BRIC countries be the new world power?



BRIC countries be the new world power?
July 2010 edition
Interview with Mathijs Bouman
A new playing field for Banking
and Corporate Finance
© 2010 KPMG N.V., alle rechten voorbehouden.
D e av o n D v o o r h e t a f r o n D e n va n
het fUsier apport voor een
i n t e r n at i o n a l e b i e r b r o U w e r
a u d i t J ta x J a dv i s o r y
w w w.g a a a n . n U
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Denisse Halm
Paul Koeweiden
Paul Koeweiden
Marjolein Buiter
Noven Chan
Lotte Diepenmaat
Anton Kupava
Benjamin Menn
Braulio Rissi
J.R.G. (Roger) Bougie
Dr. Mathijs Bouman
Dr. H.G (Henk) van Gemert
Dr. H.J.F.M. (Hans) Gremmen
Tamar Janssens, BSc
Nathalie Knobloch , BSc
Dr. Constantin Mavrocordatos
Sebastian Mennes, Msc
Prof. P.C.M. van Seters
Johanna Slot, MPhil
Laurens Tijdhof, LLM
Erik Verheijden, MSc
Mark Vitullo
Daan Wesselman
Duisenberg School of Finance
Tilburg University, TiSEM, Accountancy Department
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So many topics can fall under the theme of ‘A
New Decade’. It can thus be easy or difficult to
focus on one single topic. After all, nobody possesses a crystal ball. However, even without it, I
can say that (in my opinion) this decade is going to be a rough one.
Looking back at the past decade’s events, we are
left with many issues to deal with during this
new decade. Starting with one of the most recent events; the global financial crisis is far from
over yet. Its aftermath is still present in plenty
of things that we do and decisions we take. Another issue still open to be resolved is the UN
Climate Change Conference in Copenhagen.
The conference might be over, however the
problem and the lack of solutions and commitment is still present in this time.
Considering the more positive events of the past
decade, there are still issues to be worked on as
well. One of these issues is the definition of the
Millennium Development Goals by the UN
in 2000. They target poverty reduction within
a time constraint which ends in 2015. There is
still plenty to be done before the due date in order to achieve its targets. Another thing to consider this decade is the Euro’s standpoint. After
a very successful start during the past decade,
this decade has put some strains on it. After the
debt-crisis in Greece in the first quarter of this
year, governments are considering what to do
about the now weaker currency.
The past decade might have some consequences on our present times, however, it is the present times themselves that have already brought
a lot with them. Only six months have passed,
but this new decade already brought about
thirty earthquakes with it, the strongest ones,
in terms of damage, being the one in Haiti in
January and the one in Chile in February. Also,
new environmental challenges came with the
oil spill off the coast of Louisiana in the US. In
this decade we already had over 4 airplane accidents, the longest annular solar eclipse of the
third millennium, the Winter Olympic Games
in Canada, the soccer World Cup in South Africa, a volcano eruption in Iceland that disrupted
many flights, and the successful attempt at creating the first synthetic genome, a man-made
living organism. And there are so many more
events to come.
As for the FIRST Quarterly Committee, the
new decade also brought a new project for it.
The committee has carried out a survey among
all of the magazine’s readers. The aim of it is to
update the magazine to its readers’ interests and
likes. From the result of the survey, we will redesign the magazine in terms of the articles it
contains and the length of these, among other
things. But I do not want to spoil the surprise.
All the transformations will be implemented
in the FIRST Quarterly’s next edition in October. However, what I will give away here are the
names of the winners of the draw that followed
from the survey. The winner of the first prize is
Ricardo Uijen who will receive a DELL Netbook. The winners of the second to fifth prizes
are ...................................................... who will be
given each a semester of free guidelines from
Asset | FIRST international. In name of the entire FIRST Quarterly committee, I would like
to thank all of you who filled out the survey last
month and so contributed to the FQ committee’s New Decade project.
I wish you all a great decade!
Denisse Halm
Enjoy the reading!
Denisse Halm
FIRST Quarterly
July 2010 edition
table of contents
Background Story: The next decade: A new playing field for Bank07
ing and Corporate Finance
18 Professor: Financial architecture in a rebalancing world
PhD: High-tech innovation crosses firm boundaries by involving
question pieces
11 Interview: Mathijs Bouman
21 Interview: European Space Agency
06 Bougie: Relationship marketing: A new decade?
10 Wesselman: Giant robots with lasers
15 Vitullo: A red rose by any other name
Board Asset | FIRST International
Inge Wijnakker
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Lisanne van Beek
[email protected]
Ruud Sanders
[email protected]
Paul Koeweiden
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Nydia van der Geest
Education Coordinator
[email protected]
Niels Nooijens
Public Relations Officer
[email protected]
Activities Committee
[email protected]
Business Studies Committee
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China Symposium Committee
[email protected]
Consultancy Day Committee
[email protected]
Design Committee
[email protected]
16 Proposition: The BRIC countries will be the new world power
regular features
14 Study Abroad: Seoul, Soul of Asia
28 Internship: Beiersdorf AG
29 Alumni: Erik Verheijden
30 InBusiness: Academio
European Travel Committee
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Finance Expedition Committee
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FIRST Response Committee
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FIRST Quarterly Committee
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FIRST Quarterly
upcoming activities
Monthly Drink
On the 6th of July we will have our traditional
monthly drink. This is the perfect opportunity to
meet up with your fellow students for a nice beer!
European Travel
This year the European travel will go to Moscow, Russia. During the trip we will visit branches of several
companies, explore the city and its sparkling nightlife.
It goes without saying that this activity is a load of fun!
17 August
General Members
On the 31st of August the General Members Meeting of Asset | FIRST International will take place. The
board of Asset | FIRST International will discuss the
association as a whole as well as evaluate all the activities and the events that have taken place over the
past semester and every board member will give an
update of his or her function. Furthermore, the board
of 2009-2010 will be discharged and the new board of
2010-2011 will be installed. Afterwards, there will be a
drink at Cafe Babbus.
Finance eXpedition
In cooperation with Asset | Accounting & Finance and
Asset | Econometrics, Asset | FIRST International organises the Finance Expedition 2010. During this threeday programme, five different kinds of financial institutions will be visited: banks, trading houses and financial
service providers. At these companies, presentations
and interactive sessions will be given. Moreover, company representatives will participate in various lunches,
drinks and dinners. All in all, the Finance Expedition is
the perfect way to find out if a job in the financial world
is something for you! Invitations will be handed out to
applicants on the basis of a Curriculum Vitae selection.
14 October
Symposium on China
On the 14th of October Asset | FIRST International organises a symposium about China. This symposium is
organised in cooperation with Studium Generale and
the Association for Chinese Students and Scholars in
the Netherlands.
23 November
Consultancy Day
Do you like to solve problems for companies and
work on challenging cases? Are you considering the
prospect of becoming a consultant in the future or
are you simply interested in the consultancy field?
Then the Consultancy Day is an interesting event for
you. In the afternoon you have the possibility to attend workshops, which includes a presentation and
a case that will be given by different companies.
July 2010 edition
alternative energy
“We all know what anger is, and we have all felt
it, whether as fleeting annoyance or as full-fledged
rage.”2 Indeed, we have all experienced anger, in
all probability very recently. And therefore most
of us have a rather clear view on what anger is.
Interestingly, a brief review of the metaphors and
metonyms for anger, the literature and the internet
suggest that our viewpoints on anger are many and
varied, as delineated next.
Kövecses, who explored emotion concepts used
by English-speaking people, assumed that the conventionalised language we use to talk about emotions can be an important tool in discovering the
structure and contents of our concepts of emotion.
He also suggested that the concept of emotion we
have, reveals a great deal about our experiences of
emotions. Based on his findings, he determined that
the model of anger contained in the metaphors and
metonyms, we used to talk about anger in English,
relates to physiological features of body heat as in
the expression “You make my blood boil”, internal
pressure (“I felt as if I would explode”), redness in
the face and neck (“He got red with anger”), agitation (“She was shaking with anger”), and interference with accurate perception (“She was blind with
rage”). Finally, anger is occasionally experienced
as insanity (“You are driving me nuts”), as a dangerous animal (“She has a ferocious temper”), as
an opponent (“He was battling his anger”), and as a
burden (“Get it off your chest”). These latter depictions show that anger is sometimes perceived as a
negative emotion, not only in terms of subjective
experience, but also in terms of social judgement.
Anger was certainly perceived as a negative emotion by Evagrius Ponticus, a fourth-century Egyptian monk. Ponticus defined anger as one of the eight
deadly sins. The current heptads (pride, greed, lust,
envy, gluttony, anger, and sloth) were formulated
by Gregory the Great in the sixth century. From his
perspective, anger is a sin of the devil, and one of
immense importance and fiery power. This sin es6
FIRST Quarterly
calates to rage, obliterating all but negativity within
body, mind and soul and results in murder and war.
The message is clear: anger presents a danger to
others and to the self and should therefore be suppressed and/or avoided. This representation of
anger is a rather pessimistic one, which is in contrast to the (informed) views of others, such as for
instance Aristotle, who conceptualises anger as a
constructive emotion that requires rather complex
thought processes and moral judgments. For Aristotle a Do you like to solve problems for companies
and work on challenging cases? Are you considering the prospect of becoming a consultant in the
future or are you simply interested in the consultancy field? Then the Consultancy Day is an interesting event for you. In the afternoon you have the
possibility to attend workshops, which includes a
presentation and a case that will be given by different companies. nd many others, anger is a highly
sophisticated, socially constituted, emotional syndrome that serves to regulate human interpersonal
behaviour. For instance, because the typical instigation of anger involves the violation of social norms,
every episode of anger involves a moral judgment.
In this way, anger eventually helps to maintain particular systems of values.
Emotion talk (that is, how we talk about our emotions) suggests that anger produces heat (“You
make my blood boil”), pressure (“He was bursting
with anger”), and steam (“She is just blowing off
steam”); and when it becomes too intense it makes
people explode. These expressions partially constitute and embody our experience of anger as energy.1 But what is anger? And: How can this emotion
help us in the struggle for survival? A brief overview about an alternative source of energy.
From a Darwinian point of view, anger provides
us with the motivation and the means to remove
whatever it is that is restraining us. Anger mobilizes our energy and makes us capable of defending ourselves with great vigour and strength. Along
these lines, a certain amount of anger is necessary
to our survival.
In sum, this short overview of diverging perspectives on anger shows how the viewpoints on this
emotion vary. Whereas some people take a rather
pessimistic stance, others are much more positive
about this emotion. Let us conclude this overview
with the words of Averill:
It is easy to condemn anger because of its excesses.
It is also easy to praise anger, to let it all hang out
in the name of some self-righteous adventure. It is
much more difficult to maintain a balanced perspective, to understand anger in both its positive
and negative aspects.
At this moment (6 November) Germany is furious
at General Motors, Dick Scheringa (DSB Bank) is
angry at De Nederlandsche Bank, and Geert Wilders
(a Dutch politician) is angry at three scientists who
have labelled his political party “extreme right”,
just like he is angry at Aruba, ‘Kinderen voor Kin-
background story:
The next decade: A new playing field for
Banking and Corporate Finance
By Laurens Tijdhof, MA MSc LLM1
The next decade will bring major changes
for banking and corporate finance. In this
background article I will analyse this situation from two different angles. First from
a banking perspective. A changing global
banking environment will result in an increasing focus on emerging markets, especially Asia. Furthermore the shadow
banking system, one of the major causes
of the global financial crisis, will be more
regulated. The other side of the coin is the
corporate perspective. As a result of the
credit crisis, many companies are still not
able to raise sufficient funding. For this reason I expect the introduction of innovative
supply chain financing solutions and the
corporate industry will increase to fund
its own members through working capital.
