Adam Smith Meets Machiavelli: When in Markets, Connect to the State

We have heard a lot about lobbying in the US, and its effects on law writing, law enforcement, government contracts, and subsidies. We also know that in authoritarian governments, firms can act as the arm of the state, and firms and state can be mixed up to such an extent that it is hard to tell who is running who. A classic example is the People’s Liberation Army in China, which owned 20,000 companies 10 years ago (and was ordered to sell them). If state relations help firms in both market economies and authoritarian states, what happens when an authoritarian state gets a market economy? Again China offers an example.

A forthcoming article in Administrative Science Quarterly by Heather Haveman, Nan Jia, Jing Shi and Yongxian Wang looks at whether firms profited from connections to the state. Of course we expect the answer to be yes, but the interesting part is when the firms profited most. Here are some interesting highlights. First, market development reduced profits, so competition works. Adam Smith would be pleased. Second, state connections had little overall effect on profits – surprising, right? But remember that this was a period with changing market development over time, and the interesting finding is this: State connections increased profits when the market became more developed. Machiavelli would be pleased – even when markets are strong, an authoritarian state can Trump them.

How does this happen? The short answer is that we don’t really know the details; there are simply too many ways that a state can support specific firms that it likes, and can place other firms at a disadvantage. That’s exactly why state connections are suspicious; their results are hard to trace. At least one advantage with an authoritarian state is that it is not subtle, so some of the things it does are easy to trace. Haveman and her coauthors found that resources were directed to the state-connected firms, which explained some of their advantage, but far from all.

Will this pattern continue? Well, I have also done research on China with Cyndi Man Zhang, and we found that Chinese managers were still heavily state-oriented in their actions. Maybe that is why the ones that could also use the state did well. But the advantage is so large that it is hard to see them stop doing it, especially when they got better at using the state the further along the transition to a market economy had gone. So Adam Smith has met Machiavelli and been defeated.

Haveman, Heather A., Nan Jia, Jing Shi, and Yongxiang Wang.2016. "The dynamics of political embeddedness in China." Administrative Science Quarterly,forthcoming.

We are the Uber of Hype: When Entrepreneurs Crowd

Teaching entrepreneurship at a business school has its annoyances, and prime among them is students visiting to seek opinions and support for their business idea, which they describe as “We are the [insert famous company] of [insert market]”. That is a quick and catchy way of summarizing the idea, but there are problems with it. The main one is that it also summarizes that the idea is copied from something else. Copied ideas are not always bad, but very often they are. The first problem is that copying is easier than originality, so a copy faces competition. The second problem is that copies of successful firms (and yes, they are more common than copies of failed firms) involve too much excitement to understand the source of success. I have earlier written about DoorDash, which can be described as the Uber of meal delivery. Except that Uber gets its competitive advantage from knowing where all its cars are, always. It is not so hard to know where a restaurant is, so DoorDash is uber-like without a key uber advantage.

Well, going against logic and annoying business school professors are not decisive problems of copying successful firms. After all, none of them say what will happen in the market. So what happens, really? Now we know, thanks to a forthcoming paper in Administrative Science Quarterly by Elizabeth Pontikes and Bill Barnett. Their idea is simple. Look at spectacular successes in the financing of ventures, as well as agonizing failures of firms, and see if they result in crowding around successes and flight from failures. Then, see if the success crowd fails, and the entrepreneurs who stay near failures succeed.

Their answers are in support of the annoyed business school professors, and against the “uber of something” entrepreneurs. Yes, entrepreneurs crowd success and flee failures. But also, venture capitalists react exactly like business school professors, and they simply turn off the funding for entrepreneurs who crowd success. Also, firms that crowd success are more likely to fail, whereas firms that follow failures are less likely to fail. Clearly the impulse to chase success is a trap, whereas trying near a failure calls for thoughtfulness, which is often a step toward good outcomes.

So does this mean that entrepreneurs should be thinking about how to make a Blackberry variation, given its recent failure? Well, not so fast. Unthinking copying of anything is a problem, so they should not unthinkingly enter near a failure. Instead, they should think carefully about the elements of success, and those that led to failure. Blackberries had devoted followers because of the keyboard, and were also well liked for their security. They were hit by the sheer breadth of smartphone capabilities, and also by the market power by the largest high-price firms (Apple, Samsung) and the race upward in the market by the low-price firms. Is it still possible to make a device that keeps the Blackberry strength and survives the current market? Asking that question is the way to get from failure to success.

Pontikes, Elizabeth G., and William P. Barnett. 2016. "The Non-consensus Entrepreneur: Organizational Responses to Vital Events." Administrative Science Quarterly forthcoming.

