Category: Knowledge@Wharton Today

Are Germany, the Netherlands and Finland Pushing for a “Grexit?”

Posted on February 22, 2012

It’s been a harrowing couple of weeks for Greece and fellow euro zone members, but they have finally found a 130 billion euro bailout formula that looks set to allow the European sovereign debt crisis to muddle through for the moment.

But the deal comes at high costs, not least of which are relations between Greece and the most hardcore northern members of the euro zone – Germany, the Netherlands and Finland — which have been pushing harsh terms on Greece while arguing the strict measures will bring the best long-term outcome.

In response, Evangelos Venizelos, Greece’s finance minister, complained last week that some euro zone forces want to push Greece out of the group, and accused them of “playing with fire.” With the latest agreement, he now says the euro zone has avoided a “nightmare scenario.” But many critics of the process maintain, as they have at earlier stages, that no permanent solution has been reached and that this agreement, too, will fall apart soon — that is, if Greece does not leave, or does not get pushed out of, the euro zone first.

This thinking won new credence this week when the Financial Times uncovered a “strictly confidential” report, prepared by the International Monetary Fund (IMF) for euro zone officials, that privately acknowledged what critics have been saying publicly for months — that the of austerity measures being imposed on Greece may backfire. The steps could reduce economic growth so drastically that, even in the best-case scenario, it would worsen Greece’s debt woes rather than improve them. Greece’s debt-to-GDP ratio could end up at 160%, rather than the 120% target being touted in public. This would all be accompanied by an economic depression for Greece, which some say is already underway. It does not help that Greece has not met many of its obligations under the last bailout of 110 billion euros in 2010.

If this is the discussion behind the scenes, then it begs the question: What do Germany, the Netherlands, Finland and their supporters really want? Are they attempting to impose such harsh conditions on Greece that it has no choice but to leave the euro zone – a “Grexit” as some now refer to it?

“Probably what the politicians are trying to do is to force the Greeks to leave,” says Wharton finance professor Franklin Allen. “They don’t want to take the blame, and they can then claim it is the Greeks’ fault. They will have a tough time explaining to their taxpayers how they lost so much money.” At the same time, those officials probably still hold some hope that “something will turn up,” Allen adds. “It could work out. I agree with the report, though, on what’s likely to happen.”

The economic numbers are brutal. In Greece’s latest unemployment report, the figure hit nearly 21% (youth unemployment is at 48%), in an economy that has been in recession for some five years. The economy shrank by a further 7% in the fourth quarter of 2011. Projections for 2012 are for a contraction of between 4.8% and 7%. January budget revenues fell by 7% (compared with January of 2011), versus a targeted increase of 8.9%. Tax receipts plummeted by more than 18% for the month.

“The ‘solution’ is unlikely to get Greece out of trouble,” says Mauro Guillen, Wharton management professor, of the latest bailout. “Normally, a debt restructuring and bailout would be accompanied by measures to boost competitiveness. Unfortunately, Greece cannot do so overnight because it cannot devalue its currency — it doesn’t have one. So they are in a bind. If things continue this way, the economy could contract further — that’s the consequence of austerity — and unemployment could be high for a long time.”

Some critics say there are only two ways out of this spiral down: (1) transfer payments – a so-called euro zone-wide fiscal union — from relatively rich northern euro zone members to Greece and other members facing sovereign debt crises (Portugal, Spain, Italy and Ireland); or, (2) a Greek exit from the euro, and creation of the new drachma, which would allow Greece to devalue its new currency and increase competitiveness and productivity.

So, is Greece now better off leaving the euro zone? “In my judgment they are better off to leave,” Allen says. “Quite the best time to do that is an interesting issue. They may want to maximize the amount they can obtain before defaulting and/or achieve primary balance (when a government has more revenues than expenditures, not counting interest paments). Primary balance would certainly be an easier situation in which to undertake the default.”

The latest agreement provides Greece with 130 billion euros and could cut Greece’s debt by some 30%, with bondholders bearing the brunt of it. They will suffer a “haircut” of nominally 53.5%, but that works out to about 74% after accounting for additional adjustments in Greece’s favor. The reductions amount to some 107 billion euros.

