nep-cse New Economics Papers
on Economics of Strategic Management
Issue of 2006‒04‒08
nineteen papers chosen by
Bernardo Batiz-Lazo
Bristol Business School

  1. Competition and Entry in Banking: Implications for Stability and Capital Regulation By Boot, Arnoud W A; Marinc, Matej
  2. Outsourcing in Contests By Frode Meland; Odd Rune Straume
  3. Do Prices grow more in Euroland? Evidence from the Airline Industry By Claudio A. Piga; Enrico Bachis
  4. Organization of Multinational Activities and Ownership Structure By Mugele, Christian; Schnitzer, Monika
  5. Linkages and Spillovers from Foreign Ownership in the Indian Pharmaceutical Firms By Shandre M. Thangavelu; Sanja Samirana Pattnayak
  6. Measuring and Explaining Management Practices Across Firms and Countries By Bloom, Nicholas; Van Reenen, John
  7. Follow-on financing of venture capital backed companies: the choice between debt, equity, existing and new investors By Baeyens,K.; Manigart,S.;
  8. Intellectual Property Rights and Biotechnology: How to improve the present patent system By Ignazio Musu
  9. Caracterización de las barreras a la entrada: un estudio para la industria caleña 1994-2002 By Christian Manuel Posso Suárez
  10. R&D and Strategic Industrial Location in International Oligopolies By Garcia Pires, Armando José
  11. Takeovers By Burkart, Mike; Panunzi, Fausto
  12. Cross-Border Acquisitions and Corporate Taxes: Efficiency and Tax Revenues By Norbäck, Pehr-Johan; Persson, Lars; Vlachos, Jonas
  13. Asset Ownership and Foreign-Market Entry By Horst Raff; Michael Ryan; Frank Stähler
  14. Do Consumers Choose the Right Credit Contracts? By Sumit Agarwal; Souphala Chomsisengphet; Chunlin Liu; Nicholas S. Souleles
  15. Why Do Foreign Firms Invest in South West England? By Damian N. Whittard; Don J. Webber
  16. Is Firm Productivity Related to Size and Age? The Case of Large Australian Firms By Alfons Palangkaraya; Jongsay Yong; Andreas Stierwald
  17. The relationship between regulation and competition policy for network utilities By David Newbery
  18. El paquete turístico de todo incluido: un análisis de sus implicaciones económicas para el caso de las Islas Baleares By Joaquín Alegre; Llorenç Pou
  19. Credit Card Debt Puzzles By Michael Halisassos; Michael Reiter

  1. By: Boot, Arnoud W A; Marinc, Matej
    Abstract: We assess the influence of competition and capital regulation on the stability of the banking system. We particularly ask two questions: i) how does capital regulation affect (endogenous) entry; and ii) how do (exogenous) changes in the competitive environment affect bank monitoring choices and the effectiveness of capital regulation? Our approach deviates from the extant literature in that it recognizes the fixed costs associated with banks’ monitoring technologies. These costs make market share and scale important for the banks’ cost structures. Our most striking result is that increasing (costly) capital requirements can lead to more entry into banking, essentially by reducing the competitive strength of lower quality banks. We also show that competition improves the monitoring incentives of better quality banks and deteriorates the incentives of lower quality banks; and that precisely for those lower quality banks competition typically compromises the effectiveness of capital requirements. We generalize the analysis along a few dimensions, including an analysis of the effects of asymmetric competition, e.g. one country that opens up its banking system for competitors but not vice versa.
    Keywords: banking; capital regulation; competition
    JEL: G21 L13 L50
    Date: 2006–02
  2. By: Frode Meland; Odd Rune Straume
    Abstract: We study ex post outsourcing of production in an imperfectly discriminating contest, interpreted here as a research tournament or a procurement contest for being awarded some production contract. We find that the possibility of outsourcing increases competition between the contestants, leading to higher total contest effort, unless the ex-post bargaining strength of the contest winner is sufficiently low and/or there are very few contestants. However, even in the case of two contestants, outsourcing reduces the procurement costs of inducing a given level of effort if the contest organizer can collect entry fees. With respect to contest design, this suggests that outsourcing should generally be allowed if the objective is to induce stronger competition.
