Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry

This article studies how product introduction decisions relate to profitability and uncertainty in the context of multi-product firms and product differentiation. These two features, common to many modern industries, have not received much attention in the literature as compared to the classical problem of firm entry, even if the determinants of firm and product entry are quite different. The theoretical predictions about the sign of the impact of uncertainty on product entry are not conclusive. Therefore, an econometric model relating firms’ product introduction decisions with profitability and profit uncertainty is proposed. Firm’s estimated profits are obtained from a structural model of product demand and supply, and uncertainty is proxied by profits’ variance. The empirical analysis is carried out using data on the Spanish car industry for the period 1990-2000. The results show a positive relationship between product introduction and profitability, and a negative one with respect to profit variability. Interestingly, the degree of uncertainty appears to be a driving force of entry stronger than profitability, suggesting that the product proliferation process in the Spanish car market may have been mainly a consequence of lower uncertainty rather than the result of having a more profitable market

Regional Determinants of Firm Entry in a Developing Country

Regional policies aiming to attract new firms are largely based on evidence that originates from Europe, the USA and Japan. This may raise doubts about the usefulness of such policies when applied to developing economies. This paper addresses this issue by providing estimates of the determinants of firm entry in the Argentinean provinces. We find that most of the determinants used in previous studies analysing developed countries are still relevant. However, there is a need for additional explanatory variables that reflect the specificities of developing economies. Key words: firm entry, regional economics, Argentina. JEL: R12; R30; C33

Measuring sustained superior performance at the firm level

This paper proposes a two-dimensional Strategic Performance Measure (SPM) to evaluate the achievement of sustained superior performance. This proposal builds primarily on the fact that, under the strategic management perspective, a firm's prevalent objective is the pursuit of sustained superior performance. Three basicconceptual dimensions stem from this objective: relativity, sign dependence, and dynamism. These are the foundations of the SPM, which carries out a separate evaluation of the attained superior performance and of its sustainability over time. In contrast to existing measures of performance, the SPM provides: (i) a dynamic approach by considering the progress or regress in performance over time, and (ii) a cardinal measurement of performance differences and its changes over time. The paper also proposes an axiomatic framework that ameasure of strategic performance should comply with to be theoretically and managerially sound. Finally, anempirical illustration of the Spanish banking sector during 1987-1999 is herein provided by discussing some relevant case

Relationships and knowledge in the firm internationalization process

Based on the variables relationship and knowledge, this article aimed at analyzing how a multinational enterprise selects an entry mode to operate in a particular international market and how this initial choice evolves over time. We devised a rather new theoretical framework to address it by combining three theoretical approaches that have dealt with the firm internationalization: the Uppsala model, the relational approach, and the subsidiary development literature. We constructed a qualitative backward-looking longitudinal case study of the internationalization process of a North-American multinational enterprise in the Brazilian market. Results show that four types of relationships and three types of knowledge played the role in the events that characterized the internationalization of this firm. Based on these results, five new hypotheses concerning the interplay between relationships and knowledge in the internationalization process of the firm are suggested for future empirical tests.

Entrepreneur's Overconfidence, Private Benefits and the Market Performance of the Firm

Many firms around the world are managed and partially owned by entrepreneurs. These entrepreneurs hold under diversified portfolios and, therefore, bear idiosyncratic risk in addition to systematic risk. To compensate the additional risk borne, they extract private benefits. In this paper, we analyse how an entrepreneur's overconfidence affects the market performance of the firm, through the channel of private benefits. We show that two dimensions of overconfidence, namely overestimation of future cash-flows and underestimation of idiosyncratic risk (called miscalibration), have opposite effects on the private benefits extracted by the entrepreneur. As a consequence, firms managed and partially owned by overconfident entrepreneurs can deliver overperformance or underperformance, depending on the prevalence of overestimation or miscalibration of the beliefs of the entrepreneur.

Determinants of Decentralization within the Firm: Some Empirical Evidence from Spanish Small and Medium- Sized Enterprise

This paper examines empirically the determinants of decentralization of decision- making in the firm for small and medium-sized enterprises (SMEs) that tend to be highly centralized. By decentralization of decisions we mean the delegation of decision rights from the owner or manager to the plant supervisor or even to floor workers. Our findings show that the allocation of authority to basic workers or a team of workers depends on firm characteristics such as firm size, the use of internal networks or the number of workplaces, and workers characteristics, in particular, the composition of the laborforce in terms of education and seniority and whether or not workers receive pay incentives. External factors such as the intensity of competition and the firm s export intensity are also important determinants of the allocation of authority.

Innovation and firm growth: Does firm age play a role?

