Appunti Business history Business History notes, Appunti di Storia Economica

Scarica Appunti Business history Business History notes e più Appunti in PDF di Storia Economica solo su Docsity! BUSINESS HISTORY Session 1 Introduction: Chapter 2 and 3 Perspective: Longitudinal and evolution of businesses Timeframe of the course: three industrial revolutions (from 1750s to 2020s) Three theoretical pillars/themes  Innovation and technology  Entrepreneurial ethics  Organisational form and growth What is business history? Longitudinal evolutionary perspective on the impact of business  how business is important in terms of ethical decisions. How can we learn about solving problem. Why company are successful, why products are successful, why product fails? Understanding history is an important part of managing. Attention to the choices of actors in context (entrepreneurs, managers etc.) Attention to institutional context (organizational and ownership forms, role of technology) Similar to EH as it looks at big questions, recurring patterns & change, Different because it concentrates on micro vs macro. The firm and its theories have been of interest to many disciplines other than economics and management studies. They have also been the source of debates about legal rights, and especially the issue of the firm’s legal identity. The shift from craft production—carried out by skilled and unskilled individuals and based on the identification between the household and the workplace—to the factory sparked a radical transformation of the juridical status of the production unit itself. As a consequence, terms such as company or corporation started to be associated with a new organization structure that came to have its own legal status. This was independent from that of the single individuals involved in the different steps of the production process. Firm -> central element of capitalism CAPITALISM: economic system in which wealth creation is the main goal. Driving force of capitalism -> PROFIT (money is the goal) Capitalism "system of exchange in which productive units invest capital to produce something that is then exchanged in the market for money" money -> can be reinvested or it can be used to consume -> the money is therefore reintroduced in the system: if reinvested-> to make more money (to improve production and sell more) Firm -> productive unit, it can be represented by a productive function where Y (output) comes from a combination of K (capital) and L (labor) combined using technology . When technology is improved -> increase in productivity with the same amount of resources (shift upward of the production curve) The entrepreneur is the one who makes them effective – creates the infrastructure around production (difficult to capture) 1 Who is organizing the inputs? -> entrepreneur (or manager), The entrepreneur is the one who makes them effective – creates the infrastructure around production (difficult to capture). Different theories from observations of real historical context and environment  Neo-classical theory  Resource-based theory  Management and organization  Centrality of the entrepreneur NEOCLASSICS: Alfred Marshall : Late 19th century, industrial districts in the UK -> small firms cooperating and competing, technology not introduced by a single company but produced as an externality -> TECHNOLOGY is EXOGENOUS in the model Industrial districts: nowadays around Milan (and Crema) cosmetic district where components of big brands' products are made. Italy has several districts -> small companies operating in circumscribed geographies collaborating and competing with each other. Knowledge is very dense within districts and it flows -> districts allow innovation to take place thanks to collaboration For neoclassical theorists-> enterprise is a production function Features of the model:  Small companies  Lots of competitors  Price taker  Perfect information-> all companies operate from the same position and adopt the same decisions  Techonology -> exogenous-> technical knowledge could be obtained freely or at a low cost  Static model -> we don't look at the dynamics, simplified situation (in reality we don't have all companies competing with the same technology and being price- takers)  Interactions not relevant Anchor firm: big firm, technology-maker -> company that drives innovation in a district In this model: the firm is like an "atom" (a black box)-> interactions among inputs not investigated nor the role of the entrepreneur Atemporal and a-spatial simplification of firm's operations in this theory This abstract universe can be complicated by comparing it with another slice in time (Time 1 and Time 2), but in both cases, the analysis is static. It does not tell you how you get from Time 1 to Time 2 or Time 3. Firm performance depends on its ability to adapt to the external constraints due to technology and market structure 2 Chandler -> considers the structure of the firm very important, he can be placed on the area of the spectrum where boumond is Takeaways Session 1  Business History differs from Economic History because it focuses on the action and strategies of individuals (entrepreneurs) and organizations (firm structure and ownership) in context.  This focus on actors in context is important for future managers as it helps in decision making, reputation management, long term strategy and business responsibility.  According to the neoclassical theorists, the enterprise is basically a production function, where small firms operate in conditions of perfect competition.  Neoclassical economic theory tends to consider the technology as given in static models looking at equilibrium.  Interactions among inputs and actors as well as the distribution of power within/outside the firms are not relevant  So according to this neoclassical perspective firms are black boxes that operate in unrealistic conditions. Their strategy is determined on external conditions such as the level of technology and the market structure.  This perspective is problematic because companies are considered all the same, regardless of size, industry or structure. The action of entrepreneurs is equally hard to integrate in these models. There is no attention for change, evolution and the role of innovation. SESSION 2 Penrose readings, Ch. 2 and 3 ONLY pages 23-42 THEORY OF THE FIRM Problems of the neoclassical paradigm  Firms are all the same (very similar) they operate in a controlled environment.  they are subject to the context and do not shape it  No attention for change, evolution and growth  Innovation -> response to price changes (price: determined by the law of supply and demand), otherwise neglected  No firm dynamism This theory/view of the enterprise-> highly criticized The firms of greatest interest to business historians tend to increase their size over time. This happens in capital-intensive industries, characterized by scale economies, as well as in 5 some labour-intensive industries. Given a certain technology, one expects to find that firms expand until the point at which, in the language of neoclassical economics, marginal returns start to decrease. Nevertheless, in the real world, growth is not a mechanical process, subject only to economic calculations. Firms may continue to grow, seeking greater market shares, even though their returns on capital are declining. They may also voluntarily curb their growth by limiting their size to avoid the problems associated with expansion. In addition, firms react differently to the exogenous and endogenous technological changes that trigger the major spurts of dynamism that influence the method, speed, and direction in which firms develop patterns of growth. For instance, the new information technologies of recent years provide incentives for internal growth and further integration, given the lower incidence of information costs on management activities. But for some firms, these same technologies encourage subcontracting and outsourcing. All the phases of this dynamic process (continuity and discontinuity, expansion, stagnation, and decline) are relevant to the analyses of business scholars. Finally, relational complexity has to be considered. Firms display different patterns of growth according to their varying geographical contexts and periods. Given a certain technology, the growth of the firm is frequently determined by the dimensions and dynamism of the consumption market. Two other important elements determining the firm’s expansion can be the efficiency of the financial markets in channelling necessary resources to the firm and the presence of legal frameworks that protect the firm’s assets and facilitate trade. The evolution of firms can be linked to the cultural patterns and institutional elements of different societies. Technology fosters the process of growth, but cultural patterns still play a considerable role. Where the cultural perception of large-sized firms is negative, firms may adopt some technologies instead of others. To some extent, this helps to explain the differences in the internal structure of industries across the world and in different contexts. Other theories developed - SOMBART -> main work “Modern Capitalism”. The theory of the firm owes a lot to Sombart’s work. In his period -> big changes in the economic systems (high growth both in Europe and in the US), he observed that the market has imperfections and that in some situations it is better to organize operations in a centralized way with the firm -> Firms characterized by 1) the separation between entrepreneurship and ownership and 2)increasing specialization of productive activity. Firms emerge when capitalism reaches its most advanced stage. Capitalism is defined as “an economic organization based on exchange, where the owners of capital and workers without property collaborate unified by the market”. Sombart observed the changes in the economic systems and specifically the emergence of big business (Second Industrial Revolution). - COASE (upgrade of the neoclassical paradigm) -> rejects the idea of perfect market (sometimes the law of supply and demand fails-> sometimes difficult to define the optimal price in relation to the competition). He considers firms as a more efficient way to organize productive activity than the market.-> reason why the firm emerges Work: “The nature of the firm”. 6 According to him, there are two ways to coordinate resources: the market and the entrepreneur (-> the firm) He rejects the idea of perfect market-> not all prices are known to all individuals, the price mechanism sometimes can fail so firms can be a better way to organize production activity. The problem is: is not always easy to define where it is the optimal price. It is very difficult to define the optimal price in relation to your competition -> a lot of firms do not know what the demand is, they have to learn. The firm emerges because it’s simply more efficient than the market: «The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism ». Market mechanism -> includes COSTS (transaction costs) and the “make or buy” decision. Firms -> can decide whether to make or buy something (main strategic decisions that firms have to make) -> there are some costs that it is more convenient to outsource while others that are better to be internalized If the firm is the best way to organize production, why there are still situations in which the market is determining the price? Why don’t we have one giant company that does everything? 1) With increasing scale of the firm -> decreasing rates of return 2) Increasing the scale (more transactions) -> possible to have suboptimal allocation of resources 3) In some cases, small and nimbler firms might have different or even superior advantages as opposed to the big firm -> because they have more flexibility The conditions of the market therefore influence the optimal size of businesses EMERGENCE OF BIG BUSINESS Big, organized firms-> emerged later in time, after the first industrial revolution Historical context: When Coase started to think about making or buying decisions - Emergence of big businesses-> during the interwar period, emergence of big cartels - Growth and competition -> new important questions - What is the role of people and technology inside companies  Increasing interests for the “Inside” of the firms and the role of technology After 1940s, new questions (after the emergence of big businesses) - Why firms grow? - How do they grow and what strategies do they adopt? - How are they organized? Organizational architectures? - How do their internal dynamics operate? What is the main driver of growth for firms?  It is not about the quantity and quality of financial and human resources but how they are used -> ORGANISATIONAL CAPABILITIES 7 Capabilities and knowledge of the firm-> what allows the company to be successful and competitive What does life of the firm mean? What does growth mean? What is the final goal of the firm? The firm is the present value of the total of its resources, it depends on: – Administrative skeleton – Unique resources (technology, human resources etc.) – Its culture, the way resources are used -> interplay between resources and administrative skeleton Entrepreneurs are imaginative engines (they have the vision for the firm) that organize resources within the firm (firm-> extension of the vision of the entrepreneur, there is a continuum between the entrepreneur and the firm, the firm allows the entrepreneur to realize and their vision ), shape its culture, and identify and pursue growth opportunities Growth is an entrepreneurial decision, profits are allocated to the development of firm resources and capability -> profit equals growth (if profit is reinvested then it can be reallocated to growth opportunities) Entrepreneurs can decide to pursue growth for different reasons: (i) empire builders (not really concerned about the well-being of shareholders but obsessed with the idea of building an empire) ; (ii) good-will builders (entrepreneurs that pursue opportunities not necessarily for their own sake but for the sake of better products for consumers, better society, better working conditions…) these are the two main motives of growth Penrose’s Conceptualization of the Firm The firm is a dynamic reality, endowed with entrepreneurial spirit. (Extension of the entrepreneurial vision) Instead of be passively influenced by the market, the firm strategically impacts it and operates within a mobile and historically contingent context. Through this process the firm modifies and acts upon the technological, productive and organizational parameters of the market. Companies grow when they use their resources to plan expansion of production or new activities. In this process, the firm uses existing resources and develops new ones.  