Small Firms are Admired. But are They Good Employers?

There has been a strong movement toward smaller firms in many economies. This is partly a result of larger firms doing less well than before, and shrinking as a result of failure, and partly because large firms find it convenient to subcontract work, making their payrolls smaller than the actual work done for them. Along with this, we are seeing increased admiration for small firms, entrepreneurs founding and running them (especially), and even the “gig economy” where many people are not really employees of anyone, just individual contractors. If you took an uber ride today, you had a gig (economy) with someone.

We may wonder what all this does to employment. That’s a big question, but a practical place to start is wage levels and inequality. We already know that large firms pay more than small firms do, for the same worker. There is also some indication that they have greater wage equality, because employees inside large firms can compare their pay more easily, and can protest when inequality is high. But how does the presence of large firms affect the overall employment, including those who work for smaller firms? That’s the ambitious question answered by a paper in Administrative Science Quarterly by Adam Cobb and Flannery Stevens. They look at how US states differed in the proportion of people employed by large firms over time, and measured the effect on the income inequality -- the spread of income across the population.

What they find is disturbing for those who celebrate the rise of small firms. Large firms in a state reduce income inequality, which is only possible if they reduce inequality both inside themselves and among firms around them. So, rise of small firms means rise of income inequality. Some other findings are interesting too, and suggest problems. Large firms can have higher wage inequality if their employees compare themselves less, which is easier if they have racial diversity (races are often separated by job title, just as genders are). Racial diversity in large firms increases income inequality in the state, and this effect is especially large if the large firms are dominant employers in the state. Dispersion of large-firm employment across locations, which also prevents comparison, also makes large firms a weaker force in reducing income inequality.

Many lament the lower freedom in large firms, and hierarchies can even feel oppressive for employees. But the freedom of small-firm employment has its costs too. Jobs are lost more often, pay is lower, and even as neighbors they are less valuable – being in a state with many people employed by large firms equalizes income. Something to think about.

Cobb, J. A., & Stevens, F. G. 2016. These Unequal States: Corporate Organization and Income Inequality in the United States. Administrative Science Quarterly.

Can the State Help Firms Innovate? “Get some!”

The role of the state in business is hotly debate in some parts of the world, but less controversial in other parts. A key reason for the debate is that some think that the state can do some things better – for example, having a long-term perspective and committing resources – while others think the state should stay out because its decisions and execution are worse than the private sector. Different parts of the world has reached different answers, with the US standing apart as particularly skeptical of the state, with most of Europe and important parts of Asia having a much more optimistic view of the state.

One of the places with some controversy is actually China, which has gone through a market transition but still has state intervention both through state ownership and state grants to firms. This makes it a great place for looking at what the state can do, and an article by Kevin Zhou,Gerald Gao, and Hongxin Zhao in Administrative Science Quarterly takes advantage of this opportunity.  Their idea is simple. State ownership gives Chinese firms advantages both in general financing and in funding research and development, which in turn should help innovation. But, the effect on innovation will only happen if the firms are actually good at using these extra resources. So, they need to pick good research (decision making) and do the research and development well (execution) in order to do better than firms without state ownership.

Their research has a rich set of results on state effects, but the key conclusions are easy to summarize. Yes, state ownership means getting more money for research and development. Yes, those funds are used less effectively than in firms with no state ownership. And here is the interesting tradeoff: the two effects don’t balance out; instead they make firms with some state ownership superior to those with a lot, and with nothing. The advice is clear: get some! And interestingly, this advice is particularly important not for established firms, which one might think are the ones best able to milk the state for funds, but for start-ups. The reason is that start-ups are better users of the added funds they can get from the state. So, a state that understands this relation should (as the Chinese state clearly does) not just give money to the large and established firms, but also to startups.

And what happens if there is too much of the state? This is a problem seen some places in Europe, where there isn’t a deliberate market transition as in China, and where the state has a fair amount of money. For example, Norway has mostly been directing its oil-funded pension money abroad, for a number of reasons including the peculiarity of owning firms and choosing what firms should receive research funds. In spite of this caution, there is still significant state funded research in Norwegian firms, and Financial Times has reported some indications that it is used less effectively where there is a lot of it. Just like in China.

Zhou, Kevin Zheng, Gerald Yong Gao, and Hongxin Zhao. 2016. "State Ownership and Firm Innovation in China: An Integrated View of Institutional and Efficiency Logics." AdministrativeScience Quarterly.

Virtual Teams: When Can They Innovate?

