Research

Across both streams, I examine various phenomena of keen managerial interest, including acquisitions, corporate restructuring, global sourcing, private equity, CSR, and technological innovation. My work brings a wide variety of approaches to bear on understanding these phenomena, supplementing traditional hypothesis testing work with formal models, simulations, replications, reviews, verbal theory pieces, and other exploratory empirical approaches. I provide a brief summary of my work in each stream below. All of my published or forthcoming studies are available here, and brief descriptions of some of the working papers (WP) listed below can be found on my Current Projects page. 

Organizational scope and capabilities

Horizontal scope choices

One stream of my work focuses on corporate scope choices, studying how firms adjust their boundaries in response to changes in both external conditions and internal capabilities. My initial work in this area, coming out of my dissertation, focuses on the drivers of a firm’s horizontal scope, i.e., the portfolio of businesses in which the firm operates. While prior work has often emphasized the role of changes in external market conditions in driving scope changes, in Kaul (2012) I argue that firms may also alter their corporate portfolio in response to changing internal capabilities, entering new areas as technological breakthroughs within the firm reveal new opportunities, while simultaneously divesting out of marginal businesses. Acquisitions and divestments are thus seen not as opposites, but as two aspects of a broader reshuffling of the firm’s corporate portfolio in response to a changing opportunity set, with the relation between them being moderated by the firm’s access to slack financial resources. Moreover, innovations by rivals—which alter the value of the firm’s internal capabilities—are also shown to trigger changes in the firm’s mix of businesses.

Continuing to think about horizontal scope and firms' acquisition and divestment choices, I then ask: how do firms decide what to buy or to whom to sell? In Kaul and Wu (2016) we address the question of acquirer target choice, distinguishing between acquisitions that are aimed at deploying existing capabilities, and those that are intended to acquire and develop new capabilities, and arguing that the two types of acquisitions will require very different types of targets. We build an analytic model of acquirer target selection, incorporating the various benefits and costs of acquisition into an integrated theoretical framework, and show support for the predictions from this model in the Chinese beer industry. Kaul, Nary, and Singh (2018) then examines the other side of the story, studying who buys the businesses that firms divest. Here, we focus specifically on the role of non-venture private equity firms (buyout funds), arguing that such firms represent an institutional response to the problems of underinvestment and myopia associated with public ownership, and will therefore systematically target businesses whose parents have failed to adequately invest in building long-term strategic capabilities. Evidence from a sample of over 1700 divestments by publicly owned US manufacturing firms provides support for our arguments. In a follow-on piece, Nary and Kaul (2023) further develop the theoretical argument for the role of private equity. We argue that the market for corporate assets is subject to frictions of information, governance, and timing, and that private equity firms are specialized players designed to overcome these frictions by acting as intelligent investors, professional owners, and strategic brokers, respectively.

While these studies look at changes in a firm's product market scope, firms also adjust their geographic scope over time, adjusting the portfolio of countries in which they operate in response to changing internal capabilities and external conditions. In Berry and Kaul (2020) we argue that both types of corporate renewal--product market and geographic--have similar antecedents, and develop a theoretical framework distinguishing between resource exploiting and resource augmenting renewal, with implications for both the corporate strategy and international business literature. In a related piece, Berry and Kaul (2016) we highlight the importance of taking the antecedents of geographic scope into account, showing that once we account for the endogeneity of firm’s choice of multinational scope, we are unable to find a significant relationship between the geographic scope of US multinationals and their financial performance, let alone replicate the S-shaped relationship found in prior work. Berry and Kaul (2022) extends this work further by taking a multidimensional view of global strategy and showing that the highest performing US multinationals are those that are able to pursue high levels of aggregation, adaptation, and arbitrage simultaneously. 

