Author Archives: Henrich R. Greve

Minimally Invasive Investment: How Ventures Interact with Investment Partners

Of the many kinds of new businesses that are created every year, researchers and policy makers have been most interested in the ones that pursue innovative technologies and market opportunities. They are the ones with the greatest impact on the world, and much effort has gone into studying what makes them innovative. But let’s take a broader view on this question. What if firms around them also affect their innovation – specifically their investment partners, firms that supply them with money and expect returns from their innovations? The answer would be especially interesting if different investment partners had different effects. And as it turns out, they do.
An article in Administrative Science Quarterly by Emily Cox Pahnke, Riitta Katila, and Kathleen Eisenhardt shows how this happens. The important difference is how each organization doing investment has people trained in specific ways, and adhering to specific norms, as a result of their recruitment and career histories. For innovative ventures, venture capital (VC) firms are special because they invest in potential – in firms that could easily fail, and usually do, but have very significant profits when they succeed. VCs are different from sources of corporate venture capital (CVC), which are investment arms of corporations. They are special because they invest in fit to the corporate strategy – firms that develop products and technologies that match so well that they can become integrated into the corporation or at least use its resources well. Then there is the third kind of special investor—government agencies. They are special because they are interested in science and technology with significant societal impact.
Pahnke, Katila, and Eisenhardt looked at what happened to ventures after receiving funding from each of these sources by examining a specific high-technology industry—medical device firms developing products for minimally invasive surgery. The results were clear. The commercially oriented VC investors were good at exactly that. Their firms launched more products after the investment but did not get more patents approved after the investment. The strategically oriented CVC partners were not good at anything that could be measured independently of their strategy. No more patents were approved, and no more products were launched. That does not mean they weren’t good investors, because they could well have selected and improved the strategic fit of their firms. The government was not good at product development, having no effect there, and appeared to harm patenting, with a reduction in patents after entering the investment. That seems bad—but it is actually unclear, because government may be interested exactly in the type of scientific development that is useful for society but hard to turn into patents that give commercial benefit.
So what is going on here? We can tell that one type of investment partner – VCs – has clear and measurable goals and is good at accomplishing them. For CVC and governments, it is harder to tell. Either they are not doing well, or their goals are not exactly what we can measure. Looks like an interesting topic for further research, because each of these investment partners places big bets on our future.

Pahnke, Emily Cox, Riitta Katila, and Kathleen M Eisenhardt.2015. “Who takes you to the dance? How partners’ institutional logics influence innovation in young firms.” Administrative Science Quarterly 60(4):596-633.

When Nanotechnology Shrank: How Communities Police the Boundaries of Their Field

It is ironic that I should write a post on how communities of science police the boundaries of their field shortly after writing a blog post on how nations hurt themselves by policing their boundaries. But a paper in Administrative Science Quarterly by Stine Grodal has exactly that theme and some important conclusions. Plus, it is about nanotechnology, something we have heard about and think will shape the future of the world but don’t understand well.
In fact, what I just wrote echoes the start of the nanotechnology field. It was a term coined and advocated by futurists, it was and still is claimed to be a source of advances in science, technology, and business that will change individual lives and society, and it has been redefined many times. The redefinitions of the field are important because they are partly a consequence of these futurists and others with an interest in the term, especially the government, grappling with the question of how best to define the boundaries of the nanotechnology field so that it attracts the right kind of support from others and makes the kind of advances that are desired.
Nanotechnology became a very successful field, in part because of government intervention in the traditional way: giving out money to those engaged in research on nanotechnology. The other source of success was interest in nanotechnology companies from venture capitalists, who expressed their interest the same way: they provided money. This initiated an identity crisis because it soon became clear to the futurists that there were many in the world with little interest in their vision but significant interest in money and other resources that were becoming available, and they had the ability to fit their activities into the loosely defined field of nanotechnology. After all, entrepreneurs are well known for creativity in the pursuit of funding, and scientists are (this is less well known) extremely creative in the pursuit of funding.
The result was a backlash. The creators of the field, the futurists, looked at all the newcomers and their flexible definitions of nanotech, and thought they were changing the meaning of the term and were pursuing different futures than the one originally envisioned. Government officials saw a flood of funding applications and realized that the topics were too spread out to provide any kind of consistency unless the funding agency enforced it. Government interest in nanotechnology started with the futurists’ initiatives, so officials could ask the futurists for help in making a stricter definition of the field. The futurists were pleased to help, given that the field was losing clarity and they were losing funding as competition increased. Interestingly, even some interlopers such as scientists and entrepreneurs started rethinking the meaning of nanotech, seeing it as too trendy a term and not well enough connected to their work.

