Unrelated Industries Research Articles

Government Officials' Political Incentives and Corporate Diversification in an Emerging Economy

While the importance of state in shaping organizations is well accepted, the mechanisms through which it affects firms have been narrowly defined. Drawing on the insights from political sociology, this paper proposes a new mechanism: the state shapes corporate strategy through its bureaucratic processes of achieving its formal agenda. The state designs long-term career path that structures government officials' political incentives and possesses bureaucratic capability to engage in institutionalized interaction with business actors through the predictable tenure system and political incorporation of business actors. I test this framework in the context of Chinese publicly listed firms' diversification from 2001 to 2009. Empirical findings support that due to state's concern for social stability, firms diversify into unrelated industries to absorb laid-off workers from bankrupted state-owned enterprises. Significant difference in corporate diversification can be explained by the career stage of provincial government officials, congress years (when promotion news is announced), sensitivity of the province to social stability (e.g., minority-dominated provinces), officials' tenure in current position and political incorporation of private business leaders. This study contributes to organization theory and strategy by delineating a new mechanism through which the state affects corporations. It opens the black box of the state by delving into the bureaucratic processes of the state and highlighting the role of agency. It also provides a political explanation for corporate diversification strategy in the context of an emerging economy.

Open innovation and the value of crowds: implications for the fashion industry

Firms in many industries are seeking to incorporate ideas from outside parties to complement their own internal resources and capabilities. Suppliers, distributors, end users, scientists, firms in unrelated industries and even competitors can be important sources of information and ideas. Furthermore, with the computing capabilities available today, firms can scan online communities for sources of ideas and even harness the ideas generated by a select few key users with insights into emerging mainstream customer needs. All of this additional input helps firms compete profitably in an increasingly difficult environment. New trends include open innovation, crowdsourcing, user toolkits, mass customization and lead-user analysis. While there is emerging academic research on all of these topics, their usefulness in fashion marketing and merchandising remains relatively unexplored. This is potentially a great research opportunity, as fashion designers can obtain key ideas that boost competitiveness by working more closely with customers, suppliers, retailers and other parties. This article presents the state of the art in each of these trends, and concludes with a discussion of the implications for fashion marketing and merchandising academic research and practice.

Do Underpriced Firms Innovate Less?

This paper finds that stock underpricing triggers underinvestment in research. To identify underpricing, I build on previous literature on liquidity induced trading pressure to develop an exogenous proxy of mispricing. This measure is based on funds that underperform because of their over-exposure to an economically distressed industry and are forced to sell stocks of healthy firms in unrelated industries for liquidity reasons. As a consequence price drops below fundamentals and firms respond decreasing innovation activity. The main empirical explanation which is consistent with this finding is that underpriced firms prefer to divert resources from R&D into buying back their own shares at a discount, in particular when financially constrained and held by impatient shareholders.

AIR POLLUTION ASPECTS OF BIOMASS ENERGY UTILIZATION

Associated with conventional energy sources renewable energy sources are much advocated.Out of the renewable energy technologies biomass and biofuel represent perhaps the largestpotential commercial energy source. The interest in biomass energy generation over the years isattributed to the production surpluses in the agricultural sector and the reduced CO2 and S02emissions, which is important for combating the green house effect and acid rain with the use ofbiomass."Biofuels industry" consists of several unrelated industries such as the fuel ethanol industry andthe landfill methane-recovery industry, each of which is well established and whose biofuelshave different end-use applications. In terms of envi-cnmental aspects, each of these has specificadvantages and limitations. As most of the advantages offered by biomass energy generation areon air pollution aspects, this paper examines whether all of the different biofuel technologieshave this advantage.Most stoves and boilers particularly those used in developing countries are not equipped with aircontrol devices and are not efficient enough to permit complete combustion resulting inconsiderable health impacts to the user due to the release of numerous toxic gases. In fact, someauthors claim that when compared with the combustion offossil fuels, the emission of pollutantsfrom wood combustion is higher. Gasification of biomass also results in similar emissions.Ethanol, derived from fermentation of biomass is a clean-burning fuel if completely combusted,because only CO2 and water are emitted. However, in automobiles not equipped with catalyticconverters aldehyde emissions is a concern.Municipal waste which, is a freely available biomass energy source if burnt in an uncontrolledmanner to generate heat, release toxic gases and par.iculate matter directly into the atmosphere.Controlled incineration at extremely high temperatures reduces these effects to a certain extent.However, air pollution persists as the major concern for incinerator technologies and airpollution control mechanisms are deemed essential for incinerators.On the other hand, biogas production from municipal solid waste and other biomass sources andmethane recovery from municipal solid waste landfills release minimum amounts of airpollutants into the atmosphere.This paper emphasizes the dilemma in labelling all biomass energy conversion technologies asenvironment friendly and that proper conversion technologies and pollution control devices mustbe used to minimize air pollution.

