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FA C U LT Y S C H O L A R S H I P | 2 0 0 5 Research shows how foreign investment helps grow businesses Often the world presents intriguing trends that offer a natural setting to study competing ideas on the best way to manage and grow businesses, explains associate professor of management, Murali Chari. The 1990s presented one such opportunity in Japan. The growing prosperity of Japan and the global ascendancy of Japanese firms in the 1980s fueled a rush to study Japanese business practices. One of these practices credited for the successes of Japan was the manner in which Japanese businesses obtained capital. Japanese businesses were financed through a consortium of banks whose representatives served on the Boards of the corporations they financed to monitor performance and take corrective action when necessary. This system was said to foster a climate of “patient capital” where the few representatives of banks were able to know their client’s businesses intimately, and this proximity along with control obtained through the board seat allowed banks to be more patient with their investments in corporations. This source of patient capital in turn, many contended, allowed Japanese firms to invest for the long term thereby enhancing their competitiveness in world markets. During this time period, as is still the case, U.S. businesses obtained financing from U.S. capital markets where millions of individual stockholders and institutions assess the prospects of businesses before providing capital. Many argued that this “market” system of providing capital drove U.S. corporations to focus on the short term and scale back long term investments since investors relied on immediately tangible measures of performance and often punished firms for missing short term (e.g., quarterly) earnings targets. While there were a few scholars who pointed out the benefits of a market system for capital, their arguments were often overwhelmingly drowned out by critics of the U.S. system who attributed the relative success of Japanese corporations to the “capital disadvantage” faced by U.S. firms financed through U.S. capital markets. The early 1990s ushered in a period of economic recession and slow growth in Japan. Part of the underlying problem, many now agree, was that the bank led system of financing had resulted in a lack of objective assessment and valuation of businesses. To turn the economy around the Japanese accelerated a series of reforms which led to an influx of foreign investors, primarily from the U.S. and the U.K., investing in Japanese firms and the corresponding decline in the share of bank ownership. The foreign owners behave much like they do in the U.S. They trade their stocks frequently unlike “patient” bank owners whose ownership stakes they replaced. This trend raises an interesting and important question: What does this increase in foreign ownership do to the investment behavior of Japanese firms? Specifically, building on various arguments in favor of a U.S. style capital market, one could hypothesize that the influx of foreign capital will foster appropriate investments. Based on criticisms of the U.S.- style capital market, one could also develop the competing hypothesis that the influx will lead to under investment in Japanese enterprises. Murali and his co-authors investigated these competing hypotheses by studying investments in R&D and capital assets made by 146 of the 200 largest industrial firms in Japan from 1991 to 1997. They did not find evidence to support the notion that greater foreign ownership leads to underinvestment as critics of the U.S.- style capital markets would expect. In contrast, they found that firms with greater foreign ownership increased their investments when such increases were likely to create value supporting the appropriate investment hypothesis. These findings should help not just the Japanese policy makers, managers, and U.S. investors but also managers and policy makers from other countries who are interested in the implications of opening their capital markets to foreign investors. The full paper titled “Strategic Investments in Japanese Corporations: Do Foreign Portfolio Owners Foster Underinvestment or Appropriate Investment?” appears in the June 2006 issue of the Strategic Management Journal. Douglas K. Agbetsiafa “Financial Intermediation and Economic Integration of the Economic Community of West African States,” the National Annual Conference of the Southwestern Social Science Association, New Orleans, LA, April 2005. Peter A. Aghimien “Effects of Working Capital Management Policies on Profitability of Banks in Developing Economics, with M.A.M. Mainoma,” Journal of Accounting and Finance Research, Vol. 13, No. 1, Spring (Forthcoming). “Determining a Conceptual Framework for Accounting, with M.A.M. Mainoma,” The Journal of Accounting and Finance Research, Vol. 13, No. 3, Summer I (Forthcoming). Tracey A. Anderson “E-Filing Gains Popularity—But Should Practitioners Adopt It Now?” Practical Tax Strategies, Anderson, Fox, and York, pp. 44-48, January 2005. “History and Trends in E-Filing: A Survey of CPA Practitioners,” The CPA Journal, Anderson, Fox, and Schwartz, pp. 66-69, October 2005. Grant C. Black “Geography and Spillover: Shaping Innovation Policy through Small Business Research.” In Science and Technology Policy: Shaping the Next Generation of Research, David Guston and Daniel Sarewitz (eds.), University of Wisconsin Press, forthcoming. “The Importance of Foreign Ph.D. Students to U.S. Science” (with Paula Stephan). In Science and the University, Ronald Ehrenberg and Paula Stephan (eds.), University of Wisconsin Press, forthcoming. 3 0 | i u s o u t h b e n d s c h o o l o f b u s i n e s s & e c o n o m i c s | 2 0 0 6 a n n u a l r e v i e w
