Management Practices, Working Conditions and Productivity around the - - PowerPoint PPT Presentation

Management Practices, Working Conditions and Productivity around the World

Renata Lemos

University of Cambridge Centre for Economic Performance, LSE

Outline

• Motivation
• Measuring Management: The Data
• Management Practices and Firm Performance
• Describing Management across Firms and Countries
• Firm Characteristics Linked to Differences in Management

Practices

Motivation: Persistent productivity gap … … between developing and more developed countries … within countries and industries

• Within US SIC4, the plant at the 90th

percentile of the productivity distribution makes almost twice as much output with the same measured inputs as the 10th percentile plant (TFP ratio of 1.92)

• In India and China, larger

productivity differences (TFP ratio of

• ver 5). Larger productivity variation
• utside US.
• Source: Syverson (2004, 2011) and Hsieh and

Klenow (2009).

Among several explanatory factors: MANAGEMENT PRACTICES

• Large income & TFP differences

between countries

• Source: Jones and Romer (2009). US=1

Motivation: But why focus on management practices?

• Origins: Early 30s and 40s - The Behavioural School of Management Thought
• Hawthorn Studies (Mayo 1933; Mayo 1949, Roethlisberger & Dickson 1939)
• Improving worker voice, empowerment and skills through participatory

management as a means to improve working conditions and to achieve efficiency improvements

Management practices play an important role in improving working conditions across firms and countries Many management practices changes require low levels of capital investment

• Management changes as business investment with long-term benefits and

contributing to productivity returns

• Win-win scenario without high costs as barriers to buy-in

Outline

• Motivation
• Measuring Management: The Data
• Management Practices and Firm Performance
• Describing Management across Firms and Countries
• Firm Characteristics Linked to Differences in Management

Practices

World Management Survey (www.worldmanagementsurvey.org)

First ever large-scale international management database with data from over 10,000 firms interviews collected since 2004 across 21 countries

How to measure management practices

1) Develop management practice scoring grid

• Scorecard for Operations Management & Performance Monitoring, Target Setting, and People

Management

• 45- minute phone interview with manufacturing plant managers

2) Obtain unbiased responses

• “Double-blind”
• Managers are not informed (in advance) they are scored
• Interviewers do not know company performance
• Open ended questions
• Minimum amount of interviews per interviewer plus noise controls
• Double-scoring

3) Get managers to participate in the interview

• Introduced as confidential conversation about management, no financials discussed
• Endorsement of Bundesbank, Banque de France, UK Treasury, World Bank, etc.
• Run by 100+ MBAs and postgraduates who are loud, pushy and have business experience
• Monitor interviewer’s performance in scheduling with managers
• Overall response rate of 50%, uncorrelated with performance measures

4) Sample of Companies

• Random selection of medium and large manufacturing firms (100-5000 employees) from population

databases across countries

Score (1) No process improvements are made when problems occur (3) Improvements are made in 1 week workshops involving all staff (to improve performance in their area

• f the plant)

(5) Exposing problems in a structured way is integral to individuals’ responsibilities and resolution occurs as a part of normal business processes rather than by extraordinary effort/teams

Operations & Performance - “How are problems typically exposed and fixed?”

Note: All 18 topics and over 50 examples in Bloom & Van Reenen (2007).

Target setting - “How are problems typically exposed and fixed?”

Score (1) Goals are based purely on accounting figures (with no clear connection to shareholder value) (3) Corporate goals are based on shareholder value but are not clearly cascaded down to individuals (5) Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations Score (1) People are promoted primarily upon the basis of tenure (3) People are promoted upon the basis of performance (5) We actively identify, develop and promote our top performers

Talent Management - “How does the promotion system work?”

Example questions from the scorecard show top management practices value worker’s voice, empowerment and skills

Outline

• Motivation
• Measuring Management: The Data
• Management Practices and Firm Performance
• Describing Management across Firms and Countries
• Firm Characteristics Linked to Differences in Management

Practices

Higher management scores are significantly associated with better performance (not a causal estimation)

