THE IMPACT OF COMPETITION & GLOBALIZATION
ON MANAGEMENT PRACTICES AND WORK-LIFE
BALANCE
Nick Bloom
(Centre for Economic Performance, LSE)
Very grateful for support and funding from the:
Economic and Social Research Council; Advanced Institute
of Management; and Anglo German Foundation
21st April 2006
GENERAL OUTLINE
A. Management Practices
(Bloom and Van Reenen, 2006)
B. Work-life Balance
(Bloom, Kretschmer and Van Reenen, 2006)
C. Policy Implications
MEASURING AND EXPLAINING MANAGEMENT
PRACTICES ACROSS FIRMS AND COUNTRIES
Nick Bloom & John Van Reenen
(Centre for Economic Performance, LSE)
21st April 2006
MOTIVATION: MANAGEMENT
Large persistent productivity differences across firms and
countries which people typically claim is due to “management”
• But what is the role of management?
• And why does it vary so much across firms and countries?
To address these questions in 2001 LSE and McKinsey1 started
an ambitious joint research project to collect the first firm level
international management data set.
The LSE received no funding from McKinsey – this was made possible by the generous
support of the ESRC, AIM and the AGF!
1
OUTLINE
1. “Measuring” management practices
2. Evaluating the reliability of this measure
3. Describing management across firms & countries
4. Explaining management across firms & countries
A NEW APPROACH TO MEASURING MANAGEMENT
1) Developing management practice scoring
• Scorecard for monitoring, targets and incentives
• 45 minute phone interview of (manufacturing plant) managers
2) Obtaining unbiased responses
• “Double-blind”
• Managers are not informed (in advance) they are scored
• Interviewers do not know company performance
3) Getting firms to participate in the interview
• Introduced as “Lean-manufacturing” interview, no financials
•
•
Endorsement of Bundesbank ,UK Treasury, Banque de France
Run by 10 MBAs (loud, pushy & business experience)
MONITORING - i.e. “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
(5): Performance is
continuously
tracked and
communicated,
both formally and
informally, to all
staff using a range
of visual
management tools
Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).
WE SURVEYED MEDIUM SIZED MANUFACTURING
FIRMS
•
US (≈300), UK, France and Germany (≈150 each)
•
Medium sized manufacturers, typically about 500 employees
• Medium sized because firm practices more homogeneous
• Manufacturing because easier to measure productivity
•
Good response rate of 54%
• Response uncorrelated with firm performance
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
OUTLINE
1. “Measuring” management practices
2. Evaluating the reliability of this measure
3. Describing management across firms & countries
4. Explaining management across firms & countries
INTERVAL VALIDATION SUGGESTS MANAGEMENT
SCORING PROCESS IS CONSISTENT
Re-interviewed 64 firms with different MBA interviewers speaking
to different plant managers
Firm average scores (over 18 question)
2nd interview
5
4
Correlation of 0.75
suggests interviews
pretty reliable
3
`
2
1
1
2
1st
3
interview
4
5
WE ALSO UNDERTOOK EXTERNAL VALIDATION BY
COMPARING TO COMPANY ACCOUNTS
Labour Productivity1
Sales Growth, (% pa)
169
5.0
148
Profit Rate2, (%)
6.4
18.1
16.5
Bottom 50%
Top 50%
Management score
Bottom 50%
Top 50%
Management score
Stock Market Value3
Bottom 50%
Top 50%
Management score
Survival Rates4, (%)
1.82
99.3
1.27
97.8
Bottom 50%
Top 50%
Management score
$’000 sales per employee at 2000 prices
2 Return on capital employed (%)
1
3 Tobins’
4
Bottom 50%
Top 50%
Management score
Q ($ value of firm per $ of assets), quoted firms only
(100 - % bankrupt or liquidated 12 months after 2004)
CONCERNS WITH OUR MANAGEMENT MEASURE?
