Tag Archives: Entrepreneurship

Palm Oil, Rubber, and Colonialism

The Emergence of an Export Cluster: Traders and Palm Oil in Early Twentieth-century Southeast Asia

by Valeria Giacomin (Harvard-Newcomen Fellow in Business History during 2017/2018)

Abstract: Malaysia and Indonesia account for 90 percent of global exports of palm oil, forming one of the largest agricultural clusters in the world. This article uses archival sources to trace how this cluster emerged from the rubber business in the era of British and Dutch colonialism. Specifically, the rise of palm oil in this region was due to three interrelated factors: (1) the institutional environment of the existing rubber cluster; (2) an established community of foreign traders; and (3) a trading hub in Singapore that offered a multitude of advanced services. This analysis stresses the historical dimension of clusters, which has been neglected in the previous management and strategy works, by connecting cluster emergence to the business history of trading firms. The article also extends the current literature on cluster emergence by showing that the rise of this cluster occurred parallel, and intimately related, to the product specialization within international trading houses.

Freely available at Enterprise and Society, Volume 19, Issue 2, June 2018, pp. 272-308

Review by Helena Varkkey (University of Malaya)

In this article, Giacomin presents an archive-based historical analysis of how palm oil became one of the most important traded commodities from Southeast Asia to the world in the early- to mid-1900s. She uses the cluster (defined as a “geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities”) approach to explain how the organizational structure of the pre-existing rubber cluster in the Malay peninsula (at the time a British colony) and Sumatra (under the Dutch) formed the basis for an emerging palm oil cluster in the same geographical region.

The first part of her paper focuses on how the regional rubber cluster structure developed. While the literature commonly credits unique local factors in the development of such clusters, Giacomin instead looks at nonlocal factors: (1) mainland Chinese traders that controlled regional trading routes from major Southeast Asian ports and brought in low-skilled tappers and harvesters from surrounding territories, and (2) Western traders that brought in capital inputs (seeds, machinery and finance) and highly-skilled human resources (estate managers and engineers) from Europe and other parts of the Empire and established headquarters in major European trading ports, allowing them to access crucial market information on demand. Both of these foreign merchant communities congregated in the emerging trading hub of Singapore, strategically located in between British Malaya and Dutch Sumatra, and developed a mutual dependency: Chinese contacts were vital for Western traders wanting to run a business in the Eastern colonies, while the Chinese needed Western traders to scale up their region-based commercial activity to a global scope.

The second part of the article explains how palm oil became the “spin-off” crop of the rubber cluster in the region. During the natural rubber boom in the early 1900s, the Malaya-Sumatra rubber cluster became over-dependent on this export and thus over-specialised in terms of existing practises, agronomic knowledge (through R&D agencies like the Rubber Research Institute), and coordinating institutions (eg. the Rubber Growers’ Association). When the advent of synthetic rubber in the 1920s caused natural rubber prices to fall, companies desperately looked to diversify their production to recoup and replace their losses. However, this over-specialisation meant that they could consider only a limited range of crops similar to rubber for diversification. As it happened, the rubber estate structure could be conveniently repurposed for into oil palm estates. Furthermore, the oil palm flourished in a much narrower latitude span compared to rubber, giving confidence to companies that the demand for palm oil would be more sustained since supply would be more limited.
Giacomin concludes that even though the literature often regards over-specialisation as fatal, in the case of the Southeast Asian rubber cluster, this serendipitously led to the emergence of one of the most enduring regional clusters serving the global economy. Today, Indonesia and Malaysia account for over 90% of global palm oil exports.

While the significance of the rubber sector in paving the way for palm oil in Malaysia and Indonesia is well known, this paper remains an important and significant addition to the current literature, not only on general business management and strategy, but also more specifically in terms of (1) palm oil expansion and development and (2) agricultural systems (estate vs. smallholdings).

Firstly, the specific role of nonlocal (especially Chinese) entrepreneurs in connecting the production areas in this region to the consumption areas in the West was previously not well understood. In the context of the “global north” and “global south”, palm oil can be considered a uniquely “southern” vegetable oil. Compared to other oils like sunflower, rapeseed, and soya bean, the production, major business players, beneficiaries and direct impacts of palm oil is situated more comparatively in the global south. Giacomin alludes to this in reference to the narrow latitude where oil palm can be grown. This northern/southern framing has coloured much of the recent debates and controversies over palm oil today. This paper’s analysis on the historical role of Chinese merchants is especially useful in further informing the idea of palm oil as a “southern” oil, while at the same time, the equally important role of the Western merchants that Giacomin highlights may be useful in moderating certain northern arguments in this ongoing debate.

Secondly, the historical nature of Giacomin’s analysis of this sector is especially timely in the current period where other regions, like West Africa and Latin America, are looking to increase their global trading share of palm oil. Giacomin mentions that even though the oil palm originated from and was first produced commercially in West Africa during colonial times, Western African territories were unable to effectively penetrate global markets because they did not display the same institutional cohesion across neighbouring territories, something that Southeast Asia managed to do through the pre-existing rubber cluster. This “cluster” model may thus provide an exemplar to be used by emerging palm oil production regions and companies as an effective way to possibly break the current oligopoly (Indonesian and Malaysian firms) which is the palm oil industry. Especially for West Africa, which is considered the current “greenfield” area for palm oil outside Southeast Asia, current strategies can be developed to avoid past mistakes.

Finally, Giacomin’s analysis of early smallholders is useful to inform current discussions on the ideal agricultural systems for oil palm. Her paper argues that in the mid-20th century, the fact that the palm oil was an estate crop (involving high costs and favouring large-scale production) provided a solution to the problem previously faced by rubber companies that were facing competition from and losing market share to rubber smallholdings. While this might have been the case historically, oil palm today has been successfully adapted to the smallholder model in both Indonesia and Malaysia, with a significant share of both countries’ production (about 40% each) coming from either organised or independent smallholders. Giacomin’s analysis stops at the early decolonialisation period, before the newly independent nations began to formulate oil palm smallholder schemes as a strategic tool for rural development and poverty eradication for both countries. Her analysis however can serve as a useful starting point in the ongoing debates on if and how both the estate and smallholder systems can co-exist efficiently and in harmony.