“Who’s Patenting in the University? Evidence from the Survey of Doctorate Recipients” (with Paula Stephan, Shiferaw Gurmu, and Albert Sumell), Economics of Innovation and New Technology, forthcoming. “Scientific Teams and Collaborations: Evidence from U.S. Universities, 1981-99” (with James Adams, Roger Clemmons, and Paula Stephan), Research Policy, 34, 2005, pp. 259-285. “Firm Placements of New Ph.D.s: Implications for Knowledge Transfer,” (with Paula Stephan, Albert Sumell, and James Adams), in The Role of Labour Mobility and Informal Networks for Knowledge Transfer, Dirk Fornahl, Christian Zellner and David Audretsch (eds.), Springer, 2005, pp. 125-146. “Bioinformatics Training Programs are Hot but the Labor Market is Not” (with Paula Stephan), Biochemistry and Molecular Biology Education, 33(1), 2005, pp. 58-62. “Regional Economic Outlook 2006.” Presented at the Economics Forum, South Bend, IN, November 10, 2005. Kiyoung Chang “Corporate Cash Holdings, Foreign Direct Investment, and Corporate Governance,” with Abbas Noorbakhsh, Global Finance Journal, Vol 16, 302-316, 2006. “How Do Culture and Globalization Influence International Corporate Liquidity?” with Abbas Noorbakhsh, Global Business Conference Proceedings, Miami, FL, forthcoming 2005. “How Do Culture and Globalization Influence International Corporate Liquidity?” with Abbas Noorbakhsh, Global Business Conference, Miami, FL, November 2005. Murali Chari “Strategic Investments in Japanese Corporations: Do Foreign Portfolio Owners Foster Underinvestment or Appropriate Investment?” with David, P., Yoshikawa, T., and Rasheed, A. Strategic Management Journal, V7 (6): pp. 591-600, 2006. International diversification and firm performance: Role of information technology investments, with Sarv Devaraj and Parthiban David, Academy of Management Meeting, Atlanta 2006. Option Value of International Diversification: Evidence from East Asian Firms and the East Asian Crisis, Asia Academy of Management PDW, Atlanta, 2006. H. Lane David “So Many Measures of Trade Openness and Policy: Do Any Work?” Annual Meeting of the Western Economic Association International, San Francisco, California, July 6, 2005. “So You Want to Use a Measure of Openness? A (Sceptics) Guide to Measures of Trade Openness and Policy,” Annual Meeting of the Western Economic Association International, San Francisco, California, July 7, 2005. Robert H. Ducoffe “The Effects of Animated Banner and Popup Ads in Commercial Websites,” with Y. Gao and M. Koufaris Advanced Topics in Electronic Commerce, M. Khosrow-Pour, (ed.); Hershey PA: Idea Group, Volume 1, pp. 28-50, 2006. “Negative Effects of Advertising Techniques in Electronic Commerce,” with Y. Gao and M. Koufaris, Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, M. Khosrow-Pour, (ed.); Herhsey PA: Idea Group, 842-847, March 2006. Mark A. Fox “E-filing Gains Popularity--But Should Practitioners Adopt it Now?” with T. Anderson and R. York, Practical Tax Strategies, 73 (1), 44-48, 2005. “Unpaid and Underreported Royalties: Initiatives to Enhance the Rights of Royalty Recipients,” with T. Anderson, Entertainment Law Review, 16 (2), 27-31, 2005. “Computer–Aided Music Distribution: The Future of Selection, Retrieval and Transmission,” with N.B. Duncan, First Monday (Peer-Reviewed Journal on the Internet), 10 (4), http://firstmonday.org/issues/issue10_4/duncan/index.html, 2005. “Creative Commons: An Alternative,” Web-Based Copyright System, Entertainment Law Review, 16 (5), 111- 116, 2005. “Technological and Social Drivers of Change in the Online Music Industry,” First Monday (Peer-Reviewed Journal on the Internet) http://www.firstmonday. org/issues/issue7_2/fox [Special Issue on Music and the Internet: This paper is a reprint—with a new commentary—of an article printed in a 2002 edition of this journal], 2005. “Podcasting: A New Technology in Search of Viable Business Models,” with S. Crofts, J. Dilley, A. Retsema, and R. Williams, First Monday (Peer-Reviewed Journal on the Internet), 10 (9), http://firstmonday.org/issues/ issue 10_9/ crofts/index.html, 2005. “Market Power in Music Retailing: The Case of Wal- Mart,” Popular Music & Society, 28 (4), 501-519. [Special Issue on Music Monopoly], 2005. “History and Trends in E-filing: A Survey of CPA Practitioners,” with T. Anderson and B. Schwartz, CPA Journal, 75, 66-69, and at http://www.nysscpa.org/cpajournal/2005/1005/essentials/p66.htm, October 2005. i u s o u t h b e n d s c h o o l o f b u s i n e s s & e c o n o m i c s | 2 0 0 6 a n n u a l r e v i e w | 3 1
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Page 4 and 5: m e s s a g e f r o m t h e d e a n
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Page 22 and 23: When I graduated, my grades were me
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