Allen, explaining that he has not seen all the final details of the agreement, notes that “at one stage the idea was that the IMF, EFSF (European Financial Stability Facility) and private creditors would have equal priority. If this made it to the final agreement, then the Greeks are in a strong bargaining position. The IMF would, for the first time, be faced with a loss. Since some of their money comes from very poor countries, this would cause a huge problem for them. Greece, with a GDP per head in PPP (purchasing power parity) terms around $28,000, is actually quite a rich country, just behind Spain and Italy in the rankings which are both around $30,000 a head. They really would be taking from the poor to give to the rich.”

Marshall Auerback of Pinetree Capital, who is also an advisor and hedge fund manager for Pimco, the world’s largest bond fund, calls the new agreement “a closet bailout of the bondholders,” because of member demands that Greece, in effect, set up and an escrow account for the bailout funds, upon which foreign creditors receive first priority. He recommends that Greece leave the euro zone and create a new currency that would be devalued by 60% to 70%. This would set the stage for making Greece the “Florida of Europe,” meaning a prime spot for vacationers and retirees that would pump large amounts of capital into the country, Auerback said in an interview on Business News Network.

Certainly Greece would seem to be reaching the breaking point. As Billy Mitchell notes in his blog, Modern Monetary Theory … macroeconomic reality: “On February 12, 2012, the famous Greek composer Mikis Theodorakis wrote an open letter to the international community – THE TRUTH ABOUT GREECE – where he makes the telling point about bankruptcy:

Production has come to a standstill, the unemployment rate has reached 18%, 80,000 shops have closed down, along with thousands of small businesses and hundreds of industries. In total, 432,000 enterprises have shut down. Tens of thousands of young scientists are abandoning the country, which is every day sinking into medieval darkness. Thousands [of] formerly wealthy citizens are scavenging on rubbish heaps and sleeping on the pavement.

In the meantime, we are supposed to be surviving thanks to the magnanimity of our lenders, the Europe of the Banks and the IMF. In reality, every package deal which charges Greece with tens of billions of Euros is repaid in full, while we are burdened with new unbearable interest rates. And since it is necessary to maintain the State, the Hospitals and the Schools, the Troika [the IMF, the European Central Bank and the European Union] is burdening the middle and lower economic strata of society with excessive taxes, leading directly to starvation.

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Yelp’s Impending IPO: What’s the Review?

Posted on February 21, 2012

It’s four o’clock, and you need to make a dinner reservation. The problem is, you have no idea which restaurants are the highest rated in your area. Chances are that you’ll do what 66 million others do each month: search Yelp.

Yelp offers in-depth user reviews and ratings of everything from restaurants to churches to pet hospitals. To date, it has amassed more than 25 million reviews, making it one of the most popular sites of its kind. Users create individual profiles and increase their status (i.e., the perceived value of their reviews) by remaining active members over time and through other users’ ratings of the helpfulness of their reviews.

Last week, the company indicated that it was aiming to sell shares at between $12 and $14 in an early March IPO — part of an effort to raise $100 million. At the higher price, the firm would be valued at $838.6 million, according to an article in The Wall Street Journal.

That’s a far cry from the $100 billion valuation that some foresee for Facebook following its expected IPO later this year. With that in the air — along with recent declines in share prices for Groupon, Zynga, Pandora and LinkedIn — many are wondering if Yelp is yet another in a string of potentially over-valued technology companies planning to go public.

Yelp is still not profitable. Last year, the company lost $17 million, although revenues from local advertising increased by 74% to $83.3 million, according to the Journal. The company has warned that growth will likely moderate as the company matures in its current U.S. markets. (The firm plans to continue expanding internationally.)

Still, some analysts point out, the company has a strong foothold in the online recommendation field for a number of reasons. “They have the breadth of coverage and the richness of millions of reviews,” says Wharton marketing professor David Reibstein. The depth of feedback on the site “cannot be bought overnight” and would be “hard for [competitors] to replicate.” In a previous article in Knowledge@Wharton, Reibstein noted that group buying site Groupon, for example, suffered from intense competition among copycat sites offering similar deals. However, “customers are now loyal to using Yelp. There will have to be a motivation to switch. It is unclear what that would be.”

Also, some online activities are more easily monetized than others, notes Kendall Whitehouse, director of new media at Wharton. “One of the things that is attractive about Yelp is the site’s closeness to the user’s purchase decision,” he says. “Someone looking up a restaurant review in Yelp is very likely planning to go out to eat somewhere. And that should be easy to monetize. Like search, Yelp reveals its users’ intentions, and that makes these sites attractive to advertisers.”

