www.cox.smu.edu

How Demographics Impact Economic Growth and Entrepreneurship

2011-04-26T14:50:31Z

The demographic structure of a country matters for economic growth. Equally important, entrepreneurship matters for economic growth. Countries with younger populations or those tilted toward the aged are shown to have decreased entrepreneurial activity according to new research by Professor Maria Minniti of SMU Cox and co-author Moren Levesque. Important implications arise for governments in aging developed countries such as Germany, Italy and Japan that are attempting to catalyze growth and in developing countries with younger populations seeking greater levels of entrepreneurship.

Entrepreneurs are part of the never-ending creative destruction story. “Our argument is simple, but important as in the last few decades, failure to take this into account has had costly consequences for countries and international aid organizations,” the authors write. In other research, Minniti and Levesque show that entrepreneurs act as lubricators of economic activity by exploiting opportunities and mobilizing unused and underutilized activity.

A New Age Story?

“Everything else being the same, a country with a large cohort of older citizens is likely to exhibit lower rates of entrepreneurship than an otherwise identical one. We know that in Western Europe and Japan, the population structure is changing,” says Minniti. “Because people live longer, these countries are aging significantly. The same is true in the U.S., but up to a point. The U.S. case looks different because of immigration.” Minniti continues. “Immigrants tend to be younger. If the birth rate of a country is too low, younger people may be imported. Some countries in Europe are changing their immigration policies out of necessity.”

Past research has been unable to articulate why there are diverging rates of entrepreneurship in countries with similar socio-economic characteristics, or why certain countries have higher rates of innovation and competitiveness in spite of low levels of R&D and education. Minniti states, “Age has a strong correlation with entrepreneurship. People in the age bracket between 25-34 years old are more likely to start or be involved in new business ventures. This is true across all countries.” Age may be even more important than education, according to the research. Minniti says, “You need energy, ambition, exposure and willingness to take risks and seize on new opportunities.”

Entrepreneurship matters for grow because it is a vehicle for creation of new business and innovation into the economy.” And younger people start businesses in larger proportion. The authors developed a model revealing that if a country has a skewed distribution, whether on the young or old side, this may be problematic for entrepreneurship levels and, possibly, for growth. Of course, age is not the entire story. One assumes the younger populations in Africa would be good. But this neglects the lifecycle effects of spending and saving. “You need both — the older people who can provide savings and the young ones to do the work,” she explains.

In countries with populations skewed toward the young, there may be a shortage of financing capital and experienced workers. Thus, the returns attached to capital and experience would be high and would attract capital and experienced individuals from abroad. Conversely, in countries with populations skewed toward old people, we might find abundant savings but a shortage of potential entrepreneurs. An availability of savings would attract entrepreneurial talent from abroad.
But resource markets are slow to clear across borders and, oftentimes, do not clear at all, say the authors with respect to entrepreneurial talent. Resources do not flow freely across borders because of structural, institutional and political barriers. Entrepreneurial opportunity is often specific and localized and as a result, difficult to transfer. When these constraints exist, the relative distribution of people across age cohorts matters.

Importantly, if the market for capital and labor is free, then the distribution of the population is not a problem in theory, says Minniti. An example of this would be capital flowing to Africa (with its young) from Japan and Northern Europe or flowing to South America and Southeast Asia.

“Protectionist arguments will make everything worse,” says Minniti. “Open borders do come with costs, but in the long run they increase the standard of living for the population. Of course, it is painful when people lose jobs, but jobs get lost due to poor productivity not competition. We don’t want to become North Korea.”

Getting to Growth

“In aging countries, it seems plausible that people would begin to think beyond the 65-year-old benchmark as the endpoint of their working lives. This has implications for governments who are thinking of imposing or removing mandatory retirement laws,” the authors write. Minniti declares, “Every time you waste someone’s productivity, that’s a loss, especially because we live longer. It would be desirable to give options on retirement ages, not just age 65. I take a holistic view of economic growth. People are happier when they work.”

Growth is more than just technology and innovation. “You need more than that—you need creativity, new ideas, and services,” declares Minniti. “Those offerings are often not high tech and you need experience. I think that leveraging the experience of older workers will have a positive effect on growth.”

Some countries, especially smaller or poorer ones, may exhibit a dominant industrial sector. The relationship between age and entrepreneurship may be influenced by the characteristics of that sector. Consider a rich country with a focus on technology. The high-technology sector tends to attract people with more years of education. So the age of becoming an entrepreneur is likely to be higher in a country focused more towards high-tech entrepreneurs. The “able” workforce would then start at a later age and, given the less physical nature of the work, would likely end later.” This could bolster the case of Japan and Korea, for example. If Population A focuses on high-tech and Population B on manufacturing, an aging Population A would be less likely to experience a decrease in its total entrepreneurial activity than an aging Population B would, the research suggests.

The negative consequences of population decline can be avoided, particularly if policies aimed at increasing technological innovation and efficiency are effective. In young countries or in countries that are getting younger, the problem of sustaining entrepreneurial activity may be more difficult. A large number of young individuals compete for a limited amount of resources. Insufficient funds and collateral to obtain credit becomes one of the most serious impediments to the creation of new businesses and for self-employment.

Undesirable effects of the age-entrepreneurship conundrum could be mitigated with policies that mobilize savings and redistribute from the relatively old to the relatively young. Capital markets that are in sync with the age distribution of the workforce could overcome institutional rigidities that prevent such redistribution.

Around the globe, we see investors flocking to India, as if they were aware of this age-growth story. But Minniti says we are mostly unconscious about this phenomenon. Prior to the disasters that struck Japan, the government was committing to new high technology and green energy ventures abroad with its countries’ wealth, ie., using its capital abroad to invest in growth at home.

Age matters in more fine-grained ways than we have imagined and calculated. With governments looking for the next frontier of policy tools, perhaps considering age-related nuances can shed more light.

The paper “Age Matters: How Demographics Influences Aggregate Entrepreneurship” by Maria Minniti, Professor and Bobby B. Lyle Chair of Entrepreneurship at SMU Cox and Moren Lévesque of York University is forthcoming in Strategic Entrepreneurship Journal.

Written by Jennifer Warren.

Cox MBAs Pave the Way to Success as Tech Wildcatters

2011-03-02T19:40:54Z

Gabriella Draney (MBA '08) is featured in the February 26, 2011 issue of The Dallas Morning News for her company Tech Wildcatters, a mentorship-driven microseed fund and startup accelerator. Tech Wildcatters' 12-week accelerator “bootcamp” runs every spring and fall in Dallas. The spring bootcamp began on Monday.

This year, Tech Wildcatters chose nine companies from more than 100 inquiries for its second boot camp, compared with five of 80 applications last year. Overall, it has provided about $350,000 in seed funding to the 14 companies, Draney said. "We're trying to do everything we can to build the early-stage tech community in Dallas."

Former bootcamp participants include Vickie Morris (MBA '08) and Jeff Borden (MBA ‘06). Morris and Borden entered the program with their company Brand Protection Agency (BPA). Their service provides pricing intelligence which includes minimum advertised price monitoring and competitive pricing information. During the program, BPA launched two additional web-based products to monitor and enforce branding and intellectual property. Since the program, they have taken on twelve new customers including Samsung.

Additional information can be found at http://techwildcatters.com/news/

A Deep Dive Into Virtual Worlds, Avatars, and Social Spaces

2011-03-02T23:09:06Z

With technology, according to Ulrike Schultze, one must question where the technology begins, in combination with the user, and where it ends. ITOM professor Schultze of SMU Cox confronts new boundaries between the avatar and its user in a series of studies of virtual worlds. Her new research shines light on the innerworkings of the avatar-user relationship and what opportunities the creator is afforded—at times disturbing the balance between what is considered real versus not real. A case study of a 33-year-old female in Second Life, the iconic virtual world, adds to her insights.

In-World Fundamentals

Virtual world users invariably engage in identity work. They are defining who they are online and how this relates to who they are offline. One minute the avatar is your doppelganger, the next you inhabit the avatar. Schultze notes, “In virtual worlds, people are constantly constructing what is real and what is not. Is it me or not? Is it play or is it really something quite serious and deep?” She continues, “These are questions that we confront in our everyday lives also, but because of the speed with which interactions occur in Second Life, participants in this virtual world are confronted all the time with this line of questioning.”

In part, this is because virtual worlds are ambiguous, in-between spaces. They represent a virtual reality that is different from actual reality, but for the majority of users, they are no less real. In fact, they are an extension of most virtual worlds users’ lives — a place into which they insert themselves and explore who they really are — rather than an alternate, fictional reality. “The avatar constructs a realm of possibility for you. You may behave more assertively, more gregariously, etc. in the virtual setting. You can take risks and try new behaviors. The avatar becomes an extended form of yourself, the person that you would be in a different body and social context” Schultze points out.

Boundaries become blurred in virtual worlds; the distinctions between a user’s on- and off-line identities and between what is regarded as real versus not are unclear. This makes virtual worlds ambiguous spaces that can at times be construed as fake, and therefore safe from consequences, and at other times be treated as real. As such, they allow us to question the take-for-granted boundaries between technology and people, and between the virtual and the real. “These are philosophical concepts that researchers and I are struggling with,” Schultze explains, because where these boundaries are drawn has consequences.

Let’s take the example of a mobile phone. For some it is merely a technological device that allows them to make phone calls when there is no landline available. For others, it is an indispensable part of who they are because it makes them accessible to friends and family and allows them to get on Facebook, to not only check their friends’ updates but also post their own. For such users, the mobile represents a way of maintaining their place intheir social network on a virtual, 24/7 basis. Thus, the loss of their mobile would possibly lead to a crisis of identity.

It is also important to note that these technology-user and virtual-actual boundaries cannot be drawn a priori. Instead, they emerge in use. And Schultze’s case study sheds light on the dialectic and ongoing process by which distinctions between what is real and what is not are made in virtual worlds. It highlights that there are two dimensions along which users make assessments of whether an action, interaction or emotion is real or not.

On the individual dimension, things are categorized as not real when they are on the surface, such as using Second Life as a diversion or escape. However, they are classified as real when they touch on the user’s core being as when the user is on a quest for his/her “true self.” On the social dimension, things are categorized as not real when people hide behind their anonymity to behave in ways that are inconsiderate and hurtful to others. In contrast, they are more real when people acknowledge the actual person behind the avatar and act in ways that expresses care and consideration for them.

