management practices across europe, the us and asia
DESCRIPTION
Management Practices across Europe, the US and Asia. Christos Genakos Cambridge & CEP. MOTIVATION. Large persistent productivity spread across firms and countries: UK productivity gap with the US going back 100 years China and India 10% to 20% of US GDP per capita - PowerPoint PPT PresentationTRANSCRIPT
Management Practices across Europe, the US and Asia
Nick BloomStanford,
CEP & NBER
Raffaella Sadun LSE & CEP
John Van ReenenLSE, CEP,
CEPR & NBER
Christos Genakos
Cambridge & CEP
MOTIVATION
Large persistent productivity spread across firms and countries:
– UK productivity gap with the US going back 100 years– China and India 10% to 20% of US GDP per capita
Even after controlling for human and physical capital, there is a large “unexplained residual” in productivity both between countries and within countries
Could this be in part because of differences in management?
Historically there has been no international management data
Our aim: new project measuring and explaining management practices across firms and countries
– Extends Bloom and Van Reenen (2007) methodology to 12 countries including India and China
1. Why should management practices vary?
2. “Measuring” management practices
3. Evaluating the reliability of this measure
4. Describing management across firms & countries
5. Accounting for management across firms & countries
OUTLINE
WHY SHOULD MANAGEMENT PRACTICES VARY?
Two models - not mutually exclusive
“Optimal choice of management practices” Another factor of production (like advertising) No “better” or “worse” style of management – depends on
firm’s circumstances
“Managerial inefficiency” (Mundlak, 1961; Lucas 1978) Part of total-factor productivity Strictly “better” or “worse” styles of management
Empirically we find some support for both – today focus on “managerial inefficiency” evidence due to time constraints
1. Why should management practices vary?
2. “Measuring” management practices
3. Evaluating the reliability of this measure
4. Describing management across firms & countries
5. Accounting for management across firms & countries
OUTLINE
1) Developing management questions
•Scorecard for 18 monitoring, targets and incentives practices
•≈45 minute phone interview of manufacturing plant managers
2) Obtaining unbiased comparable responses (“Double-blind”)•Interviewers do not know the company’s performance
•Managers are not informed (in advance) they are scored
•Run from LSE, with same training and country rotation
3) Getting firms to participate in the interview
•Introduced as “Lean-manufacturing” interview, no financials
•Official Endorsement: Bundesbank, Treasury, CII & RBI, etc.
•Run by 51 MBAs (loud, assertive & business experience)
THE SURVEY METHODOLOGY
Score (1): Measures tracked do not indicate directly if overall business objectives are being met. Certain processes aren’t tracked at all
(3): Most key performance indicators are tracked formally. Tracking is overseen by senior management
(5): Performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools
MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?”
All 18 questions and 54 examples in Bloom and Van Reenen (2007)
ADDITIONAL CONTROLS FOR BIAS & NOISE
8 INTERVIEWEE CONTROLS Gender, seniority, tenure in post, tenure in firm, countries
worked in, foreign, worked in US, plant location, reliability score
3 INTERVIEWER CONTROLS Set of analyst dummies, cumulative interviews run, prior firm
contacts
5 TIME CONTROLS Day of the week, time of day (interviewer), time of the day
(interviewee), duration of interview, days from project start
MANAGEMENT SURVEY SAMPLE
Interviewed over 4,000 firms across US, Asia & Europe
Obtained 63% coverage rate from sampling frame (with response rates uncorrelated with performance measures)
Medium sized manufacturing firms:
Medium sized (100 - 5,000 employees, median ≈ 275) because firm practices more homogeneous
Manufacturing as easier to measure productivity (currently piloting in healthcare and retail)