Reibstein notes that unlike a company such as Google, which “is focused on everything,” Yelp’s success is based on the fact that it is focused on something very specific — local user reviews. Wharton marketing professor Eric Bradlow agrees that Yelp has served its niche well, particularly as an early player in the realm of online restaurant reviews. “There are some products and services for which product recommendations are not central. But, for restaurants, which are an experiential good, they are paramount.”

However, Bradlow sees a potential change that leaves a question mark over whether Yelp’s current business model is sustainable. “The next big thing will be target recommendations based on people’s social network.” As soon as word-of-mouth content becomes “Face-bookable,” he says, “then general word-of-mouth sites [like Yelp] will struggle. People want recommendations from their network.”

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Internet Privacy Takes a Hit, Again

Posted on February 20, 2012

Google, according to a report in The Wall Street Journal last week, has not been playing fair when it comes to upholding its own privacy standards.

The company has been tracking “web-browsing habits of people using Safari browser software even if [users] intended for that kind of monitoring to be blocked,” the Journal article noted, adding that this behavior has led three U.S. congressmen to ask for a Federal Trade Commission investigation. The article also pointed out the company last year signed a privacy settlement with the FTC after the commission charged it with using “deceptive tactics and violating its own privacy promises to consumers” when it launched its Buzz social network.

As for the breach the Journal found last week, Google responded that it has deleted the tracking files in question and is addressing the congressmen’s concerns.

KnowledgeToday asked two Wharton faculty — Andrea Matwyshyn, professor of legal studies and business ethics, and Shawndra Hill, professor of operations and information management — to comment on this latest incident.

Given all the recent examples of Internet companies chipping away at people’s privacy, how serious is this latest breach?

Matwyshyn: According to press reports of commentary from a Google spokesperson, the company does not necessarily consider its actions to constitute impermissible conduct: Google is alleging that users authorized the company to interact with their data in certain ways and, by implication, that this consent authorized alteration of inconsistent settings on a device, which may have happened in an unanticipated manner. 

Hill: Firms like Google need to take [care] because legal cases regarding privacy breaches can and do go to court. With each breach, Google opens itself up to punishment and a degradation of consumer trust. In this [latest incident], millions of consumers might be affected, which could indeed prove problematic for Google because of the scale of the Safari problem.

What would have led Google to do this? An obvious answer is the increasing competition for ad dollars, but is there another explanation? 

Matwyshyn: This type of error is symptomatic of the broader privacy and security culture wars going on inside all companies, but technology companies in particular. Privacy and security champions and lawyers frequently butt heads internally with engineers over design and consumer protection. In engineering-focused cultures such as Google’s, shipping code usually wins, and privacy/security and consumer protection can be viewed by some internal decision makers as secondary things you “clean up” when they go awry, rather than things companies must design around.   

Hill: It’s possible that better advertising alone is driving the data collection when consumers use the Safari browser. However, it is also possible that Google was not aware of all the consequences of their actions. It is often the case with data collection that you have one intention but that there are other uses that are unforeseen when the data or process for data collection is established. Still, Google should do a better job identifying potential problems before launching new processes.

Is it conceivable that Google didn’t know this was happening?

Matwyshyn: Code is written by humans, for humans.  Yes, it’s entirely conceivable Google didn’t do their homework and anticipate this dynamic. It’s also conceivable that a company might anticipate a dynamic such as this, but would then decide that fixing it is a lower priority than shipping code out fast. A third scenario might be that a company decides this type of dynamic is a feature and not a bug, that their consumer EULA [end user license agreement] grants the right to tweak settings on user devices and that users are unlikely to notice the exact workings of the code.

Do you think Google’s reputation as a “do no evil” site has taken a substantial hit?

Matwyshyn: “Do no evil” was Google’s successful mantra from the 1990s and 2000s. Those days are gone from the standpoint of consumer perception. Although Google’s socially-beneficial pilot programs and philanthropic efforts are commendable, in the 2010s many consumers view Google as an aggressive data aggregator akin to Facebook. Microsoft is the new underdog.

Hill: Google is scheduled to change their privacy settings next month. In addition, they have come under scrutiny regarding other privacy breaches in the past year. While the firm may continue to claim to “do no evil,” their business strategy is certainly changing; no doubt consumer perceptions, and possibly trust, will change as a result. However, other large data driven companies are using behavioral, social network and demographic information to target ads. So, it’s not like there is an alternative (right now) where user data are not being used for advertising and business intelligence.