Measurement error, but downwardly biases our results
Measurement bias (“happy manager”), but
•
“Double-blind” survey process scored from examples
designed to try and minimise this
•
Run series tests in the paper and appears OK
Reverse Causality
•
True for validation results, but only data checking tests
•
In management results concentrate on more causal
factors like competition, history, taxes etc…
OUTLINE
1. “Measuring” management practices
2. Evaluating the reliability of this measure
3. Describing management across firms & countries
4. Explaining management across firms & countries
1.2
1.2
FIRM LEVEL MANAGEMENT SCORES BY COUNTRY
1
firms
% of
.6
.8
.4
.2
2
3
4
Management score
5
1
1.2
1
3
4
5
2
3
4
5
Management score
1
US
.2
0
0
.2
Density
% .4of firms
.6
.8
1
UK
2
% .4of firms
.6
.8
1.2
Germany
0
0
.2
.4
Density
% of
.6 firms
.8
1
France
1
2
3
4
Management score
5
1
Management score
COUNTRY LEVEL MANAGEMENT SCORES*
US
3.35
Germany
3.31
France
UK
3.14
3.07
Typical UK managers?
Bad manufacturing management - a UK tradition?
“Efficient management is the single most significant factor
in the American productivity advantage”
[Marshall Plan Anglo-American productivity mission, 1947]
UK BAD AVERAGE MANAGEMENT MAINLY DUE TO
THE LONG TAIL BADLY MANAGED FIRMS
All firms
Firms with management
scores above 2
US
3.35
3.36
Germany
3.31
3.34
France
UK
3.14
3.07
US-UK gap is
0.28 points
3.34
3.23
US-UK gap is
0.13 points
US FIRMS (MULTINATIONAL SUBSIDIARIES) ARE
ALSO BETTER IN EUROPE
Average management score by firm type
in UK, France and Germany
# in sample
Domestic
379
Non-US multinational
subsidiary
US multinational
subsidiary
3.13
3.25
3.58
44
20
OUTLINE
1. “Measuring” management practices
2. Evaluating the reliability of this measure
3. Describing management across firms & countries
4. Explaining management across firms & countries
COMPETITION AND MANAGEMENT
Competition is strongly linked with good management
• True for all three competition measures in Nickell (1996):
import competition; industry rents; and # of competitors
Positive effects of competition appears to be due to two factors
• “Selection” – badly managed exit more quickly
• “Effort” – competition makes managers try harder
EDUCATION, SKILLS AND MANAGEMENT
Educations and training strongly linked with good management
• True for all five measures we used: % employees with a
degree; % of employees with an MBA, training days per
year (managers); training days per year (non-managers);
and average wages
Positive correlation appears be a combination of:
• Cause: educations & training facilitates good management
• Effect: educated & trained people attracted to well
managed firms
INHERITED FAMILY FIRMS AND MANAGEMENT
Inherited “family” firms defined as 2nd generation family owned
– excludes 1st generation “founder” firms (typically well run)
Quality of management practices in inherited family owned firms
depends on who runs them
• Firms with professional management typically run well
• Firms with inherited family management typically run less well
Work from Columbia, Harvard, and NYU shows inherited family
management also bad for productivity and growth, particularly in
larger firms and faster growing industries
In UK and France inherited family firms typically family managed
while in the US and Germany typically professionally managed
WHY DOES FAMILY INVOLVEMENT VARY ACROSS
COUNTRIES?
• Historical differences
• UK & France tradition of Primo Geniture:
[Oxford English Dictionary, 2005]
“Feudal rule of inheritance introduced into England by the
Norman Conquest. Replaced Teutonic gavelkind. Obligatory
until the Statute of Wills [1540]. Still common in many places”
• US and Germany tradition of equal division (Menchik, 1980)
• Estate tax headline rates on family firms1:
• US ≈ 50%
France ≈ 25%
• UK = 0%
Germany ≈ 15%
1 Rate
on a $25m firm. In practice these taxes are often reduced/avoided by advanced
tax planning, although this involves foresight, financial costs and some control loss.
A FAMOUS UK INHERITED FAMILY MANAGED FIRM,
WITH AN EXECUTIVE BOARD MEETING IN PROGRESS….
Note: Albert Steptoe inherited “Steptoe & Son” from his father, making him the
2nd generation, and Harold the 3rd generation
DO THESE FACTORS EXPLAIN THE UK-US
MANAGEMENT GAP?