Nanotech started out as a word with a clear symbolic vision and few adherents. Money was added, and it became unclear and populated with many newcomers, members of peripheral communities. This makes sense. The next step is the surprise, because everyone in the field started looking around and seeing a need to sort things out. The founders and funders of the vision stayed, and the newcomers started leaving. That’s how nanotech shrank, and it could well be how many other fields expand and contract over time.

Improving Evidence Presentation: An Example and Some Tips

This is an unusual blog post because it is on how to do research, not on what we have learned from research that has been done. Well, there is also something on what we have learned. I think it is very important that researchers show the data in their manuscripts by making graphs that show the reader the phenomenon and their explanation of it. This is not easy to do currently because management journals like models more than they like graphs, and models don’t show the data as clearly as graphs do.
As the editor of Administrative Science Quarterly, I am encouraging authors, associate editors, and reviewers to use more graphs. I also do it as an author, and this blog post is about a paper in Advances in Strategic Management that I wrote with Seo Yeon Song. We analyzed the ebook business, and our starting point was that there is a big movement toward self-publishing and indie (independent) publishing there, with an increased market share relative to the Big 5 publishers. Here is the graph showing this change:
How did we explain the change? Big 5 publishers can pay for advertisements, unlike indies, so indies must have some other advantage. We thought it was their readers rewarding good indie books with tweets and reviews on the website. Here is a comparison of how Amazon reviews affect sales of Big 5 and indie ebooks:

See the difference? Indies don’t have advertisements to support sales, so each new review increases their sales more. This is something that can be seen from the data without any modeling. Of course we also modeled the data. I won’t show the model here, but instead show a graph comparing the effect of Amazon reviews (the count), Amazon review score, tweets (the count), and sentiment (how positive they were). It is easy to see the results, right? Amazon reviews have a much stronger effect than Twitter posts.

Finally, here is a graph that shows the review effect in a model that extracts all other effects we could control for, such as the tweets. This is called a residual graph, and it can be used to check how much of the relation between the reviews and sales is explained by other factors. The answer is… almost nothing. This graph (a residual graph) is visually nearly the same as the earlier one. It also shows how much is left to explain by other factors that are not yet in the model, which is clearly a lot.

Well, this was a short story about ebook sales, but the more important point is that researchers can show their findings well just by graphing the data. If you want to see the program that made these graphs and some sample data to use it on, click here and here.

Going Back and Doing Good: When Foreign Workers Return Home

Here is an interesting contradiction: Some politicians say that relying less on foreign workers will make their nation more competitive, but in fact it makes the workers’ home country more competitive. Notice that I said contradiction, not paradox, because it is not a paradox at all. It is logical, and it is supported by recent research.
Here is how it works, as explained in an article by Dan Wang in Administrative Science Quarterly. Foreign workers are often used by highly advanced and competitive firms, because those firms are best positioned to take advantage of a worker’s skill wherever it is found, and to transfer it to wherever it is needed. They also have excellent production processes, advanced technologies, and knowledge on how to best operate these. Sometimes their foreign workers go back to their home countries (usually voluntarily). What happens then?
The start is quite simple. These workers may be holding knowledge of great value to firms in their home countries, so the key is whether they can make a knowledge transfer back home. The firms that hire them, or the new firms they form if they become entrepreneurs, will benefit from their knowledge. But the full story is not as simple as the start. These workers differ in how well connected they are to others, in the companies they worked with abroad, and in the companies they work with after returning. Their personal networks differ in how many people they know and how well they know them. It turns out that knowledge transfer depends greatly on these connections, because the greatest transfers happen when a worker is highly connected both abroad and after returning home.
The conclusion is clear. Playing the competitiveness card may be a good way to cater to xenophobia among voters, because those who prefer fewer foreigners around like to hear reasons for their dislike. (Even if the excuse isn’t true, it is nice to have an excuse.) But competitiveness is not a valid reason to send foreign workers home.
Wang’s research had one more important conclusion: it was not just personal networks that made knowledge transfers effective, but also an absence of xenophobia in the home country. Now the contradiction becomes even more interesting. Xenophobic policies of sending people home may be phrased as helping competitiveness, but they usually hurt it — except when the workers come from a country with xenophobic people, because then the knowledge they have won’t transfer back. Xenophobia is a lose–lose proposition.

