Business/Management

Are Patents Slowing the Productivity of Some Firms?

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According to Noah Smith, a 2015 OECD report “looked at productivity not at the global or national level, but at the corporate level. Different companies have different technologies, different management systems and different levels of talent…At a small number of companies, productivity growth hasn’t slowed at all. If you look at only these “global frontier” companies, there has been no productivity slowdown at all! This is especially true in services industries…The top performers have blazed ahead, while other companies have stagnated or even become less productive.”

Smith offers a number of possibilities for this difference, but the most interesting one revolves around patents:

[I]ntellectual property law is making it harder for companies to use ideas developed at other companies. There has been an explosion in the number of patents granted in the U.S. since the early 1980s. In Japan the increase has been even more dramatic. Some of the fastest growth has been in patents for business methods — exactly the kind of thing that ought to diffuse across companies and equalize productivity. In earlier ages, businesses could freely copy each other’s way of doing things; now, it is often illegal. 

Some level of patent protection, of course, is necessary to encourage innovation. But many economists believe that we now give out far too many patents, often for innovations of questionable originality.[ref]Economist Alex Tabarrok has criticized the mismatch between patent law and patent theory.[/ref] This is something we would expect to increase the gap between the most productive companies and the rest. 

Whatever the reason for the divergence between companies, we need to find it and fix it if we can. The divergence could be affecting a lot more than productivity. A torrent of research in the past decade suggests that much of the increase in wage inequality in developed countries is due to differences in wages between different companies — work for a good company and you get better pay, work for a bad one and you’re out of luck. Fixing the productivity divergence might help us fight inequality as well. 

Interesting stuff.

What is the Cost of Corporate Short-Termism?

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Some claim that corporate “short-termism“–or what Hillary Clinton called “quarterly capitalism“–has negative effects on the economy. But is there any evidence for the claim? A new McKinsey report answers in the affirmative:

  • From 2001 to 2014, the revenue of long-term firms cumulatively grew on average 47 percent more than the revenue of other firms, and with less volatility. Cumulatively the earnings of long-term firms grew 36 percent more on average over this period than those of other firms, and their economic profit grew 81 percent more on average.
  • Long-term firms invested more than other firms from 2001 to 2014. Although they started this period with slightly lower research-and-development spending, cumulatively by 2014, long-term companies on average spent almost 50 percent more on R&D than other companies. More important, they continued to increase their R&D spending during the financial crisis, while other companies cut R&D expenditure; from 2007 to 2014, R&D spending for long-term companies grew at an annualized rate of 8.5 percent versus 3.7 percent for other companies.
  • Long-term companies exhibit stronger financial performance over time. On average, their market capitalization grew $7 billion more than that of other firms between 2001 and 2014. Their total return to shareholders was also superior, with a 50 percent greater likelihood that they would be in the top decile or top quartile by 2014. Although long-term firms took bigger hits to their market capitalization during the financial crisis than other firms, their share prices recovered more quickly after the crisis.
  • Long-term firms added nearly 12,000 more jobs on average than other firms from 2001 to 2015. Had all firms created as many jobs as the long-term firms, the US economy would have added more than five million additional jobs over this period. On the basis of this potential job creation, this suggests, on a preliminary basis, that the potential value unlocked by companies taking a longer-term approach was worth more than $1 trillion in forgone US GDP over the last decade; if these trends continue, it could be worth nearly $3 trillion through 2025.

2001-2015 performance of long-term and short-term companies on earnings, revenue, and market cap

The report concludes that “the potential value that could have been unlocked had all US publicly listed companies taken a long-term orientation exceeded $1 trillion over the past ten years” (pg. 7).