Schultze’s study reveals how users might engage in a virtual world merely for superficial play, drawing a clear boundary between themselves and their avatar. However, once in a while, they catch a glimpse of themselves in their avatar’s behavior and mannerisms, leading them to question how different they really are from their avatar. Observing their avatar actions from a distance, they realize that they can actually be quite short-tempered, indecisive and even mean, for instance. In other words, as an avatar, their actions are less threatening to their own sense of self, thus giving them permission to assess their values, traits and skills more honestly, even if these contradict their perceptions of themselves.

Users make designations of what is real versus not, and their off-line persona versus their avatar identity, on an ongoing, case-by-case basis. Thus the boundaries are left fluid and the virtual space remains ambiguous and generative for users’ continuing expression and exploration of who they are.

Development Time and Business Apps

A key takeaway of Schultze’s research is that virtual world experiences do carry over into the real world, regardless of the way in which inhabitants try to fence off their experiences in Second Life. People become more self-aware and can rehearse new behaviors within the perceived safety of their avatar form. And by virtue of the lessons learned and experiences gained, it can be a powerful individual-level learning environment. Schultze affirms, “It is a powerful mechanism for training simulations.

After all, training and learning implies identity work. One asks: ‘Who am I? What am I good at? Do I have it in me to be as assertive, persuasive or funny as I need to be for the position I’m training for?’” Virtual worlds are spaces where you give yourself permission to try new things and to reach beyond who you currently believe you are for personal development, Schultze surmises.

Virtual worlds can be particularly useful in a training context. The classic channels of mentoring, leadership development, and educational programs can be replicated in virtual settings. Firms are developing their own virtual worlds to accomplish these types of development activities as well. Schultze adds, “A virtual world experience helps with role-playing different scenarios. Instead of running through an imaginary negotiation in your head imagining ‘and I’ll say …’ and ‘then he’ll say ….,’ you could do a dry run in Second Life. This will make it more realistic because you’d be interacting with other people who act in ways that are not anticipated.” And given the ambiguity of the space, “if your performance worked, you can claim it as real and your own; if it didn’t, you can write it off as ‘not me’. Thus failure is less personal.”

Lastly, virtual worlds, and particularly Second Life, are social networking environments, according to Schultze. In the research, she found that users believe they have obligations to others in-world through the roles they are playing out. This attests to the reality of what is taking place in virtual worlds. Whether a dress rehearsal or a personal virtual reality show starring oneself, these worlds are occupying a growing space for exploration.

The paper “The Dialectics Of the AvatarSelf Relationship: A Performative Perspective On Virtual Worlds,” authored by ITOM Professor Ulrike Schultze of SMU Cox School of Business, is the second paper in a series of research projects supported by a grant by the National Science Foundation.

Written by Jennifer Warren.

Hedging Away: Derivatives Blur Executive Compensation Incentives

2011-01-20T16:28:44Z

New research identifies an increasing practice of corporate insiders and CEOs hedging their ownership in the firms they manage. Financial engineering, also called financial innovation, has offered a way for executives to reduce the “sensitivity” of their firm-related wealth to stock price through the use of derivates. Troubling was the finding about the timing of the use of some of the derivatives—these more opaque transactions were used in lieu of selling stock when a decline in stock price was expected.

Finance Professor Swami Kalpathy of SMU Cox and co-authors analyze why and how insiders hedge ownership and the implications for corporate governance. Hedging, done on the personal account of the executive, changes the nature of equity incentives established by the Board. Thus questions arise: Should these practices be allowed? Are some forms of hedging more benign than others because they primarily help diversify holdings?

Tying executives’ wealth to firm performance has been a major goal of shareholders for the last several years. The economic rationale is to motivate managers to increase shareholder value. This has been accomplished through the use of stock and stock option-based compensation along with mandatory minimum ownership requirements. Because of “concentration” of firm-specific wealth in their investment portfolios, many executives now have the incentive to diversify or hedge their equity position in the firm. While insiders have the motivation and means to hedge, there is limited empirical research in this area.

This magnitude of unraveling of CEO incentives is troubling for shareholders as they diminish the incentives of managers to engage in corporate activities that increase shareholder value. In other words, there is very little “skin in the game.” Four key types of commonly used derivative securities were identified and analyzed in the research— pre-paid variable forwards (PVFs), zero-cost collars, exchange trusts and equity swaps. Of the executives hedging their wealth with the most aggressive types of derivatives, zero cost collars and variable forwards, findings show that executives hedged about one-third of their holdings; these hedges reduced the impact of firm performance on their firm-related wealth by 25%.

Kalpathy explains: “If insiders are allowed to engage in hedging, if the amounts are small enough that it reduces the disincentive to pass up risky projects, then it might be potentially justified.” He continues, “The problem occurs when the amount of ownership hedged becomes non-trivial as we uncover in our research. In which case, the executive’s risk-bearing ability is overshadowed by this dampened effect the hedging provides.” He continues, “Why incentivize executives in the first place if this can be unraveled by hedging. This is a dilemma. Do you allow this practice? If so, how much do you allow?”

Who Hedges, Why and How

The data reveal that a diverse group of corporate insiders engage in these derivative transactions, including CEOs and Chairmen, other senior officers, non-officer directors and blockholders with 10% ownership or more. The amount of ownership that is placed in these instruments varies by type of security. The average level of ownership hedged with collars (31%), forwards (28%), and swaps (33%) are quite similar. The percentage hedged is economically significant and larger than the average open-market insider sale. The typical CEO witnesses an approximate $60 increase in firm-related personal wealth for a $1000 increase in shareholder wealth. The authors find evidence that hedging firm CEOs witness a 25% reduction in the sensitivity of their wealth to firm performance. Precisely, the sensitivity of wealth to firm performance declines from $83 to $62.

Exchange funds are used by a higher proportion of CEOs/Chairmen of the Board (41%) while collars tend to be more concentrated in lower level firm executives (40%). On average, collars provide insiders with more upside share price gain than forwards. The average stock price appreciation the investor retains with a collar is 55%, compared to 33% for forwards. In contrast, insiders sacrifice more downside share price loss before the collar’s hedge takes effect. Specifically for collars the stock price would have to fall an average of 14% before receiving downside protection. Overall, insiders hedge a significant fraction of their ownership position, particularly with collars, forwards and swaps. When using a collar or forward agreement they also maintain a significant amount of upside in potential future share price appreciation. At the same time, both collars and forwards provide insiders with a hedge against most of the risk associated with declining share price.

The authors reveal a pattern of “good timing” with these contracts. Kalpathy states, “We find support for diversification story, but also support for an alternative explanation, that this is being done opportunistically.” Evidence shows that collars (forwards) precede shareholder securities-based litigation, earnings restatements, and negative earnings surprises (or earnings restatements)—activities that are traditionally associated with poor firm performance.

Exchange funds, more commonly used by CEOs, do not tend to be used opportunistically. Their use occurs more for diversification motives. CEOs tend to use exchange funds more frequently while upper level managers tend to use collars and PVFs more often. Equity swaps appear to be more prevalent among blockholders.

Either for personal consumption or diversification purposes, executives will want to “cash out” or monetize their holdings in firm stock. The most common method insiders have to achieve either liquidity or diversification is via an open market sale of equity. Collars, forwards, exchange funds and swaps can be used as a substitute for an open market stock sale. In fact, much of the literature produced by financial planners and investment banks stresses the diversification and liquidity aspects of these instruments. For example, literature produced by JP Morgan, William Blair and Company, and Bernstein Wealth Management all tout the diversification aspect of collars, PVFs, exchange trusts and swaps to insiders and others with significant equity holdings. In addition to providing liquidity, the hedging contracts help insiders preserve dividend and voting rights and also defer income taxes over the life of the hedging agreement.

Matters of Corporate Governance

The authors’ findings raise some concerns about how these instruments are being used. One concern is the reduction of sensitivity in CEO wealth to stock performance. Boards do not appear to adjust CEO compensation to compensate for the weakened incentives due to hedging. Indeed boards can mandate and enforce corporate policies that ban or restrict the use of these instruments, but few do.

The governance analysis in the paper suggests that these transactions take place at firms with weaker internal governance mechanisms. And questions are raised about the use of these transactions by corporate insiders, especially for collars and forwards, given evidence of poor performance following the initiation of these instruments. “Given the levels that are hedged, I don’t think this is good for shareholders,” says Kalpathy. He continues, “While investment banks like Goldman Sachs create these instruments for high net worth clients with attractive features (such as favorable tax consequences, voting rights, and dividends), there is an offsetting effect which is shareholder concerns.”

Between 1996 and 2006 there were 2,042 unique transactions by 1929 individuals that hedged ownership positions at 582 firms. The use of hedging instruments has generally increased over time, with the single largest use occurring in 2000; this may be because insiders became concerned about the run up in equity values prior to the stock market downturn that began in late 2000.

From 1996 to 2005, a total of 9 instances were found where companies disclosed some type of ban on hedging. In 2006, just 150 firms disclosed the restrictions on hedging. The new Dodd-Frank regulation says that firms have to disclose company policy on insider hedging in proxy statements from 2010 onward, whether the practice is restricted or not.

Kalpathy says that while disclosing whether a firm restricts insider’s use of derivatives is a positive step, it does not go quite far enough. When you look at the ownership by insiders in a proxy statement, you cannot see how much of their ownership is hedged. Microsoft executives, for example, may hedge 50%, but you won’t really know unless you dig through the insider filings filed with the SEC at different times during the year and aggregate them to know the magnitude hedged. What makes this even more difficult is that the details of hedging are often buried in footnotes of the relevant SEC filings. If the idea behind requiring insider hedging policies in proxy statements is to inform shareholders in a meaningful way, then they don’t convey enough information. We need a new column or at least a footnote where shareholders can see how much of the total ownership is hedged by insiders. Institutional investors may also want to know this.

The authors conclude that the ownership disclosed in annual filings such as proxy statements overstate pay-for-performance incentives in compensation contracts. This ultimately paints a somewhat misleading story of the true incentives of insider ownership in relation to the firm’s shareholders.

The paper “Why Do Insiders Hedge Their Ownership? An Empirical Examination” by Swaminathan Kalpathy of Southern Methodist University’s Cox School of Business, Carr Bettis of Arizona State University, and John Bizjak of Texas Christian University is under circulation.

Summary by Jennifer Warren.