The main concern for consumers will come when/if Google tries to maximize their advertising dollars at the expense of giving users the most relevant information to answer their search queries.

Three congressmen have called on the FTC to investigate Google over this practice. Are we finally reaching a tipping point where the privacy issue has caused enough concern that the government will mete out serious sanctions/punishment?

Matwyshyn: One possible outcome may be another FTC consent decree expanding the existing mandatory periodic FTC audits…. The organizational impact of FTC audits may be underestimated internally: FTC audits are a disruptive and expensive experience, as Microsoft learned. If this underestimation is the case, and if the privacy lessons from Buzz have not been internalized by the corporate culture, it is unsurprising that another privacy problem has arisen.

Hill: It’s hard to say which case will end up [resulting in a] severe punishment. However, with each case, we get further along into the discussion about what is acceptable and what is not with respect to consumer privacy. The hope, at least from consumers, is that the conversation will evolve into a clear set of rules and regulations that govern how online firms and others can make use of personal data while offering useful, and free, services.

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Smucker’s in a Jam?

Posted on February 20, 2012

J.M. Smucker Co. — the Orrville, Ohio-based manufacturer of jams and jellies, peanut butter, ice cream toppings, Crisco, coffee and other products — had a bad day last week when it announced its fiscal 2012 third quarter results. The report showed significant declines in sales volume (10%) and earnings (11%) which, in turn, caused an 8% drop in share price. The quarter ended on January 31.

The figures reflect a decision by the company before the 2011 holiday season to significantly increase prices — overall by 16% — on some of its most popular products. The cost of Jif peanut butter alone rose 30%. Vince Byrd, Smucker’s president and COO, noted in the earnings report that “although sales increased 12% for the quarter, we were disappointed with overall volume and its impact on earnings.” Despite the presence of “strong merchandising programs” in place around the holidays, he added, “our volume was lower than expected as a result of our higher price points coupled with lower consumer demand across the food industry.” The company also cited higher costs for peanuts as a reason for the price hike.

Yet one wonders how Smucker’s could have missed the fallout of a 30% price increase on its sales volume, especially during a time when consumers are conscious of price hikes in all categories, from groceries to gas to clothing.

As Wharton marketing professor Z. John Zhang notes, “If Smucker’s raises its peanut butter prices so aggressively, yet it does not expect a significant demand drop, you wonder if its managers were napping on the job. In general, consumers feel better accepting price increases” if they know that a firm’s costs — for raw materials, for example — are higher.  ”This is clearly not the case even if costs did indeed rise. There is no big publicity about the shortfall of peanuts like [there was about] the recent case of orange juice shortage in the U.S.”

In addition Zhang says, “it is always a dicey situation for a firm to unilaterally raise its prices, because the competition can always take advantage of it. After all, a hungry kid may not notice the difference in a lunch sandwich, and there are plenty of substitutes out there. A better way to do this would have been for the company to raise prices slowly, feeling its way forward, and thus give customers some time to adapt and adjust, especially in today’s down economy. Now Smucker’s will have to win back lost customers,” a number of whom have been trying out, and liking, cheaper competing brands.

In its earnings announcement, the company attributed the volume decline to several reasons, including: significantly higher “retail price points in the third quarter of 2012 compared to the prior year;” significantly higher “consumer pantry loading [i.e. hoarding] of peanut butter during the second quarter of 2012,” which resulted in lower volume during the third quarter; key retailers’ decision to “manage inventory levels down during the quarter,” and “particularly aggressive … competitive practices and price points” in some of the company’s product areas.

For Wharton marketing professor Jagmohan Raju, the point here is “not that consumers are cutting their grocery bills, but probably switching to lower price peanut butters or jams and jellies, most likely private labels. If price increases by Smucker’s were not matched, it is quite likely that this can happen. Probably competitors, especially private labels, did not raise prices as much,” he says, noting that he would have expected “a greater decrease in unit sales than what they saw. Either there was some increase in prices by other brands, or Smucker’s is a strong brand.”