Note: All columns estimated by ordinary least squares (OLS) with standard errors are in parentheses under coefficient estimates clustered by firm. *** denotes 1% significance, ** denotes 5% significance, and * denotes 10% significance. Sample is all firm-years with sales, employment, capital, ROCE, and 5-year sales growth data, except column 3, which also restricts to firms with two or more surveys and drops the noise controls (which have little time series variation), and column 6 which just used the most recent year to evaluate exit. Management is the organization-level management score. Profitability is ROCE, and 5-Year Sales Growth is the 5-year growth of sales. Exit means the firm was liquidated or went bankrupt. Country controls are a full set of country dummies. Industry controls are 162 SIC three-digit dummies. Controls: General controls comprise firm-level controls for average hours worked and the proportion of employees with college degrees (from the survey), plus a set of survey noise controls that are interviewer dummies, the seniority and tenure of the manager who responded, the day of the week the interview was conducted, the time of day the interview was conducted, the duration of the interview, and an indicator of the reliability of the information as coded by the interviewer. Sample: (1) (2) (3) (4) (5) (6) All Firms All Firms All Firms All Firms All Firms All Firms Dependent variable: Log (Sales) Log (Sales) Log (Sales) Profitability (ROCE) 5-Year Sales Growth (%) Exit (%) Management 0.523*** 0.233*** 0.048** 1.952*** 6.738***

• 1.138**

(0.030) (0.024) (0.022) (0.444) (1.984) (0.498) Ln(Employees) 0.915*** 0.659*** 0.364*** (0.019) (0.026) (0.109) Ln(Capital) 0.289*** 0.244*** (0.020) (0.087) Country controls No Yes NA Yes Yes Yes Industry controls No Yes NA Yes Yes Yes General controls No Yes NA Yes Yes Yes Firm fixed effects No No Yes No No No Organizations 2,927 2,927 1,453 2,927 2,927 2,927 Observations 7,094 7,094 5,561 7,094 7,094 7,094

Source: Bloom, Genakos, Sadun, Van Reenen (2013)

80 100 120 140

• 15
• 10
• 5

5 10 15 20 25 30 35 40 45

Note: Weekly average total factor productivity for the 14 treatment plants which adopted modern management practices for quality, inventory and production efficiency and the 6 control plants. All plants make cotton fabric near Mumbai, India, with between 100 and 1000 employees. Values normalized so both series have an average of 100 prior to the start of the intervention. Confidence intervals bootstrapped over firms. Control plants Treatment plants Total factor productivity (normalized to 100 prior to diagnostic)

Weeks after the start of the management changes

Performance improvements in randomized control trials on the adoption of improved management practices

Source: Bloom, Eifert, Mahajan, McKenzie, Roberts (2013)

Outline

• Motivation
• Measuring Management: The Data
• Management Practices and Firm Performance
• Describing Management across Firms and Countries
• Firm Characteristics Linked to Differences in Management

Practices

Management practices across countries: Lower- and upper-middle income countries are poor by international standards

The median firm is privately owned and around 38 years

• ld.

It employs around 330 workers,

• perates across two

production plants, and exports 20% of its production.

N=746 N=720 N=569 N=251 N=249 N=275 N=106 N=247 N=189 N=351 N=103 N=106 N=392 N=462 N=976 N=284 N=442 N=385 N=388 N=176 N=935

2.6 2.8 3 3.2 3.4 Average management score by country China India Brazil Greece Argentina Chile

• Rep. of Ireland

Portugal Mexico Poland Northern Ireland New Zealand Australia France Great Britain Italy Germany Canada Sweden Japan United States

Note: Includes control for firm size

High income countries Upper-middle income countries Lower-middle income countries

Source: Data from 8352 firm interviews between 2006 and 2010.

Source: Data from 8352 firm interviews between 2006 and 2010.

On average, firms in middle income countries are worse than firms in most high income countries across the major categories of management practices

Overall Management Operations Management Performance Monitoring Target Setting Talent Management United States 3.35 United States 3.30 Sweden 3.64 Japan 3.34 United States 3.23 Japan 3.23 Sweden 3.28 United States 3.61 Germany 3.25 Canada 2.94 Germany 3.22 Germany 3.25 Canada 3.55 United States 3.25 Japan 2.92 Sweden 3.21 Japan 3.17 Germany 3.54 Sweden 3.19 Germany 2.91 Canada 3.17 Australia 3.16 Japan 3.50 Italy 3.10 Northern Ireland 2.88 Great Britain 3.03 Canada 3.15 France 3.44 Canada 3.07 Great Britain 2.84 Italy 3.03 New Zealand 3.11 Great Britain 3.36 Australia 3.02 Sweden 2.83 Australia 3.02 Italy 3.06 Australia 3.29 France 3.00 Poland 2.83 France 3.02 France 2.96 Mexico 3.29 Great Britain 2.97 Rep. of Ireland 2.79 Northern Ireland 2.97 Great Britain 2.92 Portugal 3.27 New Zealand 2.96 Italy 2.77 New Zealand 2.93 Northern Ireland 2.87 Italy 3.26 Poland 2.94 Australia 2.74 Mexico 2.92 Portugal 2.81 New Zealand 3.18 Northern Ireland 2.90 Mexico 2.71 Poland 2.90 Greece 2.79 Northern Ireland 3.17 Mexico 2.88 China 2.69

