improving firm productivity: policy and business factors jagadeesh sivadasan university of michigan...
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Improving firm productivity: Policy and business factors
Jagadeesh SivadasanUniversity of Michigan
BRAC-IGC-IIG Conference on Entrepreneurship and
Development: Policies, Practices and
ExperienceMarch 27-28, Dhaka
BRIC-IGC-IIG,March 27-28/11
Productivity and GDP Early work by Solow (1957) and Denison (1962, 1967)
found that per capita capital accumulation accounted for less than 25% of per capita GDP growth; productivity (TFP) growth accounted for more than 50%
Young (1995) argued that factor accumulation (capital + education) key to East Asian growth miracle; later work by Klenow and Rodriguez-Clare (1997) suggests a very strong role for TFP in most of these countries as well
Easterly and Levine (2001) review concluded that TFP plays a prominent role in explaining growth across the world
Understanding micro-economic underpinnings of country-level TFP important then for promoting growth
At the micro-level, incredible variation in TFP across firms– In the US 90th percentile plant produces 2 times as much output
as the 10th percentile plant (for same level of inputs) (Syverson 2004)
– In China and India, this ratio is 5:1 (Hseih and Klenow, 2009)
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BRIC-IGC-IIG,March 27-28/11
Outline of Presentation
1. My paper on 1991 Indian policy reforms and plant productivity– Background on reforms– Theoretical framework– Data– Empirical results
2. Summary of recent related work on economic policies/trade liberalization and productivity
3. Summary of recent work on business practices and productivity
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Background on 1991 reforms
Liberalization in 1991 on all three policy fronts1. Industrial policy
• License requirements almost completely abolished
2. Foreign investment (FDI) regulations• FDI upto 51% allowed in a number of targeted sectors
3. Trade policy (tariff/non-tariff barriers)• Tariff rates reduced, with larger cuts for some sectors\
All of these essentially reduced barriers to competition
My empirical paper focuses on 2 and 3– Because these were differentially targeted at
certain industries, easier to assess effects
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms 5
Competition & Productivity – Reasons for productivity improvements
More competitive markets leads to higher productivity:– More innovation [Arrow 1962 etc]– Less slack [Hicks 1935 etc]– Encouraging adoption of technology [Rodrik 1992
etc]– Less resources wasted on rent-seeking [Posner 1975
etc]– Barriers to entry also barriers to adoption of new
methods/technology -- allows insiders/incumbents to (e.g. Parente and Prescott 2002)
– Reallocation to more productive firms [Hopenhayn 1992, Melitz 2003 etc]
Trade specifically– Learning from foreign investors/competitors – Technology embodied in inputs
BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms 6
Arguments for protection
Protection was motivated by following arguments:– Better incentives for innovation
[Schumpeter 1942, etc]– Encouraging adoption of technology
[Aghion & Howitt 1992, etc] – Less slack [Horn, Lang, and Lundgren 1994,
etc]– External scale economies at national level
[Helpman & Krugman, 1985] – High learning rates and spillover
[Grossman & Helpman 1991, etc
BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Motivation for reforms
Reforms triggered by BOP crisis, in turn caused by– Collapse of Soviet Union (India’s key trade
partner)– First Gulf war (which impacted inward
remittances)But also motivated by realization by mid-
80s that new policies required:– Export-focused countries had grown
faster: e.g. Korea, Taiwan– Failure of Soviet model– Indian industry clearly uncompetitive:
e.g. Indian cars still mostly 1950s models
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Description of data
Dataset based on annual survey of plants – similar to the LRD in the US
Repeated cross-section of about 40,000 plants (see table 1), 1986-87 to 1994-95, covers entire manufacturing sector
A census sector of about 22,000 larger plants surveyed every year, all other firms randomly sampled at approximately 1/3rd every year
Some data issues (mitigated by diff-in-diff approach):– Possible under-reporting of value added (for tax
