Firm Size and Cooperation: The Determinants of Cooperative Agreements in Information Technology Industries

This paper aims to shed light on factors that lead firms to resort to collaborative ventures. Specific attention is devoted to the role of firm size. The study relies on an extensive econometric analysis of a representative sample of firms in three Information Technology industries (semiconductor, data processing, and telecommunications). Data relating to the number and type of agreements concluded by firms, provided by the ARPA database developed at Politecnico di Milano, are correlated with firm–, industry– and country–specific variables. The findings of the econometric estimates point to the importance of firm size, scope of activity within the industries considered, diversification in related industries, and, to a less extent, degree of internationalization in explaining use of agreements. Moreover, the study provides preliminary evidence in support of a complementary relation between interfirm linkages and R&D expenditures. A positive correlation with growth rates also seems to emerge. In contrast, the s regarding the relation between internal capital expenditures and recourse to agreements are mixed.     

Choice of Distribution System in the New Zealand Life Insurance Industry

Using 1988–93 panel data drawn from the New Zealand life insurance industry, this paper examines empirically the notion that the choice of distribution system is an efficient contracting solution to incentive conflicts between owners, managers and sales agents in life insurance firms. Consistent with what was hypothesised, the empirical results suggest that choice of distribution system is distinguished by organisational form, firm size, and sales commission. However, contrary to expectations, the variables representing product diversity and asset specificity were found not to be statistically significant. The empirical results thus lend mixed support for prior predictions.     

The Determinants of Outcome in UK Take–over Bids

In this paper we have investigated the determinants of the outcome of 238 friendly and hostile take–over bids that occurred in the UK during the 1980s. We also use our model for prediction purposes and in order to map the effects of a variety of independent variables on the probability of the bid being successful. Our main results can be summarised as follows. First, target management resistance and the wealth effect of a bid are key determinants of the outcome of a bid. Second, we find limited evidence to suggest that share ownership by the bidding company and by target directors also contributes significantly to bid outcome. In the latter case we find a non–linear relationship consistent with the argument that when director holdings are low the bid is discouraged but when they are high the bid is encouraged. Third, our model is good at predicting outcome for all bids but weak at predicting the outcome of hostile bids on their own.     

Mergers and Excess Deposits: Some Evidence for the UK

In this paper we consider an argument, often used in the City and the press, that mergers take place more because of the availability of finance than for strong economic reasons. In particular, we focus on the availability of finance part of this argument and suggest that the financial sector and firms themselves use excess funds to support merger activity. Using data for the UK, we show that there is evidence for such an effect for non-bank financial institutions but results for firms are not significant. Possible interpretations of this result are also discussed.     

Executive Pay and Performance: The Empirical Importance of the Participation Constraint

The low elasticity of top executive pay to performance in recent empirical work presents a puzzle since it is clear from the data that in practice both pay and performance measures have moved closely in line in recent years. This paper demonstrates that cross-section and time-series estimates of the pay performance elasticity differ significantly unless the effect of average executive pay is included. It is argued that this can be seen as the effect of the participation constraint in a principal agent model, more commonly known as "the going rate". The going rate must be paid to executives to deter them from taking up their outside option, which is the opportunity to leave the current firm and sign an incentive contract with another firm. Thus the outside option will depend on performance by other firms. Since performance is correlated between firms, this generates a larger time-series pay performance elasticity as perceived by the executive. The paper also considers the possibility that the going

rate may induce incentive effects. The predictions of this argument are tested on a panel of data for large UK companies     

The Dynamics of Firm Growth and Survival Under Alternative Forms of Control

The publication of the passive learning model of Jovanovic [Jovanic, B., "Selection and the Evolution of Industry," Econometrica, 1982, 60, 649–670.] initiated a resurgence of interest in firm growth and survival processes. Yet all the recent work has focused on the profit maximizing firm, without considering how robust the results are to alternative forms of control. This paper applies the model to the case of the labour managed firm, a type of firm studied extensively for its divergent behaviour from profit maximising firms. The findings indicate that Jovanovic's key predictions are rendered indeterminate under labour management, although there is evidence to show that the actual empirical relationships continue to hold. In considering possible explanations for the breakdown of the results, we conclude that the Jovanovic model overemphasizes institutional structure to the neglect of more fundamental determinants of growth and survival.midt, Paul Geroski and an anonymous referee for helpful comments and discussions. Any remaining errors are my own.     

