Inside Firms Research Articles

Health product innovation and circular economy: A case study of inter-organisational cooperation in the development of a new firm

Technological renewal is increasingly complex and costly, which makes it difficult for new firms to be able to develop their innovation activities in isolation. Many of the product innovation requirements are not completely available inside firms, and so they need to form cooperative relationships with other organisations to make up for the shortages in resources and capacity. Through analysis of a case study, the aim is to understand the inter-organisational cooperation relationships established by one firm in the use, as a raw material, from another firm's activity waste – coffee dregs. This type of innovative cooperation also involved simultaneously a university and an innovation research centre in the development of a new product in the health field. It provides an example of circular economy in the context of an innovative firm's initial development, something that could inspire academics and business-people who focus their work on sustainability, innovation and inter-organisational cooperation topics, where the diversity of relationships has not yet been studied in the consulted literature. Several semi-structured interviews were carried out with representatives of the focal company and other cooperating organisations, in addition to secondary data collected from each one. From content analysis method, the results show mutual advantages, locally and nationally, in establishing cooperative relationships to develop an innovative product based on sustainability principles. Still based on the case study, six major topics were identified: (1) sustainability; (2) planning the firm's activity in the medium and long-term; (3) product innovation; (4) university-firm relationship; (5) protecting industrial property, and (6) community benefits resulting from the cooperation. Based on these topics, an innovative model is proposed, as well as presenting the contributions of this pioneering study to theory and practice. Future lines of research are indicated to guide possible empirical studies to carry out a posteriori.

Access to Financing and Racial Pay Gap Inside Firms

Access to Financing and Racial Pay Gap Inside Firms

Managerial Accounting for Decision-Making and Planning

Managerial Accounting for Decision-Making and Planning

Exporting inequality: US investors and the Americanization of executive pay in the United Kingdom

Existing studies of the political determinants of top incomes and inequality tend to focus on developments within individual countries, neglecting the role of interdependencies that transcend national borders. This article argues that the sharp rises in top incomes observed in recent years are in part a product of specific features originating in the US political economy, which were subsequently exported to other economies through the global expansion of US-based financial investors. To test the argument, we collect fine-grained micro-level data on executive pay and firm ownership structures for a comprehensive sample of publicly listed firms in the United Kingdom (UK). Our analyses uncover robust evidence that the Americanization of UK firm ownership leads to the financialization of remuneration practices and sizeable pay increases for high-level managers at those firms. Scrutinizing the causal mechanisms underlying this effect, we find them to be more consistent with changes in bargaining power inside firms rather than coercion from outside or exogenous shifts in labor markets for executives. The findings show the disruptive potential of Wall Street investments abroad to empower local managerial elites to capture greater rents and, more generally, demonstrate the need to take the transnational seriously in order to understand patterns of inequality in the global political economy.

Differential performance impacts of outsider and insider interim CEO successions

ABSTRACT This study finds differential performance impacts of outsider and insider interim CEO successions. Stock markets react incrementally positively to interim CEO successions when the interim CEOs are from outside rather than inside firms. Relative to insider interim CEOs, outsider interim CEOs produce worse earnings performance and greater restructuring charges during their services but lead more frequently to outsider permanent CEO appointments followed by better long-term earnings performance. Our findings suggest that market reactions to interim CEO successions rationally impound the investors’ expectation that outsider relative to insider interim CEO successions will generate greater short-term disruption but pave the way for greater long-term performance improvement.

Economic Growth in Times of Pandemics

Traditional economic growth theories considered capital and labor as essential growth factors for every economy. Exogenous growth theory is centered on exogenous shocks – like new technology innovations or natural crises, such as pandemics – as major drivers or downturns of economic growth measured in capital and labor impact. Endogenous growth theory then drew attention to dynamic variable interactions between capital and labor but also endogenous growth derived from ideas, innovation and learning. Growth concepts were opened up for innovation generated in productive group interaction and learning inside firms in teams, learning-by-doing while performing tasks and learning-by-using of new technology. The outbreak of the novel Coronavirus (COVID-19) heightened attention for hygiene and healthcare. According to exogenous growth theory, the health risk exposure to the exogenous shock of COVID-19 differs between employees, firms, industries, environments and countries. Health of labor capital but also a risk-free working culture, environment, industry and country will flourish growth in a COVID-19-struck economy. In endogenous growth theory terms, team hygiene and group monitoring of the collective health status but also learning-to-preventing holds future economic growth potential. Applications of the presented COVID-19 adjusted growth models will be discussed with attention to inequality of growth in the digital age. Future research directions are envisioned.

