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Archive: April to June 2011

Culture Matters in Unexpected Ways [C3]

June 29, 2011

At a recent scholarly conference in Japan, I triggered some debate with a quote from an English entrepreneur whom we recently interviewed for a research project:

"You know, I am so used to this. I actually had more problems cross-culturally when I worked … with Scottish management than … when I go to China. … When I am dealing with Chinese customers or Korean customers, I am expecting and prepared that there’s going to be some give and take. I am dealing with people who are very experienced international businessmen who also are expecting some give and take. I am sure it would be different if I were dealing with someone who has never met a foreigner before. When I was dealing with Scottish, I was a senior manager in a firm run by very parochial Scottish management team. I expected things to be easier, they expected things to be easier, [but] our expectations were far apart."

The quote raises two issues. The first is known as 'psychic distance paradox' in the literature: businesspersons frequently underestimate the challenges of working in a nearby culture because they assume differences to be negligible, which they aren't.

The second issue is less well understood. Communities such as the entrepreneurs that our interviewee does business with, the business scholars gathered at the conference, and even our MBA students are used to interact with people of quite different origins, and they develop tacit skills in handling such situations. But not all people have these capabilities, in fact most people don't. Semiconductor entrepreneurs, business professors and MBA students with cosmopolitan attitudes are a minority within the wider societies in which they operate. When taking on leadership roles, they face the challenge that not everyone in their organization shares their global outlook - the entrepreneur calls them "parochial". This can lead to management challenges that we ought to discuss in MBA classroom. Yet, to my knowledge this issue hasn't been addressed in the scholarly literature - anyone wants to do a PhD?

K. Brouthers & L. Brouthers, 2001, Explaining the national cultural distance paradox, Journal of International Business Studies, 32: 177–189.
Meyer, K.E. & Xia, H.T., 2011, Born Global Resource Integrators, AIB Conference, Nagoya, Japan, June.
O'Grady, S. & Lane, H.W. 1996, The Psychic Distance Paradox, Journal of International Business Studies 27: 309–333.

European Crises: UK vs Greece [C8]

June 22, 2011

The two countries most hit by the by governmental budgetary crises in the wake of the 2009 financial crisis are the UK and Greece, both hot budget deficits of over 14% at the peak of the crisis. For comparison, the eurozone [in theory] allows its members a deficit of 3%. However, that's where the similarities end - the source are quite different, as are the policy responses, and the appropriate responses.

In Greece, the origins of the budget crisis are structural. Already before the crisis the balance of revenues and expenditures was out of balance, the national debt was - relative to GDP - one of the highest in the world, and Greece only sneaked into the euro because it submitted what is now known to be incorrect data about its debt. The additional costs to governments arising from the financial crisis, then pushed Greece over the edge - in the views of the financial markets (or more precisely, the rating agencies).

In the UK, the budget deficit was slightly below the European average; in fact Tony Blair left office after a decade as prime minister with a slightly lower debt (in % of GDP) than what he inherited from his Conservative predecessor, John Major. The British national debt surged as a direct consequence of the financial crisis: 1) The banking bail-out was almost as large as in the US (and hence much higher as % of GDP); 2) income tax revenues dropped sharply as those high earning financiers in the city also used to pay a lot of income tax, and 3) an economic stimulus program launched by the Brown government in December 2007, including a 1-year reduction of VAT from 17.5% to 15% that was largely ineffective. The current Conservative-LibDem government likes to blame Gordon Brown for the deficit, but that is more than a bit disingenuous: Neither of the parties had lobbied at the time for better banking regulation (and the rules had been designed by the Thatcher government in the 1980s), nor did they at the time offer alternatives to the banking bail-out and the fiscal stimulous.

The policy response also has been quite different. The UK devalued its currency through very loose monetary policy (or, quantitative easing) which reduced debt held in other currencies, and provided advantages vis-a-vis trading partners (a big problem for Ireland) - but also resulted in rising inflation, among other through import prices. Greece did not have this option because it uses the common currency (and since its debt would have been in dollar or euro anyway, it would not make that much difference anyway.

