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Applied Econometrics - AEF > Strategic Options > Flashcards

Strategic Options Flashcards

1
Q

Name three facts about globalization

A
  1. Trade has grown faster than output
  2. FDI has grown faster than trade
  3. Structural imbalances have emerged across the economy with global cities operating as nodes of the global production network
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2
Q

What theory explains we see localization at the same time as globalization

A

Agglomeration theory

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3
Q

Name two different views on globalization

A
  1. Hyper-globalist view:
    - No borders - end of division
    - Global is the natural order - end of distance
    - Increasing speed + functional integration - long-run decrease in density
  2. Sceptical
    - Need to consider qualitative changes as well
    - Localizing/clustering/globalizing all coexist
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4
Q

What theory Does Alfred Marshall (1920) introduce?

A

Clustering theory based on agglomeration theory

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5
Q

What are the three reasons for clustering?

A
  1. Specialized suppliers
  2. Labor market pooling –> specialized labor pooling
  3. Knowledge spillovers
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6
Q

What are the rationales behind clustering? and what industries are more likely to cluster?

A
  1. Economies of scale
  2. Knoweledge spillovers
  3. Bounded in space –> the closer proximity the more benefit

Mature industries (industry life cycle) and high-tech industries, i.e. not manufacturing

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7
Q

What does Audretsch & Feldman (1996) test and find?

A

Use the spatial Gini-coefficient to test what industries are more likely to cluster.

They find that R&D intensive industries and industries where skilled labor is required, are more likely to cluster –> perfect parallel to Marshallian forces

Industries where knowledge spillovers play a decisive role cluser more

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8
Q

Is city size an unambiguous factor for performance?

A

No, not anymore. Connectedness has become more important.

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9
Q

What makes connectedness possible?

A

Institutional transformation and changes (e.g. in technology)

Global Production Networks (GPN)

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10
Q

Along which three dimensions, does the World Bank suggest that one can measure the geography of production and labor?

A
  1. Density –> Output per land area
  2. Distance –> ease for goods to traverse space
    - Very much driven by technological improvements such as commercial aircraft and containerization
  3. Division –> arise when borders are poorly managed/guarded; mitigations are NAFTA, NATO etc.
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11
Q

What does ‘the local buzz and global pipelines’ mean?

A

That the global economy relies on TWO networks:

  1. Geographical clusters (the buzz)
  2. International organization (the pipelines)

Closely linked to the concept of GPN

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12
Q

What is the Global Production Network (GPN)?

A

A circuit of interconnected functions, operations and transactions through which a commodity is produced, distributed and consumed

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13
Q

How is the GPN related to the ‘local buzz, global pipeline’ concept?

A

Geographically differentiated production networks (the buzz/clusters) converge in the generation of the GPN

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14
Q

How do we defined a TNC?

A

Firms with the power to coordinate and control operations in more than one country, even if they do not own them

Basic characteristics:
 Coordination and control processed WITHIN AND BETWEEN COUNTRIES
 Ability to take advantage of INTERNATIONAL DIFFERENCES in the distribution of factors
 Geographical FLEXIBILITY

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15
Q

Who are the 5 main actors in the GPN?

A
  1. TNCs –> main actors
  2. States –> regulatory authority
  3. Labor –> holders of skills and knowledge
  4. Consumers –> demand
  5. Global civil society organizations –> NGO groups affecting the GPN
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16
Q

Name 4 reasons for internationalizing

A
  1. Market seeking –> market size/growth/saturation
  2. Resource seeking –> limited raw materials
  3. Efficiency seeking –> Scale advantages, cost differences across geogrpahies
  4. Strategic asset seeking –> search for technology, patents or HC for global competition
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17
Q

Explain Dunning’s eclectic paradigm?

A

OLI:
Ownership advantages; firm-specific advantages

Location advantages; the degree to which to can obtain these O-adv. by locating elsewhere

Internalization; Whether this advantage is worth more in-house

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18
Q

What is the conventional international expansion pattern?

A
  1. Domestic
  2. Export
  3. Sales office established
  4. Foreign manufacturing
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19
Q

What is the local responsiveness dilemma?

