ARE FAMILY-FRIENDLY WORKPLACE PRACTICES A VALUABLE … · Are Family-Friendly Workplace Practices a...

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Strategic Management Journal Strat. Mgmt. J. (2010) Published online EarlyView in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.879 Received 11 March 2009; Final revision received 17 June 2010 ARE FAMILY-FRIENDLY WORKPLACE PRACTICES A VALUABLE FIRM RESOURCE? NICK BLOOM, 1 TOBIAS KRETSCHMER, 2 * and JOHN VAN REENEN 3 1 Stanford University, Department of Economics, Stanford, California, U.S.A. 2 University of Munich, Department of Management, Munich, Germany 3 Centre for Economic Performance, London School of Economics, London, U.K. We study the determinants and consequences of family-friendly workplace practices (FFWP) using a sample of over 450 manufacturing firms in Germany, France, U.K., and U.S. We find a positive correlation between firm productivity and FFWP. This association disappears, however, once we control for a measure of the quality of management practices. We further find that firms with a higher proportion of female managers and more skilled workers, as well as well- managed firms, tend to implement more FFWP. Conversely, a firm’s environment does not have a significant impact on the FFWP it provides. Copyright 2010 John Wiley & Sons, Ltd. INTRODUCTION Strategists’ key interest is in studying the perfor- mance impact of (strategic) firm actions. Recently, actions aimed at leveraging and securing firm resources have been intensively studied. Actions were measured against their ability to make a resource valuable, rare, and/or inimitable (Bar- ney, 1991). Human capital is often considered a potential firm resource (Pfeffer, 1994; Koch and McGrath, 1996; Conner and Prahalad, 1996; Lee and Miller, 1999), sparking intense inter- est among strategy scholars in the performance effects of (strategic) human resource manage- ment (SHRM) (Cappelli and Singh, 1992; Pfeffer, 1994; Ulrich, 1991; Wright and McMahan, 1992; Huselid, 1995; Fey, Bj¨ orkman, and Pavlovskaya, 2000; Batt, 2002). Some empirical studies of Keywords: Work-life balance; family-friendly work prac- tices; nonmarket strategies; firm performance; manage- ment practices; resource-based view *Correspondence to: Tobias Kretschmer, University of Munich, Department of Management, Schackstr. 4/III, D—80539 Munich, Germany. E-mail: [email protected] SHRM forge links to the specific elements of a VRIO framework (resources must be valuable, rare, inimitable, and require organizational sup- port), typically to policies leveraging the value (V) of a firm’s workforce (Koch and McGrath, 1996) and increasing the inimitability (I) of human resources (HR) by increasing employee retention (Perry-Smith and Blum, 2000). 1 However, many actions taken by firms do not seem to affect their financial performance much, which led scholars to widen the definition of firm performance to include corporate social perfor- mance (Brammer and Millington, 2008; David, Bloom, and Hillman, 2007) or environmental response (Murillo-Luna, Garc´ es-Ayerbe, and Rivera-Torres, 2008), and to consider antecedents 1 For example, by encouraging and rewarding feedback from lower ranked employees a firm can achieve superior market knowledge. Similarly, providing long-term financial incentives aligns executives’ incentives with shareholder goals, both of which will help a firm get the most out of its employees (raising V). Conversely, giving employees the option to scale down their working hours, or offering childcare support within the firm, can help a firm in retaining valuable employees (increasing I) without necessarily increasing their productivity. Copyright 2010 John Wiley & Sons, Ltd.

Transcript of ARE FAMILY-FRIENDLY WORKPLACE PRACTICES A VALUABLE … · Are Family-Friendly Workplace Practices a...

Page 1: ARE FAMILY-FRIENDLY WORKPLACE PRACTICES A VALUABLE … · Are Family-Friendly Workplace Practices a Valuable Firm Resource? There has been little or no research that distin-guishes

Strategic Management JournalStrat. Mgmt. J. (2010)

Published online EarlyView in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.879

Received 11 March 2009; Final revision received 17 June 2010

ARE FAMILY-FRIENDLY WORKPLACE PRACTICES AVALUABLE FIRM RESOURCE?

NICK BLOOM,1 TOBIAS KRETSCHMER,2* and JOHN VAN REENEN3

1 Stanford University, Department of Economics, Stanford, California, U.S.A.2 University of Munich, Department of Management, Munich, Germany3 Centre for Economic Performance, London School of Economics, London, U.K.

We study the determinants and consequences of family-friendly workplace practices (FFWP)using a sample of over 450 manufacturing firms in Germany, France, U.K., and U.S. We find apositive correlation between firm productivity and FFWP. This association disappears, however,once we control for a measure of the quality of management practices. We further find thatfirms with a higher proportion of female managers and more skilled workers, as well as well-managed firms, tend to implement more FFWP. Conversely, a firm’s environment does not havea significant impact on the FFWP it provides. Copyright 2010 John Wiley & Sons, Ltd.

INTRODUCTION

Strategists’ key interest is in studying the perfor-mance impact of (strategic) firm actions. Recently,actions aimed at leveraging and securing firmresources have been intensively studied. Actionswere measured against their ability to make aresource valuable, rare, and/or inimitable (Bar-ney, 1991). Human capital is often considereda potential firm resource (Pfeffer, 1994; Kochand McGrath, 1996; Conner and Prahalad, 1996;Lee and Miller, 1999), sparking intense inter-est among strategy scholars in the performanceeffects of (strategic) human resource manage-ment (SHRM) (Cappelli and Singh, 1992; Pfeffer,1994; Ulrich, 1991; Wright and McMahan, 1992;Huselid, 1995; Fey, Bjorkman, and Pavlovskaya,2000; Batt, 2002). Some empirical studies of

Keywords: Work-life balance; family-friendly work prac-tices; nonmarket strategies; firm performance; manage-ment practices; resource-based view*Correspondence to: Tobias Kretschmer, University of Munich,Department of Management, Schackstr. 4/III, D—80539Munich, Germany. E-mail: [email protected]

SHRM forge links to the specific elements ofa VRIO framework (resources must be valuable,rare, inimitable, and require organizational sup-port), typically to policies leveraging the value(V) of a firm’s workforce (Koch and McGrath,1996) and increasing the inimitability (I) of humanresources (HR) by increasing employee retention(Perry-Smith and Blum, 2000).1

However, many actions taken by firms do notseem to affect their financial performance much,which led scholars to widen the definition of firmperformance to include corporate social perfor-mance (Brammer and Millington, 2008; David,Bloom, and Hillman, 2007) or environmentalresponse (Murillo-Luna, Garces-Ayerbe, andRivera-Torres, 2008), and to consider antecedents

1 For example, by encouraging and rewarding feedback fromlower ranked employees a firm can achieve superior marketknowledge. Similarly, providing long-term financial incentivesaligns executives’ incentives with shareholder goals, both ofwhich will help a firm get the most out of its employees (raisingV). Conversely, giving employees the option to scale down theirworking hours, or offering childcare support within the firm, canhelp a firm in retaining valuable employees (increasing I) withoutnecessarily increasing their productivity.

Copyright 2010 John Wiley & Sons, Ltd.

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N. Bloom, T. Kretschmer, and J. Van Reenen

of actions affecting other performance dimensions(Young, Charns, and Shortell, 2001; Murillo-Lunaet al., 2008; Coombs and Gilley, 2005). Generallyspeaking, the link between nonfinancial stake-holder demands and firm actions suggests thatfirms consider multiple factors when choosing theiractions. From a strategic perspective, what is espe-cially interesting is whether actions influenced bynonfinancial stakeholders are detrimental to firmfinancial performance (i.e., if they are inconsis-tent with firms maximizing profits), or whetherthey complement other policies in making firmresources valuable, rare, and inimitable.

The management of human capital plays a cru-cial role in this line of research (Conner and Pra-halad, 1996). On the one hand, the link betweenemployees and performance seems obvious, butmany strategies designed to improve workforceproductivity are only expected to translate into‘hard’ performance measures like firm value(Perry-Smith and Blum, 2000; Arthur, 2003;Delaney and Huselid, 1996; Edmans, 2007) oraccounting profits (Huselid, 1995; Huselid, Jack-son, and Schuler, 1997) through ‘soft’ channelslike organizational commitment (Lee and Miller,1999; Eaton, 2003) or employee turnover (Guthrie,2001; Huselid, 1995). On the other hand, the rea-sons for implementing certain employee-friendlypractices are not clear-cut, as employees are aninput factor as well as a stakeholder group. Thisis especially salient for family-friendly workplacepractices (FFWP), which do not directly affectthe workplace, but rather enhance the ability ofemployees to combine working and personal life.Nevertheless, prior work looking at the associationbetween FFWP and firm performance (Perry-Smithand Bloom, 2000; Gray and Tudball, 2003; Mil-liken, Martins, and Morgan, 1998) has generallyfound a positive association whether performancewas measured in terms of work attitudes (Kossekand Ozeki, 1998; Lobel, 1999; Van Yperen andHagedoorn, 2003), organizational citizenship(Organ and Konovsky, 1989; Schnake, 1991;Smith, Organ, and Near, 1983), or even firmproductivity (Konrad and Mangel, 2000; George,2005; Collins and Clark, 2003).