Vertical scope choices

The development of new capabilities may not only a drive a firm to alter its horizontal scope, it may also trigger changes in vertical scope, i.e., in the firm’s choice to integrate or outsource various activities. In Kaul (2013) I examine this idea from the perspective of an entrepreneur who develops or discovers a new invention, arguing that the uncertainty associated with the invention results in contractual incompleteness and leaves the inventor open to appropriation risk, because the very novelty that makes it impossible to analytically or statistically determine the value of the idea ex ante also makes it impossible to contract for the appropriation of this value ex post. Faced with this appropriation risk, the inventor is motivated to become an entrepreneur, taking ownership of the required resources and commercializing the invention, so as to lay claim to the residual value herself. This argument is further developed in Kaul, Ganco and Raffiee (2023), where we consider the case of an employee inventor trying to commercialize her invention. We develop an analytic model to examine the conditions under which the employee will move to a rival, commercialize the invention with her current employer, or establish her own start-up, and the resulting value implications for the inventor, her employer, and society.

Vertical scope choices at a granular level are also the focus of Barach, Kaul, Leung, and Lu (2019) where we study the extent to which businesses on a two-sided platform rely on the platform's big data capabilities to find transaction partners, rather than their own expertise. Our core argument is that while relying on the platform's big data capabilities may boost value creation, the lack of internal learning by the focal firm will limit its ability to appropriate that value. Firms may thus be better off adopting a strategy of partial reliance, relying on the platform's big data capabilities for some tasks, but its own internal capabilities for others. We test these predictions in the context of an online labor platform, using a regression discontinuity design to estimate a firm's reliance on the platform's recommendations when deciding whom to hire, and find that firms rely heavily on external recommendations when choosing whom to consider for the job, but almost entirely on their own internal judgment when deciding whom to finally hire, with this effect being stronger for more experienced firms and firms in larger markets, consistent with our theory.  

The choice between integration and outsourcing is also the focus of my work on global sourcing. In Berry and Kaul (2015) we argue that a firm’s choice to integrate its foreign manufacturing operations may be positively related to the extent of R&D it undertakes abroad. While traditional models of global sourcing in economics have generally assumed that firms source from abroad in order to tap into lower wage costs, we adapt these models to incorporate knowledge seeking motives. We argue that firms will increasingly rely on offshore integration as they increase the extent of their foreign R&D activities, so as to maximize spillovers between collocated activities, and show evidence for this using data on the population of US manufacturing multinationals. In follow-on work—Berry and Kaul (2023)—we examine how the industry-level drivers of global integration pressures have changed over time, showing that while economies of scale in R&D at the parent level remain a critical driver of global integration, such integration increasingly takes the form of product flows from subsidiaries, driven by availability of foreign knowledge, low-cost inputs, and increasing digitization. Further, Berry, Kaul, and Lee (2021) looks at how global sourcing choices are influenced by the prevailing environmental standards in a country. Extending the pollution haven hypothesis to the question of global sourcing, we show that both offshore integration and offshore outsourcing from a country decrease as its environmental standards become more stringent (as measured by decline in per capita carbon emissions) and that this result is robust to using the binding effects of the Kyoto protocol as an instrument. The study thus highlights the possibility that firms may take advantage of lax environmental regulation abroad by sourcing from third party suppliers abroad; a possibility largely ignored in prior work focusing exclusively on firm FDI choices, even though offshore outsourcing makes up about half of global sourcing by US firms. 

Innovation and adaptation in diversified firms

Having examined how organizational scope evolves over time in response to changing capabilities, I next examine how firms' scope and structure choices impact their subsequent innovation. Together with my work on the antecedents of organizational scope choices, these papers thus contribute to the literature on strategic renewal in the context of diversified firms, highlighting how operating in multiple markets (industries, countries, etc.) both enables and constrains a firm’s ability to adapt over time.

