Global Innovation - The Paul Merage School of Business - University ...

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FACULTY INSIGHTS 32 experience INNOVATION Faculty Research Faculty research is an important part of the Merage School’s focus on strategic innovation. Following are summaries of 13 recent papers by our faculty members (names in bold) or co-written with colleagues from other UC Irvine departments or other universities. Impact of SOX’s section 404 on corporate valuation Working paper by Joanna Ho, Feng Tian (Merage student) and Agnes Cheng (Louisiana State University) SECTION 404 OF THE SARBANES-OXLEY ACT of 2002, which requires registrants to file a “clean” internal control report or an adverse report that cites “material weaknesses” (MW), has been criticized by the business community due to its alleged high compliance costs. Some companies said they would go private, due to the compliance costs. Congress and the SEC are reexamining SOX to see if a refinement or an overhaul is warranted. We studied the reports and stock market returns of 2,835 firms from 1998 to 2005 and found that those reporting “clean” internal controls realized an average“Companies filing of 10% market share gain compared to those companies reporting material weaknesses. Our report also found that: Companies filing MW reportsstillhadahigher market gain than their cost of compliance. material weaknesses reports still had a higher market gain than their cost of compliance. ”
The stock market has an increasing confidence in accounting numbers as a result of Section 404. Based on regression analysis results, we estimate that the changes in market value due to Section 404 may be as high as $1 trillion. The findings of our study will provide policy makers more information about the benefits of Section 404 and also help market participants make investment decisions. iPod and notebook PCs: Capturing value in a global innovation network By Kenneth Kraemer (Professor Emeritus), Jason Dedrick and Greg Linden (All with UC Irvine’s Personal Computing Industry Center) INNOVATION IS NO LONGER carried out within individual countries, but often crosses national borders in the form of global innovation networks. It is not clear how the economic gains from global innovation are distributed among the firms and countries involved. These gains can be measured various ways, including financial, value-added, jobs and wages, and trade flows. Our product-level studies of the iPod and notebook PC models from Lenovo and HP enable us to break out the financial value embedded in innovative products and clarify how they are distributed globally. The iPod represents radical innovation; the notebooks more incremental innovation. Since the electronics industry carefully guards its product-level data, we examined industry analysts’ “teardown reports” to obtain the “value capture” or gross profit of the lead firm and its major suppliers, which measures the value that each company (excluding direct workers) captures from its role in the value chain. Apple’s gross profit on its video iPod introduced in 2005 was $80, or 36% of its $224 wholesale price. The third generation iPod in 2003 had a gross profit of 40% of its wholesale price. For notebooks, Lenovo’s Think Pad T43 in 2005 had a 30% gross profit on its wholesale price of $1,257. HP’s nc6230 notebook realized a 28% profit on the $1,189 wholesale price. Manufacturing firms in Japan, the United States, Korea and Taiwan are the major supply partners for all of these products. For the video iPod, Japanese, Taiwanese and Korean suppliers captured 14.4% of the gross margins, while U.S. suppliers captured only 3%. Leadership of young entrepreneurial firms By Christine M. Beckman and Diane Burton (Massachusetts Institute of Technology) FACULTY INSIGHTS On the HP notebook, U.S. suppliers grabbed 19% of the margins, of which 18% went to Microsoft and Intel, while Japanese, Korean and Taiwanese suppliers earned 10%. Although the iPods and notebook PCs are all made in China, final assembly accounts for less than 2% of the value of these products. The difference “Although the iPods between radical innovation (iPod) and and notebook PCs incremental innovation (notebooks) is are all made in seen most clearly at the company level. The greatest value accounts for less for the iPod innovation is captured by the brand-name system integrator, of these products. ” Apple, which controls the product architecture and found the right combination of hardware, software and content distribution. For the mature-product notebook PCs, a much larger share is captured by Microsoft and Intel, which control the architecture and trajectory of software and hardware evolution. – Prepared under a grant from the Alfred P. Sloan Foundation China, final assembly than 2% of the value HOW DO THE EXPERIENCES of a new senior leader in a company influence the turnover rates of successors? We find that the first manager to hold a new job in a company establishes a “position imprint” which can make it difficult for managers to follow. “Position imprints” are expectations around a job that will be passed on to successors. Sometimes, those position imprints do not match the written job requirements or the experiences of successors, and herein lies the challenge. According to our analysis of 1,400 executives in 169 high technology Silicon Valley firms, the initial managers have a longevity advantage. We found that “position creators” (first to hold the job title) have a significantly lower rate of turnover than their successors. This lower turnover is not just the result of position creators being 33 Merage | 2008 – 2009
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