Deal structure decision in the global market for divested assets

We find that the deal structure decision to engage in a foreign asset purchase instead of acquiring a foreign target's equity is more likely when bidders are smaller, the bidder's proportion of foreign sales-to-total sales is higher and the target is in an unrelated industry. In addition, bidders tend to execute asset purchase transactions rather than acquiring a foreign target's equity when the target's corresponding country has a relatively favorable rating for rule of law, control of corruption, political stability and absence of violence, regulatory quality and economic freedom. We also find that bidders engaging in asset purchase transactions experience significantly more favorable valuation effects than those that acquire the equity of target firms.

The impact of laws, regulations, and culture on cross-border joint ventures

Both formal (legal) and informal (culture, language, religion) institutions determine the intensity of cross-border joint ventures between one US and one foreign partner. Using a sample of cross-border joint ventures from 105 countries, we investigate the impact of country legal, cultural and business environment factors, industry factors as well as deal specific factors on the intensity of cross-border joint ventures with one US partner. Our results suggest that US firms are more likely to form joint ventures with firms from countries with weaker legal and regulatory environments and with higher cultural, language, and religious disparity from the US. However, compared to mergers between a foreign target and a US bidder, US firms are more likely to form joint ventures with firms from countries with strong laws and regulations, as well as with smaller cultural, language, and religious differences from the US. These findings are consistent with cross-border joint ventures being a “hybrid” organizational form existing in between free-market contracts and firm-like deals such as mergers and acquisitions. Our results further suggest that foreign countries receiving large US foreign direct investments and/or relying less on export and import are associated with higher intensity of cross-border joint ventures. The volume of cross-border joint ventures with US partner is higher for firm from less competitive and/or more politically stable countries. On a firm level, US firms are more likely to form cross-border joint ventures in cases of technology transfers between the joint venture partners, in deals involving partners from unrelated industries or with foreign firms not cross-listed in the US. Overall, the results suggest that cross-border joint ventures are optimal, low cost organizational form mitigating information asymmetries, hold-up costs, and poor contract enforceability, especially in environment with larger market imperfections.

Industrial Symbiosis

The idea of industry finding uses for non-product outputs (by-products and waste) is not a new one (Desrochers 2000). Local context and incentives changed in the 20th century, however, and the practice fell out of favor due to cheap and abundant energy, resources and disposal options, subsidies that discouraged recycling, and regulations preventing re-use (Desrochers 2004). As the sustainable development agenda gained ground, other concerns led firms and governments to reconsider their strategies: increasing waste disposal costs, concerns over environmental degradation accompanied by stricter environmental regulations, and a growing awareness of the potential profits from by-product and waste utilization. The practical example of resource cycling between industrial facilities in Kalundborg, Denmark, came to the attention of the academic community (Ehrenfeld and Gertler 1997), generating substantial interest in what has become known as ‘industrial symbiosis’ (IS). In the intervening fifteen years, examples in which two or more otherwise unrelated industries develop a mutually beneficial relationship making productive use of otherwise underutilized resources (including materials, water and energy)i continue to be a topic of study. The phenomenon, and the research on it, is emblematic of the broader field of industrial ecology.

