By Laurent Germain et Anne Vanhems
We took a close look at the personality of traders to try and understand better how speculative bubbles work and we noticed that some traders do not act rationally. However they are not the only ones who affect financial markets.
For each transaction, traders have to take into account many parameters: market trends, competitors’ strategies and the latest news. But sometimes the situation gets out of hand, and other less rational aspects influence their decisions.
In spite of their experience, individuals sometimes act in a biased way. We may thus observe disproportionate reactions, such as buying shares at a price that is much too high in relation to their intrinsic value. These are illogical decisions which trigger speculative bubbles and stock markets then crash when everyone wants to sell assets simultaneously and their value collapses.
While it is now acknowledged that some traders do not act rationally at a given time, we still find it difficult to imagine that this might also be true for market-makers. These market-makers are organizations (mostly investment banks), or people, who set the buy and sell prices of assets: they are said to ‘quote’ the buying and selling prices and thus set the value of the assets. However, it is possible to demonstrate that some of these market-makers also make the wrong decisions. The market-makers are considered to be more experienced and “battle-hardened”. They are paid to stay one step ahead and traders are trained to analyze their latest strategies. As they are key players, it was difficult to admit that these market-makers might act irrationally, by increasing prices until red lights started flashing, or, inversely, lowering the price of shares in a context of increasing demand.
In order to study the effect of this phenomenon, we separated the two main biases. The first bias, related to the degree of optimism, causes the broker to misread the market trend. Thus when clues are showing that a share is about to lose value, he may think that it will soon go up again. The second bias, related to the level of self-confidence, leads him to over-estimate his own skill. He may then cause the price of the share to vary a lot, thus making the market more volatile. Now, the higher the volatility, the bigger the gains and losses.
We first observed that the biases of market-makers affect the depth and liquidity of the market. A deep market is one in which the price remains relatively stable A liquid market is a market in which prices are not set aggressively (there is then a lot of buying and re-selling).
For instance, an optimistic market maker may think that the information he received is more reliable than it actually is and consider that his judgment is less crucial for his decision. He will then tend to overestimate the price of the asset, and traders (who buy and re-sell) will decrease the number of their transactions. When this market maker is too confident of his assessment, he will quote the share less aggressively and thus increase the liquidity of the market.
The tulip bulb crisis was the first speculative bubble and remains an outstanding example of a frenzied financial market. In 1636-1637, some bulbs were sold at more than 15 times the annual salary of the horticulturist and the volumes exchanged on the markets were completely unrelated to the actual number of available bulbs.
The first conclusion we can draw from this study is that market-makers who are too confident or not confident enough can make either profits or losses. When the market maker is pessimistic, but still trusts his own judgment, then price variations are seen to be weaker.
Prices increase mechanically, and the volume exchanged by rational traders is then low. Nevertheless, one conclusion of the study is that market-makers are able to take advantage of this market: the rise in prices does not affect the overall demand.
The results of this research also show that while traders with biased behavior trigger situations of disequilibrium, market-makers who are over-confident increase the likelihood that this will happen. For instance, an optimistic market maker amplifies excessive trading, which means that there are too many transactions. We can compare this to the Internet bubble, when both traders and market-makers thought they were witnessing the birth of a new economy and hence the likelihood of extreme growth.
The prices of shares in technology start-ups then went sky-high, uncorrelated with the actual profits of the companies and nevertheless, the number of transactions continued to increase. The March 2000 crash led to a recession in the sector but also in the economy in general with losses exceeding the profits made.
Moreover, we proved that there was an unexpected result: the fact that market-makers may behave in a biased way sometimes favors traders who are not very confident. In this case, a trader who lacks confidence may get better results than a trader who acts correctly. Consider for example a share whose value will not change. The optimistic market maker believes that it will increase and therefore sets a high price. A pessimistic trader believes that it will drop and therefore sells his shares, whereas a ‘standard’ trader will wait. In this case the pessimistic trader will make profits but not the ‘standard’ trader.
We may conclude from our research that the volatility observed may not only be due to traders, but may also be amplified by the attitude of market-makers. In fact, the last conclusion of the study is that in the extreme cases of levels of confidence, we observe excessive volatility and an excessive number of transactions. In a situation in which some traders lack confidence, market-makers who also lack confidence will cause rational traders to make too many transactions.
We are now working on a new more complex model which assumes that some market-makers act according to the way others do: in other words they no longer act as independent ‘black boxes’ but take into account the strategies of their counterparts.
Reference: This article written by Laurent Germain and Anne Vanhems and the article entitled “Irrational Market-makers”, co-authored by Fabrice Rousseau and Anne Vanhems, were published in Finance vol. 35, no. 1, April 2014. This article won the Prize of the French Finance Association 2014.
These unpublished results pave the way for new strategies in which traders and market-makers should consider that, both among their peers and their competitors, some agents may take biased decisions.
