Henrich R. GreveINSEAD Chair of Organization and Management Theory Professor of Entrepreneurship

Being in the Right Place: Communities and Organizations

Overall Agenda

•Firm and Community

• The community as a node connecting information flows

• The community as a birthplace of firms

• The community as a supporting structure for firms

Node Connecting Information Flows

• Industrial cluster model

• Each industry involves a set of information flows useful for founders and those operating firm

• Suppliers similarly involve information flows• Communities with the greatest intersection of these

information flows become clusters with competitive advantage

• Is this old-fashioned? Is it contrary to smooth information flow assumptions in some of our theoretical views, like resource based view?

Figure 2a: Post-panamax Container Ship Adoption

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A hard-to-find innovation?

Post-Panamax Container Carrier: Not a subtle way to save 30+ % of total unit costs per journey

Container Network 1994

China

Dalian

Roland

Fincant

Hanjin

Howaldt

Hudong

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Hyundai

IHI

Sietas

Kawasaki

KoyoMHI

OdenseSamsung

Teraoka

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Kvarner

Mitsui

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Evergreen

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American

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Hanjin

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Hyundai

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OOCL

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Zodiac

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Cosco

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Overall Agenda

•Firm and Community

• The community as a node connecting information flows

• The community as a birthplace of firms

• The community as a supporting structure for firms

Birthplace of Organizations

• Start with observations on community organization:

• Santa Clara, CA the resort town versus Ventura, CA the oil town (but both had oil)• Molotch et al AJS 2000: Community organizations “harbor memory

traces … through something like a social structure can transpose itself from one time to the next and one institutional realm to the next”

• Northern Italy versus Southern Italy• Putnam et al. 1993: “one could have predicted the success or failure of

regional government in Italy in the 1980’s with extraordinary accuracy from patterns of civic engagement nearly a century earlier”

Community Organizing Capability?

• Early organizational founding leaves traces:

• Exemplar organizations• Network of individuals trained in founding and running

them• Cultural elements (stories, justifications)

• Polya urn: Subsequent foundings draw on the same background

• More nodes in network• Tighter connections between network• Stronger cultural background

• But only in communities with early start – so divergence

Mutual Organizations in Norway, 19th and 20th century

Savings bank foundings Cooperative foundings

Some Evidence: Financial Mutuals Create Retail Coops, 50+ Years LaterRegression of Cooperative foundingEarly Founding:

Village Fire Insurers 0.096**

Savings Banks 0.174**

Insurers 0.039

Average Treatment EffectsYear Coefficient

1915 0.372***

1925 0.490***

1935 0.484***

1945 0.524***

1955 0.532***

The Extension: Commercial Firms

• Is there a generalized founding capability in communities?

• If so, it should be shown by foundings having spillovers across forms of organizations, rather than within

• Argument has been made based on general institutional conditions:

• North (1990), Putnam et al (1993), Krugman (1991) • Argument has been made in negative direction:

• Acemoglu et al. (2002) on disease, Kitchelt and Bustokova (2009) on clientele states, Kuran (2011) on corporate role in law

• Our argument is specifically organizational

Overall Agenda

•Firm and Community

• The community as a node connecting information flows

• The community as a birthplace of firms

• The community as a supporting structure for firms

Supporting Structure for Firms

• Close link of trust between firm and customers often overlooked; easier to notice when it is broken

• Earlier work on stigmatization showed how it can unravel and create a crisis when firm breaks community norms

• Jonsson, Greve, Fujiwara-Greve ASQ 2009: Skandia insurance firm broke community norms by giving relatives of managers cheap apartments to rent --> Loss of customers in mutual funds owned by other insurance firms, as well as other firms with characteristics resembling Skandia.

• Fujiwara-Greve et al.: Skandia also suffered significant losses from scandal; was sold in the end.

Bank runs don’t happen anymore

Greece 2011

Bank runs don’t happen anymore

Korea 2011

Bank Runs and Communities

• Bank runs are contagious: often occur as a reaction to bank runs elsewhere

• Empirics: Most banks do not experience runs; runs are not predicted by bank characteristics

• So look outside bank, to community:

• Demographically diverse communities lack internal networks that drive spread of the “problem” – safer

• Economically unequal communities have spread of problem plus distrust in others - riskier

Sources of fragmentation, 1893 USA

• Heavily agrarian especially in Mid-West and West, much immigration

• Race • Religion• Wealth inequality

• These are community characteristics “outside” organization; cannot easily select away

• Religion especially important because of congregation and communication / networks

Some Evidence: Communities Turn on Banks

Variable All runs

Runs to failure

Runs to reopen

Ethnic Diversity -6.690*** -5.775** -5.775**

Religious Diversity -1.337* -1.023† -2.498**

Wealth Inequality 2.962*** 1.931* 3.598**

The Extension: Exit, Voice, Loyalty

• We have heard this before: Hirschman

• Two modern updates:

• Take seriously the structure of the community side: how are they linked in the communication side, and the mobilization structures? See them as potential social movements, for or against.

• Take seriously the structure of the firm side: how are they linked in stigmatization structures? Who will be blamed when something happens? See them as linked subjects of social control agents.

The Big Picture: Firms in Linked Communities