New resources remain underutilized if the firm does not plan for expansion/new growth strategies  Unutilized resources are a cost to the firm (inefficiency)  For this reason, growth is a continuous process. -> growth is something companies have to do to survive  The limits to growth are the managerial knowledge and the ability of the entrepreneur to respond to growth opportunities (how entrepreneurs respond to external opportunities can be a source of growth or decline) 10 Penrose -> more on the Schumpeter side of the spectrum (-> importance of the entrepreneur) -> firms can influence the market and can shape it -> being the firm the extension of the entrepreneur, the firm can shape the context The view of Penrose -> sparked new research 1) International Business  Hymer (1960) the first to look at why companies invest abroad (MNEs) – exporting competitive advantage developed at home -> companies invest abroad to maintain a competitive position and to penetrate new markets abroad they use their resources, knowledge developed domestically -> abroad they can develop specific knowledge and capabilities that can allow them to maintain their competitive position  Dunning (he developed the idea of Hymer ) then developed the OLI, which explains internationalization through RBV 2) Evolutionary theory and Bounded Rationality  The idea of internal resources was developed into the concept of ”routines” (Nelson & Winter, 1982) – standardization of processes to increase efficiency  Organizations develop rigidities (due to the routines that they develop) -> path dependency -> the routines in place shape the development of organizations  Actors are constrained by their context and their limited knowledge when taking decisions à bounded rationality Hymer e Dunning: The multinational firm Penrose’s theory was then repurposed by Hymer(1960)to study and explain the success of multinationals: competitive advantage created on domestic markets can be exploited also on foreign markets. -> domestic market can be saturated so companies look for new markets where they can export their knowledge, capabilities and competitiveness in production to reach a competitive position in new markets Later, Dunning(1979) improved this analysis and elaborated the OLI model. -> companies take decisions based on different advantages. The internationalization decisions depend on the advantages they have at home and abroad -> offshoring activities for which they can have an advantage on abroad and keep domestic activities for which they have advantage domestically for example Apple: design, marketing -> kept at home (in the HQs), not exported in other locations. While production of some components and assembling -> outsourced -> creation of global value chains based on ownership and location advantages According to OLI the firm can use abroad some of the resources developed at home: Ownership advantages (O – ownership, domestic market) Localization advantages (L – localization, foreign market) Internalization advantages (I – internalization, outsourcing?) -> which activities are better to outsource? Which are better to keep internally? 11 Again, decisions are about whatr esources to develop domestically and abroad and what to develop within or outsource Hymer and Dunning are considered the «fathers» of international business as a scholarly discipline. Nelson and Winter According to them (behavioral economists) people are risk averse and they are averse to changes because changes imply risk  Change requires resources and has uncertainties that can create costs Why then changing processes that work well? -> develop routines for activities that work well -> standardized processes and procedures Change creates anxiety, introducing change is painful Routines-> smooth working of production, developed to achieve maximization of efficiency, routines emerge as efficiency tools (routines can be at any level of organizations) Downside of standardized processes -> lack of flexibility, problem for innovation Routines create path dependencies that constraint the opportunities for growth Opportunities not easy to seize due to the lack of flexibility determined by procedures Firms can be innovative if they manage to change their routines but it is the market that determines the success of innovations To succeed in a changing environment, it is key the ability to develop routines that can be easily changed so as to easily adapt to the changing conditions Evolutionary theory and performance Why does the performance of firm change from industry to industry? Firms are made of : - Knowledge - Learning - Competencies Firms absorb, process, and generate knowledge -> Through knowledge and the combination with learning and competencies firms can generate innovation Firms operate following three main decision areas: – Utilization of productive capacity – Investment policy – Innovation policy The decision-making process is generally determined by routines. Routines create path-dependency (rigidity and institutional friction) that influences the growth trajectory firms Williamson: Transaction cost theory Humans have limited rationality and they’re opportunistic, when they organize resources, they need to find what is more efficient. Resources are organized to engage in transactions. Transactions are resource-specific, they are uncertain (uncertainty about the outcome) and they can be frequent or exceptional. 12 LECTURE 3 Musk vs Bezos (case); Schumpeter reading WHO IS THE ENTREPRENEUR? Different entrepreneur features, the category of entrepreneur is very broad There is a lot of bias (gender)  women are still not dominant, but we are going to try to expand. SUCCESS-> how do we measure it? Talking about Musk and Bezos (the case). The most successful entrepreneur: most of the class  Bezos. Both have loss some bills in the past years: all the stock market is declining in the last few years (inflation and other). Different ways to measure success: Success as an objective measure  capital owned. Success as a building  Bezos built his own fortune, while Tesla was already founded. Success as dependency form something: we are not able to live without Amazon, or with a more expensive Amazon. How they are successful? Musk  involved in tech-oriented companies. Space-x is the first one. Boring company was founded later. Open AI: competitive gaming Neuralink: operates in the technologies, robotics. Musk offered to acquire Twitter and then decide to not acquire it because of his problems (? Contrario). Because he was spending too much money. Bezos  divided his empire in 2 activities: Amazon and Bezos expeditions. Economies of attention: need of tech companies to retain clients on the platform. In the digital world we have few companies that need to maintain competitiveness by retaining users on their platforms  investment of Amazon brand into different types of platforms. Move from online to offline investing into physical retail (Whole foods) and washing compose ->moves from online to offline. Bezos has another world  side of investments. He has different participations (Google,). He also has space investment. The space race. Today we see more and more investments into the space economy. There is a move towards privatization of space business. 15 Musk’s Space X & Bezos’ Blue Origin initially fought over a NASA contract to land on Moon. More recently the race is about building Internet satellite service in space. The idea is that both Bezos and Musk portray their space ambitions as a way to help humanity — by creating a city on Mars (Musk) or building colonies in Earth’s orbit (Bezos)  investing in the future of the humanity. Humanity is threatened by natural disaster, and more  it is a way to save them. Huge business opportunity and growing industry, some people have dubbed it “Second Age of Space”. Does it make sense? Couldn’t they think about solving other issues? The idea is it doesn’t make sense, with this super high pay-off and super expense investments do not make sense. It is a long versus short term approach to big goal of the entrepreneur to save humanity. The goal is to save humanity  there are different solutions. One is to go to Mars, while the idea is that humanity is going to be destroyed in this world. What does it mean to be successful as an entrepreneur?  Make a ton of Money  Have an impact  Build a long-lasting company  Innovation path that entrepreneurs leave behind.  Number of jobs created  The happiness it generates in the society, which it is probably difficult to measure (level of satisfaction of stakeholders and employees)  Become a philanthropist  Break records and establish brands We can identify 2 different successes: personal success or organizational success. Musk  there is a need to combine personal attitude with the performance of the firm. The failure of the broken glass - was a failure but it didn’t impact negative the Musk’ persona (some think that it was his purpose to make people speak about Tesla)  it became a viral event. Musk’s business is capital and labor intensive; therefore, the revenues streams are really similar to an automotive industry. Twitter drama. What did he do with the company? Musk offers to buy Twitter in April 2022 after becoming minority shareholder for 40bln. He argues he’s doing it for democracy and freedom of speech, rather than for economic gain. He secures funding for over 40 bln to finance the deal and Twitter eventually agrees. After the price of the company drops (following the tech industry trend), Musk reconsiders advancing concerns about “spam accounts”. Lawsuit starts in the summer and eventually in October Musk agrees to buy Twitter Since he became CEO he fired about half od Twitter employees and about 1200 left.  people that are high-skilled talent in an industry that has constantly labor shortage. When we talk about success (happiness) this is not the case, and not a case of happiness also with the customer  a lot of accounts were locked. Amazon Workers demonstrations. 16 During the pandemic, the conditions of the workers were really under pressure. The impact it has on the society  logistics: he created an infrastructure that was good for all of us, but he created a human centric approach with employees that were under paid. Defining the entrepreneur: Entrepreneur-> elusive nature Which are the characteristics of entrepreneurs? What makes an entrepreneur and entrepreneur, what are the features?  Risk taking  Relentless, restless, alertness  Ready intuition of opportunities  Anticipation of known and often unknown needs  Innovativeness  Deviance  Autonomy/ independence  Organization building  creating a venture  Embeddedness  Greed and violence  they are looking for profit Entrepreneurship is something that can be passed through generations. Entrepreneurship Theory (I). In economic theory it is difficult to integrate the concept of entrepreneurship because the entrepreneurs simply provide capital but capital and labor but then we have to consider the production function and the demand  to obtain the point. Classical economists: – Core concept is equilibrium – Entrepreneur provides K – Economic forces are governed by nature For classical economics (Smith and Ricardo) entrepreneurs roll out mechanism -> specialization, division of labor Entrepreneurship Theory (II). Richard Cantillon (1680-1734)  the importance of the entrepreneurs as: – risk and uncertainty are key elements of economic activity and this justifies the entrepreneur’s remuneration (residuals)  The profit is the justification of risk. French School (Say, 1803; Bagehot, 1870) – Entrepreneur as a coordinator of resources. – Businessman at the center  it explains growth The Austrian School: Culture & Creativity. The entrepreneur is “creative” engine of growth and not a rational human being, a deviant instead. (Concept from Nietzsche). He is able to understand the spot of opportunities and acts in a way that is exceptional. 17 Musk and Bezos: who is the most disruptive? The class answer: Musk is a little bit more disruptive. When we talk about disruptive, for Schumpeter: is the entrepreneur the executive? Takeaways Session 3  Entrepreneurship is not a clear science, and it is difficult to include the contribution of entrepreneurs within productivity functions.  The concept and definition of entrepreneur has also varied through times – different theories stress different capabilities / roles. It is difficult to determine what it means to be successful as an entrepreneur. So far, it has been associated with making money and building large and enduring organizations.  Cantillon sees risk as a central element of economic activity which justifies the remuneration of the entrepreneur.  The French School recognizes the importance of the entrepreneur as a coordinator of resources.  The Austrian School builds on the idea of creativity (Nietzsche) and alertness (Kirzner). The entrepreneur is an outlier, and he sees trends ahead of others and interprets reality differently.  Schumpeter on the lines of Austrian School stresses the idea of ”extraordinary” personality who is able to go against the trends and introduce major innovations.  Other approaches are less grand in their way of seeing the entrepreneur. S/he is a normal person able to see opportunities in risky contexts (Casson), manage resources and information to take decisions.  Baumol does not consider entrepreneurship always good. The context plays an important role in both supporting entrepreneurship and determining its impact and outcomes. Takeaways Schumpeter  Schumpeter is interested in understanding economic growth and change. He focuses on disequilibrium using an historical perspective.  The entrepreneur is at the center of this change. Schumpeter defines entrepreneurship as an act of innovation towards changes in the economic environment.  Capitalism, for Schumpeter, is an evolutionary system based on the process of “creative destruction,” any act of entrepreneurship creates value by destroying the status quo.  The entrepreneur can decide to respond to change in adaptive or destructive way. The destructive way brings about innovation and provides the entrepreneur with a temporary monopolistic position.  Creative destruction constantly replaces existing goods and organizations; and every piece of business strategy has to be developed in full recognition of this process  Innovation ca be one of five activities: (i) introduction of a new good; (ii) introduction of a new method of production; (iii) opening of a new market; (iv) conquest of a new source of supply of raw materials; (v) carrying out of a new organization of any industry 20 LECTURE 4 Book: Chapter 4; Barbarigo (case) Entrepreneurs, uncertainty and risk Entrepreneurs need to be able to cope with UNCERTAINTY-> risk, transaction costs Institutions can reduce risk, they play a role in uncertainty mitigation Institutions set the rules of the game and monitor the observance of rules. Thanks to the rules of the game-> possible to know what to expect Incentives -> provided by institutions to motivate people and to promote growth Formal and informal institutions  informal : self-imposed codes of behaviors determined by tradition, culture, religion ethics. Example of informal institution-> Indian Caste System, people belong to a specific social class-> specific jobs depending on the class (not possible to change a class); child marriage  formal: political systems, economic systems, legal systems “Why nation fails”-> institutions are good but not all institutions promote growth and entrepreneurship in the same way -> possible to distinguish between extractive and inclusive institutions Inclusive (Italian institutions)-> promotion of economic growth through investments in education, innovation, infrastructures; enforcement of property rights Lead to increasing living standards: as the political power is distributed in a pluralistic manner, the interests of different social groups are represented in the political institutions). Extractive -> political power controlled by the elite, concentrated in the hands of a few people-> they promote their personal interests. They control both political and economic power. They want to maintain the status quo -> to maintain their influence and power the elite does not fully guarantee property rights (to avoid others to innovate and challenge their power) or does not allow people to receive non-propaganda education (also in detriment of innovation). People and companies, therefore, have any incentive to make the best use of their talent and skills. Examples: North Korea, Russia Extractive institutions-> institutions of developing countries, in the past they were the form of institutions everywhere Entrepreneurship at a time of high economic and institutional constraints, the pre-industrial world: Pre-industrial era (up to the 18th century): agriculture main economic activity, industrial activity very limited Malthusian economics: income/production per capita limiting population growth and diminishing returns Population growth -> exponential, but due to diminishing returns in production-> not possible to sustain population growth 21 