 

 

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On Business, Public Morality and the Hindu Epics

Posted on February 17, 2012

A recent article titled, “Business vs. Ethics: The India Tradeoff?” written by students from Wharton’s Lauder Institute and published in Knowledge@Wharton, has drawn criticism. It seemed to suggest that the Indian epics have characters who behave in ways that corrupt individuals could interpret to justify their own actions. In response to this article, Aseem Shukla, cofounder of the Hindu American Foundation, and Rishi Bhutada, member of the Foundation’s executive council, argue below that the epics are actually upholders of morality.

Today’s global business headlines are replete with a surreal litany of scandal. As those enterprises that are “too large to fail” do just that, it has also become clear that governments too often play the dual role of willing benefactor and, in the case of many politicians, beneficiary. And as the same headlines will concur, the ruinous corruption that stands at the nexus of business and government transcends national boundaries, ethnicity and religion.

Scandal, corruption and greed are not uncommon bedfellows to business and politics in the U.S. — from AIG and Lehman Brothers, which fell prey to their pathological excess in credit default swaps, to MF Global’s implosion (with a former senator at the helm) and Bernie Madoff’s Ponzi scheme. The massive accounting frauds at Olympus in Japan, and the Italian company Parmalat earlier, bring home the universality of ethical lapses that plague industry.

In the article “Business vs. Ethics: The Indian Tradeoff?” the authors posit that multinational managers seeking returns on investment in India must realize that a different, dubious ethical norm pervades business there. “Slicing through bureaucracy, inadequate infrastructure and chaotic environments demands a unique genius — one that sometimes neglects Western ethical norms,” they write.

Leaving aside a substantive discussion endeavoring to define “Indian” and “Western” ethical norms, few would dispute the contention that doing business in India requires a familiarity with structural, hierarchical and cultural norms. Whether these cultural and contextual structures are unique only to India, or attributable to post-colonial, post-globalization or other societal realities is open to debate, but the authors wandered into a far more provocative postulation in a sub-section entitled, “Of Cultural Contexts and Ethical Equilibriums.”

Ostensibly to give context to what ails India Inc. — its ethical malaise — the article turns to Hinduism’s greatest epics, the Ramayana and Mahabharata. The former, a beloved poem of more than 50,000 lines dating back several thousand years, is held sacred by a billion Hindus as the life story of an incarnation of God, Lord Rama. Idealized as the archetypal son, brother and eventual king, Rama’s rise, tribulations, victories and sorrows are seen through the prism of his consistency in nobility and his dharma, or righteous action. The latter, the Mahabharata, is four times as long as the Ramayana and celebrated as the repository of the Bhagavad Gita, or Divine Song, considered by many Hindus to be the direct revelation of Lord Krishna, an incarnation that succeeded Rama. The authors similarly indict the 2,500-year-old treatise on statecraft and leadership attributed to Kautilya, the Arthashastra, as complicit in India’s ethical failings.

The authors point to Lord Krishna’s tactical abridgement of the existing rules of war to goad Arjuna to vanquish an unarmed adversary — who, it should be remembered, had not surrendered. There are other incidents in the Mahabharata, too, where Lord Krishna, Arjuna and his protagonist family resort to questionable means to accomplish their very justifiable end — defeating Duryodhana, a most treacherous and vengeful ruler.

The article’s authors argue that episodes and vignettes within these epics, where even the characters endowed with divine birth rely on guile and trickery to ensure humanity’s victory over evil forces, mean that such tactics are normative to Indian society. If the Gods could take recourse to chicanery, the argument goes, then expect the same from Indians in the business world.

But even leaving aside the religious significance of the epics, this reductive analysis, bereft of a rooting in Hindu philosophy, is astounding. The hoary expanse of the epics, traversing several millennia of time and space, are perhaps the most influential scriptures in the Hindu tradition. How the epics and other ancient treasures are interpreted is predicated, of course, on the understanding and spiritual inclination of the reader.

After a thorough reflection upon the message of this epic, many would conclude the converse of what the authors presume. Indeed, as Gurcharan Das, a noted author and former CEO of Procter & Gamble India, writes in his own passionate meditation on the great epic in his book, The Difficulty of Being Good — On the Subtle Art of Dharma: The Mahabharata is clearly uncomfortable with Krishna’s conduct during the war. This explains, in part, why the mood of the epic now swings downward. There may have been good reasons why Krishna had to do what he did to win — good had to defeat evil — but the epic does not believe that the ends justify the means. It does not approve of the breaking of the rules of warfare. It does not believe a dharmayuddha, “just war,” can be fought unjustly.