The Politicization of Corporate Governance - A Viable Alternative?

It is now well-established that different markets may develop different growth-supporting institutions that can give rise to public firms and set capital markets in motion. Yet, the paradigm view still holds local alternatives as merely stepping-stones, a transitional passage toward achieving a deeper and more advanced market, at which point conventional legal and market institutions — modeled on Anglo-American corporate capitalism — are still held necessary. Four decades of economic development in China challenge these conventions. With modern firms with global prominence and a capital market that is the second largest in the world, corporate governance in China seems to have passed the point of an “adjust or perish” prognostic. The system that governs these Chinese firms, and the ways in which capital markets function, sustain strong governance attributes that go against many fundamentals in economics and legal thought. Political involvement and state ownership, both assumed to stand in the way of capital market growth, remain prevalent while the market continues to advance. Most strikingly, harmonization with conventional corporate governance has been pushed aside as the Chinese Communist Party decided to exercise an ever more expansive and direct role in market activity. Public firms in present-day China are increasingly being governed by a “politicized corporate governance.” Political institutions with corporate governance capacities have been deployed both inside and outside firms. These institutions now buttress or even replace weaker traditional corporate governance mechanisms in the Chinese market. The implications are striking. First, despite justified reasons for alarm, a politicized corporate governance system in China can perform the main functions of corporate governance elsewhere, thereby offering relative benefits for public firms and their stockholders. Second, these developments show how path-dependent institutional substitutes, here political institutions, reject convergence predictions yet have enough plasticity to evolve and to support modern firms and prosperous markets beyond assumed thresholds and developmental milestones. In so doing, China’s politicized corporate governance casts doubts on law and development conventions as well as on both sides of a long-standing convergence debate. Finally, the politicization of corporate governance offers a new direction in comparative corporate governance scholarship, providing evidence of an instituted reversal from outwardly conventional corporate governance toward a new form of a planned economy.

Incumbents in the Transition Towards the Bioeconomy: The Role of Dynamic Capabilities and Innovation Strategies

This study explored incumbents’ roles in the transition towards the bioeconomy by examining what goes on inside firms, what strategies they practiced, and how these affected the way incumbents engaged in the transition, as well as their ability to innovate. The study focused on the Norwegian meat-processing sector, investigating how dynamic capabilities affected incumbent firms in the transition process, and the management strategies adopted in response to external pressures (local and global) and to innovation opportunities. The analytical approach builds on two theoretical pillars: Multi-level perspective and dynamic capabilities. The findings showed that the incumbent exercised different modes of behavior—first-into-niche and follow-into-niche—in response to innovation pathways during the transition, mobilizing various dynamic capabilities—learning, financing, and organizational restructuring. The study sheds light on the underlying business dynamics of incumbent firms within a given regime and on intra-regime dynamics concerning innovation opportunities, and notes the proactive roles of incumbents in the sustainability transition.

The Who, Where, What, How and When of Market Entry

AbstractThis introductory, along with the eight articles contained within this Special Issue, highlights and brings greater clarity to entrant‐incumbent interactions and to firm movement – when entrants traverse market territories for the creation and/or delivery of offerings, where ‘markets’ include service or product categories, technology or resource spaces, industries, sectors and/or geographies. Collectively, this Special Issues explains that firm movement across market boundaries is highly consequential, influencing resource‐capability mixes inside firms, interfirm relations, market logic and industry value chains, and of course, people, communities and even nations. Specifically, we develop a field‐wide perspective of market entry by expanding on the framework of market entry that Zachary and his colleagues developed (Zachary et al., 2015) – i.e., the who (players such as incumbents, entrants, suppliers, etc.), when (the timing and sequence of entry), how (the strategy, resources, capabilities, etc.), where (the space of entry) and what (product, service, business model, etc.) – to include two additional categories: complements (networks, platforms, ecosystems) and non‐market elements (government, political, social and cultural arrangements). We also summarize the eight highly diverse and insightful articles that make this Special Issue, and conclude with a discussion to highlight foundational questions that point to new directions in future research in this field. In sum, we hope to inspire scholars to go beyond counting outcomes (e.g., entry/exit rates, or profiling successful versus unsuccessful entrants), to consider contexts, processes and contingencies (e.g., cost, time, collaboration, competition, interfirm relations, etc.) and to discover boundary conditions that inform a theory of market entry.