    Keywords: contests, outsourcing, bargaining, contest design
    JEL: D44 L23 L24
    Date: 2006
  3. By: Claudio A. Piga (Dept of Economics, Loughborough University); Enrico Bachis (Business School, Nottingham University)
    Abstract: Using more than 10 million on-line fares, we study the determinants of yearly fares’ changes in June 2002-June 2005. We verify whether airlines took advantage, after the Euro introduction, of potential inflationary pressures by increasing their fares more in routes to Eurozone nations. The evidence suggests that this was the case only for the period end 2003-end 2004. To control for other factors that may affect fares’ setting decisions, we provide insights into the effects of the takeovers of Go Fly and Buzz by EasyJet and Ryan Air, respectively. Although we generally find that fares offered immediately after the takeover by the acquiring firms were lower than the ones charged by the target firms twelve months earlier, in one case the effects of the takeover on consumers’ welfare are ambiguous.
    Keywords: Price discrimination; takeovers, Euro, changeover, low cost carriers, liberalisation.
    JEL: L11 L13 L93
    Date: 2006–03
  4. By: Mugele, Christian; Schnitzer, Monika
    Abstract: We develop a model in which multinational investors decide about the modes of organization, the locations of production, and the markets to be served. Foreign investments are driven by market-seeking and cost-reducing motives. We further assume that investors face costs of control that vary among sectors and increase in distance. The results show that (i) production intensive sectors are more likely to operate a foreign business independent of the investment motive, (ii) that distance may have a non-monotonous effect on the likelihood of horizontal investments, and (iii) that globalization, if understood as reducing distance, leads to more integration.
    Keywords: distance; joint ventures; multinational firms; ownership structure; technology spillovers
    JEL: D23 F23 L22 L23 L24
    Date: 2006–03
  5. By: Shandre M. Thangavelu (Department of Economics National University of Singapore, 1 Arts Link); Sanja Samirana Pattnayak (Department of Economics National University of Singapore, 1 Arts Link)
    Abstract: The paper examines the spillover and linkage effects from the presence of foreign firms in the Indian pharmaceutical industry. A comprehensive panel data consisting of nearly 200 firms from 1989 to 2000 was used in the current study. The recent semi-parametric estimation methods as suggested by Olley and Pakes (1996) and Levinsohn and Petrin (2003) were adopted to account for the endogeneity in the input demand. Our results suggest the existence of positive and significant spillover from the foreign equity ownership in the Indian pharmaceutical industry. However, we also found negative and significant spillovers from the backward linkages with foreign firms. The negative spillovers from the backward linkages suggest the possibility of large technology and efficiency gap between local and foreign firms. The results also suggest that institutional arrangements that protect intellectual property rights such as product patents as opposed to process patents will be important for establishing positive linkages and spillovers between local and foreign firms in the Indian pharmaceutical industry.
    Keywords: FDI, Backward and Horizontal Linkages, Olley-Pakes, Levinsohn-Petrin
    JEL: F23 C23 O3
  6. By: Bloom, Nicholas; Van Reenen, John
    Abstract: We use an innovative survey tool to collect management practice data from 732 medium sized manufacturing firms in the US, France, Germany and the UK. These measures of managerial practice are strongly associated with firm-level productivity, profitability, Tobin’s Q, sales growth and survival rates. Management practices also display significant cross-country differences with US firms on average better managed than European firms, and significant within-country differences with a long tail of extremely badly managed firms. We find that poor management practices are more prevalent when (a) product market competition is weak and/or when (b) family-owned firms pass management control down to the eldest sons (primo geniture). European firms report lower levels of competition, while French and British firms also report substantially higher levels of primo geniture due to the influence of Norman legal origin and generous estate duty for family firms. We calculate that product market competition and family firms account for about half of the long tail of badly managed firms and up to two thirds of the American advantage over Europe in management practices.