Furthermore corporates will have a stronger focus on cash as a scarce corporate asset. This increased relevance of cash management, combined with a high priority
for managing financial risks, will lead to a
greater importance of the CFO role within
the board of a company. CFOs will manage banking relations in a more strategic
way, linking the banking business wallet to
credit commitment.
Changing banking landscape
In 2008, as the global financial crisis broke
loose, banks underwent near-death experiences on a massive scale. Last year, many
banks enjoyed a recovery that was nearly
as dramatic. In the intense uncertainty that
ensued, bankers around the world have
shifted their focus away from growth toward survival. Currently, they are confronted with ambiguity about financial markets,
risk, regulation and demand. In the next
decade long-term structural changes will
fundamentally affect the global banking
Currently, about 25 global banks represent
together about 40 to 45 percent of global
industry assets. These banks can be classified in one of the following types:
1. Universal banks, with global or regional
focus, predominantly located in one of the
following developed markets: Western Europe, North America or Japan.
2. Commercial banks, with regional or local focus, located in one of the following
emerging markets: Brazil, Russia, India and
China (BRIC) or Eastern Europe.
3. Investment banks, with global or regional focus, predominantly located in the major developed markets.
In the coming years the returns of these
banks will particularly be influenced by
inflation and the shape of the yield curve.
Furthermore uncertainties will be created by government intervention, including new Basel capital requirements, consumer protection measures, new rules on
risk management and compensation caps.
Recent research from McKinsey indicates
that capital shortage triggered by the global financial crisis, and last two years addressed through several rounds of massive
capital raising, will endure and get worse.
Further capital needs will range from low
to high. Low capital needs for investment
banks, which have already raised significant amounts and are holding substantial
buffers, because they are anticipating regu-
latory change. High capital needs for commercial banks in emerging markets, because they will need to finance their future
growth. In-between are the capital needs
for universal banks, which will have modest needs in a midpoint scenario.
The global financial crisis has affected
emerging markets, especially Asia, less
severely than developed markets. Parts
of Asia were the last areas to enter into
recession and the first to emerge from it.
China’s economy never stopped growing.
Asian banks had less trouble with toxic
assets and excess leverage than banks in
Western Europe and North America. It is
highly expected that for the next several
years Asian economies will continue to
grow. In my view this will be combined
with an increasing influence and power for
large Asian banks. Asian markets will offer
the highest “return on banking”, because
banking is likely to grow much faster than
even the economy, since a large part of the
population is still “unbanked”. One of the
largest universal banks, HSBC, is confirming this view, by strategically moving its
Chief Excecutive Officer from London to
Hong Kong to optimally benefit from this
July 2010 edition
background story
More stringent liquidity and capital requirements are set to be imposed on banks
worldwide, and in addition weaker credit
ratings of their corporate clients cause additional pressure to comply with these requirements.
changing banking environment in the next
Regulated shadow banking system
The “shadow” banking system has significantly contributed to the global financial
crisis and was one of the major causes of
the problems at commercial banks. In a
June 2008 speech, US Treasury Secretary
Timothy Geithner, then President of the
NY Federal Reserve Bank, placed significant blame for the freezing of credit markets on a “run” on the entities in the shadow banking system by their counterparties.
The rapid increase of the dependency of
bank and non-bank financial institutions
on the use of these off-balance sheet entities to fund investment strategies has made
them critical to the credit markets. These
entities were underpinning the financial
system as a whole, despite their existence
in the shadows, outside of the regulatory
controls governing commercial banking
activity. Furthermore, these entities were
vulnerable because they borrowed from
“short-term, in liquid” markets to purchase
“long-term, illiquid” risky assets. This
meant that disruptions in credit markets
would make them subject to rapid deleveraging, selling their long-term assets at
FIRST Quarterly
depressed prices. Nobel prize winner Paul
Krugman described the run on the shadow
banking system as the “core of what happened” to cause the crisis: “As the shadow
banking system expanded to rival or even
surpass conventional banking in importance, politicians and government officials
should have realised that they were re-creating the kind of financial vulnerability that
made the Great Depression possible. […]
Influential figures should have proclaimed
a simple rule: anything that does what a
bank does, anything that has to be rescued
in crises the way banks are, should be regulated like a bank.” I strongly support this
view and expect a more regulated shadow
banking system in the next decade.
Corporate industry financing its own members. The commercial banking industry is
currently showing somewhat improved
performances and the corporate industry
is also starting to show signs of recovery.
However, the effects of the crisis on both
the financial economy and the real economy are still significant. Just one of these effects is a structural change in funding of the
corporate industry. This is partly triggered
by the combination of a weakened banking
industry and increased regulation of banks.
While there are some signs of economic
recovery and growth, it will take several
years before the banking industry regains
the strength required to be able to accommodate the real economy in the way it
did before the crisis. At any rate, I do not
think we will be returning to the situation
we had before the crisis. If bank lending to
corporates remains insufficient, alternative
sources will need to be used to facilitate
corporate growth. This includes alternative debt, equity or mezzanine financing
instruments, but also innovative financial
supply chain financing solutions. On the
other hand, it is important to realise that
the corporate industry also finances its own
members through working capital in the
form of accounts receivable and accounts
payable balances. In my view this financing solution will be used more extensively
in the coming years. Managing credit risk
on debtors will then be essential. This may
include linking limits and maturities to internal credit ratings and debtor’s equity.
At the portfolio level concentration risks
should be examined as well. For that reason
I expect that in the next decade a broader
group of corporates will implement more
advanced credit risk models, which are currently mainly used by banks, utility- and
commodity trading companies.
Managing bank relations
At this moment an increasing number of
companies are quantifying and measuring
their bank relationships based on wallet
distribution methodology. Many CFOs
manage their bank relations in a more strategic way, linking the banking business wallet to credit commitment from banks.
In the last decade we observed a trend towards bank rationalisation, with some large
multinationals only having two or three
background story
bank relationships globally. Since the credit
crisis this situation is now changing. Borrowing and other banking services have become more diversified over a broader group
of core relationship banks. This strategy
should mitigate the risk in case one of the
banking partners will collapse. In my view
this scenario may become more realistic in
the future. Not many large banks will remain “too big to fail”, because governments
cannot continue to act as “lender of last
resort”. This is especially true today when
governments themselves face increased default risk, as is currently the case for the socalled PIGS countries (Portugal, Ireland,
Greece and Spain) that have recently been
downgraded by some rating agencies.
Besides diversification of corporate-tobank relationships, I also observe a trend
in the corporate industry to become more
bank independent based on disintermedia-
tion. Commercial banks usually act as financial intermediaries for debt, which they
typically borrow from depositors and lend
to borrowers. By issuing corporate bonds,
instead of raising bank debt, a corporate can
borrow directly from investors, by-passing
the commercial banks. Today this is mainly
done by large multinationals but in the next
decade I also expect an increased disintermediation by smaller companies.
Administration (MA), Fiscal Economics
(MSc) and Corporate Tax Law (LLM).
1. Laurens Tijdhof is a Partner at Zanders, Treasury & Finance Solutions. He is
responsible for the Brussels office, and together with his team he is advising CFOs,
Corporate Treasurers and Risk Managers
in the field of treasury, risk management
and corporate finance. Laurens has a study
4. Emotional Quotient or EQ is one of the
ways to measure a person’s ability to be successful in life. According to theories of brain
function, a high emotional quotient means
someone is self-confident, self-aware, and
able to navigate through trying emotional
times. EQ is often tied directly to the degree of success one may have in the workplace and in personal relationships.
background at Tilburg University, where he
completed Masters in the areas of Business
2. The shadow banking system consists of
non-bank financial institutions that play an
increasingly critical role in lending businesses the money necessary to operate.
3. Krugman, Paul (2009), The Return of Depression Economics and the Crisis of 2008.
July 2010 edition
Giant Robots with lasers
Today, over 20 years later, the future of my youth has
turned out to be an utter disappointment. Even as a
six-year-old I would have granted that deep space colonies and instant teleporters might be a bit much to ask,
but why are people not whizzing by with jet packs or in
flying cars? Why do I not have a voice operated refrigerator or vacuum cleaner? Why is there no machine to
make the perfect sandwich yet? Sure, we all have mobile phones and ubiquitous access to the internet, but
if you look around you, by and large the world today
looks pretty much like it did 30 or 50 years ago: people
live in regular houses, drive cars with 4 wheels and bicycles with 2, eat their vegetables reluctantly and work
in boring office buildings.
Yet perhaps the greatest disappointment today is that
the very notion of “the future” seems old-fashioned.
The future has become a thing of the past. The new
technologies that we do have all seem geared towards
cultivating the “now”: you can call or IM chat with
anyone anytime on your phone, find out where they
are through Google, share your digital pictures, and
even know what is on every tedious idiot’s boring excuse for a mind through Twitter. Nothing propels us
into the future anymore – everything is aimed at making the now as instantaneous, exciting and “shared” as
The cause of this disillusion is the victory of the capitalist system. Fifty years ago, with WWII’s millions
of casualties and the Cold War’s millions of kilotons
worth of destructive power present in everybody’s
mind, the end of our civilisation was actually not impossible or even entirely improbable. Hence, ideology
-the idea of what you want your future to look like- actually played a prominent role. Here is the West, the
fear of and fight against the Communist Bloc bundled
ideology, economy, and technology together, for example in the space race - all because the Americans
simply had to beat the Soviets to the moon. After the
demise of communism, space exploration without a
Russian enemy became of interest only to sci-fi nerds.
FIRST Quarterly
The victory of capitalism in the battle of ideologies
also killed off the idea of the future as a driving force.
Instead, the present became its own engine, because
that is how capitalism works best: it is not aimed at
creating a better future, or even at making the world
a better place, and without an enemy it is not even
supposed to look like an ideology at all – it simply
advances the idea that profit matters most. And since
time is money, profit now is better than profit later.
No surprise, then, that in our system far more money
can be made in the short term (for example through
risk-seeking hedge funds or day-trading on the stock
markets) than with long-term investments (or investments which might benefit everybody, which is always
a long-term project). Our system values the now infinitely higher than the future.
When I was just a wee lad, anything to do with the future was just plain awesome. Whether in school projects, science museums, or Saturday morning cartoons,
anything that involved robots, lasers or spaceships
would immediately capture the imagination of any
young boy. The future would bring advances in technology that would make the world a wonderful place,
and that future would be right around the corner.
This becomes painfully obvious in the debates on sustainability. Until oil really starts running out, there is
more profit in an oil-based economy, so all alternatives
will remain marginal – with the knowledge that this
will seriously mess up our world in the actually foreseeable future. The question of sustainability is not
Al Gore and the activists’ melodramatic “how can we
save the planet?” but rather the cold, hard “how long
can we keep the current system profitable?” There is
still enough oil for now – expect no change anytime
The coming decade will look remarkably like the previous ones: we will eat, sleep, work, and move around
in the same ways, and while some new devices may
keep us chatting in an ever-more extended now, the
world is not going to change that much. I will not be
able to buy a flying car or a voice-operated sandwichmaking robot butler anytime soon – not because they
would not be awesome, but because the first question
is always the tedious “but where is the profit in that?”
Those machines would point to the future (and therein would lie their awesomeness), but that is just not interesting if profit is at the top of your mind. Unless this
changes, futuristic giant robots with lasers will remain
a distant childhood memory. dfs
Daan Wesselman is a teacher at the Language Centre
at Tilburg University and a regular columnist in the
FIRST Quarterly.
interview: mATHIJS bOUMAN
Economist and journalist
interviewers: Lotte Diepenmaat AND pAUL kOEWEIDEN
Could you briefly tell us something about yourself
and about your career?