Malthusian catastrophe -> when population > production of food (-> increase in population greater than the increase in the quantity of food available (demand > supply).) Malthusian catastrophe -> decline in the accumulated population growth Role of technology -> possible to get more from the resources available -> pushing upward the Malthusian limit Pre-industrial business environment was not characterised only by high levels of risk and uncertainty. Business activity and entrepreneurial initiatives were constrained by the market features, culture, an technology of the time. Market regulation -> to reduce transaction costs but regulation represented a limit to freedom of action Even in this context-> room for growth and entrepreneurial success : in the 16th century, Italy was the country with the highest GDP per capita (center-north Italy)  VENICE at the center of “global” trade-> connecting Europe with Levant Goods traded: “exotic” goods imported from Asia in European markets (raw cotton, spices, silk); from European markets to Asia (wool, tin, raw cloth) -> product diversification Strategic position of Venice to connect Europe to Asia 22  Local culture, language, religion,  Weather, and seasonal climate  Wars and rebellions How did traders mitigate these risks? RISK MITIGATION “TOOL” Networks of agents-> based on trust Weather conditions-> Mude System Venetian navy protection and state-level agreements to reduce the risk of cultural differences Transaction costs:  Quality and quantity of goods -> necessary to do research and gather info -> different agents  Prices -> research and negotiation -> agents and concentration of trade in hubs  Relationship with agents-> necessary to ensure contract enforcement-> clannishness Venice’s decline starts with the acceleration of the proto-globalization From Silk Road to Maritime Trade: • Silk Road (dangerous, long, costly) – Access to Levant increasingly difficult because of expansion of Ottoman Empire and difficulties of African Caravans through the Sahara (end of 15th century and 16th) • Portugal: Started colonization of Africa and Far East through trade posts along the African coast and then in the Indies • Spain: Columbus expeditions opened the way to the colonization of the Americas • Little Divergence: the Mediterranean portal cities eventually loose market share, first overcome by Spain and Portugal and then the barycenter of trade moves from Southern Europe to Northern Europe (Netherlands and Flanders) (16th and 17th century)  Decline of Venice when other empires started to raise 25 Admiral Zheng He -> admiral of the Chinese empire Chinese empire-> better prepared to conquer the world ->they had the largest fleet Different institutions from European/venetian institutions in China at that time-> they decided that it was better to close the economy -> they country remained closed until the 20th century Mude System -> to guarantee a regular supply of inputs (crucial to run businesses) However, volatility still very high -> volatility in demand for goods  the pre-industrial enterprise was adapted to such a volatile context of high transaction/information costs... Forms of Pre-Industrial Enterprise -> to adapt to volatility-> flexibility necessary Opposed to flexibility-> rigid, formalized structures and procedures. The mix of market, social and economic conditions resulted in the coexistence of three (main) forms of enterprises  Putting out system -> based on the decentralization of production into networks of labourers mainly located in the countryside.  Artisanal workshops -> based on highly specialized manufacturing, mainly located into cities and in general urban settings  Centralized manufacturing (e.g. shipyards) -> based on a mix of skilled and unskilled labour, location depending on resources’ availability. Putting out system-> production in different locations (similar to outsourcing) Example: Cottage industry In towns-> high skilled workers organized around guilds: dyeing, cloth making Advantages of the system:  Flexibility  Small initial investment Disadvantage:  Quantity produced-> limited  No control over production -> quantity, time and quality System very well adapted to the characteristics of the time Artisanal workshops in the city-> organized around guilds: association of men specialized in a certain economic activity in a specific area Guilds: 26  Setting quality standards, quantity, price...  Transmitted technical knowledge through apprenticeship  Worked as brands today,as consumers knew the characteristics of what they were buying  By promoting a closed system created information asymmetries for consumers→ high prices. Drawback of guilds: by being conservative about processes and product quality and barriers to entry, guilds ended up stifling INNOVATION Centralized Manufactures I Some activities benefited of scale intensity and concentration of the labour force, due to the nature of the production process. Little economies of scale, no serial production but a way to have workers concentrated in a single place Examples: shipyards, building, public works, mints, and mining implied a centralization of the labour force. Is it possible to speak of the first modern factories? Most “big” manufactures still employed people that were operating away from the plant. Whatever the size the technology of the time did not allow for scale economies. First state-owned, or state- participated, enterprises:  Strategic industries for the national sovereignty and power.  To locally produced imported high value-added goods. The Venetian Arsenal  Merchants did not own the hardware.  The Arsenale was de Facto a centralized operation to produce military and commercial ships.  However, the work was still decentralized in teams performing specific tasks.  The government provided the infrastructure for the trade to be carried out.  The Government owned the ships – entrepreneurship & government 27 CONTEXT of 1IR: BRITAIN in 18th century Political: Peace, stability, growing British empire, growing merchants’ class. Economic changes:  new sources of energy: Waterpower and Proximity of Coal  Introduction of new technologies  Infrastructure (roads and canals)  Sophisticated Financial Markets (connected to Empire)  you need to have a lot of capital in order to found long distance trade.  Legal Protection of Intellectual Property Structural change in all the economies involved (in all the Europe):  Increase in the rate of economic growth unseen before  Increase in the pace, amount and quality of international trade  Shift in the sectoral contribution in the economy, reduction of share of agriculture and increase in manufacturing  Specialization  Industrialization  Redistribution of workforce from agriculture to manufacturing  Urbanization Why pottery was so successful in 18th century Britain? Why was it so important?  Pottery was a way to show the social status during parties in women’s houses. During these parties they used to drink tea and exotic coffee and tea  propel tools to drink them. Tea until 1850 came from China. Water  to drink it you have to boil  it first  not good. 30 Pottery: good or bad opportunity? After Britain’s industrialization, other European economies followed the process. UK export became increasingly sophisticated including machinery Due to exports: suffering of domestic production determining mercantilist tendencies to protect their markets. -> protection of thee domestic industry In the UK for example there were campaigning for free trade because they have an advantage in their technology  it became a chance of free trade. Emergence of the great divergence: In the 1750 more than the 50% of the production came from China and India. From the early 19th century, we see that the world economic center gravity goes back to the European countries However, in recent years (2000-2010) -> shift in the world’s economy center of gravity: from western countries to China During the Victorian age (1830-1913)  UK dominated the economic world.-> naval ports, exports, manufacturing In the early 19th UK share of GDP was much more than the rest of the world. Moreover, it was a champion of free trade (promoter of free trade given that its technology was superior to that of other countries making British products more attractive) Josiah Wedgewood -> in only 10 years from an artisanal workshop employing 15 people to the Etruria Factory employing about 250 people How did production grow?  Craft apprenticeship provided to people  Exploitation of the advantages of district economy-> flow of knowledge, “open” innovation  Centralized firm: important aspects:  use of the clock-in system to regulate working hours  control of employees’ behaviors -> discouraging the use of alcohol  rudimental insurance system (which created paternalism9  introduction of accounting methods 31 From artisanal workshop to the factory system (concentrated manufacture) With the 1 IR -> centralization of resources. Machineries required the concentration of employees under one roof which allowed to obtain economies of scale Moreover, given the continuous need for energy, with the factory there was also a centralization of the source of energy:  Continuous production was convenient  Required proximity to water or coal  Determined the increase in pollution in industrial centers (no energy efficiency) The owner of the means of production capitalist needs to «manage» the workforce (Marx) Introduction of the Division of labor. Consequences:  Repetitive and alienating work  Deep change in lifestyle from rural to semi-urban Clusters of production (districts) characterized by agglomeration economies, due to very limited vertical integration. People realized the opportunity of living in the city, but the type of life was completely different  going inside the factory required to organize and distribute this people. It took 100 years before workers were organized in a proper way. Some considerations about the Factory System (FS) The FS expanded progressively and for a long time it co-existed with the preindustrial forms, in particular the putting-out system (e.g., spinning mechanized and centralized, manual weaving in cottages). It allowed better management of the labor force, of energy, a reduction of transaction costs, and to “free” innovators from the oppressive control of the guilds. However, it introduced tensions and conflicts, revolutionizing the social fabric adding the industrial bourgeoisie and the proletarians (urban areas) to merchant/traders (cities), aristocrats, and peasants (rural areas). The concentration of work allows the capitalist to exploit more employees and paying them less. The process of the first industrial revolution started to create tensions that later exploded during the second industrial revolution. Disruptive effect of the 1IR on the demand side: With the expansion of the empire and the growth of trade in Britain -> emergence of new social classes-> capitalists and traders, new products, new trends and needs, these last two especially determined by urbanization This led to an Increase in average income to sustain consumption. Need to find new tools to sell products -> first consumer society, the rise of brands 32 The future of influencers and models. Marketing is specifically in contact with technology and markets. Final situation in which we have still the big influencers but the leaders ones are going to be … AI is used to introduced digital figures that have millions of followers. Takeaways • The First Industrial Revolution brought about a complete revolution of how manufacturing was organized, this in turn impacted on the sectorial distribution of labor and contribution to economic growth (from agriculture to industry). • It started in the UK and expanded in Europe following a series of conducive conditions, such as a period of peace, the resources available from an expanding empire, political reforms introducing more rights, proximity of resources and introduction of new technology. • The main innovation was the centralization of economic activity within the firm. This required to organize production close to sources of energy to support the use of increasingly complex machineries, as well as around division of labor and strict schedules. The fact that workforce was centralized within the firm deeply changed the social texture and lifestyles, creating new social classes: the industrial capitalists and the proletariat. • Industrialization allowed production of manufactured products at an unprecedented scale and provided the UK with a competitive advantage that created the incentive to support free trade at a global level. This encountered resistance as often prevented the development of competing domestic industries in the receiving countries. • Industrialization translated also in a significant increase in demand, and an ever-increasing amount of people ready to purchase novel products. • The first consumer society was born, conspicuous consumption started to materialize as an important cornerstone of capitalism driving the continuous creation of needs. • Companies like Wedgwood tackled the conducive context of the first industrial revolution, seizing the opportunity by introducing new brands, requiring new sophisticated strategies to distribute, market and sale their products. Takeaways Wedgwood • Josiah Wedgwood came from a relatively humble background, a family of potters in the industrial district of the Staffordshire. Since a young age he got deeply involved in producing crafts-ware in clay, like stoneware, earthenware and porcelain. • In 1759 Josiah established his own workshop, where he started to experiment with both new techniques (molding, firing, and glazing) and new designs, creating a very popular line for everyday use inspired to natural shapes. • While his workshop experienced steep growth in sales, he kept innovating both its organization and production process, centralizing operations and hiring more workers, and its product features and marketing techniques. • His encounter with Thomas Bentley in the 1860s really helped him consolidate his competitive advantage in the pottery industry and expand in new markets. • In his factory, he introduced cutting-edge technology and organizational structure. Workers followed a clock-in system, use of alcohol was prohibited, and a primitive form of health insurance was introduced. Wedgwood also introduced a basic accounting system to control the business’ finances. 35 • As for product, Wedgwood was among the most successful and innovative firms in the industry. He would constantly realize new designs inspired by nature or ancient art. He separated his product lines in ornamental (decorative) and useful (for everyday use). • Wedgwood also introduced a series of innovations in marketing, distribution and sales, which allowed him to build a sustainable brand, still existing today. LECTURE 6 Book: Chapter 8; Chandler's reading; Swift (case) 36 From Creative Destroyers to Tycoons We are talking about a global integrated market. The first country to be engaged in the industrialization process was Britain. In 1800, Britain was close to production possibilities frontiers: the maximum output the economy of a country can achieves given the level of technology. The closer you are to it, the more efficient you are. Things started to change in the period of the industrial revolution  new technologies, new discoveries emerged. From 1870  new production possibilities frontier, the economies which were more efficient and closer to this frontier were USA and German while Britain was not so close. Changes in technology. There was a change in the first industrial revolution with the factory system. One of the most important changes was the spinning Jenny, used previously in the putting out system  it increased notably productivity  the same person can produce quite a lot. The innovations of the 19 th century : railways, transportation, the rotary printing system which allowed printing newspapers at low costs, telegram. We are in a context of great changes in communication and transportation system  information and transaction costs decreased (remember Barbarigo developed a large network to reduce transaction costs). Global telegraph cables (the map in the slide): a trip around the world in only 8 days  it was possible due to low transportation costs. Second Industrial Revolution Globally Communication Technology • Breakthrough in electricity: Telegraph (1840), Transoceanic cables (1860), Telephone (1870), Radio + electrification Transport & Infrastructure • Faster Ships (1820), Railways (1830), • New vehicles, first bicycle (1812), then car (1890s) • Tunnels (e.g., Frejus, 1871), Canals (e.g., Suez 1869) New transportation and communication systems- > transformation of entire sectors  commercial distribution -> emergence of department stores (free admittance, fixed prices, vast assortment, special sales, low margins etc.)  manufacturing-> large manufacturing firms pushing economic growth in the US, Germany and Britain -> they accounted for two thirds of world industrial production at the end of the 19th century Availability of commodities → expansion of industry • Agricultural commodities: rubber and vegetable oils from Asia funded the tire industry • New metals for machineries, trains, ships, engines, etc. • Competition becomes global and UK is not the only industrial leader any more What led to globalization?  