Measuring and Explaining Management Practices Across Firms and Countries
Nicholas Bloom and John Van Reenen, 2007
Published in The Quarterly Journal of Economics
We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from corporate headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high-trust regions are significantly more likely to decentralize. To help identify causal effects, we look within multinational firms and show that higher levels of bilateral trust between the multinational’s country of origin and subsidiary’s country of location increases decentralization, even after instrumenting trust using religious similarities between the countries. Finally, we show evidence suggesting that trust raises aggregate productivity by facilitating reallocation between firms and allowing more efficient firms to grow, as CEOs can decentralize more decisions.
Modern Management: Good for the Environment or Just Hot Air?
Nicholas Bloom, Christos Genakos, Ralf Martin, and Raffaella Sadun, 2010
Published in The Economic Journal
We use an innovative methodology to measure management practices in over 300 manufacturing firms in the UK. We then match this management data to production and energy usage information for establishments owned by these firms. We find that establishments in better managed firms are significantly less energy intensive. This effect is quantitatively substantial: going from the 25th to the 75th percentile of management practices is associated with a 17.4% reduction in energy intensity. Better managed firms are also significantly more productive. These results suggest that management practices that are associated with improved productivity are also linked to lower greenhouse gas emissions.
Does Product Market Competition Lead Firms to Decentralize?
Nicholas Bloom, Raffaella Sadun, and John Van Reenen, 2010
Published in American Economic Review: Papers & Proceedings
There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address this empirical lacuna we have developed a research program to measure the internal organization of firms—including their decentralization decisions—across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization.
New Approaches to Surveying Organizations
Nick Bloom and John Van Reenen, 2010
Published in American Economic Review: Papers & Proceedings
This paper examines new approaches to surveying organizations.
Are family-friendly workplace practices a valuable firm resource?
Nick Bloom, Tobias Kretschmer, John Van Reenen, 2010
Published in Strategic Management Journal
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.
The land that lean manufacturing forgot? Management practices in transition countries
Nicholas Bloom, Helena Schweiger, and John Van Reenen, 2012
Published in Economics of Transition
We have conducted the first large-scale survey on management practices in transition countries. We found that Central Asian transition countries, such as Uzbekistan and Kazakhstan, have on average very poor management practices. Their average scores are below developing countries such as India. In contrast, the Central European transition countries such as Poland and Lithuania operate with management practices that are only moderately worse than those of Western European countries such as Germany. As we find these practices are strongly linked to firm performance, this suggests that poor management practices may be impeding the development of Central Asian transition countries. We find that competition, multinational ownership, private ownership and human capital are all strongly correlated with better management. If causally interpreted, this would imply that the continued opening of markets to domestic and foreign competition, privatization of state-owned firms and increased levels of workforce education should promote better management, and ultimately faster economic growth.
The Organization of Firms Across Countries
Nicholas Bloom, Raffaella Sadun, and John Van Reenen, 2012
Published in The Quarterly Journal of Economics
We use an innovative survey tool to collect management practice data from 732 medium-sized firms in the United States, France, Germany, and the United Kingdom. These measures of managerial practice are strongly associated with firm-level productivity, profitability, Tobin’s Q, and survival rates. Management practices also display significant cross-country differences, with U.S. firms on average better managed than European firms, and significant within-country differences, with a long tail of extremely badly managed firms. We find that poor management practices are more prevalent when product market competition is weak and/or when family-owned firms pass management control down to the eldest sons (primogeniture).
Americans Do IT Better: US Multinationals and the Productivity Miracle
Nicholas Bloom, Raffaella Sadun, and John Van Reenen, 2012
Published in American Economic Review
US productivity growth accelerated after 1995 (unlike Europe’s), particularly in sectors that intensively use information technologies (IT). Using two new micro panel datasets we show that US multinationals operating in Europe also experienced a “productivity miracle.” US multinationals obtained higher productivity from IT than non-US multinationals, particularly in the same sectors responsible for the US productivity acceleration. Furthermore, establishments taken over by US multinationals (but not by non-US multinationals) increased the productivity of their IT. Combining pan-European firm-level IT data with our management practices survey, we find that the US IT related productivity advantage is primarily due to its tougher “people management” practices.