A

Trade-off between;

global standardization versus local adaptation

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20
Q

Explain Ghemawat’s (2001) CAGE framework in terms of DISTANCE:

A

Four different types of distance that make transnationalizing harder:

  1. Culture
  2. Administrative (institutional differences)
  3. Geographic
  4. Economic (differences in consumer income)
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21
Q

What is a Born Global company and what are the key drivers of Born Globals?

A

Company that is global right from inception.
–> happens more often in rapid technological contexts

Internal drivers:
- No domestic markets, Strong competitive advantage

External drivers:
- New market conditions, Technological advancements, learning from overseas

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22
Q

TNCs location choices; name the different divisions and their specific needs:

A
  1. HQ: needs a connected place, and agglomeration forces
  2. R&D: Normally at home, however more and more export
  3. Marketing & Sales: Most geographically dispersed
  4. Production: no clear patterns, various strategies exist
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23
Q

Name the three types of R&D facilities

A
  1. Support labs –> adaptation to local markets
  2. locally integrated R&D –> product innov. in local market
  3. International independent R&D labs
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24
Q

Name the four ways to transnationalize production facilities:

A
  1. Globally concentrated
  2. Host market production (each host market has a production facility)
  3. Product specialization in different areas
  4. Transnational vertical integration (chains and hubs that then is assembled at main production)
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25
Q

In the New Economic Geography theory (NEG), describe if Economies of scale are relevant, and what their benefits and costs are?

A

Economies of scale are relevant, we optimally will only have ONE production facility.

o Benefits of locating in the large market (agglomeration forces)
 Demand linkages (more consumers)
 Cost linkages (more suppliers, so cheaper to get raw materials)
o Costs of locating in the large market (dispersion forces)
 Product market competition
 Factor market competition (e.g. competition to attract best labor)

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26
Q

What effects do transportation costs have on firms’ location choices in the NEG?

A

High transp. costs –> incentive to locate in local markets

Low transp. costs –> incentive to exploit economies of scale from ONE location globally

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27
Q

What are internal and external agglomerations?

A

External; Marshallian Forces

Internal; Geographical proximity between within-firm activities (R&D and production located together e.g.)

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28
Q

As first defined, what are absorptive capacities?

A

The ability of firms to recognize new knowledge, assimilate it, and apply it to commercial ends

TWO steps:

  1. Knowledge acquisition –> firms’ capability to identify and acquire external knowledge
  2. Assimilation capability –> Firms’ routines and processes that allow them to understand external knowledge (IBM as case example)
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29
Q

According to Alcacer & Delgado (2016), in what 4 ways does internal agglomeration affect productivity?

A
  1. Continuous exchange between internal divisions, such as R&D and manuf. is key to develop absorptive capacities
  2. Economies of scale and scope in internal labor markets (gyms, shared personel)
  3. Access to intermediate inputs
  4. Control and coordination costs –> if internal less transaction costs
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30
Q

According to Alcacer & Delgado (206), in what 4 wayts does external agglomeration affect productivity?

A
  1. Abundant inputs at low costs (e.g. labor in China)
  2. Rare and unique resources (e.g. access to a port)
  3. Location-specific incentive programs (e.g. tax policies)
  4. Marshallian forces based on agglomeration economies
    a. Specialized suppliers
    b. Labor market pooling
    c. Knowledge spillovers
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31
Q

What are internal and external agglomeration forces (once again) and do they both matter?

A

YES! both matter, and affect firms’ location choices

Internal forces –> Centripetal forces that drive within-firm collocation

External forces –> centrifugal forces that drive firms to disperse activities geographically in search of best external environment (Marshallian forces)

The role of internal agglomeration is STRONGER in the case of expansion of existing establishment, whereas when considering new openings, external forces are more relevant.

