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Research Summary

Organizational Decision making Under Certainity

Ballesteros, Luis, and Howard Kunreuther. Organizational Decision Making Under Uncertainty Shocks. No. w24924. National Bureau of Economic Research, 2018. (Under Second Review).

What are the cognitive and corporate factors that affect how firms respond to external and unpredictable disruptions?
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In line with the fallacy of riskification of uncertainty by which decision makers believe that the effects of unpredictable phenomena can be captured accurately by probability distributions, organizational scholars commonly treat the organizational inefficiency in dealing with uncertainty shocks—exogenous hazards whose welfare effects spread across industries and markets, such as natural disasters, terrorist attacks, and financial crises—as a problem of risk management. This is problematic because the consequences of uncertainty shocks outstrip the predictability capacity for the average manager and entail a greater complexity of internal and external factors. Moreover, their uniqueness makes translating experience into learning far more difficult. We seek to address this inadequate approach with a theoretical framework that captures the multidimensional complexity of organizations preparing for, coping with, and recovering from exogenous uncertain disruption. We bring together the literatures on cognitive psychology that suggest that biases and heuristics drive behavior under uncertainty, a Neo-Carnegie perspective that indicates that organizational structure and strategy regulate these behavioral factors, and institutional theory that points to stakeholder and institutional dynamics affecting economic incentives to invest in prevention and business continuity. Taken together, this article offers the foundation for a behaviorally plausible, decision-centered perspective on organizational decision-making under uncertainty.

Non Market Startegy

Ballesteros, Luis, and Aline Gatignon. "The relative value of firm and nonprofit experience: Tackling large‐scale social issues across institutional contexts." Strategic Management Journal 40.4 (2019): 631-657.

What institutional conditions make the direct implementation of corporate philanthropy more socially valuable than channeling resources through nonprofit organizations?
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Nonprofit organizations (NPOs) are often identified as a natural vehicle for the engagement of firms in large‐scale social issues. We evaluate this argument by examining the conditions under which NPO experience is more valuable than firm experience in overcoming the key challenges associated with corporate disaster giving. Findings from a quasi‐experiment across the 4,396 natural disasters worldwide between 2003 and 2015 demonstrate that firms could donate more by implementing the aid through NPOs (on their own) in countries with low (high) institutional development, especially where they lack (have) market operations. However, we also observe that firms more frequently than not opted into the allocation mode that yielded comparatively low aid, raising questions about incentive alignment and communication across the business and nonprofit sectors.

Ballesteros, Luis, Michael Useem, and Tyler Wry. "Masters of disasters? An empirical analysis of how societies benefit from corporate aid." Academy of Management Journal 60.5 (2017): 1682-1708.

Company giving after disasters is growing faster than public aid, is this socially beneficial? That is, do countries recover faster via company intervention?
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Corporations have become increasingly influential within societies around the world, while the relative capacity of national governments to meet large social needs has waned. Consequentially, firms are being asked to adopt responsibilities that have traditionally fallen to governments, aid agencies, and other types of organizations. There are questions, though, about whether this is beneficial for society. We study this in the context of disaster relief and recovery; an area where companies account for a growing share of aid as compared to traditional providers. Drawing on the dynamic capabilities literature, we argue that firms are better-equipped than other types of organizations to sense areas of need following a disaster, seize response opportunities, and reconfigure resources for fast, effective relief efforts. As such, we predict that—while traditional aid providers are important for disaster recovery—relief will arrive faster, and nations will recover more fully when locally active firms account for a larger share of disaster aid. We test our predictions with a proprietary database comprising information on every natural disaster and reported aid donation worldwide from 2003 to 2013. Our analysis uses a novel, quasi-experimental technique known as the synthetic control method and shows that nations benefit greatly from corporate involvement when disaster strikes.

The figure shows the difference in HDI growth rate between treatment nations and correspondent synthetic controls. Period (0) is the disaster year. Treated are disaster countries with a substantial share of disaster giving coming from firms with operations in the affected country [(as defined by the 75th (7.7%), 95th (24.5%), and 99th percentiles (44.4%)]. The total sample of country disasters in the period 2003-2013 is 464.

Media Coverage

Ballesteros, Luis. "Markets as clubs: A study of the role of firm-market reliance in the company provision of collective goods." The Wharton School Research Series 1 (2018): 56. (Under Second Review).

