Incumbent Italian Firms Invest in Cronyism, Not Innovation

I heard an intriguing paper at the January 2020 AEA meetings in San Diego. It shows that, at least in Italy, big incumbent firms protect their position more through investment in cronyism than through investment in innovation. The abstract of the NBER working paper version of the paper appears below.

Do political connections affect firm dynamics, innovation, and creative destruction? We study Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity – a result that we also confirm using a regression discontinuity design. We build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity.

The abstract quoted above is from:

Akcigit, Ufuk, Salome Baslandze, and Francesca Lotti. “Connecting to Power: Political Connections, Innovation, and Firm Dynamics.” NBER Working Paper #25136, National Bureau of Economic Research, Inc., Oct. 2018.

Amazon Enables Flourishing of Small Diverse Entrepreneurs

(p. A24) They are a religious community known for clinging to 18th-century fashions and mores — strict rules that keep men and women apart and constraints on attire, with men favoring black suits and formal hats and women in long sleeves and long skirts.

But when it comes to doing business, Hasidic Jews have become enamored with a distinctly 21st-century company: Amazon.

The ability to sell merchandise easily and relatively anonymously on Amazon has transformed the economies of Hasidic enclaves in Brooklyn, suburban New York and central New Jersey, communities where members prefer to keep to themselves and typically do not go to college, let alone graduate from business programs.

But Amazon allows Hasidim to start selling without much experience and without making the investments required by a brick-and-mortar store. It permits Hasidic sellers to deal with the public invisibly — almost entirely by mail, by email or through package-delivery firms.

“Amazon doesn’t ask for your résumé,” said Sam Friedman, a marketer who designs trade show exhibits and works with many Amazon sellers. “And your picture is not on your business. The investment is minimal. You can work out of your bedroom.”

. . .

If Amazon is fulfilling orders, the business may effectively be running on Sabbath and Jewish holidays, though how that is carried out is the subject of vigorous debate. With a Talmudic twist of logic, some Hasidic entrepreneurs take on a non-Jew as a presumptive partner, attributing profits made on the Sabbath to that person.

. . .

Mr. Friedman is . . . organizing a business, advertising and marketing expo in Brooklyn in December [2019] to help Hasidic merchants expand their online sales by contracting with experienced copy writers, web designers, videographers and other professionals whose occupations the Talmudic Sages never even dreamed of.

“We’re not college students,” Mr. Friedman said, “but the yeshiva makes us smart enough to figure things out.”

For the full story, see:

Joseph Berger. “Insular Hasidic Communities Embrace Selling on Amazon.” The New York Times (Thursday, October 17, 2019): A24.

(Note: ellipses, and bracketed year, added.)

(Note: the online version of the story has the date Oct. 16, 2019, and has the title “How Amazon Has Transformed the Hasidic Economy.” The online version says that the article was on p. A26 of the New York edition. The article was on p. A24 of my National edition.)

E.U. Consumers Benefit from Telecommunications Deregulation

(p. A23) When Thomas Philippon moved to Boston from his native France 20 years ago, he was a graduate student on a budget, and he was happy to discover how cheap American telephone use was. In those days of dial-up internet connections, going online involved long local phone calls that could cost more than $10 apiece in France. In the United States, they were virtually free.

. . .

Today, his parents pay about 90 euros (or $100) a month in the Paris suburbs for a combination of broadband access, cable television and two mobile phones. A similar package in the United States usually costs more than twice as much.

. . .

The irony is that Europe is implementing market-based ideas — like telecommunications deregulation and low-cost airlines — that Americans helped pioneer. “E.U. consumers are better off than American consumers today,” Philippon writes, “because the E.U. has adopted the U.S. playbook, which the U.S. itself has abandoned.”

For the full commentary, see:

Leonhardt, David. “Big Business Is Overcharging You.” The New York Times (Monday, November 11, 2019): A23.

(Note: ellipses added.)

(Note: the online version of the commentary has the date Nov. 10, 2019, and has the title “Big Business Is Overcharging You $5,000 a Year.”)

Philippon’s views on competition are elaborated in his book:

Philippon, Thomas. The Great Reversal: How America Gave up on Free Markets. Cambridge, MA: Belknap Press, 2019.

When Swedish Furniture Makers Boycotted Ikea, Kamprad Found Furniture Makers in Poland

(p. A9) To encourage frugality in his workers, Mr. Kamprad was happy to offer himself as an example. He was known for reusing tea bags, flying economy class and taking public transport to airports. Even as a billionaire, he dickered over vegetable prices at farmers markets.

“Wasting resources is a mortal sin at IKEA,” he wrote in a guidebook for employees. “We do not need fancy cars, posh titles, tailor-made uniforms or other status symbols.”

He knew about global supply chains long before they were the norm. Rival retailers in the 1950s pressured Swedish furniture makers into boycotting the disruptive IKEA. So Mr. Kamprad visited Poland in the early 1960s and found primitive factories that, with training and tools from the Swedes, could make wooden furniture at much lower prices. (One problem: Some trees harvested in Poland still contained bullets from World War II.) Poland and China became two of the company’s main suppliers.

. . .

He assured his employees they had a noble mission: helping the masses afford comfortably furnished homes.

For the full obituary, see:

James R. Hagerty. “IKEA Founder Built Retailer by Keeping It Simple.” The Wall Street Journal (Saturday, Feb. 3, 2018): A9.

(Note: ellipsis added.)

(Note: the online version of the obituary has the date Feb. 2, 2018, and has the title “Ingvar Kamprad Made IKEA a Global Retailer by Keeping It Simple.”)

Amazon Will Fund Employees to Quit and Found Delivery Startups

(p. B6) First, Amazon made two-day shipping the norm. Now, as it aims to cut that to a single day, the company is encouraging its employees to quit and start their own delivery businesses.

Under a new incentive program, announced on Monday, Amazon said that it would fund up to $10,000 in start-up costs and provide three months of pay to any employee who decides to make the jump.

The new incentives build on a program the company started last June to encourage anyone, employee or not, to get into the competitive business of last-mile package delivery.

“We’ve heard from associates that they want to participate in the program but struggled with the transition,” Dave Clark, senior vice president for worldwide operations, said in a statement. “Now we have a path.”

For the full story, see:

Niraj Chokshi. “Amazon Has A Novel Idea For Delivery.” The New York Times (Tuesday, MAY 14, 2019): B6.

(Note: the online version of the story has the date MAY 13, 2019, and has the title “Amazon Will Pay Workers to Quit and Start Their Own Delivery Businesses.”)

Clayton Christensen Wrongly Predicted Bombardier Would Disrupt Boeing

Clayton Christensen and co-authors predicted in Seeing What’s Next that Bombardier was well-positioned to use disruptive innovation to leapfrog Boeing and Airbus.

(p. B8) Mitsubishi Heavy Industries Ltd. said it would acquire Bombardier Inc.’s regional-jet business for $550 million in a transaction that puts the companies on different paths in the aviation sector.

The deal unveiled Tuesday [June 25, 2019] marks the Canadian company’s exit from the commercial passenger-aircraft business following failed bets that it could compete with Airbus SE and Boeing Co. in the 100-seat single-aisle plane category.

Bombardier has restructured its aviation division over the past two years, highlighted by its joint venture with Airbus that put the European plane maker in charge of the production and sales of the 110- to 130-seat planes that the Montreal company had originally conceived as the CSeries. Those jets are now rebranded as the Airbus A220.

For the full story, see:

Vieira, Paul. “Bombardier to Sell Jet Unit.” The Wall Street Journal (Wednesday, June 26, 2019): B8.

(Note: bracketed date added.)

(Note: the online version of the story has the same date June 25, 2019, and has the title “Mitsubishi to Acquire Bombardier’s Regional Jet Unit for $550 Million.”)

The Christensen book mentioned above, is:

Christensen, Clayton M., Scott D. Anthony, and Erik A. Roth. Seeing What’s Next: Using Theories of Innovation to Predict Industry Change. Boston, MA: Harvard Business School Press, 2004.

The “Amazon Effect”: Customers Now Expect Other Sellers to Deliver Reliably Fast

(p. B4) Many Amazon.com Inc. customers have become accustomed to reliable two-day shipping, forcing other retailers to offer similar service. Businesses are making new demands of their suppliers as they trim inventories and reduce supply-chain costs. Wal-Mart Stores Inc. in July said it would penalize companies that made deliveries too late or too early.

“It’s the Amazon effect—customers are putting more pressure on their supplier to know where their product is,” said Bart De Muynck, a supply chain analyst with Gartner Inc.

For the full story, see:

Jennifer Smith. “‘Amazon Effect’ Engenders Deals for Tracking Firms.” The Wall Street Journal (Wednesday, Aug. 30, 2017): B4.

(Note: the online version of the story has the date Aug. 29, 2017, and the title “‘Amazon Effect’ Sparks Deals for Software-Tracking Firms.” Where there are minor differences in wording, the passages quoted above follow the online version.)