Banks expressed a lot of interest in the study when the article was published and we may assume that this theory has been integrated into their trading practices
Our team of researchers constructed a mathematical model simulating the effects of psychological biases on markets. We defined two reference scenarios: the first in which all actors are rational and a second including rational and irrational traders dealing with rational market-makers. This enabled us first to illustrate the impact of trader irrationality. We then compared these results to a simulation in which all of the market-makers are irrational.
By Stéphanie Lavigne
Quite unexpectedly, those European companies which invest the most in Research & Development (R&D) are also those whose majority shareholders are institutional investors (and particularly pension funds located in English-speaking countries) whereas we expected to find so-called ‘strategic’ investors (the State or families) that are generally believed to support a company’s growth policy and therefore also its innovation policy.
The advent of institutional investors in the 1990s led to a radical change in equity breakdown in European companies. Today, 50 to 60% of the capital of European groups listed on the stock exchange is held by pension funds and mutual funds (which manage other peoples’ money). Now, as leading shareholders, they have imposed their own governance principles and value creation strategies, demanding about 15% return on investment for the households whose savings they manage.
To achieve this level of return, companies are implementing financially-driven strategies with shorter investment periods, so that they can deliver ever-increasing dividends to their shareholders on a yearly or even a six-monthly basis. But is this short period of time compatible with a given company’s growth and with its R&D policy in particular?
In this study, we have tried to establish a relationship between the equity breakdown and innovation policies of major European companies.
A review of empirical studies undertaken so far reveals that they relate almost entirely to the North American market and yield contradictory results. Two opposing theories have emerged regarding the influence of institutional investors: one of the theories asserts that these investors believe in short-term profitability only and do not encourage high-risk innovation policies; the second theory, on the other hand, acknowledges the control exercised by these investors and their positive influence on innovation policy, which ensures the company’s long-term profitability.
Our study shows that in Europe, the more companies’ shares are held by institutional investors the more they spend on R&D whereas we were expecting to find strategic investors such as governments or families that are known to support companies with patient growth policies. It seems that the crucial factor is the investment period of these institutional investors: the longer the period, the greater the likelihood of the company committing to an innovation policy. This may seem insignificant, but the findings have never before been demonstrated in a multinational context (a sample of 324 European companies) over such an extended period of time (tests between 2002 and 2009).
One of the major conclusions of our study highlights the detrimental effect of short-term investor attitudes on the innovation strategies of companies, which actually need the support of long-term investors in order to carry out their R&D policies.
When analyzing how the investment period influences the innovation strategies of European companies, we compared companies having short-term or “impatient” investors (with an investment period of less than 18 months) as majority shareholders with companies where long-term or “patient” investors are the majority shareholders. Our findings show that R&D spending is higher when the majority shareholders are patient investors and lower when most of the company’s capital lies in the hands of impatient investors.
This article was written by Stephanie Lavigne and the article “Ownership structures and R&D in Europe: the good institutional investors, the bad, ugly and impatient shareholder”, co-authored by Olivier Brossard and Mustafa Erdem Sakinc, published in Industrial and Corporate Change (Volume 22, Number 4) – Oxford University Press, 5 July 2013.
Our study of equity breakdown and the innovation strategies of European companies shows that we should not be disparaging about institutional investors but focus on the crucial issue of how long they leave their investments in companies.With this in mind, companies must learn to identify the investment period of any new institutional investors promptly in order to build a privileged relationship with them and attempt to offset any short-term investors.
In our research, we conducted an empirical study of the relationship between the equity breakdown and innovation policies of leading European companies. We analysed a sample consisting of the 324 most innovative European companies (as listed on the EU Industrial R&D Investment Scoreboard between 2002 and 2009) and compared their R&D expenditure against financial and shareholding data obtained from the Thomson Financial data base.
By Akram Al Ariss
In order to win points in the global search for talents, companies had better create a human resources policy that is attractive to self-initiated expatriates. Akram Al Ariss, research professor at Toulouse Business School, has carried out a review of scientific research on this important subject.
The scale of international migrations has been steadily increasing for many years: from 214 million in 2010, the number of people living outside their country of origin has risen to 232 million and may well increase again by 96 million people between now and 2050 according to United Nations estimates. Until now, the potential use of highly skilled talents from this population by organizations has not been paid much attention by researchers. The human resource management literature on this topic refers to these talents as ‘self-initiated expatriates’. Therefore, we use this term in the rest of this article.
Highly skilled talents who undertake an international mobility are a pool of human resources that could give host countries and companies a competitive edge in the global war for talents. This is especially the case with regard to self-initiated expatriates (SIEs) made up of individuals who have chosen to move of their own free will, and who are often highly qualified and experienced, with a rich linguistic and cultural background. But dipping into this pool first requires identifying, recruiting, developing, and retaining them as staff while satisfying their ambitions. In order to do so, companies need to devise and implement a specially-tailored Human Resources strategy.