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32
Q

Name the FIVE channels of spillover effects

A
  1. Demonstration / imitation
  2. Labor mobility (positive: domestic firms hiring from TNCs, negative: TNCs attracting all the good labor)
  3. Exports (TNCs develop necessary institutions for exports, enabling domestic firms to start cheaper)
  4. Competition (positive: incentive for domestic firms to become more effecient, Negative: TNCs outcompete loval incumbents)
  5. Backward and forward linkages
  • Backward; supplier linkages
  • Forward; customers (of intermediary goods)
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33
Q

List the FIVE factors causing asymmetries in spillover effects:

A
  1. Absorptive capacity and technological gap (not too large, not too small gap from domestic to TNC)
  2. Regional effect –> spillovers decrease with distance
  3. Domestic firm characteristics –> Non-exporting firms more likely to benefit, since they have not tried international competition before. Also larger firms more likely to benefit, since they will have large potential to actually compete with new TNCs
  4. FDI characteristics –> how firms enter, if M&A, slower diffusion than if greenfield investment
  5. Other factors –> trade policy environment, IP rights, Restrictions on labor mob… etc.
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34
Q

According to Crescenzi, Gagliardi, Iammarino (2015), what are the effects of TNCs location choice on local firms’ innovation performance?

A

Overall: Positive effect from foreign FDI –> knowledge spillovers are larger than negative competition effects

Nuance: Heterogeneity of the domestic firms play a role!

  • Positive effects are ONLY seen in NATIONAL and LOCAL players, not regional and already international players
  • Only positive effects for firms not already part of a TNC network
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35
Q

What is outsourcing, and what is the rationale behind it?

A

The practice of hiring an outside company to perform services and create goods that were internalized before

Rationales:
Allows firms to concentrate on core competencies

Problems:
- Controlling and coordination costs

36
Q

List the FIVE different coordination modes/global value chains for the TNCs external network

A
  1. Market (transaction cost theory market)
  2. Modular value chain (step above market, customer needs are important here)
  3. Relationship based (the family, complex social bonds)
  4. Captive value chain (Big player has caught the small ones)
  5. Hierarchy –> vertical integration (when it is cheaper to make compared to buying)
37
Q

What are the THREE factors determining when we see the different Global Value Chains?

A
  1. The complexity of information required
  2. Ability to codify transactions
  3. Capabilities in the supply base
    (4). Degree of explicit coordination and power asymmetry
    (SEE PICTURE FROM NOTES p. 15)
38
Q

Why are dynamic capabilities becoming increasingly important in the global market?

A

Because the market becomes increasingly more volatile, so you have to be able to adapt

39
Q

What are Dynamic Capabilities as described by Teece et al. (1997)?

A

The dynamic capability framework suggests that the capacity of firms to innovate in turbulent environments comes from their ability and willingness to deploy and redeploy their assets in the face of changing external conditions

Helps firms to get out of path dependency

Done in THREE steps:

  1. Organizations need the capability to learn quickly and to build strategic assets
  2. New strategic assets have to be integrated within the company
  3. Existing strategic assets have to be transformed or reconfigured
40
Q

What is corporate agility?

A

The organization’s capacity to:

  1. Sense and shape opportunities and threats
  2. Seize opportunities
  3. Maintain competitiveness by enhancing and protecting assets
41
Q

Gagliardi & Iammarino (2018), studies Firms’ perceptions toward risk and how this affects innovation performance, what do they find?

A
  • TNCs are less risk averse, and undertake more innovation
  • However, if the firm is domestic, risk perception becomes less positive
  • When looking at stable markets, there is a larger gap bewteen innovation activities
  • Positive correlation with risk because, when firm perceive high risk, they are FORCED to innovate
42
Q

Does the risk perception parameter in the Gagliardi & Iammarino (2018) study change when looking at stable versus dynamic environments?

A

YES

  • In stable environments domestic firms have less innovation activities when having high risk perception
  • But this disappears when we look at dynamic markets (estimate becomes zero), that is that both domestic and TNCs innovate equally much depending on their risk perception
43
Q

How is dynamic capabilities related to complementarity in innovation strategy?

A

Complementarity in innovation strategy; use both internal and external resources
Dynamic capability; internal ability to redeploy resources to be in congruence with external business environment changes

44
Q

What is the multi-level system of innovation determinants to address rapid changes internally and externally?

A

Three levels of systems that have to be in place for firms’ to rapidly address changes internally and externally:

  1. The individual level –> Human capital
  2. The firm level –> R&D
  3. The network level –> Alliances and acquisitions
45
Q

What is complementarity between innovation activities?