Modernization of transportation systems  Market liberalization -> New trade policies to reduce tariffs 37 US was one of the countries that grew faster. Americans are very proud of their history. Why they were so unique? Liberal conditions that made possibilities available for everyone. The US before was a little colony of the British country. After 100 years, it became one of the faster growing countries in the world  incredible process of change. • GDP average growth was 3.9% between 1790 and 1909 • Doubled between 1790-1860 • Doubled again between 1860- 1913 How did the US manage to grow so quick and so much? Different reasons, but three main policies pushed by institutions:  Market integration: efforts in order to create an integrated domestic market-> improvement of the transportation system to foster integration -> the railway network and the construction of the artificial canal  Eire Canal that connect the Niagara Falls with New York.  Protecting the domestic industry against the British competition, applying the so-called “infant industry argument”. We need a minimum production. We cannot reach that minimum production if we need to compete with bigger and stronger companies  first protectionism to make internal firms to grow, and then remove protections (Alexander Hamilton’s Reports on Manufacturers (1791)).-> ““Manufacturing industry should be encouraged to grow by the use of a system of bounties and subsidies, and behind a protective tariff, which would free domestic manufacturers from foreign competition, and thus enable them to expand the scale of their operations, thereby achieving economies comparable to those enjoyed by foreign competitors. In this way, the “infant industries” would quickly attain maturity, and would then be able to produce at least as cheaply as foreign manufacturers”.  Protection until achieving the economies of scale. Why protections are temporary? Because there is a limitation  I cannot export and so there is a limitation in the market and in the profit I make. You have to expand in order to be innovative.  Promoting education and science, to speed the adoption and invention of technologies better adapted to their specific factor endowment. The rise of big business. Capital Intensive industries grew hugely during 19th century: Oil (Rockefeller), Steel (Carnegie), Rubber Manufacturing (Firestone, Goodyear), Beer Brewing (AB), Canned Food (Heinz), Meat (Swift), Dupont, Bayer (chemical), Marshall and Fields (department stores). 40 Several of these companies reached such high production capacity that start selling abroad This was due to:  First mover advantage in a huge growing market  Possibility of creating economies of scale and scope over high fixed costs  Vertical and Horizontal Integration → further reduction of unit costs.  Important set of investments - capacity, distribution, marketing Gustavus Swift (1839-1903). In 1872 Swift entered a partnership with Hathaway – a famous Boston wholesaler He started spotting inefficiencies in the meat value chain What were the main issues of the value chain? -> The way in which meat was processed and sold was inefficient.  Transportation conditions  Waste  Technology  Vested interests This is the value chain of that industry: Chicago as a hug: cattle from Western prairies brough to Chicago, and then shipped alive to the East Coast  this was the traditional business. He realized that it was possible to improve that value chain. transportation  transporting already slaughtered beef (dressed beef) because a lot of animals died during the trip, in order to do that it was necessary to have refrigerated lines. He called some engineers in order to develop new refrigerator products. Moreover, vagoons and icing stations were needed. Thanks to Swift a lot of different part of the cow were discovered  reducing waste, alternative uses Marketing and advertising campaign. Swift revolutionized the way in which was sent to the butcher shop. Dressed and packaged meat introduced a change in behavior and consumption habits.  Previously people went to the butcher shop and trusted the butcher who cut big pieces of meat in front of them.  Dressed meat was a novelty that required legitimization  The consumer needs to trust his supplier because he doesn’t know anything about the animal. So the relationship between butcher and client gradually weakens.  This type of innovation requires advertising and brand building activities. Swift worked intensively on the way meat was presented in order to gain the trust of consumers and overcome their skepticism. 41 Coronavirus contagious in meat processing plants is higher than in other factories. Can you think of someone who did something similar? Amazon • Digitization of books → economies of scale • Started to use the platform to sell anything → economies of scope • Vertical integration (Amazon Basics) • Robotized and automatization of logistics • Revolutionized retail (removed intermediaries) • Revolutionized publishing • Introduced AWS (opened up proprietary infrastructure) Takeaways • Starting in 1870s the pace of innovation in transport and communication accelerated. New technology in the realm of infrastructure and telecommunication allowed for space and time to shrink. • In transport the steam engine applied to railway and ships allowed for faster short and long-distance travel. The introduction of the telegraph and the telephone made communication immediate. The electrification opened up more time for productive activities and changed lifestyle in urban centers. • This launched a new era in global capitalism. International trade accelerated and companies became increasingly complex organizations employing hundreds of people and competing for markets across continents. • The 2IR involved primarily capital-intensive industries (electricity, steel, oil, chemicals, heavy machineries) in the US, Germany and lesser extent UK. These three countries accounted for 1/3 of global GDP by end of 19th century. • Huge businesses emerged thanks to the combination of economies of scale, scope, vertical and horizontal integration. • The huge size of business related to capital intensity created barriers to entry and in turn favored the creation of trusts and cartels. (Next episodes) • The 2IR created huge opportunities for entrepreneurs as well as challenges such as finding large amounts of capital and coordinating increasingly complex organizations characterized by centralization of power. 42 ownership from control. But a progressive shift from a “personal capitalism” to “managerial capitalism” (where ownership was beginning to separate from control in the largest enterprises) was clearly emerging. Boards of directors enlisted members from both within as well as outside the firm. The outsiders represented ownership and they were present on the board in larger numbers but they did not have the time, the information, or the skills necessary for managing the company on a daily basis. Instead, they relied on the inside directors who were salaried managers present in the firm on a full-time basis. In parallel with these developments was an incredible transformation of the size of firms in America. The market in the United States was as large as that in Continental Europe and was extremely dynamic due to the exponential population growth and the increased power of the American consumer. The other determining factors for the growth and consolidation of large corporations were public opinion and the choices adopted by legislators in the United States. The country was about to become the first nation of mass consumption, and Americans favorably viewed the improvements in material comforts and living standards brought on by the growth of big business. At the same time, however, they also showed signs of mistrust (or even, at times, true hostility) as big business shook up traditional ways of manufacturing and distribution. The impact that new technologies had on manufacturing processes had brought about an imbalance between supply and demand. In most cases, this situation was exacerbated by an overall drop in prices that in turn pushed big corporations to agree on ways of controlling the market. The most vocal in the so-called “antitrust” battle were small entrepreneurs. However, it is impossible to ignore a true “American paradox” when we talk about regulating competition between firms. On the one hand, the political forces and the courts in the United States were intent on limiting the growth of large corporations, but the reality is that antitrust legislation produced the opposite result. The legal prohibition of firms pursuing loose combinations (i.e., price- fixing and cartel agreements) brought about a wave of mergers (i.e., tight combi- nations). This process of industrial concentration had its start in the 1880s but reached its boom years the following decade. During this period, new and giant corporate entities were formed that were different productive and organizational terms. One of the effects was that they were able to put into the market products with lower unit costs and lower prices. The transformation involved a passage from groups of small dimensions, with local perspectives, and capable of regulating themselves in informal ways, to complex organizations of national dimensions with a formally defined structure. The emergence of an authority based on precise responsibilities and decisional powers grounded in objective criteria is a common feature in the evolution of many different institutions, including trade unions, political parties, lobbies, and professional associations. The antitrust legislation reflected America’s faith in competition and mis- trust of concentrating power, but the rise of big business represented the even stronger desire for economic growth. Before WWI -> mainly oligopolies. With the emergence of large corporations-> altered impact of small firms, which did not disappear completely but some were able to find ways to coexist with the large corporations, their main advantage was the greater flexibility 45 Why in America and not in Europe?  Europe during 2nd Industrial Revolution. • Markets in Europe were smaller and fragmented, and with less extensive distribution channels, several barriers (language, institutions, currency etc.). This is the main problem of the EU between the 1st and the 2nd industrial revolution  companies adapt much more to local characteristics and export. • There are differences in terms of governments and banks support  in continental Europe the banking system was the driver of the economy. In Germany there was the Universal Banking connected to the industry  people from the industry were sitting in the board of the Bank and vice versa. • Tendency at cartelization • Germany emerged as the leading continental economy during 19th century:  Large corps in selected capital-intensive sectors: heavy machinery, metallurgy, chemicals, electromechanics (not distribution)  Small firms still existing especially at local level and connected to artisanal activities  Export orientation especially towards eastern Europe.  Management hierarchy and export orientation  Universal banks (large) participating to industrial policy  Strong higher-education system, very science and tech oriented Germany. Prior to 1914, large corporations in Germany showed characteristics fairly similar to their American counterparts. But there were also some clear differences. Among these, owners in Germany continued to exercise a greater say in management decisions and continued to make the investments required for expansion. German owners were also attentive to making an extensive and well-designed management hierarchy into a reality. In Germany, as in the United States, public opinion was favorable toward large corporations. Furthermore, thanks to the long tradition of an efficient bureaucracy that served the State, it was easier for German entrepreneurs to coexist with management. The expansion of firms, the tendency to organize on the basis of cartels and trade associations, and the close ties between industry and the banks (which brought about the inclusion of more non-founder members in the boards of directors) created some unique complexities for the heads of the big corporations. Management methods based on family traditions or passed on from person to person were no longer adequate for expanding firms and, because of the greater need for coordination and efficiency, could actually become counterproductive. The systematic development of management on a vast scale was a timely response to the new economic and technological climate that these firms faced. But, unlike what occurred in the United States, in Germany the large corporation did not take on a leadership role in all sectors in which the Second Industrial Revolution made it possible. As had happened in America, the first large corporations were in the railroad sector and then the phenomenon extended to other industries such as electromechanics, metallurgy, chemicals, and heavy machinery. In the area of consumer goods, however, large corporations were virtually nonexistent, given the lower per capita income. Germany was predominant in the heavy machinery industry, which called for a high level of capitalization and frequently experienced a problematical cash-flow management, characteristics that help explain the significant role of the many “universal banks.”  Indeed, these banks owned shares in a number of the companies capable of exploiting the new technologies. (See previous lecture). 46 German banks played a determining role in national economic growth. On the basis of their assessments, money would flow into investments in specific companies or specific industry sectors. As a shareholder, the bank, which could usually count on a well-informed staff in the sectors where it had invested, exercised a bigger role in the management of firms. In fact, representatives of the German Grossbanken (big banks) took a much greater part than their American and British counterparts in decision-making at the highest levels of the new industrial firms. This can be attributed to two fundamental differences. 1- First, as universal banks, German financial institutions were much larger (both in capital and in number of employees) than American institutions. Just as important, because of the bigger role they played in financing firms, German banks were able to acquire more opportunities to participate in decision-making at the highest levels. 