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Working papers: 2004

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WP297: Responsible Ownership, Shareholder Value & the New Shareholder Activism

Richard Barker, Paul Sanderson, John Hendry, John Roberts

In this paper we use interview data to explore the 'new shareholder activism' of mainstream UK institutional investors. We describe contemporary practices of corporate governance monitoring and engagement and how they vary across institutions, and explore the motivations behind them. Existing studies of shareholder activism mainly assume that it is motivated by a desire to maximise shareholder value, and we find some evidence both of this and of alternative political/moral motivations related to ideas of responsible ownership. We conclude, however, that in the current situation both these act primarily as rationalisations rather than as genuine motivators. The main driving force behind the new shareholder activism is the institutions' own profit maximisation and the need to position themselves against competitor institutions in the context of political and regulatory changes that have significantly changed the non-financial expectations of their clients.

WP296: Owners, Traders & Providers of Capital: The Multiple Faces of Institutional Investors

Richard Barker, Paul Sanderson, John Hendry, John Roberts

We draw on a series of in-depth interviews with senior fund managers and senior company executives to explore how different and often-contradictory conceptualisations of institutional investors, their role in the corporate governance process, and their interactions with corporate management, are reflected in the attitudes and perceptions of the actors concerned. We find that while conceptualisations in terms of agency and ownership dominate both academic and popular discourses, the actors conceptualise institutional investors more as financial traders and, from the management perspective, politically powerful resource providers.

WP295: Motor Vehicle Recalls: Trends, Patterns & Emerging Issues

Hilary Bates, Nick Oliver, Matthias Holweg, Michael Lewis

This paper examines patterns and trends in motor vehicle safety recalls using a dataset based on 23.1 million vehicles registered in the UK between 1992 and 2002. A safety recall occurs when vehicle manufacturers call vehicles that have been sold and are in use back to their dealerships for safety-related remedial work. Safety recalls can be costly for car makers, and potentially harmful to brand and image. The data show that the incidence of vehicle recalls has been increasing - between 1998 and 2002 there was an average of over 120 recall incidents per annum in the UK, compared to less than 50 per annum between 1992 and 1994. Total numbers of vehicles recalled show no trend over time, but absolute level of recalls year on year is very high: 10.8 million vehicles were recalled during 1992-2002, representing 47% of all vehicle registrations in the period. Moreover, there are substantial differences in recall rates between different car manufacturers, suggesting that recall rates may be a useful final indicator of process performance in the car design-and-production chain. European and American producers have recall rates that are nearly three times greater than their East Asian counterparts. This paper offers some suggestions for corporate differences in propensity to recall, and concludes with an agenda for further research.

WP294: Reflexive Law, Corporate Social Responsibility & the Evolution of Labour Standards: The Case of Working Time

Catherine Barnard, Simon Deakin, Richard Hobbs

Through an empirical study of working time in the United Kingdom, we explore the scope for initiatives based on corporate social responsibility (CSR) to engender voluntary action by employers to raise labour standards. Our evidence suggests that a CSR-based approach faces considerable problems of implementation in this area, in large part because the legal mechanisms which might underpin CSR ('reflexive law') have not yet been effectively developed.

WP293: The Corporate-Fund Management Interface: Objectives, Information & Valuation

Richard Barker, Paul Sanderson, John Hendry, John Roberts

Fund managers are the primary investment decision-makers in the stock market, and corporate executives are their primary sources of information. Meetings between the two are therefore central to stock market investment decisions but are surprisingly under-researched. There is little in the academic literature concerning their aims, content and outcomes. We report findings from interview research conducted with chief financial officers and investor relations managers from FTSE 100 companies and with chief investment officers and fund managers (FMs) from large institutional investors. Of particular interest we note that FMs place great reliance on discounted cash flow valuation models (despite informational asymmetry in favour of CFOs). This leads the former to seek to control encounters with the latter and to place great store on the clarity and consistency of corporate messages, ultimately relying on them for purposes other than estimating fundamental value. We consider some of the consequences of this usage.

WP292: Incentives for Knowledge Production with Many Producers

Bronwyn H. Hall

In this paper, I briefly review the motivations for inventive behavior and describe two common incentive systems that harness and encourage such behavior. This review of well-trodden ground is performed only so that the implications of the rise of the networked knowledge economy for the effectiveness of these incentive systems can be noted. Some theoretical results on the operation and stability of the two incentive systems for the production of knowledge are presented with a discussion of how they might apply in the networked economy. The paper concludes with suggestions on open research questions.