Regional Integration, Multinational Enterprise Strategy and the Impact of Country‐level Risk: The Case of the EMU

AbstractThe European Monetary Union (EMU) provides a new macro‐level, institutional setting for multinational enterprises (MNEs). The authors investigate the impact of regional integration on MNE strategy by analysing Belgian firms’ entry‐mode choices in foreign markets, both EMU and non‐EMU ones, with a focus on what impact remains of country‐level risk. They demonstrate that regional integration has altered the impact of country‐level institutional risk on MNE entry‐mode choices inside the EMU. The conventional predictions of international business theory have been reversed, with higher country‐level risk inside the EMU driving a preference for wholly owned subsidiaries. Within the integrated region, insider firms now view higher country‐level risk as the equivalent of higher, micro‐level contracting risk. Such risk can best be mitigated through full internalization, combined with arm's length contracts, rather than through equity joint ventures.

Introduction to the thematic file

This chapter aims at a better understanding of the dynamics leading firms to create Networks of practice (NoP) to transfer knowledge and know-how between its geographically dispersed business units. In this introduction we focus on the complementarity between communities of practice (CoP) and networks of practice (NoP) inside firms to share knowledge and consolidate organizational learning. We show that informal settings where people interact around their practices, such as CoP facilitate and consolidate knowledge sharing inside firms and enable them to create a larger network. After a literature review on CoP and NoP, the chapter will highlight the role of CoP and boundaries processes (brokers, boundary objects) in the development of NoP.

Libertarianism, Information, and Unions

This article presents a normative epistemological argument for unions, developed from libertarian premises. According to Friedman, the state should set up rules for the market, whereas managers should focus on profits. On this view, business ethics can be handled by regulations, but Hayek’s theory of the market indicates that this position is problematic, since it relies on the state being able to collect the relevant ethical information. Hayek argued that a market system is more efficient than planned economies, since it handles information more efficiently. However, there is also reason to doubt that markets can provide the needed information. The price mechanism carries information solely about preferences, but ethics also concerns rights, voluntariness and needs. Moreover, Coase showed that inside firms there are no Hayekian price mechanisms. Firms are characterized by hierarchy, which means that both employers and employees may have incentives to not be forthcoming with information relevant information. The moral epistemology of Anderson, with an important role for civil society, is used to identify solutions to these informational problems. As a part of civil society, unions complement the market as a source of ethical information, and inside the firm they balance power and provide an avenue for voice.

Open-System Orchestration as a Relational Source of Sensing Capabilities: Evidence from a Venture Association

Research on innovation networks has highlighted the pivotal role that actors with more prominence and power, such as hub firms, may play in orchestrating the activities of other network members along a collective innovation effort. Our study examined the undertheorized, but no less important, type of orchestration that characterizes other organizations, such as business incubators and venture associations, who seek to support the dispersed entrepreneurial efforts of network members. We refer to this type as ‘open-system’ orchestration, as opposed to the commonly studied ‘closed-system’ type performed by hub firms. Our findings reveal how the processes of open-system orchestration differ markedly from those of closed-system orchestration, and detail how these processes influence the micro-foundations of network members’ sensing capabilities. By doing so, we also offer empirical substantiation and theoretical elaboration to the idea that dynamic capabilities might not reside exclusively inside firms, but could be co-created relationally with other parties in the business ecosystem.

Ethnic diversity and business performance: Which firms? Which cities?

A growing literature examines how ethnic diversity influences economic outcomes in cities and inside firms. However, firm–city interactions remain more or less unexplored. Ethnic diversity may help firm performance by introducing a wider range of ideas, improving scrutiny or improving international market access. Urban locations may amplify in-firm processes via agglomeration economies, externalities from urban demography or both. These firm–city effects may be more beneficial for knowledge-intensive firms, and for young firms with a greater dependence on their environment. However, firm–city interactions could be negative for cost and competition-sensitive younger firms, or for firms operating in poorer, segregated urban markets. I deploy English cross-sectional data to explore these issues within firms’ ‘top teams’, using latent class analysis to tackle firm-level heterogeneity. I find positive diversity–performance links for larger, knowledge-intensive firms, and positive firm–city interactions both for larger, knowledge-intensive firms in London and for younger, smaller firms in second-tier metros.