A

Increasing reliance on one innovative mechanism increases the marginal benefit of utilizing the other innovation mechanism

46
Q

What are some arguments for complementarity using the multi-level system of innovation determinants?

A

Individual-firm level:
- Increase HC increases R&D outputs

Individual-network level:
- Scientists(HC) establish networks across firms

Network-firm level:
- Without internal R&D, firms might not realize the need for the network

47
Q

What is meant by substitutability between innovation activities?

A

An increase in reliance on one innovation mechanism decreases the marginal benefit of investing in the other

48
Q

When do we see substitution effects?

A
  • When firms have limited absorptive capacities
  • In cases of high switching costs (path dependency)
  • In cases of diseconomies of scope (equifinality of innovations)
  • When the NIH-syndrome is present
49
Q

What are potential and realized absorptive capacities?

A

They are COMPLEMENTARY and both essential for firm innovation:

Potential revolves around; firms knowledge acquisition (experience in R&D) and knowledge assimilation capability (previous cross-patent references)

Realized revolves around; firms Transformation (# of new ideas from external knowledge) and exploitation capability (The actual number patents gained)

50
Q

What does Hagedoorn and Wang (2002) show?

A

That absorptive capacities are a contingency factor for complementarity between external and internal knowledge

  • Below a certain threshold, we have substitutability, and above that threshold, we have complementarity
51
Q

What is open and closed innovation?

A 
Close = inside company (Internal R&D, Skilled personnel)
Open = both inside and outside (Collaborative networking)

Open innovation is becoming increasingly important.

52
Q

Why is external knowledge important for innovation?

A

It helps firms to avoid technological ang cognitive lock-ins as well as it decreases the likelihood of ending in deep path dependency

53
Q

What are the differences between Regional Innovation Systems(RIS) and Clusters?

A

RISs are a more generic concept where interacting knowledge generation and subsystems linked to global, national and other regional systems’ that may STRETCH ACROSS SEVERAL SECTORS in the regional economy

So clusters are more industrially dependent, where RIS is more generic. But the effects are basically the same.

54
Q

What does Catnwell & Iammarino (2000) find when they examine TNCs and the RIS within UK firms?

A

1) the technological specialization of foreign owned firms DOES NOT DEPEND on the technological advantage of domestic firms in leading regions –> SMALL estimate of 0.154 (this is for top performing regions in the hierarchy)
2) moving down the hierarchy, the tech. specialization profile of foreign owned firms MATCHES more closely that of domestic firms –> HIGH estimate between 0.447-0.791

Overall: Local system of innovation conditions matter –> the winners are the regions that are higher up the hierarchy, since they attract high value adding foreign activities

55
Q

What does Gagliardi & Crescenzi (2018) find in regards to ‘people as carriers of knowledge’ and the role of firms’ knowledge acquisition and exploitation behavior in the context of the traditional Marshallian agglomeration theories?

A

1) Firms located in an innovation prone area tend to have superior innovation performance (due to location in good labor pool?)
2) However, these effects fade away when controlling for firm characteristics
3) using a restricted example (firm relying on external knowledge) we see positive effects from being located in an innovation prone area, while firms relying solely on internal R&D have insignificant relationships
4) this suggests that managers should NOT see firms as an enclave and should promote the use of OPEN innovation

56
Q

What is organizational ambidexterity?

A

The ability of an organization to both explore and aqcuire new knowledge while also being able to exploit and execute on this knowledge

–> only possible when combining potential and realized absorptive capacities complementarily

57
Q

What is the main drawback of universities as an external knowledge source?

A

Very dependent on geographical proximity and co-location –> however, this is changing a little bit

58
Q

Name some of the drivers behind the U-I relationships that emerged during the 80’s and 90’s

A

o Increased globalization and competition –> firms need to get closer to sources of knowledge
o Speed of knowledge exploitation increased
o Governments started promoting these collaborations
o Industry getting interested in uni research to also attract HIGHLY SKILLED PERSONNEL
o Resource flows from U to I are no longer limited to endowments, as in the past

59
Q

What are some of the rationales for Universities in engaging in U-I relationships?