Both countries now are pushing unprecedented austerity packages, cutting government expenditures where ever they can. In the Greek case, where the deficit is the result of long-term structural imbalances, this seems unavoidable. It is less obvious in the UK, where the causes of the deficit are short-term in nature, and the structural issues that the government ought to prioritize are 1) the regulation of the financial sector, and 2) the relative weight of the financial sector in the UK economy - the result of deliberate policies over the last 25 years. This however required investments in such mundane things as education of the workforce to build human capital outside the elites ... not a priority for a Conservative government.

Chinese Capitalism [C2]

June 6, 2011

Management Organizational Review, a scholarly journal focusing on contemporary management issues in China, devoted a special issue earlier this year on "Chinese Capitalism", to examine what sort of economy China is developing into. The contributors are all esteemed China experts in different academic disciplines, and based in the USA. A common theme across the contributions is that the state continues to play a much more extensive role in the economy than in virtually all other market economies. Yet the authors disagree on the economic significance and the likely future evolution of this influence.

On the one end of the spectrum, Andrew Walder (of Stanford U) argues that gradually - very gradually - private entrepreneurs are accumulating wealth and are joining the economic elite. He thus expects the nature of the national elite itself to shift - in a very gradual but continuous process, which in the long term will change the nature of the relationship between state and economy. Neil Fligstein (U of California) and Jianjun Zhang (Peking U) take a "varieties of capitalisms" approach and search for similarities between China's evolving system and other market economies, and suggest that France may come closest. Yet there are important differences that they expect to persist: In France, the role of the state is focused on welfare and social issues, whereas the Chinese state takes a much larger role large in actually owning and directly influencing firms. Also the role of organized labour is different. French trade unions do not hesitate to take on their state employers to bargain for higher wages, safer pensions or shorter working hours. That's not imaginable in China.

Nan Lin (Duke U) digs deeper to explore how state-affiliated companies (i.e. most of the largest companies) by the state, and thus by the Communist Party. Many of the largest firms may be listed on the stock exchange, yet different sorts of state-affiliated entities hold controlling equity stakes, and possibly more importantly, the typical career paths of leaders take them through leadership roles in government administration to state-affiliated companies, and back. This intrinsic overlap of economic and political elites secures continues influence of 'the state' over key companies. In his introduction, Marshall Meyer (Princeton U; no relation) pushes this point further. At the onset of the financial crisis, the Chinese state pumped massive amounts of money into the economy, mainly via state-affiliated firms. In consequence, the contribution of state-affiliated firms in GDP has been rising over the last few years, reversing the trend of the past three decades. For Marshall Meyer, this signifies a significant shift in the direction of Chinese economic transition in the long run.

Taken together these contributions indicate a process in which the balance of power constantly shifting between "the state/the party" and "the market/private entrepreneurs". Most scholars of economic transition tend to conceptualize transition as a process of changing from one system to another loosely resembling "Western" capitalism. The reality however is a process that involves a lot of experimentation with new arrangements, with the balance of power swinging like a pendulum. The Chinese variety of capitalism is not a clearly defined form, and may never be. Rather, like Yin and Yang, the centralizing forces of the stat/parties and the decentralizing forces of private enterprise find ways to co-exist - a contradiction perhaps to Western minds, but less so in an Eastern philosophy.

As a final remark, when were studying comparative economics in high school - comparing East versus West Germany, or Soviet Union versus USA - a basic point our teachers were ramming home is to compare real world to real world, and ideal model to ideal model - and avoid the journalists' style of comparing what they saw in the East with their textbook model of the West (or the other way around, in that TV station we didn't bother to watch). Yet, this remains a challenge even for these esteemed scholars - their (implicit) benchmark is the USA, yet with an ideal image, at times understating the role of the state entities, and overstating the effectiveness of corporate governance in rewarding performance.