How do the researchers determine that a company is “long-term”? Their Corporate Horizon Index consists of five financial indicators:

In a Harvard Business Review article, the researchers explain,

After running the numbers on these indicators, two broad groups emerged among those 615 large and midcap U.S. publicly listed companies: a “long-term” group of 164 companies (about 27% of the sample), which were either long-term relative to their industry peers over the entire sample or clearly became more long-term between the first half of the sample period and the second half, and a baseline group of the 451 remaining companies (about 73% of the sample). The performance gap that subsequently opened between these two groups of companies offers the most compelling evidence to date of the relative cost of short-termism — and the real payoff that arises from managing for the long term.

…While we can’t directly measure the cost of short-termism, our analysis gives an indication of just how large the value of what’s being left on the table might be. As noted earlier, if all public U.S. companies had created jobs at the scale of the long-term-focused organizations in our sample, the country would have generated at least five million more jobs from 2001 and 2015 — and an additional $1 trillion in GDP growth (equivalent to an average of 0.8 percentage points of GDP growth per year). Projecting forward, if nothing changes to close the gap between the long-term group and the others, then the U.S. economy could be giving up another $3 trillion in foregone GDP and job growth by 2025. Clearly, addressing persistent short-termism should be an urgent issue not just for investors and boards but also for policy makers.

How we manage matters.

Mastering Civility: Lecture by Christine Porath

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This is part of the DR Book Collection.

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When it comes to management research, Stanford’s Robert Sutton is someone I often look to. I follow his blog (which has unfortunately been dormant for some time) and take his book recommendations seriously. A year or so ago, I read his The No Asshole Rule. The main idea is that bullies and other toxic people–you know, assholes–negatively affects worker morale and productivity. I’ve written about his follow-up book Good Boss, Bad Boss here at Difficult Run. Needless to say, I like Sutton’s work. So when I read his Amazon review of Mastering Civility: A Manifesto for the Workplace by Georgetown’s Christine Porath, I knew I had to check it out. Sutton writes,

In the name of full disclosure, I read an advance version of this book and wrote an endorsement. That said, because I wrote a related book on “”jerks” a decade ago, I’ve since read many books on workplace jerks and what to do about them, and related matters, over the years– and I’ve endorsed a lot of them too. Mastering Civility is the best of the bunch. It is the most useful, most evidence-based, and the writing is delightful– Porath’s voice is strong and engaging. The blend of stories and studies and advice you can use right away are pitch perfect. If you like books by Adam Grant or Robert Cialdini, you will like this as Porath is one of those rare top-notch researchers who is devoted to making people’s lives better, and making our organizations more effective too. She also presents one of the most compelling arguments against treating others in rude and disrespectful ways that I’ve ever read. It’s a gem.

Porath’s survey of the research finds that rudeness and incivility can decrease creativity, disrupt attention, and increase errors. However, leaders and co-workers that practice civility a viewed more favorably by others, have more engaged employees, boost creativity and performance, help create a reciprocal, civil organizational culture, and improve decision-making. All those who work–which is pretty much everyone–should take note.

You can see a lecture by Porath below.

AEA Meeting: Minimum Wage Research

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The New York Times has a recent article discussing new research on the minimum wage presented at the annual meeting of the American Economic Association:

Image result for minimum wageJohn Horton of New York University conducted an experiment on an online platform where employers post discrete jobs — including customer service support, data entry, and graphic design — and workers submit a proposed hourly wage for completing them.

…At first glance, the findings were consistent with the growing body of work on the minimum wage: While the workers saw their wages rise, there was little decline in hiring. But other results suggested that the minimum wage was having large effects. Most important, the hours a given worker spent on a given job fell substantially for jobs that typically pay a low wage — say, answering customer emails.

Mr. Horton concluded that when forced to pay more in wages, many employers were hiring more productive workers, so that the overall amount they spent on each job changed far less than the minimum-wage increase would have suggested…When the minimum wage increased, employers tended to hire workers who had earned higher wages in the past, suggesting that they were looking for a more productive work force. 

If the pattern Mr. Horton identified were to apply across the economy, it would raise questions about whether increasing the minimum wage is as helpful to those near the bottom of the income spectrum as some proponents assume. The higher minimum wage could cost low-skilled workers their jobs, as employers rush to replace them with somewhat more skilled workers.