A
  • Helps identifying relevant research topics
  • Higher employment rates
  • More funding to research
60
Q

What are some of the rationales for Firms in engaging in U-I relationships?

A
  • Often higher cost effectiveness
  • Access to more expert personnel
  • Potential to onboard star-scientists
61
Q

What are the key take-aways from the Zucker, Darby and Armstrong (1998) research on U-I relationships?

A

1) All parties involved in the relationships are likely to be bound be contractual links
2) two complementary spillover mechanisms; face-to-face contacts and market transactions
3) You should let star scientists play a key role in your firm (co-founder, lead scientist etc.) if you want the co-location effects. Geo. proximity is not enough on its own. You will not get spillovers by being passive.

62
Q

What does the empirical study on publicly funded U-I relationships by D’Este et al. (2012) find?

A

1) Effects of geographical proximity depend on other forms of proximity –> cognitive, organizational, social, relational, insitutional etc.
2) regression on; Probability of U-I relationship = geo prox. + organizational prox + clustering of business units
3) Geo prox increases the likelihood of collaboration, BUT its importance decreases when firms are part of CLUSTERS
4) Organizational proximity/previos partnerships matter as well (positive relationship)

63
Q

What attributes does HC need in order for it to pose a potential competitive advantage?

A

Valuable, Rare, Inimitable and non-substitutable (VRIO), can be attained through isolating mechanisms

64
Q

What are the three KEY isolating mechanisms, that enable HC to become a source of competitive advantage?

A

1) Firm-specificity –> the more specific skills, the less valuable for competitors
2) Social complexity –> the more socially embedded and complex, the harder to replicate for rivals
3) Causal ambiguity –> hard to identify what individual drives organizational performance

65
Q

What are the three goals of managing Human Capital?

A

1) Attracting and hiring CRITICAL employees
Challenges; Fit with organization, asymmetric information (adverse selection and causal ambiguity)

2) Retaining the BEST employees
Challenges: social complexity, causal ambiguity (increases retention)

3) Motivating employees
Challenges: Motivating HC to build firm-specific knowledge, which cannot be applied elsewhere, teams make it hard to observe individual efforts, causal ambiguity

66
Q

In relation to moral hazard, what are the implications for HC?

A

After being hired, they start acting differently, because they have now gained security

67
Q

What is the overall element of DEMAND side frictions?

A

This deals with employees ABILITY to leave the firm

68
Q

What is the overall element of SUPPLY side frictions?

A

This deals with the employees WILLINGNESS to leave the firm

69
Q

Why is firm-specific Human Capital a critical element within demand side frictions?

A

Because it is a key isolating mechanism of HC. With highly firm-specific skills, employees’ ability to leave the firm decreases significantly. –> using learning by doing increases firm-specificity of HC.

Also, when rivals acquire firm-specific knowledge, this knowledge will inevitably undergo a transformation process, causing more frictions, since rivals will not get ALL knowledge, and will therefore be willing to pay less for it.

70
Q

Three elements that make HC uncontestable?

A
  1. Selection: where and how –> geography of labor market matters
  2. Development –> Training is an isolating mechanism
  3. Use –> Ensure that HC is deployed so they use their skills most productively (matching skill to tasks)
71
Q

What are the Three main criticisms towards Firm-specific HC as a sustained competitive advantage?

A
  1. Workers have a heterogeneous value of their skills –> mix of general and firm-specific, sometimes it might be the relevant skills that make mobility to change job
  2. Imperfect information and exchange value –> Impossible for employers to observe and value skills
  3. Supply-side mobility constraints –> idiosyncratic worker preferences, that affect their willingness to leave current job
72
Q

Describe the matrix related to classifying Human Capital

A

Two parameters:

1) Firm specificity (high and low)
2) Demand side constraints (High and low)

SEE IN NOTES…

73
Q

Are leaders portable?

A

Both yes an no. Elements of their knowledge are more portable than others:

  • General skills (very portable)
  • Strategic skills (very portable)
  • Industry skills (medium portable)
  • Social/relationship skills (less portable)
  • Firm-specific skills (least portable)
74
Q

In terms of supply side frictions, how does HC generate rents for firms?

