Archive for the ‘Academics’ Category

By Fernando Fernandez, Professor at IE Business School

As the decline of macroeconomic indicators finally starts to ease, some can now see light at the end of a tunnel. But we are not out of the woods yet.January has not brought much new information or many original comments. Except, perhaps, the fact that the international press is becoming increasingly critical, to the point of irony, of Spain’s economic policy. And of course we also have Spain’s European presidency which, while Spain continues to systematically breach Community policies (e.g. the sanctions for the takeover of Endesa or resignation in the face of the sanctions that will come as a result of transposing the services directive), is actually daring to ask for a more effective sanctions system. And this despite the years it takes to earn a good reputation in Brussels.

Elsewhere, the main indicators continue their downhill trend (this week we have had inflation, unemployment and industrial production), even if the fall is being cushioned. For some, it is a sign of the end of the crisis; for others, it is a sign of the continued destruction of employment and the industrial fabric. Perhaps the best summary has come from the Secretary of State for the Economy: we will not return to the levels of employment we had before the crisis in the next five years. Nor will we see previous levels of economic activity or consumption or retail sales for some time. And we will have to wait even longer to return to previous levels of tax collected because the flexibility of public revenue has fallen dramatically.

It is also an optimistic scenario and one that implies an automatic pendulum effect. But that effect is an illusion. It does not exist. The economy does not bounce back automatically. For example, the public deficit will not correct itself and the government will have to choose between continuing into further debt with the risk of entering into an explosive situation on markets that are becoming increasingly concerned with the public debt, or seeing sense and proposing a serious plan for fiscal consolidation.

The same will happen with the real estate sector: either prices fall by at least 30% or the excess supply will take many years to be absorbed by a population whose available income is falling as interest rates rise. If we continue to deny the problem and try to save the sector with state-subsidised housing and bookkeeping protection mechanisms, the crisis will last 10 years. Not to mention the financial sector, which is in urgent need of adjustment. Not only does it have problems with stocks, failed assets related to the real estate bubble and the over-eagerness with which certain corporate transactions were financed, but it also has a serious cash flow problem.

Even in the optimistic macroeconomic scenario described above, revenue will fall and costs will increase, a large number of banks will file losses and need injections of capital. Mergers are one way of dealing with the problem, but only if they imply significant reductions of installed capacity and running costs, and a reduction in political meddling in management processes, which is the opposite of what is happening with the consent of the competent authority.

But the worst thing for the future is the potential fall in the GDP, which is the result of a reduction in the working population by a further two million people since the beginning of the crisis. Many economists think that the Spanish miracle was basically due to the incorporation of six million workers. If we lose two million forever, we can only resign ourselves to growing on a smaller scale in the future, knowing that the aforementioned problem will get even worse. The only alternative left now is that of implementing a labour reform to make hiring workers an attractive proposition again.

By Enrique Dans, Professor at IE Business School

Many people use their mobile phone for much more than speaking, with the result that mobiles are now designed to fit well in your hands rather than against your ear. They’re no longer phones. They’re computers.I have always been particularly interested in adaptation processes where technology is concerned, especially those that happen at great speed. And I am lucky enough to live in a time when they happen quite often. Mobile telephones are a clear example: from being somewhat inconvenient and expensive, justifiable only in special cases, we are now in the situation where the number of mobiles in some countries is clearly higher than the number of users. The penetration level of mobile telephones in Spain is greater than 111%. In countries such as the United Kingdom, where it is 122%, and Hong Kong, where it is 150%, citizens presumably carry a mobile phone in each pocket.
However, the way in which they are used is particularly interesting. Many mobile telephone users still use the telephone for its original function, the one that made them start carrying the appliance in their pockets in the first place: making and receiving telephone calls. This would seem logical, except for the fact that any similarity with the “building bricks” that were popular at the beginning of the 1990s is now mere coincidence: today, the appliance many customers carry in their handbags or pockets is, let´s say… something else.