Mergers in Indian industry: performance and impacting factors

PurposeEven though there is a vast body of research on the performance of mergers in the developed markets, many issues are still unresolved. There is almost negligible research in the form of published papers on the performance of merged firms and the strategic factors impacting this performance, in the context of Indian industry. This study aims to address this gap in knowledge.Design/methodology/approachThe study uses a quantitative method and statistically analyses secondary data.FindingsThe study finds that merged firms demonstrate better operating performance as compared to both their industries and their pre‐merger performance. Merging firms belonging to unrelated industries appear to be performing better in the long‐term as compared to the related firms. Mergers which witness transfer of corporate control demonstrate a better performance than the ones that do not. Sick acquired firms negatively impact long‐term performance.Research limitations/implicationsThe first limitation of the study is that the financial sector has not been included since it follows different accounting norms. The second limitation is that the findings apply broadly across Indian industry and the limited sample size does not facilitate an industry‐specific focus. The study points towards further research using a longer time frame that might help understand longitudinal variations in merged firm performance. It also encourages future finer‐grained studies on each of the factors which impact merged firm performance.Practical implicationsManagers can prudently utilize mergers to improve firm performance in Indian industry. It appears that firms belonging to unrelated industries bestow better long‐term post‐merger cash flow returns. Managers in India do not thus have to constrain themselves to only horizontal mergers. Managers would be well‐advised to improve on their managerial capabilities since this study points towards a developing market for corporate control in the Indian context.Originality/valueThis is probably the first paper of its kind on research on the performance of merged firms in India.

Ownership structure, corporate diversification and capital structure

PurposeThe purpose of this paper is to investigate whether, and to what extent, corporate diversification into related and unrelated businesses affects capital structure choices, and whether ownership structure is germane to the understanding of corporate diversification strategies and debt‐equity financing choices.Design/methodology/approachUnivariate approaches include the parametric two‐sample t‐test, non‐parametric Kolmogorov‐Smirnov test and Kruskal‐Wallis rank test, and cluster analysis. Multivariate approaches include panel data regressions to identify the sign and magnitude of the effect of diversification on capital structure, after controlling for a number of industry and firm characteristics as suggested in the literature.FindingsCorporate diversification into related or unrelated industries has opposite effects on capital structure, after controlling for ownership structure and corporate governance mechanisms. Consistent with the prediction of organizational economics, an increase in the degree of business relatedness is associated with a reduction in debt while an increase in business unrelatedness is associated with an increase in debt. In addition, there is strong evidence that government‐controlled firms use less debt financing and that government ownership weakens the positive relationship between unrelated diversification and leverage. The results are robust to different measures of capital structure.Originality/valueTraditional finance literature has not been able to provide conclusive evidence on what affects corporate capital structure decisions. This paper shows that a corporate strategy perspective, with its emphasis on a managerial decision‐making process, can provide a behavioral basis for understanding capital structure choices.

Shield your skills for future growth

Despite recent economic turmoil, global demand for resources is expected to continue its surge well into the coming decades. The international supply of LNG is likely to form a crucial part of the future global resources trade, and Australia’s oil and gas sector could face a paralysing shortfall of skills. For global engineering service providers such as Production Services Network (PSN), the search for skills now needs to look beyond the oil and gas industry to grow skilled ranks. Recruits are being found in the water industry, the automotive industry and in the UK, PSN has had particular success in recruiting from the retired military. Adopting entrepreneurial and innovative strategies to attract and retain engineering staff has become business-as-usual for service providers that are accepting an increasing amount of responsibility from international oil companies. But with growth comes risk. As a business grows, transitioning mature engineers from unrelated industries and introducing young graduates or building local expertise in developing countries presents enormous safety risks and challenges. Perhaps the greatest challenge of all is being able to deliver industry-leading safety performance while maintaining a robust business model in a fiercely competitive services market. In the coming years the skills challenge will remain unrelenting. In a relatively small skills market like Australia, future skills solutions will be found in using network technologies to send work to where the people are—rather than the other way around. Solutions will be found by understanding the needs of generation-Y and by continuing to build incentives to retain women in the engineering workforce. The employment profile of a 21st century oil and gas engineering services provider is changing fast. Is Australia keeping up?

