Were the Acquisitive Conglomerates Inefficient?

This paper challenges the conventional wisdom that the 1960s conglomerates were inefficient. I offer valuation results consistent with recent event-study evidence that markets typically rewarded diversifying acquisitions. Using new data, I compute industry-adjusted valuation, profitability, leverage, and investment ratios for thirty-six large, acquisitive conglomerates from 1966 to 1974. During the early 1970s, the conglomerates were less valuable and less profitable than standalone firms, favoring an agency explanation for unrelated diversification. In the 1960s, however, conglomerates were not valued at a discount. Evidence from acquisition histories suggests that conglomerate diversification may have added value by creating internal capital markets.diversification, mergers and acquisitions, conglomerates, restructuring

Analysing Government Decision Making in the South African Biofuels Industry: A Game Theoretic Approach

The production of biofuels in many countries is largely driven by the government strategy and incentives that are in place. In South Africa the first round of the development of such a draft strategy took place in 2005 while the official stance on biofuels was finalized in December of 2007. During the policy development process various governmental departments had strategic goals and targets that they all were required to achieve. The achievement of these strategic targets and goals is also risky and the various departments that have some form of involvement in the biofuels industry need to decide on how much risk they are willing to take. This article sketches the game that the various governmental departments played as well as the risks that they were faced with when writing the Industrial Biofuels Strategy. In establishing a Nash Equilibrium and when comparing this to the current state of affairs in the industry an investigation is launched as to what has caused the governmental department to divert so strongly from this position. A variable Z is defined and included in the model in order to explain the current state of affairs. The Z variable is also analyzed further in order to bring some form of structure to the debate on the government’s stance on the issue.Biofuels, Game Theory, Government Strategy, Agricultural and Food Policy, Research Methods/ Statistical Methods,

Organizational Issues in the Agrifood Sector: Toward a Comparative Approach

This paper outlines a research program comparing the economic organization of agriculture in the United States and European Union. Both have highly developed agricultural sectors but their organizational arrangements vary widely. Comparative analysis not only provides a broad set of firms and industries to compare, but also highlights the interaction between the institutional environment and the arrangements established to govern agricultural transactions. We first assess the common trend toward consolidation and vertical integration, turning next to the economic organization of formal and informal networks. While history and path dependence explain some of the variety among U.S. and European practices, other local conditions are important as well. We conclude by assessing the policy implications of recent changes in economic organization.

Entrepreneurshoip and the Economic Theory of the Firm Any Gains from Trade?

Although they have developed very much in isolation from each other, we argue the theory of entrepreneurship and the economic theory of the firm are closely related, and each has much to learn from the other. In particular, the notion of entrepreneurship as judgment associated with Frank Knight and some Austrian school economists aligns naturally with the theory of the firm. In this perspective, the entrepreneur needs a firm, that is, a set of alienable assets he controls, to carry out his function. We further show how this notion of judgment adds to the key themes in the modern theory of the firm (i.e., the existence, boundaries, and internal organization). In our approach, resource uses are not data, but are created as entrepreneurs envision new ways of using assets to produce goods. The entrepreneur’s decision problem is aggravated by the fact that capital assets are heterogeneous. Asset ownership facilitates experimenting entrepreneurship: Acquiring a bundle of property rights is a low cost means of carrying out commercial experimentation. In this approach, the existence of the firm may be understood in terms of limits to the market for judgment relating to novel uses of heterogeneous assets; and the boundaries of the firm, as well as aspects of internal organization, may be understood as being responsive to entrepreneurial processes of experimentation.Entrepreneurship, heterogeneous assets, judgment, ownership, firm boundaries, internal organization

The Theory of the Firm and Its Critics A Stocktaking and Assessment

Ever since its emergence in the 1970s the modern economic or Coasian theory of the firm has been discussed and challenged by sociologists, heterodox economists, management scholars, and other critics. This chapter reviews and assesses these critiques, focusing on behavioral issues (bounded rationality and motivation), process (including path dependence and the selection argument), entrepreneurship, and the challenge from knowledge-based theories of the firm.