Overall, this paper is a valuable piece of business history that helps to further shed light on a controversial agro-economic sector often shrouded in secrecy. The fact that palm oil continues to be a hot topic worldwide today underlines the relevance and importance of such forays into history to inform the present.

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A Conceptual Framework for New Entrepreneurial History

Reinventing Entrepreneurial History

By R. Daniel Wadhwani (University of the Pacific, USA) and Christina Lubinski (Copenhagen Business School, Denmark)

Abstract: Research on entrepreneurship remains fragmented in business history. A lack of conceptual clarity inhibits comparisons between studies and dialogue among scholars. To address these issues, we propose to reinvent entrepreneurial history as a research field. We define “new entrepreneurial history” as the study of the creative processes that propel economic change. Rather than putting actors, hierarchies, or institutions at the center of the analysis, we focus explicitly on three distinct entrepreneurial processes as primary objects of study: envisioning and valuing opportunities, allocating and reconfiguring resources, and legitimizing novelty. The article elaborates on the historiography, premises, and potential contributions of new entrepreneurial history.

Keywords: entrepreneurship, entrepreneurial processes, history, theory, temporality, uncertainty, agency, opportunity, resources, legitimation

URL: https://doi.org/10.1017/S0007680517001374

Business History Review, 2017, 91 (4): 767-799 – doi:10.1017/S0007680517001374

Review by Nicholas D Wong (Newcastle Business School, Northumbria University)

This article by Wadhwani and Lubinski proposes the reinvention of ‘entrepreneurial history as a research field’ with the aim of promoting greater ‘conceptual clarity’ between comparative studies and dialogue amongst scholars in the field. This engaging and well-written paper provides a new way of considering entrepreneurial activities over time with the emphasis placed on the processes that drive entrepreneurship rather than the individuals or institutions. Following a call to arms for history to join other social sciences (“management, economics, sociology, finance and anthropology”) in developing a distinct sub-field for the study of entrepreneurship the authors provide a neat structure to the paper which begins by providing an historiographical assessment of the strengths and weaknesses of what they term the “old entrepreneurial history”. This is followed by an insight into the parameters of the concept of “new entrepreneurial history”; one which considers the development temporally and defined succinctly as “the study of the creative processes that propel economic change”. This conceptualization foregrounds entrepreneurial processes rather than focusing on particular actors, institutions, or technologies.” The third section develops a set of core processes that frame the object of study in entrepreneurial history, “(i) envisioning and valuing opportunities, (ii) allocating and reconfiguring resources, and (iii) legitimizing novelty”. The paper concludes by highlighting the important contributions new entrepreneurial history can make to the field of business history.

‘So that’s my presentation. When do I get the half million dollars?’

In assessing the historical foundations of entrepreneurship, the authors follow the well-trawled path through the German Historical School of Schmoller and Weber and ultimately on to Schumpeter which, over time, helped promote the concept of “historical change focussed on entrepreneurial processes”. It was perhaps Schumpeter more than any other who ardently proclaimed the centrality of history in enabling the understanding the role of the entrepreneur as the driving force of capitalism and “central to the operation of markets and the dynamics of economies”. However, despite the strength of scholarship that developed during the immediate post-war period, the authors highlight how the field of entrepreneurial history dissipated in later decades being replaced by formulaic, normative and structured research that was “increasingly focussed on how norms, laws and other institutions shaped entrepreneurial roles and functions”. The authors highlight how this approach ultimately led to the demise of the field in the late 1960s as Chandlerian theory on organisational form and managerial hierarchies dominated business history. The 1970s and 80s saw entrepreneurship studies receive increasing attention from business-people and policy makers alike as a way of understanding how economies and markets operate (and what drives them). However, it was still largely ignored by business historians.

To demonstrate the difficulty for historically-orientated scholarship in defining and framing the concept of entrepreneurship, the authors provide some quantitative analysis of the number of articles published in Business History Review during the period 1954-2015 which mention entrepreneurship in the full text, including references. The figures are startling, with only 44 of 1044 featuring the term ‘entrepreneurship’ and when excluding the phrase appearing in citations this figure reduces to only twenty-six articles. This provides clear evidence of the lack of engagement with entrepreneurship by business history scholars. Moreover, of those articles that directly use the term, ‘entrepreneurship’, there is a general lack of clear definitions (most rely on Schumpterian definition, whilst more recently, Mark Casson’s definition has been widely-used). The authors use this evidence to demonstrate the lack of engagement in entrepreneurial studies (beyond the individual entrepreneur at least!) in business history. This is interesting research method although it could possibly have been improved by extending the analysis into other prominent business history journals such as Business History or Enterprise and Society – this would have strengthened the conclusions drawn from this section of the study. This section finishes by highlighting how historians have tackled entrepreneurship in recent years, with Popp, Raff, Amatori, Friedman, Jones and others using a variety of approaches including biography, microlevel process (such as agency over time) and macrolevel approaches which consider the consequences of entrepreneurship for structural change (such as the industrial revolution or globalisation).

“You told him he should start his own business.”