1. Why should management practices vary?
2. “Measuring” management practices
3. Evaluating the reliability of this measure
4. Describing management across firms & countries
5. Accounting for management across firms & countries
OUTLINE
12
34
5m
anag
eme
nt_1
1 2 3 4 5management_2
INTERVAL VALIDATION OF THE SCORING
1st interview
2nd i
nte
rvie
w
Re-interviewed 222 firms with different interviewers & managers
Firm average scores (over 18 question)
Firm-level correlation of 0.627 (p-value =.000)
EXTERNAL VALIDATION OF THE SCORINGPerformance measure
ci
ci
ccim
ccik
ccil
cci
ci uxhklMNGy '
ln(capital)
ln(materials)
management(average z-scores) ln(labor)
other controls
Use most recent cross-section of data (2006)
Not causal estimation, only shows management data informative
country c
Dependentvariable
Sales(in Ln)
Sales(in Ln)
Sales(in Ln)
ROCE Sales growth
Tobin Q (in Ln)
Exit
Estimation1 OLS OLS OLS OLS OLS OLS Probit
Firms All All All All All Quoted All
Management0.300
(0.026)0.213
(0.025) 0.198
(0.028) 1.880(0.923)
0.032
(0.013)
0.250(0.075)
-0.200[0.026]
Ln(Labor)0.956
(0.024)0.471
(0.033)0.485
(0.021) -0.494(1.069)
0.001
(0.015)
0.209(0.109)
0.233[0.045]
Ln(Capital)0.438
(0.021)0.415
(0.013) 0.347(0.505
0.018
(0.010)
-0.029(0.086)
-0.158[0.045]
Ln(Skills)(% with degree)
0.059(0.013)
0.036(0.014)
0.347(0.505)
0.004
(0.073)
0.130(0.050)
-0.084[0.231]
Ind. dummies No No Yes Yes Yes Yes Yes
Noise control No No Yes Yes Yes Yes Yes
Firms 3529 2706 2706 1752 2145 374 709
EXTERNAL VALIDATION: PRODUCTIVITY & PROFIT
Cross sectional regressions. All columns include country controls. Robust s.e. in ( ) below. For probit p-values in [ ] below
Lab
or
Pro
du
ctiv
ity
Lab
or
Pro
du
ctiv
ity
Management
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/em
ploy
ee (i
n lo
gs) -
bas
ic la
bor p
rodu
ctiv
ity m
easu
re -
raw
num
bers
1 2 3 4 5Our management score - average across 18 questions
24
68
/em
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n lo
gs) -
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ic la
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ctiv
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easu
re -
raw
num
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1 2 3 4 5Our management score - average across 18 questions
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/em
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easu
re -
raw
num
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1 2 3 4 5Our management score - average across 18 questions
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asic
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r pro
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mea
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- ra
w n
umbe
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1 2 3 4 5Our management score - average across 18 questions
US & UK Japan & China
Greece, Portugal & Italy France, Germany, Sweden & Poland
Management
LINKED TO PERFORMANCE IN ALL THE COUNTRIES (NOT JUST ANGLO-SAXON ONES)
Lab
or
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ctiv
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Lab
or
Pro
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ctiv
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Management Management
1. Why should management practices vary?
2. “Measuring” management practices
3. Evaluating the reliability of this measure
4. Describing management across firms & countries
5. Accounting for management across firms & countries
OUTLINE
COUNTRY LEVEL MANAGEMENT SCORES
Average management score, by country
2.62
2.63
2.64
2.73
2.88
2.99
3.00
3.00
3.15
3.15
3.17
3.30U.S.
Germany
Sweden
Japan
Italy
UK
France
Poland
Portugal
Greece
China
India
3 statistically distinct groups appear– U.S., Germany,
Sweden and Japan
– Italy, U.K., France, and Poland
– Portugal, Greece, China and India
0 1 2 3 4
US
Germany
UK
Japan
Poland
Sweden
France
Italy
China
India
Portugal
Greece
BUT THE US IS NOT BEST AT EVERYTHING - THERE ARE NATIONAL STRENGTHS & WEAKNESSES
People managementOperations management
The US is world leading in people management, but Germany, Sweden and Japan are better on average at operations management
85% of variation in management scores within countries
Long ‘tail’ of poorly managed firms pulls down the average management score of low performing countries
Distribution of firm level management scores, by country
ALSO THE AVERAGE HIDES MUCH VARIATION
Germany
Italy U.K. France
JapanU.S. Sweden
Poland
Portugal Greece China India
1. Why should management practices vary?
2. “Measuring” management practices
3. Evaluating the reliability of this measure
4. Describing management across firms & countries
5. Accounting for management across firms & countries
OUTLINE
0.1
.2.3
Den
sity
1 2 3 4 5 6 7 8 9 10
THE AVERAGE MANAGER ALSO THINKS HIS FIRMS MANAGEMENT IS WELL ABOVE AVERAGE
Management self-score
“Average”“Worst Practice”
“Best Practice”
Sh
are
of f
irms
Response to the Question “Excluding yourself, how would you rate your company’s management from 1 to 10, one being the worst
and ten being the best?”