All articles are published in Management Organization Review, vol. 7 (2011), issue 1.

Estonian Capitalism [C2]

June 4, 2011

Visiting Tallinn, Estonia again after 15 years, I have to appreciate the transformation the country has gone through. Once part of the former Soviet Union, Estonia today is a full member of the European Union - including passport free travel and the common currency, both achievements that the UK is far from.

Estonia has embraced the free market economy more comprehensively than most (or all?) countries in Europe. This is evident in the numbers of small businesses serving the tourism industry: small traders, restaurants, pubs etc - yet without the chaotic street traders that are common in many emerging economies. The free market nature is evident even in the taxi: Taxi companies are competing on price - every company has their own pricing scheme, and passengers are free to choose which taxi they pick - not whoever is first in the queue as in all other cities and airports I know. At the same time, the government keeps a low economic profile, and has made sure not to run substantive budget deficits for two decades now.

Estonians have also embraced the electronic age more than most, possibly inspired by their neighbours to the North, the Finns. Famously, when the newly independent government met for the first time in the mid 1990s, it had no paper documents at all, as all ministers arrived with documents on their Laptop. This spirit is evident literally everywhere: Wherever in town I wanted to check my e-mail, I found a wireless network that I could log in for free - also here at the airport (so this blog will be uploaded before I board the plane!). Another neat expression of the embrace of the electronic age is the name card that conference organizer provided us: It has a memory stick build in, complete with all the conference papers.

Of course, the legacy of the Soviet regime is visible, but one has to look for it. The 1960s residential blocks not far from the hotel are probably most obvious, as is the odd old house in bad repair, even in the historical old town. But that is not too different from Western Europe, where those who look also find lousy architecture and incidences of neglect. On a positive side, Tallinn has an electronic bus system like many Central and East European cities: On top it looks like a tram, at the bottom like a bus. In these days of energy conservation, these Soviet-era systems have gained a new life.

Also in other ways Tallinn feels more like a North European city than like a post-Soviet city. Near the old town, modern skyscrapers house banks and hotels, department stores are mushrooming, people are busy partying in town on Friday night ... Also politically, Estonians have become quite like other Europeans: They are grumbling about having to contribute to bailing the Greeks, who adopted a less market oriented form of capitalism.

Lists versus constituencies in Scotland, Wales, and England

May 7, 2011

The mixed election system used at last week's election in Scotland and Wales provides an interesting quasi-experiment on the different implications first-past-the-post (FPTP) and proportional representation systems. Voters have cast two separate votes for a constituency candidate and a regional list, which was used to add a proportionate element to an essentially FPTP system. These two votes allows us to control for tactical voting that usually affects results to extrapolate impact of alternative systems.

In Scotland,

The constituency vote alone led to 73 constituency seats as follows: Scottish Nationalist (SNP) 53, Labour 15, Conservative 3, Lib Dem 2. If the 'English' rules had applied, then the SNP would have more than 2/3rds of the seats, enough in many countries to change the constitution. (But then, the UK has no constitution, and the rules for Scotland are set by the UK parliament anyway).
The regional lists vote generated SNP 44.0%, Labour 26.%, Conservatives 12.4%, Liberal Democrats 5.2%, Greens 4.4%. If this was distributed using a pure proportional system with minimum threshold of 5% (as is common in continental Europe), a parliament of 73 seats would look as follows: SNP 37, Labour 22, Conservatives 10, Lib Dems 4. (Or of 129 seats: SNP 65, Labour 38, Conservatives 18, Lib Dems 8). Either way, the SNP has a 1 seat majority.
The actual system in Scotland created by the (UK) Labour party at the time of devolution in the late 1990s uses the regional lists as a corrective on a regional basis, and there is no need to jump a country-wide 5% hurdle, but there is a de facto threshold of a similar magnitude separate for each region. So, the actual Scottish parliament is close to proportional, but more splintered than either of these pure systems would generate of 129 seats: SNP 69 (53 direct + 16 from regional list), Labour 37 (15+12), Conservatives 15 (3+12), Lib Dems 5 (2+3), Green 2 (0+2), Independent 1 (0+1). (The independent got 6.5% in the Lothian region).
Under the German system, which combines lists and proportional by allocating the number of seats proportionately, but then giving the first seats to those candidates elected directly, this would be the same proportions as above SNP 65 (53 + 12), Labour 38 (15+13), Conservatives 18 (3 + 15), Lib Dems 8 (2+6). Constituency winners get their seat, independent of the national results.