purposes) and workers (for labor law reasons)– Large informal sector not covered by the surveys
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Methodology
In first step estimate TFP– adopt a method that addressing some endogeneity concerns
typical in TFP measurement– check robustness to using a range of measures
Next, we regress estimated TFP on dummies for reforms Because reforms introduced in 1991 targeting specific
industries– use time and industry fixed effects, to estimate Difference-in-
differences effects on plant-level TFP– this controls for contemporaneous macro-shocks
We also do some further explorations of the results, looking at:– contributions of plant and reallocation terms to aggregate
productivity change– whether TFP changes linked to changes in measures of
competition– check for heterogeneous effects across industries/regions
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Summary graph: large relative improvements of productivity in
reformed sectors
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Effects of FDI and Tariff Reform on TFP
(1) (2) (3) (4)LP_TFP LP_TFP LP_TFP LP_TFP
FDI_LIB * I_(91-93) 0.087 -0.011 0.085[0.093] [0.085] [0.093]
FDI_LIB * I_(94-95) 0.376*** 0.186* 0.375***[0.095] [0.097] [0.095]
TAR_LIB * I_(91-93) 0.247** 0.163 0.247**[0.120] [0.101] [0.120]
TAR_LIB * I_(94-95) 0.577*** 0.419*** 0.578***[0.157] [0.132] [0.157]
FDI_LIB * TAR_LIB*I_(91-93) -0.334*[0.195]
FDI_LIB * TAR_LIB* I_(94-95) -0.626***[0.221]
Observations 225,662 240,275 337,104 337,104 Adj R-sq 0.443 0.448 0.412 0.414
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Robustness checks
Robust to using seven other productivity measuresRobust to using alternative measures of Tariff
liberalization (including continuous measure of tariff changes)
Robust to including a number of period-specific industry controls– Pre-91 productivity growth– Export intensity– Capital intensity– Distance to frontier
Robust to excluding new entrants – so improvements are to older/existing plants
Robust to controlling for de-licensing of some sectors
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Aggregate output growth decomposition (1) (2) (3) (4) (5) (6)
Output growth
(2)+(3)+(4)
Input growth
Inter-industry
reallocation
Aggregate productivity
growth (5)+(6)
Intra-plant productivity growth
Intra-industry
reallocation
FDI_LIB 0.325* 0.111 0.010 0.222** 0.252*** -0.029[0.191] [0.0794] [0.0649] [0.111] [0.0929] [0.0652]
TAR_LIB 1.613*** 0.520*** 0.547** 0.587*** 0.549*** 0.038[0.542] [0.127] [0.271] [0.194] [0.141] [0.137]
FDI_LIB * TAR_LIB -1.597** -0.470*** -0.406 -0.741*** -0.719*** -0.022
[0.636] [0.168] [0.299] [0.270] [0.198] [0.159]
Constant 0.366*** 0.0618 0.101*** 0.193*** 0.0601 0.133**[0.104] [0.0562] [0.0319] [0.0649] [0.0530] [0.0543]
Observations 464 464 464 464 464 464R-squared 0.14 0.15 0.05 0.04 0.04 0.00
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FDI reformed industries: most output growth from intra-plant TFP growth
Tariff reformed industries: equal share of input growth, inter-industry reallocation and intra-plant TFP growth
Not much role for intra-industry reallocation
BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
TFP growth across the distribution
(1) (2) (3) (4) (5) (6) (7) (8)Dependent variable Mean P5 P10 P25 P50 P75 P90 P95
FDI_LIB * I_(91-93) 0.0852 0.134 0.0927 0.0691 0.0757 0.0871 0.109 0.122[0.0994
] [0.163] [0.140] [0.108][0.0915
][0.0856
][0.0820
][0.0783
]FDI_LIB * I_(94-95) 0.377*
**0.550*
**0.460*
**0.368*
**0.338*
**0.347*
**0.370*
**0.375*
**[0.102
][0.148
][0.135
][0.109
][0.102
][0.093
7][0.092
1][0.090
3]TAR_LIB * I_(91-93)
0.248* 0.282 0.256 0.235 0.235* 0.252**0.283**
*0.254**
*
[0.129] [0.218] [0.186] [0.152] [0.123] [0.108][0.0964
][0.0870
]TAR_LIB * I_(94-95) 0.579*
**0.708*
**0.667*
**0.597*
**0.568*
**0.551*
**0.532*
**0.479*
**[0.168
][0.245
][0.219
][0.184
][0.170
][0.156
][0.127
][0.112
]FDI_LIB * TAR_LIB*I_(91-93) -0.334 -0.527 -0.439 -0.327 -0.299 -0.293
-0.339**
-0.333**
[0.209] [0.336] [0.296] [0.229] [0.196] [0.180] [0.160] [0.145]FDI_LIB * TAR_LIB* I_(94-95)
-0.626**
*
-0.912**
*-
0.784**-
0.617**-
0.571**
-0.566**
*
-0.564**
*
-0.525**
*[0.237] [0.336] [0.306] [0.257] [0.237] [0.218] [0.187] [0.168]
Observations 3701 3701 3701 3701 3701 3701 3701 3701Adj R-sq 0.83 0.656 0.719 0.791 0.835 0.86 0.87 0.859