Humility Empowers: How CEOs’ Attitudes and Actions Cascade Down the Firm

Managers are often given advice that combines research-based buzzwords with fundamental misunderstandings. Empowerment is a good example. The word contains “power,” and advice is usually given to those who feel a need to improve, so it was perhaps inevitable that empowerment should be associated with ideas of individuals becoming or feeling empowered through some action of their own, such as attending a course or a coaching session on how to become empowered. That’s not what empowerment means or how it works: people are empowered when someone else gives them power and authority to make their own decisions.
The distinction is important because if empowerment improves organizations, then we should start by looking at the person who empowers others. That’s exactly what was done in research published in Administrative Science Quarterly by Amy Ou and collaborators. They looked at how a CEO’s humility could empower others in the firm. Their central insight is simple and powerful: a CEO’s humility makes it easier for the top management team to work together, because each feels empowered and comfortable, and that effect on the top management team cascades down the organization.

They found that the humble CEO is the opposite of the showy CEO in two key ways. First, the humble CEO does not dominate but instead is understated and makes it easier for the closest executives to stand up and perform. For example, the humble CEO does not make public performances and speeches to the whole organization but instead lets the empowerment of the closest executives cascade down. Second, humble CEOs encourage communication to give shared understanding, which in turn lets subordinates feel motivated and confident about their decisions and helps their managers trust their judgment and commitment. This cascading down of shared understanding and trust can bring whole organizations together more effectively than inspirational speeches by showy CEOs.
There is much about that research that appeals to us, because most of us share the suspicion that showy, self-promoting, narcissist CEOs must be flawed in some way. Yet such CEOs are very common, and part of the reason is that it is easier to imagine people who make a big impression also having big effects on the firms they lead. Humility is such a low-key behavior and such (what else can I say?) humble thinking that it is hard to imagine it having a big effect. But it does. How?
The keyword is empowerment.  Humble CEOs empower their top management teams. Empowered top management teams create an organizational climate that empowers workers all the way down. A top management team that has been empowered and in turn empowers others creates norms that are so strong that it is hard to be an authoritarian manager. That’s how humility has big effects on organizations: it creates an expanding circle of empowerment.

Post the Job or Slot a Person? It Depends on Whether You Want Performance

Five years ago, I posted a blog on award-winning research showing that firms pay more and get less when hiring from the external labor market. The reason is that managers know more about their current employees, and they overestimate the value of external hires because they focus on their formal qualifications. When it comes to filling jobs internally in the organization, a manager still has to choose between placing a known worker into a job or posting the job and assessing applicants, who may or may not be familiar to the manager. With internal hiring, do managers still undervalue the workers they know?
Research in Administrative Science Quarterly by JR Keller answers that question. He looked at the difference in job performance and pay between jobs that were filled through posting and applying, and jobs that were filled through the manager picking someone (slotting).  Managers could choose which way to fill each job, and naturally they used slotting when they knew someone who fit and posting when they were not so sure. This is the same as choosing between internal job mobility and the external job market, because managers pick internal candidates when they know someone who fits the job and hire externally when they are not so sure. They also have more candidates when posting, and they know less about the applicants because they are usually from other parts of the organization. In every way you can imagine, the choice between posting and slotting is similar to the choice between external and internal hiring.
So how wrong is it to fill an internal hire through posting instead of slotting? Here is the surprise: It is not worse to fill by posting, but better. Posting means higher job performance, both absolute and compared with others. It means lower chance of leaving the job, except for leaving for a promotion, which is more likely when filling through posting. Oh, and it also means higher pay for the employee filling the job. So, for the employee this looks like a good thing; more pay and better chance of a promotion. For the firm, it looks like paying more to get more, so the net effect depends on how much more the firm is getting. In this case the answer is easy because the lower turnover from the job alone shows that the firm benefits from using posting. The better job performance is icing on the cake.
But this raises the question of why markets work better inside an organization than outside it. What is it that the manager can see better when posting internally? The answer is, nearly everything. Organizations know a lot about their employees, and this knowledge is readily available when filling jobs through posting. Not only that, the posting process forces the hiring manager to think carefully about what information to use and how to weight it in the decision, giving a more systematic and higher quality choice. All the information is there, and posting gives more choices and a better choice process.
There is an important lesson in this that goes beyond filling positions. We often have beliefs about the benefit of markets relative to social arrangements like networks. We forget that there are many kinds of markets and many kinds of social arrangements, and ultimately decision making comes down to what to choose from and how to make the choice.

Posting and Slotting: How Hiring Processes Shape the Quality of Hire and Compensation in Internal Labor Markets. Administrative Science Quarterly: forthcoming. 