In Karim and Kaul (2015), we argue that multi-business firms may fail to capture the full potential for internal knowledge recombination because of internal boundaries between units, and that organizational restructuring may help to unlock these synergies by redrawing these boundaries. Using data from the medical industry, we show that organizational restructuring is associated with an increase in subsequent firm innovation, but only when the firm has coherent and high quality knowledge prior to the restructuring, i.e., when the potential value of unexploited synergies is high. This study thus illustrates a key theme of this stream of my research: that organizations are better off pursuing innovation from positions of strength, rather than waiting till poor performance forces them to try and innovate.

That theme is echoed in Eggers and Kaul (2018), where we examine the pursuit of radical new technologies by established firms, arguing that firms will be more likely to pursue radical invention in areas where they are falling behind technologically, but less likely to succeed when they do so. We confirm this mismatch between the motivation and ability to pursue radical technologies using a new patent-based measure of the ex ante novelty of a firm’s inventions, and show that this effect is stronger in larger, more diversified firms. The study thus not only sheds new light on the factors that may limit the ability of diversified incumbents to introduce radical new technologies, it does so while avoiding the problem of sampling on the dependent variable that has often plagued work in this area. In follow-on work (Eggers and Kaul, working) examine the nature of radical recombination, developing a typology of search strategies and finding, unexpectedly, that firms pursuing radical invention have a marked preference for drawing on knowledge from unfamiliar sources to apply to  familiar areas rather than taking knowledge from familiar areas and applying it to unfamiliar problems. This 'preference for problems' is more pronounced for technologically focused firms, moreover, suggesting that diversification may not only impact when firms search for radical technologies, but also how they do so. 

While these studies focus on radical invention within incumbent firms, Giustiziero, Kaul, and Wu (2019), examines incumbent learning from new entrants. Drawing together evolutionary theory and competitive dynamics, we develop a theoretical framework describing how incumbents and entrants react to each other. In particular, we emphasize the potential for 'creative divergence' between incumbents and entrants, with entrants drawing away from incumbents even as incumbents try to learn from them, so that incumbent investments in learning from entrants realize diminishing returns. Exploratory analyses in the cardiovascular medical device industry show support for this pattern. 

In addition to influencing a firm’s technological innovation, diversification may also constrain a firm’s ability to adapt over time more generally, as the need to maintain consistency across businesses limits the firm’s flexibility within businesses. We develop this idea further in Chen, Kaul, and Wu (2019), using a simulation model to study how these adaptation constraints vary with both the relatedness between businesses and the complexity within each business. A key take-away from our study is that firms seeking synergies across businesses not only face the challenge of over-diversification—entering too many (unrelated) businesses—they may also face the threat of over-coordination—integrating too much between any pair of (related) businesses—with the latter benefiting the firm in the short-run but compromising its ability to innovate and adapt over time. In follow-on work from this project, we examine the implications of these findings for the performance of de novo, redeploying, and diversifying entrants into new markets, as a function of the complexity and turbulence of the new market, as well as its relatedness with the parent business of the de alio entrant. We also use the model's simulation framework to explore the boundary conditions of platform governance. 

Nonmarket Strategy and Social Issues

Comparative governance of social issues

A second, and more recent, stream of my research explores questions in the nonmarket strategy space, focusing, in particular, on the role of for-profit firms in addressing social issues. My initial interest in this area come from thinking about nonmarket strategy from a new institutional economics perspective, as laid out in Dorobantu, Kaul and Zelner (2017). 

Building on this perspective, one sub-stream of my work in this area focuses on the comparative governance of social issues, i.e., the question of how activities in the public interest are best organized. The key idea here is that how the best way of addressing a social problem--and whether for-profit firms, in particular, are a good solution--depends upon the nature of the activity being undertaken. Different organizational forms are likely to be comparatively efficient in different contexts.  Thus, in Kaul and Luo (2018), we consider the case of a for-profit firm serving a social cause in exchange for a price premium from its customers, competing for these contributions with a non-profit serving the same cause. We develop a formal model of this ‘market for social goods’ and derive conditions under which the firm increases total supply of the social good or service while realizing additional profit for itself, as well as conditions under which it simply crowds out non-profit provision, making profit for its shareholders but not contributing to—and in some cases diminishing—social welfare. Our main conclusion is that corporate social responsibility is most likely to be welfare enhancing when undertaken in-house by firms with strong business capabilities pursuing social causes not already served by non-profits. Where this is not the case, corporate social responsibility may simply replace substantive social efforts of non-profits with the firm’s symbolic efforts, raising firm profitability but diminishing social welfare. We extend these findings in Kaul and Luo (working), where we model the provision of a public good by a for-profit, again in competition with a non-profit, but focusing on employees as the key stakeholders contributing to the social issue.