The positive link between FFWP and perfor-mance may be problematic for several reasons.First, FFWP may simply be part of a wider setof management practices found in well-performingfirms. If a well-managed firm uses a numberof performance-enhancing management practices

and concurrently uses FFWP, omitting the set ofother practices in performance regressions cre-ates a spurious correlation between FFWP andperformance, a so-called ‘false positive.’2 Second,while the provision of FFWP may improve moraleand employee retention, the link between FFWPand a set of hard performance measures is morecontroversial and has to be studied rigorously. Forexample, employee retention may improve afterFFWP are introduced, but there may be costsof production inflexibility reducing productivityor costs of implementation reducing profitability.Third, the FFWP-performance link may not givea conclusive picture because firms may provideFFWP for reasons other than enhancing finan-cial performance. FFWP provision may be due tofirm characteristics unrelated to firm performance,which would be ignored in a narrowly definedstudy on FFWP and performance.

Further, a positive overall assessment of FFWP,if confirmed, would leave us with a puzzle: ifFFWP were unambiguously good for firm perfor-mance, all firms should introduce them on theirown accord (which they do not). One potentialexplanation is that FFWP carry significant costsof implementation borne by the firms while thereturns accrue to both firms and workers, whichcreates a divergence of private and public returnsand the resulting underinvestment (or underprovi-sion) problem. Another explanation is that firmsdo not know the extent of benefits of FFWP, andtherefore prefer to delay introducing them untilthey know more about them (Bryson et al., 2007).A third is that firms have differing benefits fromFFWP and therefore some choose to adopt them,while it is not profitable for others to do so due totheir employee base (Konrad and Mangel, 2000;Gray and Tudball, 2003) or their strategy (De Cieriet al., 2005; Becker, Huselid, and Ulrich, 1996). Afourth possible reason for this puzzle is that firmshave different preferences regarding the balance oftheir employees’ well-being and the financial per-formance of the firm. This weighting is influencedboth by internal and external circumstances of thefirm (Perry-Smith and Blum, 2000; Brammer andMillington, 2008).

2 Carmeli and Tishler (2004) show that including intangible orga-nizational characteristics in performance regressions can helpexplain considerable performance differences betweenorganizations.

Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

There has been little or no research that distin-guishes among these factors and gives an expla-nation for the differential use of FFWP. In thispaper, we study two connected aspects related tothe strategic use of FFWP. First, we investigate the‘effect’ of FFWP on firm performance measuredin multiple ways while controlling for multiplefactors, including the quality of management prac-tices (Bloom and Van Reenen, 2007, 2010b).3 Thisimposes more stringent conditions on identifyingFFWP as a bundle of activities constituting a firmresource (Koch and McGrath, 1996; Perry-Smithand Blum, 2000). Second, we study ‘determinants’of FFWP. That is, we look for differences in firmcharacteristics and external circumstances affect-ing firms’ propensity to implement FFWP (Konradand Mangel, 2000; Perry-Smith and Blum, 2000).Specifically, we ask two key questions:

i) Are FFWP positively correlated to firm perfor-mance?

ii) Which firms are likely to adopt FFWP?

The first question studies the FFWP-firm per-formance link. While the direction of causalityis difficult to establish in cross-sectional data, wesubject the claim of a positive correlation betweenFFWP and firm performance to a rigorous analysis,running a large number of robustness tests with dif-ferent measures of our dependent and independentvariables. In particular, we control for the qualityof management practices, thus presenting a morerigorous test of FFWP as a firm resource (Arend,2006). The strategic implications of a possiblepositive FFWP-performance link are clear: firmswill have to offer FFWP on top of other favor-able management practices if they want to improveperformance. The second question addresses theapparent puzzle that if FFWP are a universallydesirable policy, why do not all firms adopt them?We study a set of firm characteristics that mayaffect the propensity of adopting such practices,either because FFWP are in higher demand orbecause they are cheaper to provide in firms withcertain characteristics.

Using a novel survey tool on the provisionof FFWP as well as management practices andmatching this data with detailed information on

3 Note that we will use ‘performance’ to indicate a firm’sfinancial performance unless noted otherwise.

firm financial performance, we address two com-mon problems in testing for firm resources (Arend,2006; Newbert, 2007): first, the confirmatory biasarising from omitting other performance-enhancingresources, and second, the problems associatedwith using narrow performance measures. We thusbelieve that our study gives a nuanced picture ofthe provision and impact of FFWP and its validityas a firm resource.

We surveyed over 450 firms in Europe (Ger-many, France, and the United Kingdom) andthe United States to gather data on firm perfor-mance, management, and FFWP, and uncovereda number of surprising results. First, we foundthat, contrary to much of the existing literatureon FFWP, the positive association between firmperformance and FFWP disappears once controlsfor management practices are included. This sug-gests that some of the earlier results on the pos-itive performance impact of FFWP (Batt, 2002;Fey et al., 2000; Perry-Smith and Blum, 2000;Gray and Tudball, 2003; Milliken et al., 1998)may be due in part to omitted variable bias, asthese studies do not control adequately for man-agement quality. This calls for recasting FFWPas a nonmarket strategy affecting outcomes otherthan financial performance. Second, we find that‘external’ factors like the gender and skills com-position of the workforce and the overall qualityof management play an important role in FFWPprovision.

Our paper is structured as follows: in the nextsection, we introduce a general framework forthe provision of FFWP and their impact on firmperformance. We then derive testable hypotheseson the impact and determinants of FFWP beforewe give a detailed discussion of our dataset andthe procedures used to collect it. We subsequentlypresent and discuss our results, and finally provideconcluding comments.

A GENERAL FRAMEWORK

Although FFWP are often considered part of high-performance HR strategy and good management ingeneral, the first-order effect of FFWP is to ‘pro-vide relief for non work concerns’ (Perry-Smithand Blum, 2000: 1108). To conceptualize this,we separate FFWP and a set of ‘good’ manage-ment practices shown to improve firm productivity.Consider a simple approach of characterizing the

Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj

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N. Bloom, T. Kretschmer, and J. Van Reenen

Table 1a. Variable definitions

FFWP variablesFFWP score Composite z-score of hours worked, holidays taken, childcare flexibility,

working from home, job switching, job sharing, and childcare subsidy.Total hrs/week Total hours worked per week, averaged and weighted over managerial and

non-managerial staff.Mgmt hrs/week Total hours worked per week, managerial staff only.Non-mgmt hrs/week Total hours worked per week, non-managerial staff only.Holidays/year Days of holidays taken per year, averaged and weighted over managerial and

non-managerial staff.Childcare flexibility Degree of flexibility in case of unexpected childcare emergency.Childcare subsidy Presence of subsidy to help pay for childcare.Working from home Entitlement to working from home during normal working hours.Job switching Entitlement to switch from full-time to part-time work.Job sharing Entitlement to job sharing schemes.Output/performance variablesROCE Return on capital employed.Ln(S) (Natural) log of sales.Ln(L) (Natural) log of employees.Ln(K) (Natural) log of capital.Ln(M) (Natural) log of material costs.Ln(S/L) (Natural) log of sales per employee.Ln(K/L) (Natural) log of capital per employee.Ln(M/L) (Natural) log of material costs per employee.Firm characteristicsSkills (Natural) log of percent of employees with university degree.Female total Percentage of female employees as part of total workforce.Female mngrs Percentage of female managers as part of management layer.Mgmt Composite z-score of management questions.Industry characteristicsImPen (Natural) log of average imports/production by country/SIC pair for

1995–1999 (= import penetration).Lerner index 1 − (average rents of all other firms in the industry, 1995–1999).Competitors = 0 if none, = 1 if less than five, = 2 if five or more.

effects of good management and FFWP:

w = f (X, M, D) (1)

y = g(X, M, D) (2)

where w = work-life balance outcomes and y =performance outcomes (such as productivity orprofitability). X is an index of FFWP (such aschild/family care flexibility and subsidy—a com-plete list is given in Table 1a), and M is anindex of good management practices (such as bet-ter shop floor operations like lean manufacturing,sensible targets, and merit-based promotion pro-cedures—see the section on scoring FFWP andmanagement practices below). We model theseas being composite measures of several underly-ing practices, so that X = x(X1 , X2 , X3 , . . .) andM = m(M1 , M2 , M3 , . . .), where X1 , X2 , X3 . . .

are FFWP and M1 , M2 , M3 . . . are differentmanagement ‘best practices.’ The x(.) and m(.)

are non-decreasing functions of the arguments.Finally, D is a vector of control variables. Notethat we consider work-life balance an ‘outcome’and FFWP an ‘input.’

We expect better management practices to beassociated with better performance: ∂y/∂M ≥ 0 .We also expect more available family-friendlypolicies to be associated with improved work-lifebalance outcomes, that is, ∂w/∂X ≥ 0 (Kossekand Ozeki, 1998; Lobel, 1999; Van Yperen andHagedoorn, 2003; Organ and Konovsky, 1989;Schnake, 1991; Smith et al., 1983). In AppendixA1, we confirm this using a measure of self-reported work-life balance. The focus of thisstudy, however, is on the role of FFWP (‘X’)in Equation (2), especially ∂y/∂X, the conditionalassociation of FFWP with performance. If FFWPare implemented predominantly to improve work-ers’ well-being rather than to improve firm perfor-mance, we expect ∂y/∂X ≤ 0 , so that there is no

Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

Tabl

e1b

.D

escr

iptiv

est

atis

tics

over

all

and

byco

untr

y(s

tand

ard

devi

atio

nsin

brac

kets

)

All

(483

obse

rvat

ions

)G

erm

any

(112

obs.

)Fr

ance

(92

obs.

)U

nite

dK

ingd

om(8

3ob

s.)

Uni

ted

Stat

es(1

96ob

s.)

FF

WP

vari

able

sF

FW

PSc

ore

−0.0

21(1

.000

)0.