2- At the same time, the increasing complexity of managing problems related to production, marketing, and new product development reduced the role that bankers could play in these firms. The dimensions and the characteristics of both internal and foreign markets, the attitudes of political authorities toward big business, and the resources that were available were some of the determining elements in the creation of Germany’s system of big business. Unlike the United States, where the internal market was so large and dynamic that it was the principal target of firms, German manufactures understood that foreign markets played a critical role in their success. In Germany, there was no pressure from the government or from the courts on how big business operated. The situation was so different from America. In the case of Germany, it is important to recognize the significance of the growth of excellent institutions of higher education. They represented an important component of business success in several industries. Starting at the end of the nineteenth century, Germany was home to some of the best science departments in the world and German universities became important research centers in science and technology, much more so than their American and British counterparts. The State played a determining role in this phenomenon since early on German leaders understood the importance of investing resources in the links between science and industry. Thanks to its ability to bring together the interests of industry, the universities, and the professional associations in a context that was open to new technologies and their practical applications, Germany placed itself at the forefront in promoting a new middle class made up of engineers, technician-bureaucrats, and researchers. This new middle class successfully guided Germany’s process of industrialization and economic modernization. German economy changed, but did not destroy, the small firms, which continued to play an important role in the economy. Other countries UK: different opportunities and constraints faced by entrepreneurs -> different characteristics of the large new corporations: 1) Concentrated in consumer good and service sectors  Most of the large firms emerged in consumer products and services  today is very good in communication (such as Vodafone). 2) Limited vertical integration 47  It was a rich country, with purchasing power.  2nd market for chemical industry  There was tourism.  Great ingredients, great environment  Switzerland was in the heart of Europe and they invested a lot in connecting it with the rest of Europe  infrastructure quality was very high  good for exports.  In the cities the air was bad, with a lot of pollution, a lot of poverty, lack of health conditions, etc.  whereas Switzerland was characterized by mountains, green places (so low urbanization but in a positive sense). The trajectory was to have less kids per woman but increased the life expectancy. Baby Care in 19th century Before, people tended to have lots of kids and most of them usually died ->20-30% of infants died in the first year of their lives. Losing a child before 10 was accepted and even expected. Children were not considered different than adults With the industrial society-> CHANGE:  Babies start to be seen as precious, emotional attachment and special care  A whole new market of “things for babies” was about to emerge  New Scientific research also showed the connection between (lack of) nutrition and disease  Women start to work  In this period, kid industry is emerging. It is an industry that is inelastic  people always want the best.  massive range of opportunities. Things for babies is the new industry. There is a new connection between the type of nutrition that kids obtain, and their ability to survive. We have higher GDP per capita and less kids  parents are willing to pay more for one kid  new market. What kind of entrepreneur was Henri Nestlé? • Born in 1814 • Ended his apprentice in chemistry in 1834 • 1843 Inventor and Scientist in Vevey • 1863 started experimenting with the infant formula 50 • 1866 perfected infant formula and establishes company • 1873 scales • 1875 sells the company • 1890 died • 1905 Nestle merged with competitor When he entered in the market, it was already competitive, so why it was successful?  Self-made – his own education & apprentice  Coming from a normal family (not poor, nor rich), passionate about chemistry and science in general  Liberal Mentality, leaves Germany to be able to concentrate on scientific research  Rigorous but eclectic (adapts to different opportunities)  He was committed in getting the stuff done  he started with one idea, then realized it was not good  then started with another idea to become an entrepreneur.  Perseverant  he gets to his core product quite late in life  He was able to create a product that was cheaper and easy to use. He started to produce his formula. What was the novelty in the product? It was to use new ingredients, also for newly born babies It was a substitute to nested milk  if the kid was orphan, he would die. This helped to nurture kids and having a longer life. He advertised his product as better than others, so parents were convinced to buy premium products. It was easy to store and easy to transport and could stay for a long time. How did he organize production? Vertical integration:  upstream in the farms  downstream  pharmacy and hospital as special distribution channels. The idea behind that was the reputational effect  scientific and expert reputation on the formula. Then, he used the image of Switzerland  good climate, good environment  usage of marketing strategy and national branding  he completed the idea of the product with the good environment of the local place. Switzerland is the image of richness. On the other hand, they had to consider the gain of being a multinational company  they had to push homogenous brand and use Switzerland mostly for this idea of authentic, healthy, environment. How did he brand the product? He used the Swiss branding  it was used by several companies in Switzerland. Brands were supported by the government. 51 Strategy: what decisions did Henry Nestle take to dominate the market? • Supply Chain: vertical integration to control fresh milk quality and volumes • Distribution Channels: prioritized pharmacies and doctor's practices • Target Market: newly formed middle class with a new conception of infants; international markets • Branding: connected the image of pristine nature to build a reputation of healthy and fresh product Evolution of the Nestlé Logo. They maintain the nest  connected to the idea of nature, purity. “I regret that I cannot allow you to change my nest for a Swiss cross .... I cannot have a different trademark in every country; anyone can make use of a cross, but no-one else may use my coat of arms." H. Nestlè to one of his agents suggesting that the nest could be exchanged for the white cross of the Swiss flag. Swiss branding Switzerland: a lot of advertising  the government invests a lot in it: purity of the mountain. National Branding and Corporate Reputation. The ways in which the company use the national branding to push their products  reputation. Corporate Reputation is defined as: “the collective perception of the organization's past actions and expectations regarding its future actions, in view of its efficiency in relation to the main competitors” (Fombrum and Rindova, 2010). So, the reputation of a company has a lot to do with 2 elements: 1) its history and legacy which is difficult to change (i.e., Fanta, Adidas, IG Farben relationship with Nazi Germany) 2) The storytelling and narratives that become predominant in relation to the brand, which the company can influence through its marketing and PR activities (i.e., Apple has insisted to be a company known for data safety). Especially in the global marketplace, the conflation between national origin and corporate reputation is based on “collective perception” and stereotypes, which can both help and harm the brand. 52 Entrepreneurship during Deglobalization BAUMOL (1922-2017) He was an economist; he covered several topics-> focus on the specification of Schumpeterian theory Three main topics deepened regarding the theory by Schumpeter: 1) Role of agency in economic growth 2) Discussion on innovation 3) Relationship with institutions According to Baumol, entrepreneurs are normal people operating according to a reward system (payoff structure) which is determined by the cultural environment in which they operate  “entrepreneurship is not a synonym for virtue, but rather, a means of pursuing wealth, power, and prestige that adapts to a society’s legal and economic circumstances” one of the prime determinants of entrepreneurial behavior at any particular time and place is the prevailing set of rules that govern the payoff of one entrepreneurial activity What matters is the impact of the activities of entrepreneurs on society and what they do, not how many they are. Entrepreneurial activities can be productive, unproductive or destructive-> the productive contribution of a society’s entrepreneurial activities varies as entrepreneurs decide whether to allocate their efforts to productive activities, such as innovation, or alternately, to largely unproductive activities, such as rent seeking or organized crime-> entrepreneurs can therefore damage the economy  “If innovative entrepreneurs are defined as people who excel at finding creative ways to add to their own wealth, power, and prestige, then it must be expected that not all of them will be overly concerned with whether an activity that achieves these goals adds to the social product or, for that matter, actually impedes production” Starting point of Baumol’s theory -> review of the concept of innovation by Schumpeter Schumpeter’s forms of innovations: 1) Introduction of a new good or of a new quality of good 2) introduction of a new method of production 3) opening of a new market 4) conquest of a new source of raw material 5) carrying out of a new organization of any industry According to Baumol:  Schumpeter did not give an explanation about how entrepreneurs choose what innovation to pursue  Schumpeter did not consider other types of activities that are not necessarily positive -> mainly three types of activities missing form Schumpeter’s list: 1) Innovative acts of technology transfer -> (introduction of already-available technology, with some modifications to adapt it to local conditions), they can lead to progressive innovations -> reverse engineering= take a product and try to 55 reconstruct the production process reverse engineering in China-> they have been thriving on reverse engineering -> starting from the FDIs-> innovating from reverse engineering. 2) Innovations in rent-seeking (=extractive activities) procedures -> resource extraction, discovery of loopholes in regulation -> rent-seeking is the production of wealth by taking it out from other people -> no creation of value, extraction of resources, redistribution of resources in the hands of a few 3) Organized crime -> prohibition, in the 1920s the American government prohibited sale of alcohol-> several companies thriving on the production of these beverages had to revert their production -> sodas, while others died -> at the same time: flourishing of organized crime -> regulation prohibited legit business but criminal organization continued producing it without control Innovation theory of Schumpeter -> Baumol critiques: 1) lack some of the activities in which entrepreneurs engage + 2) the idea of entrepreneurs as virtuous/special people but, according to Baumol, they are normal people working to obtain a profit -> working according to a payoff structure  According to Baumol it is possible to have unproductive or even destructive entrepreneurship -> dismantling the heroic entrepreneur figure, introduction of an economic approach to the study of entrepreneurship Dismantling the Heroic Entrepreneur The entrepreneur is not necessarily a good person They may not be charismatic or visionary The entrepreneur moves according to a payoff scheme / incentive structure -> provided by the institutions and the culture in which the entrepreneur operates. Roman empire & medieval China -> role and status of people engaged in trade very low, in Rome -> trade activity carried out by freed slaves while incentives put on a career in public administration- > extraction of resources from people (corruption) The entrepreneur might make no productive contribution -> unproductive: no growth, it does not destroy growth; They can play a destructive role (systematic sabotage) -> destructive-> activities that bring society to a worse-off position, destruction of businesses, negative externalities Baumol’s Innovation Schumpeter’s creative destruction (making of new things and breaking existing constraints to change) delivers innovation. This is a process that comprises three steps (according to Baumol)-> necessary for the entrepreneur to succeed in them to ensure that creative destruction occurs 1. Ideas should be thought and realized -> PRODUCTION OF IDEAS 2. Then it should be adopted through experimentation (testing/ R&D) -> ADOPTION OF IDEAS -> to transform the ideas into innovation, necessary to adopt something practical, a prototype 3. Then it should be communicated (marketing) -> DISSEMINATION OF IDEAS, 56 According to Baumol, the entrepreneurial spirit does not exist, but the outcomes of entrepreneurial activities depend on the RULES OF THE GAME ( -> economy’s entrepreneurial reward structure that prevails) -> how entreprenuers act depend on policymakers contributes to growth as the entrepreneurs -> they generate the payoff, the reward structure of the economy according to which entrepreneurs operate Rules of the game include the cultural attitude towards entrepreneurship, they determine the reward structure in the economy  “The rules of the game that determine the rela tive payoffs to different entrepreneurial activities change dramatically from one time and place to another. “ Examples: 1) Ancient Rome: people of honorable status could choose among three primary and acceptable sources of income: landholding, money lending, and what Finley describes as “political moneymaking”. Commerce and industry were occupations undertaken by former slaves. Although the Roman reward system offered wealth to those who engaged in commerce and industry, it offset this gain through the attendant loss in prestige. 2) Medieval China: Imperial China reserved its most substantial rewards in wealth and prestige for those who passed the imperial examinations. Successful examination candidates were eligible for highranking positions within the bureaucracy, which carried with them high social standing. Such superior status was denied to anyone engaged in commerce or industry. he rules of the game in medieval China seem to have been heavily biased against the acquisition of wealth and position through productive entrepreneurial behavior. Those who passed the examination and were appointed to government positions, the opportunity to accumulate wealth became a likely prospect. Like the ancient Romans, the sources of these earnings usually were not associated with productive economic activity, corruption was widespread + state’s tendency to clamp down immediately on any form of private enterprise. As a result of the low status of mercantile activity and recurrent intervention by the state to curtail personal liberty and seize any accumulated innovative advantages, members of the medieval Chinese merchant class focused their ambitions not on innovation, but rather on the 57 US -> consolidation driven by economies of scale and scope and ability to take over other companies Europe-> agreements that allowed companies to continue investing and compete against foreign competition. Cartels ensured stability in prices and demand, allowed to plan investments and maintain employment levels. No incentives to growth, but to increase internal efficiency To compete against American companies operating in Europe-> cartel to maintain efficiency and keep going IG Farben, chemical industry in Germany-> agreement to coordinate on R&D, strategic decisions, prices-> cartel among some large chemical companies which was supported by the government of Weimar.  