Sunday, June 7, 2015

Modern India: How Development is not the same as Westernization

Readers who think that India is the opposite of China – democratically developed and economically backward – should be seeing recent news as eye openers. The center of mobile phone making is moving from Korea to China, right? Well, except that Indian mobile phone maker Micromax (and some domestic rivals) are showing the world one more way to compete in the mobile phone market, with new product release times coming significantly less than a month apart. Compare that with the iPhone release schedule, and you see how advanced Micromax is. Naturally they are quickly gaining market share.

Development is also going quickly elsewhere. The Indian auto industry (yes, there are multiple makers) is introducing new models that are competitive with imports, its high tech industry is now so advanced that talk about closer US alliance leading to license manufacturing of arms in India is sounding realistic, and on the political front there is even a sudden (though very late…) resolution of the major border dispute with Bangladesh.

Does this mean that India is becoming fully Westernized? Well, here we have to deal with some myths that people have, most important of which is the idea that economic development is the same as creating some sort of US/European economy. It is not. Guoli Chen, Raveendra Chittoor, and Balagopal Vissa have published a paper in Academy of Management Journal that looks at just one of multiple dimension of difference: connections between firms.

The idea is simple. We often believe that non-western economies have more informal contacts between firms than western ones, and also are more reliant on business groups of firms controlled by owner families. The second of these statements is false, by the way, there is a lot of variation in business group presence across nations, and it does not follow a clean western/nonwestern line. This article looked at the connections part, which we know less about because it is often hidden. But it can be revealed by seeing who has the best information, which the authors did neatly by examining which stock analysts were best able to predict firm performance.

If development means westernization, we should see traditional forms of ties between firms disappear, right? Well, this almost happened. Stock analysts were unusually well informed about firms in which the CEO had the same caste or ancestral language, but only if the CEO started the career before the economic reforms in 1990. They were also unusually well informed about firms in which the CEO came from the same school as them, but only for CEOs starting the career after the reform. That school effect sounds like something that would not exist in western economies, which have rules on information release, but actually it does. Indeed, westernization doesn’t mean that networks don’t matter; it means that different networks matter.

So in what way is India different from a westernized economy then? It is that both types of ties exist at once. The traditional ties are not gone; they are just limited to the “older” CEOs. “Westernized” ties exist in addition. Perhaps the old ties will be gone at some point, but it is hard to guess now that it will happen, and it is incorrect to assume that it has already happened. 

Tuesday, June 2, 2015

Force or Example? How Firms start Good Practices

The latest news on the fire in the Bangladesh clothing factory that collapsed in 2013, killing more than 1,100 people, is that the owner, national and local building safety inspectors, and some factory supervisors have been charged with murder. This is a stronger charge than the expected homicide charges, and happens because their guilt in overlooking sudden cracks in the structure and ordering employees back to work is considered serious.

Meanwhile, the major U.S. clothing companies that used that factory and many others in Bangladesh have been increasing their checking of safety at their suppliers, and have formed consortia to effectively coordinate these checks. This is a big step forward from the earlier practice of rare checks (or no checks), but they are still checking less than one-third of the clothing factories in Bangladesh, leaving many unsafe factories with less-known (but usually foreign) customers.

In Bangladesh, people held responsible are being punished. In the U.S., companies buying from the factory were facing publicity problems and could also have been targeted by social movements against sweatshops if they had not acted quickly. So what drove the reforms, threats of punishment or better understanding of the factory dangers?

A recent paper by Forrest Briscoe, Abhinav Gupta, and Mark Anner in Administrative Science Quarterly provides some useful answers. They looked at how universities react to threats – from social movements, not the law – that target sweatshop purchases by Russell, a firm that supplies branded sportswear. They looked at two ways that universities might decide to manage their supplier relations differently: either by learning from each other, or by simply responding to threats. Both would be good reasons to stop purchasing from Russell until it reformed its supply lines, but the key finding was how these reasons interacted. If a university stopped purchasing after being targeted by a threatening campaign, other universities reacted as if there was nothing to learn from it. It had simply reacted to a threat, so it probably didn't have a real reason. If a university stopped purchasing after collecting information, with no threat, other universities might copy its actions.

The conclusion is an interesting one for all who want to improve organizational practices. Threats work. But they work very locally, and expensively. The most important way that organizational change happens is actually when organizations learn from each other, and that happens much less when threats are involved. So the prosecutions in Bangladesh are important for the families of the victims, and the actions of the social movements in the U.S. are important for the conscience of the activists, but organizations learning from each other give the strongest results.