258

(0.6

55)

1.11

4(0

.859

)0.

114

(0.7

53)

−0.7

69(0

.650

)To

tal

hrs/

wee

k40

.677

(4.5

38)

38.7

51(2

.457

)35

.680

(1.4

17)

40.7

64(3

.423

)44

.087

(4.0

00)

Mgm

thr

s/w

eek

45.0

90(6

.838

)46

.852

(6.2

93)

37.5

68(3

.974

)43

.904

(6.0

94)

48.1

17(5

.637

)N

on-m

gmt

hrs/

wee

k39

.725

(4.3

10)

37.8

79(2

.397

)35

.385

(1.2

35)

40.2

05(3

.797

)42

.615

(4.0

66)

Hol

iday

s/ye

ar22

.596

(10.

043)

29.2

23(2

.409

)32

.408

(7.9

71)

27.2

71(4

.608

)12

.224

(4.4

01)

Chi

ldca

refle

xibi

lity

2.82

5(0

.389

)2.

838

(0.4

01)

2.76

4(0

.428

)2.

830

(0.4

01)

2.84

3(0

.357

)C

hild

care

subs

idy

0.16

4(0

.387

)0.

053

(0.2

20)

0.60

0(0

.491

)0.

036

(0.1

88)

0.07

6(0

.263

)W

orki

ngfr

omho

me

0.31

0(0

.413

)0.

294

(0.4

23)

0.24

2(0

.396

)0.

437

(0.4

52)

0.29

8(0

.388

)Jo

bsw

itch

ing

0.47

1(0

.471

)0.

595

(0.4

72)

0.77

4(0

.406

)0.

425

(0.4

70)

0.27

7(0

.400

)Jo

bsh

arin

g0.

097

(0.2

76)

0.07

7(0

.244

)0.

212

(0.4

01)

0.13

8(0

.314

)0.

037

(0.1

67)

Out

put/

perf

orm

ance

vari

able

sR

OC

E18

.442

(12.

609)

13.7

76(1

3.28

4)14

.896

(12.

058)

16.8

24(1

2.14

1)23

.467

(10.

388)

Ln(

S)11

.954

(1.3

26)

12.3

06(1

.186

)11

.228

(0.9

77)

11.3

63(1

.170

)12

.344

(1.3

80)

Ln(

L)

6.63

2(1

.241

)6.

939

(1.1

24)

5.86

9(0

.855

)6.

227

(1.0

29)

6.98

6(1

.333

)L

n(K

)10

.115

(1.6

11)

10.6

53(1

.309

)9.

051

(1.3

66)

9.70

4(1

.393

)10

.471

(1.6

86)

Ln(

M)

11.1

12(1

.491

)11

.285

(1.2

80)

10.1

98(1

.255

)10

.421

(1.3

43)

11.7

67(1

.404

)L

n(S/

L)

5.32

2(0

.476

)5.

367

(0.4

50)

5.36

0(0

.587

)5.

136

(0.4

41)

5.35

8(0

.430

)L

n(K

/L)

3.45

7(0

.804

)3.

678

(0.6

85)

3.14

8(0

.975

)3.

468

(0.7

87)

3.46

9(0

.749

)L

n(M

/L)

4.49

3(0

.827

)4.

341

(0.6

39)

4.32

9(1

.021

)4.

235

(0.8

73)

4.75

5(0

.707

)F

irm

char

acte

rist

ics

Skil

ls2.

710

(0.8

42)

2.36

8(0

.716

)2.

551

(0.6

67)

2.34

5(0

.828

)3.

134

(0.8

05)

Fem

ale

tota

l27

.957

(19.

770)

20.8

72(1

7.54

2)23

.888

(21.

895)

26.6

40(1

9.77

8)34

.564

(17.

901)

Fem

ale

mng

rs21

.667

(17.

909)

15.0

62(1

6.51

4)12

.147

(12.

241)

19.3

33(1

7.71

1)31

.010

(16.

695)

Mgm

t0.

059

(0.9

82)

0.11

2(0

.782

)−0

.113

(1.2

08)

−0.5

7(0

.967

)0.

160

(0.9

63)

Indu

stry

char

acte

rist

ics

ImP

en−1

.408

(0.6

76)

−1.3

37(0

.540

)−1

.237

(0.5

23)

−1.0

24(0

.582

)−1

.691

(0.7

30)

Ler

ner

inde

x0.

944

(0.0

51)

0.93

1(0

.042

)0.

959

(0.0

13)

0.95

9(0

.016

)0.

938

(0.0

70)

Com

peti

tors

2.46

2(0

.535

)2.

366

(0.5

02)

2.29

3(0

.481

)2.

530

(0.5

89)

2.56

6(0

.546

)

Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj

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N. Bloom, T. Kretschmer, and J. Van Reenen

Tabl

e1c

.C

orre

latio

nm

atri

x

Skill

sFe

mal

eto

tal

Fem

ale

mng

rsM

gmt

ImPe

nL

erne

rin

dex

Com

pe-t

itors

RO

CE

Ln(

L)

Ln(

K)

Ln

(S/L

)L

n(K

/L)

Ln

(M/L

)

Skill

s1

Fem

ale

tota

l0.

060

1F

emal

em

ngrs

0.17

4∗0.

570∗

1M

gmt

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

positive association between more FFWP providedby the firm and superior performance. Firms maythen still implement FFWP because ∂w/∂X ≥ 0(i.e., more FFWP imply better work-life balance)and they care about workers’ well-being as wellas financial performance. This could be due to thefirm owners’ preferences, labor unions, or becauseof regulatory pressures. If FFWP help make humancapital a more valuable or more inimitable firmresource by helping employees work more pro-ductively or help the firm retain talented staff, weexpect ∂y/∂X ≥ 0 , that is, better FFWP are posi-tively correlated with performance.4

We also consider the drivers of FFWP provision.Consider a set of factors Z = (Z1 , Z2 , Z3 , . . .) thatmay affect these practices. These factors can beinternal or external to the firm and may proxy forpressure by nonfinancial stakeholders to implementcertain organizational strategies such as FFWP.We therefore model FFWP as a function of thesefactors:

X = h(Z, D) (3)

Especially in the context of internal factors andcharacteristics, this allows for a simple test ifFFWP provision is used to increase the value of aresource: if an interaction term between X (FFWP)and a factor Zi (say, the proportion of skilledemployees) is positive in Equation (2), this wouldindicate that Zi is a valuable resource that is mademore effective by providing favorable FFWP. Weinvestigate this in more detail when we discuss ourregression results.

This framework is useful for a number of rea-sons. First, we can separate the effects of firm andenvironmental characteristics on FFWP and per-formance. Second, we can draw some conclusionsabout why firms provide FFWP. If there is a nega-tive, or zero, correlation between FFWP provisionand firm performance, FFWP may be providedbecause firms take other factors (like employeewell-being or corporate social responsibility) intoaccount or because firm characteristics or circum-stances dictate the implementation of FFWP.

In the following section, we derive hypotheseson the correlation between FFWP and performance

4 Note, however, that a simple positive relationship does notimply that FFWP are a valuable, rare, and inimitable firmresource. To confirm this, a more stringent test would be required(Arend, 2006; Newbert, 2007).

(Hypothesis 1) and on the determinants of FFWP(Hypotheses 2–5).

HYPOTHESES

Uncovering the FFWP-performance link

We first derive our hypothesis on the link betweenFFWP and firm performance. The management ofhuman capital and its link to firm performancehas generated significant academic interest (Con-ner and Prahalad, 1996). SHRM more generally(Cappelli and Singh, 1992; Pfeffer, 1994; Ulrich,1991; Wright and McMahan, 1992; Huselid, 1995)and high-commitment workplace practices specif-ically have been studied in much detail (Perry-Smith and Blum, 2000; Arthur, 2003; Delaneyand Huselid, 1996; Huselid, 1995; Huselid et al.,1997; Lee and Miller, 1999; Eaton, 2003; Guthrie,2001), and a subset of these looks at the impactof family-friendly policies on firm performance(Perry-Smith and Blum, 2000; Gray and Tudball,2003; Milliken et al., 1998). Using a number ofdifferent performance measures such as work atti-tudes (Kossek and Ozeki, 1998; Lobel, 1999; VanYperen and Hagedoorn, 2003), organizational cit-izenship (Organ and Konovsky, 1989; Schnake,1991; Smith et al., 1983), and firm productivity(George, 2005; Collins and Clark, 2003), the liter-ature is united in their view that FFWP positivelyaffect firm performance, which is summarized inour first hypothesis:

Hypothesis 1: There is a positive associationbetween more FFWP and firm performance.

To accurately capture the performance effectsof FFWP, however, we have to control for fac-tors that may be correlated both with FFWP andperformance and may therefore generate spuriouscorrelation if omitted. To avoid this problem andfollowing Equation (2), we include a set of man-agement practices that have previously been shownto be positively correlated with firm performance.We outline this approach in more detail when wediscuss our results.

Determinants of FFWP provision

In the following four hypotheses, we identify anumber of covariates Z1 , Z2 , Z3 . . . inEquation (3).

