Nick Bloom, Labor Topics 247, 2012 LABOR TOPICS Nick Bloom Learning

Nick Bloom, Labor Topics 247, 2012 Technologies – like pineapples - are not used by everyone. Question is why? Suri (2011, Econometrica)

Nick Bloom, Labor Topics 247, 2012 A few classic learning papers A learning related paper I know well…

Nick Bloom, Labor Topics 247, 2012 Conley and Udry (2008) is based around a learning story, with some key points Learning appears to happen slowly over time – pineapple does not immediately spread to every farmer in every village Information spreads best through friends and close contacts, suggesting people do not trust all information equally Spread also depends on success of trusted contacts, suggesting process of discovery – not everything known at t=0

Nick Bloom, Labor Topics 247, 2012 The original classic – Griliches (1957) – also focused on learning and discovery

Nick Bloom, Labor Topics 247, 2012 Hybrid seen corn is a way of developing appropriate corn for different growing conditions – breeding is done for each area A single impactful technology that spread slowly across the US So Griliches splits adoption delays into – The “acceptance” problem (the lag in uptake by farmers) which is learning within markets – The “availability” problem (breeding appropriate seed corn by market) which is discovery across markets, driven by profits The original classic – Griliches (1957) shows gradual learning about hybrid seed corn

Nick Bloom, Labor Topics 247, 2012 Duflo, Kremer and Robinson (2011, AER) suggest other non-learning stories Experiment on fertilizer use in Kenya where returns to fertilizer is about 50% to 100% per year – so a highly profitable investment Despite this farmers do not take up fertilizer, and this is despite being a well known effective technology (i.e. not learning issues) They has a model around hyperbolic discounting, and show in experiments with pre-commitment get large (profitable) uptake – Discount at harvest (rather than planting) time increases adoption by 17%, equivalent to a 50% subsidy Interestingly, these are not persistent – it appears to be a commitment issue rather than a learning story

Nick Bloom, Labor Topics 247, 2012 Suri (2011) suggests a heterogeneity interpretation instead Looks at hybrid maize adoption in Kenya over Stable rates of adoption and 30% of households switch (upside of using panel data, which Besley and Case 1993 also push) Find heterogeneity in costs and returns explains apparent adoption paradox, in particular three groups of households: – Small group very high returns, but blocked by distance to seed/fertilizer distributors – Larger group of adopters with high returns – Larger group of switchers that have about zero returns

Nick Bloom, Labor Topics 247, A few classic learning papers A learning related paper I know well…

Nick Bloom, Labor Topics 247, 2012 Does management matter? Evidence from India Nick Bloom (Stanford) Benn Eifert (Berkeley) Aprajit Mahajan (Stanford) David McKenzie (World Bank) John Roberts (Stanford GSB) (NBER WP 2012, R&R QJE)

Nick Bloom, Labor Topics 247, 2012 Management score Random sample of manufacturing population firms 100 to 5000 employees. Source: Bloom & Van Reenen (2007, QJE); Bloom, Genakos, Sadun & Van Reenen (2011, AMP) US Japan Germany Sweden Canada Australia UK Italy France New Zealand Mexico Poland Republic of Ireland Portugal Chile Argentina Greece Brazil China India One motivation for looking at management is that country management scores are correlated with GDP

Nick Bloom, Labor Topics 247, 2012 Management score US (N=695 firms) India (N=620 firms) Density Firm management spreads like productivity spreads

Nick Bloom, Labor Topics 247, 2012 But does management cause any of these productivity differences between firms and countries? Massive literature of case-studies and surveys but no consensus Syverson (2011, JEL) “no potential driving factor of productivity has seen a higher ratio of speculation to empirical study”.

Nick Bloom, Labor Topics 247, 2012 So we run an experiment on large firms to evaluate the impact of modern management on productivity Experiment on 20 plants in large multi-plant firms (average 300 employees and $7m sales) near Mumbai making cotton fabric Randomized treatment plants get 5 months of management consulting intervention, controls get 1 month Consulting is on 38 specific practices tied to factory operations, quality and inventory control Collect weekly data on all plants from 2008 to 2010.

Nick Bloom, Labor Topics 247, 2012 Exhibit 1: Plants are large compounds, often containing several buildings.