Diversification, Organization, and Efficiency: Evidence from Bank Holding Companies

We use a portfolio-simulation technique to estimate the value added from diversification by bank holding companies. Using a sample of 412 multi-bank bank holding companies (MBHCs) from 1990 to 1994, we construct pro forma benchmark portfolios for each MBHC composed of shares of single banks, weighted to correspond to the MBHC's distribution of activities. We then compare the performance and characteristics of the MBHCs to that of their pro forma benchmarks. Diversification through the holding company structure does appear to bring certain benefits: the MBHCs hold less capital and engage in more lending, on average, then their pro forma benchmarks. However, these desirable characteristics do not translate into higher profits, implying some organizational inefficiencies inherent in the holding company structure. This suggests that banks should be allowed to realize the benefits of diversification without limiting them to a particular organizational form.

The Entrepreneur's Choice of Location: Evidence from the Life Sciences

Why do biotech firms cluster? New and established firms in biotech clusters are said to capitalize on knowledge spillovers, labor-market pooling, and other externalities. Some have even argued that such spillovers are so strong that the cluster itself, rather than the individual, is the locus of entrepreneurship. Such arguments, however, do not resolve the mechanism by which clusters might contribute to the establishment of new firms. This paper proposes a conceptual framework for analyzing the locational choices of entrepreneurial firms in the life-sciences industry. Building on both the cluster literature and the literature on entrepreneurship, we develop hypotheses about how cluster characteristics, the entrepreneurs personal characteristics, and characteristics of the business environment affect the entrepreneurs decision to establish a new firm. We argue that a key factor in the location decision is the relative mobility of the appropriate resources. Our main hypothesis is that specialized labor is less mobile than capital and other resources and that it is the base from which entrepreneurs are ultimately created. If so, new firms will emerge in areas characterized by an existing concentration of specialized labor. This labor pool may be spawned by universities and incumbent small and larger biotech (or other high-technology) companies. An alternative explanation is that entrepreneurs establish new ventures outside the cluster, then move them to the cluster to take advantage of local knowledge and other resources. Or a potential entrepreneur could conceive a business plan, then relocate to an existing cluster before founding a firm. We explain how survey data can be used to sort through these explanations.entrepreneurship, biotechnology, clusters, knowledge spillovers, agglomeration economies, Industrial Organization, L26, L65, O18, O32,

F.A. Hayek: Austrian Economist and Social Theorist

Includes bibliographical references.Frederich August von Hayek is undoubtedly the most eminent of the modern Austrian economists. Student of Friedrich von Wieser, protégé and colleague of Ludwig von Mises, and foremost representative of an outstanding generation of Austrian school theorists, Hayek was more successful than anyone else in spreading Austrian ideas throughout the English-speaking world

Opportunity discovery, entrepreneurial action, and economic organization

"Strategic Entrepreneurship Journal, forthcoming""This version: 5 June 2008"This paper reviews and critiques the "opportunity discovery" approach to entrepreneurship and argues that entrepreneurship can be more thoroughly grounded, and more closely linked to more general problems of economic organization, by adopting the Cantillon-Knight-Mises understanding of entrepreneurship as judgment. I begin by distinguishing among occupational, structural, and functional approaches to entrepreneurship and distinguishing among two influential interpretations of the entrepreneurial function, discovery and judgment. I turn next to the contemporary literature on opportunity identification and argue that this literature misinterprets Kirzner's instrumental use of the discovery metaphor and mistakenly makes "opportunities" the unit of analysis. I then describe an alternative approach in which investment is the unit of analysis and link this approach to Austrian capital theory. I close with some applications to organizational form and entrepreneurial teams

Heterogeneous Capital, Entrepreneurship, and Economic Organization

We outline an Austrian approach to economic organization based on the entrepreneur and the Austrian idea of capital as heterogeneous and time-dimensioned, tow themes associated with Israel Kirzner's contributions. We provide a novel interpretation of capital heterogeneity based on the notion of attributes, argue that attributes are costly to measure and that this links directly to the theory of economic organization. In particular, we develop insights in economic organization based on the notion that entrepreneurs will often have to experiment with capital assets to gauge the value of these assets when deployed in production.Austrian Economics, capital, knowledge