This is particularly important for companies which are expanding internationally. For cost reasons, the classic pattern of expatriation of their employees with concomitant salary bonuses and various other benefits, has been replaced in the past few years by a more economical, “local plus” model, in which the employee resigns in order to be rehired under a local contract, with much less favorable conditions. But this system, which generates frustration and understandably dents staff motivation, often leads to a swift resignation, and is counterproductive. In reality, rather than the employee, it is the company that ends up losing in the long term: the saving is only illusory, since the “local plus” strategy creates a detrimental turnover of employees, leading to a brain drain in the company and damages its image in the eyes of potential expatriate candidates. The recruitment of self-initiated expatriates is undoubtedly an interesting way out of this impasse. Since they are already expatriates for non-professional reasons, they will more readily accept to work at local market conditions.
The question actually applies to every business: how to target and reach those with high added value individuals? One answer could be by simply taking into account their specific needs. The situation varies according to their experience as well as their countries of origin and host countries. Nevertheless, studies have shown that SIEs face a number of barriers and obstacles that limit their opportunities for integration in their host organizations and societies. Among the most commonly cited, we find the immigration policies of states, particularly regarding visas and work permits, recognition or not of qualifications and professional experience, barriers related to language proficiency and communication codes and, more insidiously, discrimination and stereotypes of all kinds. These difficulties are also exacerbated when it comes to women, who nowadays make up one out of two self-initiated expatriates. A company’s first responsibility is to recognize these obstacles and then help self-initiated expatriates to find a way round or overcome them in order to facilitate recruitment and enable them to find jobs matching their skills.
Human resource (HR) managers’ strategy plays an essential role in two specific ways: through adapting their organizational recruitment and selection procedures, on the one hand, and through providing cultural training and development opportunities to these self-initiated expatriates, on the other. In terms of recruitment, HR practices must adapt to this expatriate population, not only to avoid excluding it (for example by neglecting its preferred communication channels or requiring local professional experience that, by definition, it cannot have), but also to attract it (for example by not restricting the job offer to a technical description of the proposed job but giving in addition general information on life opportunities linked to the job). For the company, the main benefit of this proactive and differentiated approach is not to miss out on this highly skilled labor.
The second priority is to encourage them to stay with the company by facilitating their integration and cultural adaptation. Research cannot provide a comprehensive and definitive answer as to why an SIE remains in a job, especially as these reasons may vary from country to country. However, HR management should strive to understand the motivating factors in order to implement appropriate development and retention solutions.
These are only a few indicators from research results. The development of a relevant HR strategy tailored for self-initiated expatriates is essential in any case. Of course, whatever happens, it’s a win-win policy for expatriates themselves, for whom the choice of mobility is then crowned with success, but equally for companies who manage to attract the best candidates, thus giving them a decisive advantage in global competition. Indeed, the international workforce is a source of diversity, creativity and innovation. The winning companies will be those that are capable of looking beyond the various stereotypes, discrimination and obstacles, in order to tap into this worldwide flow of human resources.
This article written by Akram Al Ariss and articles on “self-initiated expatriation and migration in management literature,” co-authored with Marian Crowley-Henry (Department of Management, National University of Ireland Maynooth), published in Career Development International (2013); “Human resource management of international migrants: current theories and future research”, co-authored with Chun Guo (Department of Management, Sacred Heart University, Fairfiels, CT, USA), published in The International Journal of Human Resource Management, 2015.
Further Reading (books):
In writing the two articles referenced above, Akram Al Ariss and his two co-authors conducted a systematic review of the scientific research conducted on the subject of self-initiated expatriation.
By Gregory Voss
How likely is it that the reforms launched in 2012 by the European Union (EU), with the aim of ensuring a high level of personal data protection for the citizens of its 28 member states, will become applicable in 2017? It is possible, but the European Parliament, the Council of Ministers and the European Commission have yet to reach an agreement: informal three-way discussions are taking place.
Since June 2015, these three EU institutions have been jointly drafting a text for the General Data Protection Regulation (GDPR). There are still a few points on which the parliament and the council disagree, in particular with regard to obtaining an individual’s consent for the processing of personal data, the rights and responsibilities of those collecting data, and the amounts of fines for non-compliance.
A commission proposal for new legislation on personal data protection was made back in 2012. But the draft regulation, passed by the parliament on March 12, 2014, is now awaiting validation by the Council. These reforms will help protect European citizens and their personal data even with respect to international companies whose headquarters are outside the EU, but who nevertheless process data online. While the degree of personal data protection in Europe is generally quite high, the financial penalties are too low, in contrast to those enforced in the United States.
When the three EU bodies have agreed on the final draft text, it can then be adopted only after two consecutive readings of the same text by the parliament, whose members are directly elected by EU citizens and after approval by the council, which represents the governments of the 28 member states. Once adopted (most likely in 2016, though some were pushing for adoption at the end of 2015), the regulation will become applicable in the two years that follow.