Tis the Season to Reflect on Gift Giving

2010-12-15T20:40:59Z

Believe it or nor, gift giving is really a complex social and psychological phenomenon. Remember the movie “The Family Stone,” when the uptight Manhattan executive Meredith Morton, played by Sarah Jessica Parker, is finally embraced by the Stone family after she nails the Christmas gift? It gets more complicated. In new research, Marketing Professor Morgan Ward of SMU Cox and co-author Susan Broniarczyk show that gift-givers experience discomfort when they choose a gift that matches the identity of the recipient but is contrary to their own. A potential retailer’s boon, gift-givers then compensate to re-establish their identity and may choose products that express their own identity on the next product choice.

Consumer spending on gifts for family and friends accounts for approximately 10 percent of the total retail market in the United States— $300 billion spent annually. A key objective for gift-givers is to choose an item that fulfills the needs and desires of the gift recipient. But the perfect gift for a recipient could be contrary to the giver’s identity and preferences. For instance, a 55 year-old female vegetarian shared the experience of buying a gift certificate to a steak house for friend: “I didn’t feel good about it but I knew she would enjoy it.”

Gift Giving Conflict
According to Ward, “Each person possesses multiple identities which are based on traits, beliefs and group-memberships that define his or her self-concept. For instance, people are likely to have identities related to religion, athleticism, geographic location (e.g. Southerner), and ethical issues (e.g. environmentalist) among others. Gift-givers are at risk for feeling a threat to these core identities when purchasing a gift contrary to their identity for a close friend, as close others are a core part of our own self-concept. In fact, the research reveals that givers do not experience the same level of threat when choosing for a distant friend as the recipient is less self-relevant.

The researchers investigated the consequences of choosing a gift that threatens one of two central identities: a school or political identity. In their studies, the researchers told participants to imagine that they were choosing a gift for a recipient who had created a gift registry, thus, providing his/her explicit preferences. In one set of studies, gift-givers from the University of Texas at Austin (the “Longhorns”) were faced with choosing a gift from a registry for a close friend that attended either a rival school, Texas A&M (the “Aggies”), or their own school. The gift on the registry was emblazoned with the rival school’s emblem in their recognizable “Aggie Maroon” or their own school’s “Burnt-Orange Longhorn,” respectively. While making the gift choice, the givers of the rival Texas A&M gift were more likely to exhibit physical signs of discomfort such as chewing on their lip, averting their eyes, fidgeting, and crossing their arms. Upon check out, givers of the Texas A&M gift expressed the threat of this identity-contrary gift by physically distancing themselves from the offending gift, placing it further away. Moreover, in their subsequent choices, participants who chose the A&M mug for their close friends, re-affirmed their threatened identity by choosing more identity-representative (but less appealing) UT products.

A second study examined the consequences of choosing a gift that is consistent or at odds with the givers’ political identity. Givers were presented with choosing a gift from a gift registry for a close friend that had the same or opposite (Democrat-Republican) political affiliations. The registry gift was emblazoned with the political party symbols for the Democrats (a donkey) and the Republican’s elephant. At the end of the study, gift givers were presented with a subsequent choice of a periodical subscription as a reward for participation. Givers who gave a gift opposite their political affiliation were more likely to select a periodical that reasserted their political identity. Specifically, if a Democrat gave a Republican gift, s/he was more likely to select a periodical perceived as more Democratic leaning, the New York Times. In contrast, if a Republican gave a Democrat gift, s/he was more likely to select a periodical perceived as more Republican leaning, the Wall Street Journal. Notably, this tendency to select political identity-consistent periodicals was much stronger when gift givers had previously selected a gift contrary to their political affiliation.

Implications
This research highlights how consumer products can serve as both a mode of personal expression and a threat to an individual’s self-concept. The authors explain: “Prior research has shown that consumers are motivated to purchase identity-consistent products. This research shows that product purchase is such an important identity marker that even when the product is intended for someone else as a gift, it still may threaten the identity of the purchaser.”

Retailers might capitalize on this finding to generate additional purchases by encouraging givers to choose something for themselves after selecting a gift, as a way of bolstering their own identities. Sell two items instead of one! Retailers might further emphasize ways in which givers can customize registry items such as writing a custom note or choosing a personalized wrapping paper as a way to re-assert their identities.
But in their quest to make identity-consistent purchases, close friends should avoid giving gifts outside of the registry. Ward’s on-going research further examines the complexity of gift-giving when the giver is faced with purchasing from a gift registry which impedes their ability to purchase items that are not unique or reflective of the relationship between the giver and recipient. While givers grapple with how to choose from a registry without sacrificing their own tastes, retailers are inventing ways to avoid allowing givers to purchase gifts that recipients do not want. Amazon was recently awarded a patent that allows users to set up “rules”, so that whenever an order is placed by a well-meaning but clueless gift giver, the item is automatically substituted for a gift certificate of the same value, or a similar-priced item from the recipient’s Amazon “wish list”. Indeed, it seems that givers gift strategies are impervious to change and thus, retailers much protect recipients from their misguided choices. With the season of giving upon us, Ward’s research reminds givers to try to keep their recipient’s preferences foremost in their minds.

“It’s Not Me, It’s You: How Gift Giving Creates Giver Identity Threat as a Function of Social Closeness” by Morgan Ward of SMU Cox and Susan Broniarczyk of University of Texas at Austin is forthcoming in Journal of Consumer Research.

Stressed Out Overworked Systems Should Just Say "No"

2010-12-10T18:14:44Z

The consequences of pushing an operation to its max can lead to many negative consequences such as increased costs and worker burnout. In the extreme, family members of deceased workers from Foxconn in China, an Apple supplier, can tell tales about the effects of overworked systems. New research by ITOM Professors John Semple, Sreekumar Bhaskaran and Karthik Ramachandran at SMU Cox offers a novel and pragmatic approach to managing demand through better operational choices. Their research also serves as a cautionary tale for overworked systems.

Dealing with Growth
In many businesses, high demand can result in significant stress on procurement and production. In such environments, the authors show that there is a backlog limit – a point at which a firm should turn away business. The original spark for the research came from the challenges faced by a local steel manufacturing plant, which had to refuse new orders when they were heavily backlogged. This paper explains why this behavior is optimal for many types of production or inventory management systems. This work could have applications in other industries such as petroleum refining, transportation and logistics, agriculture or even apparel manufacturing.

Semple explains their work: “When your system is under stress, it actually costs you more. If you are a retailer, this means higher procurement costs; if you are a manufacturer, this means higher production costs.” Semple recalls working in a plastics factory long ago. When demand was high, the factory asked workers to cover additional shifts. It was not as productive, he remembers. “The marginal costs start rising. If you pay a guy time-and-a-half to work a second shift, it is more expensive and the quality will go down. The firm might only get 80% of normal productivity due to employee fatigue and increased rejects. Costs per unit can increase dramatically.”

To Backlog or Not to Backlog
When a firm wants to decide whether or not to entertain a new order, the future ramifications of accepting that order must also be considered. In fact, when the cost of producing additional units is increasing, the optimal sales strategy is characterized by a critical threshold, a backlog limit, which dictates when to stop selling. “One of the key sources of inefficiency in any business setting is how much money is locked up in inventory,” Ramachandran notes. “If you don’t know how many buyers will come on any given day, one way to deal with that is to actually produce a lot, have stock, and hope buyers show. Obviously if they don’t show up, there is a cost for inventory. And if the firm doesn’t have enough inventory, and many show up, then you have to procure more material in the short term which can be expensive. You will be paying for overtime and material costs may increase.”

Firms must find the balance between stocking many goods to deal with uncertain demand, and the cost of having to order new materials and labor. A punchline, says Ramachandran: “Sometimes it’s not best to reach back and pull all the strings for the customer. It’s just better to let them go, even if they take some goodwill with them.”

Take the example of steel manufacturing. Under normal circumstances, the steel manufacturer might want to increase production volume to obtain greater economies of scale. The problem for the local producer was that they were already working to the hilt, fulltime. “As a result, it was difficult to accommodate new orders from a smaller firm,” Ramachandran explains. “A new order takes two to three months. The plant would need more supplies and make people work overtime; you would have to get scrap metal from small suppliers, and fire up new furnaces. At some point, it becomes optimal to shut the door to new orders.”

Semple relays another issue: “The real question is what you do when you run out of inventory. Do you continue to take orders and let them be backlogged or not? If the backlog is really long, and the cost of procurement is high, then at some point you should tell people to come back later. When the system is overly congested and there is not enough capacity, this is a reasonable strategy.”

In environments with high demand uncertainty, this work suggests that backlogging must be viewed differently from a strategic perspective. Instead of being an encumbrance, backlogging could be a very useful way to capture extra demand that comes in on a good day, suggests Ramachandran. “Backlogging is like a bucket capturing demand on a rainy day, to be satisfied later on slow days.” In this present environment of slow demand, reflecting back, Bhaskaran suggests that firms should have backlogged orders because that capacity could have been used in a low demand period (like now).

This right of refusal implies that there is an optimal buffer, according to Semple. “Beyond a point though, don’t buffer.” He opines that this research should have been done long ago.

Intuitive approach
Our policy makes a lot of sense intuitively, suggests Ramachandran. “It may be tempting to backlog a profitable customer’s request, but this promise could have huge and complicated implications for your operation for days and weeks to come,” he states. The authors’ math is about resolving and isolating the implications of what you do today and how it will affect future operations.

Traditionally, what happens when there is more demand than supply – whether orders are lost forever or backlogged – was determined only by the nature of the product, according to Bhaskaran. “What we prove is that firms can benefit by having the option to say “no”. The message is: If you’re operation is stressed out, “just say no,” states Bhaskaran. “When you take a lost sale, the immediate cost may be high—but it also limits your future exposure to a stressed out system. Indeed, it doesn’t pay to take more orders beyond a certain point.”

The paper “A Dynamic Inventory Model with the Right of Refusal” by Information Technology & Operations Management Professors John Semple, Sreekumar Bhaskaran and Karthik Ramachandran of SMU Cox is forthcoming in Management Science.

Written by Jennifer Warren.

Running Out? Peak Theories Exposed

2010-10-25T19:41:11Z

The concept of peak oil has captured the imaginations of policymakers, analysts, researchers, and the public. But from the viewpoint of the energy economist, the idea of a peaking resource, such as oil, ushering in an era of reduced growth and hardship, doesn’t hold water. Energy economist Dr. James Smith of SMU Cox provides calculations in new research which show that the “peak” is an unreliable indicator of resource scarcity, particularly for oil markets governed by the fundamentals of price, supply, and demand. While the idea of peaking may offer some indication of scarcity, it cannot be relied upon to draw firm conclusions.