I studied economics and did my PhD at the
University of Amsterdam. After that I was a
post-doctoral fellow for a brief time and then
became a journalist. In between jobs as a journalist, I also worked at the Dutch Central Bank
for two years in early 2000s. I also taught economics at the University of Amsterdam, at the
Free University and at the University of Leiden.
Why did you decide to become a journalist?
If you consider economics or academic research, there is only room for the most brilliant.
Many people do economic research but their
work is never recognised. This is because you
have to be within the top ten, or even the top
five per cent, if you want to be cited. When I
decided I was not part of that group, I looked
for an alternative career path. From another
perspective, journalism is much more exciting
than research.
In 2003, you started working at the Dutch Central
Bank. What position did you have and how would
you describe working there?
I was mostly involved in policy making. I was
the advisor of Nout Wellink, the president of
the Dutch Central Bank, in his preparation
for the European Central Bank’s meetings in
Frankfurt. I prepared his input for the meetings on all sort of issues, from the colour of a
new banknote to the economic developments
in Eastern Europe. All in all, it was interesting
work there, but it was not the right place for me.
themselves. Nonetheless, I think it is time for
a new president. It is nice for the organisation
to have a new person at the top every once in a
while. Right now there is not enough internal
criticism at the Central Bank.
In 2006, you wrote a book called, in English,
“Dutch overconfidence; how the best economy in
the world derailed”. What pushed you to do that?
One reason was the excuse to leave the Central
Bank. The other was that I wanted to become a
freelance journalist. I have worked with a lot of
freelance journalists and writers and I saw that
they get lousy salaries. So I thought that, to become a freelance journalist, I had to accomplish
something more. I thought I should start with a
What do you think of Nout Wellink and his role in book, and it worked quite well.
the economic crisis?
Personally, I think he is a brilliant man who Could you briefly tell us about the main ideas of
really tries his best. Regarding what has been the book and the reason why you chose to name the
said about the bad role of the Central Bank Netherlands as the best economy in the world?
in dealing with the crisis, I think it is really an I would translate it as Dutch courage, rather
exaggeration. People like to judge without do- than Dutch overconfidence. It was sort of a
ing any research, which I think is wrong since delirium of the nineties, when we thought we
central bankers do not get a chance to defend would grow indefinitely. The Dutch policy
makers and politicians thought they had nailed
the economic problems and the Dutch people
July 2010 edition 11
thought we had the best economy in the world.
“Right now there is not enough
internal criticism at the
Central Bank”
low, and wage moderation was in place. It appeared to be just a happy incident that lasted for
a few years. This is where the book is about. The
Dutch economy used to have a very smooth
business cycle. Since the end of the nineties that
pattern has reversed.
How does the Dutch economy perform after the
Credit Crisis?
If you look at the labour market, we are doing
quite well, mainly because we have more flexible labour markets. There is a lot of pain hidden in the production and profit figures of small
enterprises. Normally, those workers would be
“The crisis would be ten times worse for Europe if
we would not have had the Euro”
the stock exchange for RTL. I write a few articles a week for Z-24, a modern site with a
fun way of looking at economics. I also write
a weekly column in De Groene Amsterdammer. In the beginning of April, a new book with
short articles about economics, called De Elektrische Spijkerbroek (in English: The Electric
Jeans), will be published. In the book, I try to
convince the audience that economics is not
a different science after the crisis, that you can
still have fun with it.
Could you explain the title of the book?
In the book I talk about the patents of Philips,
one of which was for an electrical fabric. This
is a fabric through which electricity was run
which makes it change shape. So in my imagination, you would try a pair of jeans on and plug
it in, making it fit you the right away. That is how
I came up with the ‘electric jeans’ title. In the
book I also talk about patents in general and
that patents no longer work the way we want
them to. Nowadays patents are a way for firms
to blackmail other firms. It makes no economic
sense anymore.
“China is an average country
that is perceived to be big because of its population”
unemployed if they had been working for a
company, but now they are not unemployed,
yet poor in a way. In the end, the crisis had
unfair impacts on the Dutch economy: some
people experienced no difficulties while a few
people experienced a lot. In the financial sector, we are one of the worst off. No bank in the
Netherlands, except Rabobank, came out well
and as a result we do not have international
banks anymore. We are doing relatively well
when looking at the budget deficit and sovereign debt. In sum, we are an average performer.
What do you do at the moment and what does
your ordinary day look like?
It depends on the day. Today I am working at
FIRST Quarterly
Do you think the crisis is over or will there be a second one?
If you look at history, it does not happen that
often that a big financial crisis has a double-dip
as a result. The turmoil of the thirties had one
wave and then after a few years an even bigger
one came. Policy makers’ and central bankers’
big mistakes were the main reasons for those
crises. I think they have learnt a lesson from
that episode and are dealing with it much better
now, so I do not expect another economic crisis
like the one in 2008. Having said that, they did
have to scale back all their policies and quit the
strategies of the past 18 months. Thus the transition will not be easy. In the future, they will
have to know in advance when to switch policies. But I do not see how this will be accomplished. I think that there will still be a couple
of big hiccups, like Dubai, Greece or China in
the future.
What about the bubble that is developing in China? Is it a problem that China has a lot of US dol-
lar reserves?
Bubbles are something we always miss. The moment the bubble develops the majority of the
experts say: this time it is different as we have a
completely different horizon. If you look at China objectively, you discover that strange things
are going on. Property prices are rising by up
to 40 per cent on an annual basis, money supply is increasing by 25 to 30 per cent and credit
growth is enormous. These are all ingredients
you need for a bubble. Thus, China is the most
likely candidate for having collapsing bubbles in
the future. With an artificially cheap currency as
a result of constantly mimicking the Federal Reserve’s Monetary Policy for the past two years,
it is very hard to imagine that it will work out for
China. Yet there are a lot of analysts who believe
that China is the perfect future. Fears of China’s
instability tend to come from the economists at
the World Bank or the International Monetary
Fund. Usually people who do not have money
riding on the bubble are the ones who are right.
So those are not the analysts at the moment
but the economists. On top of that the Chinese
have been terrible investors in the last couple
of years. They will probably end up paying for
their artificially low exchange rate. But that is
only the prediction.
What kind of impact would the burst of the bubble
in China have?
It would be very bad for Asia. China is an average country that is perceived to be big because
of its population. If you look at China’s GDP, 4.3
trillion dollars, it is comparable to the GDP of
Germany which is also quite a big country. Yet
China is not that big compared to Europe and
the US. The reason that it was able to generate
growth over the last year is because growth had
stopped in the rest of the world and, of course,
they are growing insanely fast.
This issue is about the New Decade. In general
terms, how do you see the world economy in the
From a historical perspective the recession is
not over yet. The Netherlands Bureau for Economic Policy Analysis (CPB) calculated that an
average banking crisis followed by a recession
led to a 9 per cent decrease in national income.
Right now, in the US and in Europe we do not
see even half of that. It would be unusual to go
back to 2 or 2.5 per cent growth rates after the
worst banking crisis ever. The CPB predicted a
2 per cent growth rate and in order to accom-
plish that, accounting for a 4 per cent negative
growth rate in 2009, we need dramatic cutbacks
in government expenses or a structural rise in
taxes. This crisis will stay with us for decades
because it is impossible to cut back so drastically in just a few years. I think the effects on
the financial sector will be with us for decades
too, but I hope that the crisis fundamentally
changed the way banks work. Surprisingly,
there is hardly any new regulation in place now.
“From a historical perspective
the recession is not over yet”
try gets into trouble. But the saving of a country
should come with a big humiliating clause and a
loan, of course. In the end, I am still a big proponent of the Euro. The crisis would be ten times
worse for Europe would not have had it.
Do you have any advice for our student readers?
My advice is: do not graduate this year. If you
wait another year, you will have a much better
chance of getting a job. If you know where you
can work you should graduate otherwise do a
second Master programme and learn Chinese.
And, of course, study economics because it is a
fantastic topic!
You think regulation will change somehow?
I think we missed the deadline already. Banks
are back in profit and do not need governments
to oversee them anymore. I do not believe in
perfect regulation but under-regulating clearly
did not work, so let us try over-regulation.
Right now we are still in the same situation.
Everybody is talking about new rules but nothing has changed so far. The only thing that has
changed is the banks’ perception of the future.
However, once the competition starts again,
there is nothing that guarantees that we will not
end up in the same situation as in 2008.
So, lack of regulation can possibly lead to similar
crises later on?
The real reason for the crisis is low interest rates
and Chinese hoarding dollars to finance their
imbalances. That is still the same. The only
positive outcome of the crisis is that people are
aware of the possible dangers at the moment.
The next generation will not be aware of that
and everything might go terribly wrong again.
That is why I think we need to experiment with
over-regulation in the sector.
It is not going too well with Greece at the moment.
What do you think will be the impact of Greece’s
situation on the EU and the Euro?
Most of the problems with Greece are over, now
that the European countries are prepared to
step in. There is a lot of speculation on whether
the EU should save Greece, but we know that
Greece is too big to fail, so it is in our own interest to help the country out. The German
Ministry of Finance wants a new Eurozone Exit
Clause for the future, but if Greece were to use
one, it would be bankrupt the next day due to
the introduction of a new Drachmas. Practically
the best solution would be to have some sort of
automatic saving mechanism next time a counJuly 2010 edition
study abroad
Seoul, Soul of Asia
By Laurens valk
Until the start of my exchange in South Korea
in the Fall semester of 2009, I had been editor
of the FIRST Quarterly myself, and I am glad
to contribute once more upon my return to
the Netherlands.
My journey started at the Red Square in Moscow, where I got on the Trans Siberian Railway train heading east towards Vladivostok.
Hardly any passenger on board was able to
communicate in English, resulting in many
hilarious moments. Despite the language
barrier they gave me loads of souvenirs, we
shared the food, and we spent the evenings
playing cards and drinking vodka. From
Vladivostok, it took me a full day to cross the
border with China. A reasonable time you
think? Not if you consider that I was the only
person crossing the border at that particular
office. Somewhat delayed I moved on to the
Great Wall. After a few weeks of travelling, I
reached the Tiananmen Square in Beijing and
all that remained was a 2-hour flight to Seoul.
From the beginning, Korean students took
their international buddies anywhere and
soon I got used to the overwhelming size
of the city, the habits of its citizens, and life
on campus. Sungkyunkwan University was
founded no later than 1398, which makes it
one of the oldest universities in the world.
Therefore, my accommodation was located in
the heart of Seoul and so our rooftop offered
a magnificent view of the metropolis. All the
city’s highlights could easily be reached via
the enormous metro network or by taking
one of countless cheap taxis.
Sungkyunkwan University has a shopping
mall, a theatre, and high quality sports facilities. The library is opened around the clock,
and you will find students in the reading
room at any time (I checked this once once
on Sunday night, when I could no longer
resist my curiosity). A fairly strict hierarchy
exists among professors and students, even
though – and this seems contradictory – it is
very common to be taken out for dinner by
your professor. On one occasion, a professor
took us to a bar and introduced the “Koreans
drink while doing business” culture. Perhaps
I should name this “Koreans do business
while drinking” instead, because drinking
FIRST Quarterly
obviously has priority over business and I
have been truly astonished by the amount
of soju, a strong alcoholic drink, taken in by
some. Nevertheless, when the Dutch organised a beer cantus, Korean students were so
impressed that they immediately turned it
into a semi-annual event. Besides drinks,
South Korea’s kitchen is known for its spicy
food. On the menu you can find living squid,
dog meat, and kimchi, always combined with
rice and rice wine or tea. Really healthy and
tasteful too!