This GDPR will harmonize European law and may deliver an additional benefit by triggering a broader process that leads to the standardization of international legislation on protection of personal data. Moreover, the reduction of the administrative burden arising from this single piece of legislation will enable savings of €2.3 billion per year, according to the Commission’s calculations.
The process may seem to be taking a long time, but it has to be borne in mind that it took five years to finalize the 1995 European directive on personal data protection. The GDPR is essentially at the three and a half-year mark, so there is still time for this.
The GDPR has been subject to intense lobbying efforts by the representatives of those who process data. While they may slow down the legislative process, these actors can play a legitimate role in informing legislators about the practical realities faced by the companies who collect data.
Following the Snowden revelations, efforts to reform the legislation have experienced numerous upheavals. In June 2013, Edward Snowden, a former CIA consultant and a member of the National Security Agency (NSA), revealed that the US government had collected personal data concerning individuals living outside the US from nine of the biggest American technology companies, particularly as part of an electronic monitoring program known as PRISM. On October 21, 2013, the European Parliament proposed a text in which it was stipulated that the company responsible for data processing, or its subcontractor, would have to inform the data subject about any communication of their personal data to the public authorities in the previous twelve months. This provision is clearly influenced by the PRISM case.
In general, revelations such as this one, relating to data protection, help stimulate the debate about privacy in Europe, even if they have weakened trust between the EU and the United States. On October 6, 2015, as a result of the transfer of data on an Austrian citizen to the United States, by the European subsidiary of Facebook, the Court of Justice of the European Union (CJEU) ruled against the validity of the Safe Harbor Privacy Principles, which had been used to justify the transfer and which stipulate that in the event of threats to US security, a clause allows the US authorities to access the personal data of European citizens. The CJEU’s decision, in turn, followed the conclusions of the Advocate General, , and invalidated the Safe Harbor, which according to Vossm “is a problem for more than 4,000 US and European companies that depend on the Safe Harbour Privacy Principles for the transfer of personal data to the United States.” It remains to be seen what actions the institutions and European and US companies will take following this decision.
On the other hand, even in the absence of a GDPR, the Google Privacy Policy case shows that EU member states have the tools to oblige the operator of a search engine to respect privacy and personal data protection laws. In this vein, a number of cases have led to the data protection authorities in Germany, Spain, France, Italy, the Netherlands and the United Kingdom imposing penalties on Google, including fines amounting to hundreds of thousands of euros. While the size of these fines is relatively small compared with Google’s annual turnover (€59 billion in 2014), they are examples of the more severe enforcement actions, based on the turnover of the companies sanctioned, which are foreseen in the European legislative proposals.
In France, the Commission Nationale de l’Informatique et des Libertés (CNIL – the French data protection authority) disagrees with Google about de-listing following the Google Spain decision by the CJEU. Since the court recognized this right in 2014, any person may request that the operator of a search engine erase the search results that appear in relation to their name. As a result, Google has received tens of thousands of requests from French citizens. It then proceeded to de-list results on its European search engine domains (.fr, .es, .co.uk, etc.). But it did not extend the de-listing to other geographic domains or to google.com, which any user can search. In May 2015, the CNIL requested that Google proceed with de-listing from all its geographic domains. Google, however, argues that this decision constitutes an infringement of the public’s right to information and is, therefore, a form of censorship. A CNIL rapporteur (the official who manages the case) will no doubt be appointed to resolve this issue.
While the EU is working hard to hammer out a jointly-agreed regulation on protection of personal data, its member states, such as France, continue to strengthen their legislative arsenals. On September 26, 2015, the government presented a draft document on the subject of a “digital republic”, comprising some thirty articles on the confidentiality of electronic correspondence, portability of files and open access to public data, for public consultation. Public consultation on the development of this document is an interesting approach, the effects of which deserve to be monitored.
This article, written by Gregory Voss, along with the articles “European Union Data Privacy Law Developments”, published in The Business Lawyer (Volume 70, Number 1, Winter 2014-2015); “Looking at European Union Data Protection Law Reform Through a Different Prism: the Proposed EU General Data Protection Regulation Two Years Later”, published in Journal of Internet Law (Volume 17, Number 9, March 2014); and “Privacy, E-Commerce and Data Security”, published in “The Year in Review”, an annual publication of ABA/ Section of International Law (Spring 2014), co-authored with Katherine Woodock, Don Corbet, Chris Bollard, Jennifer L. Mozwecz, and João Luis Traça.
The effect of GDPR on businesses will depend on the final text adopted by the EU. It is a certainty that greater accountability will be imposed on companies that manage personal data. Some companies will probably have to create new data protection officer posts (DPO) defined on a similar model to the “correspondant informatique et libertés” (CIL) in France. Companies specializing in conducting privacy impact assessments will also emerge. The author, therefore, advises business leaders to closely monitor developments in legislation protecting personal data, in order to be able to comply with new legislation as soon as it comes into force. He proposes raising the awareness of employees through training on data protection. Finally, companies will have to implement adequate procedures to comply with the legislation on personal data protection, including those that enable the data breach notifications that will be required by the GDPR.