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Consistent with prominent role for within-plant changes, we find shift in productivity across the full distribution
Improvement at top quartiles suggest there was slack/inefficiency even at productive firms, not just at the bottom of the distribution
BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Role of competition (1) (2) (3) (4) (5) (6) (7) (8)
Dependent variable Output price index
Input price index
Blue-collar wage index
White-collar wage index
Mean gross
margin
Mean net
profit margin
Herfindahl index
C10 ratio
FDI_LIB * I_(91-93)
-1.791 2.166*** 2.242 3.501
-0.0260**
* -0.006 -0.002 -0.026[3.870] [0.578] [2.227] [4.320] [0.0068] [0.0036] [0.0055] [0.0186]
FDI_LIB * I_(94-95) -18.06**
* -0.874 -4.758 -10.15 -0.024** -0.004
-0.0195*
*-
0.088***
[5.823] [0.984] [4.567] [10.18][0.0104][0.0043
][0.0085][0.0196]TAR_LIB * I_(91-93) -9.836** -2.079** -0.920 7.245 -0.015 -0.001 -0.002 -0.024
[4.620] [0.814] [2.434] [5.007] [0.0099] [0.0049][0.00425
] [0.0214]TAR_LIB * I_(94-95) -
26.96*** -3.726** -7.356 9.276 -0.013 -0.002-0.0165*
-0.0716*
**[8.28
6] [1.553] [4.712] [13.92][0.0129][0.0049
][0.0085][0.0201]FDI_LIB * TAR_LIB*I_(91-93) 12.10* -1.719 -1.324 -10.120 0.041*** 0.011 -0.014 0.034
[7.306] [1.284] [4.907] [8.441] [0.0141] [0.0069] [0.0165] [0.0388]FDI_LIB * TAR_LIB* I_(94-95)
28.70*** -0.446 3.886 -23.270 0.0326** 0.007 0.0242* 0.0869**
[10.79] [2.177] [8.665] [19.00] [0.0145] [0.0063] [0.0144] [0.0403]Observations 3,701 3,701 3,701 3,697 3,701 3,701 3,701 3,701 Adj R-sq 0.855 0.993 0.923 0.852 0.877 0.675 0.648 0.859
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The pattern here is consistent with competition leading to TFP growth – output price declined, consistent with higher competitive intensity– the output price declines NOT from pass-through of input price
declines – TFP growth offsets the competitive pressure, so no net margin
declines– consistent with increased competition, herfindahl index and
concentration ratios fell
BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Which regions/industries show greater improvements
Some evidence that employer friendly states (per Besley and Burgess 2002) saw greater improvements– No/ weak effect for financial development/coastal
status
Some weak evidence that industries closer to the frontier fared better
Some evidence that privately-owned plants fared better than government owned – No/weak effect for export orientation/capital
intensity
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Other recent work on trade/industrial policy
Industrial policy– Aghion, Burgess, Redding and Zilibotti (2008) examined effect
of de-licensing – Find much stronger firm growth in employer-friendly
states Trade liberalization
– Shanthi Nataraj (2009) looked at effect of tariff reductions on a larger sample that includes informal firms; confirms strong improvements in productivity even among small informal firms
– Amiti and Konings (2007) find strong TFP improvements after trade liberalization in Indonesia• They find a stronger role for input tariff reductions; we (and Nataraj)
find stronger role for output tariff reductions– De Loecker (2009) finds increases in productivity for Belgian
textile firms following lifting of quotas (trade liberalization)– Ruiz and Utar (2009) find Mexican firms that compete closely
with Chinese firms improved productivity following China’s entry into WTO
A recent literature review is in Holmes and Schmitz (2010, FRB-Minneapolis)
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity
Management practices and productivity
Other recent work on policy reforms
Role of reallocation Foster, Haltiwanger and Krizan (2001) for US (and studies for
other developed countries) show reallocation of resources to productive firms/industries play an important role in aggregate productivity growth
Hseih and Klenow (2009) (consistent with earlier work by Duflo and Banerjee (2005)) find that reallocating to US efficiency levels could increase India’ manufacturing productivity by 40-60% (30-50% for China) – policies “constrain the most efficient producers and coddle the least
efficient”– the most productive companies much larger in US– need to be cautious about studies of GDP share of “SMEs”; does a
