Thursday, July 23, 2015

Will Greeks invest? How Domestic Strife Influences Investment Decisions

Much has been written about the aftermath of the Greek crisis, but a key point raised in a recent Wall Street Journal article is the significant distrust of politicians and divides among people following the contentious politics around the referendum on the bail-out package that was offered Greece from the EU (but actually withdrawn before the vote date). Greeks on the left and far right don't trust EU, and many would like to leave the Euro. Greeks along the political spectrum believe their politicians cannot be trusted to govern competently.

Distrust and divisions matter because the Greek recovery will largely be determined by how much Greeks believe in their country. Currently, others do not. Even worse, many of the wealthiest Greeks have moved their money abroad and may well decide to keep them there until they see how the economy is doing. But an economic recovery requires someone to invest in business. Will the citizens of a nation with distrust and divisions invest?

A useful comparison for Greece might be Kenya, for two reasons. First, Greece is now a developing economy, and Kenya has been one for a while. Second, while the distrust and divisions in Greece are recent, Kenya has long been divided ethnically and politically, and distrust of the state runs deep. In recent research published in Administrative Science Quarterly, Chris Yenkey examined the spread of stock market investment in Kenya. Stock market investments are now wide-spread after the exchange in Nairobi opened, and it is spread nationwide but with some areas seeing more investment than others.

What drives investment under these conditions? Success. The strongest driver of investment by a Kenyan is how much profit others have had from their investments. That is not surprising, but there are many other results that are very interesting, and informative for Greece. First, divisions have strong effects. The investment results of others matter much more if they belong to the same ethnic group. People pay more attention to similar others, even if they are looking at objectively the same thing – stock market gains. Second, distrust matters. People living in towns with political leadership from a rival ethnic group paid less attention to the profits of those from different ethnic groups.

Equally important, the divisions can be bridged. In Kenya, people who lived in neighborhoods or worshiped in religions with a mix of ethnicity paid more attention to those who were different from themselves. People who saw much national (rather than ethnic-political) advertising were less likely to see only the gains of same-ethnicity others. Division and distrust are in the minds of people, and differences can be thought of as harmful division or helpful diversity.

The result is some old fashioned advice for Greece. Do whatever is necessary to bring the people together. Do whatever is needed to help them think of the nation rather than its politicians. The new part is that these actions are not just for reducing conflict and increasing confidence in life. They also help investment, and can be important for improving the economy.

Fidler, Stephen. 2015. Greeks, Economists Part Ways on Benefits of Eurozone. Wall Street Journal, 23/7/2015.

Sunday, July 5, 2015

Online Suggestion Boxes: Does Anyone Listen?

I think I am not the only one who has noticed how web sites are becoming pretty needy these days, using both pop-up ratings and suggestion boxes to try to get comments on the products and any other idea that the user may have. I first saw this (and was annoyed) when Amazon wanted ratings of my purchases and help fixing its suggested books, but many others use these functions. I just looked up one of the firms providing such tools and found that it has Barclaycard, Verizon, Telefonica, and Skype as its customers. And those are just the ones that are so famous that it posts their names on its web site.

I don't reply to such requests. I have other things to do, and think that firms should fix their problems without my help. I think many others also don't reply, either for the same reason or because they think that no one will take their suggestion seriously. But there are also people who do type ideas into these suggestion boxes, ranging from simple tips to longer proposals. So do the firms listen and adopt the ideas? Well, here is a potential problem. The more people give ideas, the harder it is to pay attention to them because there are simply so many ideas that the firm can't handle all. They have idea crowding.

Henning Piezunka and Linus Dahlander just published research in Academy of Management Journal on what happens when firms have  suggestion tools, and get idea crowding. Their work was built on a simple idea with some neat additions. The simple idea is that idea crowding means ideas are less likely to be used. Quality doesn't  help; idea crowding simply makes it harder to do anything. The first addition is that ideas also are less likely to be picked when they are distant from what the organization does or looks at. Again, quality doesn't help, anything distant is less likely to be picked even if it is great. But it is the second addition that really gets interesting. Idea crowding makes the effect of distance stronger. So when an idea is distant and there is idea crowding, the idea has to be truly exceptional to be used.

So far theory, but what about the evidence? Very simple: the research found that all the effects of crowding actually happen. And that has an interesting consequence for that really great idea you are about to type into the suggestion box. It will be used if it really is that great, but you do have to hope that the firm does not have idea crowding and that the idea is not distant. Type your idea and hope that others don’t do the same.