CEO duality leadership and corporate diversification behavior

This study examines an important, yet understudied relationship between CEO duality and corporate diversification. Results based on the data collected from Fortune 1000 U.S companies indicate that CEO duality is positively associated with corporate diversification into unrelated industries. Further analyses reveal that this relationship is moderated by a number of corporate governance mechanisms. We find that board equity ownership and institutional ownership concentration weaken the initially positive relationship between CEO duality and unrelated diversification while CEO tenure and board independence strengthen this relationship.

Where did all that Money Go? Understanding how Consumers Allocate their Consumption Budget

All types of consumer expenditures ultimately vie for the same pool of limited resources—the consumer's discretionary income. Consequently, consumers’ spending in a particular industry can be better understood in relation to their expenditures in others. Although marketers may believe that they are operating in distinct and unrelated industries, it is important to understand how consumers, with a given budget, make trade-offs between meeting different consumption needs. For example, how much would escalating gas prices affect consumer spending on food and apparel? Which industries would gain most in terms of extra consumer spending as a result of a tax rebate? Answers to these questions are also important from a public policy standpoint because they provide insights into how consumer welfare would be affected as consumers reallocate their consumption budget in response to environmental changes. This study proposes a structural demand model to approximate the household budget allocation decision, in which consumers are assumed to allocate a given budget across a full spectrum of consumption categories to maximize an underlying utility function. The authors illustrate the model using Consumer Expenditure Survey data from the United States, covering 31 consumption categories over 22 years. The calibrated model makes it possible to draw direct inferences about the trade-offs individual households make when they face budget constraints and how their relative preferences for different consumption categories vary across life stages and income levels. The study also demonstrates how the proposed model can be used in policy simulations to quantify the potential impacts on consumption patterns due to shifts in prices or discretionary income.

Persistence of Outstanding Performance and Shareholder Value among Diversified Firms: The Impact of Past Performance, Efficient Internal Capital Market, and Relatedness of Business Segments

The research domain that attempts to study the relationship between and performance has not yet reached definitive and interpretable findings, and recent studies challenge the existence of a diversification discount and explain it partially by a data artifact. None of these studies centred their research on the question: does there exist a specific performance pattern among diversified firms? This research aims to identify persistence in performance heterogeneity by measuring the shareholder value creation of diversified firms using alternative indicators other than the excess value methodology. It also aims to measure the impact on the performance according to the degree of efficiency of the internal capital market and the degree of relatedness among business segments. A sample of 164 diversified firms with turnover higher than 1$ billion during the period 1999-2006 is examined. Because of the presence of the firm's specific effect and the length of the time series, the persistence performance is tested through the instrumental variables (IV) system generalized method of moments (GMM) dynamic panel data and the persistence of shareholder value creation and destruction is estimated according to different estimators from top tercile and lower tercile portfolios of diversified firms. Some diversified firms persistently create value as well as beat the market index while others persistently underperform. Finally, if the efficiency of the internal capital market gives certain explanatory power of the performance pattern, but limited compared to the past performance, important insights might be drawn from the findings that diversified firms with segments in many unrelated industries perform better than others in few industries or with a high number of segments; hence the inverted-U curvilinear relationship between and performance is here not confirmed.

Performance effects of firms' expansion paths within and across industries and nations

This article contributes to the emerging discussion on the diversification—performance relationship from a dynamic perspective.The research focuses on the ability of firms to handle complexity associated with added product scope during a period of time and the effect this may have on performance.The authors hypothesize that firms undertaking expansion steps during a given period of time, involving a higher level of added product scope, and those that expand into unrelated industries in an irregular fashion, i.e. with a higher variability, will gain less from expansion. Likewise, the authors hypothesize that if the degree of expansion steps involving internationalization is higher or shows more variance, firms will gain less from expansion.These hypothesized relationships are tested using detailed longitudinal data on 3503 expansion steps undertaken by a panel of 91 German firms, whose expansion programs have been tracked for periods ranging between five and 20 years.

