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Professor David Baron, a founding member of the Kellogg School's MEDS Department

Leading scholar in the social context of business returns to Kellogg

Visiting professor David Baron spends fall term in Evanston

By Matt Golosinski

10/1/2007 - David Baron, one of the founding members of the Kellogg School’s Managerial Economics and Decision Sciences Department, has returned to Evanston for the fall term as a visiting professor of research. He was on faculty at Kellogg from 1968 until 1981, when he joined Stanford University as a professor of political economy and strategy before retiring this year. Widely regarded as an authority in his field, Baron has published more than 100 articles and three books, including Business and Its Environment, soon to appear in a 6th edition. Kellogg World asked him about that subject’s importance today, as well as what it was like to be part of MEDS as the department brought more analytical rigor to business study.

Kellogg World: Your expertise bridges areas as disparate as industrial organization, economic theory, political science, management science, finance and business strategy. What are the connections?

David Baron: My training was in decision theory, but my dissertation was on applications in economics. When I arrived at Northwestern the other new faculty in the group were economists, and I naturally gravitated toward that field. As I thought more about economics, I became concerned about the shortcomings in the theories we used. I became interested in government intervention in markets in the 1970s when the deregulation movement was beginning. Once one starts thinking about regulation one has to think about government in a serious way. What was needed were good theories about how government functions and about the interactions between business and government. I began to study political science and political economy, and that evolved toward managerial applications of the general area that I call nonmarket strategy. What I’ve been doing most recently is developing nonstandard ways of thinking about the environment of business.

KW: Can you give examples?

DB: For example, we try to explain why some consumers pay a premium for green electricity or support NGOs that pressure firms to change their practices. If such forces are growing, we need to rethink our frameworks for understanding appropriate business conduct and strategy. How widespread are these forces and the preferences of citizens that underlie them? Often there’s a big difference between what people say and what they do, and business tends to responds to actions. So the question is, “Are there motivations of citizens and companies that go beyond the customary frameworks we use and require the development of new understandings and theories.”

KW: The nonmarket concept has been one driver for Kellogg initiatives like Social Enterprise at Kellogg (SEEK). Where do you see this area going next?

DB: This is an area that is increasingly understood to be important, and the big challenge for us as academics is to make some systematic contribution to the field to help us understand it better and to turn that understanding into better business practices. The faculty here at Kellogg are at the forefront of that effort.

KW: Thinking about Kellogg students and young business leaders, what skills should they have to compete in an arena where nonmarket factors figure prominently?

DB: This depends on how directly a company and industry are affected by the social environment and by the assessments of citizens about their conduct. But it is increasingly difficult to escape nonmarket forces. For example, one area that has traditionally been immune from these considerations is private equity, but it has come under increased scrutiny for its impact on the economy and the magnitude of the profits realized. There are now bills progressing in Congress that would tax carried interest as ordinary income rather than as capital gains, as it is currently taxed.

KW: What role does globalization plays in these nonmarket forces?

DB: The more globalization progresses — the more firms operate in different institutional and cultural environments — the more challenging management becomes. Globalization means there are going to be more issues that come from other countries, not just your home country, so what you need to know is much broader. Strategies need to take into account the cultural, institutional, and social context in which you’re doing business, and at the same time those strategies must have a coherence guided by encompassing principles. Some of the factors are nation-specific, some cut across regions, and others are truly global. Kellogg students have the opportunity, especially through SEEK, to learn how to anticipate and deal effectively with these issues. A large part of this learning, however, will have to be experiential. You have to get your feet wet.

KW: With all this variety, what are the commonalities?

DB: Certainly there are common features. We have developed frameworks that help make sense of these forces and point the way to developing effective strategies. But, the details matter, and those details are where experience is important.

KW: Reflecting on the origins of the MEDS Department, what do you recall from that time?

DB: I came here a few years before MEDS was formed, and the subsequent developments were exciting. It was a time of innovation in both the mathematical and social sciences, and it was clear that there were lots of opportunities. We began an ambitious research program and were able to hire tremendous people who had an impact not only on the social sciences but also on what is taught in business schools and what is applied in management.

KW: Game theory obviously played a part in this analytical shift for business schools, and Kellogg was among those making early use of these tools. But now, as the discipline has matured, what’s the next stage in developing this kind of analysis?

DB: I think scholars are groping for the answer to that question. A lot of what the people here in MEDS have done has been revolutionary, and we are all looking for the next revolutionary concept.