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N. Bloom, T. Kretschmer, and J. Van Reenen

Workers’ skill levels

The literature on SHRM emphasizes the impor-tance of a highly qualified workforce as a factorfor competitive advantage (Pfeffer, 1994; Wright,McMahan, and McWilliams, 1994; Greenhaus andParasuraman, 1999; Lobel, 1999). Training anddevelopment of firm-specific knowledge makeskilled workers a scarce resource for the firm(Legge, 1998; Snell and Dean, 1992; Kleiner et al.,1987; Terpstra and Rozell, 1993) as their knowl-edge would not be easily replaceable (Barney,1991; Wright and McMahan, 1992; Wright et al.,1994; Conner and Prahalad, 1996). Since college-educated workers are more likely to receive suchtraining, they may be able to extract a larger partof the firm’s quasi-rents (Freidson, 1970; Raelin,1986). While part of these rents will be distributedby way of higher salaries, highly skilled workersmay also demand more FFWP as a result of theirbargaining position (Osterman, 1995). We there-fore hypothesize the following:

Hypothesis 2: Firms with a higher proportion ofskilled employees offer more FFWP.

Female participation

The majority of family and caring duties are ful-filled by women (Shelton and John, 1996; Green-haus and Parasuraman, 1999; Abbott, De Cieri,and Iverson, 1998; Borrill and Kidd, 1994; Judge,Boudreau, and Bretz, 1994; Konrad and Mangel,2000), and FFWP are affected by the proportionof employees likely to take them up when offered.We expect the proportion of female employees toaffect the provision of FFWP for two related rea-sons: First, female employees may demand morefavorable FFWP at their workplace (Konrad andMangel, 2000; De Cieri et al., 2005), which makesit advantageous and/or necessary for a firm to pro-vide them. Note that this is irrespective of whetherFFWP affect performance or not. Following ourbasic model introduced in our general framework,Equation (2) allows for other motivations such asemployee work-life balance to guide FFWP pro-vision. Assuming that women demand and benefitrelatively more from FFWP than men, it wouldsimply be a case of enhancing work-life balancefor a large proportion of a firm’s employees. Sec-ond, the female employees best placed to imple-ment improvements in FFWP are managers (Harel,

Tzafrir, and Baruch, 2003; Harrigan, 1981; Daily,Certo, and Dalton, 1999). Managers are also likelyto be in a better bargaining position to negotiatepractices beneficial to their own well-being. Boththese factors imply that, irrespective of the overallproportion of female employees, a higher propor-tion of female managers will be associated withmore favorable FFWP (Goodstein, 1994, 1995;Ingram and Simons, 1995). In other words, weexpect female managers to be associated with moreFFWP, not only because they are likely to be con-sidered ‘important’ employees by top managementbut also because they are more likely to overcomeresistance by top management to implement thesepractices. We summarize our hypotheses on therole of female employees, particularly managers,on FFWP as follows:

Hypothesis 3a: Firms with a higher proportionof female employees offer more FFWP.

Hypothesis 3b: Firms with a higher proportionof female managers offer more FFWP.

Management practices

We argued that good management and a multi-tude of FFWP offered fulfill different roles for thefirm. For example, use of ‘total quality manage-ment’ (Young et al., 2001), bundles of HR prac-tices (Huselid, 1995), and specific practices likementoring (Ragins, Cotton, and Miller, 2000), aswell as use of FFWP may simply be signs thatan organization can effectively meet the needs ofdifferent stakeholders—investors, employees, oreven society as a whole (Brammer and Milling-ton, 2008; Murillo-Luna et al., 2008; David et al.,2007). This may be either because the decisionmakers within an organization have the skills andabilities to successfully implement firm practicesbenefiting any group of stakeholders, or becausethere is a financial incentive for management toimplement them (Coombs and Gilley, 2005). Fur-ther, if both good management in general andFFWP specifically contribute to resource buildingas argued above (Barney, 1991), we would expectboth to occur jointly. We therefore hypothesize thefollowing:

Hypothesis 4: Firms with good managementpractices offer more FFWP.

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Competitive pressure

In addition to internal characteristics of the firmassociated with the provision of more FFWP, theremay also be external pressure to provide more(or less) of these practices. The firm’s environ-ment and pressure to focus on financial results isexpected to play a particularly important role. Suchpressures are likely to originate either from a firm’sexposure to foreign competition or from deregu-lation or other structural features of its primarymarket. Previous work shows that the degree ofcompetition and other structural features of a firm’sproduct market may affect the provision of HRpractices in general (Youndt et al., 1996; Koch andMcGrath, 1996; Datta, Guthrie, and Wright, 2005)and FFWP in particular (Perry-Smith and Blum,2000; Milliken et al., 1998), not least because pres-sure on financial results demands practices likelong hours (De Cieri et al., 2005; Kirby and Krone,2002; Nord et al., 2002; Smith, 1994; Wolcottand Glezer, 1995), which are incompatible with awide range of FFWP in a firm (Ouchi, 1980; Tsuiet al., 1997; Ehrenberg and Smith, 1997; Gerhartand Milkovich, 1992; Coff, 1997). Further, pre-vious research has found that competitive pressureforces firms to improve their management practices(Bloom and Van Reenen, 2007, 2010b), whichsuggests that underutilized resources or practicesdelivering modest (if any) financial benefits willbe avoided. We summarize these arguments in thefollowing hypothesis:

Hypothesis 5: Firms in more competitive prod-uct markets offer less FFWP.

DATA AND PROCEDURES

To investigate these issues, we construct robustmeasures of FFWP, work-life balance, manage-ment practices, and our independent and controlvariables across our four sampled countries (Ger-many, France, the United Kingdom, and the UnitedStates). We first discuss the collection of FFWP,work-life balance, and management data, whichwas undertaken using an innovative firm surveytool, and then the collection of performance dataand firm characteristics taken from more standardfirm and industry data sources. This data is also

freely available online to enable easy replicationof all results in the paper.5

Our variables are defined in Table 1a, anddescriptive statistics are in Table 1b. The samplingprocedure is detailed in Table A4 in the Appendix.The correlation matrix is given in Table 1c.

Scoring FFWP and management practices

Measuring FFWP and management practicesrequires codifying these concepts into somethingapplicable across different firms and countries.This is difficult, as FFWP and good managementare hard to define. To do this, we combine con-cepts that have been used previously, for examplein (i) the U.K. Workplace Employment RelationsSurvey (WERS), (ii) a management practice eval-uation tool developed by a leading internationalmanagement consultancy, and (iii) the prior man-agement and economics literature. While our focushere is on the determinants and consequences ofFFWP, we use good management practices as con-trol variables in our performance regressions.

FFWP and work-life balance perceptions

In Appendix A3, we detail the HR interview guidethat was used to collect a range of detailed FFWPand characteristics from firms. Focusing on the useof voluntary FFWP, we minimize the influence ofdifferent regulatory regimes on FFWP provision.We collected three types of data:

• The first was managers’ perceptions on theirown firm’s work-life balance versus that of otherfirms in the industry. This was used as our work-life balance outcome measure (WLB), defined asthe response to the question: ‘Relative to othercompanies in your industry, how much doesyour company emphasize work-life balance?’scored as: much less (1); slightly less (2); thesame (3); slightly more (4); much more (5).We use this variable to validate the claim that∂w/∂X ≥ 0 , that is, FFWP are effective interms of improving perceived employee work-life balance.

• The second was data on key FFWP variablesincluding childcare flexibility, home working

5 See http://www.stanford.edu/∼nbloom/SMJFiles.zip. Note thatanonymized data has been used to protect the identity of anyparticular firm or manager.

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N. Bloom, T. Kretschmer, and J. Van Reenen

Table 2. Correlations between FFWP scores

Baseline FFWPscore

Alternative 1 FFWPscore

Alternative 2 FFWPscore

FFWP factor

Baseline FFWP score 1Alternative 1 FFWP score 0.881∗ 1Alternative 2 FFWP score 0.764∗ 0.915∗ 1FFWP factor 0.909∗ 0.647∗ 0.482∗ 1

Notes:• Starred coefficients (∗ ) significant at the 5% level.• Baseline FFWP score is the double-z-score (see Equation (5)) of hours worked, holidays taken, childcare flexibility, working from

home, job switching, job sharing, and childcare subsidy.• Alternative 1 FFWP score is the double-z-score of childcare flexibility, working from home, job switching, job sharing, and

childcare subsidy, that is, the baseline FFWP score without hours worked and holidays taken.• Alternative 2 FFWP score is the double-z-score of childcare flexibility, working from home, job switching, and job sharing, i.e.

the baseline FFWP without hours worked, holidays taken, and childcare subsidy (childcare subsidy is mandatory for some firmsin our sample).

• FFWP factor is the highest-loading factor in a factor analysis of individual z-scores (see Equation (4)) of average hours worked,average holidays taken, childcare flexibility, working from home, job switching, job sharing, and childcare subsidy.

entitlements, part-time to full-time job flexibil-ity, job sharing schemes, and childcare subsidyschemes. This was gathered by asking the fol-lowing question on childcare flexibility: ‘Howmuch flexibility is there if an employee neededto take a day off at short notice due to childcareproblems or their child was sick?’ and entitle-ments to ‘working at home in normal workinghours,’ ‘switching from full-time to part-timework,’ ‘job sharing schemes,’ and ‘financial sub-sidy to help pay for childcare.’6

• The third was workforce characteristics dataon variables including average employee age,hours, holidays, and the proportion of femaleemployees, plus information on skills (the pro-portion of college-educated), trainings, andunionization. This data was used to test ourhypotheses on the internal determinants ofFFWP.