There Can Be Only One: Authenticity as Trope or Reality

We live long lives with many new experiences, yet popular culture tells us to be the same. Be true to yourself, they say. Managers have long careers with many roles, yet researchers and self-helpers tell them to be the same. Be the authentic you, they say. It is said so many times that it must be true. Except that things said too many times by too many people need to be researched, because they might be wrong and in consequential ways.

A new article in Administrative Science Quarterly by Brianna Barker Caza, Sherry Moss, and Heather Vough looks at the connection between being authentic and being the same, and it finds that what everyone says is not quite true. They asked whether consistency (being the same) is the same as authenticity (being one’s true self) and found that the answer is no. The problem with saying that authenticity demands consistency is that one’s true self is not a unified whole. We can think multiple thoughts, have multiple beliefs, and take on multiple roles, and each of these can be fully ours even though they are not consistent with each other. People are smart enough that they don’t have to be only one thing, and they are flexible enough that they don’t force themselves to be only one.
To do the research, the authors followed the careers of people who had multiple jobs at once and in some cases also changed these jobs over time. This is a strict test of authenticity because we understand and accept that people can be different at work and privately – like the quiet student who is a very outgoing and improvisational musician. Not surprisingly, the demands of authenticity were a burden for these people with plural careers. They knew that they were asked to be authentic, and that this implied being the same always, but they also felt these demands to be unnatural. Being authentic according to others was the same as being inauthentic according to themselves. So who wins this battle?
There can be no winner, but the subjects of this study usually found a truce that worked well for them. On the one hand, they had to draw lines between who they were and who they presented themselves as, but these lines did not involve acting – they involved presenting the part of themselves that belonged to the specific job they were doing at the time. Sometimes they could even present the more complete self, but they were careful about when. On the other hand, they incorporated the multiple roles and identities that belonged to them as part of themselves, and they saw this incorporation as authentic and valuable. “There can be only one” was a demand they did not have to follow because they could shape their careers and benefit (and let others benefit) from the learning and flexibility that these multiple identities gave them.
Think about the people around you. Some may seem unusual because they simply do too many things, or too different things, and we sometimes suspect that some of it is inauthentic – they act for some benefit. But you could easily be wrong, and you could underestimate their commitment to each activity and the value they add to it.

Harm to Similar People: What Awards Can Do

I recently discussed in this blog how status and prestige can do good things for a person, an organization, or a product. This effect has seen much study because it is a social fact that is very influential, and it seems arbitrary and illogical. Identical items are valued differently by supposedly smart people. We have lots of evidence that status gives benefits, including to those who are in some way connected to others with high status. To be seen with the elite is to gain some elite-ness, and casual observation of how people crowd the most prominent people in receptions will tell you they know that.

Can status also cause harm? A new article in Administrative Science Quarterly by Brian Reschke, Pierre Azoulay, and Toby Stuart found an example of this. They looked at the very prestigious appointment to the Howard Hughes Medical Institute (HHMI), which marks appointees and their research as especially accomplished, so much so that it can be used to predict future Nobel Prizes. Receiving this appointment is clearly a good thing. But what happens to those who are doing similar research but were not appointed to the HHMI? Is the similar research a connection that lets them gain some status? Or does it mark them as losers in a race for who is most important and should receive attention? Even worse, does someone else’s HHMI appointment determine what the final answer to a research question is, so that others conclude that this question can now be ignored?
Of course the blog title gave it away: prizes harm the status of similar others. Once a prize is announced, their work is seen as less and less important—their influence erodes. This erosion increases over time, and it is greater for younger (so less established) similar work. This is important to learn about on its own, because it is so different from the positive “status contagion” that we are used to finding. But there is also an exception to this finding, and it is just as interesting. Circling back to the logic that being near the elite can give some elite-ness, a prize might be able to bring recognition to similar others, and through that give them status. Resche, Azoulay, and Stuart found that can be true, but only if the similar others have little recognition to begin with. Once their work is established enough to be seen as important, the prize has negative effects.

So, prizes can give status to the less established, lifting them up. More often, what prizes do is to settle who among the established are most important, bringing one up and pushing the rest down. Anyone working in an area in which prizes are given—and pretty much any occupation or industry that involves design has prizes—will appreciate this research, because it confirms a basic intuition. You should hope to get the prize and fear that the prize is given to someone like yourself. 

Power from Arbitrary Places: What Awards Can Do

We have a general idea that status and prestige can do things – good things – to a person or organization. We are all familiar with how the prestigious classes of wine demand higher prices, even for a given quality level; there is evidence on this in research on French and California wines. Status effects are also well known from many other contexts, and a more-consequential example is financial markets, in which the most prestigious banks gain price and distribution advantages over all others.

