Understand the outside world:Knowledge, theory, and practice

Fu JunPeking University

Contents

KnowledgeTheoryPracticeInvestment

Objectives

(1) How better to communicate effectively with the outside world?

(2) An attempt to provide an overarching framework to choose, learn, understand and leverage functional knowledge and expertise to maximize performance (investment)

(3) Comments on portfolio investment v. foreign direct investment, and on anti-trust implications

“We go about our daily lives understanding almost nothing of the world.”

-- Stephen Hawking

Arguably the greatest theoretical physicist since Einstein

Knowledge

• Knowledge: Stock + Additions

• Knowledge changes/expands every day

• Have we become smarter as individuals?

• Collective v. individual memories

• Languages/signs: vehicles of knowledge

• Chinese and English

Knowledge

What is university ( 大学 )?3 functions: to store, convey, and produce knowledge

What does knowledge structure mean?Let’s look at how universities organize disciplinary knowledge

Why is this question important?To better know how people think and act knowing their training

Knowledge

Why world-class universities pursue liberal arts education (instead of specialization) for undergraduate students?

What is in 文科 aside from sciences and engineering?

Humanities + Social sciences Difference between humanities and social sciences Political science: about hierarchies Economics: about markets (methodological individualism) Sociology: socialization of individuals (constructivism)

Implications for the faculty composition of business schools as well as for the composition of board of advisors of business organizations

Knowledge

What is the core of knowledge production? Graduate School of Arts and Sciences = depth of disciplinary knowledge

Why PhDs instead of doctors? Theories and applications

Why undergraduates can directly apply for PhD but not MBA programs? The relationship between academic departments and practical schools – nor

mal distribution of knowledge sensitized to normal distribution of population

The story of Socrates (graduate seminars/undergraduate lectures) What is philosophy! Knowing the difference!

Knowledge

What to learn: knowledge, skills, and critical thinking

Theology v. Science v. Confucius

Physics v. metaphysics

Philosophy again! Epistemology and ontology

Inductive v. deductive approaches

Knowledge - Theory

• Three-level approach to understand the world

• Operational – observations (collectivism v. individualism)

• Substantive - causal mechanisms (culture v. institutions)

• Generic – theory ( 行而上为道 ; 行而下为器 )

Theory

• Normative v. empirical theories• Systematic v. ad hoc approaches• The necessity of basic assumption of human nature• Theorizing: from assumption to hypothesis• Falsification and the necessity of a prior definition -- economic person （ 3 key elements ） self-interested + rational + utility-maximization

Stock market investment – China and New York

3 functions of theory: describe, explain, predict3 measures of theory: parsimony, scope, accuracy

Theory/practice

Theory and practice

-- practice/theory/practice – inductive approach -- theory/practice/theory – deductive approach

Einstein Newton Galileo Ronald Coase

We only have partial theories!

Investment

What is investment?

”Capital requires exchange over time. To form capital, people save. Withholding goods from consumption in one period, people invest, such that they can enhance their consumption in the future periods. It is the prospect of rewards that motivates present sacrifices. Lying in the future, the prospective rewards are uncertain, however. “

– Robert Bates, Harvard University

The risk of investment without non-market institutions – the issue of political economy

“economic markets are frequently very imperfect, beset by high transaction costs and defined by institutions that produce incentives that work against economic efficiency. Indeed, creating institutions that provide low costs of transacting in economic markets is the key issue to creating productive economies.”

-- Douglas North, Nobel laureate in economics

Investment

• Portfolio investment v. direct investment

• Foreign direct investment (why it is beyond the issue of mere capital?)

• Modalities of direct investment (M&A) vertical and horizontal, and the fix of both • Why not trade but investment Back to Ronald Coase’s classic question of why the boundary between the administr

ative allocation of resources within the firm and the market allocation of resources between firm falls where it does.

Investment

• The concept of spread

• The concept of firm-specific assets (hard or soft technology)

• The concept of the value-chain of production

• The concept of ceteris paribus

• The concept of extra cost of going overseas

• The concept of the radius between supply and demand

Investment

The theoretical prediction of capital flow from capital rich to capital poor countries

The reality of FDI flows within advanced countries, why?

Institutional differences, costs, and risks!

Investment

The market approach and non-market (administrative) approach to firm-specific assets (advantages, technology)

The concept of global hierarch of technology (hard and soft) – implications for where you go for overseas investment – to explain destinations of investment (direct and indirect) outflows of Taiwan, Hong Kong, etc., and now mainland China.

Investment

FDI in China cultural v. non-cultural explanations

non-variable v. variables

3 modalities of investment

contractual joint ventures

equity joint ventures

100% foreign owned subsidiaries

The theoretic logic and empirical trends over time

Investment – anti-trust implications

• The economic logic of perfect competition and implications for technology innovations

• Ultimate driver of economic growth

• The problem of monopoly and implications for the welfare of consumers

• Implications of oligarchies for competition and innovation

• Market concentration and measurement problems

• Per se ruling and rule of reason

A cautionary note

• The assumption of the nature of modern corporate firms

• The collective rationality v. individual rationality: the corporate governance issue

• The economic logic of corporate social responsibilities

A suggestion

What to learn?

From generic to specific:

(1) A generic epistemic framework sensitive to Chinese and non-Chinese

(2) The economic logic of investment (overseas) within the firm

(3) Contextual issues both domestically and overseas (that may be country-specific)

Thank you

Q&A