South Korea has a tremendously rich culture
and so there are plenty of things to do. Seoul
alone has many ancient style royal palaces,
museums, and temples. For instance, take the
city’s nightlife: massive clubs, comfy karaoke
bars, and there is always a Starbucks around
the corner if you would like to have breakfast
at 5 o’clock in the morning. I was lucky not
to have too many early starts. My schedule
also allowed me to travel extensively, so at
one point in time I was flying to the volcanic
island Jeju, and the next week I was invited
to a traditional wedding in Busan. One day,
I climbed mountains in one of the beautiful national parks; the other day I
found myself in a high-speed train
on my way to Tokyo. And cheering
for the Red Devils in the 2002 FIFA
World Cup Stadium was being alternated with chilling on top of the
iconic Namsan Seoul Tower.
These are just a few of my many unforgettable moments, but I would
like to end with a unique situation:
the division of the Korean peninsula. After visiting the Demilitarized
Zone – the most heavily militarized
border area in the world, between
North and South Korea – I was
ready to explore the communist
state from the inside. Since there are
no direct flights to the Democratic
People’s Republic of Korea, I was
forced to transfer in Beijing. Upon
arrival in Pyongyang, I had to sign
a contract were it stated that I would
not publish anything about the tour.
However, we were accompanied by
an undercover journalist working
for The Guardian so I gladly refer to her story
of our trip recently published in The Observer (Cadwalladr, 2010).
My one semester in South Korea has been an
extremely valuable experience. I have learned
amazing things that you will only discover
when you stay long enough. I got in touch
with so many people, that I can count on a
real extensive network of friends. Some of my
Korean friends are now studying in the Netherlands and so it is my turn to show them
Laurens Valk follows the BSc International
Business and BSc Economics programmes at
Tilburg University.
Cadwalladr, C. (2010, February 14). Inside
North Korea: the ultimate package tour. The
Observer, p. 2. Retrieved from http://www.
A red rose by any other name
not be able to afford. No, this is simply part of an economic stimulus package aimed at reviving the flagging
real estate market. And, of course, the financial bailout
can in no way be construed as government interference with the market; it was simply a defensive move
on the part of the Treasury and the Federal Reserve
to return stability to the internal credit market needed
to provide the free-market economy with the faith to
seek out credit and likewise provide the means to the
banks for providing credit.
The irony is that the United States is much more socialist than any of its prominent citizens appear to be
willing to admit and has been for a good many years.
This is, after all, the nation that set up one of the first
comprehensive systems of national parks and implemented sweeping food and drug legislation. Moreover, it has at various times tried to ban alcohol and
gambling from public life, and recently pumped some
14 billion dollars into the dying automobile industry,
hundreds of billions into the failing banking industry,
and has launched such plans as the “Cash for Clunkers” programme, an automobile-purchase subsidy, as
well as a subsidy program for first-time homebuyers.
As best as I can figure it out, Americans are pretty
much willing to accept any and all socialist hobbyhorses as their own, and comfortably fit it into their
supposedly free-market individualist worldview, as
long as it does not appear that specific individuals are
being either coddled by the government or being bullied into activities that would be in their best interests
by the same. Thus, there are subsidies for car buyers
not because any specific individual is supposed to be
getting government largesse, but because the automobile industry is in trouble and needs a jump start.
Similarly, it is not that Americans have signed off on
providing less-solvent residents with a cash bonus that
makes it possible to buy a home they might otherwise
Perhaps, therein lies the solution for Obama: Avoid
calling it health care benefits, but instead refer to the
programme as the Omnibus Workforce Reliability
Initiative. And do not ask for improvements to welfare, but instead propose a Temporary Employment
Realignment Stipend. This would give it the ring of a
general programme benefitting all taxpayers, and more
importantly, it would make it sound like good leadership towards the business community in the face of
economic adversity, as opposed to soft-hearted subsidies to the economically less-fortunate among the
American populace. For the United States is, to many
intents and purposes, already a socialist nation, even if
it is not itself willing to come out of the political closet.
The problem is getting voters and policymakers to see
that if it can spend huge subsidies on anonymous institutional socialism, it is not much of a step to providing
the same succour and support to individuals in need
without compromising the “American Way.”
After all, socialism by another name already is the
American way, if one is only willing to look hard
enough to see it.
Having parents with a second home in the United
States has distinct advantages, particularly if that
home happens to be located in Central Florida. In addition to access to the national parks and amusement
centers for which the region has become famous, their
part-time residency in the state entails that they are
far more embedded in the community than any tourist ever could be. As such, as their son, I have been
privileged to meet a broad cross-section of Kissimmee
(Florida) society. Years of conversations with these
denizens have led me to conclude that Americans, at
least in Florida, are willing to march under a number
of different banners, but the red banner of socialism is
far-and-away the least likely one to gather a following.
As Barack Obama, President and Nobel Laureate, attempts to implement the various programmes which
he argues are absolute necessities for renewed prosperity and improved welfare in the United States, such
as universal health insurance coverage, improvement
of the American infrastructure, and a radical overhaul of the financial sector, he would do well to heed
the warning that he can afford to be defined as many
things, but not all things. As soon as he is perceived as
even being a closet socialist, all of his plans will be seen
as suspect and will crumble in the dust.
In like fashion, the United States maintains the world’s
largest navy not because it provides jobs to the good
folks in the shipbuilding industry, the navy ports, and
the half-million servicemen currently serving in its
ranks. No, it is a much-needed thin blue line of security in an unsafe world. The fact that the next thirteen
largest navies combined cannot equal its firepower is
conveniently rarely mentioned in appropriations debates, except, ironically, by the Secretary of Defence.
Thus, the U.S is likely to invest 100 billion dollars in
ten new nuclear aircraft carriers in the coming years,
even as forty million Americans remain uninsured,
and hundreds of thousands of Americans face destitution as their meagre unemployment benefits run out.
Mark Vitullo is a lecturer at the Tilburg University
Language Centre. He is a regular contributor to
FIRST Quarterly.
July 2010 edition
Will the BRIC countr
The question in the title is rather broad. Dominant when? And in what sense? Economically, politically or maybe militarily? Moreover,
BRIC is a rather heterogeneous set of countries: China and India are major suppliers
of manufactures and services and Brazil and
Russia are major suppliers of raw materials
and energy. It follows that the interests of its
member states differ and that the BRIC countries are unlikely to become dominant as a
group. Hence, especially for a short contribution like this, I would like to narrow the question down to a possible economic dominance
of just one BRIC member, and, since China
is the biggest member, to a possible economic dominance (goods markets) of China.
A dominant player is a player who can
exert substantial influence on the wellbeing of other countries. In goods markets, such a position could be supply
based and/or demand based1. How does
China perform in these two respects?
China may well develop a supply based dominance: although it mainly exports not so vital
manufactures, such as textiles, with alternative
sources such as Pakistan and Mexico at hand,
China has a near monopoly position in the
production of rare metals that play a crucial
role in cutting edge technology - from hybrid
cars and catalytic converters, to superconductors and precision-guided weapons. There are
indications that, now already, China draws up
plans to restrict its exports of these metals.2
But China may also develop a demand based
dominance. Such a position requires that
its import demand on world markets will
be big. If so, through a restrictive trade policy, China could improve its terms of trade
and/or its employment position at the expense of the exporting states. Shall China’s
import demand indeed become that big?
The basis for a country’s import demand
is its GDP. In the past two decades, China’s
real GDP went up with 10.4% per year between 1991 and 2000 and with 9.9% per
FIRST Quarterly
year between 2001 and 2010 (to be compared to 2.8% and 1.5% in advanced economies).4 Currently, China ranks third in
terms of GDP at PPP rates: it has 11.4% of
world GDP, behind US (20%) and the Euro
area (15.7%).5 For the near future (2014),
IMF expects the growth differential to remain.But more crucial here is the question
if this growth differential will remain in the
longer term. Looking into the future is difficult; nevertheless theory may help us here.
mands, disrupting political changes or social
tensions. And fourthly, Chinese growth can
only continue if its “institutions” are appropriate, which requires a correct approach of
property rights, corruption and competition.
Standard growth theory tells us that GDP
grows if the availability of relevant production factors as labour and capital grows,
and if available technology improves.
As to the former, although China’s labour
force is predicted to roughly equal today’s
level in 2030 , its capital stock is likely to
grow fast: over the past decades, the savings
ratio and the investment ratio in “Developing
Asia” were well above their counterparts in
the “Advanced Economies”, and this difference is expected to remain in the near future.6
1. Russia could serve as a nice example of
a supply based dominant player. Just remember how, early 2009, Europe panicked
when Russia reduced its supplies of natural gas. See
pritchard/6082464/World-faces-hi-techcrunch-as-China-eyes-ban-on-rare-metal-exports.html#comments, 24 August 2009.
3. See Statistical Annex, Tables A,
weo/2009/02/pdf/tables.pdf, pages 175 and
169, own calculations.
4. See IMF, World Economic Outlook, October 2009, page 162.
5. Jaeger, M., Demographic outlook for
BRIC countries differs sharply, Talking point
, Deutsche Bank Research, February 26,
6. Estimations by IMF for 2011-2014 are
46.8% and 41.3% for Developing Asia, to be
compared to 19.1% and 19.5%, respectively,
for Advanced Economies. Source: IMF,
World Economic Outlook, October 2009,
Table A16, page 196-200. Note, that it may
well take some time before Asia will reach its
“steady state”.
And as to the latter, also available technology favours growth in China over
growth in an advanced countries.
In conclusion, based on standard growth
theory, it is not unlikely that China’s GDP
growth will remain relatively high in the
coming decades, and that, as a result, it may
develop a demand based dominance, as well.
But this conclusion needs several qualifications. First, till now, China’s growth was especially export based and will be hampered
if the Yuan will appreciate to help correct
the global imbalances that resulted, or if the
demand in other economies recovers just
slowly. Second, China’s likely GDP growth
itself will ultimately lower the high Chinese
savings rate, since, gradually, it will render the
main reasons for Chinese households to save
less pressing. Third, solid Chinese growth requires that its economy is neither distorted
by unsound economic or trade policies at
home or abroad, nor by environmental de-
In sum, if the question in the title is narrowed down to the question if China will
be dominant in goods markets, we may
conclude that this is well possible, but only
if the necessary conditions are fulfilled.
ries be the new world
Will the emerging economies really save
the world?
Another typical example of the irony of history. Goldman Sachs, recently accused of fraud
by the SEC (Securities and Exchange Commission—regulator of the American financial
sector) and subject of a criminal investigation
by the American ministry of Justice, was still
one of the most renowned investment banks
in the world, when it published a paper in
October 2003 about the rise of four new
economic powers: Brazil, Russia, India, and
China, together known as BRIC. The title of
the paper: “Dreaming with BRICs: The Path
to 2050”. The content: in less than forty years
(compared to 2003) the BRIC economies
will have grown larger than the current G6
(United States of America, Great-Britain,
Germany, France, Italy and Japan); in 2050,
out of these 6 countries only the USA and Japan will still be among the top 6 global economic powers.
Of course, the international economic literature has paid much attention to “emerging
economies” for some time, but since the paper by Goldman Sachs was published a new
dimension was added: the emerging economies, but in particular the BRIC-countries,
have not only encountered relatively few
problems as a result of the global credit crisis in 2008, they are also increasingly being
recognised as the most important boosters of
the world economy. The traditional role play
between the established and emerging economies seems to be changing: in fact, many
people attribute the fact that the world is
starting to recover from the credit crisis to the
new economic power of the BRIC countries.
If the above suggests that we are dealing with
the relentless emergence of a new world order, then some additional information must
be given. To start with, it is important to
emphasise that the idea of a conglomerate of
BRIC economies originated from the writers
of the Goldman Sachs-paper. There was, nor
is, something like an original or natural com-
mon interest that bound or binds these countries together. Not until June 2009, almost six
years after the paper was published, did the
BRIC countries engage in a formal gathering
for the first time. This BRIC summit —which
was held in Jekatarinenburg—ended with
a summon for a “multipolar world power,”
which in diplomatic circles is code for rejecting America’s role as dominant global
superpower. That is a small basis for working
together. The four BRIC countries seem to
have more differences than similarities that
bind them. According to many observers, the
second BRIC summit — which was held in
Brasilia and took place in April 2010 — confirmed this view.