By the way, you can give me ideas by sending them to my email. Will I do what you say? Well, it depends on how good they are and how much idea crowding I have.


Sunday, June 7, 2015

Modern India: How Development is not the same as Westernization

Readers who think that India is the opposite of China – democratically developed and economically backward – should be seeing recent news as eye openers. The center of mobile phone making is moving from Korea to China, right? Well, except that Indian mobile phone maker Micromax (and some domestic rivals) are showing the world one more way to compete in the mobile phone market, with new product release times coming significantly less than a month apart. Compare that with the iPhone release schedule, and you see how advanced Micromax is. Naturally they are quickly gaining market share.

Development is also going quickly elsewhere. The Indian auto industry (yes, there are multiple makers) is introducing new models that are competitive with imports, its high tech industry is now so advanced that talk about closer US alliance leading to license manufacturing of arms in India is sounding realistic, and on the political front there is even a sudden (though very late…) resolution of the major border dispute with Bangladesh.

Does this mean that India is becoming fully Westernized? Well, here we have to deal with some myths that people have, most important of which is the idea that economic development is the same as creating some sort of US/European economy. It is not. Guoli Chen, Raveendra Chittoor, and Balagopal Vissa have published a paper in Academy of Management Journal that looks at just one of multiple dimension of difference: connections between firms.

The idea is simple. We often believe that non-western economies have more informal contacts between firms than western ones, and also are more reliant on business groups of firms controlled by owner families. The second of these statements is false, by the way, there is a lot of variation in business group presence across nations, and it does not follow a clean western/nonwestern line. This article looked at the connections part, which we know less about because it is often hidden. But it can be revealed by seeing who has the best information, which the authors did neatly by examining which stock analysts were best able to predict firm performance.

If development means westernization, we should see traditional forms of ties between firms disappear, right? Well, this almost happened. Stock analysts were unusually well informed about firms in which the CEO had the same caste or ancestral language, but only if the CEO started the career before the economic reforms in 1990. They were also unusually well informed about firms in which the CEO came from the same school as them, but only for CEOs starting the career after the reform. That school effect sounds like something that would not exist in western economies, which have rules on information release, but actually it does. Indeed, westernization doesn’t mean that networks don’t matter; it means that different networks matter.

So in what way is India different from a westernized economy then? It is that both types of ties exist at once. The traditional ties are not gone; they are just limited to the “older” CEOs. “Westernized” ties exist in addition. Perhaps the old ties will be gone at some point, but it is hard to guess now that it will happen, and it is incorrect to assume that it has already happened. 



Tuesday, June 2, 2015

Force or Example? How Firms start Good Practices

The latest news on the fire in the Bangladesh clothing factory that collapsed in 2013, killing more than 1,100 people, is that the owner, national and local building safety inspectors, and some factory supervisors have been charged with murder. This is a stronger charge than the expected homicide charges, and happens because their guilt in overlooking sudden cracks in the structure and ordering employees back to work is considered serious.

Meanwhile, the major U.S. clothing companies that used that factory and many others in Bangladesh have been increasing their checking of safety at their suppliers, and have formed consortia to effectively coordinate these checks. This is a big step forward from the earlier practice of rare checks (or no checks), but they are still checking less than one-third of the clothing factories in Bangladesh, leaving many unsafe factories with less-known (but usually foreign) customers.

In Bangladesh, people held responsible are being punished. In the U.S., companies buying from the factory were facing publicity problems and could also have been targeted by social movements against sweatshops if they had not acted quickly. So what drove the reforms, threats of punishment or better understanding of the factory dangers?

A recent paper by Forrest Briscoe, Abhinav Gupta, and Mark Anner in Administrative Science Quarterly provides some useful answers. They looked at how universities react to threats – from social movements, not the law – that target sweatshop purchases by Russell, a firm that supplies branded sportswear. They looked at two ways that universities might decide to manage their supplier relations differently: either by learning from each other, or by simply responding to threats. Both would be good reasons to stop purchasing from Russell until it reformed its supply lines, but the key finding was how these reasons interacted. If a university stopped purchasing after being targeted by a threatening campaign, other universities reacted as if there was nothing to learn from it. It had simply reacted to a threat, so it probably didn't have a real reason. If a university stopped purchasing after collecting information, with no threat, other universities might copy its actions.

The conclusion is an interesting one for all who want to improve organizational practices. Threats work. But they work very locally, and expensively. The most important way that organizational change happens is actually when organizations learn from each other, and that happens much less when threats are involved. So the prosecutions in Bangladesh are important for the families of the victims, and the actions of the social movements in the U.S. are important for the conscience of the activists, but organizations learning from each other give the strongest results.