AND THIS OVER-SCORING OCCURS IN EVERY COUNTRY IN OUR SAMPLE
0 1 2 3 4
US
Germany
Sweden
Japan
UK
France
Italy
Poland
Portugal
India
Greece
China Self score*Actual score
* Divided by 2 to normalize to a similar scale
COMPETITION & MODELS OF MANAGEMENT
“Exogenous managerial inefficiency” – positive impact
–Selection models Hopenhayn (1992) or Syverson (2004)
“Optimal choice model” – ambiguous impact
–In contracting models balance between opposing profit and market-size effects (Raith 2003, Vives 2004)
Competition proxies Dependent variable: Management
Import penetration(SIC-3 industry, 1995-1999)
0.066(0.033)
1 - Lerner index1
(SIC-3 except sample, 1995-1999)1.964
(0.721)
# of competitors(Firm level, 2006)
0.158(0.023)
Observations 2499 2980 3589
Full controls2,3 Yes Yes Yes
COMPETITION AND MANAGEMENT PRACTICES
1 Lerner index = (operating profit – capital costs)/sales ≈ rents2 Includes 108 SIC-3 industry, country, firm-size, public and interview noise (analyst, time, date, and manager characteristic) controls3 s.e. in ( ) below, robust to heteroskedasticity, clustered by country-industry
3 competition proxies from Nickell (1996) & Aghion et al. (2005)
FAMILY FIRMS & MANAGEMENT – AN OLD TOPIC
Alfred Chandler1 and David Landes2 claimed that the UK industrial decline relative to US & Germany was linked to family firms
“The Britain of the late 19th Century basked complacently in the sunset of economic hegemony. Now it was the turn of the 3rd generation…and the weakness of British enterprise reflected their combination of amateurism and complacency”
1 Alfred Chandler, “Scale and Scope: The Dynamics of Industrial Capitalism”, (1994)2 David Landes, “The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present”, (1969)
FAMILY FIRMS AND MODELS OF MANAGEMENT PRACTICES
Likely family impact depends on involvement
•Ownership but not management probably positive
• Concentrated ownership so better monitoring
•Management probably negative
• Smaller pool to select CEO from
• Possible “Carnegie” effect on future CEO’s
• Less career-concern incentive for non-family managers
• All effects likely to be worse with primo geniture (succession of eldest son to CEO position)
FAMILY MANAGEMENT (PARTICULARLY A PRIMO GENITURE SELECTED CEO) IS PROBLEMATIC
% Dependent variable: Management
Family1 largest shareholder-0.137(0.023)
-0.008
(0.043)
Family1 largest shareholder & family CEO-0.169(0.025)
-0.073(0.049)
Family1 largest shareholder, family CEO & primo geniture2
-0.254(0.043)
-0.223(0.046)
Observations 4141 4141 4141 4141
1 Family defined as 2nd generation or later2 Based on question: “How was management of the firm passed down: was it to the eldest son or by some other way?”. Non primo geniture alternatives: other sons, son in-laws, daughters, brothers, wives, nephews and cousins.
Note includes SIC-3 digit, country, skills, firm size and public controls
WE ALSO LOOK AT MULTINATIONALS AS A WAY TO EVALUATE THE ROLE OF LOCAL CONDITIONS
Interesting to examine because:If the management variations all due to local constraints
then multinationals should look like domestic firms
If instead management partly a technology then multinationals may export this
– Idea in theory papers like Helpman et al. (2004), Antras et al. (2008), Burstein & Monge (2008)
Domestic Firms
Foreign Multinationals
THERE IS NO TAIL OF REALLY BADLY RUN MULTINATIONALS
0.2
.4.6
.8
Den
sity
1 2 3 4 5Our management score - average across 18 questions
0.2
.4.6
.8
Den
sity
1 2 3 4 5Our management score - average across 18 questions
MULTINATIONALS DO APPEAR TO BE WELL MANAGED IN ALL COUNTRIES
2.4 2.6 2.8 3 3.2 3.4
US
Japan
Germany
Sweden
UK
Italy
France
Poland
Portugal
China
India
Greece
mean of domestic firms mean of multinationals
MANAGEMENT PRACTICES ALSO MAY REFLECT LABOR MARKET REGULATIONS
Tough hiring/firing practices may be impaired by law
Management practices for hiring, firing, pay and promotions is negatively correlated with strength of labor market regulations
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Correlation of -0.752
World Bank labor market regulation index
QUANTIFYING EFFECTS OF COMPETITION, FAMILY FIRMS, MULTINATIONAL & LABOR REGS:
• ACROSS COUNTRIES ~ ½ VARIATION
• ACROSS FIRMS ~ ½ VARIATION
COMPETITION, FAMILY FIRMS, MULTINATIONALS & LABOR REGULATIONS ACCOUNT FOR ≈ ½ COUNTRY SPREAD
2.4 2.6 2.8 3 3.2 3.4
US
Germany
Sweden
Japan
UK
France
Italy
Poland
Portugal
Greece
China
India
raw management data
management predicted from comp, family, MNE and regulation
Marginal R-squared on country fixed-effects reduced by 45% after controlling for number of competitors, family management and primo geniture, multinational status and labor market regulations