In addition to the four BRIC countries, there
are other prominent emerging economies,
which are nevertheless often associated
with BRIC: Mexico (BRICM), South Africa
(BRICS), and Eastern Europe and Turkey
(BRICET). If these countries and regions
are included in the discussion about the role
of the emerging economies, the statement
about the new economic world power will
become even more complex and confusing.
The most important shortcoming of the idea
of emerging economies functioning as pioneers of such a new world order lies in the denial of underlying differences. This does not
just refer to differences between BRIC countries or the differences between BRIC countries on the one hand and the second echelon
(Mexico, South Africa, Turkey, and Eastern
Europe) on the other hand. But this is especially important regarding the differences
between the more or less established emerging economies compared to the multitude of
smaller economies in the world.
This last source of contradictions can be illustrated with the recent development of the
G20 — the twenty most important economies in the world. The G20 has been sped up
by the global financial crisis in 2008; as a result the significance of the G20 has increased
tremendously. All of the above mentioned
economies are —unlike the Netherlands! —
formal members of the G20. The question
that remains is what these upcoming economies will actually do with the increased recognition of their interest in and influence on
running the world economy. Will they use
their influence to serve the general interest of
the entire world economy or will they act in
their own best interest?
The answer to this question should become
clear during the coming G20 gatherings, in
June in Toronto and in November in Seoul.
In Toronto and Seoul influential decisions
have been put on the agenda, especially regarding the “global financial architecture”
(Worldbank, International Monetary Fund,
Financial Stability Board etc.). Recently, 23
of the world’s smaller economies are united
in an informal coalition named the “Global
Governance Group” or “3G”. This group consists of countries such as Botswana, Chili,
Costa Rica, Malaysia, the United Arab Emirates, and Switzerland. In a recent letter —
dated March 2010 — to Secretary-General
of the United Nations Ban Ki-moon, the 3G
expressed her concern that the increasing
weight of the G20 would interfere with the
UN’s role, which she described as “the only
global party with universal participation en
unassailable legitimacy.”
Will the emerging economies really save the
world? The 3G, the remarkable coalition of
smaller countries, is certainly not assured
that will be the case. In Toronto and Seoul
it will become clear whether the established
and emerging economies are only acting in
their own best interest, or whether the interests of smaller (and poorer) countries that do
not belong to the G20 will seriously be taken
into account. Pay close attention, because
here too history could present its irony once
Paul van Seters is Professor globalisation
and sustainable development
July 2010 edition
FIRST Quarterly
July 2010 edition
professor article:
Financial architecture in a rebalancing world
by Henk van Gemert
1. The Great Financial Crash
The Great Financial Crash of 2008, which led
to a global loss of confidence among savers,
investors and citizens, the near collapse of the
entire financial system and a severe decline in
output and wealth all over the world, will undoubtedly continue to be analysed and debated over the next decade. Questions like How
could this happen? and What went wrong?
illustrate the fundamental nature of the crisis (BIS, 79th Annual report is excellent in
this respect). From a policy perspective, the
main challenge was first to rescue the World
on the Edge and next to start considering and
discussing the consequences of the Crash in
terms of repairs and structural reformations.
Meanwhile the economics profession is getting ready to start the rewriting of textbooks
in Macroeconomics and Finance (and perhaps integrating the two a bit in the process).
By now, thanks to a remarkable combination
of market resilience and courageous policymaking, the recovery from the crisis appears
to be surprisingly quick and strong, especially in the emerging market economies. Initial
feelings that the Great Crash would mark the
end of the globalised capitalist system seem
exaggerated. However, the damages to the
system are deep and fundamental. They are
connected with market imperfections and
governance failures both at the macro and the
micro level. They also touch upon the nature
of human behaviour in terms of rationality
and ‘animal spirits’ like greed and selfishness.
For the same reasons, solutions are complex
and comprehensive. The corporate, the national and the international dimensions of
the damage must be taken into account and
country-specific factors need to be considered as well. Particularly in Europe, governments are facing tremendous difficulties to
get control over the inherited debt.
Three aspects are becoming obvious as the
crisis evolves. First, apart from financial repairs in the short run, structural system reforms are indispensable to restore trust and
regain long-term growth and stability. Secondly, most of the measures require international cooperation and joint action. Thirdly,
in order to meet the realities of the 21st century, developing countries should be given a
greater say in the new architecture.
FIRST Quarterly
2. The emergence of the G20 and the rebirth of the IMF
The meeting of the G-20 Leaders in Washington on Nov 15, 2008 (two months after the
collapse of Lehman Brothers) was an event
of tremendous importance. A new institution emerged, a cross-section of the world, a
political forum which represents 90 percent
of world income, 80 percent of world trade
and two-thirds of the world’s population1.
The G-20, while replacing the G-8, took the
lead in dealing with the crisis and looking for
appropriate responses. Four working groups
were installed to come up with concrete proposals to restore global growth and financial
market stability as well as to investigate and
prepare the needed reforms in the world’s financial system. Their reports served as input
for the next meeting of the G-20 Leaders in
London on April 2, 2009. A new order was
born. Developed and developing countries
joined forces. Or, as World Bank President
Robert Zoellick put it recently: If 1989 saw
the end of the ‘Second World’ with Communism’s demise, then 2009 saw the end of what
was known as the ‘Third World’. Indeed, with
the share of the developing countries in global GDP, global trade and global finance rapidly rising, and the developing world being
the prominent engine of the recovery from a
crisis which originated in the west, the world
is rebalancing, and it is time to modernise
and strengthen the multilateral institutions
During the London Summit, thanks to the
excellent performance of Managing Director
Dominique Strauss-Kahn, the IMF regained
its position and authority at the centre stage
of the new architecture. First, the IMF was
given a leading role in the macroeconomic
policy coordination (fiscal stimulus, monetary easing). Secondly, the IMF was asked
(together with the Financial Stability Board)
to start preparing structural financial reforms
(strengthening transparency and accountability; enhancing regulation and macro-prudential supervision; promoting integrity in
financial markets). Thirdly, in order to reassert its role as the ultimate provider of liquidity for countries with balance of payments
problems, the resources of the IMF were increased from $250 to $750bln and an issue of
$250bln SDR was also permitted. The expansion of resources was financed not only by
the familiar rich countries, but this time also
the BRIC-countries agreed to contribute.
In a way, the crisis marks the revival of the
IMF. Its key functions (governance, lending,
technical assistance) were redefined. The notorious conditionality clause was changed. It
still remains critical to ensure that necessary
policy adjustments are made, but conditions
have become more focused, and less pressing or burdensome with respect to measures
which are not directly crucial to the success of the program. Apart from the existing
stand-by arrangements a new precautionary
facility was introduced for countries with
strong economic policies and a proven track
record. This new credit line allows countries
to insure for a crisis while avoiding the political and market shame of borrowing from
the Fund. Meanwhile the IMF has provided
loans to several countries in Eastern Europe
and Central Asia (but not to countries in
Latin America and South East Asia as these
regions had been building up their own rainy
day funds through the accumulation of foreign reserves in the period preceding the crisis).
The next step of the governance reform is to
ensure a decision-making structure that reflects current global realities. Even after the
quota change of October 2009, current voting shares are still a legacy of the distribution
of economic power at the end of the Second
World War. For instance, European countries hold more than 30% of the votes and
the United States almost 17%, while the four
BRIC countries only hold 10%. The G-20 has
instructed the IMF to schedule a new, more
ambitious round of reforms in January 2011
(two years earlier than scheduled). Various
suggestions have been made to bring about
larger shares for the emerging countries (and
smaller ones for the rich…), as well as to redefine the voting rules (qualified majority,
veto threshold). One interesting proposal
(made by Eswar Prasad) is to reduce all existing shares by 20% and set up an auction to allocate them. Last but not least, modalities are
being sought to give non-Europeans a chance
to run for the post of Managing Director. Undoubtedly, negotiations on all these topics
professor article
will be tough, but in the end a significant shift
is necessary to enhance the IMF’s legitimacy
and effectiveness.
3. Dealing with the Damage
The list of policy issues that will shape the
next decade in the aftermath of the Great
Crash of 2008 is long and overwhelming.
Below I will briefly introduce some key concerns.
• Exit policies
In response to the crisis, governments have
provided substantial resources to support
aggregate demand and to save the banking
sector. These unconventional and bold actions have resulted in major increases of fiscal
deficits and public debts, particularly in the
advanced economies. According to IMFprojections the central government’s debtto-GDP ratio of the advanced economies will
rise from 73% at the end of 2007 to 109% at
end of 2014. For emerging economies, the
fiscal outlook is stronger, which reflects the
more favourable structural conditions and
smaller output losses in comparison to the
rich economies.
Also, central banks have employed a wide
range of measures to rescue the financial system and to mitigate economic contraction.
Policy interest rates were cut to historically
low levels. Moreover, monetary authorities
immediately began to inject large amounts
of liquidity and, at a later stage, to purchase
long-term securities to lower long-term interest rates and boost credit. Emerging market
economies also eased monetary conditions
but not as much and as broadly. In general,
whilst central banks have mostly rolled back
the large liquidity and other ‘balance sheets
operations’ by now, monetary policy is still
accommodating as interest rates have been
maintained at low levels until today.
On February 17, 2010, the IMF’s Executive
Board discussed the principles for exiting
from the extraordinary and unprecedented crisis intervention policies and ways to
gradually return to normal and sustainable
conditions. From their assessments, it is clear
that the key challenge is to find a balance
between unwinding exit policies too early,
which could jeopardise progress in securing
economic recovery on the one hand, and
maintaining intervention too long, which
would distort private incentives and create
macroeconomic risks on the other. Indeed,
fiscal consolidation and monetary normalisation need a medium-term strategy. Especially
in the advanced economies, where evidence
of a self-sustaining recovery is still weak, caution is called for and the adjustment process
should be monitored carefully. Yet, in order
to anchor expectations and to avoid market
uncertainties, policy makers need to formulate coherent and credible exit strategies now,
and begin to implement these when feasible.
A serious complication in the macroeconomic policy choices is the existence of international linkages and spillover effects.
Domestic adjustment policies will affect international trade, capital flows and exchange
rates, which in turn influence the individual
countries’ performance. Also, a consistent
and credible communication with the market
is important. Obviously, policy coordination
and information exchange across countries is
necessary to ensure better outcomes and to
prevent destabilising processes. It is a delicate
balancing act.
• Global imbalances
A connected concern in the attempts to coordinate macroeconomic policy internationally
is the necessity to reduce global imbalances.
Since the end of the Asian crisis current account deficits and surpluses have resulted
in large and persistent capital flows from
capital-poor emerging market countries,
especially in Asia, to capital-rich industrial
countries, the United States in particular. The
main component of these “uphill” capital
flows includes the accumulation of foreign
reserves. As imbalances cause the stock of
cross-country claims to increase year by year,
this situation is critical and cannot be allowed
to continue for another decade. At a certain
point in time, the appeal of investing abroad
and accumulating more foreign assets will
drop. Even worse, central banks and other
investors might try to repatriate their wealth,
which would set in motion a chain reaction of
falling asset prices, a collapse of the US dollar and severe balance sheet deteriorations.
It may be a dooms-day scenario but it is not
According to the BIS team, it is difficult to
know what to do about the dependency that
developed between the export-led growth
in much of the emerging world and the
leverage-led growth in a large part of the industrial world. Some observers argue global
imbalances would disappear once the Chinese authorities would allow their currency
to appreciate against the US Dollar. It might
help, but in its essence the problem is much
more complicated. It is connected to spending propensities, growth opportunities and
development priorities on two sides of the
Pacific. For that reason, unwinding the dependency will take time, probably more than
one decade.