To produce these articles about data-protection legislation, the author has analysed many legal documents and “hundreds of pages of proposals, amendments and opinions”, especially those resulting from the work carried out by WP29, the independent EU working group on the handling of personal data. In his articles, he puts the proposals of European authorities to adopt a GDPR into perspective and offers practical advice for businesses. He has also examined the changes in opinion of various European bodies, the European Commission, Parliament and Council, and has studied the reactions of legislators to Edward Snowden’s revelations on electronic surveillance.
By Alain Klarsfeld
Between 2010 and 2012, three key Acts were promulgated, requiring businesses and administrations to make significant progress in terms of gender equality. The Act of 2011 focused particularly on gender balance on the administrative and supervisory boards of companies and public administrations. Here is an overview of the impact of this Act by the research professor Alain Klarsfeld.
Despite the laws and affirmative action in favor of employment equality and the fight against discrimination, only minor advances have been made in many areas. Companies have certainly gotten close to the legal quota of 6% required concerning employment for the disabled, whereas the proportion was barely 4% ten years ago, but this is still far from satisfactory. Regarding older workers, companies have also made real efforts to prolong their employment (+8% in 7 years), with a rate of 44.5% for 55-64 year-olds at the end of 2012, after a long period of stagnation during the 2000s. Among other positive developments, we should mention the creation in 2011 of an ombudsman (Défenseur des Droits), who joined the French High Authority for the Fight Against Discrimination and for Equality (HALDE) and whose role is to further the fight against discrimination by ensuring that access to one’s legal rights, now simplified and streamlined, is more effective.However, the employment situation of young people remains a concern, and has not significantly improved. As an example, a young graduate with five years of higher education can take, on average, a year to find a first position, despite the legislative incentive known as the ” Contract between Generations*”. Similarly, the employment rate of people from immigration populations, whether first or second generation, has changed very little.
There is nonetheless a silver lining to this rather gloomy picture: the entry of women into the governing bodies of companies and institutions: the supervisory boards. It all started with an Act of 2011 concerning the balanced representation of women and men on supervisory boards and also to professional equality, which provided for the progressive introduction of quotas as a step towards the feminization of the governing bodies of large companies. The goal was to reach 40% of women by 2017, made mandatory with financial and non-financial penalties in the event of non-compliance. This is a real cultural shift that has opened the way for women to play a major role.
Quota-based policies are not universally approved. In fact, they are frequently contested. Their implementation may even be counter-productive, as evidenced by the tensions around ethnic or caste quotas in India or Malaysia. There were no such quotas before 2008, when they were introduced by Norway, since followed by 11 other countries, but they have had an encouraging effect in favoring equality on supervisory boards. It might have been supposed that the women in these positions would be seen as lacking legitimacy. However, studies show that the operation and work of boards of directors are improved. Women who are genuinely recruited for their skills appear to be less conformist, ask more questions and make these bodies more dynamic.
This legal obligation has also had the effect of putting a stop to a damaging system of cooptation. The boards of directors tended to exist in isolation, coopting new members from among their acquaintances. The imposition of quotas has opened new horizons regarding professional recruitment processes, by head-hunters for example, who are now compiling databases of highly qualified women and offering them to apply to these positions. In the future, it would be a good idea to verify that the creation of directories of qualified people has led to the recruitment of more professional administrators overall, and not necessarily just women.
Thanks to this Act, which imposes a “positive obligation”, offers have emerged for training as administrators, helping to make the role genuinely professional. In the years to come, it will be necessary to verify that the presence of women on boards of directors supports or provides leverage for parity in corporate executive positions, and that no further legislation is necessary to achieve parity. Already, outside the scope of the Act, major groups, including companies listed on the French CAC 40, have set themselves goals for the recruitment of female managers and top executives. This is less of a blunt instrument than an obligation to comply with quotas, but it will again be necessary to verify that its potential trickle-down effect in companies, at every hierarchical level, produces real progress.
* A scheme introduced in 2013 to help private companies create jobs, including permanent employment contracts for young people.
From an interview with Alain Klarsfeld and the chapter “Equality and Diversity in years of crisis in France”, co-authored with Anne-Françoise Bender and Jacqueline Laufer, published in the book “International Handbook on Diversity Management at Work – Country Perspectives on Diversity and Equal Treatment (second edition)”, May 2014.
Professional equality: This means the same rights and opportunities for both men and women, in particular as regards access to employment, working conditions, training, qualifications, mobility, promotion, work-life flexibility and remuneration (equal pay).
The chapter “Equality and diversity in years of crisis in France”, published in 2014, provides an up-to-date overview of developments in France concerning professional equality and diversity since the first edition of the book “International Handbook on Diversity Management at work – Country Perspectives on Diversity and Equal Treatment” was published in 2010. The book is the result of an analysis of changes to the European and French legislative framework and of the various reports and publications on the subject, as well as of paying attention to and monitoring the work of think-tanks, associations and businesses that deal with the fight against discrimination and the importance of diversity, in and outside of Europe.