In Wales,

the constituency vote alone let to 40 constituency seats as follows Labour 28, Conservative 6, Plaid Cymry 5, Liberal Democrat 1 - which means a clear 3/4 majority for Labour.
the regional lists vote generated: Labour 36.9%, Conservatives 22.5, Plaid Cymru (PC) 17.9%, Liberal Democrat 8.0%, UKIP 4.6%, Green 3.4%, Socialist 2.4%, BNP 2.4%, Welch Christian Party 0.9%, others/independents 0.9%. With a threshold of 5% in a parliament of 60, this would yield: Labour 26, Conservatives 16, Plaid Cymru 12, Lib Dems 6. Note, however, how close UKIP and the Greens are to the 5%-threshold - if either of the had made 5% they would enter with 3 seats. No overall majority for anyone.
In the actual system, the seats were: Labour 30 (28+2), Conservatives 14 (6+8), Plaid Cymru 11 (5+7), Lib Dems 5 (1+4). Here the results is actually dominated by the FPTP element as only 20 seats are allocated from the lists. Labour got additional seats from he lists because their constituency direct seats are highly concentrated in some 'regions' of Wales and they have no direct seats in other 'regions'.
Note that 'regions' in Wales are actually quite small: Each region elects 11 to 13 seats, of which 4 are allocated through the lists. This means the minimum threshold is actually quite high, about 6-7%. This was to high for UKIP (5.2% in South Wales East) and the Greens (5.2% in South Wales Central).
In the German system, where representativeness if paramount, but all constituency winners get a seat, the number of members of parliament would be increased from 60 to 64 to make the numbers add up: Labour 28 (28+0), Conservatives 17 (6+11), Plaid Cymru 13 (5+8), Lib Dems 6 (1+5).

In England, we had local council elections. First-past the post was the only system on offer. In my constituency, I had the choice between exactly two candidates, representing respectively the party in government (Conservative) and its coalition partner (Liberal Democrats). Neither of which had bothered to campaign much. Unsurprisingly, voter participation was much lower than in Scotland or Wales...

Footnote for techies: I used Hare-Niemeyer system to calculate seats under proportional system. Under De Hont system, the smaller parties may get one seat less and the large parties get one seat more.

Business in the long run...

April 26, 2011

Business history books, if they are well-written, provide an interesting way to remind ourselves of the long-term implications of what we are doing. Too much of decision making in business - and scholarly research - is driven by specific short term decisions, with few thinking through the likely long-term consequences of our actions. Stepping back and recognizing ourselves and our businesses in the long-term flow of history provides a wider horizon of opportunities - and of unintended side-effects. Good historians can also dig deeper into activities and decision-making as they explore company archives that provide rich information that contemporary business researchers can only dream off. Moreover, an advantage of studying a 'dead' firm is that as researcher one can be more frank in discussing the weaknesses without concern to the reputation of the company that today carries the name.

Over the Easter break, I have been reading a meticulously researched yet very readable business history of Beecham, which in the 1980s and 1990s was a major UK pharmaceuticals and consumer goods giant. It was written by a former colleague of mine, Tony Corley of the University of Reading (well, strictly speaking Tony retired some 15 years before I arrived in Reading, but he was very much present in the office ... some people never really retire).

