Management Practices in Europe,
the US and Emerging Markets
Nick Bloom (Stanford Economics and GSB)
John Van Reenen (LSE and Stanford GSB)
Lecture 1: Management and firm Performance
Nick Bloom and John Van Reenen, Management Practices, 2011
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Why care about management and productivity?
Measuring management
Nick Bloom and John Van Reenen, Management Practices, 2011
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Productivity
• Gross Domestic Production (GDP) per capita – basically
Income per person – is a key indicator of economic wellbeing
• GDP per capita increases by growth of inputs (e.g. more
capital or labor) or higher Total Factor Productivity (TFP)
GDP = Inputs + Total Factor Productivity (TFP)
e.g. Labor, capital, materials
• Note: per capita GDP falls if employment rate
(employment/population) falls (e.g. Unemployment) even if
productivity constant
Nick Bloom and John Van Reenen, Management Practices, 2011
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Productivity “Facts”
• Macro: Productivity varies across nations and over time
– Robert Solow: TFP growth at least as important as
growth of inputs in explaining economic growth
– Cross country GDP/capita differences largely due to
TFP differences
– US Productivity slowdown 1973-1995 and broadbased “productivity miracle” post 1995
• Micro: Productivity varies hugely across firms
Nick Bloom and John Van Reenen, Management Practices, 2011
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In long-run most countries have enjoyed catch up
Growth with the GDP/head leader (US) but not all
Source: Maddison (2008) Data is smoothed by decade
Nick Bloom and John Van Reenen, Management Practices, 2011
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Large Income & TFP Differences between countries
Source: Jones and Romer (2009). US=1
Nick Bloom and John Van Reenen, Management Practices, 2011
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Why it matters for policy
• Increasing TFP means that the economic “pie” is bigger
so more room for
– Consumption increases
– Tax cuts
– Increases in public goods (e.g. Environmental quality)
• Harder to achieve if productivity stagnant
• But what can be done to increase productivity?
Nick Bloom and John Van Reenen, Management Practices, 2011
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Factors increasing productivity
• Proximate factors:
– “Hard” technology (e.g. Research & Development)
– Skills (e.g. Expansion of college education)
– Management (a technology & a skill?)
• Some deeper factors “driving” the above
– Competition
– Globalization
– Regulations & government policies
– Legal
– Culture
Nick Bloom and John Van Reenen, Management Practices, 2011
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Productivity Differences across firms within
countries is huge
• US Census data on population of plants
– Plant at 90th percentile produced 4x plant at the 10th percentile
(Syverson, 2004)
• Not just mismeasured prices: we see these differences
in detailed industries where we measure plant prices
(e.g. boxes, bread, block ice, concrete, plywood, etc.)
• These firm-level productivity differences could account
for large part of cross country differences.....
Nick Bloom and John Van Reenen, Management Practices, 2011
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Distribution of plant TFP differences: US-Indian productivity
gap related to US having far fewer low productivity plants
Source: Hsieh and Klenow (2008); mean=1
Nick Bloom and John Van Reenen, Management Practices, 2011
How Total Factor Productivity increases
• Within Firms (Traditional view)
– The same firms become more productive (e.g. new
technology spreads quickly to all firms, like Internet)
• Between Firms (“Schumpeterian” view)
– Low TFP firms exit and resources are reallocated to
high TFP firms
• High TFP firms expand (e.g. more jobs) & low TFP
firms contract (e.g. less jobs)
• Exit/entry
Nick Bloom and John Van Reenen, Management Practices, 2011
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These two effects are well known to cricket fans
Within batsman (each batsman improves)
Between batsman (more time for your best batsman)
Nick Bloom and John Van Reenen, Management Practices, 2011
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Example of How Total Factor Productivity
increases –Firm A twice as productive as firm B
Period 1
A
B
Productivity
-output/jobs
2
1
Jobs
10
10
20
Output
20
10
30
Aggregate
productivity
Total
1.5
(=30/20)
Aggregate (weighted) productivity is 1.5
Nick Bloom and John Van Reenen, Management Practices, 2011
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How Total Factor Productivity increases – both
firms increase TFP by 0.5
Period 1
A
B
Productivity
2
1
Jobs
10
10
Output
20
10
Aggregate
productivity
Period 2
Total
A
B
2.5
1.5
20
10
10
20
30
25
15
40
1.5
(=30/20)
Total
2
(=40/20)
Aggregate productivity increases from 1.5 to 2 (one third)
Nick Bloom and John Van Reenen, Management Practices, 2011
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How Total Factor Productivity increases – both
firms increase TFP by 0.5
Period 1
A
B
Productivity
2
1
Jobs
10
10
Output
20
10
Aggregate
productivity
Period 2
Total
A
B
2.5
1.5
20
10
10
20
30
25
15
40
1.5
(=30/20)
Total
2
(=40/20)
Aggregate productivity increases from 1.5 to 2 (one third)
Nick Bloom and John Van Reenen, Management Practices, 2011
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How Total Factor Productivity increases reallocate all jobs & output to firm A
Period 1
A
B
Productivity
2
1
Jobs
10
10
Output
20
10
Aggregate
productivity
Period 2
Total
A
B
2
1
20
20
0
20
30
40
0
40
1.5
(=30/20)
Total
2
(=40/20)
Aggregate productivity increases from 1.5 to 2 (one third)!
