Research Roundup: February 2023

Globalization Is Alive and Well

As the relationship between the U.S. and China becomes increasingly strained, some experts believe that the world is witnessing the beginning of the end of globalization. They predict that a fallout between the two countries will lead to a “bifurcated” economy in which global interactions fall into two camps: those among China and its allies and those among the U.S. and its allies.

Not so fast, say four co-authors of an analysis recently published in the Journal of International Business Studies. They argue that the two global superpowers have too much to lose from disengaging from each other, so that the forces of globalization will remain intact.

The co-authors include Ilan Vertinsky, professor of international business, and Yingqiu Kuang, research fellow of data science, both of the University of British Columbia in Vancouver; Dongsheng Zhou, professor of marketing at the China Europe International Business School in Shanghai; and Victor Cui, associate professor of entrepreneurship, innovation, and global strategy at the University of Waterloo in Ontario.

As an example of what’s at stake, the researchers cite an Oxford Economics report, which finds that U.S. trade with China saves every American family an average 850 USD in living expenses annually. In 2019, U.S. companies generated 50 billion USD in profits from trade with China. Likewise, China has seen its exports grow from 2.35 trillion USD in 2015 to 2.65 trillion in 2020, according to the OECD.

Moreover, the co-authors believe that the U.S. government has overstated the extent to which China’s technological innovation threatens natural security. It’s more likely that China will be unable to sustain its technological innovation due to its top-down control of research and its increasing shortage of young workers. “We expect China’s threat will slowly disappear,” says Cui. “Once the fear of China’s rise declines in the U.S., we expect the disengagement to slow down and even dissipate.”

Disengagement also would significantly hinder the entire world’s ability to manage global threats such as climate change, inflation, and future pandemics. It could even lead to increased military conflict. For these reasons, Cui adds, “Globalization is not over.”

Conflict Increases as Temperatures Rise

In another recent study focused on political tensions, researchers have developed a framework that links fluctuations in global temperatures to increases in global conflicts. Their framework shows that periods of high temperatures are associated with a rise in social unrest, ranging from rebel bombings of government resources to civilian protests against state oppression.

The study was conducted by a multidisciplinary team that includes Ujjal Kuma Mukherjee, associate professor of business administration the Gies College of Business at the University of Illinois at Urbana-Champaign; Benjamin Bagozzi, professor of political science at the University of Delaware in Newark; and Snigdhansu Chatterjee, professor of statistics at the University of Minnesota in Minneapolis.

Periods of high temperatures are associated with a rise in social unrest, ranging from rebel bombings of government resources to civilian protests against state oppression.

“International cooperation on climate change mitigation efforts have been premised on the notion that harmful social and economic activities in one region can spill over into other regions through greenhouse gas emissions, global warming, and the aftereffects of extreme climate events,” says Mukherjee in an article on the University of Illinois website.

He points to the farmer protests in India, which are in response to changes both farmers and the government are making to adapt to shifts in climate patterns. While not uncommon, these types of conflicts could be further exacerbated by rising temperatures. Such occurrences, he adds, “are likely to reverberate regionally, because everyone depends on agriculture and mineral resources.”

Policymakers and researchers have focused primarily on the impact of climate change on human health, economic activity, and competition for resources, but less on social conflict, says Mukherjee. “Researchers, particularly political science researchers, should be interested in our framework from a methodological standpoint, because they can take the model and analyze similar data that can help in policymaking.”

More Fraud Than Meets the Eye

When high-profile corporate fraud comes to light, it invariably attracts the heightened attention of regulators. But how much fraud goes undetected? That was the question that intrigued finance professors Alexander Dyck of the University of Toronto’s Rotman School of Management; Adair Morse of the Haas School of Business at the University of California, Berkeley; and Luigi Zingales of the University of Chicago Booth School of Business.

In a paper published in the Review of Accounting Studies, the team examined reports involving financial malfeasance, including financial misrepresentations, financial restatements, enforcement releases by the U.S. Securities and Exchange Commission (SEC), and legal prosecutions of insider trading by the SEC. The researchers focused their analysis on the time period from 1997 to 2005, which centers around the 2001 collapse of auditing firm Arthur Andersen.

The timing of Arthur Andersen’s downfall gave the researchers a unique opportunity: They were able to compare instances of financial fraud detected prior to 2001 with those detected among former Andersen clients afterward, when companies were under far greater scrutiny.

The team discovered that, after Arthur Andersen’s collapse, three times more fraud was detected among former Andersen clients than among non-Andersen companies. From this finding, the researchers infer that at least 10 percent of U.S. companies are engaged in some level of fraud. The level of fraud in Canada, they add, is likely no different.

After Arthur Andersen’s collapse, three times more fraud was detected among former Andersen clients than among non-Andersen companies.

This analysis supports previous research that estimates the true incidence of corporate fraud to be between 10 percent and 18 percent. Dyck, Morse, and Zingales estimate that such fraud would decrease the equity value of companies by 1.6 percent—equivalent to 830 billion USD—primarily due to a company’s diminished reputation among those aware of what’s happening behind the scenes.

“I spend a lot of time running a program for directors of public corporations,” says Dyck. “I tout this evidence when I say, ‘Do I think you guys should be spending time worrying about these things? Yes. The problem is bigger than you might think.’”