Following the illuminating section on the historiography of entrepreneurship, the next section tackles the concept of entrepreneurship as it relates to field of history. Here the authors provide a succinct and applicable definition of entrepreneurial history: “the study of the creative processes that propel economic change”. Here they are keen to point out that, “the definition focuses on the study of entrepreneurial processes and their relationship to change”. They provide three key premises that link entrepreneurial history to historical change over time: the temporal foundations of agency; multiplicity in the forms of value; and the collective and cumulative character of entrepreneurship. With reference to the first premise, the authors cite the work of Popp et al., and Beckert, by suggesting that understanding entrepreneurial agency “hinges on examining the processes by which they envision and pursue futures beyond the constraints of the present context”. Here they are making clear linkages to the concept of forward projection, that being the idea that the study of entrepreneurial history requires the researcher to understand the necessity of entrepreneurs to think-forward and plan for an “unpredictable future”. This is a novel approach, although it is reliant on a particular set of sources that work as evidence for qualitative research that can enable the historian to penetrate the mindset of the entrepreneur. The two papers cited by Popp and Holt both rely on extensive sets of letters between entrepreneurs and their familial, social and business networks which help construct a picture of the entrepreneur and the strategic forward planning for key developments such as succession, diversification, or international expansion. The second premise, multiplicity in the forms of value, suggests that entrepreneurs can find value beyond baseline profitability. Here the authors infer that entrepreneurs can seek future forms of (non-economic) value such as civic, environmental, academic, and industrial. This again is linked to the idea that the pursuit (or accumulation) of intangibles such as reputational and social capital can provide competitive advantage in the market place and, perhaps, can be considered as entrepreneurial as innovation, expansion and diversification. The final premise, the collective and cumulative character of entrepreneurship, refers to the domino effect of entrepreneurial opportunities that provide the foundation for, and provoke, further streams of entrepreneurship. This is linked to the notion that entrepreneurs have a sense of collective identity and the idea that “they belong to a generation, group or epoch”. The importance of this premise is that it moves away from what the authors refer to as the “heroic individual”. Here, new entrepreneurial history calls for further analysis of “cumulative entrepreneurial processes across multiple actors over time that propel historical change”.

The third section of the article points to processes that act as primary objects of study in entrepreneurial history. The first of these, envisioning and valuing opportunities, is linked to the classical characteristics of entrepreneurship such as forecasting market changes, seeking new opportunities, accessing and creating new technologies, exploiting new markets/territories and developing new practices. However, the authors highlight how new entrepreneurial history deviates from the old forms by explaining how the new opportunities are enacted rather than discovered. This is because actors define value and worth in different ways and this changes over time. The second process is allocating and reconfiguring resources; here they suggest that entrepreneurial history can “explore the processes and mechanisms by which actors allocated and reconfigured resources towards uncertain, future ends”. This section highlights the value of history in analysing the process and motivation for entrepreneurs to influence macro-level developments in terms of institutional or societal change and how this influences their allocation of resources. The final process identified by the authors, legitimizing novelty, builds on the previous processes as, in their view, legitimacy can pose ‘a problem in the entrepreneurial process because the new forms of value and new combinations of resources entrepreneurs introduce often fail to conform to widely shared expectations regarding rules, norms, beliefs, and definitions. Legitimation processes thus form another important focus of research in entrepreneurial history”. The key contribution of the historian in this area is understand the process of legitimation and to analyse how and why societal or institutional change occurs over time.

Congratulations on starting your own firm.

In terms of the potential contributions that new entrepreneurial history can make the authors have compiled a helpful table that compares it to Chandlerian business history, new institutional business history, and new economic histories of business. This table, in part, helps reinforces the central tenets of new entrepreneurial history (such as the emphasis on the process of entrepreneurship, the cumulative and collective approaches, the impact on development of society and institutions, the methods of assigning value over and above profit etc.) and how it diverges or challenges traditional schools of business history. The eclectic approach to entrepreneurship as designed by the authors provides a framework for future research to follow in order to consider the development of entrepreneurship over time but also in understanding how entrepreneurship influences, and is influenced, by, individual, institutional and societal micro and macro-level factors. Perhaps the greatest contribution, as highlighted in the conclusion, is the implications or influence that new entrepreneurial history can have on entrepreneurs today. Here the authors demonstrate the strength of the historian in enabling entrepreneurs to understand the world and “acting in it”. By following the framework developed in this paper, business historians have opportunity to develop a richer and deeper insight into the core factors that influence and drive the process of entrepreneurship.

A couple of minor observations: the definition provided by the authors, in my opinion, could be broadened out slightly. In the case the authors raise the point that new entrepreneurial history focuses on the study of the creative processes that propel economic change, [my emphasis], however, this framework could be used to study processes far beyond the purely economic (including, for example, environmental, technological, cultural, management, social, political). Indeed, the section on ‘multiplicity in the forms of value’ highlights how value can be assigned to non-economic factors, such as the accumulation of social and cultural capital, environmental, civic, academic, esthetic, industrial etc. The definition in this instance seems too narrow in enabling the researcher to understand change and the authors themselves provide insight into factors beyond market forces. In terms of broadening out the concept, I feel this particular theme has potential to inform research beyond business history and could have relevance to research in other branches of management and organisational studies, and perhaps even other disciplines in social sciences. My second observation concerns the blurring or overlap between premises two and three concerning the recruiting and allocation of resources on one hand and gaining of legitimacy on the other hand. Both sections cover similar areas with regards to the winning institutional support or driving institutional change in order to gain support or enhance legitimacy. I feel there is scope to draw greater distinctions between these two processes.

To conclude, this article presents a well-considered and well-structured contribution to the field of entrepreneurial history. The authors establish a real need for their approach and then provide a strong, clear and adaptable framework that can open the field to future researchers. As a business historian myself, I am always sympathetic to papers championing a historical or temporal approach and found this paper extremely useful to my ongoing research projects. I am sure it will make a strong contribution to the field and provoke much discussion and research in the years to come!

Acknowledgements

I am extremely grateful to Andrew Popp and Niall Mackenzie for their feedback on an earlier draft of this review.

Entrepreneurs and Indian Transnational Business

Transnational Indian Business in the Twentieth Century

By: Chinmay Tumbe (Indian Institute of Management Ahmedabad, India)

Abstract: This article argues that migration and investment from India moved in tandem to chart the evolution of transnational Indian business in the twentieth century, first toward Southeast Asia and Africa and later toward the United States, Europe, and West Asia. With a focus on the banking and diamond sectors, the overseas investment project of the Aditya Birla Group, and the transnational linkages of India’s one hundred richest business leaders, the article locates important events, policies, and actors before economic liberalization in 1991 that laid the foundation for subsequent globalization of Indian firms.