Does management matter? Evidence from India
Nicholas Bloom, Benn Eifert, Aprajit Mahajan, David McKenzie, John Roberts, 2013
Published in The Quarterly Journal of Economics
A long-standing question is whether differences in management practices across firms can explain differences in productivity, especially in developing countries where these spreads appear particularly large. To investigate this, we ran a management field experiment on large Indian textile firms. We provided free consulting on management practices to randomly chosen treatment plants and compared their performance to a set of control plants. We find that adopting these management practices raised productivity by 17% in the first year through improved quality and efficiency and reduced inventory, and within three years led to the opening of more production plants. Why had the firms not adopted these profitable practices previously? Our results suggest that informational barriers were the primary factor explaining this lack of adoption. Also, because reallocation across firms appeared to be constrained by limits on managerial time, competition had not forced badly managed firms to exit.
The distinct effects of Information Technology and Communication technology on firm organization
Nick Bloom, Luis Garicano, Raffaella Sadun, and John Van Reenen, 2014
Published in Management Science
Guided by theories of management by exception, we study the impact of Information and Communication Technology on worker and plant manager autonomy and on span of control. We find, using an original dataset of American and European manufacturing firms, that better information technologies (Enterprise Resource Planning for plant managers and CAD/CAM for production workers) are associated with more autonomy and a wider span, while technologies that improve communication (like data intranets) decrease autonomy for workers and plant managers, consistently with the theory. Using instrumental variables (distance from ERP’s birthplace and heterogeneous telecommunication costs arising from regulation) strengthens our results.
Do Private Equity-Owned Firms have better management practices?
Nick Bloom, Raffaella Sadun and John Van Reenen, 2015
Published in American Economic Review Papers and Proceedings
We use an innovative survey tool to collect management practice data from over 4,000 medium sized manufacturing firms across Asia, Europe and the US. These measures of managerial practice are strongly associated with firm-level performance (e.g. productivity, profitability and stock market value). Private equity firms are significantly better managed than government, family and privately owned firms. Although they are also better managed on average than publicly listed firms with dispersed owners, this difference is not statistically significant. Looking at management practices in detail we find that private equity owned firms have strong people management practices (hiring, firing, pay and promotions) but even stronger operations management practices (lean manufacturing, continuous improvement and monitoring). This suggests that private equity ownership is associated with broad based operational improvement in management rather than just stronger performance incentives. Finally, looking at changes in management practices over time, it appears that PE targets poorly managed firms and these firms improve their management practices at a faster rate than other ownership types.
Are founder CEOs good managers?
Victor Manuel Bennett, Meghan Lawrence, Raffaella Sadun, 2015
International data on measuring management practices
Nick Bloom, Renata Lemos, Raffaella Sadun Daniela Scur and John Van Reenen, 2016
Published in American Economic Review – Papers & Proceedings
Rapid advances in computer power and increased openness of national statistical agencies have led to unprecedented availability of large datasets. Consider three types of firm datasets. First, governments collect administrative data on firms: information on jobs, investment and output has long been collected to calculate national, industrial and regional statistics. Second, there has been an explosion of Big Data – various forms of data typically created for business purposes. We focus on a third type of international firm data, which is collected from surveys.
Why do we undervalue competent management?
Nick Bloom, Raffaella Sadun and John Van Reenen, 2017
Published in Harvard Business Review
In MBA programs, students are taught that companies can’t expect to compete on the basis of internal managerial competencies because they’re just too easy to copy. Operational effectiveness—doing the same thing as other companies but doing it exceptionally well—is not a path to sustainable advantage in the competitive universe. To stay ahead, the thinking goes, a company must stake out a distinctive strategic position—doing something different than its rivals. This is what the C-suite should focus on, leaving middle and lower-level managers to handle the nuts and bolts of managing the organization and executing plans.
What Drives Differences in Management Practices?
Nicholas Bloom, Erik Brynjolfsson, Lucia Foster, Ron Jarmin, Megha Patnaik, Itay Saporta-Eksten, and John Van Reenen, 2019
Published in American Economic Review
Partnering with the US Census Bureau, we implement a new survey of “structured” management practices in two waves of 35,000 manufacturing plants in 2010 and 2015. We find an enormous dispersion of management practices across plants, with 40 percent of this variation across plants within the same firm. Management practices account for more than 20 percent of the variation in productivity, a similar, or greater, percentage as that accounted for by R&D, ICT, or human capital. We find evidence of two key drivers to improve management. The business environment, as measured by right-to-work laws, boosts incentive management practices. Learning spillovers, as measured by the arrival of large “Million Dollar Plants” in the country, increase the management scores of incumbents.