UK-US MANAGEMENT PRACTICE GAP1
-0.11
-0.08
-0.08
-0.28
-0.01
Total
Competition
management
Gap
1
Inherited family
Education
(% employees managed firms
(primogeniture)
with degree)
Residual
management
gap
Note: (a) based on our sample of medium sized manufacturing firms; (b) 1 point on the
management scale associated with about 20% higher productivity.
GENERAL OUTLINE
A. Management Practices
(Bloom and Van Reenen, 2006)
B. Work-life Balance
(Bloom, Kretschmer and Van Reenen, 2006)
C. Policy Implications
WORK LIFE BALANCE, MANAGEMENT PRACTICES
AND PRODUCTIVITY
Nick Bloom, Toby Kretschmer and John Van Reenen
(Centre for Economic Performance, LSE)
21st April 2006
MOTIVATION: WORK-LIFE BALANCE (WLB)
With unemployment at historically low levels increased UK focus
on quality of jobs rather than just quantity. Focus sharpened as
family friendly policies and female participation moved up the
political agenda, raising questions such as:
• Are WLB and productivity trade-offs or complements?
• Do competition and globalization erode employees WLB?
To address these issues the we added questions on WLB
outcomes and practices to the end of the management survey.
OUTLINE
1. Competing models of work-life balance
2. Measuring work-life balance and testing the models
3. International (and multinational) evidence
COMPETING MODELS OF WORK LIFE BALANCE
Trade-Off
Theory
Win-Win
Theory
Evidence
WLB correlation with:
Management
Negative
Positive
?
Competition
Negative
Ambiguous
?
Productivity
Negative
Positive
?
OUTLINE
1. Competing models of work-life balance
2. Measuring work-life balance and testing the models
3. International (and multinational) evidence
DEFINING OUR WLB MEASURES
• WLB practice score defined averaging over 5 questions:
– Working from home allowed (yes/no)
– Full/part time job switching allowed (yes/no)
– Job sharing allowed (yes/no)
– Childcare subsidy (yes/no)
– Childcare flexibility (low/medium/high)
• WLB outcome measure defined by the question:
– “Relative to other companies in your industry how much
does your company emphasise work life balance”?
(1) “much less”, (2) “slightly less”, (3) “the same”,
(4) “slightly more” and (5) “much more”
WLB (PRACTICES AND OUTCOMES) BOTH LINKED
WITH GOOD MANAGEMENT
Management Quality
3.6
3.5
3.4
3.3
3.2
3.1
3
2.9
Very Low
Low
Average
High
Very High
Work-Life Balance Outcomes
Contradicts the “Trade-Off” theory
Supports the “Win-Win” theory
WLB (PRACTICES AND OUTCOMES) ARE NOT
LINKED TO COMPETITION
Examined a range of competition measures and found
no evidence for any link between WLB and competition
In fact the correlation was typically positive but insignificant
Competition appears not to make firms treat their employees
worse - presumably if they did employees would leave for the
competitors!