It became one of the main contractors of Nazi Germany The cartel (IGF) tried to take over companies outside the country -> in the UK this was blocked, UK few cartels especially in strategic industry (while before UK was open to free trade) The attempt to take over chemical companies in the UK by German companies -> blocked by the government Nowadays -> Chinese companies trying to take over companies in the west blocked by governments. Recently China tried to acquire a Dutch company producing microchips in periods of deglobalization -> stepping in of governments to control economic activities IVAR KREUGER  1900s: Travelled the world and gained experience in construction industry in USA, SA, Europe  Ties with finance in Sweden: Oscar Rydbeck  1908: co-founded the construction company Kreuger & Toll Byggnads AB; from there he acquired Förenade  1916: Took over J&V  1919: Founded Film Production Company  1923: IMCO  Mid’1920s: started deals with Governments in exchange of monopolies  1927: International expansion Daido Match Japan; BMC Britain; Belgium etc.  1929 Time Magazine Cover What is striking about him as an entrepreneur?  More powerful than institutions, he was dealing with them  Introduction of new financial instruments -> new way to take advantage of financial markets, for example B shares-> title of ownership without voting rights, way to dilute the ownership while maintaining control (used by Zuckenberg to establish Facebook and Meta) 60  Able to turn a situation of crisis into a way to make money out of the acquired companies Schumpeterian entrepreneur? yes Innovation -> creation of monopoly & changing the industrial structure Construction company -> the success in such company allowed him to have the money to acquire Forenade (match industry) In less than 15 years he built his empire -> EMPIRE BUILDER, he didn’t care about the wellness and benefit for stakeholders Why Sweden for the match industry?  Small market, around 5 mln people  Strong education  Strong Financial Sector  Export oriented economy -> Biggest match exporter in the world, because of the small internal market they specialized in the export  Neutrality during wars -> strong currency, advantage: possible to takeover companies in other countries.  Comparative advantage for match industry  Plenty of timber-> raw materials availability (vertical integration)  Innovations 1844 safety match; 1872 match machine; 1900 production completely mechanized  Match industry cartelized 80% J&V vs. 20% Förenade in the 1910s Why matches? Was it an attractive industry?  PRODUCT: commoditized product, characterized by low margins, substitutes emerging -> not attractive  MARKET: smoking was increasing, plus matches for domestic use -> attractive  COMPETITION: fragmented industry & low barriers to entry-> given the simple technology necessary to produce them. Problem-> high competition. In order to ensure that a company can maintain its market share it is necessary to obtain licenses from the government (way for governments to make money by protecting categories. Nowadays licenses for-> tobacco, slot machines, taxis-> one of the most powerful service protected by the government, limited supply relative to demand. Also pharmacies service regulated by licenses in Italy) -> only way for the match production to be profitable: having a monopoly, possible to inflate the low margins-> Kreuger needed to convince the government to give him the license  CONTEXT: post war economy & increasing tariffs His goal -> he wanted Sweden to dominate in the industry, making it the main production hub for matches His strategy:  CHASING MONOPOLY: Sweden first, he wanted to make Sweden the main hub for the production of matches but he pursued also global expansion-> given the strong 61 Sweden currency, it was better to establish production also abroad instead of exporting + reorganization of local operations  CONSOLIDATION AND CARTELIZATION-> to acquire other companies he often recurred to betrayal and threats, corporate espionage and he made several deals with governments (-> Lending money to governments in need in exchange of licenses) and competitors  SECRECY -> he made extensive use of debt-> high leverage; to make sure to be able to serve the debt he created a holding company in the US to raise money there -> to convince US banks to lend him money: demonstrating that he had assets to pay back & giving dividends to people who had already invested -> when dividends are distributed the stock price increases -> paying dividends using the money just raised  Verry blurred and secret info about the financial part Banks providing money without due diligence -> because of the trust by Swedish banks & in the US-> inflating the connections with the government. -> reputation Why did Keynes consider him the greatest financial intelligence of his time?  His role in channeling funds from countries with excess of capital to those in need  Broker between financial institutions and governments Financial instruments used -> b share and selling shares at discounts (financial innovation) FRAUD:  Ponzi scheme -> raising money to pay out dividends to raise the price of stock and raise more money-> for 10 years he was able to raise money just based on his reputation  Inflate asset value  Obtain new investment by offering securities (debt) as collateral  Forgery of Italian treasury bills Reputation  Financial industry based on network + expectations  Very little regulation on international finance  Sweden small society also based on social capital  Use financial disparity between EU and USA Can a fraudster have a Positive impact on society? Was Kreuger a crook from the start? YES he was a crook:  He always employed a criminal approach to business: lying and cheating, skimming money from his companies into his personal accounts, counterfeiting, threatening his competitors  He was seeking notoriety and influence, he wanted to make a name for himself  He inflicted frauds to investors who suffered losses. After his death auditors found a loss exceeding the debt of Sweden. No he wasn’t  He had a higher (nationalistic) purpose: 1) Build global monopoly under Swedish control; 2) Make Sweden great 62 LECTURE 9 Book: Chapter 10; Sloan (case); Slides; Warshow reading MANAGERS AS ENTREPRENEURS  intrapreneurship up to know-> we have considered entrepreneurs, the founders of their own business -> Schumpeterian view change of perspective -> we’re going to talk about managers, not the owners of the company they are running. Can they be entrepreneurs? Second industrial revolution -> new global leaders, US and Germany. Characterized by big businesses, high initial investment necessary to exploit the new technologies -> possible to achieve economies of scale New context:  WWI and its aftermaths -> how it interrupted the globalized economy  US progressive era -> period of political activism (against monopolies, working conditions)  the roaring 1920s-> period of sustained growth of GDP, GDP per capita and in consumption, especially in new products (for example household appliances) ECONOMIC EFFECTS OF WWI WWI interrupted the world previously created -> globalized world characterized by growth, liberalism, new markets and new technologies -> end of globalized world Effects:  no population growth  GDP: constant or little decrease in European countries; dramatic increase in the US  Debt : huge increase for most EU countries 65  Inflation: it increased everywhere, especially in Germany -> why? 1)Expansionary monetary policy-> Central Banks reducing interest rates and a greater increase in money supply (governments printing money to finance war efforts-> using gold reserves and foreign reserves to buy domestic currency + printing money ); 2) expansionary fiscal policy (if governments had the money) -> increasing public expenditures. 3) demand > supply -> scarcity in some sectors  industrial production, global decline of 50% -> growth in the US while in EU decrease (except for Italy) WWI killed 20 million people The WWI changed the global order:  England was no longer the global world power but kept control over most of its empire.  The US emerged as the new undisputed global power and creditor -> new leader from economic and political perspectives  Germany was being punished.-> Versailles Treaty, Germany asked to pay for the damages caused by the conflict-> Germany had to pay for all the costs incurred by the Allies during the conflict + several restrictions: expropriation of German assets (even private ones), restrictions on trade (prevent Germany from exporting)  Russia did not exist anymore, the revolution had transformed it into The Soviet Union.  The last empires within the European borders disappeared.  Europe was destroyed and highly indebted (to the US). This shaped how reconstruction was faced! US sold goods and services to the allies during the conflict + granted them loans Green -> net creditors Red -> net debtors, France, Belgium -> most impacted by the war (destruction) Britain -> large debt towards the US but if the others repaid their debt -> credit so ability to pay the debt to US To pay allies, Germany used the reserves of gold and foreign currency + printed new paper money to finance the public deficit. 66 Consequences -> after WWI inflation was immediately higher in Germany but the monetary policy made it increase dramatically-> HYPERINFLATION, while other countries were trying to adopt policies to decrease inflation The economic consequences of the peace  In a context of increasing economic nationalism, which hindered foreign trade and investment, Germany was forced to make large payments and concessions to the Allies. -> Germany had to pay to ensure that the allies could have the resources for the reconstruction and to repay their own debts. It had to pay all the costs connected to the conflict so that the Allies could repay their debt.-> (US initially not in agreement with the high reparation costs charged to Germany but then accepted it because it was the only way to receive the money provided to the allies)  Domestic public spending ended relying on money creation, what led to hyperinflation and a dramatic fall of the value of the German mark. -> no incentive to invest in Germany  Chaos was only solved when the payments demanded from Germany were renegotiated and the country received an international loan (that is, money from the US) to face its debt towards France, Belgium, Britain etc. So the others France, Belgium, Britain and the others) could repay their debt (to US) as well.  But the damaged within the German society had already been done. Nationalism, wishes of revenge and trust on “magic” recipes to reinstall the German leadership spread alarmingly fast. 15/11/1923 -> peak of the hyperinflation period What about at the other side of the Atlantic?  In the US: time of prosperity, time characterized by increasing level of gdp per capita and of consumption (roaring 20s)  US -> “century run winner”, perceived as the new leader US symbol of growth and modernity Why symbol of modernity? • New, modern, attractive products in new industries. • New organizational methods: scientific organization (also known as Taylorism). • New forms of enterprises: The managerial and M-form company. 67  Increased salaries so to create new markets ($5 for 8h + bonus for extra time). -> to increase demand (making employees able to afford the model T) and support mass consumption. He did that also to motivate employees because th scientific management method caused the alienation of workers  Ford hated bureaucracy and created a centralized organization reporting to him.  1917 Ford Motors accounted for 40% of US car production. 1920s and early 1930s-> Ford leader of the industry but then General Motors surpassed it General Motors .Inc  Founded by William Durantin 1908 and grew through acquisition of different smaller car manufacturers : Buick, Oldsmobile, Cadillac, Oakland (Pontiac), Chevrolet.  Durant did not organize his plants and there was a lot of cost replication – he just focused on increasing capacity. • So, in 1920 the company was struggling financially, and DuPont acquired a 33% minority share. -> DuPont appointed Sloan as general manager SLOAN-> he was not the owner but the manager He adopted a different strategy  Diversification rather than standardization -> not customized cars but production of a few models (each model was standard but different models available) -> “a car for every purse and purpose” -> ford only one model in one color  Replacement -> Sloan understood the change in customer needs-> changing the car after a few years due to the change in needs over time (REPLACEMENT DEMAND) (Ford-> making it possible for everyone to have a car -> first-time buyers)  Multidivisional firm (M-form)-> change in the organizational structure, divisions organized around each model and later around the geographic market + greater level of decentralization -> separation between top management and divisional managers+ more decentralization of decision-making power. Top management -> strategy planning, coordination, forecasting Divisional managers -> day-to-day management (Ford instead wanted to do everything) Sloan adopted a peculiar M-Form -> involvement of divisional managers in decision making The introduction of the multidivisional firm -> introduction of accounting tools and KPIs Were the owners of General Motors happy with the management of Sloan?  Owners satisfied because the company was performing really well (even after the crash of 1929). But owners wanted to keep an eye on what the managers were doing -> managers refused-> AGENCY THEORY: the objectives of owners and managers may be different (managers -> short term perspective vs long-term perspective of owners) Sloan -> new approach to the market and change of organizational structure After Sloan’s retirement -> decline in GM market share 70  Both Ford and GM -> standardized product (ford just one model while GM few models) was there any option for the smaller car manufacturers?  Customized & sophisticated cars -> produced one by one  Need for specialized high skilled workers “if you cannot be Ford or General Motors be a Bentley” The emergence of the M-form New organizational form introduces as a response to the differentiation and diversification strategies adopted by large companies. Can family/personal firms professionalize management? Family firms use to face two great challenges: professionalization and sucession-> disputes among family members + family succession-> appointing as managers members of the family who may not have the necessary skills (only 15% of family firms are still controlled by the family in the 3rd generation). Let’s have a look at FIAT:  Who founded FIAT? -> Agnelli  Who have been managing the company since its foundation?  Who were Vittorio Valleta, Sergio Marchionne and Luca Cordero di Montezemolo? -> not members of the family but appointed as managers, they had the business administration skills and competences necessary -> they run the company while the family maintained some control (part of the board) Keywords:  Deglobalization  Decrease in European leadership and rise of the US  Inflation  Rise of american capitalism  Managerial capitalism -> multidivisional structure, increased separation and tension between owners and managers  To try and increase profit margin (and also in response to market saturation) -> either increasing economies of scale or diversification rather than standardization Takeaways  WWI brought about a complete transformation of the global order. The US emerged as undisputed global power .  