Turbulence, Firm Decentralization, and Growth in Bad Times
Philippe Aghion, Nicholas Bloom, Brian Lucking, Raffaella Sadun, John Van Reenen, 2021
Published in American Economic Journal: Applied Economics
What is the optimal form of firm organization during “bad times”? The greater turbulence following macro shocks may benefit decentralized firms because the value of local information increases (the “localist” view). On the other hand, the need to make tough decisions may favor centralized firms (the “centralist” view). Using two large micro datasets on decentralization in firms in ten OECD countries (WMS) and US establishments (MOPS administrative data), we find that firms that delegated more power from the central headquarters to local plant managers prior to the Great Recession outperformed their centralized counterparts in sectors that were hardest hit by the subsequent crisis (as measured by export growth and product durability). Results based on measures of turbulence based on product churn and stock market volatility provide further support to the localist view. This conclusion is robust to alternative explanations such as managerial fears of bankruptcy and changing coordination costs. Although decentralization will be suboptimal in many environments, it does appear to be beneficial for the average firm during bad times.
Management Practices, Work—Life Balance, and Productivity: A Review of Some Recent Evidence
Nicholas Bloom, John Van Reenen, 2006
Oxford Review of Economic Policy
Increasing product-market competition is believed to be a driving force behind higher productivity. However, even those critics of globalization who accept this argument claim that there is a hard trade-off because tougher competition comes at the price of reducing work—life balance (WLB). Optimists, by contrast, argue that competition can spur better WLB practices and therefore higher productivity, so there is a ‘win—win’ situation. To address this issue we use an innovative survey tool to collect the first international data on management practices and WLB practices, surveying 732 medium-sized manufacturing firms in the USA, France, Germany, and the UK. We find that the USA has the best management practices but the worst work—life balance. When we look within countries, however, we reject the pessimistic ‘trade-off’ model. First, WLB outcomes are significantly associated with better management, so that well-run firms are both more productive and offer better conditions for their employees. Second, tougher competition increases average management quality but does not negatively affect employees’ working environment. As with many other studies, better WLB practices are associated with significantly higher productivity. This relationship disappears, however, after controlling for the overall quality of management.
Recent Advances in the Empirics of Organizational Economics
Nicholas Bloom, Raffaella Sadun, John Van Reenen, 2010
Published in Annual Review of Economics
We present a survey of recent contributions in empirical organizational economics, focusing on management practices and decentralization. Productivity dispersion between firms and countries has motivated the improved measurement of firm organization across industries and countries. There appears to be substantial variation in management practices and decentralization not only between countries, but also especially within countries. Much of the poorer average management quality in countries like Brazil and India seems to result from a long tail of poorly managed firms, which barely exist in the United States. Some stylized facts include the following: (a) Competition seems to foster improved management and decentralization; (b) larger firms, skill-intensive plants, and foreign multinationals appear better managed and are more decentralized; (c) firms that are both family owned and managed appear to have worse management and are more centralized; and (d) firms facing an environment of lighter labor market regulations and more human capital specialize relatively more in people management. There is evidence for complementarities between information and communication technology, decentralization, and management, but the relationship is complex, and identification of the productivity effects of organizational practices remains a challenge for future research.
Does competition raise productivity through improving management quality?
John Van Reenen, 2011
Published in International Journal of Industrial Organization
A classic question in industrial organization is whether competition raises productivity and if so, through what mechanism? I discuss recent empirical evidence from both large-scale databases and specific industries which suggests that tougher competition does indeed raise productivity and one of the main mechanisms is through improving management practices. To establish this, I report on new research seeking to quantify management. I relate this to theoretical perspectives on the economics of competition and management, arguing that management should be seen at least in part as a transferable technology. A range of recent econometric studies suggests that (i) competition increases management quality and (ii) improved management quality boosts productivity.
Why Do Management Practices Differ across Firms and Countries?