Par Pierre André Buigues
France’s has had a foreign trade deficit since 2003 and the country’s share of the world export market is continuing to drop. France’s share of the export market went from 6.1% in 1995 to 5.1% in 2000. It then fell to 4.2% in 2006 and stood at just 3.5% in 2013. The automotive sector provides a good example of this French industrial decline. In 2003, France’s automotive sector had a trade surplus of €12.6 billion but this had turned into a €6.9 billion deficit by 2014!
Economists put the decline of French foreign trade down to a lack of competitiveness, due to both price and other reasons. In France, costs have tended to increase faster than productivity and the products are not perceived as giving sufficiently high ‘value for money’, particularly compared with products “Made in Germany”.
The French aeronautical sector is an exception to this trend; indeed, the sector has prevented the balance of trade deficit from plunging further. The aviation sector – both civil and military – and the space industry have posted a foreign trade surplus in excess of €23 billion over the last few years, representing the largest surpluses in the overall French balance of trade. France is the world’s second largest exporter in the aeronautical field, with 22% of the worldwide market, after the United States (35 %). Germany is the third largest exporter with 14% of the worldwide market. France has seen its market share increase by 8% in ten years, unlike the agri-food and automotive sectors.
Airbus’ exports represent the lion’s share of French exports. Airbus accounts for roughly 50% of French exports in the aeronautical sector. Table 1 below shows direct sales of new French-built aircraft to foreign airline companies and the shipments of turnkey A380 aircraft from France to Germany for subsequent deliveries from the Hamburg site, as well as the value in euros (€M) of these exports.
The aeronautical sector is an oligopoly characterised by heavy capital investment and products with advanced technology . As such, the cost of entering the market is extremely high. In France, the aeronautical sector represents around 4,000 companies and employs 320,000 people directly. The success of the French aeronautical sector is the result of an industrial strategy built on strong technological assets, strategic European alliances and strong political support:
However, a certain number of challenges lie ahead for the French aeronautical industry.
1- Asia accounts for an increasingly large part of the global air-transport market and a new manufacturer could enter the market to compete with the two powerhouses, namely Airbus and Boeing. Airbus forecasts that passenger traffic in China will exceed that of the United States within 20 years and China aims to take a share of the aeronautical sector. To develop its sales in China, Airbus decided to increase its purchases of Chinese components and to set up an A320 assembly plant in the country.
2- France plays a pivotal assembly role in Europe. The country imports parts and aeronautical equipment, essentially from Europe (foreign trade deficit) and exports complete aircraft (large foreign trade surplus). Complete aircraft account for over two thirds of French aeronautical exports. Delocalising the assembly of Airbus aircraft therefore has a negative impact on France’s balance of trade. At the same time, Germany is taking an increasingly important position in the European aeronautical sector, with a growing number of A320s being assembled on the site in Hamburg. This is Airbus’s best-selling aircraft, already assembled on several sites, in Toulouse, Hamburg, Tianjin (China) and, since 2015, in Mobile (USA).
3- Aeronautical R&D accounts for over €3 billion of investment in France every year. However, within Airbus itself, the question is being asked as to whether R&D leadership has shifted from France to Germany. At the beginning of the 2000s, the R&D expenditure of Airbus France was one and a half times greater than that of Airbus Germany. Ten years on, the R&D expenditure in Germany was 10% more than in France. To be more precise, Airbus Germany is responsible for a significant section of the fuselage of Airbus planes and for the cabins. In addition, Germany is the leader in terms of materials R&D, although France is still the R&D leader for certain key components, such as the cockpit, flight controls, navigation and traffic management.
4- The aeronautical and space industry is also one of the rare industrial sectors in which jobs are being created, and in which skilled jobs are predominant. Engineers and managers account for approximately 41% of all the jobs in the sector. However, the French education system is not able to supply the aeronautical sector with all the technicians, welders, and metal workers that it requires. For instance, small-and-medium-sized aeronautical sub-contractors have much greater problems recruiting the staff they need than Airbus.
5- Finally, the industry also carries significant risks, considering the investment required to launch a new aircraft. Indeed, there was a fear the A380 would not be a commercial success. Each new aircraft brought onto the market can also run into serious problems, as in the case of the A400M. Consequently, there is no guarantee of success.
By Pierre André Buigues, based on research by Elie COHEN and Pierre-André BUIGUES (2014) “Le décrochage industriel”, Fayard, pp 439, [978-2-213-68188-7]; Pierre-André BUIGUES and Denis LACOSTE (2011) “Stratégies d’Internationalisation des Entreprises Menaces et Opportunités”, De Boeck, pp 376. [978-2804162917]
By Gaël Gueguen
Basing itself on results for Tour de France cyclists, this study shows that cultural differences between team members have no effect on performance, an observation which may also be valid, under certain conditions, for the workplace, where of the issue of diversity remains a subject of ongoing debate.