These arguments are further developed in Luo and Kaul (2019), where we compare not only for-profit and non-profit organizations, but also government provision and self-governing collectives. We develop a verbal argument highlighting the superior efficacy of for-profits in developing innovative solutions to social problems, as well as the potential for economies of scope between public and private provision, while also pointing out the limits to for-profit provision of public goods given externalities and information asymmetry. We also consider the advantages of other organizational forms, especially the superiority of non-profits in playing a fiduciary role in safeguarding stakeholder interests, as well as the advantage of self-governing collectives in solving assurance problems. Based on these arguments we develop a conceptual mapping linking the nature of the social issue to the most efficient organizational form for addressing it, considering not only pure forms, but a variety of hybrids.

Having laid out a general theory for the comparative governance of activities in the public interest, I am now interested in testing different parts of that theory empirically. In Jeong, Kaul, and Luo (working) we empirically examine the comparative governance of infrastructure projects, specifically internet broadband providers, comparing for-profit provision to provision by cooperatives. Building on theoretical arguments from our own prior work, we argue that infrastructure projects (such as internet broadband provision) will generate externalities in the local community, which for-profit providers will ignore, but cooperatives, being owned and controlled by members of the community, will internalize. Cooperatives will thus dominate for-profit providers in communities where accounting for externalities is important to quality decisions, and social cohesion makes cooperatives viable. Evidence from internet broadband provision in the United States from 2014 to 2017 supports these predictions, with cooperatives being more likely to enter (rural and low-income) communities marginalized by for-profits, and offering higher quality service and technologies when they do so. 

On key takeaway from my work on comparative governance of social issues is that such issues are not always (or often) best addressed by for-profit firms. Where a different governance arrangement would be comparatively efficient, trying to address a social issue through CSR or sustainability may be counter-productive, since the resources used for the CSR initiative could have been better used elsewhere. Whether as consumers, employees, or just citizens, we would have been better off investing in other arrangements (non-profits, cooperatives, and yes, even the government) to deal with the issues that plague us, than relying on, and rewarding, corporate attempts at social responsibility.

Social impact of CSR

Comparative efficiency, or the lack thereof, is not the only reason to be critical of the social impact of CSR efforts. There are other ways in which an activity billed as 'socially responsible' may fail to truly advance social welfare, and much of my recent work focuses on understanding whether, and under what conditions, CSR activities are truly delivering positive social impact. Thus, in Luo, Kaul, and Seo (2018) we critically examine the argument that corporate philanthropy offers firms insurance-like benefits in the event of accidents, highlighting the possibility of adverse selection and moral hazard in the use of such insurance. We develop a formal model of reputation insurance, considering not only the demand for such insurance by firms, but also the terms on which it supplied by society, and derive a set of alternate equilibria based on varying assumptions about the nature of firms, the ability of stakeholders to sustain collective action, and the level of information asymmetry. We then test the empirical predictions corresponding to these equilibria in the US oil industry, finding a positive association between the amount oil firms give in philanthropic donations and the number and extent of their subsequent oil spills—a finding consistent with adverse selection / moral hazard. 