 The epics are very clear that the laws of Karma are absolute and relentless. Every action must bear consequences to the deed. Not only do Arjuna and his brothers see the annihilation of all their children during and after the war, but even Lord Krishna’s progeny die out after a spasm of fratricide. The message of the scriptures is dissonant with India’s contemporary ethical conundrums.

 Rather than being seen as a perverse rationale for ethically suspect business practices, the Mahabharata, and the Bhagavad Gita within — a climactic conversation between Lord Krishna and Arjuna — are actually celebrated by management gurus as a primer on morality in business, karma capitalism. The concept of karma yoga is encapsulated here — that managers and workers must perform righteous action, but without attachment to the result. Profits result from good karma, the Bhagavad Gita proclaims, and should be shared by those who shared in those efforts.

 The Ramayana, too, where Mahatma Gandhi proclaimed he took his leadership lessons from, is often cited as an inspiration to ideal business practices. As Vivek Mansingh, former country manager of Dell India R&D, wrote: “The importance of emotional intelligence, which is an embodiment of motivation, empathy and social skills, increases as one goes up the management chain…. It is in this … that I recognize a similarity with the Ramayana.” And while Kautilya’s Arthashastra includes the wiliest tactics for successful statecraft, scholars know the realities of Kautilya’s times — he was advising his protégé, the great Chandragupta Maurya, during an unstable time of Macedonian and Persian invasions, when the very unity of an Indic nation-state was at risk. Kautilya was the father of realpolitik, perhaps, but it is a fundamental error to see [his teachings as a] rationalization of corruption or ethical failures.

 Instead, tomes have been written on Kautilya’s celebrated aphorisms of management, and only recently did this forum feature M.V. Rajeev Gowda of the Indian Institute of Management, Bangalore, taking a different view of the Arthashastra. “Corruption has certainly existed in India historically; Kautilya, in his Arthashastra, discusses how to combat it,” Gowda wrote, in diametric contrast to a perspective that would see corruption in the modern business milieu as somehow sanctioned in that work.

 That India’s politico-economic life is infested by a culture of lax ethical standards is demonstrably true; to contend that the Hindu epics and ancient texts inform this deficit is equally myopic. This tendency to broadly impugn religious scriptures, or construct a normative cultural paradigm assailing a particular community and its traits, is an intellectually lazy path taken before. Suketu Mehta, a well-known Indian-American author was excoriated for his collective indictment of South Asians and the community’s “pursuit of success and money at any cost” in his depiction of Raj Rajaratnam [founder of Galleon Group] and his conviction for insider trading.

 The Anna Hazare-led awakening of Indian civil society demonstrates that condemnation of public sector corruption — and by extension, that of the Indian business-political complex — invokes a hypernorm model of business ethics. As Wharton’s Thomas Dunfee and Thomas Donaldson argued in their book Ties That Bind, the proscription of corruption in the writings of all major world religions, including Hinduism, is one of many sources of ethical behavior, so that the insistence for transparent business practice is a hypernorm.

 Having only just repudiated the derogatory epithet “Hindu rate of growth” that once defined India’s notoriously anemic economy, allegedly hamstrung by Hindu nihilism, many Hindus will reject any attempt to define corruption as a religio-culturally inspired reality in Indian society. Corruption and ethical failings are far too prevalent in contemporary India — but rather than being informed by Hindu scriptures, the scourge attests to how far society has diverged from them.

Additional reading:

 Temples, Townships and Schools: India’s Philanthropic Legacy

 Wharton’s Philip Nichols: ‘We Have to Line up Incentives So People Don’t Act Corruptly’

 Capital Plight: What Drives Corruption in India?

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How India’s Liberalization Shaped a Generation of Entrepreneurs

Posted on February 15, 2012

Since India began liberalizing its economy in 1991, entrepreneurship in the country has been on the upswing. Some of the most respected companies in the business community today are considered children of liberalization. Take information technology firm Infosys: In the first decade of its existence, from 1981 to 1991, Infosys grew to less than $5 million. In the 20 years since liberalization began, the company has grown to become a $6 billion-plus entity, and one that is well established in the global arena.