Another study found that when the minimum wage increases, employers may be put out of business. After identifying the ratings of thousands of restaurants in the San Francisco area, the researchers

found that many poorly rated restaurants tend to go out of business after a minimum-wage increase takes effect. By contrast, highly rated restaurants appear to be largely unaffected by minimum-wage increases, and over all, there is no substantial rise in restaurant closings after a minimum-wage increase. 

The results are broadly consistent with a 2013 study…showing that a sizable minimum-wage increase in New Jersey resulted in many lost jobs as numerous businesses closed, but an almost offsetting number of new jobs as other businesses opened, which the authors argue were more productive. 

Just add this to the growing evidence of adverse effects of the minimum wage.

Why We Work: TED Talk by Barry Schwartz

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This is part of the DR Book Collection.

Image result for why we workAs some of my past writing should indicate, the concept of meaningful work is a major area of interest for me. What management researchers have found is the prevalence of both intrinsic and prosocial motivation when it comes to constructing meaning at work. As Wharton professor Adam Grant explains, “[P]sychologists have demonstrated that prosocial and intrinsic motivations involve different reasons for expending effort. For intrinsically motivated individuals, effort is based on interest and enjoyment; for prosocially motivated individuals, effort is based on a desire to benefit others.”[ref]Adam M. Grant, “Does Intrinsic Motivation Fuel the Prosocial Fire? Motivational Synergy in Predicting Persistence, Performance, and Productivity,” Journal of Applied Psychology 93:1 (2008): 49.[/ref] Psychologist Barry Schwartz highlights this kind of research in his short TED book Why We Work. For example, Schwartz explores the impact of “job crafting” and viewing one’s job as a “calling”:

It is people who see their work as a “calling” who find it most satisfying. For them, work is one of the most important parts of life, they are pleased to be doing it, it is a vital part of their identity, they believe their work makes the world a better place, and they would encourage their friends and children to do this kind of work. People whose work is a calling get great satisfaction from what they do (pg. 17).

This outlook is not necessarily brought about by the job description provided by the company, but often through aligning one’s values and job performance with the ultimate purpose (the Aristotelian telos) of the organization. It is especially motivating to be in contact with those who are positively affected by your work. While I at times quibbled with his economic reasoning (or the absence thereof), I was pleased to see Schwartz acknowledge the “positive-sum structure” of market transactions in which everyone benefits:

What this market logic means is that virtually every job that people do can be seen as improving the lives of customers, even if only in small ways. And what that means is that virtually every job that people do can be made meaningful by focusing on the way sin which it improves the lives of customers, as long as it’d done right and done well (pg. 30).

For those unfamiliar with the research behind meaningful work, this book can serve has a nice introduction. You can see Schwartz’s TED talk below.

Is Entrepreneurship Predetermined?

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How much is entrepreneurship predetermined by family background? According to a new study,

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Parent Role-Modelling

recent papers have collectively suggested that entrepreneurship might be more predetermined than previously thought – entrepreneurship education has been proven to be effective in primary school (Huber et al 2014) and, to a lesser extent, in secondary school (Elert et al 2015), but not at all when individuals are older, that is, students (Oosterbeek et al 2010) or adults (Fairlie et al 2015). Moreover, strong intergenerational associations in entrepreneurship have attracted considerable attention. While part of this relationship has been shown to be genetic (Nicolaou et al 2008), parental role-modelling appears to be the main driver of the intergenerational association in entrepreneurship (Lindquist et al. 2015). Additionally, exposure to a dense entrepreneurial environment during formative years also increases the likelihood of entry into entrepreneurship (Guiso et al. 2015).

So the policy-relevant questions arise: To what extent is entrepreneurship predetermined? Have we spent (public) funds wisely by implementing policy measures and education aimed at changing the behaviour of adult people?

