August 2010
Occasional paper
26
Why do Management
Practices Differ Across
Firms and Countries?
Nicholas Bloom and
John Van Reenen
Abstract
Economists have long puzzled over the astounding differences in productivity between firms
and countries. For example, looking at disaggregated data on U.S. manufacturing industries,
Syverson (2004a) found that plants at the 90th percentile produced four times as much as the
plant in the 10th percentile on a per-employee basis. Only half of this difference in labor
productivity could be accounted for by differential inputs, such as capital intensity. Syverson
looked at industries defined at the four-digit level in the Standard Industrial Classification
(SIC) system (now the North American Industry Classification System or NAICS) like
“Bakeries and Tortilla Manufacturing” or “Plastics Product Manufacturing.” Foster,
Haltiwanger, and Syverson (2008) show large differences in total factor productivity even
within very homogeneous goods industries such as boxes and block ice. Some of these
productivity differences across firms and plants are temporary, but in large part they persist
over time. At the country level, Hall and Jones (1999) and Jones and Romer (2009) show
how the stark differences in productivity across countries account for a substantial fraction of
the differences in average per capita income. Both at the plant level and at the national level,
differences in productivity are typically calculated as a residual—that is, productivity is
inferred as the gap between output and inputs that cannot be accounted for by conventionally
measured inputs.
JEL classification: L2, M2, O32, O33
Keywords: organization, management
This paper was produced as part of the Centre’s Productivity and Innovation Programme.
The Centre for Economic Performance is financed by the Economic and Social Research
Council.
Acknowledgements
The authors gratefully acknowledge Stiftung Stahlwerk Georgsmarienhuette for funding this
research. Nicholas Bloom is Assistant Professor of Economics, Stanford University, Stanford
California. He is also an International Research Fellow. John Van Reenen is Director of the
Centre for Economic Performance and Professor of Economics, London School of
Economics. He is also a Research Fellow in the Centre for Economic Policy, London.
Both authors are also Faculty Research Fellows, National Bureau of Economic Research,
Cambridge, Massachusetts.
Published by
Centre for Economic Performance
London School of Economics and Political Science
Houghton Street
London WC2A 2AE
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means without the prior permission in writing of
the publisher nor be issued to the public or circulated in any form other than that in which it
is published.
Requests for permission to reproduce any article or part of the Occasional Paper should be
sent to the editor at the above address.
© N. Bloom and J. Van Reenen, submitted 2010
2
Economists have long puzzled why there are such astounding differences in productivity
between firms and countries. For example, looking as disaggregated data on U.S.
manufacturing industries, Syverson (2004a) found that plants at the 90
th
percentile
produced four times as much as the plant in the 10
th
percentile on a per-employee basis.
Only half of this difference in labor productivity could be accounted for by differential
inputs, such as capital intensity. Syverson looked at industries defined at the four-digit
level in the Standard Industrial Classification (SIC) system (now the North American
Industry Classification System or NAICS) like “Bakeries and Tortilla Manufacturing” or
“Plastics Product Manufacturing.” Foster, Haltiwanger and Syverson (2009) show large
differences in total factor productivity even within very homogeneous goods industries
such as cement and block ice. Some of these productivity differences across firms and
plants are temporary, but in large part they persist over time. At the country level, Hall
and Jones (1999) and Jones and Romer (2009) show how the stark differences in
productivity across countries account for a substantial fraction of the differences in
average per capita income.
Both at the plant level and at the national level, differences in productivity are typically
calculated as a residual - that is, productivity is inferred as the gap between output and
inputs that cannot be accounted for by conventionally measured inputs. For this reason,
Abramovitz (1956) labeled total factor productivity at the country level “a measure of our
ignorance.” Productivity differences at the firm level have long been a measure of our
ignorance, too. For example, one potential hypothesis has been that persistent
productivity differentials are due to “hard” technological innovations as embodied in
patents or adoption of new machinery. Although there has been substantial progress in
improving our measures of technology, there remain substantial productivity differences
even after controlling for such factors.
In this paper, we present evidence on another possible explanation for persistent
differences in productivity at the firm and the national level—namely, that such
differences largely reflect variations in management practices. As two British-born
academics, we are accustomed to reports that blame Britain’s relatively low productivity
3
on bad management. Indeed, this view is so common in the UK that it has generated a
vibrant export industry of TV shows on bad management in manufacturing (“The
Office”), private services (“Fawlty Towers”), and the public sector (“Yes, Minister”).
Now that “The Office” has been so successfully imported into the US, this raises the
question as to whether Michael Scott (the infamously bad American manager in the
show) is representative of US firms?
But while ascribing differences in productivity to management practices has long been
popular for TV shows, business schools and policy makers, it has been less popular
among economists for two broad reasons. First, much of the management literature is
based on case studies, rather than on systematic empirical data across firms and countries.
To tackle this problem we have, over the last decade, undertaken a large survey research
program to systematically measure management practices across firms, industries and
countries. We begin by describing our survey approach, which focuses on aspects of
management like systematic performance monitoring, setting appropriate targets and
providing incentives for good performance.
A second reason that economists have tended to shy away from management-based
explanations for productivity differences is a sense that changing management seems a
relatively straightforward process. To be sure, there are always adjustment costs and
agency costs, but if we are correct about the substantial size of the potential gains from
improved management, it seems as if such barriers should be surmountable. In turn, this
insight suggests that perhaps management differences are rooted in deeper informational,
social, legal and technological differences. Thus, once we have explained how we
measure management and identified some basic patterns in our data, we 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.
4
As a foretaste of our argument, here are ten conclusions we will discuss in this paper
based on our management data.
First, firms with “better” management practices tend to have better performance on a
wide range of dimensions: they are larger, more productive, grow faster and have higher
survival rates.
Second, management practices vary tremendously across firms and countries. Most of the
difference in the average management score of a country is due to the size of the “long
tail” of very badly managed firms. For example, relatively few U.S. firms are very badly
managed, while Brazil and India have many firms in that category.
Third, countries and firms specialize in different styles of management. For example,
American firms score much higher than Swedish firms in incentives but are worse than
Swedish firms in monitoring.
Fourth, strong product market competition appears to boost average management
practices through a combination of eliminating the tail of badly managed firms and
pushing incumbents to improve their practices.
Fifth, multinationals are generally well managed in every country. They also transplant
their management styles abroad. For example, US multinationals located in the UK are
better at incentives and worse at monitoring than Swedish multinationals in the UK.
Sixth, firms that export (but do not produce) overseas are better managed than domestic
non-exporters, but are worse managed than multinationals.
Seventh, inherited family owned firms who appoint a chief executive officer as a family
member (especially the eldest son) are very badly managed on average.