The Benefits of Managerial Ambidexterity

Sometimes business organizations have more to gain from cooperating, not competing, with rival firms. This strategy—otherwise known as “coopetition”—can be the key to maximizing innovation. But for rival companies to engage in coopetition effectively, they need what a recent paper calls “ambidextrous managers.”

The paper, recently published in the International Journal of Operations and Production Management, is co-authored by Chandrasekararao Seepana, lecturer in digital business and analytics at the University of Bristol’s School of Management in the U.K.; Antony Paulraj, professor of operations and supply chain management at NEOMA Business School in France; and Palie Smart, professor of operations management at the University of Bristol.

The researchers surveyed 313 companies that are collaborating with their competitors. The team asked these companies for perspectives on three areas: the role of joint investment in innovation, the skills required for successful innovation, and the ways managers can convert shared resources into successful innovation.

Organizations surveyed emphasized that, to maximize the innovation process, rival firms must do more than simply share skills and resources. Instead, they must employ ambidextrous managers who not only can use combined existing resources effectively, but also explore new possibilities by training staff, creating new products, and designing new processes. When managers can handle both tasks at once, the researchers note, firms can achieve the greatest mutual advantage.

“Coopetition involves risk and uncertainty, which can be mitigated by ambidextrous managers. It has become a tactic that is not just reserved for industrial heavyweights. Smaller companies and even SMEs now look to it as a way to foster innovation,” says Paulraj. “Our analysis demonstrates that ambidextrous management is essential for ambidextrous innovation, which involves both the improvement of existing products and services, and the invention of new ones.”  

CEO Pay Dips When Liberals Lead

When left-leaning politicians are elected, their actions can have a direct impact on CEO pay. That’s the finding of three finance professors in an article that appears in the Journal of Corporate Finance. The co-authors include Dimitris Petmezas and Nan Xiong, both of Durham University Business School in the U.K., and Bunyamin Onal of Sabanci Business School in Türkiye.

Using the Database of Political Institutions, which collects data related to political parties and their tenure in governments worldwide, the three analyzed political transitions in 23 countries between 2000 and 2017. They then analyzed Standard & Poor’s Capital IQ data related to the firm characteristics and executive pay at nearly 11,000 companies during the same time period.

Petmezas, Xiong, and Onal found that under liberal-leaning governments, CEO pay is reduced by almost 6 percent—primarily due to reductions to bonus amounts. In contrast, when liberal-leaning leaders are voted out and non-left-leaning leaders are voted in, CEO pay increases by an average of nearly 3 percent.

Under liberal-leaning governments, CEO pay is reduced by almost 6 percent. When non-left-leaning leaders are voted in, CEO pay increases by an average of nearly 3 percent.

This pattern can happen for two reasons, says Xiong. First, a compensation committee might be influenced to reduce CEO pay by a government’s pro-income-equality sentiment. Second, because CEO pay must be publicly disclosed, a committee might want to maintain the public’s positive perception of the company.

As wealth inequality becomes a growing problem worldwide, CEO compensation—now 324 times that of the average worker—has come under greater scrutiny. These findings, which quantify the impact different political ideologies can have on wealth inequality, might be of interest to voters deciding whom to vote for in upcoming elections, the researchers note.

“Left and non-left-leaning governments have different approaches to tackling this,” says Petmezas. However, he adds, these findings show that left-leaning policies “are more effective in reducing the inequality between employers and their CEOs and tackling the widening inequalities in their respective countries.”

Research in the News

■  Projects explore AI’s potential benefits for the elderly. The Johns Hopkins Artificial Intelligence and Technology Collaboratory for Aging Research at Johns Hopkins University in Baltimore has announced 14 projects that will receive a portion of a 20 million USD grant from the U.S. National Institute on Aging. The funding supports the development of artificial intelligence (AI) devices to help elderly adults combat cognitive decline, sustain good health, and maintain their function and independence for longer periods of time.

Each of the projects will receive a 200,000 USD mini-grant. They include the development of a virtual reality platform to reduce social isolation, an AI-powered handlebar device to improve balance, and algorithms to screen for age-related illnesses, among other innovations. The funding also will launch a five-year collaboration among the university’s medical school, engineering school, Johns Hopkins Technology Ventures, and Carey Business School.

■ Scholar seeks ways to fund carbon-reducing projects. Chunxia Jiang, an associate professor of finance at the University of Aberdeen Business School in Scotland, has been awarded a share of 144,000 GBP (173,868 USD) in funding from the Scotland Asia Partnerships Higher Education Research Fund. She will work with scholars at Kanazawa University in Japan and the National University of Singapore to discover the most effective ways to finance environmentally friendly projects. Their research will focus on projects in developing countries that are trying to manage high carbon emissions with limited funding.

■ Grant supports open access. The Hanken School of Economics in Finland has received a grant of 171,250 EUR (182,081 USD) as part of an initiative called Policy Alignment of Open Access Monographs in the European Research Area (PALOMERA). The grant will fund a two-year project to discover how European universities, libraries, funders, and publishers can make scientific books more accessible online.

“Individual scientific articles have been so highly prioritized when it comes to free access that longer formats, such as books, have fallen a bit behind,” says Mikael Laakso, an associate professor at the school. The project will work to better understand the challenges involved in open-access scholarship, as well as to identify viable financial models to support open-access distribution of long-format scholarship.

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