WP291: Exploring the Patent Explosion

Bronwyn H. Hall

This paper looks more closely at the sources of patent growth in the United States since 1984. It confirms that the increase is largely due to US patenters, with an earlier surge in Asia, and some increase in Europe. Growth has taken place in all technologies, but not in all industries, being concentrated in the electrical, electronics, computing, and scientific instruments industries. It then examines whether these patents are valued by the market. We know from survey evidence that patents in these industries are not usually considered important for appropriability, but are sometimes considered necessary to secure financing for entering the industry. I compare the market value of patents held by entrant firms to those held by incumbents (controlling for R&D). Using data on publicly traded firms 1980-1989, I find that in industries based on electrical and mechanical technologies the market value of entrants' patents is positive in the post-1984 period (after the patenting surge), but not before, when patents were relatively unimportant in these industries. Also, the value of patent rights in complex product industries (where each product relies on many patents held by a number of other firms) is much higher for entrants than incumbents in the post-1984 period. For discrete product industries (where each product relies on only a few patents, and where the importance of patents for appropriability has traditionally been higher), there is no difference between incumbents and entrants.

WP290: In the Mirror of the Market: the Disciplinary Effects of Company/Fund Manager Meetings

Richard Barker, Paul Sanderson, John Hendry, John Roberts

We consider the consequences of the regular private meetings between directors of FTSE 100 companies and their major institutional shareholders. Whilst the economic incentives for both the flow of information and the formation of 'strategic informational relationships' between the two have been described elsewhere, little attention has been paid to date to the effects that increased levels of monitoring and surveillance have on the conduct and performance of company directors. We present findings from a qualitative study in which we interviewed finance directors and fund managers, and observed a series of meetings between them. We draw on Foucault's analysis of the operation of disciplinary power to suggest that the meetings serve as ritual reminders to directors that their primary objective must be the pursuit of shareholder value, a task that whilst empowering, may also have unintended consequences.

WP289: Reforming the Governance of Corporate Rescue: The Enterprise Act 2002

John Armour, Rizwaan Jameel Mokal

English corporate insolvency law has been reshaped by the Enterprise Act 2002. The Act was intended to 'to facilitate company rescue and to produce better returns for creditors as a whole'. Administrative receivership, which placed control of insolvency proceedings in the hands of banks, is for most purposes being abolished. It is being replaced by a 'streamlined' administration procedure. Whilst it will still be possible for banks to control the appointment process, the administrator once in office owes duties to all creditors and must act in accordance with a statutory hierarchy of objectives. In this article, we seek to describe, and to evaluate, this new world of corporate rescue.

WP288: Corporate Governance, Competition & Finance: Rethinking Lessons from the Asian Crisis

Ajit Singh, Jack Glen

This paper critically examines the Greenspan-Summers-IMF thesis concerning the Asian crisis, which suggested that the fundamental causes of the Asian crisis lay in the microeconomic behavior of economic agents in these societies - in the Asian way of doing business. The paper concentrates on corporate governance and competition in emerging markets and outlines the international significance of these issues in the context of the New International Financial Architecture and the Doha Development Round at the WTO. It reviews new analyses and fresh evidence on corporate governance, corporate finance and on competition in emerging and mature markets, to suggest that the basic thesis above is not valid and the consequent policy proposals are therefore deeply flawed.

WP287: Has China's Economic Reform Improved Enterprise Performance? A DEA Evaluation of China's Large & Medium Enterprises

Yang Qing Gong

This paper attempts to investigate whether China's economic reform has improved enterprise performance, and what determine enterprise efficiency in the context of China's transition. Contrast to the results of improving enterprise performance measured by TFP from other studies, we find that there is a general tendency of divergence of enterprise efficiency rather than a convergence of firm's efficiency as is expected from a competitive market. Further econometric analysis suggests that firms of different ownership types seem to respond similarly to catch up with technology frontier, enterprise reform characterised by profit retention program have improved firms' efficiency at the initial stage of reform, and market competition seems to be working, but ineffectively.

WP286: Exports, FDI, Growth of Small Rural Enterprises & Employment in China

Xiaolan Fu, VN Balasubramanyam

This paper analyses the growth of employment in China during the post reform period. It argues that the Chinese experience with export-led growth provides an excellent example of the phenomenon of a vent for surplus productive capacity provided by exports, identified by Adam Smith in the Wealth of Nations and elaborated by Hla Myint. The paper extends the Smith-Myint model of 'vent-for-surplus' productive capacity to 'vent-for-surplus' resources by allowing foreign investment inflows. The 'vent-for-surplus' effect of exports on employment growth is examined in a dynamic labour demand framework for a panel of township and village enterprises (TVEs) in China.

WP285: Multinationals in Developing Communities: How EU Multinationals Build Social Capital in Poland

Ian W. Jones, Chris M. Nyland, Michael G. Pollitt

Corporate Social Responsibility (CSR) is usually an area that does not lend itself easily to inter-company or cross-country analysis. This paper is an attempt to provide some metrics of multinational CSR drawing on the recent literature on social capital. We look at the self-reporting of social engagement in Poland by European multinational firms with operations there, mapping the configurations of declared engagement. Such social engagements are an important component of how these companies contribute to social capital in the communities within which they operate. We find high performance by some firms, with stronger performance depending upon the multinational's country of origin. Two case studies - on Bayer and Danone - detailing different but successful approaches to social capital building are given.