Business History Review (Forthcoming – Published online: 12 December 2017)
https://doi.org/10.1017/S0007680517001350

Review by Niall G MacKenzie (Strathclyde Business School)

Chinmay Tumbe’s article in Business History Review, ‘Transnational Indian Business
in the Twentieth Century’ is, as the title suggests, an exploration of Indian business history at home and abroad throughout the twentieth century. The article is well-written with a number of themes present throughout which go beyond simple transnational analyses, encompassing elements of kith (networks) and kin (family) in the development of Indian business over the period set against changing migration patterns within and outwith, the Indian sub-continent. A further clear theme throughout the paper is the changing role and concomitant impact of the institutional frameworks in which Indian business acted under, both in domestic and international terms. It is on these areas that this review takes its focus.

The paper compares and contrasts twentieth century Indian migration trajectories and their impact on Indian international business connections, with a particular focus on the activities of the banking and diamond industries, as well as highlighting a number of famous Indian firms and entrepreneurs including the Godrej, Birla, and Tata families, Lakshmi Mittal, and the top 100 richest Indians using a mixture of archive data, corporate histories, biographies, and secondary materials such as magazines and newspapers. In this sense, the paper is a non-traditional business history piece that combines a variety of methodological approaches to paint a picture of Indian transnational business history over the twentieth century that distinguishes itself with its attention to rigour, a clear story arc, and the creation of a historical framework for future studies. As one may expect from Business History Review, the writing is tight, the subject matter broad but detailed in its analysis, and a number of valuable insights into how Indian business developed over the period emerge as a result.

Tumbe’s work covers both Indian domestic business activities and overseas investment activities by Indian companies over the twentieth century, offering readers an interesting and illuminating analysis of these subjects which reflect a growing interest in Indian business within business history more generally, including a special issue in Business History edited by Carlo Morelli and Swapnesh Masrani on Indian Business in the Global World, publication of the Oxford History of Indian Business by Dwijendra Tripathi (2014), the developing economies initiative at Harvard Business School which focuses on (amongst other developing countries) Indian business, a 2015 conference on Indian and South East Asian business history hosted by Harvard Business School bringing together scholars from all over the world, and a number of articles published in each of the major business, economic, and accounting history journals. In this sense Tumbe’s paper is a continuation of the growing interest in Indian business history around the world and recognition that much of the history of the country has been written from the perspective of the west, and in particular Anglo-Indian viewpoints.

Work written from the perspective of indigenous Indian scholars therefore has the potential to provide counterpoints, deeper insights, and more interesting considerations of phenomena and change that are oftentimes taken for granted by Western scholars. Indeed, much theory that has been produced in business and management has been done so within Western developed countries and typically by Western scholars. This is a point that has been raised in the Family Business Review journal by its outgoing editor Pramodita Sharma (with family business stalwarts Jim Chrisman and Kelin Gersick), who in a 2012 editorial called for more testing of existing theory, and creation of new theories by looking at ‘different institutional contexts’ as ways of doing this. This is a call that applies beyond family business however and into business and management more generally – cognizance of context and its multiple forms and applications to existing and new knowledge is something that historians are perhaps naturally familiar with and indeed drawn to, but which has value beyond history also.

Arguably the most interesting aspect of the paper (to this author at least) was the focus on the role that Indian family businesses played within the constantly evolving Indian and global institutional contexts over time, engaging domestic and international business networks and deploying their capital in different ways to address their aims and aspirations. The case of AV Birla going to study at MIT is one such example – scions of large family businesses nowadays are regularly packed off to global top institutions to gain a world class education and expose them to more of the world in preparation for taking the helm of the family business. However, according to Tumbe, in the mid-1960s India was a relatively insular looking country and business environment which suggests Birla’s decision to study at MIT was one that was more than just expanding personal horizons but was in fact, at the time, a relatively novel way of preparing Birla and the helping firm’s international expansion aspirations. Birla was then an early example of what is now a relatively standard practice in terms of preparing for the future leaders within the family business, but also of preparing the business itself by accessing and leveraging the networks that come with enrolment in top global education institutions for higher education.

One of the principal questions posted in the paper was “How and why did Indian business operations extend beyond the boundaries of the subcontinent, and was migration a relevant factor in this process?” The short answer that Tumbe’s paper provides, is that migration was a relevant factor in the process (as one might reasonably expect), but also that Indian business operations did exist beyond the boundaries of the subcontinent and the reasons for doing so were varied. In some cases, Indian businesses were accessing existing networks of Indian diaspora for soft landings abroad, in others they were seeking to expand operations due to the constrictions that were imposed on them by an FDI-hostile Indian government that resulted in domestic industrial stagnation and a strong push factor to invest abroad, requiring Indian businesses to look outwards for international expansion and growth opportunities. Kith and kin were therefore important features of such expansion with the desire to mitigate the agential risk that naturally comes with the creation of distance between operations and control as far as possible. Consistent within this is the recognition that friends and family are important in business expansion and development; Tumbe provides a demonstrable example of this in his analysis of Birla’s expansion into Antwerp and the role Vijay Mehta, a cousin of AV Birla’s best friend based in Antwerp and Bangkok, played in Birla’s first overseas investment.

Tumbe’s article is ultimately a broad sweep analysis of Indian transnational business activities and development over the twentieth century that illustrates the changing nature of business in India, the shifting institutional context, and the opportunities and constrictions that come with doing business in a developing country. Its relevance and interest to business and economic historians is clear in its historical analysis and content, but its wider applicability to understanding contemporary business and management phenomena such as resource orchestration, transnational business, and family business is also apparent. For those familiar with Indian business history it will likely confirm a number of existing thoughts and concepts, but for those who are not as familiar it provides an enjoyable and informative overview of how Indian business changed over the course of the twenties century with an array of source material that is handled well and written in an engaging fashion.