We subsequently constructed our FFWP mea-sure as the composite z-score (see below) of all fivedimensions on FFWP as well as the hours worked

6 Note that our measure of FFWP provision does not measurethe actual take-up of these practices within the firm, whichdepends on social and firm-wide norms (Drago and Wooden,1992; Thompson, Beauvais, and Lyness, 1999) and personal andfamily characteristics (Gray, 1989; Grover and Crooker, 1995;Lobel, 1991). This is because we focus on the supply of FFWPas a decision variable by firms. However, our FFWP score issignificantly positively correlated with self-reported work-lifebalance in the firm, suggesting that FFWP are taken up toimprove firm work-life balance.

and holidays taken. Using alternative measures ofFFWP (see Table 2) gives similar results.

Management practices

We follow Bloom and Van Reenen (2007, 2010b)in our definition of good management practices.They find that the external validity of their man-agement score is high given its strong and posi-tive correlation with firm performance.7 We groupmanagement practices into four areas: ‘operations’(three practices), ‘monitoring’ (five practices), ‘tar-gets’ (five practices), and ‘incentives’ (five prac-tices). The operations management section focuseson the introduction of lean manufacturing tech-niques, the documentation of process improve-ments, and the rationale behind introductions ofimprovements. The monitoring section focuseson the tracking of the performance of individu-als, reviewing performance (e.g., through regularappraisals and job plans), and consequence man-agement (e.g., making sure that plans are kept andappropriate sanctions and rewards are in place).The targets section examines the type of targets(whether goals are simply financial, or operational,

7 They also do survey re-rater tests by reinterviewing 10 percentof the sample using different interviewers and interviewees(different plant managers) in the same firm. They find theseindependent surveys to be highly significantly correlated. Forexample, the intrafirm correlation of the management scores forthe 64 firms interviewed repeatedly were correlated at 0.734 (p-value of 0.001), suggesting the two different interviews wereproviding broadly consistent information about firm practices.See Bloom and Van Reenen (2010a) for details.

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or more holistic), the realism of targets (stretching,unrealistic, or nonbinding), the transparency of tar-gets (simple or complex), and the range and inter-connection of targets (e.g., whether they are givenconsistently throughout the organization). Finally,incentives (or people management) include pro-motion criteria, pay and bonuses, and the fixingor firing of bad performers, where best practiceis deemed to be an approach that gives strongrewards for those with both ability and effort.These practices are all ranked on a scale of 1–5.

The key step to scoring management practicesis the use of ‘double-blind’ surveys. The firstpart of double-blind is that the survey was con-ducted by telephone without telling managers theywere being scored. This enabled scoring to bebased on the interviewers’ evaluation of actual firmpractices, rather than the firms’ aspirations, man-agers’ perceptions, or the interviewers’ impres-sions. To run this blind scoring, we used openquestions (e.g., ‘Can you tell me how you pro-mote your employees?’) rather than closed ones(e.g., ‘Do you promote your employees on tenure[yes/no]?’). These questions target actual prac-tices and examples, with the discussion continu-ing until the interviewer can accurately assess thefirm’s typical practices. In most cases, three orfour questions were needed to score each practice.The survey was targeted at plant managers, whoare typically senior enough to have an overviewof management practices, but not so senior asto be detached from day-to-day operations of theenterprise.

The second part of double-blind is that the inter-viewers did not know anything about the firms’financial information or performance prior to theinterview. This was achieved by selecting medium-sized manufacturing firms (who interviewers havetypically not heard of before) and by providingonly firm names and contact details (but no finan-cial details) to the interviewers. The interviewerswere specially trained graduate students from topEuropean and U.S. business schools. All inter-views were conducted in the respective manager’snative language. Since each interviewer ran over50 interviews on average, we could include inter-viewer fixed effects in all specifications to addresspotential concerns over inconsistent interpretationof categorical responses.

Finally, detailed information was collected onthe interview process itself (number and type of

prior contacts before obtaining the interview, dura-tion, local time of day, date, and day of theweek), the manager (gender, seniority, national-ity, company and job tenure, internal and exter-nal employment experience, and location), and theinterviewer (we include interviewer fixed effects,time of day, and a subjective reliability scoreassigned by the interviewer). Some of these sur-vey controls are significantly informative about themanagement score, and when we use these as con-trols for interview noise in our estimations, thecoefficients on the management score and FFWPtypically increase, suggesting we are removing sur-vey noise.

Obtaining interviews with managers

Interviews took about 50 minutes on average andwere run from a single U.K. site. Overall, weobtained a high response rate of 54 percent, whichwas achieved through four steps:

• First, the interview was introduced as ‘a pieceof work’8 without discussion of the firm’s finan-cial position or company accounts, making itrelatively uncontroversial for managers to par-ticipate. Interviewers did not discuss financialsin the interviews, both to maximize managers’participation and to ensure our interviewers weretruly blind on the firm’s financial position.

• Second, questions were ordered to begin withthe least controversial (shop floor management)and finish with the most controversial (pay,promotions, and firings). The FFWP questionswere placed at the end of the interview toensure as much candor as possible in managers’responses.

• Third, the performance of the interviewers wasmonitored as was the proportion of interviewsachieved, so interviewers were persistent inchasing firms (the median number of contactseach interviewer had per interview was 6.4). Thequestions are also about practices within the firmthat any plant manager can respond to, so therewere potentially several managers per firm whocould be contacted.9

8 Words like ‘survey’ or ‘research’ were avoided, as these areused by switchboards to block market research calls.9 We found no significant correlation between the number, type,and time span of contacts before an interview is conducted andthe FFWP and management scores. This suggests that whiledifferent managers may respond differently to the interview

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N. Bloom, T. Kretschmer, and J. Van Reenen

• Fourth, written endorsements of the ‘Bundes-bank’ (in Germany), the ‘Banque de France,’and the ‘Treasury’ (in the United Kingdom)helped demonstrate to managers that this wasan important exercise with official support.

Sampling frame and additional data

We focus on the manufacturing sector, where mosteconomists regard productivity as easier to mea-sure than in the nonmanufacturing sector (seeGriliches [1994] for a discussion). Moreover, wefocused on medium-sized firms, selecting a sam-ple where employment ranged between 50 and10,000 workers (with a median of 700). Very smallfirms have little publicly available data, so mea-suring performance from public sources would bedifficult. On the other hand, very large firms arelikely to be more heterogeneous across plants, andit would be difficult to get a representative pic-ture of FFWP in the firm as a whole from justone or two plant interviews. We drew a samplingframe from each country to be representative ofmedium-sized manufacturing firms, and then ran-domly chose the order in which firms were con-tacted (see Appendix A4 for details). We excludedany clients of our partnering consultancy firm fromour sampling frame.

Comparing the responding firms with those inthe sampling frame, we found no evidence thatresponders were systematically different from non-responders on any of the performance measures.They were also statistically similar on all otherobservables in our dataset, except on size whereour firms were on average slightly larger than thosein the sampling frame.

Productivity and competition data

Quantitative information on firm sales, employ-ment, capital, materials, and so forth came fromcompany accounts and proxy statements, and wasused to calculate firm-level labor and total factorproductivity and profitability. The details are pro-vided in Appendix A4. To measure competition,we follow Nickell (1996) and Aghion et al. (2005)in using two broad measures. The first measureis obtained by calculating the three-digit indus-try Lerner index of competition by country, which

proposition, this does not appear to be directly correlated withtheir responses or firm management.

is (1 − prof its/sales), calculated as the aver-age across the entire firm-level database (exclud-ing each firm itself).10 This is constructed for theperiod 1995–1999 to remove any potential con-temporaneous feedback. The second measure ofcompetition is the survey question on the numberof competitors a firm faces (see Appendix A3),valued 0 for ‘no competitors,’ 1 for ‘less than fivecompetitors,’ and 2 for ‘five or more competitors.’We also use three-digit import penetration of salesto measure exposure to international competition.

RESULTS

Validation issues and descriptive statistics

Using FFWP z-scores

As mentioned above, we convert our surveyresponses on FFWP into z-scores. That is, wetransform each firm’s response on a FFWP, Xi ,as follows:

zi = Xi − Xi

σXi

(4)

By subtracting the sample mean of practice Xi

and dividing by the standard deviation, we elim-inate problems of consistently different levels ofprovision of specific practices. For example, if achildcare subsidy is provided much less frequentlythan childcare flexibility, a simple sum of the rawFFWP scores would imply that an above averagescore in a childcare subsidy may have the samecontribution to the composite score as a belowaverage score in childcare flexibility. Constructinga z-score avoids these problems. From our indi-vidual scores, we then construct a ‘double-z-score’by summing all individual z-scores and performingthe same procedure on the sum, that is:

zzi =∑

zi −∑

zi

σ∑zi

(5)

This lets us interpret the regression coefficientsintuitively—for example, a one unit change in anindependent variable will lead to a change of zzi

standard deviations in the FFWP score.

10 Note that in constructing this measure we draw on all firms inthe population database, not just those in the survey.

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Robustness of our FFWP score

Our measure of FFWP implies that there is a bun-dle of FFWP that is comparable across our foursampled countries that is affected in the sameway by our independent variables. However, dif-ferent regulatory environments may imply thatsome practices are more common in some coun-tries than others. For example, hours worked areaffected in Germany and France by the EU Work-ing Time Directive, limiting employees to a max-imum of 48 hours per working week. To accountfor this, we constructed a number of differentmeasures of FFWP, omitting and including prac-tices that may differ systematically across coun-tries. We also performed a factor analysis on ourindividual practices’ z-scores and used the high-est loading factor as an alternative FFWP score.Table 2 gives the correlations between the respec-tive FFWP scores.11

Descriptive statistics

The first issue we address is the associationbetween FFWP and perceived work-life balance.In Appendix A1, we show that many individualFFWP are significantly associated with the work-life balance score reported by plant managers, andthat all signs go in the expected direction (i.e.,negative for hours worked, positive for all others).Most importantly, our aggregate z-score of FFWPhas a coefficient of 0.259 and is highly significant,so that a one standard deviation improvement inthe FFWP score will be associated with a 0.259improvement in self-reported work-life balance.