Managerial Incentives to Diversify and Shareholder Monitoring: Evidence from International Acquisitions

The authors examine how a firm’s risk change around an international acquisition is related to the managerial equity interest in the firm. Focusing on the international acquisitions made by bidding fi rms that have weak monitoring from outside shareholders, those that make an acquisition in an unrelated industry, and those that experience negative stock returns around announcements, the authors find that managers of these firms tend to undertake risk‐decreasing international acquisitions with the increase of managerial equity ownership and previously granted stock options. The evidence suggests that managerial incentives to use foreign acquisitions to reduce the risk of their personal wealth are more often utilized in the absence of shareholder monitoring.

Entrepreneurs: Invent a new brand name or revive an old one?

This paper discusses launching an entrepreneurial venture by acquiring a once popular brand name and reviving it. Interviews were conducted with 10 executives who acquired dormant brands and successfully relaunched them into the market. Their comments suggest that, with proper planning, an entrepreneur may be able to substantially increase his or her chances of success by reviving brands, rather than spending the enormous amount of capital required to build new brand image. Conclusions suggest that nostalgia targeting is not enough; the revived brand must be repositioned to satisfy today's customer values. Evidence also suggests licensing a revived brand name to unrelated industries may prove very profitable for the entrepreneur.

MG plans sale to focus on process technology

mg technologies ag is to divest its holding in the chemical industry to concentrate its focus on its process technology and components businesses. Its decision to abandon its previous ‘twin-track’ strategy that saw it operate in two unrelated industries follows a full strategic review of its operations that was initiated in June. Visit www.filtsep.com for the latest filtration industry news

Technology-Based Entrepreneurs: Does Internet Make a Difference?

This paper is an empirical analysis of the personal characteristics of Italian high-tech entrepreneurs. We analyze differences in the characteristics of founders according to the sector of operation of the start-up. In particular, we investigate whether entrepreneurs in Internet related activities differ from those operating in other ICT industries (especially in manufacturing). For this purpose, we analyze a sample composed of 246 entrepreneurs that between 1984 and 1999 established 116 new firms that operate in ICT manufacturing and service industries and are located in Northern Italy. The findings highlight that Internet entrepreneurs generally are younger and less educated (especially in technical fields) than the other sample founders. They quite often are at their first professional experience; if they have prior working experience, it generally is in unrelated industries. Such findings are related to evolutionary theories that emphasize the role of the nature of technical change and of the stage of the industry life cycle in influencing the characteristics and behavior of new firms and their founders.

The Transformation of Boral: From Dependent, Specialist Bitumen Refiner to Major Building Products Manufacturer

This essay explores the route by which Boral transformed itself from being a small firm operating in a niche within the petroleum industry to its current position as one of the largest manufacturers of building products in Australia. Boral's exit from the oil industry was largely influenced by the declining attractiveness of that market as a result of a more competitive environment. The direction of its subsequent voyage across industry and market boundaries was set by the exploitation of firm specific knowledge and competencies. Boral's bold leaps into apparently unrelated new industries represented the transfer of a core set of capabilities into new markets. Boral acquired new skills which augmented its competencies and it was able to use them to gain a competitive advantage in a wide range of related markets.

Cannibalization risk and limited liability: implications for firm valuation and capital budgeting

When two firms combine, the negative cash flows of some projects can cannibalize the positive cash flows of other projects. This may at least partly explain recently documented observations that there is value loss from diversification, value gain from splitting up an existing firm, and that the value loss is higher in the case of diversification into unrelated industries. Also, this may explain why the value and riskiness of an identical project can be different for firms with different assets in place and why the value of a project as stand-alone may be irrelevant for a firm’s investment decisions.