LATEST WORKING PAPERS

WP438
Measuring Corporate Governance: Lessons from the 'Bundles Approach'
Dec 12 Schnyder, G.

Abstract:This paper reviews recent studies that analyse and criticise existing academic and commercial corporate governance (CG) indices. Most of these 'rating the ratings' papers reach the conclusion that encompassing composite measures of CG are ineffective and suggest therefore to return to simpler measures. This paper draws on the 'configurational-' or 'bundles approach' to CG and argues that, while the criticisms made by the 'rating the ratings' papers are justified, their recommendations are misguided. Based on four central insights derived from the 'bundles approach', the paper shows that reverting to simpler measures of firm-level CG practices is a step in the wrong direction, in that it eliminates information about interactions between different corporate governance mechanisms. This is particularly consequential for comparative CG research that aims to identify differences in country-specific CG systems. Alternative solutions are developed to improve corporate governance measures, which take into account insights from the 'bundles approach'.


WP437
Enhancing Islamic Finance: Establishing an Islamic Stock Market that overcomes Problems of the existing Stock market
Dec 12 Sheng, A. and Singh, A.

Abstract: This contribution is concerned with the desirability and feasibility of establishing Islamic stock markets within the current global context. There is at present deep disaffection with stock markets in advanced countries. A central contention of this paper is that the proponents of Islamic stock market will find it easier than their UK counterparts to implement an ethically based programme which is regarded as essential for successful reform. Stronger ethical underpinnings of the Islamic stock market will give it a decisive edge in world markets. The time for Islamic stock markets has therefore come.


WP436
Governing Externalities: The Potential of Reflexive Corporate Social Responsibility
Sep 12 Johnston, A.

Abstract: Externalities occur where an economic actor takes a decision which results in actions that affect other parties without their consent. In most cases, the creator of the externality will be a corporation because they are the most important actors in modern economies. There is a market failure as the corporation obtains all the benefits of the activity but does not bear all the costs.

Since Ronald Coase's seminal work, economists have generally argued that externalities should be dealt with either by instrumental regulation or by bargaining between the creator and victim. The regulator should choose between these two options on the basis of cost-benefit analysis. In particular, the costs associated with government intervention should be compared with the transaction costs confronting parties where they attempt to deal with the externality by means of a contract. Most economists assume regulatory costs (including the costs of producing and enforcing regulation and the distortions of economic activity to which it gives rise) will be very high, so the 'cure' of regulation will normally be worse than the 'disease' of externalities, making government intervention undesirable from an efficiency standpoint. This makes them sanguine about leaving many, or even most, externalities to the market, even though its failure led to the externality in the first place. They then assume that if the parties fail to reach agreement on a solution to a particular externality, this will be for transaction costs reasons, so leaving the externality where it falls is the most efficient outcome in the circumstances.

This paper argues that neither of these methods offers a wholly adequate way of dealing with externalities in a globalised economy characterised by factually and technologically complex chains of causation. As is widely recognised by sociologists as well as economists, instrumental regulation faces massive difficulties in dealing with externalities. It can also be argued that transaction costs are not the only barrier to bargaining. The result is that many externalities go uncorrected, and it cannot simply be assumed that this is an efficient outcome. The paper then argues that this governance 'gap' could be filled by the doctrine of Corporate Social Responsibility (CSR), but only if two conditions are met. First, CSR must be understood as corporations voluntarily taking responsibility for, or internalising, the externalities their operations create. This requires corporate decision-makers to change the frames they use so as to take account of the costs their activities create. Second, corporations must be steered towards a socially adequate identification and internalisation of those costs by the careful use of procedural, or reflexive, regulation. A reflexive regulatory approach to CSR would require corporations to meet with those who consider themselves affected in order to construct the 'facts' about the externality, and then require corporate decision-makers to internalise that externality in a manner which is acceptable to all concerned. This would arguably result in many externalities being identified and corrected in a cost-effective way, and should be considered as an alternative or complement to other methods of governing externalities.


WP435
Pathways to Impact and the Strategic Role of Universities
Sep 12 Hughes, A. and Kitson, M.