Lessons from ‘Too Big to Fail’ in the 1980s

Can a bank run be stopped? Government guarantees and the run on Continental Illinois

Mark A Carlson (Bank for International Settlements) and Jonathan Rose (Board of Governors of the Federal Reserve)

Abstract: This paper analyzes the run on Continental Illinois in 1984. We find that the run slowed but did not stop following an extraordinary government intervention, which included the guarantee of all liabilities of the bank and a commitment to provide ongoing liquidity support. Continental’s outflows were driven by a broad set of US and foreign financial institutions. These were large, sophisticated creditors with holdings far in excess of the insurance limit. During the initial run, creditors with relatively liquid balance sheets nevertheless withdrew more than other creditors, likely reflecting low tolerance to hold illiquid assets. In addition, smaller and more distant creditors were more likely to withdraw. In the second and more drawn out phase of the run, institutions with relative large exposures to Continental were more likely to withdraw, reflecting a general unwillingness to have an outsized exposure to a troubled institution even in the absence of credit risk. Finally, we show that the concentration of holdings of Continental’s liabilities was a key dynamic in the run and was importantly linked to Continental’s systemic importance.

URL: http://EconPapers.repec.org/RePEc:bis:biswps:554

Distributed on NEP-HIS 2016-4-16

Review by Anthony Gandy (ifs University College)

I have to thank Bernardo Batiz-Lazo for spotting this paper and circulating it through NEP-HIS, my interest in this is less research focused than teaching focused. Having the honour of teaching bankers about banking, sometimes I am asked questions which I find difficult to answer. One such question has been ‘why are inter-bank flows seen as less volatile, than consumer deposits?’ In this very accessible paper, Carlson and Rose answers this question by analysing the reality of a bank run, looking at the raw data from the treasury department of a bank which did indeed suffer a bank run: Continental Illinois – which became the biggest banking failure in US history when it flopped in 1984.

images

For the business historian, the paper may lack a little character as it rather skimps over the cause of Continental’s demise, though this has been covered by many others, including the Federal Deposit Insurance Corporation (1997). The paper briefly explains the problems Continental faced in building a large portfolio of assets in both the oil and gas sector and developing nations in Latin America. A key factor in the failure of Continental in 1984, was the 1982 failure of the small bank Penn Square Bank of Oklahoma. Cushing, Oklahoma is the, quite literally, hub (and one time bottleneck) of the US oil and gas sector. The the massive storage facility in that location became the settlement point for the pricing of West Texas Intermediate (WTI), also known as Texas light sweet, oil. Penn Square focused on the oil sector and sold assets to Continental, according the FDIC (1997) to the tune of $1bn. Confidence in Continental was further eroded by the default of Mexico in 1982 thus undermining the perceived quality of its emerging market assets.

Depositors queuing outside the insolvent Penn Square Bank (1982)

Depositors queuing outside the insolvent Penn Square Bank (1982)

In 1984 the failure of Penn would translate into the failure of the 7th largest bank in the US, Continental Illinois. This was a great illustration of contagion, but contagion which was contained by the central authorities and, earlier, a panel of supporting banks. Many popular articles on Continental do an excellent job of explaining why its assets deteriorated and then vaguely discuss the concept of contagion. The real value of the paper by Carlson and Rose comes from their analysis of the liability side of the balance sheet (sections 3 to 6 in the paper). Carlson and Rose take great care in detailing the make up of those liabilities and the behaviour of different groups of liability holders. For instance, initially during the crisis 16 banks announced a advancing $4.5bn in short term credit. But as the crisis went forward the regulators (Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency) were required to step in to provide a wide ranging guarantee. This was essential as the bank had few small depositors who, in turn, could rely on the then $100,000 depositor guarantee scheme.

053014_fmf

It would be very easy to pause and take in the implications of table 1 in the paper. It shows that on the 31st March 1984, Continental had a most remarkable liability structure. With $10.0bn of domestic deposits, it funded most of its books through $18.5bn of foreign deposits, together with smaller amounts of other wholesale funding. However, the research conducted by Carlson and Rose showed that the intolerance of international lenders, did become a factor but it was only one of a number of effects. In section 6 of the paper they look at the impact of funding concentration. The largest ten depositors funded Continental to the tune of $3.4bn and the largest 25 to $6bn dollars, or 16% of deposits. Half of these were foreign banks and the rest split between domestic banks, money market funds and foreign governments.

Initially, `run off’, from the largest creditors was an important challenge. But this was related to liquidity preference. Those institutions which needed to retain a highly liquid position were quick to move their deposits out of Continental. One could only speculate that these withdrawals would probably have been made by money market funds. Only later, in a more protracted run off, which took place even after interventions, does the size of the exposure and distance play a disproportionate role. What is clear is the unwillingness of distant banks to retain exposure to a failing institution. After the initial banking sector intervention and then the US central authority intervention, foreign deposits rapidly decline.

It’s a detailed study, one which can be used to illustrate to students both issues of liquidity preference and the rationale for the structures of the new prudential liquidity ratios, especially the Net Stable Funding Ratio. It can also be used to illustrate the problems of concentration risk – but I would enliven the discussion with the addition of the more colourful experience of Penn Square Bank- a banks famed for drinking beer out of cowboy boots!

References

Federal Deposit Insurance Corporation, 1997. Chapter 7 `Continental Illinois and `Too Big to Fail’ In: History of the Eighties, Lessons for the Future, Volume 1. Available on line at: https://www.fdic.gov/bank/historical/history/vol1.html

More general reads on Continental and Penn Square:

Huber, R. L. (1992). How Continental Bank outsourced its” crown jewels. Harvard Business Review, 71(1), 121-129.

Aharony, J., & Swary, I. (1996). Additional evidence on the information-based contagion effects of bank failures. Journal of Banking & Finance, 20(1), 57-69.