A

With perfect competition, there are no rents in acquiring HC on strategic factor markets, however, when competition deviates from being perfect (no perfect information), HC will generate frictions (rents)

75
Q

What are the two main types of influence a firm can use to attract HC?

A

Sorting effect –> self-selection

Incentive effects –> performance based pay

76
Q

In relation to sorting effects, what does empirical evidence show?

A

Multiplication example; Most productive employees ALWAYS choose the variable pay structure, which also increases overall output

Also dependent on workers’ risk attitude –> the more risk averse, the less variable pay

Overall: Individual characteristics matter, and people will therefore self-select, if you put the right payment scheme out for them

77
Q

What does Wowak and Hambrick (2010) show in regards to which characteristics that shape the effect of pay arrangements on executives’ behavior?

A
  • They rely on stock options and say that the effectiveness using stock options depend on 4 aspects:
  1. Motives and drives (materialism)
    - High materialism –> good effect from stock options
    - Low materialism –> less effect, but still present
  2. Cognitive frame (risk perception, focus on promotion)
    - High focus and low focus on promotion, no effect from stock options
    - Medium focus gives the most effect
  3. Self-confidence (how much they believe in themself)
    - High self-confidence –> high effect from options
    - Low-self confidence –> no effect from options (flat)
  4. Ability (talent)
    - High talent –> options magnify executives’ performance
    - Low talent –> negative effects from options
78
Q

Are nonpecuniary incentives important?

A

YES –> empirical evidence support this view.
But: you still need pecuniary incentives AND these are very important in attracting employees, whereas nonpecuniary incentives become more important when talking about retention of employees (beyond $75,000 per year, we do not become much happier, Princeton)

79
Q

What are the three types of incentives you can provide HC?

A
  1. Extrinsic incentives –> pecuniary; important to show to the external environment
  2. Intrinsic incentives –> non-pecuniary; what is important at the individual level
  3. Social incentives –> BOTH nonpecuniary(individual level) and pecuniary (reputation, LinkedIn) rewards from social relations
80
Q

Which of the three incentives; extrinsic, intrinsic and social is the most important?

A

None. Employees demand a combination, and mix depends on individual characteristics

81
Q

In terms of reserachers and inventors, what incetivizes them the most? Why is this important to firms?

A

Non-pecuniary –> Intellectual challenge and independency in their work

Important because star-scientists are key for firms’ innovative performance, therefore, firms’ need to know how to incentives and retain them

82
Q

What does Sauermann (2017) show?

A
  • Compares employees’ pecuniary and nonpecuniary incentives across start-ups and established firms, and check for differences in innovative performance

FIVE independent variables differs between startups and established firms:
1) financial pay, 2) Job security, 3) Independence, 4) Responsibility, 5) Intellectual challenge

FINDINGS:
1) job security becomes more important as firms increase in size

2) Independence and challenge have positive effects on innovation performance
3) Salary has a negative effect –> these 2) and 3) explain why we see startups generating more patents

83
Q

Traditionally, what factors have been said to retain employees?

A

1) Job satisfaction
2) Organizational commitment

Both very hard on-the-job related factors

84
Q

What are the three factors that determine the degree of embeddedness of employees?

A

All three split into; community and organization

1) Links –> Extent of people having links to other people and the organization
2) Fit –> Does job and community fit with other aspects of their life
3) Sacrifice –> How much will you lose/sacrifice, if you quit?

85
Q

What is it that is different about embeddedness compared to traditional theory?

A

It accounts for BOTH on-the-job and off-the-job attributes of the labor force

Possibly more relevant in developed countries

Empirical evidence support that embeddedness have actual effects on HC behavior

86
Q

What role does geographic preferences play in terms of supply-side frictions?

A

So because people become embedded to regions in which they live, people are less willing to leave that area, implying the geographic preferences matter –> even the climate can matter

87
Q

Why does geograhic preferences matter?

A

Because preferences for amenities are not uniformly distributed across the population
–> rises sharply with income, depends on life cylcle of employee

When companies compete for talent –> place becomes a competitive factor

Therefore, firms’ location choices matter, also for attracting talent

Applied Econometrics - AEF (5 decks)

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