Let´s analyse the way they are used and let´s take two popular appliances, such as the BlackBerry or the iPhone. If we look at their users, what do we see? If we are talking about a BlackBerry, a person who holds the mobile between his/her index fingers in both hands while pressing the keys with both thumbs. In the case of the latter, we see a user who holds the telephone with one hand while moving the index finger of the other hand around the touchscreen. Each form of interaction has its supporters and detractors, but both cases have one thing in common: the mobile spends more time in the user´s hand than next to his/her ear. Many users spend more time reading messages, looking at websites, consulting maps and other operations that require them to look at the screen than speaking on the telephone with the speaker next to their ears and the microphone next to their mouths. This far down the line, the 1989 Fortune article that mentioned the Motorola MicroTAC and predicted that “portable phones won´t get a lot smaller than this one, because after all, they have to reach from your ear to your mouth” brings a smile to our face at the very least.

So why do many users normally use their mobile phone for something other than speaking on the phone, and why are they are designed to fit better in the hand and not next to the ear? The fact that what those users carry around with them is still called a “mobile telephone” is a kind of throwback to its original purpose, because now it is actually something else. What those users carry with them is a computer. Small, but a computer nonetheless: with its microprocessor, its ROM and RAM and its hard drive, etc., offering much the same scope as a computer. Not many people use this type of terminal to write long texts, but replying to an e-mail, searching the web, reading the newspaper, going over the restaurant menu or finding the location of their destination is pretty common. There are still those who buy the latest mobile because “it is very sophisticated” and use it for speaking on the telephone. And there are those who deny everything and say that “the telephone is for speaking on the telephone” and “I´m not going to live life stressed out looking at the screen every two or three minutes”, as if carrying it with them means that they have to check their e-mail and browse the web every 10 minutes. When all is said and done, it is simply a question of adaptation.

Of course, this kind of change needs many other things to change too. It requires a change in data rates to encourage use, and a change in attitude as far as web design is concerned to enable access from this type of appliance. Wanting to log on to your company´s website from a mobile phone and finding that you can´t because it has some absurd piece of Flash is frustrating – try it. Our “mobile telephone” is no longer just a mobile telephone: speaking on the telephone is only one of its functions. The mobile telephone has grown and taken us into another age.

By Prof. Javier Carrillo, Professor at IE Business School

The inability to reach an international agreement which would bring continuity to the current Kyoto Protocol is incomprehensible, from both an environmental and business perspective.After 12 days of intense work, last weekend saw the closure of the 15th Conference of the Parties (COP 15) of the United Nations Framework Convention on Climate Change (UNFCCC), which took place in Copenhagen. Thousands of delegates from 193 countries again tried to reach, again unsuccessfully, an international commitment to the continuity of the current Kyoto protocol when it expires in 2012. Once again, the commitments were postponed and hopes transferred to later negotiations, which will take place later in the year, before the next summit in Mexico in December. The importance of clearing up the uncertainty concerning the post-Kyoto regime as quickly as possible is of great importance not only for the environment, but also for business. The lack of sufficiently clear price indications for reducing emissions after 2012 is having a negative effect on current business decisions concerning investments in mitigation measures, increasing risk premiums and the cost of finance. The continued postponement of national commitments and the resulting lack of decisive action by companies have particularly negative effects on capital-intensive sectors, such as electricity, in which investments must be made over a timeline of between 25 and 30 years. In this context of relative uncertainty, the predominant attitude among businesses will continue to be that of diversifying their activities for controlling emissions, including the purchase of emission rights and involvement in the clean development mechanism, where applicable, depending on the costs of the various options. There will also be greater emphasis on the lines of business that are profitable regardless of whether or not emissions are reduced, but may as well reduce the emissions anyway. The uncertainty is also causing a delay in more important investments, which, paradoxically, will prevent the assumption of more demanding commitments to reducing emissions in the future. Alternatively, if the tighter restrictions are adopted later, the time lost will mean greater investment efforts, which will undoubtedly imply higher costs for reducing emissions than if the reduction process had been more gradual. It is necessary to make urgent and significant progress in the definition of a post-Kyoto system in at least two directions. There is an urgent need to define and agree on emission reduction targets on an international scale, as well as the mitigation instruments designed to ensure said targets are met. In particular, there is a need to guarantee continuity and extend the scope of the international emissions trade system provided in the protocol itself, in order to meet global reduction targets at a cost lower than that of other direct regulation instruments. Accordingly, in environmental but also in business terms, it is appropriate for the European Union, and Spain as a member state, to continue to lead the negotiation process to reach an international post-Kyoto mitigation agreement within the framework of the UNFCCC that provides those two basic elements: targets and instruments. In short, generic, non-binding commitments are not suitable for guaranteeing an attractive context for investment in new technologies and mitigation projects. Establishing targets and instruments sufficiently in advance plays a key role in providing a long-term indication of the price of carbon. If the aim is to meet the targets set in the current system, it is both urgent and essential to convince investors these targets will be maintained.