Some claim that more than half of all professional employees are now in virtual teams, where virtual means that one or more of the following is true: 1) team members are dispersed, 2) team members communicate electronically, and 3) team structure is shifting over time. I am the member of such teams, and my teams are also multinational  (some count that as a dimension of virtualness too). All of these factors make it harder to manage teams, and especially hard for teams that innovate rather than perform standard tasks. Why? Because teams that innovate need close communications in order to share idea, develop them further, and avoid misunderstandings along the way. Distance, in any form, makes this harder.

So why let innovating teams be virtual? Part of the reason must be that managers are confident in the results. However, research in Administrative Science Quarterly by Christina Gibson and Jennifer Gibbs looked at the issue and found that there are significant drawbacks in making teams virtual. Along each dimension of virtualness, teams lost some innovation ability. But importantly, they also found that this negative effect could be reduced. If the teams were managed in a way that made communication psychologically safe, there was still reduced innovativeness in more virtual teams, but less reduction. 

Psychological safety is a simple idea because it just means that team members should be able to say things without fear that other team members will react negatively, even if they are not sure that what they are saying is correct. This is important because when doing innovations, it is normal to be in doubt, but important to bring up issues, especially those that are uncertain, because innovation comes from testing out and resolving uncertainty. So, this is very useful research, with clear implications for how one can design teams for innovation.

The research also has two other features I wanted to mention.  One is that the research is 10 years old, but still an important insight. Good research stays current a long time. The other is that part of the research was done on a fighter aircraft budgeted to 200 billion, so obviously a context calling for highly innovative teams. They don’t say what aircraft it is, but I can guess because I happen to know about an aircraft program that was budgeted to 200 billion but now costs 400 billion. Psychological safety in virtual teams makes a difference... The picture of my guess on the aircraft is in this post.

Gibson, C. B., & Gibbs, J. L. 2006. Unpacking the Concept of Virtuality: The Effects of Geographic Dispersion, Electronic Dependence,Dynamic Structure, and National Diversity on Team Innovation. AdministrativeScience Quarterly, 51: 451-495.

Did ASQ Help Create the Field of Strategy? Some Evidence

Administrative Science Quarterly is a generalist journal covering a wide range of research on organizations, as you can see in its invitation to contributors. One might think this would make it less influential in any particular topic, but this is not true. The leading generalist journals are more prestigious than specialized journals, and as a result they get top quality papers, especially if those papers are meant to have wide impact. This gives them more readers, and readers who pay more attention. Equally important, generalist journals are places that assemble papers with multiple ideas that can cross-fertilize fields of study. Often they are the places to look for ideas that will grow and rejuvenate fields.

So is that true for ASQ and strategy? A paper by Sridhar Nerur, Abdul Rasheed, and Alankrita Pandey looks at how strategy developed over time, focusing on research in Strategic Management Journal and journals that cited it, or were cited by it. This inflates the influence of SMJ a bit, but is fair enough because SMJ is the leading specialist strategy journal. Next they looked at citations between journals staggered in time periods. These changed over time, as strategy research took shape, but I think that the figure below is a good example because it shows 1995-1999, which was a time period in which the strategy field nearly had its current shape.

Notice that there are two-way arrows between the leading generalist journals ASQ and AMJ (Academy of Management Journal), and ASQ and ASR (American Sociological Review). Other than that, all the arrows show journals learning more from ASQ than ASQ learns from them – they are one-way arrows (the arrows point in the direction of citations, so an arrow into a journal means a citation to the journal, which is the same as acknowledging influence from the journal). Interestingly, in this time period, there is no direct influence from ASQ to SMJ, so we cannot see ASQ shaping strategy directly, but we can track indirect influences such as ASQ to ResPol (Research Policy) to SMJ. This pattern of indirect influence started in 1990; before that ASQ directly influenced strategy. 

Does this mean that ASQ was a starting point that lost influence? Not at all. In fact, all these journals cite each other, so the graph just shows the highest-volume citation paths.  When adding up the direct and indirect influence, the total influence can be found, and Nerur, Rasheed, and Pandey show that ASQ maintained a top 3 rank as a source of new strategy knowledge in all time periods except 1985-1989. They also show a broader point—in the top 5 most influential journals in strategy, only one was a specialist: SMJ.

So we know that ASQ is influential in strategy, but it is not a strategy journal. It is a prestigious generalist journal, which makes it influential in many fields.

Nerur, S., Rasheed, A. A., & Pandey, A. 2016. Citation footprints on the sands of time: An analysis of idea migrations in strategic management. Strategic Management Journal, 37(6): 1065-1084.