Other Unpublished Work | 2010

Does Management Matter: New Empirics and Old Theories

by Nicholas Bloom, Christos Genakos, Raffaella Sadun and John Van Reenen

Abstract

We collect data on management practices on nearly 6,000 firms in 17 countries in the Americas, Europe, and Asia. We present several "stylized facts" finding support for some basic economic theories of management practices–e.g. the positive size-management quality correlation (Lucas, 1978) and the positive relation between exports and management quality (Melitz, 2003). US firms appear on average to have the highest management scores due to their relative absence of a long tail of very badly managed firms. This appears primarily related to more powerful selection effects in North America as the correlation between both firm size and firm growth with management quality is much stronger there. Using new panel data on changes in management practices over time, we argue that more intense product market competition generates both powerful selection effects and incentivizes incumbent firms to upgrade their management practices.

Keywords: Management Practices and Processes; Organizational Change and Adaptation; Performance Productivity; Competition;

Language: English

Format: Print

Citation:

Bloom, Nicholas, Christos Genakos, Raffaella Sadun, and John Van Reenen. "Does Management Matter: New Empirics and Old Theories." 2010.

We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.

HBR's 90th anniversary is a sensible time to revisit a basic question: Are organizations more likely to succeed if they adopt good management practices? The answer may seem obvious to most HBR readers, but these three economists cast their net much wider than that. In a decade-long study of thousands of organizations in 20 countries, they and their interview team assessed how well manufacturers, schools, and hospitals adhere to three management basics: targets, incentives, and monitoring. They found that huge numbers of companies follow none of those fundamentals, that adopting the basics yields big improvements in outcomes such as productivity and longevity, and that good nuts-and-bolts management at individual firms shapes national performance. At 14 textile manufacturers in India, for example, an intervention—involving free, high-quality advice from a consultant who was on-site half-time for five months—cut defects by half, reduced inventory by 20%, and raised output by 10%. A control group saw no such gains. The authors' global data set suggests that implementing good management at schools and hospitals yields change more slowly than at manufacturers—but it does come eventually. And the macroeconomic potential—for incomes, productivity, and delivery of critically needed services—is huge. A call for "better management" may sound prosaic, but given the global payoffs, it's actually quite radical.

We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. To help identify causal effects, we look within multinational firms, and show that higher levels of bilateral trust between the multinational's country of origin and subsidiary's country of location increases decentralization, even after instrumenting trust using religious and ethnic similarities between the countries. Trust raises aggregate productivity through two channels: (1) trust facilitates reallocation between firms by allowing more efficient firms to grow as CEOs can decentralize more decisions and (2) trust complements the adoption of new technologies, thereby increasing productivity within firms during times of rapid technological change.

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