Emergence of Peak Theories
The concept of an exhaustible resource reaching a peak and then thereafter becoming exhausted came into play in 1956 when M. King Hubbert first introduced his hypothesis. His predictions proved out in the 1970s when U.S. oil production in fact “peaked.” (Other factors informed this though like cheaper oil from the Middle East.) But the oil crisis gave credence to his work even though peak oil was not the culprit. Dr. Smith recalls that Scientific American ran a cover story about peak oil in the mid-‘70s. In recent times we have seen Foreign Policy say a long “goodbye” to oil as well as National Geographic and others.

A lot has been learned since then. Smith’s central message is that the fundamentals are missing in the equations that should be factored into the ideas of peaking. He writes:

“Any well functioning market economy, endowed with a limited amount of an exhaustible resource, will apportion production through time according to prevailing economic incentives that reflect market fundamentals, by which I mean the cost of production, discount rates, the strength of current versus future demand, and the availability of substitutes.”

Smith says that price will indicate a production trajectory according to supply and demand. Let’s look at the two main drivers of supply and demand: energy producers and consumers. “Producers are driven by attempts to maximize profits,” Smith explains. “ As a producer, I have oil reserves. If I believe they will be really scarce in five years I’m not going to produce as much today because I’ll be rewarded more later when price is higher. So I leave these resources in the ground. That’s part of an inter-temporal balancing.” Consider the shale gas players faced with excess supply and low prices. One oil major, Conoco has announced they will shut in some natural gas production. This is an economically rational choice. What’s more, oil producers don’t develop additional reserves until they are needed. Realistically, no business would carry 100 times the amount of inventory needed to satisfy demand. Carrying excess inventory is expensive.

Alternatively, consumers are looking to maintain their standard of living in daily affairs. Smith says, “We regulate consumption of many things according to price. If something becomes more expensive, we find a cheaper substitute and this makes us better off than buying what has become more expensive. We have more effective income that way.” He continues, “Consumers react to price and perceived price signals. If something is overpriced, they substitute, conserve, and reduce. And therefore since we haven’t exhausted the supply of a resource like oil, the resource is not priced out of reach. We may have pushed the price of it being out of reach five years or ten years down the road.”

Consumers are doing their part by conserving and protecting standard of living by stretching income, not just today, but in the future and over their children’s foreseeable lifespan, says Smith. “The producers are in it for the money, bringing resources to market when it’s most advantageous and beneficial to consumers. ‘I don’t want to sell oil when you are not willing to pay for it,’ the producer would say. ‘At the point when you do value it, I will bring it to market.’ Seen from this perspective, the peak has as much to do with peaking demand as it does with physical constraints on supply. Both sides are working toward the same end. Consumers get satisfaction from prudent consumption; producers are receiving income to distribute some of it to shareholders.”

Peaking Scenarios
Many thought in summer 2008 that oil prices of $145 a barrel might indicate the peaking of oil supplies. Analysts had a field day placing bets on $200 and $300 oil. The crisis that followed and the bottoming out at $35 by early January 2009, were exactly the types of fundamentals illustrated by Smith’s peaking scenarios under different economic assumptions.

First a few terms to remember for the discussion ahead. Demand for a resource represents the combined force of population growth, economic development, and other forces. Also remember that substitutes exist for the depletable resource, a backstop technology like solar, hydrogen-based energy forms or other renewables. The backstop’s cost is likely relatively high, therefore it has not taken share from the lower priced exhaustible resource. The timing of a peak depends on “the fundamental factors that describe the economy.” This all depends on demand, volume of the resource, cost to produce the depletable resource versus the backstop, discount rate, and the economic growth rate.

Hubbert predicted the peak of oil would come at roughly the mid-point of an exhaustible resource’s lifespan. However Smith shows that in light of the above fundamentals, a peak can come early or late over the exploitation period. Even more sophisticated models allowing for technological change may cause production to peak more than once along a path. Natural gas production from unconventional resources would attest to that scenario of multiple peaks. Hubbert applied his theory to predict that U.S. natural gas production would peak in 1973 at 14 trillion cubic feet (tcf); but today we produce over 20 tcf and output is still rising.

The research illustrates how peaks behave in a benchmark scenario that could reflect oil markets, with a reasonably estimated growth rate of 1.5%, discount rate, costs, and reserves. Peak production occurs when 64% of the resource remains. Price starts at $26.61 and rises over 26 years to $100, to the cost of the backstop technology. As price rises to $100, the cost of the backstop, and given the strength of demand at these prices, the total resource endowment is produced and exhausted just as the backstop technology becomes economic. Smith says, “If we were to rely on the peak to signal impending exhaustion, it seems that substantial warning is supplied; it certainly provides more than a last-minute indication.

Under a lower growth scenario of .5%, the peak is shown to occur at the very outset of the life of the resource, when 100% of the resource remains. With demand being smaller in the low-growth case, the resource appears to be in fact less scarce. Peaking provides an inverse (opposite) indicator of resource scarcity: “the more economically abundant is the resource, the sooner the peak will arrive because there is less reason to conserve.” Unfortunately, Smith notes, the dynamic behavior of the peak is not so very consistent. At a higher economic growth rate of 2.75%, the peak is delayed to the very end of the exploitation period when none of the resource remains. In short, peaking is an ambiguous indicator of the arrival of scarcity.

Peaking Unhinged
“How come the small change in growth rate would completely unbalance these dynamics?” Smith questions. “Because the peak is only one of several indicators that reflect the economy’s striving to balance today’s demand and future supply. The peak is interacting with the price movement and with the changes in the level of consumption. There’s no way to predict when the peak will arrive without doing the calculations. There’s no geologically proper or predetermined moment for the peak to arrive.” He concludes that the peak is just the reflection of other underlying economic factors that are adjusting to bring supply and demand in balance.

The essence of market allocation is such that you don’t want to run out before there is a replacement available at a cost that is acceptable to consumers. “As long as we have cheaper oil today, we don’t want to jump to the alterative and bypass this lower priced energy source,” Smith relays. “We do have to pace ourselves going through however. As a resource becomes increasingly scarce, price rises in a fairly predictable way. Before we run out of conventional oil, its price will rise to the level that ushers in the new age of the backstop.”

Looking at other peak scenarios, Smith considers a case called ‘resource disappointment,’ when suddenly it is realized that less of the resource exists than previously thought. Here consumers adjust by reducing consumption and saving more of the resource for the future. This reaction causes the peak to arrive sooner, when only 21% of the resource has been used. “It make sense if you know there’s not that much of a resource to sustain the future, so you’re going change utilization now. This takes pressure off price today. If consumers step back, it means they understand the need to save some of this for our kids’ use. That’s a reduction in demand today. You would think price would shoot up, but not if well-meaning consumers step off the demand pedal. A market economy weighs future benefits against present costs.”

Another scenario that demonstrates the ambiguity of peaking as an indicator of scarcity comes with a one-shot cost-saving technological breakthrough. Price is initially reduced. The peak arrives after 21% is consumed versus 36% for the benchmark case. Given that the cost to produce is cheaper, with the same physical reserves, what happened to demand? The peak comes sooner because of more consumption.

But if the cost-saving innovations arrive continuously, rather than all at once, the peak is delayed to the point when 40% of the resource is exhausted. So, do cost-saving technologies (reduced scarcity) advance the peak or retard its arrival? It can happen either way. Innovation that reduces cost say 3% every year versus the one-shot breakthrough give opposite results. Both are cost reductions for the same resource. But the peak is impacted in opposite ways in these otherwise similar situations. Thus, timing of the peak is ambiguous regarding underlying fundamentals. It is clear that the peak doesn’t reliably predict or reflect the real change in scarcity.

Smith draws the conclusion from his scenarios: “If you tell me the peak is coming sooner: Should I applaud or cry? I need to see the fundamentals before I can know what arrival of the peak portends for the economy.”

Optimal depletion?
“We are becoming a more global economy that is governed by markets. That’s the right paradigm, “ Smith states. “If we are really going to become a battery-powered nation, a lot of this will depend on who owns the resources that are inputs for that. We are best off having diversified energy sources. It is better to not have just one way to get around.”

Even China, with its government intervention in energy markets, has learned that they have to listen to market forces. “With exchange rates, they are learning, “ Smith relates. “Most countries are moving in the right direction, except North Korea maybe. Even Cuba is moving in the right direction.”

Smith recognizes a U.S. government policy push to subsidize alternatives such as wind, solar, biofuels, and more stringent fuel efficiency standards. “If this is motivated by climate change concerns, it’s one thing to intervene accordingly to mitigate carbon emissions. But if this push is motivated by a fear of peak oil, that concern and the policies it begets are misplaced. There are two very different motivations for getting off oil, and some people who are seen to advance climate change agendas may in fact be motivated by the fear of peak oil. They may not trust oil as a way to sustain our industrial base going forward. But that is misplaced. The price system will regulate utilization and we should not shutter the cheapest energy forms we have. That will only impose unnecessary costs on society and retard growth.”

As analysts continue to study fundamentals, map where technology is taking us, and chart, say coal consumption in China, many hands are contributing to the knowledge base. “Top level changes in statistics or indicators give no meaning to what is happening on the ground, the fundamentals,” surmises Smith. Peak theories are not reliable in revealing true scarcity.

The paper “The Portents of Peak Oil (And Other Indicators of Resource Scarcity)” by Professor James Smith, Cary M. Maguire Chair in Oil and Gas Management, has been presented at global conferences in Asia, Europe, and the U.S.

Written by Jennifer Warren.

Avoiding the Never-Never Land of Marketing Communication

2010-10-22T15:47:53Z

Marketers beware: There is an ideal level of communications that your customers will tolerate. Beyond that point, they will be turned off of your company’s products and messages, providing diminishing returns to the firm and hurting the relationship.

New research by Glenn Voss, marketing professor at SMU Cox, and co-authors, analyzes how communication volume, the mix of communication channels, and customer preferences combine to create an optimal level of communications. This is important given the many channels available to marketers, both traditional and electronic. Voss says, “I’m always interested in exploring boundary conditions, when a relationship that you expect to occur breaks down. For example, there is a point where satisfaction does not lead to repurchase. Here, we are interested in that point when relational communication does not lead to stronger relationships or repurchase.”

The authors focus on “relational communication,” which means personalized communication with an existing customer through a variety of channels. This is part of a broader relationship-building marketing strategy. These communications may remind customers of needed services, announce new products and locations, survey customer satisfaction following a service encounter, and convey targeted promotional offers. In this study, the authors examine communication volume related to three channels commonly used for targeted customer contacts – phone, email, and postal mail.