The second issue we examine in more detail isthe connection between our two composite vari-ables, FFWP and management practices. As FFWPare often regarded as part of strategic humanresource management, one might expect a posi-tive correlation between FFWP and good manage-ment practices. The regression results for individ-ual management practices on our FFWP score arereported in Appendix A2. We find that a numberof individual management practices are positivelyand significantly associated with the provision ofFFWP. Most notably, when running our preferredregression with all individual dimensions of man-agement practices, we find that the incentives cate-gory is significant and positive in our basic FFWP

11 We ran all regressions with our alternative FFWP scores withno qualitative differences. Results are available on request.

regression. Thus, firms offering more FFWP alsohave better people management practices, suggest-ing that firms for which human capital is an impor-tant resource tend to both treat and manage theiremployees better.

Regression results—consequences of FFWP

In our first set of regressions, we focus on theperformance effects of FFWP. Our results on theassociation of firm performance with FFWP aregiven in Table 3.

Column (1) in Table 3 finds a positive associa-tion between our FFWP score and a firm’s laborproductivity (i.e., sales per employee).12 This isin line with a number of previous studies (Perry-Smith and Blum, 2000; Gray and Tudball, 2003;Milliken et al., 1998). However, in Column (2),we find that once we control for the managementpractices used in a firm, the coefficient’s magnitudedrops drastically and becomes completely insignif-icant. This is in line with our Hypothesis 4 thatbetter run firms offer more FFWP. It does, how-ever, suggest that omitting the set of managementpractices typically found jointly with FFWP willlead to spurious correlation between FFWP andfirm performance. Our remaining columns (3–8)confirm this result: there seems to be no posi-tive and significant correlation between FFWP andfirm performance when controlling for all inputs(3) and measuring performance as a return on cap-ital employed (5–8) once management practicesare controlled for. Allowing all production-relatedcoefficients to vary by country (Columns (4) and(8)) does not change results either. Hypothesis 1,therefore, finds no support in our regressions. Notethat an insignificant (or positive) result on ournarrow performance measure (sales per employee)and a negative one on our broader measure (returnon capital employed [ROCE]) would have impliedthat firms offering generous FFWP do not receivethe targeted benefits (through increased sales peremployee), but bear the cost of implementingthem (which would result in a negative correlationbetween FFWP and ROCE). Our results suggestthat although there is no positive effect on labor

12 The coefficient’s p-value is 1.50.

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N. Bloom, T. Kretschmer, and J. Van Reenen

Table 3. FFWP and firm performance

Dependent variable (1)Ln(S/L)

(2)Ln(S/L)13

(3)Ln(S/L)14

(4)Ln(S/L)

(5)Profits

(ROCE)

(6)Profits

(ROCE)

(7)Profits

(ROCE)

(8)Profits

(ROCE)

FFWP score 0.048 0.018 −0.010 −0.008 −0.886 −1.095 −1.490 −1.599Mgmt 0.093∗∗∗ 0.048∗∗∗ 0.043∗∗∗ 0.913 1.104 1.124Skills 0.019 0.022 1.156 1.194Female total −0.001 −0.000 0.025 0.027Ln(K/L) 0.118∗∗∗ 0.137∗∗∗

Ln(M/L) 0.401∗∗∗ 0.300∗∗∗

Ln(L) 0.023 2.286∗∗∗ 2.178∗∗∗ 3.576∗∗∗ 10.525Ln(K) −1.807 −2.468Ln(M) 0.631 −2.369Country dummies yes yes yes yes yes yes yes yes3-digit SIC dummies yes yes yes yes yes yes yes yesStandard controls yes yes yes yes yes yes no yesFull controls no no yes yes no no yes yesFirms 483 483 438 438 432 432 425 425Adjusted R2 0.226 0.257 0.737 0.765 0.169 0.170 0.165 0.216

Notes:• All regressions (OLS) allow for arbitrary heteroskedasticity.• In all columns, ∗∗∗ = significant at the 1% level, ∗∗ = significant at the 5% level, and ∗ = significant at the 10% level.• Variable definitions follow Table 1a.• ROCE is the average taken over accounting years 2002–2005 to smooth out yearly variations.• ‘Country dummies’ includes four country dummies.• ‘3-digit SIC dummies’ includes 98 industry dummies.• ‘Standard controls’ includes a dummy for public listings, the ln(age) of the firm, and a dummy for consolidated accounts.• ‘Full controls’ includes the standard controls and the share of workforce with degrees, the share of female managers and

non-managers, the share of workforce with MBAs, and a U.S. MNE as well as a non-U.S. MNE dummy.• Columns (4) and (8) include a set of country dummies interacted with ln(capital–labor ratio), ln(materials–labor ratio), and

ln(employment). The reported coefficients are the ones for the United Kingdom (the base country).

productivity, there is no negative one on profitseither, implying that FFWP pay for themselves.

This leaves the question of why firms imple-ment FFWP if they have no apparent effect onfirm performance. One reason would be that somekey employees can (or will) work more produc-tively if they are presented with a bundle ofFFWP. In other words, providing FFWP can helpturn certain groups of employees into a valuableresource by improving retention or making themwork more productively. In this case, firms withmany FFWP and a large number of employeeswho work more productively with more FFWP

13 Conditioning on the sample where total factor productivity(rather than just labor productivity) can be measured gives thesame qualitative results.14 Including Ln(L), that is, firm size in regressions (1)–(3) doesnot change our results qualitatively. Ln(K) is insignificant witha coefficient of 0.006 and a standard error of 0.653, suggest-ing constant returns to scale. The coefficients on FFWP andMgmt are −0.011 (0.624) and 0.047 (0.002) in specification(3) (standard errors in brackets).

should perform better. For example, an interactionterm between the percentage of female managersor skilled employees and FFWP should then carrya positive and significant sign in a performanceregression. We report our results with interactionterms in Table 4 and find that none of the interac-tion terms (with management, skills, or the propor-tion of female managers) are significant, suggest-ing that FFWP are not provided to keep valuablegroups of employees or motivate them to workmore productively.

A second possible explanation is that firms endup implementing FFWP because a number of keyemployees demand it and firms value the well-being, and specifically the work-life balance, oftheir employees as well as the financial perfor-mance of the firm. This is consistent with ourmodel presented in our general framework, wheretwo processes generate two outputs—work-lifebalance and financial performance. Note that in allour regressions, the use of performance enhanc-ing management practices is positively correlated

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

Tabl

e4.

FFW

Pan

dfir

mpe

rfor

man

cew

ithin

tera

ctio

nte

rms

Dep

ende

ntva

riab

le(1

)L

n(S/

L)

(2)

Ln(

S/L

)(3

)L

n(S/

L)

(4)

Ln(

S/L

)(5

)L

n(S/

L)

(6)

Ln(

S/L

)(7

)L

n(S/

L)

(8)

Ln(

S/L

)(9

)L

n(S/

L)

(10)

Ln(

S/L

)(1

1)L

n(S/

L)

(12)

Ln(

S/L

)

FF

WP

scor

e0.

007

0.01

50.

017

0.00

90.

027

0.02

5−0

.036

−0.0

22−0

.009

−0.0

20−0

.012

−0.0

11M

gmt

0.09

4∗∗∗

0.09

4∗∗∗

0.09

4∗∗∗

0.09

4∗∗∗

0.09

5∗∗∗

0.09

0∗∗∗

0.04

8∗∗∗

0.04

8∗∗∗

0.04

8∗∗∗

0.04

8∗∗∗

0.04

8∗∗∗

0.04

3∗∗∗

Fem

ale

mng

rs0.

002

0.00

10.

002∗∗

0.00

2∗∗

Skill

s0.

014

0.01

20.

019

0.01

7F

FW

fem

ale

0.00

10.

001

Hig

hF

FW

fem

ale

0.00

20.

002

FF

WP

×sk

ills

0.00

3−0

.000

Hig

hF

FW

skill

s0.

024

0.01

4F

FW

mgm

t−0

.007

0.01

3H

igh

FF

WP

×m

gmt

0.02

60.

030

Ln(

K/L

)0.

116∗∗

∗0.

114∗∗

∗0.

117∗∗

∗0.

115∗∗

∗0.

114∗∗

∗0.

116∗∗

Ln(

M/L

)0.

396∗∗

∗0.

396∗∗

∗0.

402∗∗

∗0.

402∗∗

∗0.

403∗∗

∗0.

402∗∗

Cou

nty

dum

mie

sye

sye

sye

sye

sye

sye

sye

sye

sye

sye

sye

sye

s3-

digi

tSI

Cdu

mm

ies

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

Stan

dard

cont

rols

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

yes

Ful

lco

ntro

lsno

nono

nono

noye

sye

sye

sye

sye

sye

sF

irm

s45

345

345

345

345

345

343

343

343

343

343

343

3A

djus

ted

R2

0.25

10.

251

0.24

90.

250

0.25

10.

251

0.74

00.

740

0.73

60.

737

0.73

70.