• Rep. of Ireland

2.89 Argentina 2.76 Rep. of Ireland 3.14 Portugal 2.83 France 2.69 Portugal 2.87

• Rep. of Ireland

2.75 Chile 3.13 Rep. of Ireland 2.81 Chile 2.66 Chile 2.82 Chile 2.75 Poland 3.12 Chile 2.72 India 2.63 Argentina 2.76 Mexico 2.72 Argentina 3.08 Brazil 2.69 New Zealand 2.63 Greece 2.73 China 2.49 Brazil 3.06 Argentina 2.68 Portugal 2.59 China 2.71 Poland 2.43 Greece 2.97 India 2.66 Greece 2.58 Brazil 2.71 Brazil 2.33 India 2.91 Greece 2.66 Argentina 2.56 India 2.67 India 2.19 China 2.90 China 2.63 Brazil 2.55

.2 .4 .6 .8 1 1 2 3 4 5 Firm Average Management Score

Argentina Brazil Chile Mexico India China United States Bottom 25% in US: 2.944

United States in comparison to Upper- and Lower-Middle Income countries

Management practices within countries: Despite having some well managed firms, lower- and upper-middle income countries have many badly managed firms in comparison to the United States

% of firms scoring score within the range of the bottom quartile

• f US firms:
• 63% of Argentinean firms
• 66% of Brazilian firms
• 62% of Chilean firms
• 47% of Mexican firms
• 69% of Indian firms
• 72% of Chinese firms

Source: Data from 249 AR, 569 BR, 275 CL, 189 MX, 720 IN, 746 CN, and 935 US firm interviews between 2006 and 2010.

SMEs are worse managed than larger firms within middle income countries than SMEs are in comparison to larger firms in high income countries across several dimensions of management

Note: All columns estimated by ordinary least squares (OLS) with standard errors are in parentheses under coefficient estimates clustered by firm. *** denotes 1% significance, ** denotes 5% significance, and * denotes 10% significance. Sample is all firm-years surveyed from 2006 to 2010. Firm-level operations & performance monitoring management practices is the average of questions 1 to 7, targets setting practices is the average of questions 8 to 12 and talent management practices is the average of questions 13 to

• 18. All sets of management practices are normalized to have a standard deviation to unity. Controls: Country controls are a full set of

country dummies. Industry controls are 155 SIC three-digit dummies. General controls comprise of firm-level controls for average hours worked and the proportion of employees with college degrees (log), plus a set of survey noise controls that are interviewer dummies, the seniority and company tenure of the manager who responded, the day of the week the interview was conducted, the time of day the interview was conducted, the duration of the interview, and an indicator of the reliability of the information as coded by the interviewer.

(1) (2) (3) (4) (5) (6) (7) Dependent variable: All Countries All Countries Latin American Countries Asian Countries

(excludes Japan)

Anglo-Saxon Countries Southern & Central European Countries Scandinavian & Western European Countries Operations & Monitoring Z-Score SMEs (<=200 employees)

• 0.388***
• 0.358***
• 0.397***
• 0.419***
• 0.338***
• 0.369***
• 0.394***

(0.025) (0.021) (0.053) (0.073) (0.037) (0.070) (0.050) Targets Z-Score SMEs (<=200 employees)

• 0.373***
• 0.334***
• 0.405***
• 0.403***
• 0.375***
• 0.216***
• 0.260***

(0.024) (0.022) (0.055) (0.074) (0.037) (0.075) (0.053) People Z-Score SMEs (<=200 employees)

• 0.309***
• 0.265***
• 0.285***
• 0.270***
• 0.257***
• 0.264***
• 0.286***

(0.024) (0.022) (0.057) (0.075) (0.036) (0.073) (0.049) Country controls No Yes Yes Yes Yes Yes Yes Industry controls No Yes Yes Yes Yes Yes Yes General controls No Yes Yes Yes Yes Yes Yes Observations 8352 8352 1282 1466 3003 849 1576 SMEs (N) 2618 2618 409 262 1059 341 513

Outline

• Motivation
• Measuring Management: The Data
• Management Practices and Firm Performance
• Describing Management across Firms and Countries
• Firm Characteristics Linked to Differences in Management

Practices

– Public sector, Government-owned – Family and Founder Ownership – Foreign Multinationals – Product market competition – Workforce Education

Public (government) ownership is associated with worse management practices

Source: Data from 8352 firm interviews between 2006 and 2010.