Please Lobby Someone Else: Social Movements Can Make Firms Unpalatable

Under fundraising rules following the Citizens United v. FEC Supreme Court, funding needs for politicians are so great that a member of congress is expected to raise at least $18,000 per day, every day of the year. For new members, that can mean as much as 30 hours per week on fundraising calls, an amazing use of time for members of a legislative body that is supposed to deliberate to govern and make laws. Equally important, many of those calls have to be to firms, who can afford higher donation amounts than individuals. Firms also like this arrangement, naturally, because lobbying for favors involves donations as an important tool.

So is it possible for a firm to lose touch with politicians? Mary-Hunter McDonnell and Timothy Werner has a forthcoming article in Administrative Science Quarterly showing that this can happen. The idea is simple, but powerful. Politicians are stuck between those who fund their reelection and those who actually vote. Often voters don’t pay close attention to the funding, so politicians can take money from a broad range of firms, but social movements can single out firms for attention. This does not mean that voters will also notice whether these firms have political connections, but politicians cannot take the risk that they will notice – so they stay away from the firms that get singled out.

How do we know? It is actually quite easy to see how well connected a firm is politically. It can donate money (but politicians can return the donation), it can be invited to testify to congress, and it can simply get contracts to do work for the government. All of these connections get weaker if social movements target firms for boycott actions, they showed. And even more importantly, the research found that the weakening of connections was especially pronounced if the social movement issue had much voter attention, or if the firm was well known to begin with. This makes sense because the risk that voters will notice is especially high if either the firm or the issue is well known.

What does this mean for firms, and for society? Well, for firms the lesson seems clear – they need to avoid the attention of social movements in order to keep the attention of politicians. Not a very ethical implication, but a clear one. And for society? Well, it may seem nice that social movements can isolate firms from politicians through boycotts, but is it really? The main reason it is possible is that other firms are happy to pick up the slack through lobbying more when some firms are isolated. And those firms are not necessarily better. We live in a world of B2C (business to consumer) and B2B (business to business) commerce, where B2B is much bigger and less exposed to boycotts. If there is a boycott of Victoria’s Secret (which has happened) and defense contractor Lockheed Martin picks up the slack, do we have a better society?

McDonnell, Mary-Hunter and Timothy Werner. 2016. Blacklisted Businesses: Social Activists’ Challenges and the Disruption of Corporate Political Activity. Administrative Science Quarterly, forthcoming. 

Keeping Threesomes Stable and Creative

Just to halt any false expectation you may have, this is a blog post about how sets of three (or more) firms can collaborate for innovating over time. It is a very interesting and important topic because the approach for doing innovations has changed a lot recently, and especially in fast-moving industries involving information technology: apps, smartphones, internet servers, automotive computer controls for example. We have long done research on firms being innovative (on their own), and we are beginning to know a lot about firms pairing up to make innovations. Unfortunately, the new approach is to do innovations in groups of three or more, and to keep working in different configurations of firms. That is something we know little about.

Fortunately, a forthcoming paper in Administrative Science Quarterly by Jason Davis has important insights. He looks at the central problem of how these groups of firms can stay together and maintain the high trust and low conflict needed to be innovative over time. Using data on collaborative projects from firms in the computing industry, he found a key insight that is only possible by understanding how different interfirm collaboration is from interpersonal collaboration.

People can form stable collaborative relations if one of them acts as a leader and is recognized as such, or if they form a cohesive team with all members staying close. That’s not what makes firm collaborations stable and innovative. Firms cannot have one leader over time because repeated projects typically involve different configurations of interests and capabilities. They cannot be cohesive because each project typically has greater complementarities between one pairing (dyad) of firms than between the other two. As a result, the configurations that work for people fall apart in conflict or in distrust when firms try to repeat collaborative innovations.

Instead, what is special about firm is recognition that firms are interdependent and that they need to work together in the future, even if they do not collaborate closely at a specific time point. This leads to a form of collaboration called group cycling: each pair of firms that are most interdependent works together closely, with the third at a distance, but they remain in touch and aware of the need to reconfigure with a different focal pair later on. Conflict is avoided because the most complementary firms work together. Trust is kept because all partners see current collaborations as preparations for future collaborations.

Interfirm collaborations is a special kind of network among organizations. Part of its special status comes from the realization that, unlike many other networks, what works for firms is different from what works for people. This is a good insight in management because we often think that intuition carries over from one level to the next.

Davis, Jason P. 2016. The Group Dynamics of Interorganizational Relationships: Collaborating with Multiple Partners in Innovation Ecosystems. Administrative Science Quarterly, forthcoming.