A summary of selected new research by HBS faculty.

Diversification Best Bet in Emerging Markets

In today's era of global competitiveness, companies in the industrialized world have slimmed down their operations in order to focus on doing a few things well. These focused operations contrast sharply with the ungainly conglomerates assembled in the 1960s and 1970s that provided a variety of seemingly mismatched products and services. And while many consultants and investors are seeking to extend this focused model into emerging markets such as India, China, and Malaysia, one size may not fit all, say Professor Krishna G. Palepu and Assistant Professor Tarun Khanna, authors of "Corporate Strategies for Business Groups in Emerging Markets," a working paper slated to be published (under a different title) in the July-August issue of the Harvard Business Review. This new study makes a case for diversification efforts for companies in business environments where big may, in fact, be beautiful. "Focus is successful only when the existing economy provides the necessary institutions to support it. A company's strategy should be context-dependent," explains Palepu, who, with Khanna, analyzed statistical data from five hundred business groups in India and spoke to dozens of managers in Malaysia, Indonesia, and Chile.

The pair found that companies outside the United States perform better when they replicate the quality certification institutions, financial services, business training, and regulatory bodies that are taken for granted in the West but are not available in emerging markets. "Companies can create value by developing these systems for themselves," notes Palepu. For example, large diversified companies doing business in India and South Korea, where there are few business schools, have benefited from setting up internal management development programs and facilities in order to maintain a qualified pool of employees.

Replicating U.S. business practices in other countries is a very complex challenge, asserts Palepu. "In order to do venture capital, you need a stock market so that the venture capitalists can cash out their investments. To have a stock market, you need reliable financial reporting, reputable auditing bodies, and an independent financial press. Creating institutions similar to those we have in the United States takes a very long time because of such interdependencies."

Looking Out for Number One

The tension between the desire to maintain cordial relations with others and the need to act in one's own self-interest affects all human relations. This conflict is particularly apparent in the workplace, where employees must cooperate in order to achieve the company's goals at the same time they are competing to enhance their careers. In a working paper titled "Cloaking Self-Interest with High-Minded Principle," HBS doctoral student Justine Fenwick and Assistant Professor Robert J. Robinson explore how these contradictory forces can play out in the business world.

In one part of this study, the researchers asked their subjects to allocate a company's year-end bonus money. Half of the participants were to share the money with either a partner or subordinates, and half were to divide the bonus for others, keeping none of it for themselves. Not surprisingly, the subjects who had a personal stake in how the cash was awarded gave themselves a larger chunk than the nonbenefiting subjects thought they merited. "When people stand to gain from a situation," says Fenwick, "their decision-making process is altered."

One interesting finding was the subtle manner in which participants revealed their self-interest. When participants could share in the cash bonus, they divided the entire bonus equally between themselves and their partner. However, nonbenefiting subjects viewing the same situation did not feel that either employee deserved half of the entire bonus. Thus, it appears that subjects cloak their self-interest under the guise of the high principle of equality. In this experiment they behaved fairly with their partner but more generously than those observing felt was warranted.

"People will always tend to err in their own favor, yet they are convinced that they are being just," notes Fenwick. "Managers should recognize that there will always be a potential for conflict when decision-makers stand to gain from their choices."

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