Wednesday, December 28, 2011

Self deceit, self conceit in Chinese SOEs

For the first time in my professional career, I attended a Chinese state-owned public company's annual meeting last week. During that meeting, the chief executive briefed the audience (the senior management team and highest-ranked divisional managers across the country and overseas) on the overall performance of the company in the past year, described its challenges as well as opportunities ahead, and laid out its specific goals and targets for the coming year.

It's not surprising to hear both praises and criticism from the speech, but upon hearing one of the praises, I couldn't help myself drifting a bit far away because I really found that praise a little over the top and even somewhat disturbing. It went like this, "...our financing department has made marvelous achievement in the past year, having successfully secured large loans from major banks during the time of an extreme credit tightening". Interesting, huh? Is this really a marvelous achievement?! Or is it just something they are born with, something they are entitled to, or something they can easily do but others can't? Everyone knows that major SOEs in China could easily get cheap credit from big banks which, by the way, are also state owned. Sometimes the banks are even begging them to borrow money from them!

I know there could be some variation among SOEs themselves too in terms of the capacity to get cheap loans - scale, region, industry - all those things matter, but comparing to millions of small and medium sized firms in the private sector, that label, SOE, alone is like a golden pass to seemingly endless funding. Now this unfair ability somehow became a "marvelous achievement"?!

It's safe to say that this kind of image burnishing is not merely confined to this particular company. I certainly didn't see this as an achievement of Chinese SOEs at all, what I see from this specific case is management delusion, self deceit, self conceit, and maybe most important of all, a need to change.

Friday, December 23, 2011

Thursday, December 22, 2011

Paper on China's institution

The University of Hong Kong professor Xu Chenggang has written a paper about the fundamental institutions of China's economic reform and development. This over-70-page article provides one of the latest and most comprehensive analysis of the institutional account for China's miraculous economic development in the past three decades. He argued that it is China's regionally decentralized authoritarian system - a combination of political centralization and economic regional decentralization - that can explain the "China puzzle", i.e., why a seemingly ill-suited institution could achieve such spectacular growth and poverty reduction. In addition, he pointed out that grave social problems are also determined by this governance structure.

Here is the abstract:
China's economic reforms have resulted in spectacular growth and poverty reduction. However, China's institutions look ill-suited to achieve such a result, and they indeed suffer from serious shortcomings. To solve the "China puzzle," this paper analyzes China's institution—a regionally decentralized authoritarian system. The central government has control over personnel, whereas subnational governments run the bulk of the economy; and they initiate, negotiate, implement, divert, and resist reforms, policies, rules, and laws. China's reform trajectories have been shaped by regional decentralization. Spectacular performance on the one hand and grave problems on the other hand are all determined by this governance structure.
Full text can be found here (log in needed) and here.

World democracy index 2011

25 nations are placed under "full democracies", most of which are in Europe. The U.S. ranks only 19th, falling from 17th last year. Hong Kong and Singapore are 80th and 81st, respectively, after Malaysia (71st), The Philippines (75th) and even Ghana (78th).

Among BRIC nations, India ranks highest, at 39th. Followed by Brazil (45th) and Russia (117th). China fell from last year's 136th place to 141st this year. North Korea is bottom.

See the full ranking here by the Economist Intelligence Unit.

Monday, December 19, 2011

Return on Luck

Jim Collins, the author of business megasellers Built to Last and Good to Great, wrote a new book recently with Prof. Morten Hansen of UC Berkeley and INSEAD, entitled Great by Choice, part of which tackles the long intriguing problem in business strategy  - Why do some people and their businesses thrive in uncertainty, even chaos and others don't? And what is the role luck plays in this context?

Luck is an abstract and elusive concept which is hard to quantify. However, Collins and Hansen tried to study it more systematically by defining luck as an event which satisfies some three basic criteria. Then they counted the number of "luck events" - good luck, bad luck, the timing of luck, and so on - for each subject across the window of the study. They found out that for enterprises that were eventually built into companies which outperformed their industries by a factor of 10, or 10Xers, as the authors dubbed, they weren't generally "luckier" than the rest. Then the question is, what on earth differentiates 10Xers from the comparison cases?

Their answer is that, luck - whether good or bad - is not the determining factor for a business to thrive in any circumstance, what really matters is how you manage luck and make choices in order to create a huge return on it, i.e., Return on Luck (ROL). To illustrate this, real world examples of how people choose differently when facing "luck events" are adopted, such as Bill Gates, Progressive insurance, Southwest Airlines among others, which are palatable and of course make their stories more compelling. But since choices are always made by people, does this mean different outcomes are in the end driven by different people? If so, unless clear links between the difference in people and difference in ROL are made explicit, it may still be hard to really opertionalize the notion of ROL.