larger share suggest “good SME development” or “misallocation”? E.g. Retail sector in India productivity was just 6% of US
(McKinsey report, 1997). Among other important factors, two key policy factors :– restrictions on FDI (still not fully opened delaying Walmart retail
entry)– restrictions on big stores due to tax and labor laws (smaller stores
avoid both) Caselli (2005) – holding productivity fixed, redistributing from
agriculture to other sectors would reduce income inequality by 2/3
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity Management practices and productivityOther recent work on policy reforms
Other drivers of productivity
Syverson (2010) surveys literature on productivity determinants
In addition to competition (induced by industrial policy/trade reforms) and access to inputs (trade reforms), other key sources include– Worker human capital -- but maybe small role
per Fox and Smeets (2009)– Incentive pay for workers and human resource
practices– Managerial talent and practices
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity Management practices and productivityOther recent work on policy reforms
Human Resource Practices
Piece rates or output linked incentives could lead to large productivity improvements (and increased firm profits) (Lazear 2000)
Linking managerial pay to productivity of workers improves overall productivity (Bandiera et al 2007)
Where production happens in teams,– Group incentives and problem solving teams help
increase productivity (Hamilton et al 2003, Boning et al 2007)
– relative ability of peers and also social connections with peers affect productivity (Mas and Moretti, 2010, Bandiera et al 2010)
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity Management practices and productivityOther recent work on policy reforms
Managerial practices and productivity
Economists have considered managerial talent/practices as a potential driver of productivity for long (Walker 1887)
Bloom and Van Reenen (2007) – Surveyed 734 US and European firms on about 18
management practices in 4 areas (operations, monitoring, targets and incentives)
– found measures of “good management practices” strongly correlated with high productivity
– Again more competition associated with better management
– Family firms with CEO chosen as eldest son very badly managed
Bloom and Van Reenen (2010) and Bloom at al (2010) extended study to 17 countries– Key finding is that for less developed countries, low
scores are because a large number of smaller firms are poorly managed (whereas for US relatively few are badly managed)
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BRIC-IGC-IIG,March 27-28/11
Indian reforms and productivity Management practices and productivityOther recent work on policy reforms
Managerial practices and productivity
Bloom, Eifert Mahajan, McKenzie and Roberts (2010) conducted a randomized experiment– Random subset of textile firms provide management
consulting advice– Find productivity gains for firms that received advice
Management practices encouraged were:1. Factory operations: Tracking machines, breakdowns and
keeping factory floor tidy2. Quality control: Recording and formalizing ways to address
quality defects3. Inventory: Monitoring and tracking inventory4. Human resources management: Performance driven
incentives/defined job descriptions5. Sales/order management: Tracking production per order
(to improve pricing) Study suggests lack of knowledge about
management practices – firms unaware of good practices and underestimate how impactful they can be
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BRIC-IGC-IIG,March 27-28/11
Conclusions Industrial and trade policy
– A large number of studies suggest increased competition from industrial and trade liberalization spurs productivity growth
– Aggregate growth gains from reallocation to more productive firms after liberalization
Business practices play an important part in productivity– academic work has tested and found strong positive
effects for a number of incentive pay, human resources and management practices
– while results are intuitive, surprisingly these practices are not widespread , particularly among smaller firms in developing countries!
– Competition could play a role in promoting adoption of these practices
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