Abstract: There has been an increasing focus on the strategic role of universities in stimulating innovation and economic growth, primarily though the transfer of technology. This paper interrogates some of the key aspects of much of the conventional wisdom concerning the transfer of technology and the knowledge exchange process in general. It analyses the results from two unique surveys: a survey of the UK academic community which generated more than 22,000 responses; and stratified survey of businesses which generated more than 2500 responses. The paper shows that there are many knowledge exchange mechanisms used by academics - these include commercialisation processes but also many other 'hidden' connections. It also shows that knowledge exchange involves academics from all disciplines - not just those from science and engineering - and involves partners from the public and third (not for profit) sectors as well as private sector businesses. Furthermore, it shows that the main constraints that hinder or limit the knowledge exchange process include a lack of time, insufficient internal capability to manage relationships; and insufficient information to identify partners. Problems concerning cultural differences between academics and business and disputes concerning intellectual property are not prominent. Overall, the paper suggests that the notion of an academic 'ivory tower' seems to be a myth as far as the UK is concerned. It also suggests that a strategic focus on strengthening connections between academia and the rest of society may generate long-term benefits but it will also face challenges and should not distort or divert from the foundations of scholarship on which the success of universities are built.


WP434
The Econmics of Austerity
Jun 12 Konzelmann, S.

Abstract: The 2007/8 financial crisis has reignited the debate about austerity economics and revealed that it is a highly contested yet poorly understood idea. This article locates the debate in its historical context, tracing it from the early 18th and 19th century Classical debates, which focused mainly on the means by which fiscal deficits should be financed. As capitalism evolved, so did ideas and theories about the economics of austerity. Following World War One, concerns about high levels of government debt produced the 1920s 'Treasury view' - that government deficits are economically damaging and austerity is required to rein them in. During the 1930s Great Depression, when unemployment was the main concern, this perspective was challenged by the 'Keynesian view' - that government deficits could be economically beneficial during the slump, when the private sector was unable to generate sufficient effective demand to pull the economy out of depression. From this perspective, austerity was the policy prescription for the top of the business cycle, to prevent the economy from over-heating and igniting inflation. The 'stagflationary' crises of the 1970s challenged this view; and during the decades preceding the 2007/8 crisis, austerity was considered to be a policy for the bottom of the business cycle, when the excesses of a bubble-inflated boom had been revealed by its collapse. In the aftermath of the 2007/8 financial crisis, however, austerity no longer has the economic objective of macroeconomic stabilization. Instead, it has become the objective itself - demanded by actors in the international financial markets as evidence that governments are serious about managing their deficits and paying back their debts, thereby protecting the financial interests of investors in sovereign debt. However, if austerity undermines economic growth - as it is doing at present - markets are unlikely to remain loyal to those countries suffering the effect. It is therefore important that policy-makers and political leaders learn the lessons of the 2007/8 financial crisis with regard to the economics of austerity - before it is too late.


WP433
A Different Path to Growth? Service Innovation and Performance amongst UK Manufacturers
Jun 12 Tether, B. and Bascavusoglu-Moreau, E.

Abstract: Introducing and innovating services is advocated as a means by which manufacturing firms in advanced economies can retain or enhance their competitiveness. But little is known about how manufacturers innovate services, nor about the impact of service innovation on manufacturers' performance. Using two consecutive waves of the UK Innovation Survey, this paper first examines how manufacturers innovate services, comparing this with how they innovate goods (i.e., material products) and production processes. We find that manufacturers tend to innovate services differently: R&D is found to be unimportant, whilst investments in marketing and training are found to be related to service innovation. The paper then examines the impact of service innovation on performance, in terms of innovative sales per employee and total sales per employee. We find that service innovation does not increase innovative sales but is associated with higher total sales per employee.


WP432
The Evolution of Science Policy and Innovation Studies
Jun 12 Martin, B.R.

Abstract: This paper examines the origins and evolution of the field of science policy and innovation studies (SPIS). In particular, it seeks to identify the key intellectual developments in the field over the last 50 years by analysing the publications that have been highly cited by other researchers. Along with other studies reported in this Special issue, it represents one of the first and most systematic attempts to identify and analyse the most influential contributions to an emerging field on the basis of highly cited books and articles. The analysis reveals how the emerging field of SPIS drew upon a growing range of disciplines in the late 1950s and 1960s, and how the relationship with these disciplines evolved over time. Around the mid-1980s, SPIS started to become a more coherent field centred on the adoption of an evolutionary (or neo-Schumpeterian) economics framework, and an interactive model of the innovation process, and (a little later) the concept of 'systems of innovation' and the resource-based view of the firm. The article concludes with a discussion of whether SPIS is perhaps in the early stages of becoming a discipline.


