she use the Samsung.
We are getting used to product placements now as a way of more or less subtly influencing us. If you watch music videos, you have probably noticed the odd-looking pill-shaped music player that often appears in them. The advertising industry is currently wondering how much product placement can be done before it really starts annoying people, but for now it is seen as a useful collaboration.

The Samsung placement is especially interesting because there are more interesting kinds of collaboration inside that phone, and involving Samsung in general. First, we need to recognize that this is overall a Samsung innovation: it leads the phablet market because they were the first to market such a large phone, and other phone makers thought the size was so unpractical that it took nearly a year of market success to convince them that this was a viable market. But capable as Samsung may be, it cannot make a phone like that using Samsung parts. Samsung makes the screen, which has a 1920 x 1080 density, the same as the setting of the display that I am using now. (And, more than the screen of my laptop can show. . . ) But inside the phone, the makers of parts is a long list including Qualcomm, Wacom, Murata, Maxim, Broadcom, Avago, Silicon Image, Micron, and Audience.

Phone makers typically put together devices from many parts suppliers, so this is not completely unusual: an iPhone would also have many parts makers, especially because Apple knows less about hardware manufacturing than Samsung does. But the key point is that the parts of a pioneering phone cannot just be ordered off the shelf, they involve collaboration between the phone maker and the part makers. It is through a large set of alliances and informal collaborations and much practice in making them work well that Samsung is able to put together innovative phablets. For me, part of the fun behind the Oscar Selfies news is that it involved Samsung, a company we are using as an example of skills in using alliances in the book Network Advantage. Having Ellen DeGeneres do nice Selfies is the rest of the fun: To me, the combination of Ellen and fun photography is hard to beat.

Wednesday, February 19, 2014

iSpy Denial: Why Firms Need to Do the Right Thing

The news on the activities of National Security Agency (NSA) include a story that has been overlooked by many: there is a leaked document about a piece of spyware software called "DROPOUTJEEP", which makes an iPhone reveal significant information about its owner, including details such as files stored, messages sent and received, phone calls, and location. Apple has issued a denial that it collaborated with NSA to make this program. The denial is interesting because the document says nothing about a role of Apple in creating this software, and the NSA is perfectly capable of making spy software without help from the maker of a device. In user forums there have indeed been allegations that Apple is involved, but such allegations typically happen and don’t have much weight if there is no supporting evidence.

So why does Apple care? We could take a hint from the reactions of other technology companies to information on NSA activities to monitor their users. Google, Facebook, and Yahoo have issued angry responses to reports that NSA were listening in on their user’s communications by doing the Internet equivalent of a wiretap. Google went a step further by using encryption so that NSA would be left with a decryption task if it was able to continue wiretapping Google’s communications. That is a hard slap, because listening in on the internet is fairly easy, but decrypting digital communications takes a lot of time and computing power.

Apple, Google and other firms are not against national security. They do, however, dislike any technologies that will let the government monitor their users without legal backing. And because their managers are practical with respect to what they like and dislike, we can conclude that they are well aware that their users dislike such monitoring too. We know that customers can react by backing off from transactions with firms that do things they are against. That finding was in a paper by Stefan Jonsson, Takako Fujiwara-Greve, and myself on how a scandal involving favoritism in an insurance company led to withdrawals from mutual funds that customers saw a similar to insurance.

But now there is new research on others who have opinions on what firms do, and can react to it. Amandine Ody-Brasier and Freek Vermeulen published a paper in Administrative Science Quarterly looking at the pricing of grapes to Champagne producers. One would think that grapes had a single price, or at least one that was only determined by quality, but in fact there is substantial variation in the pricing. And here is the interesting finding: Champagne producers who were doing (or suspected of doing) things that the grape makers disliked, such as having a non-French subsidiary or making Champagne under a store brand, were secretly punished by having to pay more for their grapes.

So firms that are concerned with keeping a distance between themselves and any rumors of misconduct and scandal are doing the right thing. Not only is misconduct an embarrassment, it can also be punished on both sides, by suppliers and customers. Walking the straight and narrow path seems to be the way to get to profitability.
Wakabayashi, D. 2013. Apple Denies Working With NSA on iPhone Backdoor. Wall Street Journal, 31.12.2013.