Tony Corley traces Beecham from the foundation as a pill manufacturer in the 1840s to its amalgamation first in 1989 in "Smithkline Beecham" and then in 2000 in "GlaxoSmithkline". The story of Beecham includes many early international business activities of the sort we research in the age of globalization. Before 1914, when Beecham was still a family-owned firm, it had a production subsidiary in the USA and export sales especially to Commonwealth countries such as Australia, Canada and India. Already in the 1960s, Beecham had an R&D subsidiary in the USA and was engaged in extensive "reverse knowledge transfer"; it appointed a non-British CEO in 1986; and after the merger with Smithkline it had legal headquarters in the UK, but operational headquarters in the USA. Such high degrees of internationalization continue to create major organizational challenges even for the best multinationals.

Key to the evolution of the firm have been the men (no women) at the helm of the organization. Each one of them leaves his mark on the organization, but often not in the way they intended. Several entrepreneurs shaped new paths of growth and/or profitability for the firm, while others kept the firm afloat in volatile times. Tony Corley does a great job in exploring the character of the key players in the company, and the interplay between them in the company leadership. While most of the leaders had major achievements, none of them was flawless, each having personal weaknesses. Great people sometimes also make great mistakes, that successors then have to deal with. The worst mistakes of Beecham CEOs, arguably, relate overly ambitious diversification strategies - notably in 1914, 1945 and 1971. According the Freek Vermeulen, whose book I reviewed here a few weeks ago, this continues to be a major trap in today's boardrooms.

Corley, T.A.B., 2011, Beecham from Pills to Pharmaceuticals, Lancaster: Crucile Books.

Alternative Vote System (2): Qui Bono?

April 4, 2011

In the run-up to the UK referendum, there has been quite a lot of speculation as to which party would gain from AV. In particular, the Conservatives seem to be running scared that any system other than the current one would undermine their ability to run the country. Well, most of what is being said in the media on this topic is, in my humble opinion, nonsense.

The essence is that candidates that appeal to more than their core supporters have a chance of overtaking candidates on the basis of second preferences. While this may impact on the kinds of candidates that the parties put forward, I believe this will only have a small impact on the distribution of seats in parliament:

While the media seem to expect the LibDems to gain about 20 seats, my own simulations do not support this view. I simulated an AV system for all London constituencies (see May 11, 2010), and found the LibDems not getting close to gaining any seats in London, while the Conservatives had a net gain from Labour of 2 seats.
In principle, the second preference votes are likely to help candidates who take a centrist position. In the British context, this might help independent candidates representing local interests and a distaste for 'Westminster politics' in general (a common sentiment). Results from Australia, where AV has been used for a long time, suggest such a possibility: there 4 of 150 MPs were independents (plus 1 Green who counts as sort of independent) (see August 22, 2010).
If voters see LibDems as being "between" Labour and Conservatives, they might be able to pick up a large share of second preferences, and hence seats. However, during the Blair years, the LibDems actually moved to the left of 'New Labour' on some issues, while now in government they support the Conservatives. So it is not clear how popular they will be as second preference. I would rather put it in a different way; under an AV system, the LibDems have strong incentives to position themselves as a party of the political centre.
Will the AV system help smaller parties? Small parties that have radical views supported by a hard core of supporters but hated by most others - say Socialist, Loony or BNP - are going to find it even more difficult to get any seats (which would be a good argument for extending AV to local elections).
Small parties that offer positions of broad appeal, i.e. in the political centre, may benefit from second preference votes in specific constituencies where the candidates by the big parities (whoever is big in the particular constituency) are highly unpopular. They would then play a role similar to independents and tap into the 'anti-Westminster' mood. Thus, conceivably, UKIP or the Greens may get a seat or two.

Based on this analysis, I suggest that the shift to AV is really about local dynamics, not about majorities in parliament. So, it hard to see why the Conservative party is so opposed to giving voters more power. In Scotland and Wales they should actually be able to pick up a few seats. Perhaps they really fear that the "everyone-but-Conservatives" vote is very powerful.