This paper explores the relationship between firm growth, innovation and firm age. We hypothesize that young firms undertake riskier innovation activities and are more oriented towards employment growth than towards harvesting returns in the form of sales growth. Using an extensive sample of Community Innovation Survey for the period 2004-2010, we apply quantile regressions and a Heckman sample selection technique to study the impact of R&D activities on firm growth according to firm age. Our results show that R&D intensity is positively associated with firm growth. However, for young firms R&D shows an increasing influence across the quantiles, while for old firms R&D shows a stable or perhaps decreasing effect over the quantiles. Firm age shows a significant negative impact among young firms, while for the sample of old firms the impact of firm age becomes non-significant. Our Heckman estimations show the evolution of the impact of the R&D on firm growth confirming a significant impact on sales and productivity growth, while the impact is negligible for employment growth. Keywords: firm age, firm growth, innovation, quantile regression. JEL CODES: L25, L20

Multimarket contact externalities: the effect of rival's multimarket contacts on focal firm performance

Given that firms develop their activities in a network of multiple players, interfirm rivalry is not only a matter of direct competitors, but also of indirect competition. In spite of this, the literature on competitive dynamics tends to focus on analyzing rivalry as an exclusive function of the competitive relationship between a focal firm and its direct rivals. In this article, we extend competitive dynamics literature by considering how focal firms are affected by the relationships of their rivals with third-party firms. Specifically, we study the effect that the multimarket contacts of rivals produces on the performance of the focal firm. Additionally, we incorporate the idea that there are different strategic options for operating in an industry that affect the intensity of multimarket contact externalities. Our results show that multimarket contact among firms causes externalities that indirectly affect firms that are not directly involved in this competitive relationship. We find that multimarket contact externalities differ between and within strategic groups.

Firm-Specific Investment, Sticky Prices, and the Taylor Principle

According to the Taylor principle a central bank should adjust the nominal interest rate by more than one-for-one in response to changes in current inflation. Most of the existing literature supports the view that by following this simple recommendation a central bank can avoid being a source of unnecessary fluctuations in economic activity. The present paper shows that this conclusion is not robust with respect to the modelling of capital accumulation. We use our insights to discuss the desirability of alternative interest rate rules. Our results suggest a reinterpretation of monetary policy under Volcker and Greenspan: The empirically plausible characterization of monetary policy can explain the stabilization of macroeconomic outcomes observed in the early eighties for the US economy. The Taylor principle in itself cannot.

Downsizing, Job Insecurity, and Firm Reputation

This paper studies how firms make layoff decisions in the presence of adverse shocks. In this uncertain environment, workers' expectations about their job security affect their on-the-job performance. This productivity effect on job insecurity forces firms to strike a balance between laying off redundant workers and maintaining survivors' commitment when deciding on the amount and timing of downsizing. This framework offers an explanation of conservative employment practices (such as zero or reduced layoffs) based on firms having private information about their future profits. High retention rates and wages can signal that the firm has a bright future, boosting workers' confidence. Moreover, the model provides clear predictions about when waves of downsizing will occur as opposed to one-time massive cuts.

On the distribution of income and worker assignment under intra-firm spillovers, with an application to ideas and networks

We study the earnings structure and the equilibrium assignment of workers when workers exert intra-firm spillovers on each other.We allow for arbitrary spillovers provided output depends on some aggregate index of workers' skill. Despite the possibility of increasing returns to skills, equilibrium typically exists. We show that equilibrium will typically be segregated; that the skill space can be partitioned into a set of segments and any firm hires from only one segment. Next, we apply the model to analyze the effect of information technology on segmentation and the distribution of income. There are two types of human capital, productivity and creativity, i.e. the ability to produce ideas that may be duplicated over a network. Under plausible assumptions, inequality rises and then falls when network size increases, and the poorest workers cannot lose. We also analyze the impact of an improvement in worker quality and of an increased international mobility of ideas.

Intellectual property rights and efficient firm organization

I show that intellectual property rights yield static efficiency gains, irrespective oftheir dynamic role in fostering innovation. I develop a property-rights model of firmorganization with two dimensions of non-contractible investment. In equilibrium, thefirst best is attained if and only if ownership of tangible and intangible assets is equallyprotected. If IP rights are weaker, firm structure is distorted and efficiency declines:the entrepreneur must either integrate her suppliers, which prompts a decline in theirinvestment; or else risk their defection, which entails a waste of her human capital. Mymodel predicts greater prevalence of vertical integration where IP rights are weaker,and a switch from integration to outsourcing over the product cycle. Both empiricalpredictions are consistent with evidence on multinational companies. As a normativeimplication, I find that IP rights should be strong but narrowly defined, to protect abusiness without holding up its potential spin-offs.