During 2IR huge companies had emerged and had organized according to the functional U-form. This form was suited for specialized companies centered on one main core-business. It did not work well in complex organizations as it overburdened functional mangers and did not allow them to effectively report on strategic issues.  In the 1920s, the concentration process had resulted in big companies accumulating extra resources that needed to be organized efficiently and put into productive use. Several industries reached maturity and new strategies were needed to ensure growth. 71  Several firms invested their extra resources to fund R&D departments and create new products, differentiation and diversification became the most viable paths to grow.  In the automotive industry, Ford had emerged as the dominant firm thanks to its efficient production system based on moving assembly line and obsessive attention to costs. He had introduced mass production of cars and cars had become affordable to most people, including Ford’s employees. However, Ford was resisting change and did not want to delegate power.  This rigidity was exploited by Sloan, who was able to reorganize GM, a company formed from the agglomeration of different car producers, into a coordinated entity organized according to decentralization of decision making across product division.  This was the Multidivisional M-form, which gained traction as companies became increasingly complex and differentiated towards the 1940s. Each product division was headed by a manager who in turn overviewed over division-specific functions. Some functions though still remained centrally managed at the headquarter level, which allowed for more strategic focus at the top of the firm.  At GM Sloan was able to gain increasing market share not only thanks to the adoption of the M-form but also thanks to his product mix and the idea that consumers could choose different cars according to taste, purpose and price-range. He educated the consumer to desire diversity and novelty. 72 – Retaliation by trading partners- Domino effect results in decade-long meltdown in capital flows and international trade In EU, American companies withdrew investment (due to the increase in interest rates (no expansionary monetary policy) in the US which caused a contraction in demand) -> Unemployment increased tremendously in Europe 1931 European Financial Crisis Sept. 1931 Britain abandons Gold Standard 1933 U.S. abandons Gold Standard -> possible for the currency to float International monetary system falls apart (exchange controls)  Majority of countries abandoning the gold standard Thomas J. Watson and IBM IBM core business -> Herman Hollerith (German who moved to the US) he introduced the first punched card machine -> computation machine which accelerated the counting & collecting of data -> employed for the census in America reducing the time it took to complete it While Hollerith introduced it in the us -> in Germany: Willy Heidinger (Deomag) Herman Hollerith & Willy Heidinger -> Schumpeterian entrepreneurs, they were the ones producing a creative destruction (introduction of the innovation) What about TJ Watson? -> he was the one able to scale the company and make IBM a leading company in the US and expand also in Europe  Result of TJ Watson “operations” -> constant growth of IBM revenues and employees  Company growing more abroad -> especially in Germany which accounted for a big portion of IBM revenues -> involvement with the Nazi regime (IBM just an example of the many companies engaged with the regime) Did Watson’s IBM win or lose from Hitler’s seizure of power in Germany in 1933? WIN:  Rising revenues  Stronger need for IBM’s products (for census, racial policy)  Autocratic leader -> only one person to negotiate with 75  ICC president LOSE  Not possible to take moneey out of the country (the profits must be reinvested in Germany) -> PROFIT REMITTANCE CONTROLS  Reputation IBM -> acquisition of Deomag How ? -> in 1923-24 -> hyperinflation in Germany. Deomag was a partner of IBM -> right to sell the technology of IBM. Due to hyperinflation, at the end of the war the debt of Deomag towards IBM increased due to the currency mismatch -> solution provided by Watson: converting the debt into stocks -> acquisition of Deomag by IBM (90%) German government prohibited the repatriation of capital -> companies could continue doing business in Germany but it was not possible for them to “export” the profits made in Germany -> the government introduced a rule preventing capital exits-> profits could only be reinvested in Germany ->lot of investments in real estates During the 30s -> investment in Germany be US companies due to prohibition of repatriation Up to the beginning of the war -> us companies in favor of doing business with Germany (preferring the Nazi government to communist parties) US active support of the Nazi Regime during the 1930s (Pawels, 2003)  American oil companies (Texaco and Standard) provided Hitler with oil and rubber stockpiles that were important for the German war effort. Before Pearl Harbor these were supplied via neutral states.  Henry Ford was a fervent supporter of the Fuhrer and its German subsidiary produced parts and trunks for the Germany military well into the 1930s.  GM was likewise contributing to providing Hitler with “wheels and wings” to face the upcoming war.  The telecommunication company ITT supplied Germany with communication equipment to synchronize land and air attacks.  In June 1940 German victories were celebrated in New York at dinners and parties attended by GM German delegate James Mooney, Edsel Ford and the philo- fascist boss of Texaco Rieber among others. What was going on in Germany in the 1930s? Should Watson have closed down IBM’s business in Nazi Germany at some point in time? If so, when?  1925 Hitler had published Main Kampf  1931 Tight capital controls and ever-increasing tariffs 76  1933 Nazis come to power after backroom maneuvers; trade unions abolished; Germany withdraws from League of Nations (established to guarantee peace) (joined in 1926)  1933 Census asks for religion – Watson visits Germany to approve capital infusion in the German subsidiary  1935 Nuremberg Laws in Germany + Social Security Act in the US (extension of public fundings to public administration -> money provided to IBM to cover the loss from closing the business in Germany -> IBM took the money but continued carrying out business in Germany)  Reintroduction of military spending (new Navy and Air Force)  1936 German army occupies Rhineland, against the Versailles Treaty  Foreign firms required to remove Jews from their German affiliates  Prominent Jews are fleeing the country and having their properties seized.  Olympics in Berlin, softening of attacks to Jews. At that time -> Hitler praised by many powerful people Stay for opportunistic reasons and divest for ethical (per il razzismo) reasons Leaving Germany before WWII -> greater loss opportunity than leaving Russia  Consider the trade-off with reputation and the amount of business Reasons for a company staying in the country:  Employees’ argument, responsibility towards them -> having to fire them in case of leaving the country  Concerns about plants falling into local hands -> technology protection (possible for competitors to challenge in other markets)  Optimistic view -> improvement of the situation, necessary to maintain a foothold in the country  Appealing market, risk of feeding competitors that can become a threat also in other markets Arguments in support of divesting  Loop economy -> due to capital controls it is difficult to repatriate profits  Risk to be involved into war economy  Forced to share technology and data  Reputational losses in other markets (if staying) Watson meets Hitler in June 1937. In your opinion, why did he decide to do that? Would you have taken that decision? Non-official diplomat role of Watson Companies that Left Russia since the beginning of the war in Ukraine Tech companies and companies that would otherwise be affected by sanctions Tim Cook’s for Andrew Ross Sorkin’s DealBook 2021 https://www.youtube.com/watch?v=HM9r6Q_jFCE Detail questions at minute 22.12 + 22.44 77 Lecture 12 Book: Chapter 12 and 16; Mitsui Case; Slides THE JAPANESE RECIPE-> to prosperity Country image  Quality  Order  Continuous improvement  Just-in-time Japan-> very old society which implies several problems-> costs of the welfare state and pension retirement plans Moreover, one of the countries with the largest gender gap Evolution of GDP per capita starting from the first industrial revolution Starting from the late 19th century-> In Japan fast growth, especially after WWII In the 1990s, Japan was the second largest country in terms of GDP and some expected Japan’s economy to surpass US economy, however due to inflation and a consequent crisis the economy went into stagnation Japan-> experienced and extremely rapid economic development  It is possible to identify different stages in the growth of Japanese economy Starting point: 1868, Meiji revolution -> period of gradual structural change, modernization & industrialization of the country until WWII. Structural change and industrialization accelerated during the interwar period Until WWII -> growth in the economy but Japan not yet an international competitor After WWII and until 1990s-> Japan international champion, around 8% of growth annually in this period With the US occupation after WWII, the US tried to change the institutions, which had determined the success of Japan but without succeeding 80 After 1990s-> “lost decades” Part 1. Starting point: Feudalism under the Tokugawa’s dynasty Before the Meiji revolution-> feudalism institutional contest prevailing Feudalism based on a stratified society.-> social rigidity Emperor at the top (symbolic role) but the actual ruler-> SHOGUN (political and military leader) Upper class-> samurai and aristocracy At the basis-> artisans and merchants & peasants Peasants -> majority of the active labor force devoted mainly to rice cultivation Merchants-> some of them succeeded in developing connections with powerful politiicians. They started to provide financial services to wealthy landowners and they got privileges to make business (trade)-> in this way they became rich -> “political merchants” such as the Mitsui family Japan, 1851 Sakoku Starting from the XVI century, the country had progressively isolated itself from the «Western» influence. -> close economy Nationalism Strong nationalistic sentiments and imperial strategies (North China, Korean peninsula) Feudal System  An hereditary military dictatorship (shogunate – Tokugawa family) and an Emperor.  A rigid, pyramidal social structure, but ethnic homogeneity  Strong central government institutions Economics The economy mainly based on specialised agriculture (rice) Key role played by rich merchants – Deijima island (Dutch trading post) Modern Elements Urbanisation and infrastructures (roads). Good education to both genders (about 30% of population). 81 Japan was at the centre of the Pacific whaling routes -> the wailing trade grew a lot during the 19th century Whale oil was very popular in the US Largest use of whale oil: using it for lighting The US was the largest country engaged in whale trade which increased a lot in the first decades of 19th century Perry forced the signing of the Treaty of Kanagawa (1854) In the early 1950s -> US trying to reach an agreement with Japan to obtain the right for US ships to sail in Japanese ports  US pushed the Japanese to sign the agreement and open Japanese ports to American ships for refueling and provisioning -> opening of the Japanese economy The treaty (treaty of Kanagawa 1854) signed -> most-favoured-nation clause, meaning that if in the future Japan would enter into agreements with other countries, US entitled to receive the same treatment. Japanese elites took the position that they needed to modernize the state s military ́ capacities to avoid further coercion from Western powers. Looking also at the changes taking place in US and Western Europe, it became clear that modernization required an institutional change. -> this led to the Meiji revolution Part 2. The Meiji Restoration (1868) It was a Coup d’état which ended with the shoguns’ feudalist system-> to restore the power of the Meiji’s emperor. It opened the Japanese economy and society to foreign influence Main objective of the government: ECONOMIC MODERNIZATION-> strong and widespread nationalism, state intervention to catch up with strong economies The «Modernization» process was pervasive in the realms of politics, of institutions, of the society, of technology and of business activity. Areas of modernization: infrastructures, technology, industry, institutions A major actor in the change -> the State Soon after the State organized the Iwakura Mission (1871-1873) to understand the changes introduced in industrialized countries to succeed The State’s push. Dimensions of Modernization The state played an important role in the modernization of Japan -> state push The changes introduced affected several dimensions: Technological: importation of foreign technology and knowledge -> inventing new technology requires huge efforts so adopting the technology of others is less costly - Foreign experts (import of knowledge) -> hired for a limited period of time 82 Zaibatsu: Business groups (-> different companies) characterized by the fact that they operated in different industries, owned and controlled by families. Holding company -> in- house bank providing financial services for all the companies in the group, the holding company fully controlled by the founding famiily Managers were hired to run the companies but, in order for the family to maintain control, they appointed an intermediary Main features of zaibatsu: -> multi-subsidiary structure  Family control-> HQ (honsha)  Diversified subsidiaries  Self-support through bank branch and trading company (sogo sosha)-> ensured financial liquidity to the companies  Separation between ownership and management -> Banto (until WWII) and professional management. Bant= general manager, not part of the family but close to them (esveral years of employment)  Welfare program and paternalism-> to motivate the workers  Connection with government initiatives-> beneficiaries of government increase in public expenditures, military procurement Zaibatsu characterized by a decentralized production structures Recap of the structures: US large corporations (Swift, Ford)-> centralized authority (usually owner=manager); U- form (different units according to the functional role within the company) Throughout the 19th century -> changed into US MANAGERIAL CAPITALISM (Sloan)-> separation between ownership and control; M-form (increase in managerial staff); diversification within the same industry  In the us : vertical integration -> diversification in one industry (as opposed to the zaibatsu) The zaibatsu were crucial to the economic growth of Japan but also SMEs (before WWI they accounted for 95% of production) played an important role. Often they were not fully independent companies but frequently linked to the zaibatsu-> subcontracting relationships Zaibatsu also provided education, health assistance to employees -> to create loyalty Japan Imperial Expansion  1910 Annexation of Korea (previously under Chinese sphere of influence)  1931 Manchuria – Manchuko puppet state; 1936 Inner Mongolia 85  1941-43: Southeast Asia - Greater East Asia Co-Prosperity Sphere Zaibatsu part of the imperial expansion of Japan -> expansion was a way to get new natural resources and markets, they contributed to the development of the infrastructure in the controlled territories The zaibatsu were the major beneficiaries of the public military procurement. Zaibatsu • The Zaibatsu accounted for a significant part of the Japanese industrial production. • Manufacturing activities, extraction and production of raw materials (coal and steel), transport (shipping) as well as more traditional activities such as banking, and trading. • Family holdings (the old mercantile houses) started to control largely diversified business groups with a growing number of subsidiaries. • They controlled these subsidiaries through cross-shareholding and other practices such as leveraged equity and directorates. • From early years of Z’s development, a separation between ownership and management took place. • Community of companies: They could also rely on sub-contracting to clusters of small entrepreneurial and specialized production of intermediate goods (large groups worked as venture capital). Biggest zaibatsu -> MITSUI Zaibatsu supported the Japanese modernization and military effort Since before WWI evident tendency to an informal strict connection of privately-owned enterprises with the political power in charge for the provision of various services. Zaibatsu greatly profited from WWI –> Japan participated as a support of the Allies in Asia  Mitsui created the shipbuilding and engineer unit in 1917  Supported training through technical schools In 1920s the number of companies under the Mitsui zaibatsu control quadrupled.  