Nicholas Bloom and John Van Reenen, 2010
Published in Journal of Economic Perspectives
Economists have long puzzled over the astounding differences in productivity between firms and countries. In this paper, we present evidence on a possible explanation for persistent differences in productivity at the firm and the national level — namely, that such differences largely reflect variations in management practices. We have, over the last decade, undertaken a large survey research program to systematically measure management practices across firms, industries, and countries. Our survey approach focuses on aspects of management like systematic performance monitoring, setting appropriate targets, and providing incentives for good performance. We explain how we measure management; identify some basic patterns in our data; then turn to the question of why management practices vary so much across firms and nations. What we find is a combination of imperfectly competitive markets, family ownership of firms, regulations restricting management practices, and informational barriers allow bad management to persist.
Human Resource Management and Productivity
Nicholas Bloom and John Van Reenen, 2011
Chapter in the Handbook of Labor Economics
In this chapter we examine the relationship between Human Resource Management (HRM) and productivity. HRM includes incentive pay (individual and group) as well as many non-pay aspects of the employment relationship such as matching (hiring and firing) and work organization (e.g. teams, autonomy). We place HRM more generally within the literature on management practices and productivity. We start with some facts on levels and trends of both HRM and productivity and the main economic theories of HRM. We look at some of the determinants of HRM—risk, competition, ownership and regulation. The largest section analyzes the impact of HRM on productivity emphasizing issues of methodology, data and results (from micro-econometric studies). We conclude briefly with suggestions of avenues for future frontier work.
Management Practices Across Firms and Countries
Nicholas Bloom, Christos Genakos, Raffaella Sadun and John Van Reenen, 2012
Published in Academy of Management Perspectives
For the past decade we have been using double-blind survey techniques and randomized sampling to construct management data on more than 10,000 organizations across 20 countries. On average, we find that in manufacturing American, Japanese, and German firms are the best managed. Firms in developing countries, such as Brazil, China, and India, tend to be poorly managed. American retail firms and hospitals are also well managed by international standards, although American schools are worse managed than those in several other developed countries. We also find substantial variation in management practices across organizations in every country and every sector, mirroring the wide spread of productivity and profitability within industries. One factor linked to this variation is ownership. Government and founder-owned firms are usually poorly managed, while multinational, dispersed shareholder, and private-equity-owned firms are typically well managed. Family-owned firms are badly managed if run by family members compared with similar family-owned firms run by external CEOs. Stronger product market competition and higher worker skills are associated with better management practices. Less regulated labor markets are associated with improvements in incentive management practices such as performance-based promotion.
Incomplete Contracts and the Internal Organization of Firms
Phillipe Aghion, Nicholas Bloom, John Van Reenen, 2013
Published in The Journal of Law, Economics, and Organization
We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital, and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.
The New Empirical Economics of Management
Nicholas Bloom, Renata Lemos, Raffaella Sadun, Daniela Scur, John Van Reenen, 2014
Published in Journal of the European Economic Association
Over the last decade the World Management Survey (WMS) has collected firm-level management practices data across multiple sectors and countries. We developed the survey to try to explain the large and persistent total factor productivity (TFP) differences across firms and countries. This review paper discusses what has been learned empirically and theoretically from the WMS and other recent work on management practices. Our preliminary results suggest that about a quarter of cross-country and within-country TFP gaps can be accounted for by management practices. Management seems to matter both qualitatively and quantitatively for performance at the level of the firm and the nation. Competition, governance, human capital, and informational frictions help account for the variation in management. We make some suggestions for both policy and future research.
The World Management Survey at 18: lessons and the way forward
Daniela Scur, Raffaella Sadun, John Van Reenen, Renata Lemos, Nicholas Bloom, 2021
Published in Oxford Review of Economic Policy
Understanding how differences in management ‘best practices’ affect organizational outcomes has been a focus of both theoretical and empirical work in the fields of management, sociology, economics, and public policy. The World Management Survey (WMS) project was born almost two decades ago with the main goal of developing a new systematic measure of management practices being used in organizations. The WMS has contributed to a body of knowledge around how managerial structures, not just managerial talent, relate to organizational performance. Over 18 years of research, a set of consistent patterns have emerged and spurred new questions. We present a brief overview of what we have learned in terms of measuring and understanding management practices and condense the implications of these findings for policy. We end with an outline of what we see as the path forward for both research and policy implications of this research programme.