The Economics of Business Process Design: Motivation,Information and Coordination Within the Firm

This paper presents a transaction cost analysis of the internal business processes of firms. Business processes are collections of activities which are technologically or managerially linked so that they jointly affect value added. Their organisation is characterised by their ‘architecture’—the allocation of responsibilities amongst individuals and groups and communication between them for information and coordination—and their incentive structure. The overall costs of organisation are determined by losses due to imperfect motivation of process members, which flows from the incentive structure, and imperfect information and coordination, which flow from the architecture, together with the resource costs associated with incentives and architecture. Perfect motivation corresponds to ‘team behaviour’ and a quantitative model, based on team theory, indicates how the best architecture depends on the degree interaction between activities comprising the business process.     

Viability of Traditional Banking Activities: Evidence from Shifts in Conduct and Excess Capacity

This paper applies modem statistical techniques to estimate levels and shifts of market conduct and aggregate excess capacity in the provision of traditional US banking products such as loans and demand deposits. A variety of models indicate that loans are competitively supplied, with no obvious excess capacity as defined. Some models indicate an anticompetitive shift in demand deposits after 1984, but other evidence suggests that this result may be an artifact attributable to the growth of NOW accounts, MMDAs, and the like. All results suggest that the current levels of these services can be profitably sustained under current market conditions.     

The Determinants of Firm Exit from Exporting: Evidence for the UK

This study seeks to understand to what extent new exporters are able to survive in international markets and whether exit from exporting is more likely to be associated with firm-level heterogeneity or more general factors such as trade costs and/or barriers to entry and exit (such as sunk costs). This study presents the first analysis undertaken for a nationally representative group of UK firms on the determinants of exit from exporting, using panel data covering all market-based sectors of the UK during 1997–2003. Our findings suggest that the probability of a firm ceasing to export is directly influenced by its productivity and other attributes associated with firm-level productivity differences (such as size and foreign ownership). Micro-finance factors, such as profitability and the ability to finance through long-term debt, play an additional role. Lastly, sectoral differences (e.g. industrial concentration) also help explain the firm’s exit decision, whilst trade costs lead to a higher probability of exiting from selling internationally.     

Is Scale and Cost Inefficiency in the Swiss Bus Industry a Regulatory Problem? Evidence from a Frontier Cost Approach

The aim of this study is to analyze the scale and cost inefficiencies in operation for the Swiss regional bus companies. For this purpose,we have considered estimation of a stochastic and a deterministic frontier cost model for a sample of 93 bus companies in 1989. The estimates of inefficiency from the frontier models are compared and discussed within the political and regulatory setting within which the Swiss regional bus companies operate. The empirical results indicate that regulation does not seem to influence the cost efficiency significantly. Only the tariff subsidies have a negative influence on efficiency. This is an interesting result because in the current transport policy debate, the abolition of this kind of subsidy has been raised.     

A Survivor Test of the American Agency System of Distributing Property Liability Insurance

In earlier work byjoskow and by Cummins and VanDerhei, the American Agency system of distribution has been deemed inefficient, i.e. excessively costly. We test this in a natural way by examining whether the system survives in competition with more efficient systems. We find that it survives, but is in steady decline.     

Double Deflation and the Measurement of Output and Productivity in UK Manufacturing 1979–89

The objective of this paper is to examine the impact of applying double deflation methods to the measurement of productivity growth in UK manufacturing between 1979 and 1989. A number of alternative indicators of output growth are considered and it is argued that double deflated value added is the superior concept to employ for the measurement of productivity. It is shown that output measured by double deflated value added fell by 0.05% over the period between 1979 and 1989 whereas the official series indicates that output rose by 12.2% over the period. Measuring productivity as output per person employed, the double deflated value added measure indicates that between 1979 and 1989productivity increased by 34%> whereas the official series indicates an increase of 51 %. Whereas the latter may indicate a productivity miracle the former does not     

Market Structure,Learning and Product Innovation: Evidence for the EPROM Market

The study analyses the market for semiconductor memory chips, in particular EPROMs. Semiconductors are very interesting industry for studying empirically the dynamics of innovation. Given the short product life cycles of generations of chips, the market dynamics unfold much more rapidly than in other industries and are therefore better amenable to empirical observation. One of the aims is to shed more light on the link between learning and the dynamics of product innovation, as well as their influence on market structure. Learning with an old generation turns out to be an important determinant for product innovation. The further down the firm has moved on the learning curve, the higher its market share, and the larger becomes the probability that the firm is an early innovator. The results are consistent with the persistence of leadership hypothesis.     