The Study
The results indicate that there is an ideal level of communication volume that varies considerably across these three channels. Furthermore, the ideal point shifts in response to multichannel communication efforts and can vary across individuals depending on their channel preferences. Because these shifts in ideal points are directly linked to repurchase behavior and customer profitability, the results provide insights that can help managers develop more effective relationship strategies. Voss says, “The optimal level varies by individual. For example, I become very reactive particularly to postal mail as a form of relational communications. It is such a waste of resources, and fills up my mailbox.” He continues, “This will of course vary according to the relationship you have with the firm, and depending on the perceived usefulness of the communication. Some are welcome because they are to remind me; others are just a pain.”

According to the research, its important to consider the impact of specific channels— individually and in combination—rather than just aggregate volume. This allows firms to more effectively manage the overall volume of communication and the channel mix. The results also highlight the importance of considering individual-level customer characteristics, such as channel preference, which will ultimately influence repurchase.

“The message is clear that marketers should avoid too much relational communication because it will hurt their relationships with the customer,” states Voss. “I refuse to buy from one department store for this very reason—their relational communication strategy. I’ve asked them to stop sending me direct mail and they don’t. One wonders, how many customers are they turning off?” This type of negative reactance occurs when customers perceive that relational communication volume is invasive, obtrusive, or environmentally wasteful.

“Our results say, though it varies across industry, companies and individual customers, the danger of turning off customers is very real,” Voss indicates. “It’s clear that firms are wasting resources. And as individuals, we expect to have some privacy or at least some control over what comes into our lives.”

Avoiding Overkill
A key message gleaned by Voss is that companies should recognize the potentially detrimental effect of too much relational communication. They then need to identify what the optimal amount is.

A continuum of customer responses exists to relational communication. Low levels of relational communication elicit a customer response of reciprocity, which is being open and responsive to the communication. But high levels of relational communication can elicit negative reactance, which leads to a backlash or boomerang effect. Taken together, the two theories imply an ideal point that represents the threshold at which customer response shifts from positive to negative. By allocating contact across multiple channels, firms can significantly shift the ideal point of communication volume — and by extension customer repurchase behavior. Marketers should recognize the influences between individual channels, and also pay attention to customers’ preferences for different channels.

Voss further cautions: “A lot of smaller companies outsource this activity to so called “experts,” and they lose control over it. These third parties are incentivized to do more volume, as they are paid for doing more. There may be a bias toward doing too much by outsourcing this activity.”

There are also implications for social networking with all the feeds, tweets, and pings. An abundance of communication floats across the web. Personally speaking, Voss responds, “I find it an invasion of privacy when communication is being sent to me surreptitiously in a way that I cannot control it or turn it off. That aspect of control may be a most important aspect. I feel in control with ‘do not call.’ With direct mail, there’s opt in/out, but many times they don’t comply. The Internet poses the problem of control with pop ups and other noted forms of privacy invasion. We’re being chased all around the Internet.”

This drives home the message of know thy customers’ preferences for the medium and when the ‘fine line’ into never-never land has been crossed.

“Enough is Enough! The Fine Line in Executing Multichannel Relational Communication” by Glenn Voss of SMU Cox, Andrea Godfrey of University of California, Riverside, and Kathleen Seiders of Boston College is under review.

Written by Jennifer Warren.

Cox in the News 2010 9/13 - 9/26

2010-10-05T21:33:32Z

Tax Lessons from the Lone Star State (9/20/2010)
FOX News

W. Michael Cox, Director of the Cox School of Business O’Neil Center for Global Markets and Freedom, discusses why Texas has not been as negatively affected by the economy as the rest of the nation. “We have low income taxes [and] we have low corporate income taxes as well,” he said. “We’re one of seven states with no personal income tax rate, and that’s why my city of DFW is adding one million people every six years.”

Link: http://video.foxbusiness.com/v/4342934/tax-lessons-from-the-lone-star-state/

Governments Cannot Buy an End to Poverty (9/22/2010)
The Mail and Globe

W. Michael Cox, Director of the Cox School of Business O’Neil Center for Global Markets and Freedom, has his book Myths of Rich and Poor referenced in an article about how the United States government cannot buy its way out of poverty. “The officially poor people of the United States, were they to form a country of their own, would be roughly as well off as Europeans.”

Link: http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/governments-cannot-buy-an-end-to-poverty/article1717407/?cmpid=rss1

Bill O'Neil Making a World Class Investment in Alma Mater SMU (9/26/2010)
The Dallas Morning News

Bill O’Neil, founder and publisher of Investor’s Business Daily, commented on the importance of having the O’Neil Center for Global Markets and Freedom in the south at SMU. “You need a Harvard or a Stanford in the South,” he said. “If SMU keeps upgrading and improving itself, it could emerge as that.”

Link: http://www.dallasnews.com/sharedcontent/dws/bus/columnists/chall/stories/DN-Hall_26bus.ART.State.Edition1.2497067.html

The Supply Side Lesson of Henry Ford (9/21/2010)
Investor’s Business Daily

Dwight R. Lee, the chairman for the Center for Global Markets and Freedom, commented on how the current administration is going about raising purchasing power the wrong way. “Increasing productivity is the cause for high purchasing power and high paying jobs, not the other way around,” he said. “This is the supply side that most politicians have yet to learn from Henry Ford’s five-dollar day.”

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Cox In the News 2010 9/1 - 9/10

2010-09-15T23:00:55Z

What Now for Gulf? Fire Complicates Drill Debate (9/3/2010)
Associated Press

Also Appeared in 71 other publications including ABCNews.com, The Boston Globe, Yahoo!.com, CNBC, The Philadelphia Inquirer and the Chicago Tribune

Director of the Maguire Energy Institute Bruce Bullock commented on the latest oil rig fire and how it might affect the current drilling moratorium. “Anything that casts any kind of shadow on the industry right now certainly complicates lifting the moratorium," said Bullock. “There are over 100 fires in the gulf every year. Were it not for the BP incident, this would receive very little coverage.”
read more on AP.com

U.S. Offshore Oil Fire May Delay Lift of Drill Ban (9/3/2010)
Reuters

Director of the Maguire Energy Institute Bruce Bullock commented on the recent oil rig fire in the gulf, and how it might delay the lift of the moratorium. “Anything that casts any kind of shadow on the industry right now certainly complicates lifting the moratorium,” said Bullock.
Read more on Reuters.com

In Politics, White is Still All Business (9/5/2010)
Dallas Morning News

Finance Professor Mike Vetsuypens commented on how businessman Bill White is creating profits for companies. “An executive putting his own money in the deal gives me confidence,” said Vetsuypens. “If I were a fellow investor in Wedge I’d like to see more of that kind of behavior.”
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What We Do; What We’re Paid to Do It (9/6/2010)
The Dallas Morning News

Associate Director of the Maguire Energy Institute Bud Weinstein commented on what the outlook for jobs prospects looks like in the Dallas Ft. Worth area. “The good news is we’ve added jobs over the past year. The bad news is we’re still considerably low our peak our peak employment level,” said Weinstein. “If and when a sustainable national economic rebound occurs, I fully expect the Dallas Fort Worth area to outperform the nation.”
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How China Can Sustain Growth Cleaner and Greener

2010-09-14T16:22:41Z

China recently became the number one energy consumer in the world, surpassing the U.S.’s dominance on that score for nearly a century. With China’s greater electricity demand from power-hungry cities and industry, its carbon emissions will rise to chokingly high levels. It surpassed the U.S. as the largest emitter in 2006, and by just 2015, emissions are forecast to be 35% greater than the U.S’s.

Focusing attention and policies toward greener infrastructure in energy and water will be important for China as it continues on its growth trajectory. New research by finance professor Andrew Chen of SMU Cox and sustainability researcher-writer Jennifer Warren offers evidence that China’s sustainable growth can be met by investing in greener infrastructure through capital markets—bringing with it a climate change dividend.

Economy & Ecosystem
The world’s economic system and ecosystem have everything to gain by teasing apart the infrastructure and climate change-related issues for China. But the challenges ahead are complex and expensive. Particularly, China wants financing and technology transfer from the U.S., considered a key player in helping promote further environmental clean up. China’s continuing demand for power generation and its water resource challenges indicate that large financial resources will be needed to complement green policies already in existence.

But how can China achieve its desired level of modernization without overwhelming the globe’s atmosphere, oceans, and natural resource supplies? In power generation, China is forecast to consume 24% of world demand (in investment) between 2005-2030. And don’t forget, a ton of CO2 emitted today is worse than a ton emitted a decade ago with the earth’s lessened capacity to absorb the emissions, according to a 2009 reporting by Union of Concerned Scientists.

China’s energy infrastructure choices can impact global warming, and it must also simultaneously address its water challenges, which run in concert with its energy choices. China’s choices in clean, green and efficient now can serve as an insurance policy against climate change effects both seen and unknowable. Recent government crackdowns on industry for inefficient energy use say that China understands the full implications of the health and wealth effects of its energy consumption. Over 2,000 factories are to be shut to increase energy efficiency and enhance international competitiveness.

Other challenges are revealed on the water infrastructure front for China.
Water infrastructure tends to attract less private capital owing to policy risk in developing countries. And climate change is expected to worsen water problems— increasing the frequency of floods and droughts. Water issues intersect important policy areas such as energy, health, food, and environment.

Bring in the Markets
China needs to bring the private sector into infrastructure projects to accomplish its economic growth and development goals. China especially needs more clean energy and efficient water infrastructure to combat air and water pollution, alongside the impacts of climate change as China becomes more water-stressed in the coming years.

While various combinations of company-to-company and country-to-country trade and agreements emerge, another facet in the climate change challenge remains – paying for the infrastructure projects which will absorb and incorporate many of the desirable green technologies and products. Entire programs of infrastructure related to cleaner power generation and sustainable water supply and sanitation will need to be built and financed in the decades ahead. While we need to encourage cooperative approaches between government and the private sector, a bigger partner capable of vetting numerous infrastructure projects and technologies exists – global capital markets and the investors that support them.

Infrastructure projects are inherently risky with large capital outlays, long completion times and regulatory and political risk. The common “contract finance” approaches of BOT (Build-Operate-Transfer) and PPP (Public-Private Partnerships) in infrastructure development have led to substantial losses worldwide and reveal flaws. The same story of flaws repeats itself in BOT and PPP projects in China. Many wastewater treatment plants with private participation are BOT, but investors in China are reported to have grown weary. Many times the bidding process suffers the “plums” problem. The bidding firm (buyer) may have more knowledge about the projects costs and its economic value to the disadvantage of the seller, the government. This plums problem gives rise to corruption, game playing and waste.