To what extent can one transpose certain well-known management concepts (such as team work, strategy, rivalry, etc.) to a sport, e. g. cycling, so as to better understand how it works, and, by extension, further our understanding of company life? A first attempt to answer that has been made in a study by Gaël Gueguen (assessed particularly in relation to the number of nationalities involved), that questions whether the cultural diversity of teams taking part in the Tour de France has an impact on their results.
High level sport necessarily draws on the best resources, whether human or material. A high level team will seek out the best possible athletes for a given budget and thus attempt to recruit in the world market. In the case of the Tour de France, where the internationalization of teams has intensified in recent years, there was a notable reduction in the number of exclusively national teams entered by traditional ‘cycling’ countries such as France, Italy, Spain, Belgium and the Netherlands between 1987 et 2009, and a corresponding upswing in the number of teams comprising five and more different nationalities. This trend is continuing: in 2015 for the first time, a South African team included two Eritreans. This globalization of professional sport, however, is not without risk: cultural diversity can lead to coordination problems (problems of mutual understanding, for example, when different languages are spoken within a team) and have a negative effect on racers’ team spirit (differences in values or attitudes). This question is all the more crucial in cycling, a discipline where the vital need for sponsors and the international nature of competitions sometimes requires that foreign sportsmen be recruited simply because their countries are targeted by the sponsoring brands.
Should we take care to only include sportsmen of similar cultures in high level teams, or can we drop the idea? Wouldn’t a group focused on a specific task requiring rare complementary resources and coordination in competitive situations (exceptional climbers, sprinters, ace cyclists, highly versatile leaders and so on) be weakened by too wide a diversity among its members? It would appear not. Cultural diversity has no impact on sports results. Cycling team coaches can select a cyclist for his worth regardless of nationality without worrying about strong cultural differences. A possible explanation for this is that the professionalism of cyclists and their managers compensates for any coordination problems. . Indeed, since everyone’s efforts are supervised and synchronized by a chief coach, the roles of all team members are clearly defined, and regular training also helps transform each cyclist’s tasks into a perfectly mastered routine.
A company is rarely made up of homogeneous human resources as regards gender, age, experience, nationality, salary, etc. Do such significant differences increase the performance of work teams or not? Analysis of studies on diversity in the workplace show contradictory results. Diversity of team members can in some cases, for example, increase creativity and improve decision-making (since the clash of different opinions can spark good ideas). In others, however, it can negatively affect unity, trust and communication with a corresponding increase in tension and conflict. Can the observation that diversity and performance in cycling appear not to be related, help us to better understand what is happening in the corporate context? No doubt, but only under certain conditions. The Tour de France competition is somewhat particular which makes it hard to generalize, firstly in that members of professional cycling teams are extremely specialized, and then that, in this most important cycling event, teams of only the nine best riders among the thirty-odd under contract compete with each other and not the entire group (which would, however, be the case for a company).
Nonetheless, the methodology used can easily be transposed for a study of the impact of cultural diversity in teams of top managers on the performance of multinationals. This is of interest now that more and more firms are diversifying their executive boards as they expand internationally. In a multinational company such as L’Oréal, for example, the recruitment of managers from different countries is considered to be the principal factor behind successful product-launches in emerging countries. To limit a ‘Tower of Babel syndrome’*, multicultural teams are organized around a leader who, through experience in a variety of countries, knows how to handle inter-cultural tensions.**
* Coordination difficulties arising from different languages spoken within a team.** “L’Oréal Masters Multiculturalism” de Hae-Jung Hong et Yves Doz (Harvard Business Review, juin 2013).
The article “Diversité culturelle et performance des équipes sportives de haut niveau : le cas du Tour de France”, by Gaël Gueguen (Management International, 2011).
Although cycling is a somewhat particular activity, especially given that all its participants are highly specialized, the results of this research may be applied to the workplace provided that certain conditions are met. In groups comprising team members with clearly defined roles and specific tasks it may be stated that neither cultural diversity nor other differences such as gender, origin, age or education have a negative impact on collective performance. As with cycling, a specific team culture that transcends cultural boundaries may well arise.
I analyzed the results of 487 teams (4,375 racers) taking part in 23 Tours de France between 1987 and 2009 in order to determine whether cultural diversity harms performance. The study was based on several factors which allowed me to determine the cultural heterogeneity of the teams (based, primarily, on the number of countries represented). The aim was to compare the performance of teams of cyclists (their results) with the level of cultural diversity via a linear regression analysis intended to measure the strength of the relationship between a series of independent variables and one requiring explanation.
By Sylvain Bourjade
It is difficult to find experts that are both competent and independent. We show that in order to avoid conflicts of interest clouding expertise, the opinions and votes of each expert must be made public.