Nick Bloom and John Van Reenen, Management Practices, 2011
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How Total Factor Productivity increases reallocate all jobs & output to firm A
Period 1
A
B
Productivity
2
1
Jobs
10
10
Output
20
10
Aggregate
productivity
Period 2
Total
A
B
2
1
20
20
0
20
30
40
0
40
1.5
(=30/20)
Total
2
(=40/20)
Aggregate productivity increases from 1.5 to 2 (one third)!
Nick Bloom and John Van Reenen, Management Practices, 2011
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Some Empirical Evidence on reallocation
• Need large-scale database of many firms/plants
• Reallocation appears to be an important factor:
– In aggregate US productivity growth: ~half of aggregate TFP
growth in a 5 year period in typical industry due to reallocation
– Following trade liberalizations: about half of productivity gains due
to shrinking/exit of less productive plants (e.g. Pavcnik, 2002)
– For certain sectors: In retail trade, almost all of labor productivity
growth is due to exit/entry of stores (Foster et al, 2006)
• Caveats
– Reallocation is not immediate (e.g. trade dislocation)
– Some shocks can destroy valuable “specific capital”
Nick Bloom and John Van Reenen, Management Practices, 2011
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What about management?
• Case studies of management:
– Toyota and British Leyland
– Goldman Sachs and Lehman Brothers
• Obviously management matters but
– how to generalize?
– how much does it matter?
– what causes the differences?
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Why care about management and productivity?
Measuring management
Nick Bloom and John Van Reenen, Management Practices, 2011
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The Survey Methodology
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 London, with same training and country rotation
3) Getting firms to participate in the interview
•Introduced as “Lean-manufacturing” interview, no financials
•Official Endorsement: Bundesbank, PBC, CII & RBI, etc.
•Run by 78 MBAs (credible with business experience)
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Example question: “how is performance tracked?”
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
Nick Bloom and John Van Reenen, Management Practices, 2011
(5): Performance is
continuously
tracked and
communicated,
both formally and
informally, to all
staff using a range
of visual
management tools
22
Study question: “Do you think you can
measure management practices?”
Nick Bloom and John Van Reenen, Management Practices, 2011
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4
0
2
(log(sales/employee)
Productivity
-6
-4
-2
labp
Management practices and performance
1
2
3
Management
score
management
Nick Bloom and John Van Reenen, Management Practices, 2011
4
5
24
Study question: “Do you think this research
proves that differences in management
cause differences in firm performance?”
Nick Bloom and John Van Reenen, Management Practices, 2011
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Management practices across countries
US
Germany
Sweden
Japan
Canada
France
Italy
Great Britain
Australia
Northern Ireland
Poland
Republic of Ireland
Portugal
Brazil
India
China
Greece
2.6
Distinct groups
2.8
3
3.2
meanManagement
of management Score
Country
Nick Bloom and John Van Reenen, Management Practices, 2011
Average
3.4
US, manufacturing, mean=3.33 (N=695)
0
.2
Density
.4
.6
.8
Management practices across firms (US and India)
2
3
management
4
5
India, manufacturing, mean=2.69 (N=620)
0
.2
Density
.4
.6
.8
1
1
2
3
management
Nick
Bloom
and John
Van Reenen, Management
Practices, 2011
Firm
level
management
score, manufacturing
4
5
27
firms 100 to 5000 employees
Study question: “What are the factors that
are most important in leading to differences
in management practices across firms and
countries?”
Nick Bloom and John Van Reenen, Management Practices, 2011
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Class Presentations
From Lecture 2 onwards there will be two 15 minute presentations
from the class on a firm you have worked in or know.
We have sent out a Doodle scheduler to sign up
Present about 6 slides drilling into detail on an interesting part of their
management practices, ideally linked to the course.
Try to include as many pictures/figures as possible and feel free to be
creative and surprise the class.
Nick Bloom and John Van Reenen, Management Practices, 2011
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Wrap up and next class
• We see massive variation in income across countries and
performance across firms
• Much of these differences appear to be driven by productivity,
with management a key factor explaining this
• Competition, ownership, regulation and education appear to
be important in explaining differences in management
• Next week drill into management practices for monitoring
• In advance everyone should use the grid to score a firm – any
sector and size – they know to prepare for class discussion
Nick Bloom and John Van Reenen, Management Practices, 2011
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Back Up Slides
Nick Bloom and John Van Reenen, Management Practices, 2011
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Big TFP dispersion among US ready mix concrete plants: More
Competition means higher productivity (cut off lower tail)
Low competition
High competition
Source: Syverson (2004)
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Variation even greater across firms than across countries
Brazil
Canada
China
France
Germany
Great Britain
Greece
India
Ireland
Italy
Japan
Poland
Portugal
Sweden
US
0
.5
1
0
.5
1
0
.5
1
0
.5
1
Australia
1
2
3
4
5
1
2
3
4
5
1
Nick Bloom and John Van Reenen, Management Practices, 2011
2
3
4
5
Firm-Levelmanagement
Management Scores
1
2
3
4
5