Another interesting and somewhat counterintuitive point the authors have raised is that people or companies that follow a disciplined approach in turbulent times often outperform those who constantly adjust to adapt to the environment. The metaphor is built around the story of two explorers who set out separately to reach the South Pole in 1911. The one who set ambitious goals for each day but never overshoot on good days or undershoots on bad ones eventually won the race. So are companies like Progressive Insurance, Intel and Southwest Airlines. But from a theoretical point of view, why and when does discipline trump adjustment and adaptation? Is it a result of some optimization process and how? Is discipline working more effectively as environment becomes more turbulent and chaotic? In industries that are less affected by disruptive and chaotic change, would companies with strict disciplines still outperform those without?

Here are some reviews and interviews from WSJ, FT, Forbes, Knowledge@Wharton (part 1, 2) and INSEAD Knowledge.

Sunday, December 18, 2011

The dismal and evil science

See the first NYTimes column from the Standup economist.

Well, it's not a more rigorous proof of how trade can make the society worse-off (some may have already seen his "constructive proof"), it's his empirical "proof" of how economics can make the society worse-off. In a nutshell, he basically summarized some key findings from his recent JEBO paper:

1. Econ majors donate less than non-econ majors; (well documented, though)
2. Selfishness is not nurtured via taking econ classes among econ majors - taking econ classes did not have a significant negative effect on later giving by these students; (the "selfish gene" may have guide them to choose econ as their major in the first place)
3. Selfishness can be nurtured via taking econ classes among non-econ majors - taking econ classes did have a significant negative effect on later giving by these students. (negative externality)

Conclusion. For the society as a whole, taking economics classes makes it more selfish. So is economics a dismal science? Yes indeed, but moreover, it's kind of evil too.

Friday, December 9, 2011

Papers to watch

2012 AEA Annual meeting is less than a month away. For organizational economists and strategy researchers, these following papers may merit your attention:

New Developments in the Organization of Firms
Scale, Scope, and Performance
RENATA KOSOVA (Cornell University)
FRANCINE LAFONTAINE (University of Michigan)
BO ZHAO (University of Michigan)
Organization and Information: Firms' Governance Choices in Rational-Expectations Equilibrium
ROBERT GIBBONS (Massachusetts Institute of Technology)
RICHARD HOLDEN (University of Chicago)
MICHAEL POWELL (Massachusetts Institute of Technology)
Organize to Compete
RICARDO ALONSO (University of Southern California)
WOUTER DESSEIN (Columbia University)
NIKO MATOUSCHEK (Northwestern University)
A Dynamic Approach to Span of Control: Theory and Evidence
VALERIE SMEETS (Aarhus University)
FREDERIC WARZYNSKI (Aarhus University)
MICHAEL WALDMAN (Cornell University)

Experiments in Firms
Once and Done: Leveraging Behavioral Economics to Increase the Bottom Line of Non-Profits
AMEE KAMDAR (University of Chicago)
STEVEN LEVITT (University of Chicago)
JOHN LIST (University of Chicago)
CHAD SYVERSON (University of Chicago)
Working from Home or Shirking from Home? Evidence from a Chinese Field Experiment
NICK BLOOM (Stanford University)
JOHN ROBERTS (Stanford University)
JENNY YING (Stanford University)
Management, Capital and Firm Organization among Small-Scale Enterprises in Ghana
DEAN KARLAN (Yale University)
CHRIS UDRY (Yale University)
Ex Post (in)efficient Negotiation and Breakdown of Trade
ANTOINETTE SCHOAR (Massachusetts Institute of Technology)
RAJKAMAL IYER (Massachusetts Institute of Technology)

Contracts and Institutions
The Role of Contractual Publicity in Impersonal Trade
BENITO ARRUÑADA (Universitat Pompeu Fabra)
Relational Renegotiation: Theory and Evidence from the Movie Industry
ROBERT GIBBONS (Massachusetts Institute of Technology)
DANIEL BARRON (Massachusetts Institute of Technology)
RICARD GIL (Johns Hopkins University)
KEVIN J. MURPHY (University of Southern California)
Fixed versus Open Prices: A Choice between Countering Opportunism and Creating Value
DESMOND LO (Santa Clara University)
Business Associations and Private Ordering
JENS PRÜFER (Tilburg University)

Legal and Economic Foundations of Organization
What is Law? A Coordination Model of the Characteristics of Legal Order
GILLIAN K. HADFIELD (University of Southern California)
BARRY R. WEINGAST (Stanford University)
On the Evolution of Collective Enforcement Institutions: Communities and Courts
SCOTT E. MASTEN (University of Michigan)
JENS PRUFER (Tilburg University)
Focal Transactions and Theories of Firm and Market Organization
STEVEN TADELIS (University of California-Berkeley)
OLIVER E. WILLIAMSON (University of California-Berkeley)

Capital Structure and Firm Organization
Innovation, Capital Structure, and the Boundaries of the Firm
DIRK HACKBARTH (University of Illinois-Urbana-Champaign)
RICHMOND D. MATHEWS (Duke University)
   DAVID T. ROBINSON (Duke University)