Using a “market finance” approach over contract finance approaches can create diversification, increase liquidity, and eliminate the plums problem existing in BOT and PPP. This approach can help level the competitive playing field; deter political and policy risk; and develop more transparent market mechanisms.

The use of project securitizations or initial public offerings via capital markets for large-scale projects can ensure ample funding and bring awareness of a project globally. Greater community interest can be generated using domestic capital markets to avoid “mood swings” of public opinion, which often occur when foreign firms are brought into public works projects. With water a delicate public issue, citizens can participate as shareholders and stakeholders with governance and oversight roles under a capital market approach for true private-public partnerships.

Government needs to pave the way however with consistent policies. Across the globe, innovative approaches in delivering services that raise standard of living and reduce environmental impact have emerged, but need to be scaled up. The goal of sustainability in financing and natural resources should guide analyses of policies that promote cleaner energy and greener water infrastructure development.

“Sustainable Growth for China: When Capital Markets and Greener Infrastructure Combine” by distinguished finance professor Andrew Chen of SMU Cox and Jennifer Warren, principal Concept Elemental, is forthcoming in The Chinese Economy.

Summarized by J. Warren.

Stars, Stripes or Goldilocks: Employee Relations Set the Tone

2010-09-24T16:35:08Z

Does your firm foster innovation and creativity like a Google or Apple? Or perhaps the star system came crashing down when the economy hit bottom? Something considered more elusive (yet tangible to employees) may be at play. Marketing Professors Glenn Voss and Zannie Voss of SMU Cox, along with Daniel Cable of UNC Chapel Hill close the research gap by showing that a firm’s culture sets a tone for performance.

How employees relate to each other affects organizational performance, and is even a source of competitive advantage. The research says that four basic relational models form the fundamental building blocks of all human relationships. They are communal sharing, authority ranking, market pricing and equality matching. According to Zannie Voss, “These four different relational models should apply to all human relations. After all, work is a person-to-person endeavor.

“The communal sharing idea relates to whether we are acting in unity, as a group,” Zannie continues. “Giving a reward for good behavior or outstanding performance is market pricing.” Equality matching is similar to democratic voting and the concept of equal shares, which proved less prevalent of a model in the workplace. Authority ranking is central command, that leadership and control exists. “We wanted to test whether these existed in firms,” she says.

“Most of us are cognizant about what type of culture we are operating in,” states Zannie. “Given our results, for organizations that may be heavy in authority ranking or market sharing, too much emphasis is actually bad for performance. A firm may need to look at how to scale that back.” She suggests firms should look at how to incorporate other models. Maybe a firm could benefit more from communal sharing in parts of the organization. Perhaps it’s R&D where a boost is needed and controls can be let loose (by communal sharing), or incentivize in moderate levels through market pricing. Consider how performance can be increased, Zannie suggests.

Idiosyncratic communities

The research details how firms develop their own idiosyncratic ‘models’ that enable employee cooperation, impacting the ways employees interact and are motivated. They write: “In order to sustain cooperative behavior, all firms must develop some behavioral norms and basic assumptions about human relationships such as how decisions are made, contributions are defined, and roles are defined.”

Employee retention, studied in the paper, is an important indicator of organizational performance since employees hold the firm’s knowledge: They are the source of value creation and innovation, and represent a firm’s most critical resource. Different relationship norms have different implications for employees’ cooperation, information sharing, and creativity. The authors examine how innovation relates to performance by measuring revenue streams generated by intellectual property. Employee behaviors ultimately affect customer purchase decisions. The research also looks at sales revenue as an indicator of performance relative to customer markets.

By analyzing a three-year period of data across 112 firms, the authors tested their theory. Key findings revealed that firms performed better – in terms of workforce retention, revenues from innovation, and sales revenues – the more they emphasized communal sharing, while placing moderate emphasis on authority ranking and market pricing.

Communal sharing — the idea of group unity, solidarity, being part of a clan— is working together as a team and the absence of opportunistic behavior. “Think of Japan in the 1980s with its model of group work, which strove for quality,” mentions Zannie. “There were benefits.”

Communal sharing had positive impacts on all outcomes in the research “To update this concept, we can look to the German economy,” offers Glenn Voss, “as an indicator of success of communal sharing. Of countries going through economic recession, Germany was one of first countries to find recovery. As part of their economic recovery plan, German workers shared in the cutbacks of the number of hours worked rather than losing jobs. They all shared the pain with 30-hour workweeks. But this allowed for continuity in employment. Many attribute Germany’s quick exit from recession because of their shared effort,” he adds.

Falling Stars, Rising Communities?

Another key takeaway is that it takes a balanced approach in finding the right model and mix. “There’s no magic bullet,” says Glenn. “Authority ranking was consistently something that you want to do in moderation, market pricing too. In the German culture, there’s a lot of authoritarianism as there is in the German economy. Just because there’s communal sharing doesn’t mean authoritarianism doesn’t exist or a hierarchical structure.” He continues, “It’s a balancing act. You may need a good dose of this and that, and then a whole lot of communal sharing.”

The example of Germany stands in sharp contrast to the lack of balance which was evident in U.S., U.K., and Irish financial firms, with a heavy reliance on market pricing. Market pricing to extreme leads to the star system, notes Glenn. “It’s difficult to set up that kind of system without alienating the bottom and middle levels,” he says. Topping up a CEO’s handsome salary while the rest of the firm’s HR budget languishes does not set a positive tone for current and future employees.

Interestingly, communal sharing has tangible results. Firms need to know when to use which model, adds Zannie. “If improved employee retention is needed for example, know where you are in relation to these different models, and modify,” she clarifies. For example, a firm may develop a general norm that decisions are made by consensus (communal sharing), although distribution of pay raises are based on individual contribution (market pricing). Another firm may generally rely on strong authority to make decisions about the firm’s direction, but engage in communal sharing when it comes to developing new products that align with that direction.

“In balancing authority or market pricing, it’s also important to note that low levels of authoritarianism can be bad,” Glenn mentions, “manifesting as a lack of leadership or the need for someone to direct. The same goes for market pricing.” He adds, “Without market pricing you end up with a communist system. You lack the incentive structure to get employees to perform better relative to their colleagues, or even out-perform them.” The takeaways offered by the research are ‘very intuitive’ and particularly relevant as firms continue to sort out a better path going forward.

The paper “Relational Models and Organizational Performance” by Zannie Voss and Glenn Voss of SMU Cox School of Business with Daniel Cable of University of North Carolina at Chapel Hill is under review.

Written by Jennifer Warren.

Building a Better Environment for Investors: Global Bond Control

2010-08-03T16:25:29Z

In the quest for higher returns and more diversification, investors turn to global bond markets. But investing in bonds from foreign countries, especially ones with less stringent laws and regulations, leaves the investor open to more risk. Is there a way to mitigate some of the risk, a “work-around” possibly? New research by Darius Miller and Natalie Reisel of SMU Cox shows how bonds issued from firms in weak investor regime countries can offer investors another path to protect their investments.

Laws and their enforcement vary greatly around the world, and many an investor has paid dearly for laxity of investor protections. Miller’s research points out that the corporate and institutional governance emanating from the many countries impact “important financial and economic outcomes” such as firm size, access to capital, and even the economic growth of the country. Investors can be protected by legal rights at the country level or, and the author’s recognize, by the rights provided by the firm issuing the bonds.

Make Better Laws?
Numerous experts suggest that countries should change their laws to improve the investment climate and environment. “This is difficult to do even in developed countries,” Miller acknowledges. So what can firms do? “Instead of legal convergence of laws, then maybe firms can do things on their own, change laws that the firm itself operates under,” he explains. “They can issue securities in high legal (governance) environments or countries. If that’s the case, then you might see firms promise to protect investors in a way that allows for access to capital, protection of investors, and ultimately the opportunity for growth.”
The evidence showed that firms are in fact increasing investor protections at the security level when country level protections are weak, a prediction made by the academic Coase in 1960.

The authors set about to see whether international firms attempting to raise capital through bonds have a work-around for being in a country with poorer laws and enforcement. Miller explains, “In this paper, we examine the contracts that firms issue to see if they modify them to increase protections for investors when they are in a country with less stringent corporate governance laws that go against investors.” He states, “The answer is yes, in fact. This is the case. We find that actual contracts in securities are modified to have higher standards of protections when the firm’s country of origin has weak institutions.”

Miller uses the case of Brazil as an example. “If you issue a domestic contract in Brazil, given the courts there, that contract will not be worth as much as a bond contract in say, the UK. Investors won’t believe there’s enough laws or enforcement.” But a firm can piggyback off the U.S.’s legal regime, which allows them to write these kinds of contracts that protect the investor. Their research proves this trend is occurring. As financial markets globalize, international firms have found ways to cope with the hand that’s been dealt to them. These firms are adding more investor protections to substitute for the weak protections of the environment in which they are operating.

Studying Yankee Bonds
The Yankee bond market, used by non-U.S. firms to raise capital, is second in size only to the Eurobond market. Miller wrote some of the first papers analyzing Yankee bonds. Yankee bonds are registered U.S. securities that allow both public and private enforcement via the SEC or through class-action lawsuits. The authors analyzed these foreign public corporate bonds issued in the US, or Yankee bonds, to look at the covenants from 1,500 bonds issued from firms representing 50 countries— amounting to half a trillion dollars worth of debt. Restrictive covenants are used in bond issues to protect bondholders from opportunistic behavior by managers, essentially restricting their actions such as financing activities, investment choices, and payouts.

According to the authors, Yankee bonds with restrictive covenants are adaptations of contracts that increase protections. Yankee bonds allowed for the authors’ test of whether international contracts adapt to weak investor protections at the country level. The research showed that firms placed more restrictive covenants in their bond issues in countries with:

Weak creditor rights laws;
Less stringent financial disclosure laws;
And, more lenient laws.

The research indicated that restrictive covenants are valued by investors. They reduced the cost of debt by 93 basis points; covenants were found to reduce the cost of debt for non-U.S. firms in both strong and weak legal regimes. Bond covenants can also substitute for creditor rights protections at the country level. The countries that issued Yankee bonds with greater frequency were: Canada (31%), the UK (14%), and then Germany (7.5%). The authors list the countries that issue Yankee bonds by covenant intensity and creditor rights rankings.

