Meet the New Faculty: Olav Sorenson, Professor of Organizational Behavior
"When you look at pretty much any industry you see clusters of firms: computers in Silicon Valley, film in Hollywood, shoes in Massachusetts, Wisconsin, and St. Louis, Missouri," says Olav Sorenson, professor of organizational behavior, who joined Yale SOM from the Rotman School of Management at the University of Toronto where he served as Jeffrey S. Skoll Chair in Technical Innovation and Entrepreneurship, and Professor of Strategy.
Sorenson has extensively studied economic geography, or why firms cluster. "The traditional explanation has been that there is some advantage to being near your competitors and sharing resources. But in the studies that have been done, particularly for performance effects, it looks like youíre worse off if youíre located in one of these clusters, so then itís a real puzzle why they continue to exist."
Sorenson looks at clusters not from the perspective of where to ideally locate all the plants in an industry, but from the point of view of where an entrepreneur starting a business should put his or her firm. "When you think of it from that perspective it makes a lot of sense. Most entrepreneurs are coming out of the industry and have experience at some existing firm, but when they get started they need capital, they need to recruit employees and so forth, and social networks and connections to people in the area makes a huge difference in being able to acquire those resources. So entrepreneurs are basically limited in where they can start firms. Every entrepreneur is doing whatís rational for them ó theyíre gathering the resources they need through their network and starting their business where they are ó but because of it, industries end up being tightly concentrated which may not be the ideal thing for production."
Sorenson has looked at this broad stream of research at the industry level in footwear, computer workstations, and biotech. He is currently using Danish census data to examine this from the perspective of the individual by looking at all of the entrepreneurs who are starting up in Denmark, where they are locating their factories, and how the experience they have in those locations affects their performance.
Sorenson also studies how relationships affect economic transactions. "Iíve been looking at the extent to which, once you actually have a relationship, then there are also emotions involved. I think those emotions, even if itís not conscious, affect how people interpret information and lead them to make misallocations of resources."
As an example of this, Sorenson recently examined the film industry, looking at distributors like MGM and Paramount and what happens when they work with filmmakers with whom they have past working relationships. "If theyíve worked with the director or producer before, they tend to advertise the film more heavily, theyíre more likely to release it during a high demand period like the summer or over a holiday, and because of that, those films do better. So they think theyíre getting good deals when they work with those people. But if you actually control for the effects of what they put into it, and the market release date decisions that they themselves influence, it looks like those films actually do worse. Itís entirely self-constructed."
The entertainment industry, particularly film, is one industry setting of special interest to Sorenson. "I think there are a couple of reasons why itís interesting. One, itís an industry where clearly relationships matter a lot. Two, you have a lot of team production. You get a lot of mixing and matching of people. Traditional firms are starting to do more of that, but itís harder to see it acting within the firm, whereas in film, you can see these organizations coming together to make one film and then disbanding and reassembling."
The venture capital industry is another area of focus for Sorenson. "Again, my initial interest in the industry was that itís one where social networks seem to matter a lot on at least a couple of dimensions. One is actually finding the entrepreneurs that they invest in. Venture capitalists almost always invest in entrepreneurs they know. Itís very rare that you get an entrepreneur just sending something in over the transom and getting it funded. Part of it is how do you actually verify the information on the business plan or about the entrepreneur? And the second thing is that I think itís clearly connected to these regional differences that Iím interested in on a broad, more theoretical level. A lot of the dynamic regions we think about, at least in modern industries like biotech, software, and so forth, are ones where you have a local venture capital community that seems quite important to fostering the development of the industry."
Sorenson will teach the Venture Capital course at SOM this fall. The course will take students through the lifecycle of a venture capital fund, from how to raise funds and structure the agreements between the limited partners and the venture capitalists, to how to predict which companies will be good investments and how to get out of the investments and make money.
"One of the things that I think is different about the course is that, with every question, I try to be very research driven in terms of what are the answers to those questions and going into the latest research in finance, economics, law, and sociology thatís warranted at each of those stages. Itís an interesting class because it covers such a wide range of business issues and a wide range of academic perspectives."
Read about other new faculty: