Center for Global Management

WHAT DETERMINES THE INDUSTRY SPECIALIZATION OF LOCATIONS: EUROPEAN IMMIGRANTS AND THE LOCATION OF U.S. INDUSTRIES (2019-20)

Sebastian Ottinger

Ph.D. student in global economics and management (entered 2016)

Silicon Valley employs more people in the IT industry than any other location in the U.S. Detroit employs more people in the auto industry than any other comparably sized city. Such clustering of industries in a few locations is common in the manufacturing sector. How do we explain where industries cluster?

Ottinger’s research helps to answer this question. When explaining the reason why specific locations are centers of industries, he purports that it is essential to understand how they became such centers in the first place. Anecdotal evidence suggests that where initial pioneers locate is a contributing factor. Early starts give locations a “first-mover” advantage and help them become and remain national and regional industrial centers.

Yet providing systematic empirical evidence that supports this account has proven difficult. Entrepreneurs choose where they set up shop wisely. Ottinger advocates that many European immigrants arriving in the second half of the 19th century were among such pioneers for the manufacturing belt in the United States. His research predicts that where immigrants set up shop was based on the settlement patterns of earlier immigrants. These earlier immigrants — predominantly farmers — chose locations because they were suitable for agriculture, not manufacturing. However, the immigrants that arrived later brought skills and knowledge to the then-novel manufacturing sector and set up pioneer establishments where the earlier immigrants had settled. Ottinger identifies the sectors that these immigrants were experienced and skilled in using historical trade data and calculating European origin countries’ specialization across various industries in the manufacturing sector. His research suggests that immigrants promoted the establishment of regional and national centers for manufacturing-based industries in the U.S. and that these locations have tended to remain centers until the present day.

The CGM support made a significant contribution to the progress of Ottinger’s research. Funding was used to hire a data digitization specialist to gather data on all traded goods and imports into the U.S. by trading partners in 1851, 1881 and 1909. This allowed Ottinger to manually match traded goods to particular manufacturing industries and then use this as a historical measure of specialization in manufacturing, thus strengthening the paper’s findings immensely. It also provided Ottinger the first harmonized data set on specialization at highly disaggregated industry levels covering almost all industrialized nations during the “First Globalization” from 1870 to 1914. Ottinger will make this data publicly available and is certain that this data source will find further uses to answer interesting questions in other domains by researchers around the world. Ottinger has disseminated his results widely and presented the findings in seminars at Harvard, Boston, and Brown universities. He also has presented the paper at two sessions of the National Bureau of Economic Research’s Summer Institute, as well as at the Econometric Society World Congress and Congress of the European Economic Association. The paper will be Ottinger’s job market paper at the end of the year. He is now working on two spin-off projects strongly related to the research.

INSTITUTIONAL DETERMINANTS OF GLOBAL VENTURE CAPITAL (2017-18))

Paul Momtaz

Ph.D. student in finance (entered 2017)

Around the globe, venture capital (VC) is an important financial intermediary, determining the success of entrepreneurial companies and, hence, the success of whole economies. Given the increasing globalization of business, a nation’s competitive advantage depends crucially on an active VC market. It is important to take a global approach to understanding VC activity and firm performance that acknowledges the role of regional idiosyncrasies and studies how to design optimal VC markets.

Momtaz’ research sheds light on the role of formal and informal institutions for the functioning of the global VC market. While the U.S. VC market has dominated the promotion of innovative startups for a long time, recent evidence suggests that venture capitalists are becoming more attracted to opportunities outside the U.S., with an increase in Asia’s VC market by 875 percent in only six years. It is important to understand the drivers behind this tectonic shift, as VC is at the heart of economic growth and crucially determines innovation. Momtaz’ research examines the role of how local rules and cultural factors determine the effectiveness and efficiency of the global VC market. In addition to traditional VC transactions, the research also focuses on initial coin offerings (ICOs) as a special and very disruptive case of global VC. This entailed the study of peer-to-peer VC transactions in which a traditional financial intermediary is absent.

Overall, CGM support made a significant contribution to the progress of the research. CGM funding was used to hire research assistants to gather, check and analyze data and create comprehensive and unique data sets on global VC transactions and ICOs. Because of the size of the database, a web server was set up to perform computations online and source real-time data from various web sources, using web-scraping methods. Some data had to be collected manually, such as accessing the World Bank databases and collecting social capital information on participating individuals, for example, CEOs and key investors from social networks such as LinkedIn and Xing. The next steps will involve further organizing and analyzing the data before proceeding to the main tests, including the setting up of econometric models. The data sets allowed key research questions to be addressed, such as: Why are international venture capitalists losing interest in funding mature U.S. companies, while they are increasingly investing in mature Asian companies? Why is the trend reversed for young companies? The data also enabled Momtaz to write his first empirical paper on the ICO phenomenon. Based on his research, Momtaz has been invited to act as the editor of a special issue on ICOs in The Journal of Alternative Investments. Moreover, the first paper based on the research supported by the CGM is forthcoming in a leading international entrepreneurship journal.

In 2018–19, the CGM is supporting Momtaz with global research under the working title “The Freelance Economy: Where Local Labor Supply Meets Global Labor Demand.”

HOW MUCH DOES YOUR BOSS MAKE? THE EFFECTS OF SALARY COMPARISONS (2016-17)

Ricardo Perez-Truglia

assistant professor of global economics and management

Funding from the Center for Global Management was used to support the design and implementation of field experiments with firms in the developing world. One of these projects studies the effects of salary comparisons in the workplace. When setting salaries, firms face a dilemma. On the one hand, setting unequal wages can provide incentives for employees to work harder and enable employers to retain their most productive workers. On the other hand, unequal pay may destroy motivation if employees dislike inequality. Professor Ricardo Perez-Truglia and Professor Zoe Cullen of Harvard Business School conducted a series of field experiments designed to understand the causes and consequences of salary comparisons inside a large corporation. The funding from the Center for Global Management was used to hire a part-time research associate who assisted with data collection, cleaning and analysis and facilitating meetings with the cooperating institution.

The experiment was conducted with 2,060 employees from a multibillion-dollar corporation in Asia. In addition to rich survey data about the satisfaction and expectation of these employees, the researchers collected unique data on the employees’ behavior, such as their effort, their productivity and their progression in the company (e.g., whether they stay with the company, are promoted or transferred). The authors show that employees have large and systematic misperceptions about the salaries of their managers and their peers. Moreover, they show that perceptions about the salaries of other employees have significant causal effects on their behavior. Whereas believing that one’s peers are paid better reduces effort, performance and retention, believing that the managers are better paid increases these same outcomes.

Findings from this project are of great business and management relevance. The finding that employees are substantially averse to horizontal inequality but tolerant of vertical inequality goes against the widespread view that social comparisons force firms to compress the salaries between bosses and subordinates. Also, this evidence can explain why firms provide most of the incentives in the form of promotions. The second project supported by this same CGM award looked at how inflation expectations affect firm and customer decisions.

In 2017–18, the CGM is supporting Perez-Truglia’s global research into management practices, focused on firms located in Asia.