WP431
Variety of Search and Innovation: A Comparative Study of US Manufacturing and Knowledge Intensive Business Services Sectors
Mar 12 Cosh, A. and Zhang, J.

Abstract: Whilst the variety of search activities promotes innovation, there is a central tension between a firm's potential benefits from wide and diverse search activities and its ability to reap these potential benefits. In this paper, we argue that the potential and realised benefits from a firm' search activities are influenced not only by its resources and capabilities, but also by the nature of innovation activities at sector level. Drawing upon a statistical analysis of a large scale survey conducted in the US, we examine the impact of a firm's external search strategy along two dimensions (search intensity and direction) on its innovative performance. Our findings suggest that manufacturing firms tend to benefit from wide and diversified search activities whereas knowledge intensive business services (KIBS) firms tend to benefit from narrow and specialised search activities. Furthermore, when taking account of firm size and absorptive capacity, a more nuanced picture emerges. Implications and contributions to the innovation search literature are discussed.


WP430
Islamic Finance Revisited: Conceptual and Analytical Issues from the Perspective of Conventional Economics
Mar 12 Sheng, A. and Singh, A.

Abstract: After a brief recent empirical sketch of Islamic finance, the paper turns to its main theoretical and conceptual purpose. It seeks to relate the concepts of Islamic and conventional finance, and to examine certain important questions which arise from the interaction between these systems. The paper is written from the perspective of conventional modern economics, as the authors are students of the latter.The paper discusses the main tenets of Islamic finance, as well as those of modern economics, including the implications of zero interest rates and those of Modigliani and Miller theorems. The most notable finding of this paper is that John Maynard Keynes' analysis of employment, interest and money provides, inadvertently, the best rationale for some of the basic precepts of Islamic finance. The paper concludes that there is no inevitable conflict between the two systems and cooperation between them is eminently desirable and feasible.


WP429
Capability Theory, Employee Voice and Corporate Restructuring: Evidence from UK case studies
Dec 11 Deakin, S. and Koukiadaki, A.

Abstract: We examine the relationship between capability for voice and corporate restructuring through an empirical study of the operation of the UK's Information and Consultation (I&C) Regulations of 2004. These Regulations, implementing an EU Directive, introduced elements of the continental European codetermination model into UK law, while allowing for flexibility and experimentation in forms of employee representation. Although the absence of a preferred role for trade unions in the establishment of I&C arrangements limited the scope for interaction with existing structures of collective bargaining, there is evidence that unions were able to use the new arrangements to extend their influence in some contexts. We also report evidence of deliberation mitigating the impact of restructurings on workforce morale and contributing to a longer-term perspective on skills in some firms. We conclude that the I&C model has unfulfilled potential in the UK context.


WP428
Indian Labur Law and its Impact on Unemployment, 1970-2006: A leximetric Study
Dec 11 Deakin, S. and Sarkar, P.

Abstract: We analyse a recently developed leximetric dataset on Indian labour law over the period 1970 to 2006. Indian labour law is seen to be highly protective of workers' interests by international standards, particularly in the area of dismissal regulation. We undertake a time-series econometric analysis to estimate the impact of the strengthening of labour laws on unemployment and industrial output in the formal economy. We find no evidence that pro-worker labour legislation leads to unemployment or industrial stagnation. Rather, pro-worker labour laws are associated with low unemployment, with the direction of causality running from unemployment and output to labour regulation.


WP427
Science and Technology Studies: Exploring the Knowledge Base
Sep 11 Martin, B., Nightingale, P. and Yegros-Yegros, A.