Similarly, in Seo, Luo, and Kaul (2021), we examine the role of philanthropic variety on firm financial performance. While firms may do more good for society by concentrating their philanthropic donations on a single cause, they may gain greater financially rewards by spreading their donations across causes, especially if those who support their philanthropic efforts (employees, customers, etc.) are more concerned with whether a firm gives to a cause than how much it gives. Empirical analysis of corporate philanthropy in the United States confirming that firms do, in fact, benefit financially from spreading their donations across a wider range of causes, with this relationship being stronger for firms that operate in multiple countries and industries, for non-local giving, and for giving by firms whose donations are less likely to face activist scrutiny, consistent with moral hazard. In addition to examining the financial consequences of corporate giving, I also examine the role such giving plays in society. In Kaul, Luo, and Seo (working) we show that corporate giving is highly elitist, going disproportionately to high-income urban communities and being largely unresponsive to changing socio-economic needs even in those areas, with supplementary analyses suggesting this lack of responsiveness is the result of a combination of organizational inertia and a lack of clear focus.

Another reason why supposedly socially responsible actions by firms may fail to deliver meaningful social impact is positive efforts by a firm on one dimension of social performance may come at the cost of performance on other dimensions. In Lee and Kaul (working) we examine this argument in the context of the introduction of a cap-and-trade regime to reduce carbon emissions in California. We show that while firms did respond to this program by reducing their carbon emissions (as expected) this reduction came mostly from cuts in waste treatment, and was therefore accompanied by a significant increase in toxic waste emissions from California manufacturing facilities relative to facilities elsewhere, especially if the facilities faced stiff competition, had not made previous commitments to toxic waste reduction, and were not in close proximity to an environmental NGO.

Even if the firm's own actions substantively advance the cause it is pursuing, their impact on social welfare may still be ambiguous if others respond to these actions by cutting support, or those who are excluded from them are left worse off. In Mohliver, Crilly, and Kaul, (2023) we build a formal model of firms' support for a social issue that takes into account not only a firm's own incentives to invest in CSR, but the incentive of its competitors as well. We show that for social issues that are contentious, a firm's actions in support of an issue may lower the chances that its rival will take a supportive stand and potentially raise the chances that the rival will take an opposing stand. In some cases, then, rival firms may take opposite stands on a social issue, increasing socio-political polarization even as they both realize greater profits for their shareholders. And even if one firm were to take a stand in support of a social issue for ethical or altruistic reasons (i.e., without taking profit into account), this would only increase the financial incentive for its rival to take an opposing stand.

In addition to the response of competitors, government response may matter as well. In Seo, Luo and Kaul (working), we look at the relation between corporate philanthropy and government transfers in the United States, and find that as corporate donations per capita to a county increase this increase is offset by an almost equal decrease in government transfers per capita to that county. More importantly, while corporate donations tend to be concentrated in high-income, urban counties, where key corporate stakeholders tend to live and work, donations to such counties are associated with a decline in government transfers to rural and low-income counties in the same state, even if these counties are not directly receiving corporate donations. These findings suggest that corporate donations, while beneficial to stakeholders in affluent communities, may, in fact, increase socio-economic inequality in the country as a whole. 

These insights are brought together in a summary piece--Kaul and Luo (working)--where we develop an emergent theoretical framework, based on our own work, as well as the work of others, to explore the gap between social responsibility and social impact. Our core thesis is that for-profit firms can contribute to social welfare, but that doing so requires careful and critical consideration of both the potential alternatives to for-profit intervention, and the potential unintended consequences of CSR. Managers must be given proper guidance on designing socially effective CSR initiatives, and supporters of firms' CSR efforts must be taught to view such efforts with appropriate skepticism, if financial advantage and social welfare are to be aligned. Firms can do well by doing good, especially where innovative solutions to social ills are required, but only if we put careful effort into ensuring that both goals are met; glibly assuming that anything that's called social responsibility is socially beneficial may only hurt social welfare. Our framework offers four criteria against which CSR initiatives should be assessed--they must be substantive, unequivocal, inclusive, and comparatively efficient--and argues that only initiatives that meet all four criteria, while also enhancing firm profits, can unambiguously claim to be improving social welfare.