IE Focus | By Gonzalo Garland, Professor of Economic Environment at IE Business School

The dollar is at an all time low, and everything points to it continuing to show signs of weakness over the next few months. Is this the beginning of the end of its reign?In the last few weeks we have seen how the euro continued to appreciate against the dollar to reach 1.5 dollars per euro, settling at around 1.47-1.48. Though this level is still far from the high of 1.6 in July 2008, it has generated worries about European exports during the current economic lull. Moreover, although the official stance maintains the importance of a strong dollar, in reality this exchange rate boosts US exports which is positive for the recovery of the world’s largest economy. A weak dollar is also convenient for China: With the Yuan semi-pegged to the American currency, the weak dollar in turn lowers the prices of Chinese exports. Although there are many other drivers underlying the growth of the Asian giant, we shouldn’t forget this effect.

Furthermore, the US trade deficit remains substantial, constituting one of the main reasons for the dollar’s weakness. Additionally, the US policy of keeping interest rates close to zero attracts little capital to the country, further contributing to a depreciated dollar. Therefore, and despite the enormous appetite for US assets by countries like China, there aren’t many reasons to expect a serious strengthening of the dollar in the short term. In the medium term, however, the situation may change. The latest figures for GDP growth corresponding to the third quarter in the US was positive. But it’s still early for excessive optimism, since the recovery is fragile and plenty of uncertainty remains. The exit strategy for expansion poicies will be complicated, and adjustments will have to be made subtly. Experience from the recent past tells us that when the US decides to change the direction of its monetary policy and starts raising interest rates, it does so very rapidly in a series of raises that take them above the interest rates of the Euro zone, which in turn boosts the dollar. This is why analysts are forecasting a euro-dollar exchange rate of 1.2-1.3 dollars per euro for the next year or so. This could change, however, if inflation rises in Europe and the European Central Bank with its anti-inflationist attitude raises interest rates in the Euro zone.

And in the long term? In the long term and as long as the US current account deficit is not significantly reduced, it is reasonable to assume that the dollar won’t be as strong as in the past. This is even more likely if China opts slowly but surely to diversify its reserves and investments among other currencies and geographical areas, even though that particular move doesn’t seem imminent. We still live in a world in which the main currency is the dollar, with competition rising. If there is movement, it will be slow. Despite the fact that we have been hearing more lately about the dollar crisis, we shouldn’t expect a collapse of the dollar in the short or medium term.

Foreign job postings slow the climb up the corporate ladder for executives, according to research presented at the annual meeting of the Academy of Management, which ended on Tuesday.

A chief executive without an overseas work background reaches the top job about two years sooner than those who went abroad, said Monika Hamori, professor of management at IE Business School in Madrid. The more assignments and the longer time spent outside the home organization, the longer it takes, she said. “The results show that executives with international assignment experience take longer to reach the top echelon,” said Hamori, who with IE colleague Burak Koyuncu studied the careers of chief executives at companies on the S&P 500 and Financial Times Europe 500 indices.