Mitsui operated as venture capital of smaller companies working as subsidiaries Ready to introduce professionals quite early, keeping the ownership but releasing the power (terrorism in 1920s and 1930s)  In 1930s Mitsui established a fund for the promotion of social services? 86 During WWII participated in the Junsenji Keizai – war effort At the outbreak of WWII, Japan had not yet reached a comparable level to US and Europe, only after the war an industrial structure able to compete with the strongest businesses in the US and Europe was created After WWII-> the country was destroyed but war could not destroy traditional characteristic of Japanese society-> nationalism, social cohesion The Japanese “miracle”  Country with the highest growth rate After WWII -> US occupation & SCAP Us tried to destroy the Japanese structure of zaibatsu and their connections with the government  They tried to reduce the monopolistic power by dissolving and prohibiting the zaibatsu -> anti-monopoly law (until the start of the Korean war But the zaibatsu were dissolved only in theory  The central banks of the zaibatsu became independent, they were able to absorb the subsidiaries of the zaibatsu (no longer control of the family) -> new form of organization: keiretsu (controlled by banks) How did Japan manage to reconstitute the former system? Did it improve/change? MITI: Key Role in the reconstitution of Japanese Economy after WWII State-> essential role in maintaining and increasing the competitive position of many industrial sectors in Japan 87 Just in time (make what is needed when it is needed) opposed to just in case (-> make all we can just in case), which required a huge amount of inventory Vertical (kigyo) Keiretsu, i.e. Toyota -> vertical keiretsu second type of company group (developed between 50s and 60s) Structure of the vertical keiretsu:  One major manufacturing company (head of the group) and its many smaller subcontractors (suppliers of components and semi-worked products) plus bank and trading companies.  Relationships through cross- shareholding and debt relationships.  Subcontracting with companies in the network instead of pure vertical integration, grants more flexibility.  The keiretsu system based on informal relations low integration, and high coordination follows the value chain.  Subcontracting features a huge power asymmetry between firms, but mutual dependence and it is characterized by great flexibility.  This is strategic for Japanese innovations as Total Quality Management and above all Just In Time Toyota Motors -> assembler of cars, 80% of the value of the automobiles purchased from other firms  Vast network of connected firms, to avoid being dependent on single suppliers, in this way different suppliers put in competition with each other -> possible for Toyota to compare prices and quality of components. Advantages of this lack of long-term agreements  Increases in costs -> borne by suppliers and implicit agreement that over time-> decrease in price of components  Quality control responsibility of suppliers The low level of formal integration coupled with high levels of cooperation and coordination -> source of competitive advantage for Japanese companies (more flexibility) Sum-up: The main ingredients of Japanese success in the postwar period  Large and homogeneous market -> key component of competition  Industrial structure (large companies, keiretsu, small subcontractors)  Industrial relations promoting employees, loyalty (low level of social conflicts, lifetime employment, competition among horizontal groups )  The coordinating role of the State: the MITI and the design of policies  An aggressive outwards internationalization, through exports and foreign direct investments (but conservative inwards) 90  Some industries are eager to knock down and reconstruct to introduce the best tech (dismantling the old plants and replacing them with new ones)  Japan became the global leader in sectors such as steel, automobiles, consumer electronics, office machinery, electronic components and machinery for telecommunication. Takeaways  Japan represents a peculiar case of catching up and introduction of capitalism.  Up to 1868, Japan was a very traditional society, primarily based on rice cultivation and on a feudal system under the control of the Shogun, the military leader.  The principle of the Sakoku, isolation, ensured the country had minimal contacts with the outside, trade was limited to contacts with Dutch and Portuguese traders.  In 1853, Commodore Perry knocked at Japan’s door. It was the global economy. Japan was a good stopover for the US ships trading from California to China. It was also in a privileged position to access the whaling fields of the pacific. And it was rumored to be rich on coal.  With the 1868 Meji Restoration, the Shogunate was abolished, and the country’s rich elites decided to introduce a modernization process that would allow Japan to maintain its independence and join the club of the advanced economies.  The government supported a modernization in technology, industry, institutions and politics. In order to do that and to facilitate equal relationships with the West, Japan sent teams of experts abroad and invited foreign one in the country, in order to study and select the institutional structure more suitable for Japan.  The government wanted to create the conditions for entrepreneurship to thrive. It supported the growth of industry by constructing plants and gradually involving wealthy merchant families. Banks contributed to this transition and remained important players in the industrial system.  This led to the emergence of zaibatsu, conglomerate businesses operating in diversified fields; coordinated through a family holding; and interlinked through cross-participation.  In the interwar period, Japan established as dominant economy. The zaibatsu had supported the war effort during WWI and continued by fostering Japanese expansion in Asia (plan of the Greater East Asia Co-Prosperity Sphere).  During this period, the zaibatsu increased the number of companies under their control in diversified businesses. Honsha were the headquarters, which families increasingly left under the control of professional management (BANTO). They also provided capital by financing promising entrepreneurs. (i.e. Mitsui with Toyoda).  In a brief span of time, Japan was able to catch up, restore after the War, and develop a technological leadership in some sectors, above all cars and consumer electronics (in the 1980s, especially in high tech).  This success was NOT fortuitous. It was the result of a tight cooperation between entrepreneurs, industry and government.  After the War, The American administration tried to re-design Japan according to its geopolitical goals. This included dissolving the zaibatsu system.  Zaibatsu were split in smaller companies, family participations were reduced, confiscated or placed in the market. Former zaibatsu banks though were able to reconstitute the former system into the keiretsu. 91  The zaibatsu system was then reconstituted in the form of vertical and horizontal keiretsu after the war, despite the US attempts to dismantle industry concentration, under the American control of SCAP.  The keiretsu is a less structured and decentralized structure. Companies are still connected through cross-participations, but governance relationships are looser and more informal.  Keiretsu are organized as an assembly of companies (in diversified lines of business in the case of horizontal keiretsu) with a main bank and trading companies in support.  Sogo-shosha are trading companies connected to the keiretsu – which support the marketing and investment of keiretsu especially abroad.  Vertical keiretsu developed around large manufacturing companies such as Toyota and are characterized by high flexibility in the relationship with suppliers.  A final important role in Japan industrial growth was played by teh MITI, which concentrated in enhancing Japan industrial independence and competitive advantage especially in the steel industry. Chronological period up to now-> middle of the 20th century (prior to WWII) Corporate entrepreneurship -> entrepreneurial actions within firms 92 The spread of the 2nd Industrial Revolution meant an increasing R&D intensity. R&D became a strategic asset, main source of competitive advantage Scientists were doing research and patenting products (initially, under their name, and soon under the name of the companies, which started to accumulate patents as strategic assets). To see how important R&D became -> In the US, employees within R&D departments increased from 3.000 in 1920, 10.000 in 1933 and 30.000 in 1940. But R&D activity became increasingly expensive, given the high costs of a lab and the (often much) delayed payoffs of the research, particularly basic research. This could be sustainable only through a cooperative effort, in the form of national systems of innovation.  Not possible for a single company to undertake R&D activities, so national systems of innovation were created -> R&D became a collective effort Pioneers of the national system of innovation -> US and Germany Strong interaction between research universities and R&D in firms-> also collaboration with federal agencies State -> increasing investments in education to train the people to be employed in research and guaranteeing legal property rights, for instance through patents National systems of innovation promoted the consolidation of the industries of the second industrial revolution and little by little led to the emergence of the technologies of the third industrial revolution WWII -> stimulus for scientific research and the development of new technologies, firstly for military purposes and then for civil ones Further development of aircraft industry for example was promoted by the war -> more powerful engines needed to be used in airplanes to transport bombs War promoted R&D  The Second World War quickly removed budget constraints and made «big science» (i.e. pure basic research for which a lot of money is necessary) possible. -> during wars it is possible to increase spending (especially for defense) without limits  Governments funded basic research directly (through research institutions) and indirectly (procurement).  The areas in which the research efforts of ”big science” concentrated were: chemicals, pharmaceuticals, air transportation, “new materials” (plastics), and electronics and computing.  This effort continued during the Cold War, leading to the 3rd Industrial Revolution. - > characterized by the development of semiconductor (-> general purpose 95 technology GPT)/transistors (Shockley 1947) integrated circuits (1956), and microprocessors (1968). GPT-> steam power and semiconductors Because of the war -> the German government has approved the increase in government spending on defense purposes (first time after WWII) SEMICONDUCTOR INDUSTRY -> important for technology today and central to the 3rd industrial revolution Noyce’s case Noyce -> US, Silicon Valley  Born in 1927, in Burlington, Iowa  Ph.D. in physics from MIT in 1954 -> scientist  Works at Philco. In 1956 William Shockley invited him to come work for him in California.  In 1957 Noyce left with seven other Shockley engineers to form a new company – >they contributed to establish FairChild  1959 applied for patent for semiconductor integrated circuit (chips)  1968 founded Intel with Gordon Moore in Mountain View  Promoted an association to encourage cooperation between private and public sector-> association of semiconductor private companies an public research companies Why was Noyce able to have this kind of impact? What was the context?  He took advantage of the cold war context -> the money invested by the US government in the defense industry and the leadership of US companies After WWII US companies did not face too much competition (EU and Japan were destroyed and recovering, URSS and China did not participate to the global trading system) • US companies – Large organizational structures – Managerial capitalism – Important role played by R&D (new products, new technologies) • Rise of advertising and creative industries  Investment of the US government in defense industry but also in aerospace industry (just for propaganda) American Administrations grew worried of the “communist threat” → Truman Doctrine of “containment” Domino Theory, if one country falls to communism this will lead neighboring ones to fall too McCarthyism Era - the practice of making accusations of subversion or treason without proper regard for evidence 1961 the Berlin wall was built to separate the West Berlin from the rest of the Eastern Bloc The USSR and the USA competed for influence in Latin America and the decolonizing states of Africa and Asia. 96 Arms Race: 1950-1960 military spending reached 10% of US GDP Military Investment in the US since WWII  Federal Spending for R&D increased from 80 million in 1940 to 1.3 billion in 1945 (mostly for applied military research)  Then it grew further from 30 billion in 1955 to 90 billion in 1969.  Billions spent to produce innovation but also to create a nuclear arsenal that now is very old and needs maintenance.  Investment in weapons and military communication.  FederalGovernmentemerged as the main demand for these products, before they were commercialized. The Cold War and the Space Race  Since its inception, the US Government has spent US 650 billion on Nasa  Adjusted for inflation is 1.19 trillion, (almost as much as 2020 Covid stimulus), about 19 billion per year  Space program was incorporated in the rhetoric of American and capitalist superiority during the Cold War  JFK MOON SPEECH https://www.youtube.com/watch? v=G6z-h6faR6o  The result was a trickle-down effect in terms of consumer technologies How Technology supercharged the post war period – Shrinking of Time -> communication  Shrinking of space -> transportation  Applied physics and electronics COMMUNICATION • 1965 first satellite for commercial telecommunication: Intelsat I (nicknamed Early Bird) • Telex facilitated international communication • The cost of phone-calls dropped • The first internet ARPANET (1969) was developed by Defense department to connect their systems in case of nuclear war TRANSPORT • First commercial jet flew from New York to Paris on October 26, 1958 • Newer ocean-going ships • Invention of the container for transport of goods (1956) and standardization (1961) APPLIED PHYSICS  Nuclear program, uses of Atomic Energy (Manhattan Project)  New Materials (synthetic rubber, polyester, Plexiglas)  Chemicals, Pharmaceutical, Biotechnologies  1970s Sematech – government sponsored consortium in semiconductor production to ensure US leadership vs Asian competition 97