Risk Management Failures

We present a model in which financial firms are engaged in preemptive competition for trading opportunities and the cost of risk management increases with time pressure. Because time pressure is in turn endogenous to risk management choices, strategic complementarities can trigger a race to the bottom: firms’ decisions to abandon risk management, while individually rational, are collectively inefficient. Market immediacy and trading volume are inversely related to the efficiency of risk allocation. Externalities operate through opportunity costs and agency costs, and support regulations that view risk management as both a governance problem (inside firms) and a coordination problem (among firms).

Public Support for Innovation in Russian Firms: Looking for Improvements in Corporate Performance Quality

This research focuses on the efficiency of Russia’s policy to foster innovation. We conduct an empirical analysis of how policy instruments impact firms’ behavior. The analytical data are obtained from a survey of more than 650 Russian industrial firms in 2012. The analysis shows that state support for innovation clearly targets successful companies and does not target laggard or insider (i.e., partially state-owned) firms. Comparing innovation effects on firms with and without state support, we found no strong improvement in corporate performance as a result of state-supported innovation. A significant positive correlation with state support existed for only one characteristic of firm performance: export volume. Considering specific effects of tax incentives and public subsidies on companies’ innovation behavior, we found out that direct public funding was more likely to mitigate risk and facilitate the launch of new innovative projects. Simultaneously, both tools lead to public funds crowding out private funds.

Electronic Platforms in a Consumer Search Model

We use a search model to study how the outside market affects the inside market. Consumers look for price and match information through either a costly sequential search or a monopoly platform, which chooses the number of inside firms. Our analysis finds an equilibrium where each consumer visits the platform first. The number of firms chosen by the platform is inversely related to search cost, due to the presence of two opposing effects: the competition-intensifying effect and the market-expansion effect. The same pattern arises when several competing stores in the platform choose the number of firms.

The Interplay between Payout Policies and Debt Inside Banking Firms

The paper asks whether there is an important interplay between the payout policies and the leverage structures of financial firms. We analyze a sample of United States commercial banks, and find a significant interaction between dividends and leverage after fall 2008. Banks are more likely to pay dividends and also tend to pay out larger shares of the available resources when they raise their non-deposit leverage. Conversely, firms have more restrictive dividend policies when they increase in deposit leverage. We interpret this result arguing that, by receiving high dividends banks' owners can shift some of their risk towards the non-deposit creditors. Deposit creditors instead, can withdraw their funds upon demand, and they seem to contain the risk-shifting of dividends. The crisis of 2007-2008 appears having accentuated this behavior. Banks were facing severe credit freezes and liquidity constraints, hence didn't want to expropriate their depositors from the dividend value. We do not observe a significant interplay between leverage and the payout associated to banks´ share repurchases.

Capital and Labor Reallocation Inside Firms

We document how a plant-specific shock to investment opportunities at one plant of a firm (treated plant) spills over to other plants of the same firm--but only if the firm is financially constrained. While the shock triggers an increase in investment and employment at the treated plant, this increase is offset by a decrease at other plants of the same magnitude, consistent with headquarters channeling scarce resources away from other plants and toward the treated plant. As a result of the resource reallocation, aggregate firm-wide productivity increases, suggesting that the reallocation is beneficial for the firm as a whole. We also show that--in order to provide the treated plant with scarce resources--headquarters does not uniformly tax all of the firm's other plants in the same way: It is more likely to take away resources from plants that are less productive, are not part of the firm's core industries, and are located far away from headquarters. We do not find any evidence of investment or employment spillovers at financially unconstrained firms.

A case specific analysis of mergers within the motor vehicle industry

This paper develops a theoretical model of mergers and applies it to the largest vehicle manufacturing firms in Iran, namely: Iran Khodrou and Saipa. The paper concentrates on the joint profit maximization and multidivisional firm approach. We estimate the relevant demand and cost functions based on a panel data procedure. Our empirical results indicate that if the insider firms cooperate in the post- merger situation and maximize their joint profit, the profitability of the merger to the insiders and outsiders will depend on reaction of the insiders to the production of one another; the merger would be socially unprofitable. When the insiders’ reaction is modeled, insiders profit from the merger, but outsiders loose and vise versa. If the insiders form a two divisional firm after the merger and the production decisions at each division is delegated to the manager of that same division, then the merger is profitable socially, but costly from the standpoint of the outsiders. There is no evidence of private profitability in this kind of mergers.