737

Not

es:

•A

llre

gres

sion

s(O

LS)

allo

wfo

rar

bitr

ary

hete

rosk

edas

ticity

.•

Inal

lco

lum

ns,

∗∗∗=

sign

ifica

ntat

the

1%le

vel,

∗∗=

sign

ifica

ntat

the

5%le

vel,

and

∗=

sign

ifica

ntat

the

10%

leve

l.•

Var

iabl

ede

finiti

ons

follo

wTa

ble

1a.

•‘H

igh

FF

WP

’is

adu

mm

yva

riab

le=

1if

the

doub

le-z

-sco

refo

rFF

WP

isgr

eate

rth

an1.

•‘C

ount

rydu

mm

ies’

incl

udes

four

coun

try

dum

mie

s.•

‘3-d

igit

SIC

dum

mie

s’in

clud

es98

indu

stry

dum

mie

s.•

‘Sta

ndar

dco

ntro

ls’

incl

udes

adu

mm

yfo

rpu

blic

listin

gs,

the

ln(a

ge)

ofth

efir

m,

and

adu

mm

yfo

rco

nsol

idat

edac

coun

ts.

•‘F

ull

cont

rols

’in

clud

esth

est

anda

rdco

ntro

lsan

dth

esh

are

ofw

orkf

orce

with

degr

ees,

the

shar

eof

fem

ale

man

ager

san

dno

n-m

anag

ers,

the

shar

eof

wor

kfor

cew

ithM

BA

s,an

da

U.S

.M

NE

asw

ell

asa

non-

U.S

.M

NE

dum

my.

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N. Bloom, T. Kretschmer, and J. Van Reenen

Table 5. Determinants of FFWP

Dependent variable (1)FFWPscore

(2)FFWPscore

(3)FFWPscore

(4)FFWPscore15

(5)FFWPscore

(6)FFWPscore

(7)FFWPScore

(8)FFWPscore16

Skills 0.117∗∗ 0.082Female total 0.003Female mngrs 0.005∗ 0.005∗

Mgmt 0.153∗∗∗ 0.145∗∗∗

ImPen −0.130 −0.125Lerner Index 0.811 0.282Competitors −0.017 −0.062Ln(L) 0.092 0.074 0.074 0.093 0.085 0.086 0.086 0.087Ln(K) 0.011 0.030 0.025 −0.013 0.019 0.020 0.018 −0.012Country

dummiesyes yes yes yes yes yes yes yes

3-digit SICdummies

yes yes yes yes yes yes yes yes

Standard controls yes yes yes yes yes yes yes yesFirms 453 453 453 453 453 453 453 453Adjusted R2 0.540 0.535 0.539 0.554 0.535 0.534 0.533 0.558

Notes:• All regressions (OLS) allow for arbitrary heteroskedasticity.• In all columns, ∗∗∗ = significant at the 1% level, ∗∗ = significant at the 5% level, and ∗ = significant at the 10% level.• Variable definitions follow Table 1a.• ‘Country dummies’ includes four country dummies.• ‘3-digit SIC dummies’ includes 98 industry dummies.• ‘Standard controls’ includes a dummy for public listings, the ln(age) of the firm, and a dummy for consolidated accounts.

to FFWP provision. That is, although FFWP alonedo not have a tangible effect on firm performance,it is still the well-managed firms that implementthem more readily.

Finally, it may be that firms are optimally choos-ing the correct degree of FFWP for their firms,so there is no systematic variation to identifythe performance equations. If there were no opti-mization errors, no exogenous shocks, and noadjustment costs, we could not identify the coef-ficient of FFWP on performance, even if oneexisted. Although this is possible theoretically, it isunlikely to be the whole story in empirical practice.

15 The positive and significant coefficient on management qualityis robust to including a number of noise controls pertainingto the interview process, including interviewer dummies, theseniority, gender, tenure, and number of countries worked in ofthe manager who responded, the day of the week the interviewwas conducted, the time of the day the interview was conducted,the duration of the interview, and an indicator of the reliabilityof the information as coded by the interviewer.16 The total percentage of female employees was omitted due tothe high degree of colinearity between the total percentage andthe percentage of female managers. Coefficients and significanceof the other variables remain virtually unaffected by the inclusionof the total percentage of female employees.

Regression results—determinants of FFWP

We now turn to our regressions on the determi-nants of FFWP provision. Our results are given inTable 5.

We can see from Table 5 that the proportion ofskilled employees has a robust positive associationwith the provision of FFWP. Column (1) usesbasic controls only, while Column (8) includes allvariables of interest. We find that although the levelof significance decreases once management and theproportion of female managers are included,17 thecoefficient is consistently positive. Hypothesis 2 is,therefore, broadly supported.

The percentage of female managers is also posi-tively and significantly correlated with FFWP pro-vision in Columns (3) and (8). The overall pro-portion of female employees is not significantas seen in Column (2), which suggests a com-plex relationship between female employees andFFWP provision. It is not simply the proportion

17 Omitting either the proportion of female managers or manage-ment results in a significant coefficient on skills, which is notsurprising as using all three internal variables simultaneouslymay cause colinearity problems.

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

of female employees that results in provision ofFFWP. Rather, it is the presence of a group ofkey employees—female managers—that places acomparably higher value on more FFWP in anorganization. There are at least two possible inter-pretations of this. Either, female managers nego-tiate a bundle of advantageous FFWP when inthe firm (bargaining effect), or they choose towork only for firms that provide sufficiently gener-ous FFWP (self-selection effect). As always withcross-sectional data, the direction of causality ishard to establish, but the positive coefficient of theproportion of female managers on FFWP is robustand significant, suggesting tangible differences inFFWP policies among firms with different genderworkforce composition. We therefore find supportfor Hypothesis 3b, but not Hypothesis 3a.

The final variable relating to the internal char-acteristics of the workplace are the managementpractices in a firm. In all our regressions, the coeffi-cient on good management practices is positive andhighly significant—see Columns (4) and (8). Thissuggests that well-run firms offer their employ-ees more FFWP. Therefore, Hypothesis 4 on theconcurrent use of good management practices andadvantageous FFWP is supported. However, asshown above, FFWP have no independent effecton financial performance.

Our hypotheses on external determinants ofFFWP are tested in Columns (5)–(8) of Table 5.We find that import penetration (5) and the gen-eral degree of competition in an industry (Columns(6) and (7)) are not associated with more or lessFFWP. In our regression with all covariates (8),the external determinants remain insignificant. Therejection of Hypothesis 5 is in contrast to thestrong support of our earlier hypotheses on inter-nal determinants of FFWP. It suggests that externalpressure to provide or abandon FFWP is not assignificant as the influence of factors at the work-place itself—either through the composition of theworkforce (i.e., more skilled workers and morefemale managers) or the general use of good man-agement practices. Further, our results also suggestthat firms operating in tough product markets tryto cope with the situation by means other thanreducing the number of FFWP available to theiremployees. This is especially interesting as theseproduct market competition variables have beenfound to be strongly correlated with good man-agement practices.

CONCLUSIONS AND IMPLICATIONS

In this paper, we studied the impact of FFWP onfirm performance and found that increased provi-sion of FFWP is only positively correlated withbetter firm performance if we omit managementquality. Once we control for general manage-ment quality, there is no significant associationbetween FFWP and performance measured in dif-ferent ways. This raises the question of why firmswould want to implement them in the first place.To investigate this, we studied the firm and envi-ronmental characteristics that are correlated withincreased FFWP use, and find that firms with ahigher proportion of skilled workers and femalemanagers, as well as better management prac-tices offer more FFWP. One interpretation of thisis that firms must offer FFWP to avoid losingkey employees, which may constitute a valuableresource for the firm. In further analysis, however,we find that this is unlikely to be a driving factorfor FFWP provision, as firms with more femalemanagers or skilled workers do not benefit morefrom FFWP than others. Instead, our results areconsistent with firms valuing more than just finan-cial performance when choosing their strategies.This resonates with the recent work on corpo-rate social responsibility (Brammer and Milling-ton, 2008; David et al., 2007) and environmentalsustainability (Murillo-Luna et al., 2008).

Our ‘non-results’ on the performance impact ofFFWP combined with the results on the inter-nal determinants of FFWP use have implicationsfor resource-based view (RBV) scholars, espe-cially those interested in human capital as a firmresource. Our findings suggest that FFWP bun-dles are not a general ‘best practice’ that improvesfirm performance in the sense of a firm capabil-ity or resource. There is also no indication thatFFWP help firms create more value from specificemployee groups, specifically female managersand skilled workers. Rather, our results supportthe conclusion that FFWP are neither a value-creating bundle of activities nor a lever for existingresources—they do not affect firm performancedirectly or indirectly. While explicit tests of theRBV are difficult to execute (Arend, 2006; New-bert, 2007), our results do not suffer from con-firmatory bias arising from tautological resourcedefinitions and narrow performance measuresignoring costs, as we consider both productivity

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N. Bloom, T. Kretschmer, and J. Van Reenen

(that ignores implementation costs) and profit mea-sures (that includes them). A more rigorous testof FFWP as a firm resource would have to meetadditional criteria (Arend, 2006), but these criteriamainly rule out false positives, that is, activitiesthat are identified as resources but really are not.Indeed, earlier studies may have attributed FFWP afalse positive impact by failing to control for otherVRIO resources (Arend, 2006) and by consideringrestrictive performance measures, something ourcomparatively more stringent test does not do.

One possible implication from the discussionabove is that FFWP have no role to play in organi-zations that maximize financial performance. Note,however, that the provision of FFWP is also notnegatively correlated with firm financial perfor-mance. This rebuts the claim that providing FFWPdetracts from profits. Given the positive relation-ship between the provision of FFWP and actualwork-life balance, our results show that althoughproviding FFWP may not increase profits, they atleast pay for themselves. If employees’ well-beingis tied to work-life balance, they can be made bet-ter off with investors no worse off. The overallprovision of stakeholder desires is thus increasedwith the provision of FFWP.