In a recent paper, we assess the predetermination of entrepreneurship outcomes by calculating and analysing sibling correlations (Lindquist et al 2016). We argue that sibling correlations are more complete and precise measures of predetermination, including the importance of genes, family background, and neighbourhood effects as determinants of entrepreneurship. Sibling correlations have been used before to study outcomes other than entrepreneurship and provide much broader measures of the importance of family background and neighbourhood effects than intergenerational associations (Solon 1999). Their interpretation is also straightforward – the higher the sibling correlation, the larger the importance of family background.

Their results?:

  • 25% of the variance in individuals’ decisions to become self-employed is explained by family background and community influences;
  • For incorporation, this is close to 35%;
  • These percentages are slightly higher when we consider measures of successful entrepreneurship such as above median years of self-employment and incorporation;
  • Brother correlations are always larger than sister correlations;
  • The largest correlation is for males with above median years of incorporation, which is close to 50%;
  • Mixed sibling correlations are consistently smaller than same-sex correlations.
  • Parental entrepreneurship status is quite important;
  • Parental education and income matter much less; and,
  • Family structure and immigrant status do not matter.
  • Parental self-employment is a prime explanatory force in individual self-employment, but not incorporation; and
  • Parental incorporation explains individual incorporation best, but not self-employment.
  • Between 56–78% of the sibling correlations in self-employment; and
  • Between 38–46% of the sibling correlations in incorporation.

The researchers conclude “that parental entrepreneurship and genes are the two most important factors generating sibling similarities in entrepreneurship.” Policy wise, the authors explain that “children appear to be able to learn about entrepreneurship through their family and community environment, which implies that it may be possible to teach entrepreneurship to young people.”

Check it out.

Density and Productivity

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Image result for you are my density

A new study finds evidence that denser populations are more productive:

Is it selection, or the sorting of talents (Behrens et al. 2014) that leads only the most productive firms to locate in denser areas? Or do agglomeration economies explain why firms located in less dense environments are less productive?  Empirical evidence suggests that the main driver of differences in productivity is not selection (i.e. tougher competition inducing less productive firms to exit the market) but agglomeration economies (Combes et al. 2012). The usual suspects are the higher availability of services, better infrastructure, sharing of public goods, a denser labour market allowing for better matching, and technology spillovers (Duranton and Puga 2004). Using firm-level data for France, we confirm in a recent study that misallocation has a spatial dimension: resource allocation and the associated effect on productivity are related not only to firms’ characteristics, but also to the environment in which they operate (Fontagné and Santoni 2016). Denser commuting zones seem to offer a better match between employers and employees.

It’s a bit technical, but interesting nonetheless. Check it out.

Management Quality Matters

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Building on the work of Stanford economist Nicholas Bloom and the World Management Survey, new research suggests that management quality matters for firm adaptability to adverse competitive shocks. The researchers explain,

Studying the way that corporations adjust to competitive shocks is difficult, and isolating the role of management even more so. New technology directly affects the productivity of firms, but it simultaneously transforms the competitive environment to which management needs to adapt. It is difficult to disentangle the role of external competitive forces from the direct effects of technological change. Policy shocks provide better opportunities to isolate the firm response because they do not directly emanate from an underlying process that is shaping the productivity of a firm. Recent research has therefore focused on policy shocks, such as a new trade agreement, unexpected exchange-rate shocks, or changes to the minimum wage.

Emerging markets might provide a better setting for a test of the relevance of management practice, because these markets have firms which differ more widely in their governance and management quality. Our recent research focuses on the productivity response of Chinese firms to external labour cost shocks (Hau et al. 2016). Many industries in China feature a large numbers of state-owned firms (SOEs), private Chinese firms, and foreign firms. Each have very different management practices…Chinese firms have undergone regular large labour cost shocks because of large revisions to the minimum wage set at the local level. In the seven-year period from 2002 to 2008 alone, there were more than 17,000 minimum wage increases in China’s 2,852 counties and cities…For firms with many workers at, or near, the minimum wage, these minimum wage increases often had a dramatic impact on average labour cost.