Neo-Schumpeterian views of Economic Development Today

The Theory of Economic Development of J.A. Schumpeter: Key Features

By Iurii Bazhal (Economics Department, National University of Kyiv-Mohyla Academy)

Abstract: This paper comprises translation into English of the preface of Iurii Bazhal to the first Ukrainian edition of Joseph Schumpeter’s famous fundamental book “The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle” that was translated in Ukrainian and published in 2011 in commemoration of its 100th anniversary. The paper reveals the contemporary significance of this classical book as the challenger on replacing the neoclassical approaches in capacity to become the mainstream of modern economic theory. It is shown that Schumpeter’s approach gives a new vision of driving forces for economic development where a crucial conceptual place belongs to the category of innovation. Second part of the paper reviews modern Neo-Schumpeterian approaches which have substantiated the importance of the structural innovation technological change of national economy for economic development. The government must permanently analyze a compliance of the actual production structure in the country with the current and future technological paradigms.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:69883

Distributed by NEP-HIS on: 2016-03-29

Reviewed by Stefano Tijerina (University of Maine)

In an effort to recommend economic policy solutions to the “young market economy” of Ukraine, Iurii Bazhal breaks down Joseph Schumpeter’s principles of national economic development, arguing that current global implementations of economic development policies dominated by the neoclassical economic model are not generating and have never generated “evolutionary innovative ‘jumps.’”(p. 12). Emerging economies and stagnant advanced economies would benefit immensely from the revision of the neoclassical approach, centering instead on the Neo-Schumpeterian approach that recognizes economic structures of technological systems as the base of long-term economic growth (idem). From Bazhal’s perspective, business-government partnerships should focus on national economic development strategies that center on the creation and advancement of innovative technological systems that generate revolutionary global social, cultural, economic, and political change.

Schumpeter 3

These historical transformations that have changed humanity and its relation to resources and the natural world have catapulted some nations into positions of power that have translated into national economic prosperity. Bazhal identified five “paradigms” that altered the economic development of the modern world, including the substitution of machinery for handwork in weaving (1790-1850), coal mining and the steam engine (1851-1895), iron industry (1896-1946), oil based energy and organic chemistry products (1947-1989), and microelectronics (1990-2040). Schumpeter identified these periods as “dynamic” periods of economic development (pp. 4 & 13).

Contrary to “static” development where reproduction of traditional production structures were replicated nation after nation across the world, “dynamic” economic development based on technological innovation was and continues to be the only solution for capitalist nations interested in substantially increasing their national wealth and social welfare (p. 4). Nations spearheading the different periods of global innovation promoted and justified the implementation of the revised status quo in order to legitimize its global systemic outreach, restraining other nation’s ability to create and produce new dynamic value added solutions to their own development strategy (idem). This, said Bazhal, explained the “trap” that has impeded the present economic development of nations such as Ukraine (idem).

Ukraine 1

In order to achieve “dynamic” economic development like the one that catapulted Britain and the United States into positions of global power, it was necessary to move beyond the “model of circular flow of income and expenditure between firms and households” promoted by the neoclassical macroeconomic model (p. 6). This Schumpeterian view that “new combinations” of economic development strategies and technologies is what takes nation states into new realms of economic development patterns is what Bazhal is arguing for Ukraine. Combinations, I would argue, that are exemplified in Brazil’s reinvention into an ethanol-based economy that moved the nation away from oil dependency and thus breaking the restrains imposed by the oil based development model advanced by the United States throughout the Twentieth Century. Brazil’s case represented a “disruption of equilibrium by new combinations,” as Schumpeter would put it (p. 7). A new equilibrium based on an increase in the size of resources, the size of capital, the size of the labor force and the size of the national domestic product represent at that point Schumpeterian dynamics of economic development. Impactful and effective economic development therefore lies in business-government relations where the innovative entrepreneur has the flexibility and authority to influence the direction of policy; norms, regulations, and institutional designs that allow the entrepreneurial forces to implement and carry forward new “combinations or innovations”(idem).

A more deregulated system, argues Bazhal, would allow Ukraine’s entrepreneurial forces to move forward with the model recommended by Schumpeter. Yet the neoclassical restrains promoted by the European Union, the United States and the multilateral agents impede the clicking of new combinations (p.8). Ukraine’s economic development salvation lies in the invention or creation of a “new technological paradigm” that will catapult the nation into a more advanced economic development stage within the global economic market system (p. 11). This evolutionary dynamic, argues Bazhal, must be accompanied by “structural technological changes” that will guarantee stable economic development conditions at the design and implementation stages of the policy.

Schumpeter’s theory indicates that for this to take place, the nation’s business and political actors must also be willing and prepared to execute the “creative destruction” of the traditional systems and philosophical ideas of production. This aspect of the evolutionary process, from my perspective, is what is impeding Brazil from capitalizing fully from its transformation into an ethanol-based economy. Although not highlighted by Bazhal, the economic, political, social, cultural, domestic and international struggle against the forces of status quo are factors that require a more thorough analysis. In the case of Ukraine it is these same forces that block the nation’s self-determined transition into an evolutionary technological economic development dynamic.

Schumpeter 1

The implementation of a Neo-Schumpeterian economic development model in Ukraine or in any other nation across the world would look similar, in relative terms, to what happened in the United States during the oil or the microelectronics era. The new technological wave became the core driver of the nation’s economy, impacting at first the internal dynamics and systems of production and then replicating the same outcome nation after nation in incremental patterns. Not all nations converted to fossil fuels at once but eventually all did, accompanied by the construction of roads for the transit of vehicles together with the adoption of multiple other technologies and innovations that justified the conversion into a fossil fuels-based world. The same pattern has been developing on front of our eyes as the world adjusts to the microelectronics era.

As in the case of Brazil, a new technological innovation emanating from Ukraine would result in new structures of enterprise, new dynamics and interrelations between multiple economic indicators and sectors, new secondary and service productions sectors, in addition to value added systems, new forms and sectors for investment, new capital flows, new consumption patterns, and new domestic and international patters of trade flows.

