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 21 st April 2006

A. A.Management Practices (Bloom and Van Reenen, 2006) B. B.Work-life Balance (Bloom, Kretschmer and Van Reenen, 2006) C. C.Policy Implications GENERAL OUTLINE

MEASURING AND EXPLAINING MANAGEMENT PRACTICES ACROSS FIRMS AND COUNTRIES Nick Bloom & John Van Reenen (Centre for Economic Performance, LSE) 21 st 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 McKinsey 1 started an ambitious joint research project to collect the first firm level international management data set. 1 The LSE received no funding from McKinsey – this was made possible by the generous support of the ESRC, AIM and the AGF!

1. 1.“Measuring” management practices 2. 2.Evaluating the reliability of this measure 3. 3.Describing management across firms & countries 4. 4.Explaining management across firms & countries OUTLINE

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)

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 MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?” 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

1. 1.“Measuring” management practices 2. 2.Evaluating the reliability of this measure 3. 3.Describing management across firms & countries 4. 4.Explaining management across firms & countries OUTLINE

INTERVAL VALIDATION SUGGESTS MANAGEMENT SCORING PROCESS IS CONSISTENT 1 st interview 2 nd interview Re-interviewed 64 firms with different MBA interviewers speaking to different plant managers Firm average scores (over 18 question) Correlation of 0.75 suggests interviews pretty reliable

Labour Productivity 1 1 $’000 sales per employee at 2000 prices 3 Tobins’ Q ($ value of firm per $ of assets), quoted firms only 2 Return on capital employed (%) 4 (100 - % bankrupt or liquidated 12 months after 2004) Bottom 50%Top 50% Management score Sales Growth, (% pa) Bottom 50%Top 50% Management score Survival Rates 4, (%) Bottom 50%Top 50% Management score Stock Market Value 3 Bottom 50%Top 50% Management score Profit Rate 2, (%) Bottom 50%Top 50% Management score WE ALSO UNDERTOOK EXTERNAL VALIDATION BY COMPARING TO COMPANY ACCOUNTS

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…

1. 1.“Measuring” management practices 2. 2.Evaluating the reliability of this measure 3. 3.Describing management across firms & countries 4. 4.Explaining management across firms & countries OUTLINE

FIRM LEVEL MANAGEMENT SCORES BY COUNTRY France UKUS Germany Management score % of firms

COUNTRY LEVEL MANAGEMENT SCORES* US Germany UK 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] France

UK BAD AVERAGE MANAGEMENT MAINLY DUE TO THE LONG TAIL BADLY MANAGED FIRMS All firmsFirms with management scores above 2 US Germany UK France US-UK gap is 0.28 points 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 Domestic Non-US multinational subsidiary US multinational subsidiary # in sample

1. 1.“Measuring” management practices 2. 2.Evaluating the reliability of this measure 3. 3.Describing management across firms & countries 4. 4.Explaining management across firms & countries OUTLINE

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 2 nd generation family owned – excludes 1 st 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 firms 1: 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 2 nd generation, and Harold the 3 rd generation

Total management Gap Inherited family managed firms (primogeniture) CompetitionEducation (% employees with degree) Residual management gap DO THESE FACTORS EXPLAIN THE UK-US MANAGEMENT GAP? UK-US MANAGEMENT PRACTICE GAP 1 1 Note: (a) based on our sample of medium sized manufacturing firms; (b) 1 point on the management scale associated with about 20% higher productivity.

A. A.Management Practices (Bloom and Van Reenen, 2006) B. B.Work-life Balance (Bloom, Kretschmer and Van Reenen, 2006) C. C.Policy Implications GENERAL OUTLINE

WORK LIFE BALANCE, MANAGEMENT PRACTICES AND PRODUCTIVITY Nick Bloom, Toby Kretschmer and John Van Reenen (Centre for Economic Performance, LSE) 21 st 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.

1. 1.Competing models of work-life balance 2. 2.Measuring work-life balance and testing the models 3. 3.International (and multinational) evidence OUTLINE

COMPETING MODELS OF WORK LIFE BALANCE Trade-Off Theory Win-Win Theory Evidence WLB correlation with: ManagementNegativePositive? CompetitionNegativeAmbiguous? ProductivityNegativePositive?

1. 1.Competing models of work-life balance 2. 2.Measuring work-life balance and testing the models 3. 3.International (and multinational) evidence OUTLINE

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 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: ManagementNegativePositive CompetitionNegativeAmbiguousZero ProductivityNegativePositiveZero Consistent with a more “Free-market” view

1. 1.Competing models of work-life balance 2. 2.Measuring work-life balance and testing the models 3. 3.International (and multinational) evidence OUTLINE

THE FRENCH ADOPT THE NICEST WLB PRACTICES AND THE AMERICANS THE TOUGHEST France UK US Germany COUNTRY LEVEL WLB AVERAGE SCORES* * Sum of scores for allowances and flexibility over: working-from home, job- sharing, 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

A. A.Management Practices (Bloom and Van Reenen, 2006) B. B.Work-life Balance (Bloom, Kretschmer and Van Reenen, 2006) C. C.Policy Implications GENERAL OUTLINE – OVERVIEW TWO PAPERS

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

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 POLICY IMPLICATIONS FOR INHERITANCE TAX – FIRST SOME BACKGROUND 1 A £1m family firm has 16 employees on average. Taxing firms with >£1m will exclude most family shops, pubs, small businesses etc.

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 firms 1 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 POLICY IMPLICATIONS FOR INHERITANCE TAX 1 90% of family firms worth less than £1m. An average £1m firm has 16 employees. Consider reforms for a more neutral inheritance tax

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

MANY COMPETITORS AND NO (PG) FAMILY CEO FEW COMPETITORS AND/OR (PG) FAMILY CEO 2.7% firms in tail 1 9.0% firms in tail 1 1 Tail defined as a score ≤ 2. In the whole sample 6.9% of firms are in the tail. N=415 N=317

CONTINGENT MANAGEMENT PRACTICES Dependent Var HC Manage ment FC Manage ment HC-FC Manage ment LevelFirm Industry Ln (% degrees) i firm level (0.039) (0.043) (0.043) Ln (ave wage) i firm level (0.122) Ln (% degrees) j Industry level (US) (0.169) Standard Errors Robust Clustered Firms 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

Dependent variable Sales (in Ln) Sales (in Ln) Sales (in Ln) ROCETobin Q (in Ln) Sales growth Exit Estimation 1 OLS Probit Firms All QuotedAll Management i (0.025) (0.011) (0.012) (0.688) (0.075) (0.006) [0.026] Ln(Labor) it (0.014) (0.021) (0.021) (1.202) (0.109) (0.011) [0.045] Ln(Capital) it (0.013) (0.013) (0.899) (0.086) (0.008) [0.045] Ln(Materials) it (0.020) (0.020) (0.723) (0.050) (0.007) [0.231] Controls 1 NoYes Noise controls No Yes Observations 6,2675,350 5,089 2,6354, Firms EXTERNAL VALIDATION: PRODUCTIVITY & PROFIT 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

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 TARGETS - i.e. “HOW TOUGH ARE TARGETS?” Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).

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 INCENTIVES - i.e. “HOW DOES THE PROMOTION SYSTEM WORK?” Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).

FAMILY OWNERSHIP PROBIT Dependent variable Family owned, family CEO & primo geniture 1 Country = UK [0.015] Country = France [0.042] Country = Germany [0.303] Log (employees) [0.012] Log (firm-age) [0.017] Industry controls Yes Observations Marginal effects, p-values in [ ] brackets underneath