Contradicts the “Trade-Off” theory
No implications for the “Win-Win” theory
WLB PRACTICES AND PRODUCTIVITY ALSO
UNRELATED
WLB and productivity are strongly positive correlated
But of course WLB and productivity both are linked with good
management - controlling for management eliminates the
correlation between productivity and WLB
Firms provide the productivity maximising amount of WLB for
their employees firms
Contradicts the “Trade-Off”
Contradicts the “Win-Win” theory
MODELS OF WORK LIFE BALANCE
Trade-Off
Theory
Win-Win
Theory
Evidence
WLB correlation with:
Management
Negative
Positive
Positive
Competition
Negative
Ambiguous
Zero
Productivity
Negative
Positive
Zero
Consistent with a more “Free-market” view
OUTLINE
1. Competing models of work-life balance
2. Measuring work-life balance and testing the models
3. International (and multinational) evidence
THE FRENCH ADOPT THE NICEST WLB PRACTICES
AND THE AMERICANS THE TOUGHEST
COUNTRY LEVEL WLB AVERAGE SCORES*
2.54
France
UK
1.87
Germany
1.84
US
1.53
* Sum of scores for allowances and flexibility over: working-from home, jobsharing, full/part time switching, childcare flexibility, childcare subsidies
INTRIGUINGLY, US MUTLINATIONALS IN EUROPE
ADOPT LOCAL “NICER” WLB PRACTICES
For management practices US firms bring over their better
management practices with them to Europe
But for work-life balance practices US firms adopt the “nicer” local
European approach
Since these WLB practices are typically not regulated suggests
US firms are choosing nicer WLB practices in Europe, which in
turn suggests Europeans value this more
Working for a US multinational in Europe is typically
good for employees
ALSO NO EVIDENCE THAT “GLOBALIZATION” IS
BAD FOR WLB EITHER
We find a very strong positive link between firm size and WLB,
noting that large firms are also typically much more globalized
Also find no evidence multinationals reduce employees WLB, and
in fact the correlation is positive but insignificant
Suggests employees belonging to more globalized firms do not
suffer (and probably gain) in terms of their WLB
Working for larger globalized firms (in Europe and the
US) is typically good for employees WLB
GENERAL OUTLINE – OVERVIEW TWO PAPERS
A. Management Practices
(Bloom and Van Reenen, 2006)
B. Work-life Balance
(Bloom, Kretschmer and Van Reenen, 2006)
C. Policy Implications
COMPETITION IS GOOD
Well known that competition benefits consumers – more choice
and lower prices
We find that competition also raises productivity by improving
management practices
And we find no evidence – as many have claimed – that
competition harms workers work-life balance
Continue to pursue the successful policy agenda of
increasing competition in the UK
“GLOBALIZATION” APPEARS GENERALLY GOOD
Multinationals (especially US ones) are typically higher
productivity, better managed and pay their workers more
Larger firms and multinationals also appear not to harm (and if
anything improve) the WLB of their employees
Trade is also an important factor is raising competition
Continue to push for open and globalized UK markets
at home and in Europe
POLICY IMPLICATIONS FOR INHERITANCE TAX –
FIRST SOME BACKGROUND
Standard assets (savings, housing etc)
• 40% inheritance tax above a £275,000 threshold
Private companies (typically family firms)
• 0% inheritance tax, and no cap on this relief
• Exemption introduced in Budgets from 1979 to 1992
• Rationale that inherited family firms help the economy
1
A £1m family firm has 16 employees on average. Taxing firms with >£1m will exclude
most family shops, pubs, small businesses etc.
POLICY IMPLICATIONS FOR INHERITANCE TAX
Inherited family management is associated with poorer
management and productivity in medium & larger firms.
So there may be benefits from capping the inheritance tax
exemption for private companies:
•
Increase productivity by removing a distortion in favour of
family inheritance in larger firms1
•
Improve intergenerational equality - which is bad in the UK
by international standards - by taxing large inheritances
•
Raise revenue – for example a £1m cap could raise £250m
Consider reforms for a more neutral inheritance tax
1
90% of family firms worth less than £1m. An average £1m firm has 16 employees.
AND FINALLY…………..
MANAGEMENT RESEARCH NEXT STEPS
This summer follow up a second survey wave on 3000 firms to:
•
•
Extend to more countries:
•
Europe: Italy, Poland, Sweden and Greece
•
India
Extend to more industries
•
•
Pilots in Retail, Education (Schools) and Health
(Hospitals)
Extend to look at organisational structure and use of IT
Quotes to finish……..
THE WEIRD WORLD OF MANUFACTURING
Spoke to companies making…..
• Plastic balls to stop birds nesting on water near airports
(reported no competitors)
• European sex-toys (few exports – aimed at domestic “tastes”)
….and an amazing array of people
• “I spend most of my time walking around cuddling and
encouraging people - my staff tell me that I give great hugs”
• “……….…..[long silence]………….sorry I just got distracted
by a submarine surfacing in front of my office window”
BACK-UP
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
• Exogenous managerial inefficiency (Lucas 1978)
• Strictly “better” or “worse” styles of management
• Well managed firms strictly better performing
• Empirically we find some support for both
1.2
MANY COMPETITORS AND NO (PG) FAMILY CEO
.8
1
N=317
0
.2
.4
.6
2.7% firms in tail1
1
2
3
4
5
Average management score across questions and interviews - note dropping lean3
1.2
FEW COMPETITORS AND/OR (PG) FAMILY CEO
1
N=415
0
.2
.4
.6
.8
9.0% firms in tail1
1
2
3
4
5
Average management score across questions and interviews - note dropping lean3
1
Tail defined as a score ≤ 2. In the whole sample 6.9% of firms are in the tail.