Abstract: Science and Technology Studies (STS) is one of a number of new research fields to emerge over the last four or five decades. This paper attempts to identify its core academic contributions using the methodology developed by Fagerberg et al. (2011) in their parallel study of Innovation Studies. The paper uses the references cited by the authors of chapters in a number of authoritative 'handbooks', based on the assumption that those authors will collectively have been reasonably comprehensive in identifying the core contributions to the field. The study analyses the publications most highly cited by the handbook authors, in particular examining their content and what they reveal about the various phases in the development of STS. The second part of the study analyses the 'users' of the STS core contributions who have cited these contributions in their own work, exploring their research fields, journals, and geographical location. The paper concludes with some comparisons between STS and the fields of Innovation Studies and Entrepreneurship, in particular with regard to the role of 'institution builders' in helping to develop a new research field.


WP426
Gender Inequality and Reflexive Law: The Potential of different regulatory Mechanisms for making Employment Rights effective
Sep 11 Deakin, S., McLaughlin, C. and Chai. D.H.

Abstract: We review the different regulatory mechanisms which have been used in the UK context to promote gender equality in employment over the past decade, including legal enforcement based on claimant-led litigation, collective bargaining, pay audits, and shareholder pressure. Evidence is drawn from case studies examining the effects of these different mechanisms on organisations in the public and private sectors, and from econometric analysis of the impact of stock market pressures on firms' human resource practices. We argue that there is scope for reflexive solutions to improve the effectiveness in practice of UK equality law, by inducing efficient disclosure by employers, setting default rules, and encouraging bargaining in the shadow of the law.


WP425
Open Innovation, the Haldane Principle and the new Production of Knowledge: Science Policy and University-Industry Links in the UK after the Financial Crisis
Sep 11 Hughes, A.

Abstract: This paper analyses science policy resource allocation in the light of a comparison of the open innovation and Mode 2 new production of knowledge conceptual frameworks. It provides a brief historical review of the evolution of science funding and the application of the Haldane principle in the UK. The core of the paper analyses academic and business attitudes to university-industry links using two recent large scale surveys and argues that there is a largely false dichotomy drawn between applied and basic research. University-industry links are already extensive and encompass a wide range of interactions than those captured by the usual debate over science engineering and narrow conceptions of commercialisation based on patenting and spin-outs.


WP424
Legal Evolution: Integrating Economic and Systemic Approaches
Jun 11 Deakin, S.

Abstract: This paper explores the scope for synthesis between economic and systemic approaches to the understanding of legal evolution. The evolutionary and epistemic branches of game theory predict that stable norms will emerge when agents share common beliefs concerning future states of the world. Systems theory see the legal order as a social system which reproduces itself by recursive acts of legal communication, thereby giving rise to self-reference and operational closure. At the same time, the legal system is cognitively open, that is to say, indirectly influenced by other social systems in its environment. This gives rise to the possibility of coevolution of law and the economy. It will be argued that systems theory, by developing the idea of law as an adaptive system with cognitive properties, provides a missing link in the evolutionary theory of norms. Recent game theoretical models imply that common knowledge is not entirely endogenous to agents' interactions, but depends to a certain extent on emergent normative structures. These include the public representations of common knowledge which are provided by the legal system. The paper will explore the implications of this idea, argue for an integrated economic and systemic analysis of legal evolution, and consider some of the theoretical and methodological implications of such a step.


WP423
An End to Consensus? The Selective Impact of Corporate Law Reform on Financial Development
Jun 11 Deakin, S., Sarkar, P. and Singh, A.

Abstract: Legal origins theory suggests that law reform, strengthening shareholder and creditor rights, should enhance financial development. We use recently created datasets measuring legal change over time in a sample of 25 developing, developed and transition countries to test this claim. We find that increases in shareholder protection contribute to stock market growth in the common law world and in developing countries, but not in the civil law world. We also find evidence of reverse causation, with financial development triggering legal changes in the developing world. We consider a number of reasons for the selective impact of law reform, focusing on the endogeneity of the legal system to its economic context, and on resulting complementarities between legal and financial institutions.


WP422
Anglo-Saxon Capitalism in Crisis? Models of Liberal Capitalism and the Preconditions for Financial Stability
Jun 11 Konzelman, S. and Fovargue-Davies, M.