Monday, May 25, 2015

Hanergy gambling? When people and firms take risks

Li Hejun is the tycoon who owns more than 70 percent of Hanergy Thin Film Group, a solar energy firm that became famous after its shares dropped by 47 percent on May 20. The price drop was remarkable for the total stock value loss and the fact that it made him lose his position as the richest man in China; it is also remarkable for having happened in a fraction of a second thanks to computer trading driving share prices down.

There is now a great deal of uncertainty around Hanergy and the events of the stock value fall, so what I am writing in this paragraph could become outdated quickly. First, it is alleged that Mr. Li was behind a large stock sale that triggered the crash.* (Of course, it was also important that there weren’t enough buyers for that sale and additional sale attempts by others afterwards.) Second, Mr. Li both owned stock (80 percent at the latest filing) and had “short” stock (opposite of owning, 7.7 percent). Third, the company (not him) had pledged stock as collateral for a series of loans, with the latest loan being USD 200 million. Finally, Hanergy sales of equipment to its mother company were an important part of its business, but the sustainability of that business model was questioned by some.

Confused by this information? It is chaotic, but for an investor it is easy to add up: This is a company with so many question marks that an investment would be risk at the level of pure speculation. Interestingly, the actions leading to this risk were fully under the control of the investor who lost the most from them: Mr. Li. Of course, we are familiar with firm owners and top managers who take risks that look excessive to others, so the Hanergy events are not new except for the scale of risks and losses. They do however raise the question of what makes individuals and firms take risk.

There has been much research on individuals taking risks when facing losses guided by prospect theory, which is based on how people evaluate gains and losses differently, and take high risks to escape losses. There has been much research on organizations making changes when facing low performance guided by performance feedback theory, which is based on how organizations discover and seek to solve problems following disappointing performance, but are less eager to find opportunities. A recent paper by Kacperczyk, Beckman,and Moliterno in Administrative Science Quarterly sheds new light on risk taking and changing by asking whether the drivers of change and risk in organizations are the same.

The study findings speak to both theories. Organizational change happens the way performance feedback theory specifies, both for risky change and less risky change. But an important component of performance feedback theory is what level of performance is seen as disappointing, and there the results are different. Organizational change of the less risky kind is driven by comparing the performance against that of other organizations, so competitors in the market. Risky organizational change is driven by comparing the performance against that of other units in the same organization. Why are they different? Well, the internal comparison is not against market competitors – it is against nearby managers and career rivals. That’s personal, and when losses are personal people take risks. So, risky organizational change is a blend of performance feedback and prospect theory.

What do these findings say about Hanergy? Well, so far we do not have information of any fraud in the Hanergy case, so it looks like a big bet gone wrong. And the bet is interesting because it is made by an individual who controls the firm so closely that there is little difference between him and the firm. In such a case, any comparison of performance gets personal because the firm falling behind means that he falls behind, so high risk taking would be a natural response. It is a very good demonstration of how closely held firms can go wrong.


Kacperczyk, Aleksandra, Christine M. Beckman, and Thomas P.Moliterno. 2015. "Disentangling Risk and Change: Internal and External Social Comparison in the Mutual Fund Industry." Administrative Science Quarterly 60(2):228-62.

*I knew I would end up correcting this paragraph. The initial report was incorrect; he actually bought shares just before the crash. I have not seen news yet on who made the fateful sale that started the price drop.

Tuesday, April 28, 2015

Hands off my Partner! France shows how a Third Party Can Complicate an Alliance

There is excitement in the business press around the dealings that the state of France has with car maker Renault, and the impact this could be having on the alliance of Renault and Nissan. The story starts with complicated maneuvers by the Economy Minister (this is France, after all), which are interesting enough to mention, but I will soon get to the alliance issue.

The start of the excitement is that the French government made a change in the stock voting rights late last year that benefits long-term investors, because they get double voting rights, so double the power, if they have held the shares for two years or more. But there is more to the law; it can also be used to favor French or other European shareholders over others, and specifically it lets the French state get double voting rights on its shares. That is a big power grab in a nation that has large state shareholding of many companies. The French government has assured managers and other owners that their intentions are purely beneficial and they do not intend to discriminate against others. The very existence of the law, and past French Economy Minister behavior against firms, place that assurance very much in doubt.