CONTINGENT MANAGEMENT PRACTICES
Dependent Var
Level
Ln (% degrees)i
firm level
HC
Manage
ment
FC
Manage
ment
HC-FC
Manage
ment
HC-FC
Manage
ment
HC-FC
Manage
ment
Firm
Firm
Firm
Firm
Industry
0.220
(0.039)
0.100
(0.043)
0.120
(0.043)
Ln (ave wage)i
firm level
0.337
(0.122)
0.281
(0.169)
Ln (% degrees)j
Industry level (US)
Standard Errors
Firms
Robust
Robust
Robust
Robust
Clustered
732
732
732
424
732
Note: “HC management” average z-score of the 3 most human capital focused
questions (questions 13, 17 and 18). “FC management” average z-score of the
3 most fixed capital focused questions (1, 2 and 4). “HC-PC management” is
the difference of these two measures.
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
EXTERNAL VALIDATION: PRODUCTIVITY & PROFIT
Dependent
variable
Sales
Sales
Sales
(in Ln)
(in Ln)
(in Ln)
Estimation1
OLS
OLS
OLS
All
All
All
Firms
ROCE Tobin Q
Exit
(in Ln)
Sales
growth
OLS
OLS
OLS
Probit
All
Quoted
All
All
Managementi
0.085
0.034
0.250 0.018
0.042
2.469
(0.025) (0.011) (0.012) (0.688) (0.075)- (0.006)
-0.200
[0.026]
Ln(Labor) it
0.999
0.539
0.540
2.172
(0.014) (0.021) (0.021) (1.202)
0.209
(0.109)
-0.022
(0.011)
0.233
[0.045]
Ln(Capital) it
0.103
0.104 -0.148
(0.013) (0.013) (0.899)
-0.029
(0.086)
0.024
(0.008)
-0.158
[0.045]
Ln(Materials) it
0.362
0.354 -0.439
(0.020) (0.020) (0.723)
0.130
(0.050)
-0.010
(0.007)
-0.084
[0.231]
Controls1
No
Yes
Yes
Yes
Yes
Yes
Yes
Noise controls
No
No
Yes
Yes
Yes
Yes
Yes
Observations
6,267
5,350
5,350
5,089
2,635
4,777
709
Firms
732
709
709
690
374
702
709
1 Includes country, year, SIC3 industry, skills, hours, firm-age, and public/private
Robust S.E.s in ( ) below. For probit p-values in [ ] below
TARGETS - i.e. “HOW TOUGH ARE TARGETS?”
Score (1) Goals are
either too
easy or
impossible to
achieve;
managers
low-ball
estimates to
ensure easy
goals
(3) In most areas,
top management
pushes for
aggressive goals
based on solid
economic
rationale. There
are a few "sacred
cows" not held to
the same rigorous
standard
(5) Goals are
genuinely
demanding for all
divisions. They
are grounded in
solid, solid
economic
rational
Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).
INCENTIVES - i.e. “HOW DOES THE PROMOTION
SYSTEM WORK?”
Score (1) People are
promoted
primarily upon
the basis of
tenure
(3) People
are promoted
upon the
basis of
performance
(5) We actively
identify, develop
and promote our
top performers
Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).
3
4
5
6
7
Lowess smoother
-2
bandwidth = .8
-1
0
Management Score
1
2
FAMILY OWNERSHIP PROBIT
Dependent variable
1 Marginal
Family owned, family
CEO & primo geniture1
Country = UK
0.109
[0.015]
Country = France
0. 096
[0.042]
Country = Germany
0.058
[0.303]
Log (employees)
-0.022
[0.012]
Log (firm-age)
0.052
[0.017]
Industry controls
Yes
Observations
718
effects, p-values in [ ] brackets underneath