What were the firm responses to the 20% increase in the minimum wage?

The incremental productivity increase of SOEs [state-owned firms] was small and statistically insignificant (indicated by the vertical line representing a 95% confidence interval around the mean effect). Private firms show a statistically significant productivity response if their initial productivity is low, whereas foreign firms show by far the largest productivity increase in the year of the minimum wage increase. The point estimate of incremental TFP growth, just under 10%, is economically large and corresponds to almost a full year of trend growth. External competitive shocks therefore trigger large productivity improvements in some firms, but not in others. Ownership structure accounts for a large proportion of this variation.

Drawing on previous research, the authors draw up three dimensions to measure the quality of firm management:

  1. Monitoring practices: The collection and processing of production information;
  2. Target-setting practices: The ability to set coherent, binding, short-term and long-term targets; and
  3. Incentive practices: Merit-based pay, promotion, hiring, and firing.

Their findings indicate that larger firms–especially foreign-owned–are better managed, while state-owned were the least well managed. The graph below “illustrates that the positive productivity response to the labour cost shock tends to be, ceteris paribus, larger for firms with a higher predicted management quality.”

“The horizontal axis shows the triple interaction between the impact function IF(ws/wmin), the (log) minimum wage increase and the predicted management score (Mgmt_Score). To keep the figure simple, we plotted only those 29,998 firm-year observations for which the minimum wage increase was larger than 20%. For the same minimum wage exposure (or value of the impact function) and the same large minimum wage increase, a firm observation with a low predicted management score will tend to be on the left. Those with a high predicted management score will be to the right.”

The “evidence indicates better-managed firms adapt better to adverse competitive shocks, and suggests that management quality matters for this adaptability.” In other words, management matters.

The Drucker Lectures: Short Film of Peter Drucker

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This is part of the DR Book Collection.

Image result for the drucker lecturesThe late Peter Drucker (1909-2005) is one of the most influential management thinkers of all time as well as “the most cited management writer in the textbooks, exceeding that of Abraham Maslow, Max Weber, and Frank and Lillian Gilbreth…”[ref]Patricia G. McLaren, Albert J. Mills, Gabrielle Durepos, “Disseminating Drucker: Knowledge, Tropes and the North American Management Textbook,” Journal of Management History 15:4 (2009): 391.[/ref] His influence has been felt worldwide, particularly in Japan during the post-war boom.[ref]See also Chuck Ueno, “Peter Drucker’s Influence in Japan,” People and Strategy 32:4 (2009): 8-9. While the Clarke Professor of Social Sciences and Management at Claremont Graduate School, Drucker also lectured in Oriental Art at Pomona College and was appointed to the Board of the Asian Art Museum in San Francisco.[/ref] His outlook on management was that of a liberal art—“‘liberal’ because it deals with the fundamentals of knowledge, self-knowledge, wisdom, and leadership; ‘art’ because it is also concerned with practice and application.”[ref]Peter F. Drucker, The Essential Drucker (New York: HarperCollins, 2001), 13.[/ref] When Drucker was asked why he was turning his attention from corporate management to churches in his later years, he politely corrected them: “As far as I’m concerned, it’s the other way around. I became interested in management because of my interest in religion and institutions.” Drucker’s views on management, corporations, and the like were heavily influenced by his reading of Soren Kierkegaard. “Key to Kierkegaard’s philosophy (and to Drucker’s understanding of it) is the emphasis that Kierkegaard placed on living in the material realm.”[ref]Karen E. Linkletter, Joseph A. Maciariello, “Genealogy of a Social Ecologist,” Journal of Management History 15:4 (2009): 338.[/ref] Drucker’s search for existential purpose within the material realm of organizations can also be traced to his German intellectual and cultural background. Some researchers have viewed him as “a secularized German theologian” bucking against “‘the fall’ of modernity…”[ref]Madeline Toubiana, Gad Yair, “The Salvation of Meaning in Peter Drucker’s Oeuvre,” Journal of Management History 18:2 (2012): 179.[/ref] For many German scholars, “modernity meant an abandonment of tradition, coupled with a loss of meaning and faith…”[ref]Toubiana, Yair, 2012: 182.[/ref] Thus, Drucker believed that organizations and managers had “secularized theological duties; …moral duties in a world devoid of meaning[.]”[ref]Toubiana, Yair, 2012: 179.[/ref] In essence, work within an organization became a kind of worship; a way to tap into a higher purpose. As Drucker summarized,