Alternative Vote System (1): Changing Dynamics

April 3, 2011

On May 5, Britain goes to vote on a referendum on (small) changes in the electoral system. The proposal is for an Australian style 'alternative vote' (AV) system, where voters rank their preferences rather than simply select only their most preferred local candidate. Why do many think this change is necessary, and how is it going to change elections?

The basic problem is that for the last three decades, including the eras of Maggie Thatcher and Tony Blair, Britain has been governed by parties that had received less than 43% of the popular vote. While they had a more or less solid majority in parliament, they did not have a majority of the people behind them. The current coalition government is an exception. In the 1950s, over 90% of voters voted for one of the two big parties; in the last couple of elections, only about 70% did. In consequence, governments lacked legitimacy.

An obvious solution to this problem would be to shift to some form of proportional representation. Yet, this would radically alter the power structures in the country (see May 8, 2010), and the vested interests of those in power in the country (not just the political parties) make such a radical change politically infeasible.

The proposed AV system is simulating a run-off election: The votes for the least successful candidate are redistributed to the candidate with most votes until one candidate achieved at least 50% of the votes. Hence, any MP would have support by at least 50% of the voters - even if this is only a second-best sort of support. Situations of candidates representing a constituency with less than a third of the votes could not happen. In areas of Britain with strong regional parties, notably Scotland and Wales, such situations are quite common. In London, the MP from Hampstead was elected with 32.8% of the votes - so two third of voters were against their representative...

What are the consequences of the AV system? I believe the main changes are in the dynamics on the local level.

As candidates in most constituencies need at least some 'second preference' votes, they need to be careful not to alienate supporters of other candidates. In the simple majority system in place now, it is OK if half of the voters hate you as long as you have a strong group of core supporters and the others don't all vote for the same other person. Under AV, a polarizing candidate is likely to get few second preferences. Consequently, parties are less likely to put forward candidates with radical views supported by their core supporters but few others.
Incumbent MPs always have an advantage because they are already known to voters, while challengers typically have yet to build their reputation. When an incumbent looses support, under the simple majority system there are two scenarios. Either multiple challengers end up competing with each other, making it easy for the incumbent to be re-elected. Or, the locally largest party puts forward a candidate, who then received votes 'against the incumbent' rather than because voters consider him/her as the best candidate. Under AV, voters are not limited by the decision of the locally-largest party as to who shall be the challenger. They can rank multiple challengers on top. In consequence, it will be easier to vote an incumbent out of office! And that's probably why so many sitting MPs are opposed to AV.
Under simple majority, it suffices if the vote for others is divided, or opponent voters don't show up at the election. Under AV, having two equally strong candidates from the centre left does not help the right wing candidate, nor do two equally strong centre right candidates de fact help the left wing candidate. Hence, there will be more competition as to who will represent the 'centre left' or 'centre right' sort of position - and voters have more choice.
In the so-called safe constituencies, where the winning candidate won last time with more than 50% of votes, nothing much will change (there are surprisingly many of those, including 32 of 73 constituencies in London). As before, hardly any serious campaigning will take place and voters will be taken for granted. However, seats may marginally get 'less safe', which is good for voters in the sense that they receive more attention from Westminster.
Under simple majority, many voters vote tactically not for the candidate who they like most, but vote for the candidate who is the 'least bad option' of those two (rarely three) who has a realistic chance given results at the last election. Under AV, they can record their true preference with their first preference, and still ensure that their 'least-bad-option' gets ahead of the candidate they really don't like. This means voters can communicate a much more differentiated opinion to their politicians than under the simplistic current system.

In conclusion, I do not expect AV to change the majorities in parliament. Yet, it will change what sort of individuals will be representing the parties. And, it will make it easier to throw out sitting MPs. These dynamics of course threaten the interests of some of those currently in power. As with any proposed form of electoral rules, those who benefited from the old system are opposed to it. The question is whether the British people want the preserve those power structures, or give voters more options to trigger change.