• Regulation and supervision
Not surprisingly, the Great Crash immediately sparked off a violent debate about the effectiveness and scope of financial regulation
and prudential supervision. Although the
financial sector already belongs to the most
heavily regulated sectors of the economy,
the crisis triggered a strong desire for more
or rather for better regulation. Many experts,
national regulatory bodies but notably also
the various sector-specific standard setters
(such as the Basel Committee on Banking
Supervision, the International Organisation
of Securities Commissions, the International
Association of Insurance Supervisors and the
International Accounting Standard Board)
came up with recommendations and decisions. As to content, a kind of reform consensus seems to be growing about how the regulatory framework should be strengthened:
raising banks’ capital and liquidity ratios,
increasing collateral requirements, abolishing misaligned incentives like compensation
schemes, improving risk measurement and
risk attitude, and enhancing the transparency
of traded products. Additionally, when implementing reforms in the regulatory framework, content, coverage and structure are all
relevant. First, in the new architecture it will
be necessary to provide adequate oversight
of a much wider range of players than those
belonging to the traditional three pillars of
the financial system (banking, insurance and
securities markets). Secondly, where responJuly 2010 edition
professor article
sibilities are divided there will have to be
stronger mechanisms for cooperation among
different regulators as well as with the monetary authority. Altogether, the main overall
challenge is to find a right balance between
achieving prudence and stability on the one
hand and preserving efficiency and innovation on the other.
Also macro-financial stability is an urgent
worry for the next decade. The Financial Stability Board, together with the IMF, has (re)
formulated a number of tools and practices.
One non-spectacular but important initiative is to enhance information exchange. This
would allow authorities to better capture the
build-up of risk in the financial sector and to
better monitor the vulnerability of domestic
economies to shocks like sudden stops in
capital flows. The idea is to establish an early
warning system (or rather continue previous
work which began after the Asian Financial
Crisis), as an important source of input for
the bilateral, multilateral and global surveillance activities of the IMF. Several other
initiatives emphasise the development of a
macro-prudential framework which would
address the so-called systemic risk. Systemic
risk emerges when a shock simultaneously
affects all financial institutions or when the
responses to a shock destabilise market dynamics. One aspect of the new framework
would be to detect this type of risk at an early
stage and identify the relevant underlying
linkages. Potential indicators include asset
prices, credit growth, liquidity and debt-ratios. Another aspect, of course, is to find tools
and procedures of pre-emptive action. An innovative model in this respect is to develop
anti-cyclical regulatory tools and incorporate
them in the monetary policy framework. It is
a promising but still highly controversial debate.
4. Globalisation needs governance
The Great Crash has reinforced the debate
about the pains and gains of financial globalisation. We have seen this before, especially in
the wake of the Asian Financial Crisis, when
the mantra of the Washington Consensus
(‘stabilise, privatise and liberalise’) lost its
relevance and appeal, and economists started
to emphasise the role of strong institutions
FIRST Quarterly
in creating sound financial systems and economic growth (see Dani Rodrik for a great
review of the road from ‘market fundamentalism’ to ‘institutions fundamentalism’). As we
know now, these two views are complementary. The experiences of the emerging market
economies in Central Europe, South East
Asia and Latin America show that a strategy of opening-up along with comprehensive
domestic reform, can release a great growth
potential and enable countries to improve
living standards, alleviate poverty and reduce
inequality, provided the process is carefully
managed in terms of institutional design as
well as in terms of speed and sequence. It is
a challenge and policy mistakes can easily
cause a lot of harm. Yet, in the end I agree
with Mishkin that globalisation is one of the
most powerful weapons for stimulating institutional development and that wealth is not
something that can be attained by remaining
closed off to the rest of the world. In addition,
Africa needs to embark on this route in order
to catch up. So at this point the only conclusion can be to learn from the mistakes and
be bold in accepting the consequences. This
time the consequence is a stronger and more
representative global governance framework.
Henk van Gemert is a Senior Lecturer in the
Department of Economics. His research and
teaching focuses on Development Finance.
He is also the Academic Director of the BSc
1. The G-20 includes eight advanced economies (US, Canada, Australia, Japan, Germany, UK, France and Italy), the four BRIC
countries (Brazil, Russia, India and China),
seven other emerging market economies
(Argentina, Brazil, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey),
and one extra seat for the EU.
BIS, 79th Annual Report, 29 June 2009,
Chapter 1: Rescue, recovery, reform.
Andrew Crocket, Rebuilding the Financial
Architecture, Finance & Development, Sept.
The Economist, IMF Briefing, Mission: Possible, April 11th 2009.
IMF, Exiting from Crisis Intervention Policies, Public Information Note 10/27, Febr.
23, 2010.
John Lipsky, Preparing for a Postcrisis World,
Finance & Development, June 2009.
Frederic Mishkin, Globalization and Financial Development, Journal of Development
Economics 89 (2009).
Dani Rodrik, Goodbye Washington Consensus, Hello Washington Confusion?, Journal of Economic Literature Vol XLIV (Dec.
Robert Zoellick, The End of the Third
World?, Woodrow Wilson Center for International Scholars, April 14, 2010.
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Interview: Constantin Mavrocordatos
Payload manager at the European Space agency
interviewers: Marjolein Buiter and Noven Chan
Source: ESA
Could you briefly tell us something about the European Space Agency (ESA) and its site here in
ESTEC is the biggest site of the ESA. About
1200 out of the 2000 people working here are
staff of the ESA and the rest are people who
are working here temporarily as contractors.
ESTEC is a technical centre dealing with
spacecraft projects. The ESA is headquartered in Paris, but has other centres as well:
for instance, the control centre in Germany,
and the processing centre in Italy. Moreover,
there are also offices in Washington, Moscow,
Toulouse and there is a new centre in the UK.
But all these centres are much smaller than
ESTEC. We also have an astronaut centre,
located in Cologne, where we select a pool of
future astronauts for training every two years
and send them a few years later to the Space
Is ESTEC a testing site of the ESA?
It is not only a testing site but it is also a design
centre. We have engineers who design satellites, who understand what the users need
and who are able to respond to the needs of
these people. When we need to build a satellite for a specific mission we write down the
technical specifications and then assign it to
an industry to build it for us. During the development we closely follow the building of
the satellite and when it is ready we add an
ESA rocket to launch it. Sometimes we also
buy services of other launching companies.
We are not only designing satellites, but we
also have a research branch which develops
technologies that will be needed for future
missions. We have to anticipate to make sure
we have the technology that will be needed
in five or ten years from now. One third of
the staff is working in this research directorate, which belongs to the technical director-
ate of ESTEC. In this directorate there are
three branches, one is electrical engineering,
another is mechanical engineering, and the
third is quality control. We have a full group
of engineers dealing only with quality and
probability analysis.
You have a technical background: what did you
study and why did you choose to work at the
ESA? Have you always been interested in space
or was it a coincidence?
When I was a child, my dream was to become
an astronaut, but I actually did not manage to
become one. Nonetheless, I still loved planes
and flying altogether and therefore I decided
to work in the field of space engineering. I am
not really an astronaut but I am quite close
to one.
I studied electronic engineering in France.
After which I got a PhD, and worked for six
July 2010 edition
to meteorologists, and also
help different countries to
manage risks. For example,
in case of a tsunami they
need to know which areas
are prone to floods and move
those areas’ populations. If
the flood has occurred you
need to help in reorganising the security process, the
moving of the population
out of the affected areas and
help people with the reimbursement by their insurers,
by estimating the damage
that has occurred.
Source: ESA
years in Toulouse, France for a private space
company called Thales. After those six years I
changed sides, hence I switched to an organisation that hires companies like Thales. This
is how I joined the ESA fifteen years ago.
You just mentioned that you worked for Thales,
which is a defence contractor. How is it related to
your current line of work?
Thales is a very big company, which has many
branches. It goes from nuclear power plants
to missiles, from aircraft electronics to space.
Actually, while I was working at Thales, the
branch I was working at was also dealing with
military projects, excluding weapons, projects such as observation satellites for military purposes. Here in ESTEC we have no
military activities, it is even forbidden by our
convention to deal with military activities.
You are the Payload Manager of the GMES/
Sentinel 3 project. Could you tell us what this
project is about?
GMES stands for Global Monitoring of the
Environment and Security, and is a programme that comprises a series of satellites.
In particular, there are three projects which
are part of GMES. They are called Sentinel 1,
Sentinel 2 and Sentinel 3. Each of these three
projects has two satellites in development.
Sentinel 3 is dedicated to the observation of
the Earth with special instruments that will
help predicting climate, give information
Let me talk more specifically
about the Sentinel 3 project
which consists of a set instruments. First of all, it has a big
infra telescope, that is able to measure the
temperature of the sea with a very high accuracy of 0.1 degrees Celsius. Furthermore,
it can take pictures of the entire earth in one
day. It has another instrument, which is also a
telescope and is designed to detect the colour
of the sea. It analyses the movement of the
currents, detects the presence of plankton
and chlorophyll in the sea and pollution. The
third instrument, which consists of a group
of instruments, is designed to measure the
sea level with a very high precision. The first
one measures the distance between the satellite and the surface. The other determines
with the precision of a centimetre where the
satellite is located. So, if you know where you
are, and what the distance to the surface is,
you are able to determine the sea level. All
these different instruments are on a big satellite, which weighs about 1.2 tons. It will
be launched in 2013 probably from Kourou,
Guyana, close to the Equator. Whenever we
design a satellite mission we also have to be
prepared to launch from an alternative site.
In cases of a failure, our back-up site is Plesetsk, a Russian site located to the north of
As a Payload Manager, I am in charge of all
the instruments on the Sentinel 3. I have a
team of six engineers and each of them is responsible for one of the instruments. I supervise this team.
Do you think the Sentinel 3 project could help
prevent natural disasters?
The main objective is to deal with these natural disasters, but a secondary objective is to
give the means to predict and to anticipate,
even though you cannot stop any natural disaster with a satellite. However, the earlier we
give a warning, the better one can anticipate
and organise the necessary actions to deal
with the consequences.
How does a regular work week look like for you?
Every week, all the engineers in my team get
together and we prepare the work for the next
days of the week. We all travel quite a lot and
we need to plan a little bit what the objectives
are, what might be important and what the
priorities are. We do this in the beginning of
the week, including the review of the previous week. I give advice to the engineers. First,
I collect information and afterwards we exchange and decide together how to deal with
problems that already appeared or still might
come up. Every day there is a new problem
that we have to detect and solve.
The theme of this edition is ‘A New Decade’.
What does the new decade at the ESA look like?
There are many aspects to answer in this
question. One of these is the economic aspect. Up till now I would say that we did not
really feel the economic crisis. This does not
mean we will not feel its effects in a few years.
July 2010 edition
When you plan a mission, you plan it now,
but you develop it in a period of ten years.
The decisions that are taken now may not
show immediate consequences but it is possible that these are just delayed. When this
happens there will be, of course, some budget
restrictions, as for example some recruitment
policy being a little stricter or some sort of
constraints on new projects.
You mentioned autonomy. Do you cooperate
a lot with Russia, or with other space nations?
Is there collaboration between the ESA and
the NASA in certain aspects?
Yes, absolutely. We cooperate especially regarding big missions which cannot be handled by a single country alone. For example
the ISS (International Space Station): it is
such a costly programme that not a single nation can afford it. We cooperate a lot with the
NASA but also with the Russians, especially
in manned missions. Since we are not so ad-
vanced in this field we send our astronauts for
training there.
Recently the US Space Programme was temporarily stopped, because of problems with a
shuttle. Did this have any consequences for the
ESA in general?