WP284: Entry, Exit & the Dynamics of Productivity Growth in Chinese Manufacturing Industry

Yang Qing Gong

In this paper we have attempted to examine aspects of the competitive selection process, firms' entry, survival and exit, in an important sector of Chinese manufacturing, looking in particular for changes resulting from the latest stage of reform, dubbed the transition to the "socialist market economy". These dynamic processes may be becoming increasingly important for the continuing growth of manufacturing, as the agricultural sector as a source of surplus labour begins to decline.

WP283: Between the Global & the Local: A Comparison of the British & German Clothing Industry

Christel Lane, Jocelyn Probert

The clothing industry is regarded as one the most globalised industries of developed economies, yet most studies focus on the geography of production for US firms and pay scant attention to the geography of trade or to other national cases. This paper broadens the perspective to cover the whole network of German and British clothing firms' relationships by examining both their supply chain organisation and their market strategy, including their relations with retailers. It demonstrates the interdependencies between their strategic responses at different stages of the value chain and shows that relationships with both suppliers and customers have strongly defined the industry and firms in both countries, albeit differently. The global context of the clothing industry and the common pressures experienced by the national industries are also considered. We draw on industry statistics and on early impressions from interviews with clothing firms and retailers in both countries during 2003.

WP282: Opting Out of the 48-hour Week - Employer Necessity or Individual Choice? An Empirical Study of the Operation of Article 18(1)(b) of the Working Time Directive in the UK

Catherine Barnard, Simon Deakin, Richard Hobbs

The EU Working Time Directive has so far had little impact on an ingrained culture of long-hours working in the UK. Case studies suggest that the use of individual opt-outs from the 48-hour limit on weekly working time is a principal reason for this. However, removal of the individual opt-out (currently under consideration at EU level) is unlikely to make much difference to UK practice in the absence of a wider review of working time policy. In particular, the UK's individualised system of workplace bargaining is currently ill-placed to adapt to a continental European model of working time regulation.

WP281: The Legal Road to Replicating Silicon Valley

John Armour and Douglas Cumming

Must policymakers seeking to replicate the success of Silicon Valley's venture capital market first replicate other US institutions, such as deep and liquid stock markets? Or can legal reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 13 years of data spanning an entire business cycle. We show that the legal environment matters as much as the strength of stock markets; that government programmes more often hinder than help the development of private equity, and that temperate bankruptcy laws stimulate entrepreneurial demand for venture capital. Our results provide generalisable lessons for legal reform.

WP280: The Impact of Regulatory Stringency on the Foreign Direct Investment of Global Pharmaceutical Firms

Beth Ahlering

Cross-national regulatory differences in safety, price and intellectual property protection are an inherent feature of the operating environment of the global pharmaceutical firm. Institutional, transaction cost and more recent 'race to the bottom' theories assume that regulation represents a cost to the firm; therefore firms 'vote with their feet' and avoid investment in stringently regulated markets. However, a cross-national empirical study of the FDI levels of 20 firms across 19 markets reveals that regulatory stringency is not related to FDI, and price control stringency is positively related to FDI, when controlling for other market factors. National governments are not powerless in games of regulatory arbitrage, and have in fact developed adaptive strategies to maintain high regulatory standards and FDI simultaneously. Furthermore, global firms weigh various factors in their investment decisions, and suffer from classic optimisation problems, including information asymmetries and bounded rationality, which prevent total 'regulatory optimisation'. The implications for existing theories of international business, globalisation and regulation are discussed.

WP279: Labour Standards & the "Race to the Bottom": Rethinking Globalisation & Workers Rights from Developmental & Solidaristic Perspectives

Ajit Singh and Ann Zammit

There is a protracted stalemate between rich (the North) and poor (the South) countries over the question of minimum labour standards in developing economies. This paper is a sequel to Singh and Zammit (2000). It considers afresh key issues in the controversy. While fully recognising the moral, political and philosophical dimension of this complex issue, the paper concentrates on the central economic question of the "race to the bottom". It emphasises the difficulties of establishing labour standards in the vast informal sectors in developing countries and suggests that the ILO conventions 87 and 98 should be amended to properly reflect these concerns. It also argues that ILO core conventions should be broadened to include the right to decent living. The overall conclusion is that labour standards are important indicators of economic development but their promotion is best achieved in a non-coercive and supportive international environment such as that provided by the ILO.

WP278: Exports, Technical Progress & Productivity Growth in Chinese Manufacturing Industries

Xiaolan Fu

Theories suggesting either static or dynamic productivity gains derived from exports often assume the prior existence of a perfect market. In the presence of market failure, however, the competition effect and the resource reallocation effect of exports on productive efficiency may be greatly reduced; and there may actually be disincentives for innovation. This paper analyses the impact of exports on total factor productivity (TFP) growth in a transition economy using a panel of Chinese manufacturing industries over the period 1990-1997. TFP growth is estimated by employing a non-parametric approach and is decomposed into technical progress and efficiency change. We have not found evidence suggesting significant productivity gains at the industry level resulting from exports. Findings of the current study suggest that, for exports to generate significant positive effect on TFP growth, a well-developed domestic market and a neutral, outward-oriented policy are necessary.