Manufacturing - Working Papers

Organizational Capacity and Profit Shifting

Katarzyna A. Bilicka, Daniela Scur, 2021
NBER Working Paper 29225

  • This paper analyses the effect of a firm’s organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better such practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.

The World Management Survey at 18: Lessons and the Way Forward

Daniela Scur, Raffaella Sadun, John Van Reenen, Renata Lemos, Nicholas Bloom, 2021
NBER Working Paper 28524

  • 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, relates to organizational performance. Over 18 years of research, a set of consistent patterns have emerged and spurred new questions. We will 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.

Managing Trade: Evidence from China and the US

Nicholas Bloom, Kalina Manova, John Van Reenen, Stephen Teng Sun, Zhihong Yu, 2018
NBER Working Paper 24718

  • We present a heterogeneous-firm model in which management ability increases both production efficiency and product quality. Combining six micro-datasets on management practices, production and trade in Chinese and American firms, we find broad support for the model’s predictions. First, better managed firms are more likely to export, sell more products to more destination countries, and earn higher export revenues and profits. Second, better managed exporters have higher prices, higher quality, and lower quality-adjusted prices. Finally, they also use a wider range of inputs, higher quality and more expensive inputs, and imported inputs from more advanced countries. The structural estimates indicate that management is important for improving production efficiency and product quality in both countries, but it matters more in China than in the US, especially for product quality. Panel analysis for the US and a randomized control trial in India suggest that management exerts causal effects on product quality, production efficiency, and exports. Poor management practices may thus hinder trade and growth, especially in developing countries.

Come Together: Firm Boundaries and Delegation

Laura Alfaro, Nicholas Bloom, Paola Conconi, Harald Fadinger, Patrick Legros, Andrew Newman, Raffaella Sadun, John Van Reenen, 2018
NBER Working Paper 24603

  • We develop an incomplete-contracts model to jointly study firm boundaries and the al-location of decision rights within them. Integration has an option value: it gives firm owners authority to delegate or centralize decision rights, depending on who can best solve problems that may arise in the course of course of an uncertain production process. To examine the evidence, we construct measures of vertical integration and delegation for thousands of firms in different countries and industries. In line with the model’s pre-dictions, we find that input value and supplier uncertainty play a key role in shaping both integration and delegation choices.

All in the family? CEO choice and firm organization

Renata Lemos and Daniela Scur, 2018
CEP Discussion Paper 1528

  • Family firms are the most prevalent firm type in the world, particularly in emerging economies. Dynastic family firms tend to have lower productivity, though what explains their underperformance is still an open question. We collect new data on CEO successions for over 800 firms in Latin America and Europe to document their corporate governance choices and, crucially, provide causal evidence on the effect of dynastic CEO successions on the adoption of managerial best practices tied to improved productivity. Specifically, we establish two key results. First, there is a preference for male heirs: when the founding CEO steps down they are 30pp more likely to keep control within the family when they have a son. Second, instrumenting with the gender of the founder’s children, we estimate dynastic CEO successions lead to 0.8 standard deviations lower adoption of managerial best practices, suggesting an implied productivity decrease of 5 to 10%. To guide our discussion on mechanisms, we build a model with two types of CEOs (family and professional) who decide whether to invest in better management practices. Family CEOs cannot credibly commit to firing employees without incurring reputation costs. This induces lower worker effort and reduces the returns to investing in better management. We find empirical evidence that, controlling for lower skill levels of managers, reputational costs constrain investment in better management.

CEO Behavior and Firm Performance

Oriana Bandiera, Stephen Hansen, Andrea Prat, Raffaella Sadun, 2017
NBER Working Paper 23248

  • We measure the behavior of 1,114 CEOs in six countries parsing granular CEO diary data through an unsupervised machine learning algorithm. The algorithm uncovers two distinct behavioral types: “leaders” and “managers”. Leaders focus on multi-function, high-level meetings, while managers focus on one-to-one meetings with core functions. Firms with leader CEOs are on average more productive, and this difference arises only after the CEO is hired. The data is consistent with horizontal differentiation of CEO behavioral types, and firm-CEO matching frictions. We estimate that 17% of sample CEOs are mismatched, and that mismatches are associated with significant productivity losses.