N=231 N=8121

2.8 2.9 3 Average management scores Public Private

Note: Includes control for firm size and country

Public ownership is associated with particularly poor people management (hiring, firing, pay, and promotions)

Gap between public and private ownership by subcomponents of management

• .25
• .2
• .15
• .1
• .05

Difference in management score between public and private firms

Note: Includes control for firm size and country

Operations & Performance Monitoring Target Setting People Management

Source: Data from 8352 firm interviews between 2006 and 2010. Note: Operations and Performance Monitoring is adopting modern techniques, collecting and using data, Target Setting are the setting, balance, time horizon and effectiveness of targets, and People Management are performance-related hiring, promotions, bonus, and exit.

Firms owned and controlled by the founder or by the founding family are typically badly managed in comparison to firms of other

• wnership types

Source: Data from 8352 firm interviews between 2006 and 2010. Note: Founder owned , founder CEO” firms are those still owned and managed by their founders. “Family firms” are those owned by descendents of the founder. “Dispersed shareholder” firms are those with no shareholder with more than 25% of equity, such as widely held public firms.

N=1255 N=1300 N=231 N=1429 N=220 N=443 N=318 N=2505

2.6 2.7 2.8 2.9 3 3.1 3.2 Average management score by ownership Founder owned, founder CEO Family owned, family CEO Government Private Individuals Managers Founder/Family owned, external CEO Private Equity Dispersed Shareholders

Note: Includes controls for country and firm size

Ownership structure across countries

.

.2 .4 .6 Percentage of firms managed by founder or founding family

Sweden Poland France United States Australia Canada Germany Great Britain China

• Rep. of Ireland

Chile New Zealand Northern Ireland Japan Mexico Portugal Argentina Greece Italy Brazil India

Founder, Founder CEO Family, Family CEO

Firms owned and managed by founder/ family members are most common in India and Latin American countries as well as Southern European countries Ownership can account for up to 38% of cross- country differences in management Some leading explanations:

• Shareholder

protection regulation

• Underdevelopment
• f financial markets
• Weak legal system
• Labour relations

Source: Data from 8352 firm interviews between 2006 and 2010. Note: Frequencies of ownership taken across all firms within each country.

Multinationals appear to achieve good management practices wherever they locate

Source: Data from 6726 firm interviews between 2006 and 2010, of which 4,327 are purely domestic and 2,399 are foreign

• multinationals. Domestic multinationals are excluded—that is, the domestic subsidiaries of multinational firms (like a Toyota

subsidiary in Japan).

2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 Average management score by country United States Sweden Japan Germany Canada Italy Great Britain Australia Poland France Mexico China New Zealand Portugal India Chile Northern Ireland Brazil Argentina

• Rep. of Ireland

Greece

Foreign Multinationals Domestic Firms

Competition appears linked to better management

Source: Data from 8205 firm interviews between 2006 and 2010. Note: Reported competitors defined from the response to the question “How many competitors does your firm face?”.

2.8 2.9 3 1 2 to 4 5+

Number of reported competitors

Workforce education appears linked to better management

2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3 Average management score

0% 1% to 10% 11% to 25% 26% to 50% +50%

Percentage of managers with a college degree

2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3 Average management score

0% 1% to 10% 11% to 25% 26% to 50% +50%

Percentage of non-managers with a college degree

Source: Data from 8352 firm interviews between 2006 and 2010.

Conclusion, 5 broad results:

• Middle income countries in Latin America and Asia are towards the bottom of the

international rank of management practices.

• There is a large tail of badly managed firms in middle income countries in Latin

America and Asia.

• The substantial gap in management practices presented by small firms in

comparison to larger firms is larger within middle income countries in Latin America and Asia than in high income countries.

• Management quality is positively and significantly correlated with better firm

performance measures.

• Several firm characteristics appear to be linked to the variation in management

practices across firms and countries: 1) Public sector, Government-owned, 2) Family and founder ownership, 3) Foreign multinationals, 4) Product market competition, and 5) Workforce education.