But enough legal issues, over to alliances. The Renault – Nissan alliance is famous as one of few very successful cross-border alliances of large firms. It started more or less as a rescue of Nissan, which was in bigger trouble than Renault when it was initiated, though neither firm was healthy. As a result, both firms own a portion of each other, but Renault has voting shares over Nissan but not the other way around. And what started as a rescue led to very significant success and growth. Now Nissan has double the car sales of Renault.

The Renault CEO Carlos Ghosn has made big personal investments in making the alliance work, and has drawn much credit from its success. He reacted quickly against the new law through seeking to make a special Renault exemption from it (this is legal), as well as speaking publicly against the law. No doubt he is doing this because Nissan enjoys their relation with Renault but do not trust the French state.  Indeed, he has been supported by his board of directors, as well as from the Nissan board of directors. He has until recently looked like he would be able to get a majority of Renault stockholders to vote for the exception, as he is required to do.

And now I need to bring the French state maneuvers back into the story. The Economy Minister Emmanuel Macron has arranged to buy a substantial share of Renault stock and to have options to sell them after the shareholder meeting. Translation: he is using taxpayer money to buy the votes necessary to stop Ghosn at the shareholder meeting. This is nearly certain to work, making France an even more important shareholder in Renault as intended.

What about the alliance, then? Well, it is going to be interesting. As long as France does not intervene much, it is likely that it will go on as before because Renault and Nissan are still useful for each other. But if there are problems things could change dramatically because Nissan actually needs Renault much less now than it used before. The main problem would be that Renault owns so much of Nissan that getting away from Renault would be hard. It is easy to see ways that this change in power will cause problems, and much harder to see any benefits to the alliance -- or to France.


Stacy Meichtry,  Jason Chow and Sam Schechner. 2015. France Outflanks, Outrages Renault’s Ghosn. Wall Street Journal, April 27 2015.
Greve, Henrich R., Timothy J. Rowley, and Andrew Shipilov. 2013. Network Advantage: How to Unlock Value from your Alliances and Partnerships. Jossey-Bass. 

Sunday, April 12, 2015

Loyal Cheaters: When Organizations Promote Wrongdoing

Every now and then we hear news about employees who are engaged in wrongdoing of various kind, usually harmful to customers and employees. The most spectacular have been financial fraud, as when traders lose money while performing trades that break the internal rules of their banks. UBS trader Adoboli was convicted for unauthorized trading that led to a 2 billion dollar loss; Barings Bank trader Leeson was convicted for unauthorized trades that lost 1.4 billion dollar. Barings Bank went bankrupt; UBS bank stock owners (and surely, customers as well) suffered financially from the losses.

We often think of such wrongdoing as being the result of bad employees acting against their company, but is that really the right story? It is certainly a poor fit with these trader cases, because both of them started trading out of control after losing money, not while making a profit. You could see them as trying to avoid getting fired, but surely that does not fully explain risking lengthy prison terms.  In fact, an odd but plausible true explanation is that their wrongdoing was an attempt to save the firm from losses.

Research supporting this explanation has been done by Donald Palmer and Christopher Yenkey, and will soon be published in Social Forces. They looked at another context with some famous wrongdoing: the cycling race Tour de France. There, the beginning of blood monitoring in the 2010 race makes it easy to investigate which cyclists likely engaged in blood doping or drugging, even if they did not get blood values suspicious enough to fail tests. Of course is well known that Lance Armstrong engaged in doping for many years and was stripped of 7 wins; not everyone knows that Alberto Contador was declared winner in 2010, but lost the victory after a drug investigation. The key point in Tour de France is that players may cheat to benefit themselves and their team, and it is actually possible to test what makes them most likely to cheat.

So what determined cheating? The role in the team is most important, because specialists such as team leaders and sprinters had the most suspicious blood values, while their supporting cyclists had the second-most suspicious values. Members of teams that let each cyclist compete individually were least likely to cheat. People don't cheat for themselves as often as they cheat for their organization.

So we have an interesting result that should give pause to anyone who sees wrongdoing in organizations as a result of individuals looking out for themselves. It could be exactly wrong: they are trying to help their employer. This means that the right response against wrongdoing is not more organizational control of what people do, but less pressure to win. 

Palmer, D., C.B. Yenkey. 2015. Drugs, Sweat, and Gears: An Organizational Analysis of Performance-Enhancing Drug Use in the 2010 Tour de France. Social Forces.

Alberto Contador (center) celebrating his Tour de France victory. 
To the left is Andy Schleck, who has now been declared the winner.