Management Practices, Working Conditions and …ed_emp/@emp_ent/@ifp_seed/...Management Practices,...

Management Practices, Working Conditions and

Productivity around the World

Renata Lemos

University of Cambridge

Centre for Economic Performance, LSE

http://www.lse.ac.uk/



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

over 5). Larger productivity variation

outside 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





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

of 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





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 0 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

To

tal fa

cto

r p

rod

uctivity

(no

rma

lize

d to

10

0 p

rio

r to

dia

gn

ostic)

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





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

old.

It employs around

330 workers,

operates 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 3.4Average management score by country

ChinaIndia

BrazilGreece

ArgentinaChile

Rep. of IrelandPortugalMexicoPoland

Northern IrelandNew Zealand

AustraliaFrance

Great BritainItaly

GermanyCanadaSweden

JapanUnited 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.


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

0.2

.4.6

.81

Kern

el D

en

sity E

stim

atio

n

1 2 3 4 5Firm 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

of 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





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


N=231

N=8121

2.8 2.9 3Average 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 0Difference 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

ownership 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 3.2Average 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

.

0 .2 .4 .6Percentage 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

of 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 3.8Average management score by country

United StatesSweden

JapanGermany

CanadaItaly

Great BritainAustralia

PolandFranceMexico

ChinaNew Zealand

PortugalIndiaChile

Northern IrelandBrazil

ArgentinaRep. 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

Avera

ge

ma

na

ge

ment sco

re

0 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 3.3Average management score

0%

1% to 10%

11% to 25%

26% to 50%

+50%

Percentage of managerswith a college degree

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

0%

1% to 10%

11% to 25%

26% to 50%

+50%

Percentage of non-managerswith a college degree


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.

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