That is a good question. In these days only
Russians and Americans are able to send people into space and they were always used as
a back-up for each other. Obviously, now we
need to rethink our policy and we have also
started to develop some projects for servicing the ISS in Europe. One is a project called
ATV (Automated Transport Vehicle), which
is not manned. It is able to dock at the ISS,
fuel the station and recover all the rubbish to
return it to Earth. It actually does not return
in the obvious sense of the word since it is
being burned in the atmosphere. This programme is under study even though nothing
real is under development to date. Another
study is about return vehicles which are able
to fly to the station, dock there and bring the
astronauts back to Earth in case of an emergency. ESA-A. Van der Geest
Source: ESA - A. van der Geest
July 2010 edition
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PHD Article
High-tech innovation crosses firm
boundaries by involving suppliers
By Johanna Slot
Traditionally, high-tech innovation was an internal activity. However, the task has become
increasingly complex due to fast-pace developments in technology. Now, high-tech firms
resort to outside knowledge sources, thereby
crossing firm boundaries. Next to cooperation
with competitors and customers, firms involve
their suppliers in new product development.
How should these firms organise this type of
open innovation?
1. Introduction
Innovation is the lifeblood of modern economies; innovation has a major impact on the
daily lives of consumers. Innovation brings
forward new products which satisfy changing
customer needs; innovation improves the quality and lowers the prices of products (Hauser,
Tellis & Griffin 2006). Innovation has a great
impact on business: innovation creates new
markets and destroys old ones (Abernathy &
Clark 1985). For firms, the development of innovative new products is an important activity
in gaining competitive advantage (Wind & Mahajan 1997). Innovation is critical: it can cause
incumbent firms to lose and new entrants to
win (Chandy & Tellis 2000).
Thanks to rapid scientific technological developments, technology is at the core of many
newly developed products ( John, Weiss &
Dutta 1999). High-tech innovation is different
from non-tech innovation. Two aspects are relevant in this respect. First, scientific knowledge
has a substantial role in enabling technological
improvements leading to new products. Second, the development of new high-tech products is costly. The development processes may
involve research and development on new technologies requiring basic research, prototyping
and testing, extending developing time and increasing development costs. Material and labor
cost of reproduction and distribution of hightech products are typically only a fraction of the
knowledge development costs ( John, Weiss &
Dutta 1999).
Traditionally, high-tech new product development was an activity kept within firm boundaries. A firm would develop a new product on the
basis of the marketers’ perception of customer
needs, and would develop necessary components themselves or order off-the shelf with
suppliers. However, high-tech innovation is
becoming increasingly complicated due to fastpace developments in technology which makes
stand-alone innovation extremely costly (Wind
& Mahajan 1997). In addition, suppliers increasingly need to do development work themselves before they can deliver components. As
a result, high-tech firms increasingly resort to
outside sources to find the expertise needed.
This changed the scope of high-tech new product development.
Today, high-tech new product development
is characterised by extensive cooperation
with customers, suppliers and even competitors. This practice is coined ‘open innovation’
(Chesbrough 2003; Rigby & Zook 2002). In
today’s world, we find examples of such open
innovation collaborations all around us. For
example, in the car industry, the competitors
Toyota, Peugeot and Citroën have joined forces
to develop the ‘triplet’ cars Toyota Aygo, Peugeot 107 and Citroën C1. In the semiconductor industry, manufacturers frequently involve
their suppliers for achieving production of even
smaller computer chips. In the development
of medical equipment, hospitals are typically
involved to ensure the tools meet user requirements.
2. Literature review
In recent years, the value of outside sources
of knowledge to the innovation process has
been increasingly acknowledged in academic
research (e.g. Cohen & Levinthal 1990; Narasimhan, Rajiv & Dutta 2006; Wuyts, Dutta &
Stremersch 2004; Sivadas & Dwyer 2000). A
lot of research has focused on innovation together with competitors in R&D alliances and
joint ventures (e.g. Rindfleisch & Moorman
2001; Rowley, Behrens & Krackhardt 2000;
Powell, Koput & Smith-Doerr 1996). In such
(temporary) collaborative agreements, the parties agree to jointly develop and share knowledge. This way, a firm increases its access to
expertise. Especially in high-tech industries, in
which R&D is pervasive and technological developments are rapid, collaboration with competitors may help a firm to survive.
In addition, research attention has been spent
on involving customers in the innovation process. One stream of literature reports on the
benefits and costs of co-development with
customers (e.g. Fang 2008). Some critics have
argued that customers are unable to conceive
truly novel product concepts, which is an important ingredient for innovation (Bonner &
Walker 2004). Another stream of literature focuses on involving lead-users, which are those
customers experiencing leading edge needs and
are treated as exemplars for the bulk of the customers (Von Hippel 1986). In high-tech new
product development, the involvement of customers is an important phenomenon. Customers increasingly formulate their own needs and
may already start thinking of solutions (Appleyard 2002), thereby initiating new product development projects themselves.
Next to competitors and customers, a firm
can also cooperate with suppliers for developing new products. However, this type of cooperative effort has received far less academic
attention. For high-tech firms, cooperation
with suppliers is of the utmost importance.
Characterised by an ongoing stream of radical
July 2010 edition
PHD Article
and incremental innovations, these markets
frequently face changes in terms of products
made, technologies and knowledge studied and
processes followed (Abernathy & Clark 1985),
making existing structures obsolete. Involving
suppliers helps firms to stay abreast of the latest
technological developments (Wuyts, Dutta &
Stremersch 2004). In terms of NPD success, involving suppliers in new product development
is reported to result in better product designs,
which are marketed faster and ultimately translate into higher customer value. Although the
necessity to include suppliers in new product
development to access new knowledge is apparent, involving suppliers is easier said than done.
This article will discuss some of the issues associated with involving suppliers in high-tech new
product development.
3. A portfolio approach to involving suppliers in high-tech new product development
As mentioned earlier, firms active in high-tech
industries need to involve suppliers in order to
access outside knowledge. Working with suppliers may take many forms. On the one end
of the spectrum, a firm can tap into external
knowledge pools by licensing know-how from
supplier parties, or simply buying components
from supplier parties. In such a situation, market governing mechanisms apply. On the other
extreme, a firm could decide to set up a contractual joint venture with its supplier(s), thereby
applying hierarchical governing mechanisms.
In between these forms, we find hybrid designs
(Williamson 1991), in which the focal firm and
supplier(s) cooperate intensively. For the focal, developing firm employing such cooperative designs with suppliers, the key questions
to planning supplier involvement are: WHICH
suppliers should be involved, WHEN should
these suppliers be involved, and HOW should
they be involved?
3.1 Knowledge-based view
The knowledge-based view is well-suited to
solve questions related to planning supplier
involvement in high-tech new product development. The knowledge-based view focuses on
knowledge as the most strategically important
resource of the firm (Grant 1996), having distinct characteristics leading to particular challenges. First, the transfer of knowledge within
the firm as well as between firms can be slow,
costly and uncertain due to its tacit nature
and its complexity (Kogut & Zander 1992).
FIRST Quarterly
Second, the ability to transfer knowledge is
highly related to the capacity for aggregation
of knowledge, which, in turn, depends on the
absorptive capacity of the recipient (Cohen
& Levinthal 1990). Third, knowledge as a resource represents unique appropriability problems in the sense that reselling knowledge is
possible without losing it, and that marketing
knowledge makes it available to buyers concurrently (Grant 1996). Given these knowledge
characteristics, markets are deemed unsuitable
for coordinating the exchange of knowledge
as a resource. The knowledge-based view sets
forward this very argument to defend the existence of the firm, as firms can create the conditions in which knowledge can be exchanged for
the benefit of production without opportunism
problems (Grant 1996).
The same rationale can be followed to explain
the existence of supplier involvement in internal firm processes too. As has been pointed out
earlier, one of the very goals for supplier involvement is to gain access to new knowledge,
an asset very valuable for high-technology industries (Narasimhan, Rajiv & Dutta 2006).
Transfer of tacit and complex knowledge requires proximity between two parties (Grant
1996). Close cooperation including frequent
interaction between two firms could be a successful way to coordinate external knowledge
transfer. Supplier involvement designs in which
parties work together intensively shape the
conditions necessary for external knowledge
transfer. In addition, suppliers involved in an
NPD project tend to have intensive relationships with the firm, which reduces opportunism problems (Rowley, Behrens & Krackhardt
2000; Stump & Heide 1996). In summary, supplier involvement proposes an alternative to
the firm as an organisational form for external
knowledge transfer.
3.2 Supplier portfolio characteristics
In high-tech innovation, the managerial decision to involve a certain supplier in new product development is not independent of the decision to involve another supplier. Frequently,
high-tech products are highly interdependent,
meaning that changes in one process affect the
other. Similarly, involving one supplier affects
the choice of involving another supplier. In addition, as the total group of suppliers involved
determines the knowledge pool the developing firm can source from, the only correct way
to handle the problem is a portfolio approach
analysing all suppliers simultaneously, involving analysis of both the ‘average level’ as well as
the ‘variation’ of characteristics in the portfolio.
The first aspect dictated by theory pertains to
the size of the supplier portfolio. Ceteris paribus, the larger the supplier portfolio, the more
knowledge can be sourced. However, as the
supplier portfolio becomes larger, the coordination costs of the interactions between all parties increase. These costs can be substantial, as
inter-organisational transfer of technological
knowledge is especially difficult (Kotabe, Martin & Domoto 2003). Hence, an excessively
large portfolio of involved suppliers lowers the
knowledge sourcing benefits.
Second, the knowledge heterogeneity of the
supplier portfolio deserves attention. Knowledge heterogeneity refers to the differences in
technological knowledge among the suppliers
(Bonner & Walker 2004). Theory dictates that
two parties can only learn from each other if
they have different knowledge, such that there
is a learning potential. However, the cognitive
distance between the two parties must not be
too wide, otherwise the two parties will face too
many challenges in the learning process (Kogut
& Zander 1992). A supplier portfolio with high
knowledge heterogeneity indicates knowledge
differences between the suppliers, which offers
many opportunities to learn, although the costs
associated with the knowledge transfer are expected to be high.
Third, the duration of supplier involvement is
necessary to plan. A technological development
process typically comprises the following phases: concept generation stage, feasibility study
stage, specification stage, design and building stage, prototype testing stage, pilot testing
stage, followed by volume ramping and product
introduction. Suppliers can be involved for only
one phase of the new product development
process or they can be involved for multiple
phases. Involving a supplier for multiple phases
means that the developing firm is exposed to
external knowledge longer, which will benefit
new product development. In addition, if the
supplier is involved for multiple phases, synergy
effects arise in coordination. On the portfolio
level, variation in the duration in which the suppliers are involved decrease cost efficiencies, as
synchronising activities and process concurrency facilitate scheduling (Brown & Eisenhardt
1997; Tatikonda & Montoya-Weiss 2002).
Fourth, the tie strength with the supplier portfolio needs to be taken into account, which con-
PHD Article
sists of both the interaction frequency and the
closeness (cf. Marsden & Campbell 1984) between the focal firm and the suppliers. Frequent
interaction is necessary for transferring technological knowledge due to its tacit and complex
nature (Kogut & Zander 1992), but frequent
interaction increases costs. Interaction with
close suppliers, however, will not contribute
much to the resource pool of new knowledge.
Close partners are likely to have similar ties
and knowledge sources (Granovetter 1973),
and the firms have probably exchanged their
knowledge already (Uzzi 1996). The development of redundant knowledge is a result. Closeness, however, does facilitate cooperation, as
close ties serve as control mechanisms (Rowley, Behrens & Krackhardt 2000) generating
cooperative norms and trust (Uzzi 1996). On
the portfolio level, variation in both interaction
frequency and closeness increase costs, thereby
reducing the benefits of supplier involvement.