N.R. Narayana Murthy, co-founder and chairman emeritus of Infosys, is categorical that the company would not have seen this kind of success had India not set forth on the liberalization path. He has often said, “If there is one great example of the success of liberalization, it is Infosys.” Indeed, at the 16th Wharton India Economic Forum held in Mumbai earlier this year, keynote speaker K.V. Kamath, chairman of ICICI Bank and Infosys noted that liberalization “has allowed a whole new generation of entrepreneurs to flower, execute their vision and add tremendous value.”

In a recent study, Kaustubh Dhargalkar, professor of business design and head of the innovation lab at the Center For Innovation and Memetics at the Mumbai-based Welingkar Institute of Management Research and Development, and his research assistant Rudra Desai, have examined the role that liberalization has played in shaping successful entrepreneurs in India. Dhargalkar’s study focuses on companies listed in Group A of the Bombay Stock Exchange (BSE) from 1995 to 2011. He says that it typically takes three to four years for policy decisions to reflect on firm performance at the ground level; Dhargalkar chose this particular category for the study because it represents the elite, high-performing and sought-after firms. “The listing of a company in this group is an indicator of the success of the company,” he notes. “These are blue chip firms.”

According to Dhargalkar’s study, the number of first generation companies listed in Group A has grown from nine in 1991 to 30 in 2011. That number does not include those start-ups that moved out of Group A for various reasons, such as being acquired by another firm. “If we were to consider the total number of first generation companies getting listed, as well as going out of, Group A on the BSE then 32 more companies would be added to the list,” the researchers write. “In simple terms, 62 different first generation companies got listed in Group A of the BSE [from] 1995 to 2011.” That’s an increase of 588%.

But even if one were only to consider the 30 companies that were listed on Group A and did not move out during the period studied, the increase in percentage terms since liberalization is still significant. In 1995, first generation companies accounted for 9.78% of the firms listed on Group A. In 2011, they constituted 15.08%. According to the study, moving forward “the gap in numbers between the first generation companies and older established companies will gradually reduce, though not get bridged…. If reforms are pushed by the government in an orderly manner, the Indian entrepreneurs would continue to create big-ticket successes.”

But given the current state of Indian politics, where the government has been reduced to a state of policy paralysis due to charges of corruption, what will be the effect on entrepreneurship? “There will be some impact,” Dhargalkar says. “But the power of entrepreneurship in India has been unleashed by the liberalization process and even if the pace of reforms is slow, entrepreneurs will find a way to move ahead.”

Dhargalkar lists four key reasons for the increased influence of first generation companies in the post-liberalization era: Technology has substantially reduced the costs associated with niche marketing; stock markets have become more efficient and transparent and made it easier for entrepreneurs to access money; the costs of starting up an enterprise have fallen because of access to angel investors and venture capitalists; and Indians have opened up to entrepreneurship.

Pointing out that entrepreneurs are important in any economy because they create employment, generate new ideas and implement new techniques in management functions, Dhargalkar notes: “Over time, entrepreneurs will increasingly contribute to India’s GDP and also have a greater impact on the socioeconomic fabric of the nation.”

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Mobile Payments: Not a Game Changer Yet?

Posted on February 14, 2012

In March, PayPal will enable its users to pay through their mobile phones, tablets or iPads at 2,000 Home Depot stores across the U.S., and by the end of the year at 20 other national retailers. Mobile payments are rapidly gaining popularity, but large scale adoption will depend on consumer perceptions of security and the pricing of such services, according to Wharton faculty.

A subsidiary of online shopping portal eBay, PayPal last year exceeded expectations with $4 billion in mobile payments volume, and the company predicts that figure will reach $7 billion in 2012, company spokesperson Anuj Nayar told Knowledge@Wharton Today. Last November, mobile payments were 538% higher on Black Friday than on the same day in 2010, according to PayPal. The firm’s latest encouragement comes from a pilot program it launched in January at 51 Home Depot stores, mostly in the San Francisco Bay area.

Mobile payments are a small fraction of the net payments of $118 billion that PayPal put through in 2011. Even so, Shawndra Hill, a Wharton professor of operations and information management, finds PayPal’s mobile initiative “exciting,” although she doesn’t think it is “a game changer just yet.” Before wide scale adoption occurs among consumers, “mobile solutions need to prove that they are as secure as paying with credit cards or cash,” she says. Also, consumers will need to trust the brands offering these services, just as “they have had a long time to learn to trust credit cards.” Further, mobile payment options need to be more convenient and possibly cheaper than other avenues, Hill adds.