The Mediator scandal showed that conflicts of interest can have serious repercussions which may even lead to the deaths of several people. How can this be avoided while guaranteeing quality expert advice? Our research shows that it is possible to limit conflicts of interest by laying down rules for more transparency, but within limits.
It is always a challenge to find good experts: the most competent of them often have conflicts of interest. The researchers are partially financed by manufacturers with whom they sometimes are bound by consultancy contracts. This means that they may alter their opinion in order not to displease the manufacturers in question.
To minimize these conflicts of interest, without nevertheless having to rely on less qualified experts, we made a mathematical model of the behavior of the different parties. Experts are torn between three requirements: they may indeed have a biased opinion due to the conflict of interest, but they have at the same time to protect their reputation for impartiality so that they continue to be called upon as experts. Finally, even if they do have strong ties with industry they nevertheless continue to uphold certain principles. For example, they will refuse to approve a drug if they know it to be dangerous. We believe that experts’ choices are based on these three elements, namely loyalty to a customer, the need to protect their reputation for impartiality and the need to uphold their moral principles.
In France, in most of the consultative agencies such as the National agency for safety of medicines and health products (ANSM- l’Agence Nationale de Sécurité du Médicament et des Produits de Santé), which was called Afssaps until 2012, neither the experts’ reports nor their votes are divulged. If an expert wishes to have a potentially dangerous drug approved for marketing, his reputation is not affected, since nobody knows the role that he has played in this decision. Opacity thus tends to favor poor decisions which may endanger the health of consumers (by for instance approving the marketing of a potentially toxic drug) due to conflicts of interest.
Conversely, any transparency which is based on the reputation of experts, improves the expert advice. This is the case when their identity and the content of the report as well as their votes are known. In this case, the expert can no longer hide behind the argument “It was the committee that decided “. In the United States, the Food and Drug Administration (FDA), which is responsible for approving drugs for the American market, thus decided to improve its expert advice rules in order to limit conflicts of interest. The experts now pronounce their opinion simultaneously and the FDA reveals how each expert voted and publishes a detailed report of each meeting.
The first results of this theoretical study are in no way surprising as the positive effects of transparency are well-known. But our research has spotlighted more astonishing effects in which transparency, on the contrary, has a negative effect on the quality of decisions taken by expert committees, leading for instance to the approval of dangerous substances. This is because, when the expert’s conflicts of interest are well-known, everyone expects him to come out in favor of the manufacturers that finance him. This means there is no danger that his reports and votes will damage his reputation, since it is already “bad” due to the fact that he has revealed his links with these manufacturers.
Conversely, if he does not reveal his conflicts of interest, the expert will be inclined to vote against the manufacturers’ proposals in order to protect his reputation. Hence, according to the model we developed, the decisions will be improved if the reports and decisions of experts are divulged, but not necessarily their links with manufacturers. The rules should also encourage them to be honest: experts who have taken dangerous decisions should no longer be consulted. When decisions are to be taken, the way in which the consultative procedure is set up is crucial: it is particularly important to know each expert’s opinion and the way in which he voted.
It is still difficult to prove beyond doubt that the quality of expert advice is improved when transparency rules are applied. This cannot be observed since the quality of the decision can only be judged after a long time. To determine whether the new rules of the Food and Drug Administration are successful, we shall have to analyze the results in 10 years’ time. Nevertheless it is clear that more transparency will be helpful for French and European health and safety agencies, especially given the many health issues under discussion.
This is the case in particular for “endocrine disruptors”, compounds which interfere with our hormone system (including the notorious Bisphenol-A, which is now prohibited in food containers). Several scientific studies have proven the dangers of these chemical substances, but they are still widely used by manufacturers. The decisions of the European Food Safety Authority (EFSA) concerning endocrine disruptors, have been severely criticized by scientists, who accuse EFSA of being too sensitive to lobbies and conflicts of interest and of having opaque expert-advice rules. Conversely, in climatology, the Intergovernmental Panel on Climate Change (IPCC), whose reports are widely recognized by scientists, has particularly strong transparency rules.
By Sylvain Bourjade and the article “The roles of reputation and transparency on the behavior of biased experts” published with Bruno Jullien in the RAND Journal of Economics, Vol. 42, No. 3, 2011.
The model we have developed applies both to drug agencies and other fields in which expertise is required but risks being biased by conflicts of interest. This is the case for instance for anti-monopoly policy, for which experts have to decide whether to entities may merge even though the experts in question may have links with these entities or with their competitors. It is also the case for recommendations made by financial analysts. Even more surprising is that this work also applies to peer reviews of scientific work in which scientific articles are judged by other researchers whose names remain secret.
The work done by Bruno Jullien is a theoretical study in a field of mathematics called “game theory”. It involves modelling the behaviour of experts by estimating which elements predominated in their decisions. That depends on the short and long-term objectives of the experts. The study is not based on expertise data, since it is not available for the moment.