Yankee bonds, while not offering protections identical to U.S. domestic law, afford enough enforcement with their restrictive covenants for investors and issuers. U.S. enforcement was also important in the case of Aeromexico, with creditors threatening the firm with bankruptcy to force the firm to act on its covenant violations. The recent case of Greentown China Holdings Ltd. illustrates the potential value of covenants in Yankee bonds. To prevent covenant violations and near technical default, Greentown issued local renminbi debt and bought back the foreign bonds, which benefited the international bondholders.

Conclusion
The message is that better laws and institution are better for investors, says Miller. “If you are wronged by a company where there are better laws and court systems to back you up, you will be more likely to lend them money. When firms have access to capital, they can build more things, hire more people, and economies can grow,” he notes. “Volumes of research points to the fact that if you have strong laws and institutions, then the economy will grow,” Miller concludes.

“Do country level investor protections impact security level contract design? Evidence from foreign bond covenants” by Darius Miller and Natalia Reisel of SMU Cox School of Business is under review at Review of Financial Studies.

Written by Jennifer Warren.

Cox MBA Alum Named Inc. Magazine Top 30 Under 30

2010-07-20T15:21:19Z

Callie Works-Leary, founder of Dallas-based modern fabric boutique CityCraft, honored as one of America’s coolest young entrepreneurs by national business magazine.

DALLAS; July 19, 2010 – Inc., the national magazine for growing companies, released the 2010 Top 30 Under 30 list today, naming Dallas business owner Callie Works-Leary as one of the “coolest entrepreneurs in America”.

Works-Leary, 29, is the owner and founder of CityCraft Modern Fabric Boutique & Sewing Lounge located in the Inwood Village shopping center. Recently expanded to meet demand, CityCraft makes sewing cool again with a collection of modern and stylish fabrics and sewing classes for all ages and levels.

Frustrated by the lack of resources for young, modern sewers in the Dallas area, Works-Leary developed the concept for CityCraft shortly after graduating from SMU’s Cox School of Business with an MBA in Entrepreneurship.

“The job market was horrible when I graduated, and I always knew I wanted to start my own business, so I was constantly on the lookout for good opportunities,” says Works-Leary. “Most people are surprised to learn that I started sewing just a few months before I started writing the CityCraft business plan.”

Unlike most owners of similar boutiques across the country, Ms. Works-Leary knows she is a business owner first and a hobbyist at a very distant second. “Running a business is all-consuming,” notes Works-Leary. “Most people that start hobby-related businesses burn out quickly because they believe that running a business related to their hobby means practicing their hobby all day long. I rarely get to sew, but that’s okay. What gives me the most satisfaction is delighting my customers.”

Callie Works-Leary is also a graduate of The Hockaday School in Dallas, Texas, and Skidmore College in Saratoga Springs, New York.

For more information about CityCraft, visit http://citycraftonline.com or contact Callie Works-Leary at callie@citycraftonline.com or (214) 697 3403.

For more information about Inc. Top 30 Under 30, contact Lindsay Silberman at lsilberman@inc.com or (212) 389 5341.

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Cox in the News: July 2nd - July 11th

2010-08-26T20:48:43Z

1) Don’t Trust Your Rearview Mirror (7/2/2010)

E & P

Cox’s Associate Dean of Executive Education Frank Lloyd wrote a piece on the changing atmosphere of the business world. Technology is the driving force behind all of the change, and in order for companies to thrive in the new environment, they need to continually find ways to find and keep a competitive advantage. In order to prosper in today’s economic environment, firms are going to have to realize that what worked in the past isn’t going to necessarily work in the future. Companies must adapt and create leaders who can lead, make money, and help the organization grow during volatile times.

Link: http://www.epmag.com/Magazine/2010/7/item62574.php

2) Drilling Ban Counter to Economic Reason (7/2/2010)

Houston Business Chronicle

Director of the Maguire Energy Institute Bruce Bullock commented on BP’s newly appointed executive Bob Dudley, who is in charge of the newly created Gulf Coast Restoration Organization. Dudley Replaced "I think it's certainly helped to calm the atmosphere down a little bit. Certainly, Hayward had become a bit of a lightning rod," Bullock said. Dudley's reputation as cool-headed, crisis manager has helped him get off to a good start.

Link: http://www.chron.com/disp/story.mpl/business/7092561.html

3) Relief Well is Last Best Hope to Contain Gusher (7/5/2010)

Forbes

Director of the Maguire Energy Institute Bruce Bullock comments on the possibility of the relief wells for BP’s disastrous oil spill being successful on the first try. "You're going 18,000 feet to hit a dinner plate,” he said. “My guess is two or three times is more of a likelihood," he said.

Link: http://www.forbes.com/feeds/ap/2010/07/05/general-energy-us-gulf-oil-spill-relief-well_7743244.html

4) Regional EPA Chief Defends Drilling Moratorium (7/9/2010)

KERA

Director of the Maguire Energy Institute Bruce Bullock appears on KERA’s Program “Think,” and discusses what he thinks about President Obama’s Drilling Moratorium. “A six month moratorium, with a date and some big blue ribbon commission to take a look at it is more a political move than a policy move” said Bullock. He also said a “pause” is more appropriate, during which time spill plans could be completed; engineering issues addressed, and blow-out preventers tested. He says then drilling could proceed

Link:http://www.publicbroadcasting.net/kera/news.newsmain/article/1/0/1673680/North.Texas/Regional.EPA.Chief.Defends.Drilling.Moratorium

Cox In the News 2010 July 9

2010-09-24T20:21:54Z

Director of the Maguire Energy Institute Bruce Bullock commented on the magnitude of the BP oil spill disaster. “I would certainly agree from an environmental standpoint it’s the worst catastrophe we’ve seen, and from an economic standpoint as well,” said Bullock. “Those were human decisions that were made that had terrible consequences.”

Watch the full episode. See more Think.

Texas Governor Rick Perry announces Gulf Project at SMU Cox

2010-07-07T22:26:51Z

In a press conference today at SMU Cox School of Business, Gov. Rick Perry announced the formation of the Gulf Project, a coalition of energy and environmental scientists, policy experts, academic researchers, private sector research scientists and state officials who will work to ensure Texas never endures the environmental and economic disaster currently occurring in the Gulf of Mexico as a result of the Deepwater Horizon rig explosion.

Southern Methodist University, The University of Texas, Texas A&M University, the University of Houston, Rice University, Texas Tech University, the Research Partnership to Secure Energy for America (RPSEA), Texas General Land Office and Texas Railroad Commission are participating in the effort, and other experts and institutions of higher education may join later.

“The Maguire Institute at SMU Cox has been a leader in a the study of management, policy, workforce development and other issues,” said Bruce Bullock, director of the Maguire Energy Institute at SMU Cox. “We are delighted to participate in this initiative.”

For additional information, please visit http://www.governor.state.tx.us/news/press-release/14848/

Regulation Change Forces Foreign Firms into U.S. Financial Market

2010-07-02T21:13:39Z

In an attempt to make U.S. financial markets more attractive for foreign firms, a new Securities and Exchange Commission deregulation effort post-Sarbanes-Oxley has had the opposite effect. The outcome has been that one of the historically-rarest type of cross-listing is now the most prevalent, courtesy of depositary banks creating unsponsored American deposit receipts (ADRs). New research by Finance’s Caruth Chair Darius Miller of SMU Cox and co-authors reveals that the majority of foreign firms are now trading on Over-The-Counter (OTC) markets rather than major exchanges, to their detriment.

In 2005-06, New York Stock Exchange watchers began noticing the trend of foreign firms listings moving to the relatively unregulated London market rather than New York. Miller notes that numerous think tanks, policy groups, and capital markets’ committees were formed to combat the trend and restore a framework that would enhance U.S. market competitiveness. One change to deregulate disclosure requirements for foreign firms trading on the U.S. over-the-counter market has caused a worrying trend of foreign forms now being listed here involuntarily, amended Rule 12g3-2(b). These foreign firms, unknowingly, are now being traded in the U.S.’s Over-The-Counter (OTC) markets, also called “Pink Sheets,” without their approval or even knowledge. This was not the intent of the amendment.

The net effect of this deregulation has been the destruction of $23 billion in firm value. The firms most disadvantaged by the regulatory changes are large firms that could meet NYSE criteria to list — if they wished to be in the U.S. And U.S. depositary banks (and investors) have benefited at the expense of foreign firms. Miller says, “It was designed to reduce the paperwork to list in the OTC market and therefore make the U.S. market more attractive, but the first order effect was that depositary banks used the loopholes in the deregulation to cross-listed hundreds of firms that didn’t want to be cross-listed.” Unwittingly, foreign firms trading in the U.S. through an unsponsored ADR program are liable under state and federal securities legislation, leaving them at-risk of class action lawsuits

How This Happens

The first ADR was created in 1927 by JP Morgan for the U.K.’s retailer Selfridges to trade in the exchange of the time, the New York Curb Exchange. An ADR is a stock that trades in the U.S. based on a certain number of foreign firm shares. Most ADRs are done at the companies request (sponsored). By 1983, the SEC had made unsponsored (involuntary) programs almost impossible to create, that is, until the late 2008 amendment.

The regulation change forced many foreign firms away from their preferred choice of being unlisted in U.S. capital markets, and caused a drop in the firm’s stock price This stands in sharp contrast to the positive wealth effects that come from voluntary cross-listings, according to earlier research. “Traditionally over the last thirty years, foreign firms had to file for an exemption to cross-list in the U.S.,” Miller explains. “Now they don’t have to apply for the exemption; it comes automatically. It was believed that more firms would come to OTC markets, without the Sarbanes-Oxley compliance costs, which should help us compete with less regulated global markets.” But a loophole made it possible for depositary banks to list these firms through an unsponsored ADR without permission. “The SEC knew about it and let it go,” Miller replies to a question asked about their knowledge.

Firms are rational actors, weighing the costs and benefits associated with a U.S. listing. However, these involuntary cross-listings caused by the SEC regulation amending Rule 12g3-2(b) had significant negative consequences for many firms. The research also shows that cross-listings have important wealth effects for depositary banks, also giving them incentives to establish financial instruments that can force firms from their preferred listing strategy. A new unsponsored ADR program leads to an average decrease of 7.2 percent in value for foreign firms. Since Rule 12g3-2(b) was amended, unsponsored ADR programs have grown to represent over one-third of the total U.S. cross-listing universe. Their impact on the OTC market has also prompted calls for regulation changes in how OTC stocks trade. As more countries begin to experiment with this type of listing, the potential importance of involuntary listings is increasing globally.

