providing enterprises with essential capabilities to anticipate, absorb and adapt to exogenous risks, and undertake endogenous risks in pursuit of larger expected profits with higher probabilities of success – empowering firms to learn and execute in their risky environments as enabled information platforms.<sup>21</sup> The main types of traditionally-measured KBC investments can be relatively easily mapped into the four pillars of risk managed initially proposed by Ehrlich and Becker (1972), namely:<sup>22</sup>

- Investments in **_knowledge_** of supply and demand trends and the likelihood of shocks, including changes in existing and emerging new global technologies and changes in consumer preferences – based on investments in R&D, and in global connectivity (including investments in knowledge diffusion networks and various search and match mechanisms to learn from and co-create with other local firms, global corporate partners, suppliers and buyers, universities and their extended communities, and the diaspora, and investments in local knowledge networks by informal enterprises).

- Investments in **_protection/enabling_** to reduce the probability of losses and increase the probability of successful reallocation and innovation –based on investments in market research, branding and advertising to expand product varieties and market reach and thereby diversify location-specific product risks both on production and demand sides– as the optimal reallocation of resources under uncertainty may not be to invest all into a high-risk new technology, but to invest some resources in the existing technology and benefit from the option value of waiting until some additional uncertainties are resolved.<sup>23</sup> D’Erasmo and Moscoso Boedo (2012) show that firm-level volatility is negatively correlated with such intangible expenditures: firms that incur higher intangible expenses are able to serve more markets and thereby diversify and reduce market-specific demand risk.<sup>24</sup>

21 See Hulten (2013) on some policy implications of conceptualizing the firm as an information platform.

22 Sheffi (2005) surveys a wide range of largely intangible investments spanning the four pillars that firms have made to increase knowledge, self-protect, insure against and cope with low-probability high-impact disruptions, broken down into “reducing vulnerability” (early detection and security investments in databases and software to reduce the likelihood of intentional disruptions from industrial actions, sabotage or terrorism), “building resilience through redundancy” (investments in slack, non-used inventory, capacity and IT systems, and increased holdings of retained earnings) and “building resilience through flexibility” (investments in new business models to allow interchangeability of plants, parts and people, realign supplier relations in supply chains, and modify internal culture towards greater safety, quality, continuous communications, and conditioning for disruptions).

> 23 Bloom et al. (2007) show that higher uncertainty reduces the responsiveness of investment to demand shocks, with uncertainty increasing real option values and making firms more cautious when investing or disinvesting (firms only hire and invest when business conditions are sufficiently good, and only fire and disinvest when they are sufficiently bad; when uncertainty is higher, this region of inaction expands, as firms become more cautious in responding to business conditions). Investment is also shown to have a convex response to positive demand shocks, magnifying the response, and a concave response to negative demand shocks. Empirically, these ‘cautionary’ and ‘convexity’ effects of uncertainty are large and play an economically important role in shaping firm-level investment decisions, with a one-standard deviation increase in their measure of uncertainty (like that which occurred after September 11, 2001 and the 1973 oil crisis can halve the impact effect of demand shocks on enterprise investment. This implies that the responsiveness of firms to any given policy stimulus may be much weaker in periods of high uncertainty, suggesting that countries where firms face systematically higher uncertainty may require significantly higher levels of stimulus to achieve a comparable impact.

24 The authors find a significant negative relationship between firm-level idiosyncratic volatility and intangible expenses, based on US data from the Kauffman Firm Survey and Compustat both for a general measure of intangibles (selling, general and administrative expenses) and for advertising expenditures, and controlling for industry-time fixed effects and a time trend: their results imply that if the top quartile firm of the intangible expenses distribution in the Compustat sample (a firm with $84 million in intangible expenses) reduces expenditures to that of the median firm, its volatility would increase by roughly 23%. Their proxy for risk is the volatility of the portion of growth in sales which is not explained by either industry or economy-wide time effects, or firm characteristics 10