If firm performance is strongly explained by a national market, the company allocate resources to help its recovery in the aftermath of large shocks. Can this motive explain giving greater than alternative explanations such as reputation and altruism?

When firms decide to engage in the provision of collective goods that benefit social welfare (i.e., to behave pro-socially), they may consider the economic relevance of such goods for their own market operation. The bigger the stake of the firm in a market is, the greater its reliance on the market’s collective goods, such as communication infrastructure. Therefore, a market’s relative importance for a firm is a major predictor of corporate pro-social behavior. I show that accounting for variation in economic reliance leads to a more accurate prediction of corporate pro-social behavior than widely invoked arguments rooted in the extant literature.

Ballesteros, Luis. "How firms bring social innovation and efficiency to the global effort to recover from national uncertainty shocks." Handbook of Inclusive Innovation (2019): 225

How are corporate resources become a comparative advantage that help societies worldwide manage grand challenges?

For-profit organizations may bring innovation and efficiency to the provision of public goods, traditionally known as corporate pro-social behavior or corporate social responsibility (CSR). This study reports on this in the of setting uncertainty shocks—i.e., exogenous and unpredictable hazards that disrupt significantly the welfare of a geographical area, such as natural disasters, terrorist attacks, technological accidents, pandemics, and episodes of violent crime—and governments lack the means to meet social needs. With technical know-how, reconfigurable resources, and quick-building financial capacity, firms often step forward at times when governments or other entities are short on them.

Ballesteros, L., Tyler Wry, and Michael Useem. "Follow the leader? The costs of solving uncertainty and ambiguity with the wrong cognitive referent" (2018). (Under Revision)

When engaging in philanthropic giving, when the company should try to donate first or imitate another company and what increases the probability of realizing a rent from such behavior?
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Scholars have long sought to demonstrate the financial value of non-market behavior and found that stakeholders tend to respond positively when such behavior aligns with their values or interests. This work builds on the premise that stakeholders have stable preferences and are able to identify behaviors as contextually appropriate. However, firms’ pro-social behavior often occurs under high uncertainty of the social need and the firm’s capacity to respond. Hence, stakeholders are likely to interpret a firm’s actions with other cues. We argue that stakeholders use a firm’s preexisting reputation to predict the contextual appropriateness of its non-market behavior. Well-reputed firms will thus derive rents regardless of their response, while poorly-regarded firms will be punished, regardless of the relative social value of their donation amount. In turn, these assessments will become cognitive anchors that shape how subsequent responses are viewed. The reputation of the first mover overrides the reputation of an imitating follower, which obtains a spillover benefit or loss. Our analyses use a database covering every firm donation to every natural disaster worldwide from 2003 to 2015 and the preliminary results point to important boundary conditions for the relationship between company pro-social behavior and rent accrual.

Market Startegy

Ballesteros, Luis "Exposure to environmental uncertainty, risk taking, and the proneness to innovate" Working Paper (2018).

Does experiencing large disasters increase innovative behavior?

Risk taking is at the essence of innovation and the literature traditionally assumes risk preferences to be stable across time. I evaluate the argument that exposure to exogenous high-consequence shocks alter risk preferences and thus risk taking. To identify this causal effect, I construct panel data on patents by U.S. county from 1990 and 2015 as proxy for innovation and then use large geophysical and meteorological disasters as natural experiments that generate substantial and sudden changes in uncertainty at the local level. I expect that counties exposed to natural disasters will observe comparatively large number of patents. Additionally, I test the moderating effects of the frequency and magnitude of exposure to disasters.

Ballesteros, Luis, Heather Berry, and Aseem Kaul. "Uncertainty Shocks and Entrepreneurship." Working Paper (2018).

How do exogenous disruptive events affect firm failure and founding and, therefore, the overall level of entrepreneurship?

The effects of uncertainty shocks on entrepreneurship are unknown. On the one hand, uncertainty shocks are associated with prominent levels of business mortality. The Federal Emergency Management Agency estimates that 40% of small businesses do not reopen after being hit by a natural disaster and 90% will fail within a year unless they can resume operations in less than a week and studies have shown that uncertainty shocks reduce output, employment, and productivity and suggest that business activity declines even in countries not directly hit by a disaster due to economic interdependencies. On the other hand, other studies suggest that uncertainty shocks may be beneficial to entrepreneurship. Building off the idea of ‘destructive creation,’ scholars have argued that uncertainty shocks may challenge established incumbents and open up opportunities for new business creation and radical innovation. This study seeks to resolve this debate through novel evidence on the relationship between uncertainty shocks, risk preferences, and entrepreneurship.

Ballesteros, Luis. "Risk preferences and entrepreneurship: Evidence from a national survey." Working Paper (2019).

Are individuals with lower risk aversion less likely to become entrepreneurs than risk-seeking individuals?

I explore the relationship between risk preferences and business creation. I use a longitudinal, multi-thematic survey representative of the Mexican population at the national, urban, rural and regional level to combine: i) the identification of changes in risk preferences over time, the ii) the exposure to community-level phenomena, and iii) administrative data on economic activity. Using the instrumental validity of natural disasters, I document that comparatively low levels of risk aversion relate with high rates of entrepreneurship.

Ballesteros, Luis, and Catherine Magelssen. "Multinational enterprise innovation and turbulence: a subsidiary-level study." Working Paper (2019).

Does going through market turbulence make some subsidiaries more innovative than others?

We connect micro and macro approaches in decision making under uncertainty to study shocks that increase the level of market volatility affects the risk appettite of decision makers within the subsidiary. We offer evidence that behavioral factors affect the decision-making process of MNE units. Particularly, our study shows how an individual certainty premium by which decision makers value environmetal stability may translate to the organizational level.

Ballesteros, Luis, Heather Berry, and Aseem Kaul. "Disaster Aid, Country Animosity, and International Trade." Working Paper (2018).

How does foreign aid in the aftermath of national disasters change perceptions of country animosity and facilitate market expansion from firms from enemy countries?

The literature that studies the country-specific determinants of market entry predominantly approaches the institutional environment as relatively stable (North 1990). However, uncertainty shocks are known to generate systemic disruptions that reshape norms, values, and rules which otherwise change incrementally (Bloom 2009). It is during these disruptions when local perceptions of geopolitical and economic conflict or cooperation are comparatively vulnerable to be deviated by the behavior of strategic foreign actors. Particularly, the actions undertaken by foreign national governments to help the shock-affected country may reduce the negative local perceptions of firms that are conational to the responding government. The liability of foreignness that these firms may be mitigated, at least temporarily and thus increasing their opportunities for market entry.

Ballesteros, Luis, Catherine Magelssen, and Meghana Ayyagari. "Business internationality and the performance consequences of economic disintegration: Evidence from Brexit." Working Paper (2019)

Are multinational firms better prepare to handle economic disintegration than domestic firms?

Multinationalism helps firms access suppliers and consumers spatially dispersed. It can increase labor productivity (Martin et al. 2017), administrative capacity (Acemoglu et al. 2007), knowledge spillovers (Alcacer and Chung 2007, Javorcik 2004), innovation (Knott and Turner 2019), and foster economies of scale (Alfaro et al. 2018) and competitive advantages (Berry 2014). A line of research has also associated multinationalism with risk diversification. Hence, multinational firms cope with shocks better than domestic firms such as natural disasters (Oetzel and Oh 2014) or financial crises (Aghion et al. 2016).

The general discourse in which these arguments have flourished and been tested is the continuous globalization of markets and production. In recent years, however, antiglobalization processes have resulted in actual or potential threats to international trade and investment. One can argue that multinational firms may be more vulnerable than domestic firms to suffer the consequences of economic disintegration (Boehm 2014). Theoretically, this is unclear because multinational firms may adjust easier to the closeness of national markets via reallocation of resources and a higher ability to move operations to a different country (Alfaro and Chen 2012, Mata and Woerter 2013).

We seek to solve this debate by focusing on the case of Brexit. We hypothesize that the negative effects associated with the Brexit Referendum rise in the economic dependence of the firm on the U.K. (i.e., the share of firm income that is explained by the U.K. market). However, this effect is modulated by the easiness to exit the U.K. and thus directly related with the directness of the investment, whether the firm is a supplier or demander of goods, and the level of globalization of the core industry in which the firm operates.