    Keywords: competition; family firms; management practices; productivity
    JEL: L2 M2 O32 O33
    Date: 2006–03
  7. By: Baeyens,K.; Manigart,S.;
    Abstract: We study the financing strategies of 191 start-ups after they have received venture capital (VC) and thereby contribute to the staging literature. The VC backed start-ups have raised financing on 345 occasions over a five-year period after the initial VC investment. Surprisingly, bank debt is the most important source of funding for these young and growth-oriented companies, supporting the view that VC investors have a certifying role in their portfolio companies. Bank debt is available to firms with a lower demand for money, lower levels of risk and of information asymmetries, implying that staging of equity funding is less important for these firms. A firm only raises equity when it’s debt capacity is exhausted, hinting that equity investors are investors of last resort. New equity is provided by the existing shareholders in 70% of the equity issues, supporting earlier findings that staged financing is important in venture capital financing. New shareholders invest when large amounts of funding are required and when risk and information asymmetries are high. We interpret these findings as support for the extended pecking order theory. In line with syndication arguments, new investors thus provide risk sharing opportunities and skills to screen and monitor and thereby reduce information asymmetries. New equity investors face adverse selection problems, however, in that only the most risky investments are syndicated.
    Keywords: financing strategy, venture capital, bank debt, external shareholders
    JEL: G32
    Date: 2006–03–27
  8. By: Ignazio Musu (Department of Economics, University of Venice "Ca' Foscari")
    Abstract: The paper discusses two types of problems related to assigning or denying intellectual property rights to agro-biotechnological innovations in the relation between developed and developing countries. First, protecting property rights on innovations creates incentives towards further research and innovation, which in some cases may be beneficial to society, in others not so. If the assigning of the right does not guarantee the potential beneficial use of the innovation, not assigning rights would not prevent its potentially dangerous utilization. Secondly, the power of exclusion of the holder of an intellectual property right limits access to the newly produced knowledge: this may discourage the process of producing new knowledge, harming developing countries. Moreover the property right holder may end up with excessive market power when commercializing the innovation, which is also harmful to developing countries. It is shown that these problems cannot be solved by denying protection to property rights on innovations, but by improving procedures for awarding these rights and accompanying them with appropriate liability rules and antitrust measures.
    Keywords: Intellectual property rights, Biotechnology, Patent system
    JEL: O30 O33 O34
    Date: 2006
  9. By: Christian Manuel Posso Suárez
    Abstract: RESUMEN En este trabajo se realiza un análisis de las principales barreras a la entrada en mercados industriales, y un contraste empírico para el sector manufacturero del área metropolitana de Cali durante el período 1994 - 2002. El análisis se realiza con base en las diferentes perspectivas teóricas que plantean la Organización Industrial y la Microeconomía. También se realiza un análisis descriptivo de la dinámica empresarial que existe en el sector manufacturero del área metropolitana de Cali y se intenta contrastar el efecto de las barreras a la entrada a través de una estimación con la técnica de datos de panel; con este fin, se estima un modelo de corte transversal en donde se tiene en cuenta el efecto de las barreras a la entrada en 17 sectores industriales; posteriormente se hace lo mismo con un modelo de efectos fijos. Se encontró que las principales barreras a la entrada en la industria caleña son la estructura de costos medios, la concentración del mercado y la intensidad tecnológica. Los sectores más concentrados son el de fabricación de papel y productos de papel, fabricación de productos minerales no metálicos, fabricación de productos de caucho y plástico, y la industria de bebidas. ABSTRACT In this work an analysis is made of the main entry barriers in industrial markets, and an empirical contrast for the manufacturing sector of the metropolitan area of Santiago de Cali from 1994 to 2002. The analysis was based on different theoretical perspectives proposed by industrial organization and micro-economy. A descriptive analysis was also carried out of the entrepreneurial dynamics which exist in the manufacturing sector of the city of Santiago de Cali, with the intention of contrasting the effect of the entry barriers by means of an estimate using the panel data technique. For this purpose, a cross-section model is estimated in which the effect of the entry barriers in 17 industrial sectors is taken into account. This is done subsequently with a fixed effects model. It was found that the main entry barriers in industry in Cali are the medium cost structures, the concentration of the market, and the technological intensity. The most concentrated market sectors are paper manufacturing and paper products, he manufacture of non-mineral metal products, rubber and plastic and the beverage industry.