Management as a Technology?

Nicholas Bloom, Raffaella Sadun, John Van Reenen, 2017
NBER Working Paper 22327

  • Are some management practices akin to a technology that can explain firm and national productivity, or do they simply reflect contingent management styles? We collect data on core management practices from over 11,000 firms in 34 countries. We find large cross-country differences in the adoption of management practices, with the US having the highest size-weighted average management score. We present a formal model of “Management as a Technology”, and structurally estimate it using panel data to recover parameters including the depreciation rate and adjustment costs of managerial capital (both found to be larger than for tangible non-managerial capital). Our model also predicts (i) a positive impact of management on firm performance; (ii) a positive relationship between product market competition and average management quality (part of which stems from the larger covariance between management with firm size as competition strengthens); and (iii) a rise in the level and a fall in the dispersion of management with firm age. We find strong empirical support for all of these predictions in our data. Finally, building on our model, we find that differences in management practices account for about 30% of total factor productivity differences both between countries and within countries across firms.

Turbulence, Firm Decentralization and Growth in Bad Times

Philippe Aghion, Nicholas Bloom, Brian Lucking, Raffaella Sadun, John Van Reenen, 2017
NBER Working Paper 23354

  • What is the optimal form of firm organization during “bad times”? We present a model of delegation within the firm to show that the effect is ambiguous. 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 firm decentralization from ten OECD countries and US administrative data, we find that firms that delegated more power from the Central Headquarters to local plant managers prior to the Great Recession out-performed their centralized counterparts in sectors that were hardest hit by the subsequent crisis. Using direct measures of turbulence based on product churn and stock market volatility, we show that the localist mechanism dominates. This conclusion is robust to alternative explanations such as managerial fears of bankruptcy and changing coordination costs. Although delegation is better suited to some environments than others, countries with more decentralized firms (like the US) weathered the 2008-09 Great Recession better: these organizational differences account for about 15% of international differences in post-crisis GDP growth.

Management Practices, Workforce Selection and Productivity

Stefan Bender, Nicholas Bloom, David Card, John Van Reenen, Stefanie Wolter, 2016
NBER Working Paper 22101

  • Recent research suggests that much of the cross-firm variation in measured productivity is due to differences in use of advanced management practices. Many of these practices – including monitoring, goal setting, and the use of incentives – are mediated through employee decision-making and effort. To the extent that these practices are complementary with workers’ skills, better-managed firms will tend to recruit higher-ability workers and adopt pay practices to retain these employees. We use a unique data set that combines detailed survey data on the management practices of German manufacturing firms with longitudinal earnings records for their employees to study the relationship between productivity, management, worker ability, and pay. As documented by Bloom and Van Reenen (2007) there is a strong partial correlation between management practice scores and firm-level productivity in Germany. In our preferred TFP estimates only a small fraction of this correlation is explained by the higher human capital of the average employee at better-managed firms. A larger share (about 13%) is attributable to the human capital of the highest-paid workers, a group we interpret as representing the managers of the firm. And a similar amount is mediated through the pay premiums offered by better-managed firms. Looking at employee inflows and outflows, we confirm that better-managed firms systematically recruit and retain workers with higher average human capital. Overall, we conclude that workforce selection and positive pay premiums explain just under 30% of the measured impact of management practices on productivity in German manufacturing.

The New Empirical Economics of Management

Nicholas Bloom, Renata Lemos, Raffaella Sadun, Daniela Scur, John Van Reenen, 2014
NBER Working Paper 20102

  • 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 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. Competition, governance, human capital and informational frictions help account for the variation in management.

Incomplete Contracts and the Internal Organizations of Firms

Philippe Aghion, Nicholas Bloom, John Van Reenen, 2013
NBER Working Paper 18842

  • 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 within firms. 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.