Tuesday, October 19, 2010

Management and firms

These days I'm desperately trying to prepare myself for the day I will be allowed to carry out my own research on firms. There is nothing to suggest that this will be soon, but still, it makes me feel better about my current incarnation as consultant...

So, I was reading a recent paper by Bloom and Van Reenen published in the Winter 2010 Journal of Economic Perspectives. I think I'd seen some working paper versions but in any case, this time I read it more thoroughly.

They're basically trying to see why it is that management practices differ across countries, as evidenced by large variations in labor productivity, and focussing on management rather than other technological factors which are (hopefully) taken account of in existing analyses. Why these differences exist is one question, another is why they persist when the benefits to improving management are apparently so clear (as another Bloom et al randomised control trial on Indian firms finds)?
What we find is a combination of imperfectly competitive markets, family ownership of firms, regulations restricting management practices, and informational barriers allow bad management to persist.
As someone more or less familiar and interested in developing economies, this seems pretty much to say it all -  poor countries generally have all of these factors in spades. And this is it - in comparing performance on 18 basic management practices across countries, the average management score of a country is basically brought down by some VERY badly managed firms, generally found in developing countries where they can exist while being badly managed, whereas they would presumably be competed out of the market elsewhere.

Multi-nationals are apparently well managed everywhere, followed by exporting firms, while family run firms with an appointed head (such as the first son) are especially badly managed.    

But reading all this it becomes harder and harder to distinguish this from productivity - in the literature, all of the above is discussed in terms of productivity - multinationals are more productive, exporters are more productive, small firms are less productive etc. Indeed, they go on to say:

In one sense this cross-country ranking is not surprising, since it approximates the cross-country productivity ranking. Although we cannot offer a rigorous argument here about the magnitude of any causal effect, it certainly appears plausible that management practices should be viewed as part of the determinants of national productivity.

They also run regressions and find that indeed there is a positive correlation between their management measure and productivity as well as growth. 

On getting to this point I was slightly underwhelmed. It's pretty obvious. But at the same time, I suppose it gives us a better insight into reasons for differences of productivity across firms (was this not what X-efficiency was all about though?)  

In any case, at the national level, there are then 2 ways of raising management practices/productivity - raising the average productivity by improving business education etc, or helping better managed firms to be more successful - get the market mechanism operating. The kind of technical assistance I come across at the moment from the EC appears to be moving from the latter to the former, to actually working with firms.

But then there's another question - where to get the qualified people to provide firms with good advice.....    


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