    Date: 2005–10–31
  10. By: Garcia Pires, Armando José
    Abstract: In a spatial economy where oligopolist firms compete in R&D, it is found that geography affects the innovative behaviour of firms. Notably, international differences in market size conduce to endogenous asymmetries between firms given that firms located in the country with more demand have stronger incentives to invest in R&D. This 'R&D linkage' between demand and competitiveness promotes firms to strategically delocalize to the larger country. As a result, a spatial equilibrium arises with only total or partial agglomeration, but never with symmetric dispersion.
    Keywords: agglomeration effects; asymmetric firms; industrial location; oligopoly; R&D investment
    JEL: F12 L13 O31 R3
    Date: 2006–03
  11. By: Burkart, Mike; Panunzi, Fausto
    Abstract: This paper reviews the existing literature on takeovers. Takeovers are a means to redeploy corporate assets more efficiently and to discipline incumbent management. However, an active market for corporate control also brings about potential inefficiencies. Takeovers may be undertaken for reasons other than value creation and the threat of a control change can induce inefficient actions on the part of target firm management and employees. The functioning of the market for corporate control is further impaired by incentive and coordination problems inherent in the takeover process. When the target firm is owned by many small shareholders, the free-rider problem prevents bidders firms from earning a profit on the tendered shares. We analyse implications of this problem as well as ways to overcome it. As widely held firms are atypical in many countries, we also discuss the impact that target ownership structure has on the incidence and efficiency of control transfers.
    Keywords: efficiency of control transfers; free-rider problem; takeovers
    JEL: G34
    Date: 2006–03
  12. By: Norbäck, Pehr-Johan (The Research Institute of Industrial Economics); Persson, Lars (The Research Institute of Industrial Economics); Vlachos, Jonas (Stockholm Institute of Transistion Economics)
    Abstract: We find that reduced foreign corporate taxes may lead to inefficient foreign acquisitions if complementarities between foreign and domestic assets are low, and to efficient foreign acquisitions if such complementarities are high. Moreover, with large complementarities, foreign acquisitions can increase domestic tax revenues. The reason is that in the bidding competition between the foreign firms, all benefits from the acquisition, including tax advantages and evaded taxes, are competed away and captured by the domestic seller which, in turn, pays capital gains tax on the proceeds. Technical issues in the tax code, such as the treatment of goodwill deductibility, is also shown to crucially affect the pattern of foreign acquisitions.
    Keywords: Tax Competition; Ownership; Tax Revenues; FDI; M&As
    JEL: F23
    Date: 2006–03–09
  13. By: Horst Raff; Michael Ryan; Frank Stähler
    Abstract: This paper examines the link between a firm’s ownership of productive assets and its choice of foreign-market entry strategy. We find that, controlling for industry- and country-specific characteristics, the most productive firms (i.e., those owning the most assets) will enter through greenfield investment, less productive ones will choose M&A, and the least productive ones will export. In addition, the most productive firms are shown to prefer whole ownership to a joint venture. These predictions are confirmed in an econometric analysis of Japanese firm-level data.
    Keywords: foreign direct investment, merger and acquisition, joint venture, greenfield investment, firm heterogeneity, productivity
    JEL: F12 F15
    Date: 2006
  14. By: Sumit Agarwal (Bank of America); Souphala Chomsisengphet (Office of the Comptroller of the Currency); Chunlin Liu (University of Nevada - Reno, Finance Department); Nicholas S. Souleles (University of Pennsylvania)
    Abstract: A number of studies have pointed to various mistakes that consumers might make in their consumption-saving and financial decisions. We utilize a unique market experiment conducted by a large U.S. bank to assess how systematic and costly such mistakes are in practice. The bank offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. To minimize their total interest costs net of the fee, consumers expecting to borrow a sufficiently large amount should choose the contract with the fee, and vice-versa. We find that on average consumers chose the contract that ex post minimized their net costs. A substantial fraction of consumers (about 40%) still chose the ex post sub-optimal contract, with some incurring hundreds of dollars of avoidable interest costs. Nonetheless, the probability of choosing the sub-optimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors were more likely to subsequently switch to the optimal contract. Thus most of the errors appear not to have been very costly, with the exception that a small minority of consumers persists in holding substantially sub-optimal contracts without switching.
    Keywords: Consumption-Saving, Borrowing, Consumer Finance, Consumer Credit, Credit Cards, Banking
    JEL: G11 G21 E21 E51
    Date: 2005–11–07
  15. By: Damian N. Whittard (South West Regional Development Agency); Don J. Webber (School of Economics, University of the West of England)
    Abstract: Regional Development Agencies compete to attract foreign direct investments (FDI) that generate economic benefits. This paper seeks to identify factors that attract FDI to the South West region of the UK. The results suggest that the South West’s average wage levels, population density, unemployment rate, physical infrastructure expenditure, growth and the relative dominance of the manufacturing sector all contribute to the multinational enterprise’s decision to locate to the South West. The amount of defence spending is also found to be a determinant, suggesting that the defence sector might be an attractor of FDI. These results are endorsed by a separate survey analysis.
    Keywords: FDI; South West
    JEL: F2 L2 R1
    Date: 2006–03
  16. By: Alfons Palangkaraya (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Jongsay Yong (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Andreas Stierwald (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: We investigate the relationship between productivity, size and age of large Australian firms employing more than 100 employees or holding assets in excess of $100 million. In addition, we also investigate the extent of productivity persistence among these firms by looking at transition matrices of productivity distribution and productivity-rank mobility. The empirical study is based on the IBISWorld database used to estimate translog cost function to measure (a residual based) productivity. We find evidence, though somewhat weak, that larger and older firms are on average less productive. Furthermore, we find stronger evidence for a high degree of inertia in terms of productivity ranking within an industry.
    JEL: L25
    Date: 2006–03
  17. By: David Newbery
    Abstract: Should regulation of potentially competitive elements of network utilities be left with sector regulators or solely subject to normal competition laws? Britain evolved licenses for network activities overseen by regulators while the EU places more emphasis on making sector regulation consistent with competition law. The paper discusses the appropriateness of the competition law approach for telecoms and electricity. Post-modern utilities like telecoms, in which facilities-based competition is possible, lend themselves to the approach laid out in the Communications Directives, and its application to mobile call termination is discussed. Electricity, where collective dominance is more likely, does not fit comfortably into this approach. Instead, licence conditions retain advantages where it may be necessary to modify market rules in a timely and well-informed manner, as exemplified by the English Electricity Pool.
    Keywords: Regulation, competition policy, telecommunications, electricity, market power
    JEL: G18 L94 L96
    Date: 2006–02
  18. By: Joaquín Alegre; Llorenç Pou
    Abstract: The percentage of tourists visiting the Balearic Islands that choose the all inclusive package holiday has increased impressively since the turn of the century. The aim of this paper is to analyse the reasons behind this increase, as well as the economic effects that it is causing. For that purpose, several econometric models are estimated with data drawn from the Tourist Expenditure Survey and the brochures of the main tour operators in the Balearics. The main results are the following: (1) it cannot be accepted that the all inclusive product is capturing new segments of demand. (2) The increase in the percentage of tourists that choose the all inclusive product seems to be the result of a price strategy from tour operators. (3) The comparison of mean expenditure among the different types of board shows that the all inclusive option implies an expenditure per tourist per day clearly lower than that from the rest of types of board. (4) The increase of the importance of the all inclusive package is causing a dramatic change in the distribution of tourism receipts among the different economic agents. In fact, the all inclusive package shows levels of revenues paid in origin and in the Balearics highly different from those detected with the other tourist options.
    Keywords: Tourism, all inclusive package, tourist expenditure, tour operators.
    Date: 2006–03
  19. By: Michael Halisassos (School of Economics and Business, Goethe University Frankfurt); Michael Reiter (Dept. of Economics and Business, Universitat Pompeu Fabra)
    Abstract: Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an ‘accountant-shopper’ framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.
    Keywords: Credit Cards, Debt, Self Control, Household Portfolios
    JEL: E21 G11
    Date: 2005–10–09

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