Decentralization of Decision-Making at the Firm: Analysis of Firms in 7 European Countries and Russia Irina Levina National Research University “Higher School of Economics” WCCE, Rome, 26 June 2015

Quotes “It doesn’t make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do.” Steve Jobs, Apple “The art of delegation is one of the key skills any entrepreneur can master.” Richard Branson, Virgin Group

Introduction Last years: significant and fast changes in the internal organization of firms In particular: decentralization of decision-making at the firm – Increasing share of strategic questions move to responsibility of middle and local management Quick development of theoretical and empirical literature However: still a lot of unanswered questions

In this paper… I use data of two extensive firm surveys To compare performance of centralized and decentralized firms To shed more light on factors that affect organization of decision- making at the firms To check persistence of the results across countries Main result: – Not only factors that affect relative costs and benefits of decentralization – But also behavioral, non-economically-rational, factors Have an important influence on the organization of decision- making at the firm

Literature Firm decentralization and economic outcomes: Standard economics: – Higher demand for decentralization from more productive firms [Acemoglu et al. (2007); Aghion et al. (2014)] However: – Decentralization increases initiative of employees [Aghion and Tirole (1997)] Behavioral economics, psychology: – Employees involvement and autonomy are important for intrinsic motivation [Weibel et al. (2014); Benz and Frei (2004, 2008)]

Literature What shapes organization of decision-making? Theoretical models: – Comparison of relative costs and benefits of decentralization [Aghion and Tirole (1997), Acemoglu et al. (2007), Alonso et al. (2008)] Benefits: better access to information, quicker decision-making Costs: possible divergence of incentives, limited trust Empirical results: – Firm size, age, quality of human capital, trust, competition, … [Caroli and Van Reenen (2001), Acemoglu et al. (2007), Bloom et al. (2010, 2012)] No results about importance of behavioral factors

Theory Frey (2004), Benz (2008): procedural utility – People derive utility not only from the outcomes – But from the processes that lead to the outcomes as well Benz & Frey (2004, 2008): Job satisfaction of self-employed is on average higher than job satisfaction of employed persons – Even after controlling for income, hours worked, and individual characteristics of the respondents Interpretation: self-employed value job autonomy and interesting job – Confirmed by data Applications to organization of decision-making at the firms?

Hypothesis Organization of decision-making at the firms: Firm owners/CEOs – Can value running their businesses by themselves – Can value keeping the decision-making power in their hands Hypothesis: Behavioral factors – intrinsic motivation of firm owners or CEOs to keep more decision-making power in their hands – have an important influence on organization of decision- making at the firm This can have important implications for firms’ development!

Data Two extensive surveys of manufacturing firms – “European Firms in a Global Economy” run in 2010 in 7 European countries: Germany, UK, France, Austria, Spain, Italy and Hungary – “Russian Firms in a Global Economy” run in 2014 in Russia Top managers surveyed Samples representative in each country by industry and firm size About firms surveyed in each country (exceptions – Austria and Hungary – about 500 firms)

Question about decentralization With reference to strategic decisions which of the following statements better describes your firm situation? Decisions in your firm are… – … centralized: the CEO/owner takes most decisions in every area – … decentralized: managers can take autonomous decisions in some business areas Mild wording: – Decentralized firms = take autonomous decisions in some business areas High response rate: more than 96% But still: only 25% of decentralized firms in the sample

Statistics Share of decentralized firms Total>=100 empl.>=250 empl. Spain39%59%64% UK38%43%40% Austria35%65%58% Germany29%52%58% France22%28%30% Russia17%25%25%29%29% Hungary16%20%29% Italy15%25%32%

Decentralization & outcomes InnovationsNew productsExports DC DC DC Germany7159***3723***5840*** UK7163** France Austria ** Spain7466***2420**6249*** Italy7565*** *** Hungary7250***4622***6655 Russia5445*

What shapes organization of decision-making? Europe Decision-making is decentralized Employment, log 0.07***0.05*** 0.06***0.05*** Share of employees with higher education 0.00*** Some managers have experience of work abroad 0.08***0.07*** Young firm (<6 years) 0.06***0.05*** 0.04**0.03* Middle-aged firm (6-20 years) Largest shareholder's share, log -0.06*** Three largest shareholders' share, log -0.11***-0.07***-0.06*** Largest shareholder - individual(s) -0.12***-0.11*** Firm is controlled by family -0.13*** CEO - member of family of owners -0.16*** Gender of CEO: male -0.05*** Age of CEO 0.00 Control for region and sector dummies Yes 14,05313,31613,19413,171 13,131

What shapes organization of decision-making? Russia Decision-making is decentralized Employment, log 0.04*** 0.03*** Share of employees with higher education 0.00 Some managers have experience of work abroad 0.08*0.06 Young firm (< 6 years) * Middle-aged firm (6-20 years) Owner with control share -0.09*** CEO - member of family of owners -0.06*** Gender of CEO: male 0.03 Age of CEO Control for region and sector dummiesYes 1, ,6481,647

What’s in common? Decision-making is decentralized Austria Germany Spain Italy Russia Hungary France UK Employment, log.08**.08***.09***.03***.03*.03***.05*** Share of employees with higher education.00.00***.00*.00.00** Some managers have experience of work abroad.05.10***.06**.07*** * CEO - member of family of owners -.43*** -.31*** -.29*** -.12*** -.07* -.06*** -.05*** -.05** Gender of CEO: male ** **.05 Control for firm age; regional and sector dummies Yes

Results Decentralized firms demonstrate on average better performance in a spectrum of areas. They are more likely – To innovate, to introduce new products to the market, to export The results confirm the Hypothesis: Behavioral factors are important for the organization of decision-making at the firm. Firms – With higher concentration of property – Run by CEOs related to the family of owners – Run by men (in some countries) Are less likely to be decentralized But: – Why the strength of the effect differs so much between the countries? – Some cultural values?

Further research

Move to the regional level Analogue of Benz & Frey “entrepreneurs’ job satisfaction surplus”? Maybe some other cultural factors?