Management always lives, works, and practices in and for an institution, which is a human community held together by the bond that, next to the tie of family, is the most powerful human bond: the work bond. And precisely because the object of management is a human community held together by the work bond for a common purpose, management always deals with the Nature of Man, and…with Good and Evil as well. I have learned more theology as a practicing management consultant than I did when I taught religion.[ref]Quoted in Linkletter, Maciariello, 2009: 339.[/ref]

It is because of insights like these that I recently read through The Drucker Lectures: Essential Lessons on Management, Society, and Economy. The book is not a series of formalized essays or selections from published works, but delivered lectures and remarks spanning from the 1940s to 2003 (Drucker passed away in 2005). You get a sense of the consistent themes of his work, even as his philosophy evolved.

You can catch of glimpse of this in the short film below.

Why Diversity Programs Fail

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Diversity training doesn’t work. At least that’s one takeaway from the write-up in The Washington Post on new research published in Harvard Business Review:

In the cover story of the latest issue of the Harvard Business Review, sociologists from Harvard University and Tel Aviv University explore the counterintuitive idea that some of the most common tools for improving diversity — one of which is mandatory training — are not just ineffective. They could be detrimental to improving the number of women and minorities in the managerial ranks.

Making people attend diversity training may seem to make sense, said one of the study’s co-authors, Alexandra Kalev, in an interview: “But it doesn’t work. For decades, diversity management programs flourished with no evidence whatsoever about their effects and their success.” 

The article is based on a series of research papers by Kalev and Harvard’s Frank Dobbin that studied nearly 830 U.S. companies. It describes how, five years after implementing compulsory diversity training for managers, companies actually saw declines in the numbers of some demographic groups — African American women and Asian American men and women — and no improvement among white women and other minorities.

Some of the findings have implications even outside of the workplace:

The authors point to a range of past social science studies that have shown that efforts to reduce prejudice can backfire — actually increasing bias or leading to more hostility rather than less. In another past study, white subjects who felt forced to agree with a document about bias toward blacks felt more prejudice; those who felt they could choose felt less. The pair also say that when diversity training is just focused on a certain group — like managers or one where there’s been a bias problem — it can also have worse results…The researchers also found that other tactics often aimed at helping with diversity, such as skill tests to help prevent bias in the hiring process or grievance systems where employees can log complaints, also led to declines in the number of women and minorities in the companies’ workforces over time. Managers don’t like being told who they want to hire, so they often distribute tests selectively, Kalev said, while grievance systems can make managers feel threatened and retaliate.

Is there any hope? Yes:

Kalev said their research has shown that training programs that focus on multiculturalism and the business case for diversity — rather than the legalistic reasons behind why it’s being offered — have a less negative impact. Still, she says, “even the most fascinating diversity training will be way more efficient if the crowd is sitting there voluntarily.” 

Indeed, that’s one of the tactics their research found actually lead to more diversity among managers. Voluntary programs that let people choose whether to attend might seem futile — most people don’t think they’re biased, so might not attend — but engagement, rather than coercion, led to growth among several minority groups in Kalev’s research. Diversity managers told she and Dobbin that 80 percent of people typically do attend, even when programs are voluntary. And strong representation from leaders can be one way to help encourage people to show up.

Food-for-thought.