According to Wharton marketing professor Barbara Kahn, pricing of mobile payments will determine their popularity, especially when conventional credit cards also move to mobile formats. “The issue from the consumer point of view will be which form of mobile payment to use, just like we now decide which type of card to use,” she says. “Right now, the end user [usually] pays list price for the item regardless of what kind of card is used; sometimes there is a cash discount, or in some countries a fee for using a credit card. I would imagine all of these pricing issues are on the table now.”

Hill suggests that mobile payment processors could expand their market opportunity by offering lower transaction fees than credit cards. Also, the requisite infrastructure and standards for money transfers have to keep pace, she notes.

PayPal’s mobile payments option is part of its recently launched PayPal Wallet, which includes a card that allows offline payments at stores. With that, “consumers will choose if they want to swipe a card, use an app or tap their phone,” says Nayar. Others in the mobile payments space include Google Wallet, which stores customer credit card information on smartphones, and so-called NFC devices that can be used for electronic payments. (The Near Field Communications Forum is a group of companies — including Nokia, Sony, Samsung and Microsoft, among others — that is developing mechanisms for payments and other services across devices.)

Mobile payments are just one of many new options consumers will see this year, according to Scott Dunlap, PayPal’s vice president of emerging opportunities. “In 2012, we will see a rise in virtual currencies and the ability to use them to pay for ‘real’ goods,” he wrote recently in the online magazine Gigaom.com. “Imagine paying for groceries at Safeway with Facebook credits or using extra frequent flyer miles for that cup of coffee at Starbucks.”

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A Good Deal, for Whom?

Posted on February 13, 2012

After months of wrangling, the government last week announced a $26 billion settlement with five of the country’s biggest banks that is designed to offer some relief to homeowners victimized by fraudulent mortgage practices and foreclosure abuses.

The five banks include Bank of America, JPMorgan Chase, Citibank, Wells Fargo and Ally Financial.

The goal of the settlement is to hold the banks accountable for a range of shady dealings — ranging from charging new homeowners excessive fees for insurance policies to evicting current homeowners on the basis of unsubstantiated or false information — and also to jumpstart the moribund housing market.

Observers, however, are skeptical about who this settlement will really help. Some say the banks have gotten off easy even as relatively few homeowners will be helped by the promised aid. A column in Sunday’s New York Times business section, for example, suggests that the payback to people whose properties were wrongly foreclosed on will most likely be less than $2,000 per homeowner. The column also describes the settlement as a “stealth bailout of the major banks” because, as one critic points out, “it will improve the value of the second liens or home equity lines of credit [the banks] own” because these holdings are “worthless if the first mortgages preceding them are underwater.”

Nor is there any expectation that the banks will actually carry through on the promised compensation, the column goes on to say, citing other agreements with the government — such as Countrywide Financial’s predatory lending settlement in 2008 — in which banks failed to live up to the terms of a deal.

Finally, skeptics doubt that the mortgage industry’s reputation will be rebuilt after an agreement that offers too little, too late to help either individual homeowners or the overall housing market.

According to Kent Smetters, Wharton professor of business and public policy, “The agreement ostensibly deals with alleged acts committed by banks during the foreclosure process, including improper papering and fees. However, the remedies in the agreement itself use broad brush strokes that do not sufficiently target the harmed parties, instead benefitting some homeowners who simply borrowed more than they can repay. It is not surprising, therefore, that the help is diluted.”

The real problem, he adds, “is not the total size of payments, but a banking system with insufficient accounting systems and securitization processes that render targeted remedies nearly impossible.”

Wharton real estate professor Susan M. Wachter describes the deal as “a start, a down payment, if you will. It covers only a small share of the market. But for those it helps, it will matter. And it may help put into place a template for solving the far larger part of the problem that is out there.”

Indeed, an article last week in The New York Times notes that the money “will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosures,” but adds that the agreement remains “the broadest effort yet to help borrowers owing more than their houses are worth.” It predicts that about one million people will be able to get their mortgage debt “reduced by lenders or will be able to refinance their homes at lower rates.”

In addition, the article states, the settlement does not preclude regulators from filing criminal charges against banks or investigating other questionable practices related to the housing market, such as insurance and tax fraud or the bundling of risky mortgages into securities later sold to unsuspecting investors.

 

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