A new paper by Anne Bowers and Matteo Prato in Administrative Science Quarterly gives interesting new details on the effects of status. They look at equity analysts, who seek to help investors in the stock market by issuing reports on firms and estimating their future earnings. This is difficult work, both in getting the estimates right and in gaining the confidence of investors, but some analysts are so highly regarded that their estimates can move the price of stock they report on. They have market power even though they just act as observers and forecasters. But how can an investor determine what analyst to pay attention to?

Conveniently, there is the magazine Institutional Investor, which caters to the large (and very powerful) institutional investors such as mutual funds and pension funds, as well as ordinary investors. The magazine has an annual All-Star award, given mostly for accurate estimates but also for other qualities such as high service to customers (again, institutional investors). This award is prestigious, but it is also a sign of quality. If the market could consider the quality and prestige aspects of the award separately, someone who was nearly good enough for the award should gain nearly as much power as someone actually getting it. You are probably guessing that this is not what happens. And you are right.

Bowers and Prato had a very clever way of finding this out. The award is given across many categories of equities, and these categories often change through addition, deletion, combination, and splitting.  This is neat because it means that an analyst could become an All-Star, or lose an All-Star award designation from a prior year, simply because the categories changed. Focusing only on these changes in awards, they found that the difference between having an award and not having one was a great deal of market power. Gaining an award meant that an analyst moved stock prices much more; losing one meant that an analyst moved prices much less.

The second of these effects should give you pause. Financial markets are supposed to be smart and to be able to predict the average outcome of many future events. But the loss of market power when an analyst loses the All-Star distinction because of a category change suggests that the markets are forgetting what they knew. The quality of an analyst doesn’t suddenly change, so if the market power changes, we know that the market has forgotten the quality. This is not good news for those of us who let institutional investors such as mutual funds or pension funds hold our pension investments.

Underselling Labors of Love: Why Give Discounts to Rich Tourists?

The world is full of people in creative occupations. Taking a broad view of creative occupations as those involving work with personal shaping of the product and service, about 40 percent of the world’s workers are in these occupations. Among them, artists and craftspeople are the ones we most readily associate with creative work because they instill their work not only with personal design and careful craftwork but also with a passion that makes each piece a labor of love. We recognize this most readily with artists making one-of-a-kind works, but many craftspeople turning out decorative items also make each piece an individual expression. They should get paid well for this, right?
Maybe not. In a new article in Administrative Science Quarterly, Aruna Ranganathan studied the pricing of wood bangles made by craftspeople in southern India, finding that the artistic ambitions of the craftspeople had a surprising effect on the prices they charged, relative to prices charged by traders selling exactly the same goods but not involved in their creation: they gave a discount to buyers who appeared to be especially appreciative of their work. The reason became clear from how they described their work. Unlike traders, who freely admitted selling crafted work just to make money, the craftspeople took personal pride in every piece they made and were especially attached to the best ones. Some items they refused to sell; others they made sure to sell to people who seemed likely to appreciate them and display them prominently.
This makes sense, because every artist wants to be acknowledged and wants the work to be appreciated. Indeed, this was especially important to the craftspeople Ranganathan studied, who saw their work as having such strong elements of the sacred that they viewed their workshops as being like temples. But what’s harder to understand is how craftspeople determine whether someone will appreciate their work. Not every transaction involves words, especially in an area that attracts many tourists who don’t speak the local language, as was the case in Ranganathan’s study. Instead, the craftspeople looked at the customers. And the financial decisions they made based on what they saw might be surprising.
If a customer wore handcrafted jewelry or clothing, or carried a handbag made from natural fibers, the craftspeople considered these clear signals that they would appreciate great craftwork. The craftspeople also believed that foreign tourists, who are fairly easily identified, would see their work as more exotic and be more likely to appreciate it. These two groups have something in common: they are likely to be wealthier than local customers wearing inexpensive items such as plastic jewelry and carrying synthetic handbags. Yet the craftspeople offered discounts to both of the wealthier groups and charged more—market price or even above—to the poorer customers. Market price (or higher) for the poor, discounts for the rich. It seems strange and unfair, but in creative work money is just part of the transaction—appreciation is the other part, and for the artist, this is a tradeoff.

In reporting evidence from social science, we often end up looking at behaviors that make sense on one dimension and not on another. I perfectly understand the artist who is willing to give a discount to have a piece appreciated. I don’t like the idea of the richest customers getting discounts. I suppose the best thing to do is not to bargain too much when buying art as a tourist. Hand-crafted items from local artisans should provide the artisan with both appreciation and a better standard of living.