Our results have implications for future researchin several fields. Specifically, studies on the perfor-mance effects of FFWP from a RBV perspectiveshould control for other dimensions of manage-ment practices to reliably isolate the performanceeffects of such practices, and thus identify theirvalue as a firm resource (Arend, 2006). ‘Intangi-bles’ like managerial capabilities that affect per-formance and are correlated with tangible firmcharacteristics have to be taken into account infuture studies (Carmeli and Tishler, 2004). Theproblem of unobservables is likely to resurfacein many studies trying to identify and evaluatefirm resources. Our results also matter for HRmanagers and academics who group FFWP understrategic human resource management alongsidea number of other, performance enhancing HRpractices. FFWP have implications different fromother strategic human resource management prac-tices, as they affect employee well-being ratherthan firm financial performance. FFWP shouldnot be criticized for their lack of positive finan-cial impact, as they do have a tangible effect onemployee well-being. Therefore, FFWP should betreated as policies that improve firm performance

in terms of the satisfaction of a particular stake-holder group—the firm’s employees—but thatfinancial performance should not be the primarygoal of implementing FFWP. Our work also feedsinto a wider, emerging research field of nonmarketstrategies affecting auxiliary performance dimen-sions. Researchers face a complex problem withfirms choosing strategies to serve multiple stake-holders. Firm characteristics affect these strategicactions in complex ways, and there may be inter-actions between the different performance dimen-sions that have to be identified empirically ratherthan assumed (or ignored) a priori.

Our results carry some limitations. First, wefocus on manufacturing firms. We do this mainlyto avoid problems in measuring firm performance,but it would be interesting to compare our resultswith data from the service sector. Second, we donot measure the degree to which FFWP are takenup by employees. While this has some disadvan-tages, it has the advantage of capturing the pro-vision of FFWP rather than their take-up in theworkforce, which may be conflated with questionsof corporate culture, peer pressure, and so forth. Inother words, while provision of FFWP is a deci-sion variable by the firm, take-up of FFWP willat the very least be the result of a combination ofFFWP supply (by the firm) and demand (by itsemployees). Third, we only sample firms with lessthan 10,000 employees, so we lose the very largestfirms (although since we use subsidiaries, some ofthe parents of our firms are very large). We do notthink this biases our results, but studying the verylargest firms would also be of interest.

Our work could be extended in several ways.We used country dummies in all our regressionsand found significant differences in FFWP provi-sion across our four sampled countries—Germany,France, the United Kingdom, and the UnitedStates.18 We do not discuss these results in detail,but it is a promising avenue of future research tostudy cross-country differences in FFWP scoresto find different international models of FFWP.Further, the role of female managers in FFWP pro-vision is interesting. Specifically, our result that it

18 The signs of our country dummies show that firms in Europeancountries offer significantly more FFWP than U.S.-based firmsafter controlling for observables, while labor productivity inContinental Europe tends to be higher after controlling for inputfactors. Further results on the country dummy coefficients areavailable on request.

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

is not the overall proportion of female employ-ees but rather the proportion of female managersthat matters warrants further study. Will femalemanagers not work for firms that do not providesufficient FFWP, or are they more successful in‘pushing through’ the provision of such practices?The well-known stylized fact that female man-agers are paid less than their male peers19 suggeststhat firms compensate their female workforce withmore FFWP. This is a highly relevant topic forfuture research.

ACKNOWLEDGEMENTS

We thank the Anglo-German Foundation and theESRC for financial support, Marlo Gotting andChristina Finsterwalder for excellent researchassistance, and Alex Bryson, Alex Edmans, Fer-dinand Mahr, Anja Tuschke, Ingo Weller, EditorWill Mitchell, two referees, and seminar partici-pants at the 2007 Academy of Management meet-ings, University of Toronto, INSEAD, Hong KongUniversity of Science and Technology, HEC Paris,Aston Business School, Kent Business School, TUDarmstadt, WZB Berlin, and DG EMP for com-ments. Data and estimation routines are availableon the authors’ Web sites.

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N. Bloom, T. Kretschmer, and J. Van Reenen

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Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

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Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj

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N. Bloom, T. Kretschmer, and J. Van Reenen

APPENDIX A3: HR INTERVIEW GUIDE

Run in parallel as the management survey, but targeted at the HR department.

Workforce characteristics —data field BreakdownTotal number of employees (cross-check

against accounts)(all employees)

Percentage with university degree (all employees)Percentage with MBA (all employees)Average age of employees (all employees)Percentage of employees (managerial/non-managerial)Average training days per year (managerial/non-managerial)Average hours worked per week (incl.

overtime, excl. breaks)(managerial/non-managerial)

Average holidays per year (all employees)Average days sick leave (all employees)Percentage part time (managerial/non-managerial)Percentage female (managerial/non-managerial)Percentage employees abroad (all employees)Percentage union membership (all employees)Are unions recognized for wages bargaining

[yes/no](all employees)

Work-life balance (WLB/outcome measure—question

Response choice (all employees)

Relative to other companies in your industry,how much does your company emphasizework-life balance?

[much less; slightly less; the same; slightly more; muchmore]

FFWP —question Response choice (managerial/non-managerial)If an employee needed to take a day off at

short notice due to childcare problems ortheir child was sick, how do they generallydo this?

[not allowed; never been asked; take as leave withoutpay; take time off but make it up later; take as annualleave; take as sick leave]

FFWP —what entitlements are there to thefollowing:

Breakdown

Working at home in normal working hours? (managerial/non-managerial)Switching from full-time to part-time work? (managerial/non-managerial)Job sharing schemes? (managerial/non-managerial)Financial subsidy to help pay for childcare? (managerial/non-managerial)Market and firm questions —question Response choiceNumber of competitors? [none; less than five; five or more]Number of hostile takeover bids in the last

three years?[none; one; more than one]

Interviewer’s assessment of the scoring reliability— 1–5 scoring system calibrated according to:1 = Interviewee did not have enough expertise for the interview to be valuable; I have significant doubts about

most of the management dimensions probed.3 = Interviewee had reasonable expertise; on some dimensions, I am unsure of scoring.5 = Interviewee had good expertise, I am confident that the score reflects management practices in this firm.

Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj

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Are Family-Friendly Workplace Practices a Valuable Firm Resource?

APPENDIX A4: DATA

Sampling frame construction

Our sampling frame was based on the Amadeusdataset for Europe (Germany, France, and theUnited Kingdom) and the Compustat dataset forthe United States. These all have information oncompany accounting data. We chose firms whoseprincipal industry was in manufacturing and whoemployed (on average between the years 2000 and2003) no less than 50 employees and no more than10,000 employees. We also removed any clientsof the consultancy firm we worked with from thesampling frame (33 out of 1,353 firms).

Our sampling frame is reasonably representa-tive of medium-sized manufacturing firms. TheEuropean firms in Amadeus include both privateand public firms, whereas Compustat only includespublicly listed firms. There is no U.S. databasewith privately listed firms with information onsales, labor, and capital. Fortunately, there is amuch larger proportion of firms listed on the stockexchange in the United States than in Europe, sowe were able to go substantially down the size dis-tribution using Compustat. Nevertheless, the U.S.firms in our sample are slightly larger than those ofthe other countries, so we were always careful tocontrol for size and public listing in the analyses.

Another concern is that we conditioned on firmswhere we have information on sales, employment,and capital. These items are not compulsory forfirms below certain size thresholds, so disclosureis voluntary to some extent for the smaller firms.Luckily, the firms in our sampling frame (over50 workers) are past the threshold for voluntarydisclosure (the only exception is for capital inGermany).

We achieved a response rate of 54 percent fromthe firms that we contacted: a very high successrate given the voluntary nature of participation.Respondents were not significantly more produc-tive than nonresponders. French firms were slightly

less likely to respond than firms in the other threecountries, and all respondents seemed randomlyspread around our sampling frame.

Firm-level data

Our firm accounting data on sales, employment,capital, profits, shareholder equity, long-term debt,market values (for quoted firms), and wages (whereavailable) came from Amadeus (Germany, France,and the United Kingdom) and Compustat (UnitedStates). For other data fields, we did the following:

Materials

In Germany and France, these are line items inthe accounts. In the United Kingdom, these wereconstructed by deducting the total wage bill fromthe cost of goods sold. In the United States, thesewere constructed following the method in Bresna-han, Brynjolfsson, and Hitt (2002). We start withcosts of goods sold (COGS) less depreciation (DP)less labor costs (XLR). For firms who do not reportlabor expenditures, we use average wages and ben-efits at the four-digit industry level (Bartelsman,Becker, and Gray, 2000) until 1996, and then Cen-sus Average Production Worker Annual Payroll byfour-digit NAICS code and multiply this by thefirm’s reported employment level. This constructedmeasure is highly correlated at the industry levelwith materials. Obviously, there may be problemswith this measure of materials (and therefore valueadded), which is why we check robustness to mea-sures without materials.

Industry-level data

This comes from the OECD STAN database ofindustrial production. This is provided at the coun-try ISIC Rev. 3 level and is mapped into U.S. SIC(1997) three-digits (which is our common industrydefinition in all four countries).

Copyright 2010 John Wiley & Sons, Ltd. Strat. Mgmt. J. (2010)DOI: 10.1002/smj