“Our findings suggest that you advance faster if you are in proximity to the corporate headquarters’ social networks than if you are on assignment abroad.” With a few exceptions, foreign divisions represent the periphery, far from companies’ centers of power, she said. The average chief executive is appointed to the top job in 24.83 years from the start of his or her career but those with international assignments take 1.96 years longer than those without international experience, the researchers found. “Do it for a year or two, do it when you’re young and don’t switch companies when you get back,” said Hamori.

One third of the chief executives in the study had international assignments.

IE Focus | By Rafael Hurtado, Professor at IE Business School

The collapse of the stock market has highlighted the shortcomings of the hedge fund system of short sales and fuelled debate on the need to set limits and rules for this type of operation.In recent months, and in particular after the great crash of the stock markets as from September 2008, the hedge fund system of short sales has been a subject of analysis and debate by many players on financial markets. The consequences and system of short sales are a source of great controversy in the financial sector.

Short sales take place through the loan of securities. A short position (short sale) takes place through the sale of an asset that is not held by the investor, but borrowed through an intermediary and later bought to pay the loan. The profit is obtained if the initial sale is completed at a higher price than the purchase price. With a short sale, the investor obtains greater profit if the price of the asset falls.

On many occasions, hedge funds not only involve short sales, but also use a significant amount of leverage. For a short sale, an intermediary must lend a certain number of shares. Some companies say that they have uncovered signs of their shares being lent as part of a chain. This type of transaction involves further risk. Read more…

IE Focus | By Kenneth Dubin, Professor at IE Business School

In an environment marked by uncertainty, scant resources and a lack of interconnectivity, people management should be based on structures that are more horizontal and less formal coordination systems.The present crisis should mark a before and after in human resources management. Politicians and social players will (or may not) reform the employment market and the labour relations system. However, for businesses and managers (and also for employees), the change is a must: yesterday´s competitive strategies have expired and taken with them the (bad) habits we acquired in people management.

The current situation is defined by uncertainty, the shortage of financial resources and the revolution of inter-connectivity; new business commitments in both SMEs and multinationals must be quick, flexible and innovative. This means working by project and generating value through knowledge rather than capital resources. Projects require collaboration between the functional areas of the company and also between the company and external agents (suppliers, other businesses and, more often than not, clients) and who may be located far from Spain. Read more…

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IE Focus | By Antonio Rivela and Ignacio de la Torre. Professors. IE Business School

However, many foreign analysts are asking why the subprime hurricane has had hardly any effect on the Spanish market in comparison with its impact on the North American or British banking market if, in theory, Spain was on a similar track (housing price bubble, high credit penetration and runaway foreign deficit). Although many have responded to this question with apocalyptic visions, it is our opinion that the actual situation is much less dramatic. In this article, we will make a detailed analysis of this opinion as objectively as possible.

As was pointed out by Alfredo Sáenz, CEO of Banco Santander, subprime mortgages do exist in Spain. However, his statement needs to be explained: yes, they do exist, but to a much lesser extent than in other markets. Where do they come from? There are two basic ways in which the subprime disease can be caught: by awarding subprime mortgages or by buying securitisations linked to subprime risk. If we analyse the first of the phenomena, there are four very good reasons why hardly any subprime mortgages have been awarded in Spain: Read more…

IE Focus | By Enrique Dans, Professor at IE Business School

There are politicians who try to stop it, as if that were possible, as if those who oppose technological progress had ever won a battle against it. There are companies who confine it to specific functional areas or restrict it to specific personnel and there are even countries who try to block it so that citizens cannot gain access to it. We constantly come up against situations in which our options for using technology as we would like are scant or even non-existent due to not having access to a certain device, not having connectivity or a power supply, or to pure and simple ignorance. Read more…