4. Concluding remarks
In summary, involving suppliers in new product
development can improve new product development dramatically by increasing access to
external knowledge sources, which are critical
ingredients in fast-paced high-tech innovation
processes. However, composing a supplier portfolio for involvement is not straightforward and
deserves thorough analysis. Next to the number
of suppliers to be involved, a firm must select its
suppliers based on their knowledge background
and must plan the duration of the involvement
and the interaction with the suppliers closely.
Trade-offs exist between knowledge transfer
on the one hand and the costs associated with
coordinating supplier involvement on the other
hand. In addition, these benefits and costs stem
from both the choice of the individual suppliers
as well as the resulting supplier portfolio composition.
Drs. J.H. Slot is a PhD student at the Department
of Marketing, Tilburg School of Management and
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July 2010 edition
At Beiersdorf AG
By Nathalie Knobloch
In April 2009 after passing all my exams in
the master’s programme of Strategic Management I decided to take half a year off in
order to do an internship at the department
of International Sales at the headquarters
of Beiersdorf AG (BDF) in Hamburg, Germany. BDF is one of the top international
health & beauty companies, listed at the
German stock index offering leading international brands such as Nivea, Labello
and Hansaplast. The company also manufactures adhesive applications under its
brand Tesa. BDF has more than 125 years
of experience, more than 150 affiliates and
20,000 employees worldwide and generated record sales of €5.97 billion in 2008.
No wonder that even before my first day at
work I was highly motivated to start working in such a challenging and fast-paced
environment – and I would not be disappointed throughout the upcoming six
Within the international sales department,
I was working in the field of global customer management or in other words ‘international key account management (IKAM)’.
IKAM was a field of business that did not
cross my way in any course at university.
My assignments
Basically, my main tasks were threefold.
First and most importantly, I was supporting a key account manager who was responsible for one of BDF’s biggest customers: A global player with affiliates in Europe
and Asia. Typical assignments for me as an
intern were to do research on the customer
by e.g. collecting data on sales forecasts,
latest developments etc and to conduct
benchmark-and market analyses. This information have been used by my boss as a
starting point for his international annual
planning with the customer. From an internal perspective I was in close communication with the key account and country
managers of the respective BDF affiliates
in Europe and Asia. As an example I had
to ask them on a regular basis to send me
customer specific data, such as the development of new product launches. From an
FIRST Quarterly
external point of view, I was in direct contact with the customer by sending them for
instance sales data.
Second, I was supporting the internal International KAM coordination between the
different key account managers in the HQ
and abroad and I was for instance in charge
of the preparation and organisation of international meetings.
Third, I had other totally different assignments, such as the creation and maintenance of virtual rooms at the BDF intranet
in order to improve efficiency in communication with all respective affiliates.
What I liked the most
I felt highly integrated in the team and I
had my own projects and responsibilities.
Once, during an international workshop
I was presenting my own project in front
of senior key account managers. This was
a big change compared to presentations
given at university, but a challenge that was
actually fun to comply. I also liked the fact
that I could join official business dinners,
where I enjoyed meeting and having a chat
with colleagues from other affiliates.
The great network for the several hundreds
of interns at BDF was another great experience. Weekly activities such as dinners,
drinks, sports and cultural events have
been organised, during which it was very
easy to meet other fellow interns in an informal setting.
Another benefit was the project overlapping with other departments such as the
International Sales Controlling and Supply chain management departments, which
helped me a lot in understanding the full
scope of complex projects.
What are the main take-aways?
The knowledge I gained in the area of
IKAM is of course one of the main takeaways. However, probably more important
are certain soft skills that I acquired. I learnt
that it is not always pure theoretical knowledge that counts. Especially in the domain
of sales no manager appreciates a mindset,
which is said to be too ‘mainstream’. In contrast, it is often more important to make
use of common sense and to think in a prag
matic manner when analysing real-world
business problems. Besides, an independent way of working as well as pro-activity
is highly appreciated, too.
While communicating with national key
account managers from the respective affiliates worldwide, I could notice some
interesting cultural differences in terms of
business formalities between Europe and
Asia. When asking for data from let’s say a
Dutch or English colleague it is normal to
approach the person by only using the first
name, something which is in most cases
strongly inappropriate in the majority of
Asian countries.
To conclude, I encourage every student to
do an internship, because no matter how
high your average is, working experience
gained through an internship is definitely
highly appreciated or even strongly recommended by most Human Resource recruiters.
alumni: Erik verheijden
As a student, I did not really think about
the future. Of course studying is actually
preparing for the future, but at least I did
not spend a lot of time thinking about what
would happen in the world, the coming
few years. That all changed when I started
my internship at ASML in Veldhoven.
Working 40 hours a week is definitely a
sudden change from student life! However,
it certainly was worth the effort. Now, after
roughly 1,5 years being a flex-worker, I got
my fixed contract for an undefined period
at ASML.
ASML is the world’s leading provider of
lithography systems for the semiconductor
industry, with offices in more than
15 countries and supplying systems
throughout Asia, the United States and
Europe. Lithography systems are used
to reduce the size and at the same time
increase the functionality of microchips,
and consumer electronic equipment. From
this explanation, it probably has become
clear that ASML is a high-tech innovative
company, which at first sight would not fit
a ‘marketing guy’ from Tilburg University.
However, the semiconductor industry is
a very interesting one, characterized by
very cyclical behaviour. A small change
in for example consumer electronics
demand can have an amplified impact
on demand for lithography systems.
Therefore it is very important for ASML
to understand the market dynamics and
foresee (macroeconomic) threats and
opportunities. For example, due to the
credit crisis the revenue dropped to 184
million euro in the first quarter of 2009,
which is 80% lower than the first quarter
of 2008! This indicates the volatility of
the market and the importance of a good
forecast, which is the task of my department
within ASML.
We closely follow macroeconomic trends
as well as new electronic applications
which can influence electronics demand.
We have to answer questions like: What
is the impact of a new Windows version
on PC sales? What will be the impact of
cloud computing on the electronics market
during the next 5 years? What is the impact
of the increased use of social network sites
like Hyves and Facebook on technology
spending? After we have answered these
questions, we are able to simulate the
possible future of ASML.
Increasing worldwide demand does,
however, not necessarily mean that our
customers can actually afford new ASML
systems, which in 2009 had an average
selling price of € 21.1 million. Therefore it is
also important to analyse if our customers
have enough cash available to finance new
purchases. This has certainly become a lot
more difficult over the past year.
Luckily, we do not have to do all this
research ourselves. We have contact with
external analysts all over the world, who
keep us up to date about changes in the
market, new to-be-released electronic
products and potential future technologies
and hypes. Using this information we
create simulation scenarios. Creating
these scenarios and making a forecast is,
however, only one part of the job. The
other part is communicating this message
throughout the company, which involves
giving presentations and discussing the
future planned capacity for ASML.
What I really like about working at ASML
is that in this high-tech company, the
marketing department is relatively small.
This means that the work I do is directly
used by the top management for making
decisions and formulating the companies’
strategic vision, which at least gives me
the feeling that I really add value to the
organisation. Furthermore, I have lots of
contact with people from all over the world,
due to the multicultural environment
within ASML and the geographically wide
spread activities of ASML. Also, we have a
very central position within the company,
because our view on the market has to be
communicated to lots of different
departments. Investor Relations, Product
Marketing, Central Planning and naturally
the board of management, everyone has
to understand the market and should be
aware of the latest forecast.
Even though I am a Marketing Management
MSc, I am now mainly analysing the market,
which is actually market research. I think
this is a good addition to my knowledge,
because in the end we should all understand
market dynamics and there is no way to
learn this better then at a company at the
very end of a supply chain, like ASML. I
am learning about the worldwide market,
the semiconductor industry and at the
same time developing my communication,
presentation and analytical skills at a high
professional level.
What will happen in the next decade?
No one will know for sure, there are
definitely lots of opportunities, but still
also economic threats. The only thing we
can conclude is that it will definitely be a
very interesting one, career-wise as well as
Erik Verheijden is working as market
analyst at ASML Netherlands B.V. in
Veldhoven. Erik has a MSc in Marketing
Management and was active for Pro-M /
First International in several committees
from 2006 to 2008.
July 2010 edition
In Business:
A NEW DECADE in the academic world starts with Academio – Social Science;
Knowledge Connected!
Academio is an initiative by two students
from Tilburg University with expertise in
Strategic Management and IT. Tamar Janssens (CEO) and Sebastian Mennes (CIO)
both have successfully set up IT companies
whose main activities are web-design and
application development ( and Despite the
fact that the site was not launched at the time,
Academio was nominated for the Philips Innovation Award in March, 2010. Recently,
Academio launched its first beta version.
Academio: what about it?
Academio is an internationally orientated
social science network which is particularly aimed at knowledge sharing between
students, academics and professionals.
Throughout recent years a wide variety of
social networks has popped up, yet none of
them is focused on knowledge sharing. Do
you find academic articles, notes, student
documents, research drafts and similar scientific content on Facebook? Can you easily find people with similar knowledge and
professional interests within your first degree
network? Would you even consider bothering them with your scientific questions? If
you have a question to which your classmates
might know the answer, would it not be great
to go beyond the scope of BlackBoard or other electronic learning environments to reach
similar students from other institutions?
With Academio we provide our members
with such a solution!
Knowledge Domains
By dividing knowledge in so called ‘domains’
we bring likeminded students, academics,
professionals and organisations in the scientific world together. Our main knowledge
domains concern Economics & Business
Administration, Healthcare, ICT, Nature &
Technology, Behaviour and Social Sciences,
Law, and Language & Culture. Within these
main domains we categorised approximately
another 110 sub domains. Each (sub) domain has itsown portal, on which various
FIRST Quarterly
types of knowledge can be found. Academio
brings people, science and organisations together, revolving around the theme to which
their professional interest is devoted to: they
are connected through science.
By supplying a diverse set of digital media
and innovative tools we aim at improving the
communication and information processes
of our members in their daily studies and
work. We use state-of-the-art design in combination with the most recent online technologies to create a worldwide platform for
sharing scientific knowledge.
Not just another social network
We strongly differentiate from other social
media since none of them is truly focused on
knowledge sharing. On the Academio platform it is not important to know what you
and your friends did last summer. It is important what happens within your field (domain)
of interest. Neither is it our focus to show you
who is linked to who; our focus is to show
you what scientific knowledge can be found
where. In addition to that, we provide complementary functions that assist members
in their daily search for scientific knowledge
and we also enable one to sign in with minimal efforts using LinkedIn, Facebook, Hyves
or Gmail accounts. In that sense, Academio
is supplementary to other social networks,
and on top of that adds a critical component:
A new decade in the academic world
When Academio reaches a large user base,
new ways for teaching could emerge that
would enhance the quality of education. By
using Academio, students can build on work
from peers and scientists can easily find
equally minded colleagues in conjoint paradigms from other countries and universities.
Morover, knowledge will be verbalised and
widely disseminated. Taking these examples
into consideration, it is obvious that Academio stimulates knowledge sharing, valorisation and even innovation - as a result of which
the science economy will be stimulated.
Ambassadors requested!
For both scientists and students we aim at
providing a diverse set of scientific tools. Additionally, we aim at maintaining quality standards of the (user-generated) content on our
platform. We also have a lot of ideas and we
aim at continuously improving our concept.
Logically, we need the inputs and help of our
visitors! On you can leave
your feedback on our platform. We are also
setting up a network of ambassadors who are
willing to manage knowledge of the domains
and guard the scientific degree of the content.
If you are interested to participate in our
ambassador´s programme, please contact us
via [email protected] for more information.
From left to right: Tamar Janssens and Sebastian Mennes
of weet jij*
een beter
moment om
in actie te
Assurance • Tax • Advisory
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