Abstract: The return to economic liberalism in the Anglo-Saxon world was motivated by the apparent failure of Keynesian economic management to control the stagflation of the 1970s and early 1980s. In this context, the theories of economic liberalism, championed by Friederich von Hayek, Milton Friedman and the Chicago School economists, provided an alternative. However, the divergent experience of the US, UK, Canada and Australia reveals two distinct 'varieties' of economic liberalism: the 'neo-classical' incarnation, which describes American and British liberal capitalism, and the more 'balanced' economic liberalism that evolved in Canada and Australia. In large part, these were a product of the way that liberal economic theory was understood and translated into policy, which in turn shaped the evolving relationship between the state and the private sector and the relative position of the financial sector within the broader economic system. Together, these determined the nature and extent of financial market regulation and the system's relative stability during the 2008 crisis.


WP421
Financial Globalisation and Human Development
Jun 11 Singh, A.

Abstract: This paper is concerned essentially with the question, how does financial globalisation affect welfare? Orthodox theory suggests that because of greater risk-sharing between countries that financial liberalisation entails, there should be no welfare losses. Greater risk sharing should lead to greater smoothing of consumption and/or growth trajectories for developing countries. Yet there is widespread evidence of crises following liberalisation. Apart from these international macro-economic issues, it is argued here that financial globalization changes the very nature of capitalism from managerial to finance capitalism. This profoundly affects at the micro-economic level corporate governance, corporate finance and income distribution. Both macro- and micro-economic factors outlined here influence human development.


WP420
Equality Law and the Limits of the 'Business Case' for addressing Gender Inequalities
Mar11 McLaughlin, C. and Deakin, S.

Abstract: The 'business case' for gender equality rests on the claim that organisations can improve their competitiveness through improved diversity management, in particular by reducing turnover and training costs and minimising reputational and litigation risks arising from potentially discriminatory behaviour. It is also argued that through the mechanism of socially responsible investment (SRI), shareholders can put pressure on the management of listed companies to take gender issues more seriously. We assess these claims through an empirical study which draws on interviews with institutional investors engaged in SRI and with managers in a range of organisations in both the private and public sector. We find that organisations are increasingly responding to the argument that persistent gender inequalities represent a form of mismanagement of human resources, with negative implications for the delivery of services, in the public sector, and for the efficiency of the firm, in the private sector. Shareholder engagement, however, has so far had very little impact in this area. We discuss regulatory reforms, including tighter rules on firm-level disclosure of gender policies and practices, which could address these issues.


WP419
Global Imbalances, Under-Consumption and Over-Borrowing: The State of the World Economy and Future Policies
Mar11 Cripps, F., Izurieta, A. and Singh, A.

Abstract: This paper addresses the question of whether growth convergence can be sustained in the global economy without compromising welfare and without causing major crises. It employs a simplified stock-flow analytical framework to examine the proposition that the pace and pattern of global growth is conditioned by 'under-consumption' in some regions of the world and 'over-borrowing' in other regions. A baseline projection using the Cambridge-Alphametrics model (CAM) illustrates consequences of resumed global imbalances after the 2008-2009 crisis. An alternative scenario exemplifies the case in which China and India shift towards internal income redistribution and domestic demand orientated policies and suggests that this will not be sufficient to correct global imbalances or induce improved growth rates in other developing regions. Finally a more ambitious development perspective is simulated. Such a scenario requires internationally-coordinated policy efforts, with greater role for governments in the management of demand, income distribution and environmental sustainability, as well as measures to reduce instability of exchange rate and commodity markets.


WP418
Comparative Advantage, Industrial Policy and the World Bank: Back to First Principles
Mar11 Singh, A.

Abstract: This paper provides a critical analysis of the World Bank's new thinking on industrial policy. After outlining the changing perspectives on industrial policy put forward by the World Bank over the last three decades, we argue that the bank's economists have taken one step forward (the approval for the enhanced role of the state) but also one if not two steps backward (by strong encouragement to countries to seek their current comparative advantage in pursuing industrial policy). We argue that a critical analysis of the World Bank's policy stance on industrial policy as on other main issues is essential because of the institution's hegemony in policy analysis of economic development as well as its conditionality, which may now well include what this paper regards as its inappropriate industrial policy. The analysis in the paper combines classical contributions on international trade and the world economy, relevant economic history, as well as Krugman's comments on these issues in terms of modern economic analysis. The paper concludes with reflections on the appropriate industrial policy for developing countries that the World Bank should support.