Deregulation Gone Sideways

The results provide evidence on how (de)regulation intended to make unregistered foreign firms enter U.S. capital markets had significant unintended consequences. Since the foreign issuer is not involved in the unsponsored ADR program, it has little say on how its investors are treated. For example, competing ADR banks often create multiple unsponsored ADR programs for the same underlying stock. Even though all trading takes place with one ticker symbol and one CUSIP, each bank can charge investors different fees and apply different exchange rates on dividend payments, resulting in returns differing for different investors in the same security.

Overall, the creation of an unsponsored ADR program eliminates the foreign firm’s ability to control how and when their shares will trade in the U.S. market. Some firms have attempted to distance themselves from the regulation’s reach, but it may not really limit their liability under state or federal securities legislation along with the risk of being named in a class-action lawsuit. The Supreme Court is currently hearing a case regarding National Australia Bank to determine the extraterritorial reach of U.S. securities law, says Miller.

Six months since the new rule took effect, there have been a total of 748 firms cross-listed via an unsponsored ADR program. The most frequent countries are Japan, U.K., and Hong Kong. The international financial press noted the large increase in unsponsored programs and the potential negative effects on the numerous Japanese and French companies that had previously passed on U.S. capital markets. In the decade before the amendment, there was a total of 69 unsponsored programs created; six months following the amendment, 748 new unsponsored ADR programs were created. Trading volume for these programs is also substantial; almost $100 billion, or two-thirds of the dollar volume traded in the OTC markets in 2008 was of unsponsored ADRs.

Of the four major depositary banks, three were active in the creation of unsponsored ADRs following the new amendment. Bank of New York issued a total of 609 new unsponsored ADRs, followed by Deutsche Bank with 308 and Citigroup with 216 issues. In contrast, JP Morgan has largely resisted creating unsponsored ADRs, citing the potentially adverse impact on some firms. Ten firms decided that the cost of a U.S. cross-listing exceeded the benefits by delisting and deregistering; They were subsequently and involuntarily “pulled back” into the U.S. market when depositary banks created unsponsored ADR programs. In several instances, the same depositary bank that was asked by the firm to terminate its sponsored ADR program subsequently created an unsponsored ADR program for the same firm.

Calculated Target

Depositary banks were found to choose the largest, most profitable and highest valued firms within a particular country, and those most attractive to U.S. investors. These banks prefer firms with larger international presence and potential investor recognition. Firms that have the highest potential for ADR fee generation are more likely to be chosen by depositary banks. If a firm currently meets the NYSE listing requirements, it is also more likely to be involuntarily cross-listed. Firms that are most likely to be able to convert their unsponsored ADR program to a sponsored ADR program, which would also generate fee income to the bank, were the chosen ones.

Previous research by Miller suggests that firms from poor investor protection countries have the most to gain from the announcement of a cross-listing in the U.S. However in this case, banks choose firms that would be most attractive to U.S. investors (and that generate fee income) rather than the types of firms more likely to benefit the most from cross-listing.

Banks received a windfall from the amendment. During the three-day window surrounding the rule’s effective date of October 10, 2008, the average abnormal return to depositary banks was 6.64%. On the first day the rule became operational, 117 new unsponsored ADR programs were created. The loophole allowing the creation of unsponsored ADR programs resulted in a large positive wealth gain to these financial institutions. Bank of New York noted a large increase in revenue owing to this line of business.

Ultimately, the impact and the consequences of the deregulation were economically large and significant. “The amendment was good for the U.S. investor but not necessarily the foreign firms,” Miller states. “Some firms are trying to distance themselves through language on their websites, but they are in a bind. If they try to leave the U.S., there are negative consequences in terms of valuation and reputation. So they almost have to become sponsored and pay the banks’ fees.”

The paper “Uninvited U.S. Investors? Economic Consequences of Involuntary Cross-listings” by Darius Miller of SMU Cox School of Business, Peter Iliev of Pennsylvania State University, and Lukas Roth of University of Alberta is under review.

Written by Jennifer Warren.

At midyear, Dallas area business leaders tell columnist Cheryl Hall, things are looking up

2010-07-06T13:54:57Z

June 28, 2010

By CHERYL HALL
The Dallas Morning News

Halfway through 2010, Dallas-Fort Worth is on a cautious mend.

Sales are slightly higher. Profits are holding their own. Hiring is beginning to pick up. And unless there's another unforeseen disaster or the current one in the Gulf of Mexico creates bigger problems here than expected, the year should shake out as a better one for D-FW than 2009.

That's the consensus of 80-plus business owners, executives, academics and nonprofit group leaders who represent a wide swath of our local economy. . .

Al Niemi, dean of the Southern Methodist University Cox School of Business, gives a startling statistic: In 2006 and 2007, the last two years of positive job growth, Texas created 52 percent of all jobs in the United States.

"The factors that underscored this phenomenal growth spurt are still with us and will guarantee that Texas and D-FW continue to lead the nation," he says.

I urge you to go online and read more complete responses.

Read the full story.

# # #

CRM 2.0: High-Definition Business Strategies

2010-06-09T19:22:30Z

CRM 2.0: High-Definition Business Strategies

When it comes to marketing, customers are king. But managers across different departments should “hold court” with customers as well. For more than a decade, firms have eagerly adopted customer relationship management (CRM) systems to better connect to their customers, hoping to drive firm performance. CRM creates the most value when it is geared toward the firm’s business strategies, according to new research by Marketing Professor Jacquelyn Thomas and colleagues.

Some academics have heralded CRM to be the new marketing paradigm. Others have seen it as a fad, resulting in ‘losses or no bottom-line performance improvement.’ “CRM systems got a bad wrap because firms either did not know how to use them or did not use them to their full capacity,” noted Thomas commenting on a 2003 Gartner Group study. She asks: “Can people use CRM processes simply and inexpensively? Yes. You can devise a CRM-type system. Look at your current transaction database, determine the financial value of customer segments, and see what emerges from it to address customer needs.”

Source of advantage

The basic premise of CRM is that the customer is an asset of the firm and they should be managed, says Thomas. “To manage them as a financial asset you need to have understanding and insight about customer needs, wants, and behaviors, now and in the future. This allows you to identify trends, and even needs that they don’t articulate, and change your offerings to meet them.”

The aim of CRM is to engage customers in long-term relationships. The authors’ concept of CRM embodies the key idea of firms viewing customers as assets and managing them to maximize their value across their lifecycle. This is done by systematically accumulating and processing information across the relationship lifecycle. CRM can affect future marketing decisions, such as communication, price, distribution, and brand differentiation. For example, many hotel chains are able to flexibly manage their room pricing based on previously collected customer data.

CRM can be thought of as an organizational capability, the authors say. They view it as “a source of advantage, which permits businesses to become unique and to improve patterns of capacity utilization.” Originally, CRM was developed in a business-to-business context, helping the manufacturer manage its relationship with a distributor. “It was a supply chain management function — analyzing metrics that looked at the differential value of the customer,” Thomas notes. “CRM then expanded to the business-to-consumer markets.” While CRM still applies to the operations side, it also involves learning about the customer’s role in the delivery process of a product or service offering to better facilitate exchange. “You want to more cost effectively get your product from point A to B,” she adds. “So, integrate CRM into both marketing and operations.”

The study analyzed the responses from a sample of business executives spanning ten industries, which included energy supply, mining, forestry, agriculture, pharmaceuticals, clothing apparel, and toys. The study also looks at CRM within the context of commoditized and non-commoditized products. CRM has a larger role to play in commoditized industries such as energy. “With gasoline, what makes people choose one station over the other ?”questions Thomas. “Managers believe it’s all about cost? It may be more than cost — it’s my general experience, cleanliness, security, and perhaps ease of transaction.” Energy firms observed their customers and asked them what was important when buying gasoline. To better understand their customers needs, they had to use CRM to compete, suggests Thomas. Innovations such as paying at the pump, and even faster with a Speedpass, were the results of CRM initiatives.

From field interviews, findings show that firms with commoditized products did little with CRM initiatives. Firms with non-commoditized products like Smartphones, have more levers to pull because their markets are diversified. They can use brand differentiation or communications strategies to focus on different market segments. Having worked in the pharmaceutical industry, Thomas offers, “Pharmaceuticals is very much a relationship business. There can be commoditization within particular drugs, but CRM provided an edge. CRM is about finding solutions for your customer, doctors in this case.”

In its early days, Apple took a niche position in the PC market and built a high degree of customer loyalty. But today, rather than just focusing on its brand, Apple also offers an ease of facility reflected in the iPhone. “You don’t need to go to the check-out register,” Thomas relays. “If Apple only considered its brand, they wouldn’t care about the customer’s check-out process. They would just say: ‘Buy Apple, we’re great.’ But they go beyond the product focus into how the customer interacts with their products and services.” That’s CRM.

CRM indirectly affects firm performance by increasing efficiency and driving down costs. In the airline industry, for example, CRM has resulted in significant cost reductions by eliminating waste from targeting unprofitable customers. CRM can positively affect a firm’s cost leadership position, and thus lead to superior performance.

More than Marketing

The authors advise more collaboration between CRM teams and other strategy-, brand-, advertising-, and operations-oriented groups in the organization. A CRM team, or even a consumer insight group, should be integrated into other business units. This is a significant departure from earlier CRM proponents, who argued for distinct customer acquisition organizations and retention organizations. They suggest embedding “CRM experts” into departments that develop and execute the core strategies.

“We learned that many managers view CRM in isolation, and not within other strategic contexts,” Thomas sums up. “CRM enhances other strategies; it is not an either/or proposition. If you’re focused on brand differentiation, then use CRM to provide insights and enhance it.” The authors found merit in focusing CRM efforts on the fundamental strategies of differentiation and cost leadership. If customer insights and implementation of CRM is not aimed at the key strategies that link to firm performance, then the effect of CRM may be minimal. This may explain CRM’s lack of effectiveness frequently reported in business practice. CRM should not be used to replace foundational business strategies, but to enhance them, Thomas concludes.

“Customer relationship management and firm performance: The mediating role of business strategy” by Jacquelyn Thomas of SMU Cox School of Business, Martin Reimann of University of Southern California, Oliver Schilke of Stanford is forthcoming in Journal of the Academy of Marketing Science.

Written by Jennifer Warren.