Theoretically Bazhal’s advancement of the New-Schumpeterian model as the adequate paradigm shift for the Ukrainian economy is convincing and proven to be effective, as I pointed out in the case of Brazil, but the challenge remains in the implementation stage. Although Bazhal is aware that the technological revolution results in drastic changes on the state’s economic system and that it threatens the interests of those currently benefitting from the production status quo, he never provides his or Schumpeter’s solutions to these challenges. The success stories of Britain and the United States in altering the technological status quo indicate that domestically engineered social and political control systems must become an integral part of the sophisticated nation building process of post-modern nation states in order to secure flexibility for Schumpeter’s entrepreneur and the effective and efficient maneuverability of the government-business partnerships that advance the Neo-Schumpeterian model domestically and internationally.

Technology and Financial Inclusion in North America

Did Railroads Make Antebellum U.S. Banks More Sound?

By Jeremy Atack (Vanderbilt), Matthew Steven Jaremski (Colgate), and Peter Rousseau (Vanderbilt).

Abstract: We investigate the relationships of bank failures and balance sheet conditions with measures of proximity to different forms of transportation in the United States over the period from 1830-1860. A series of hazard models and bank-level regressions indicate a systematic relationship between proximity to railroads (but not to other means of transportation) and “good” banking outcomes. Although railroads improved economic conditions along their routes, we offer evidence of another channel. Specifically, railroads facilitated better information flows about banks that led to modifications in bank asset composition consistent with reductions in the incidence of moral hazard.

URL: http://econpapers.repec.org/paper/nbrnberwo/20032.htm

Review by Bernardo Bátiz-Lazo

Executive briefing

This paper was distributed by NEP-HIS on 2014-04-18. Atack, Jaremski and Rousseau (henceforward AJR) deal with the otherwise thorny issue of causation in the relationship between financial intermediation and economic growth. They focus on bank issued notes rather deposits; and argue for and provide empirical evidence of bi-directional causation based on empirical estimates that combine geography (ie GIS) and financial data. The nature of their reported causation emerges from their approach to railroads as a transport technology that shapes markets while also shaped by its users.

Summary

In this paper AJR study the effect of improved means of communication on market integration and particularly whether banks in previously remote areas of pre-Civil War USA had an incentive to over extend their liabilities. AJR’s paper is an important contribution: first, because they focus on bank issued notes and bills rather than deposits to understand how banks financed themselves. Second, because of the dearth of systematic empirical testing whether the improvements in the means of communication affected the operation of banks.

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In 19th century north America and in the absence of a central bank, notes from local banks were substitutes among themselves and between them and payment in species. Those in the most remote communities (ie with little or no oversight) had an opportunity to misbehave “in ways that compromised the positions of their liability holders” (behaviour which AJR label “quasi-wildcatting”). Railroads, canals and boats connected communities and enabled better trading opportunities. But ease of communication also meant greater potential for oversight.

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ACJ test bank failure rates (banks that didn’t redeem notes at full value), closed banks (ceased operation but redeem at full value), new banks and balance sheet management for 1,818 banks in existence in the US in 5 year increments between 1830 and 1862. Measures of distance between forms of communication (i.e. railroads, canals, steam navegable river, navegable lake and maritime trade) and bank location emerged from overlapping contemporary maps with GIS data. Financial data was collected from annual editions of the “Merchants and Bankers’ Almanac”. They distinguish between states that passed “free banking laws” (from 1837 to the early 1850s) and those that did not. They also considered changes in failure rates and balance sheet variance (applying the so called CAMEL model – to the best of data availability) for locations that had issuing banks before new transport infrastructure and those where banks appear only after new means of communication were deployed:

Improvements in finance over the period also provided a means of payment that promoted increasingly impersonal trade. To the extent that the railroads drew new banks closer to the centers of economic activity and allowed existing banks to participate in the growth opportunities afforded by efficient connections.(p. 2)

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Railroads were the only transport technology that returned statistically significant effects. It suggested that the advent of railroads did indeed pushed bankers to reduce the risk in their portfolios. But regardless of transport variables, “[l]arger banks with more reserves, loans, and deposits and fewer bank notes were less likely to fail.” (p.20). It is thus likely that railroads impact banks’ operation as they brought about greater economic diversity, urbanisation and other measures of economic development which translated in larger volume of deposits but also greater scrutiny and oversight. In this sense railroads (as exogenous variable) made banks less likely to fail.

But ACJ note that means of transportation were not necessarily exogenous to banks. Reasons for the endogeneity of transport infrastructure included bankers promoting and investing in railroads to bring them to their communities. Also railways could find advantages to expand into vigorously active locations (where new banks could establish to capture a growing volume of deposits and serve a growing demand for loans).

Other empirical results include banks decreased the amount of excess reserves, notes in circulation and bond holdings while also increased the volume of loans after the arrival of a railroad. In short, considering railroads an endogenous variable also results in transport technologies lowering bank failure rates by encouraging banks to operate more safely.

Comment

The work of AJR is part of a growing and increasingly fruitful trend which combines GPS data with other more “traditional” sources. But for me the paper could also inform contemporary debates on payments. Specifically their focus is on banks of issue, in itself a novelty in the history of payment systems. For AJR technological change improves means of payment when it reduces transaction costs by increasing trust on the issuer. But as noted above, there are a number of alternative technologies which have, in principle, equal opportunity to succeed. In this regard AJR state:

Here, we describe a mechanism by which railroads not only affected finance on the extensive margin, but also led to efficiency changes that enhanced the intensity of financial intermediation. And, of course, it is the interaction of the intensity of intermediation along with its quantity that seems most important for long-run growth (Rousseau and Wachtel 1998, 2011). This relationship proves to be one that does not generalize to all types of transportation; rather, railroads seem to have been the only transportation methods that affected banks in this way.(p4)

In other words, financial inclusion and improvements in the payment system interact and enhance economic growth when the former take place through specific forms of technological change. It is the interaction with users that which helps railroads to dominate and effectively change the payments system. Moreover, this process involves changes in the portfolio (and overall level of risk) of individual banks.