The Dynamics of Oligopoly Behavior: A Study of the US Cigarette Industry, 1955–90

This paper uses the comparative statics method of testing for a monopoly equilibrium to track the competitiveness of the US cigarette industry between 1955 and 1990. The degree of competition ranged from somewhat less than a Coumot–Nash equilibrium would imply to somewhat more. Although the industry's behavior was highly autocorrelated, there were periodic reversions to behavior that was much more competitive than the trend     

The Use of the Logit Model in Applied Industrial Organization

Qualitative choice models, such as the logit model, can capture important firm and product asymmetries. This paper surveys use of the logit model in industrial organization, with special focus on its application to merger analysis. The basic model and its motivation are reviewed, as is its estimation. Discussed in some detail is the use of the logit model to predict the price and welfare effects of horizontal mergers in differentiated products industries. Simulation using a qualitative choice model is argued to be far superior to traditional structural analysis. Logit merger simulations have the particular virtues of low informational and computational burdens and the use of the logit model can be motivated as reflecting a diffuse prior on the structure of demand.     

Sustainable Asset Growth and the Accounting Rate of Return in Not–For–Profit Organizations: Theory and Evidence

Parties needing to monitor the financial performance of not–for–profit (NFP) organizations have traditionally relied upon financial ratios of accounting data. This practice can lead to misleading inferences about profitability in relation to organizational needs, since accounting rates of return are potentially poor proxies for economic rates of return. In this paper we show how to compensate for the imprecision of the accounting rate of return through the use of a simple interpretive rule based on the finding that accounting and economic rates of return are on the same side of the growth rate. According to our rule, the accounting rate of return must exceed the asset growth rate in order to sustain growth with internally–generated cash flow. Logistic regressions are used to test the rule's ability to predict sustainable asset growth in a sample of NFP hospitals. The findings not only validate the rule, but also show that the rule exploits all usable information contained in the accounting rate of return     

Small Firms and the Strategy of the First Mover

Timing of entry and the decision to be a leader or follower in products or markets is a complex decision and empirical evidence suggests that first movers do not always 'capture' all the potential benefits from being first. Small firms in particular are faced with problems when deciding on whether to be a first or later mover. Their strategies were examined using a sample of 264 firms in chosen industry sectors and specific external and internal factors were found to explain much of the variation in timing of entry strategies by these firms. In particular a composite measure of the technological turbulence that firms faced in their supply chain was seen as a crucial determinant of early entry whilst uncertainty as to general business conditions explained much of the late and non pioneering strategies. Even within this group of small firms, size also played an important role with the smallest companies tending to be the most pioneering     

Privatization in Russia: What Should be a Firm?

This paper examines a variety of issues associated with the restructuring of Russian industry prior to privatization, from a transactions cost perspective. It is argued that none of the components of the industrial hierarchies inherited from the Soviet system corresponded closely to firms in a modem market economy. Moreover, product–level concentration of production created potential monopoly problems. Ideally, it would have been desirable to restructure Russian industry to create efficient organizations and competitive market structures prior to privatization. However, political and information constraints precluded widespread fine tuning of the existing industrial hierarchies prior to privatization. Given these constraints, the decision of the Gaidar government to focus privatization on ’enterprises’, i.e. the smallest organizational units within the industrial hierarchies, was sensible and led to significant deconcentration of Russian industry. Policies with regard to voluntary separation of subunits of enterprises and aggregation of enterprises prior to privatization also helped to promote deconcentration. Significant additional restructuring of Russian industry is expected now that the mass privatization has been completed.     

The Effects of UK Pharmaceutical Policy on Government Drug Expenditure: Cost Control and Incentives for R&D

This paper investigates the impact of UK pharmaceutical policy on the level of NHS pharmaceutical expenditure. UK pharmaceutical policy is one which has managed to control costs, but at the same time, has not sacrificed the rewards for conducting long-term R&D in the UK. The analysis provides evidence that the government policies which encourage long-term R&D and the development of new drugs actually lead to lower overall pharmaceutical expenditure by the NHS. The reason for this is attributed to the savings associated with the replacement of new drugs for other less effective drugs. Additional results show that the UK receives positive spillovers from the R&D conducted by US firms and this R&D has a cost reducing impact on NHS pharmaceutical expenditure.     

R&D Costs,Innovative Output and Firm Size in the Pharmaceutical Industry

This study examines the relationships between firm size, R&D costs and output in the pharmaceutical industry. Project–level data from a survey of 12 US–owned pharmaceutical firms on drug development costs, development phase lengths and failure rates are used to determine estimates of the R&D cost of new drug development by firm size. Firms in the sample are grouped into three size categories, according to their pharmaceutical sales at the beginning of the study period. The R&D cost per new drug approved in the US is shown to decrease with firm size, while sales per new drug approved are shown to increase markedly with firm size. Sales distributions are highly skewed and suggest that firms need to search for blockbuster drugs with above–average returns. The results are consistent with substantial economies of scale in pharmaceutical R&D, particularly at the discovery and preclinical development phases.