0.2
.4
.6
.8
De
nsity
1 2 3 4 5Our management score - average across 18 questions
0.2
.4
.6
De
nsity
1 2 3 4 5Our management score - average across 18 questions
“GOOD DOMESTIC” (MANY COMPETITORS, NOT PG FAMILY) OR MULTINATIONAL
5.9% firms in tail1
18.1% firms in tail1
1 Tail defined as a score ≤ 2. In the whole sample 9.6% of firms are in the tail.
N=1244
N=2899
“BAD DOMESTIC” (FEW COMPETITORS OR PG FAMILY)
Original methodology for measuring management practices for over 4000 firms across 12 countries
Better management practices are strongly associated with superior firm performance
Significant within country variation in management practices
Product market competition, family management, multinational status and labor regulation account for
– About 50% of tail of badly managed firms
– About 50% cross country management gap
It was hard work but…?
SUMMARY
MY FAVOURITE QUOTES:
[Female Interviewer speaking to a US manager]
Interviewer: “I was wondering if you would have 30-40 minutes to talk with me about your day-to-day production process?”
US manager: “You would have a better chance of coming in here with a razor and slitting my wrists than getting me on the phone for 40 minutes!!!”
Getting those managers on the phone was not easy…
French secretary: “You want to talk to the plant manager? They are legal proceedings against him, so hurry up!! ”
MY FAVOURITE QUOTES:
The Swedish manufacturing goals
Production Manager: “Workers individual goals?
They just want to go home!”
Production Manager: “We’re owned by the Mafia”
Interviewer: “I think that’s the “Other” category……..although I guess I could put you down as an “Italian multinational” ?”
The difficulties of defining ownership in Europe
Interviewer: “How many production sites do you have abroad?
Manager in Indiana, US: “Well…we have one in Texas…”
Americans on geography
BEST QUOTE:
Swedish female plant manager for medical instruments company with 70% world market share asked about the competition they face in the product marketplace:
“We have no competitors, just parasites”
Management Practices across Europe, the US and Asia
Nick BloomStanford,
CEP & NBER
Raffaella Sadun LSE & CEP
John Van ReenenLSE, CEP,
CEPR & NBER
Christos Genakos
Cambridge & CEP
BACK-UP
FAMILY OWNERSHIP VARIES ACROSS COUNTRIES
0 .2 .4 .6 .8
India
Greece
Portugal
Italy
Germany
UK
US
France
Japan
China
Sweden
Poland
share family owned (2nd+ generation)
share founder owned (1st generation)
• About 1/4 of Japanese, US and Northern European firms family owned• About 3/4 of Indian firms family owned
MULTINATIONALS ARE MOST COMMON IN NORTHERN EUROPE, LESS IN ASIA & THE US
0 .1 .2 .3 .4 .5
Foreign multinational % of firms interviewed
France
Sweden
UK
Poland
Germany
Greece
Italy
Portugal
China
US
India
Japan
FIG 3. COUNTRY LEVEL RELATIVE SCORES
-.4 -.2 0 .2 .4
mean of people (human capital) – operations (physical capital) management
India
Poland
US
China
UK
Greece
Portugal
Japan
Germany
Italy
France
Sweden
Relatively better at ‘operations’ management
Relatively better at ‘people’ management
FIG 4. MULTINATIONALS TAKE THESE HOME COUNTRY PRACTICES ABROAD
-.4 -.3 -.2 -.1 0 .1
US
UK
Canada
Holland
Germany
Italy
France
Finland
Denmark
Switzerland
Japan
Belgium
Sweden
mean of people (human capital) – operations (physical capital) management
Only source countries with 25+ subsidiaries in our data
CONCERNS WITH OUR MANAGEMENT MEASURE?
(2) Firm performance-related measurement bias in management score (i.e. the “happy manager” problem), but
• Surveying methodology using examples tries to minimize this
• Competition and management positively linked (later)
• Management-performance link is as important in Europe (where managers less likely to “talk up” Anglo-Saxon practices) as it is in UK & US
• No link between past productivity growth & management
• Not all questions significant (and not linked to “subjectivity”)
• Other subjective questions insignificant – i.e. “feel-good” work-life balance questions, organisational devolvement questions
So potential problem – but no evidence that major phenomenon
02
46
8la
bp
1 2 3 4 5Our management score - average across 18 questions
bandwidth = .8
Lowess smoother
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World Bank labor market regulation index
…BUT, LABOUR MARKET REGULATION IS NOT LINKED WITH POOR OPERATIONS MANAGEMENT