The idea that users shape technology is not new to those well versed in the social studies of technology. However, AJR’s argument is novel not only for the study of the economic history of Antibellum America but also when considering that in today’s complex payments ecosystem there are a number or alternatives for digital payments, many of which are based on mobile phones. Yet it would seem that there is greater competition between mobile phone apps than between mobile and other payment solutions (cash and coins, Visa/Mastercard issued credit cards, PayPal, Bitcoin and digital currencies, etc.). AJR results would then suggest that, ceteris paribus, the technology with greater chance to succeed is that which has great bi-directional causality (i.e. significant exogenous and endogenous features). So people’s love for smart phones would suggest mobile payments might have greater chance to change the payment ecosystem than digital currencies (such as Bitcoin), but is early days to decide which of the different mobile apps has greater chance to actually do so.

Wall Street (1867)

Wall Street (1867)

Another aspect in which AJR’s has a contemporary slant refers to security and trust. These are key issues in today’s digital payments debate, yet the possibility of fraud is absence from AJR’s narrative. For this I mean not “wildcatting” but ascertaining whether notes of a trust worthy bank could have been forged. I am not clear how to capture this phenomenon empirically. It is also unlikely that the volume of forged notes of any one trusted issuer was significant. But the point is, as Patrice Baubeau (IDHES-Nanterre) has noted, that in the 19th century the technological effort for fraud was rather simple: a small furnace or a printing press. Yet today that effort is n-times more complex.

AJR also make the point that changes in the payments ecosystem are linked to bank stability and the fragility of the financial system. This is an argument that often escapes those discussing the digital payments debate.

Overall it is a short but well put together paper. It does what it says on the can, and thus highly recommended reading.

La Deutsche Vida

Foreign family business and capital flight. The case for a fraud to fail

By Giovanni Favero, Università Ca’ Foscari Venezia (gfavero@unive.it)

Abstract:
The research here proposed is a micro-analysis of a business ending in bankruptcy in the aftermaths of the first oil shock, concerning the Italian subsidiary of a German wareenamelling group established in the town of Bassano in 1925. Following the budget reports and the interviews with the former entrepreurs, the company flourished until the 1960s, when managerial and entrepreneurial successions emphasized the growing difficulties deriving from growing labour costs. A tentative reorganization of the company was hindered in 1968 by union resistance and political pressures for the preservation of employment levels. In 1975 the board of directors decided to declare bankruptcy as a consequence of the huge budget losses. However, a subsequent inquiry of the Italian tax authority discovered an accounting fraud concerning hidden profits in 1974 and 1975. The fraud disclosure shows how historical conditions could create the convenience for performance understatement not only for fiscal purposes, but also in order to make divestment possible. However, it is also used here as an element to argue that business sources and the story they tell should not be taken at their face value, and that a different reconstruction of the company’s path to failure is possible. The literature concerning the missed recognition of opportunities is then mobilised in order to interpret the inconsistencies that emerge from the triangulation of business archives, press columns and interviews with union representatives and politicians. This allows to put back into perspective what results as an obsession of company management with labour costs, concealing the importance of other competitive elements, such as the increasing specialisation of the producers of home appliances. This ‘refractive error’ may be typical of businesses operating in (presumed) mature industries at international level, where wage differentials offer the opportunity to pursue quite literally exploitation much further.

URL: http://econpapers.repec.org/paper/vnmwpdman/63.htm.

Reviewed by Bernardo Bátiz-Lazo

This paper was distributed by NEP-HIS on 2013-12-15 and offers an interesting combination of business and accounting history around the long-term performance of the Italian assets of an Austrian family business (named Westens). The investment relates to a enamelling plant in the town of Bassano in 1925 (called Smalteria Metallurgica Veneta or SMV, today part of BDR Thermea). The Bassano plant was one of the largest factories of glazed products (for use in electric water heaters, bathtubs and heating products like radiators). Favero’s story takes us from its origins until the Westens leave the company in 1975. Activities, however, continued and by “the end of the 1970s the company focused its production in the heating sector… In the mid-eighties the company expanded into foreign markets. “[see further here].

Air photo of original factory (Source: http://www.baxi.it/storia/)

Air photo of original factory (Source: http://www.baxi.it/storia/)

The narrative gyrates around the Bassano plant, some three generations of Westens and an equal number of internal grown talent at the helm of SMV. Favero argues that the reason behind the origins of SMV and other similar investments in Central and Easter Europe by the Westens was to overcome growing protectionism and the end of Empire. However, the number of secondary references suggests the SMV case is relevant for Italian business history and perhaps, more could have been said about this. Nevertheless, we can follow the changes in corporate governance, the attitude of the family to foreign investments, the changing relationship between national branches and SMV’s “strategy” (a term used rather loosely by the author) as the 20th century progresses. Also how the plant was established on the basis of a then unique process of enamelling, a source of competitive advantage that also erodes as time goes by. Some discussion about the role of Chandler’s “first mover advantage” within family business would have been desirable here.

It is evident that Favero has had access to a large number of source material (including oral histories and fiscal authority memoranda and investigative papers). Yet the case is rather short and this result in the narrative progressing some time in jumps rather than a smooth flow. For instance, it is only until the end that we learn why the fraud was discovered five years after the original owners declared bankruptcy. Namely the intervention of the Italian government to maintain employment kept the plant (or the company, its not clear) afloat. There is also reference to some “bad blood” between the Westens and the Italians but we are not totally sure why and when. There are indications of growing tensions with unions and Favero tries to make a case about “management’s “obsession with labour costs”. We could also benefit from learning about the inconsistencies Favero between different sources. Perhaps an idea would be to add a timeline where one side maps changes in strategy, corporate governance or in the ruling family and the other side maps changes in the environment.

However, in its present form this makes a potentially useful teaching case in a world economic history, international business or globalisation course. Favero also claims the SMV case is part of a larger project looking at Westens’ investments in different countries. I certainly look forward to future instalments.

Giovanni Favero

Giovanni Favero