Management Practices and firm performance: evidence from large-scale surveys

October 27, 2020
Editorial Entrepreneurship
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The paper is the result of a joint research between several universities and the national statistical agency. What was the research goal for the collaboration?

This project is a collaboration with the US Census Bureau towards understanding management and organizational practices and the drivers of productivity growth in establishments. We tested and administered the first widespread paper-based survey of the use of management practices in firms, building on the instrument of the World Management Survey, conducted via phone interviews. This allowed us to capture data from many more firms with less burden on the survey respondents. The US Census Bureau hopes to continue to include the Management and Organization Practices survey as a supplement to it’s annual survey of manufacturers (the ASM) every five years, with the second round completed for 2015 and 2020 MOPS currently underway.

The study underlines that management practices are tightly linked to several measures of performance, and they account for about one-fifth of the cross-firm productivity spread: what does it mean and what are its consequences?

Structured management practices include for example, quality checks and reducing defect rates, hiring and firing based on performance, and tracking and achieving targets of production. Firms who follow these practices have higher profitability, higher innovation rates and lower rates of exit. Structured management practices able to explain a fifth of the differences across firms in labour productivity, measured as the output per worker. This is about the same contribution as R&D and more than information technology or skills, which have been well-established as the determinants of productivity. The bottom line is that management matters.

Please, can you briefly describe the main drivers of differences in management practices and how they are connected to the geographical context in which the business develops?

There are certain policy environments which support and complement structured management practices. For example, when there is no automatic membership of employees into the factory union (measured by the “Right to Work law” that varies across state legislations in the United States), it is easier to implement practices related to hiring, promoting and firing on the basis of performance rather than tenure. Being in the proximity of large multinationals (“Million Dollar Plants”) appears to help firms pick up these practices faster through the flow of workers.

 Follow up research from this study and current projects related to management?

Currently me and Prof. Schivardi have a collaboration with the Bank of Italy to measure the role of these practices in the response of firms to COVID, the results of which I hope to share with you very soon. I have also completed the pilot in India for a similar study with Prof. Nick Bloom and Prof. Pete Klenow from Stanford University, to examine the role these practices play in a developing country context.

What Drives Differences in Management Practices

The author

Megha Patnaik is assistent professor at the Department of Economics & Finance, Luiss.