Nick Bloom, Labor Topics 247, 2012 Exhibit 2a: Plants operate continuously making cotton fabric from yarn Fabric warping

Nick Bloom, Labor Topics 247, 2012 Fabric weaving Exhibit 2b: Plants operate continuously making cotton fabric from yarn

Nick Bloom, Labor Topics 247, 2012 Quality checking Exhibit 2c: Plants operate continuously making cotton fabric from yarn

Nick Bloom, Labor Topics 247, 2012 Exhibit 3: Many parts of these Indian plants were dirty and unsafe Garbage outside the plantGarbage inside a plant Chemicals without any coveringFlammable garbage in a plant

Nick Bloom, Labor Topics 247, 2012 Exhibit 4: The plant floors were often disorganized and aisles blocked Instrument not removed after use, blocking hallway. Tools left on the floor after use Dirty and poorly maintained machines Old warp beam, chairs and a desk obstructing the plant floor

Nick Bloom, Labor Topics 247, 2012 Yarn piled up so high and deep that access to back sacks is almost impossible Exhibit 5: The inventory rooms had months of excess yarn, often without any formal storage system or protection from damp or crushing Different types and colors of yarn lying mixed Yarn without labeling, order or damp protection A crushed yarn cone, which is unusable as it leads to irregular yarn tension

Nick Bloom, Labor Topics 247, Management practices before and after treatment Performance of the plants before and after treatment Why were these practices not introduced before?

Nick Bloom, Labor Topics 247, 2012 Intervention aimed to improve 38 core textile management practices in 5 areas Targeted practices in 5 areas: operations, quality, inventory, HR and sales & orders

Nick Bloom, Labor Topics 247, Intervention aimed to improve 38 core textile management practices in 5 areas Targeted practices in 5 areas: operations, quality, inventory, HR and sales & orders

Nick Bloom, Labor Topics 247, 2012 Months after the diagnostic phase Adoption of the 38 management practices over time Treatment plants Control plants Share of 38 practices adopted Non-experimental plants in treatment firms Months after the start of the diagnostic phase

Nick Bloom, Labor Topics 247, 2012 Management practices before and after treatment Performance of the plants before and after treatment Why were these practices not introduced before?

Nick Bloom, Labor Topics 247, 2012 Look at four outcomes with weekly data Quality: Measured by Quality Defects Index (QDI) – a weighted average of quality defects (higher=worse quality) Inventory: Measured in log tons Output: Production picks (one pick=one run of the shuttle) Productivity: Log(VA) – 0.42*log(K) – 0.58*log(L) 27

Nick Bloom, Labor Topics 247, 2012 Poor quality meant 19% of manpower went on repairs Workers spread cloth over lighted plates to spot defectsLarge room full of repair workers (the day shift) Defects lead to about 5% of cloth being scrappedDefects are repaired by hand or cut out from cloth

Nick Bloom, Labor Topics 247, Previously mending was recorded only to cross- check against customers’ claims for rebates

Nick Bloom, Labor Topics 247, Now mending is recorded daily in a standard format, so it can analyzed by loom, shift, design & weaver

Nick Bloom, Labor Topics 247, 2012 The quality data is now collated and analyzed as part of the new daily production meetings Plant managers meet with heads of departments for quality, inventory, weaving, maintenance, warping etc.

Nick Bloom, Labor Topics 247, 2012 Quality improved significantly in treatment plants Control plants Treatment plants Weeks after the start of the experiment Quality defects index (higher score=lower quality) Note: solid lines are point estimates, dashed lines are 95% confidence intervals

Nick Bloom, Labor Topics 247, 2012 Differences are not driven by one firm QDI fell in every treatment firm by at least 10%.

Nick Bloom, Labor Topics 247, Stock is organized, labeled, and entered into the computer with details of the type, age and location. Organizing and racking inventory enables firms to substantially reduce capital stock

Nick Bloom, Labor Topics 247, 2012 Inventory fell in treatment plants Control plants Treatment plants Weeks after the start of the experiment Yarn inventory Note: solid lines are point estimates, dashed lines are 95% confidence intervals

Nick Bloom, Labor Topics 247, Many treated firms have also introduced basic initiatives (called “5S”) to organize the plant floor Marking out the area around the model machine Snag tagging to identify the abnormalities

Nick Bloom, Labor Topics 247, Spare parts were also organized, reducing downtime (parts can be found quickly) Nuts & bolts Tools Spare parts

Nick Bloom, Labor Topics 247, Production data is now collected in a standardized format, for discussion in the daily meetings Before (not standardized, on loose pieces of paper) After (standardized, so easy to enter daily into a computer)

Nick Bloom, Labor Topics 247, Daily performance boards have also been put up, with incentive pay for employees based on this

Nick Bloom, Labor Topics 247, 2012 Productivity rose in treatment plants vs controls Control plants Treatment plants Weeks after the start of the experiment Total factor productivity Note: solid lines are point estimates, dashed lines are 95% confidence intervals

Nick Bloom, Labor Topics 247, Management practices before and after treatment Performance of the plants before and after treatment Why were these practices not introduced before?

Nick Bloom, Labor Topics 247, 2012 Why doesn’t competition fix badly managed firms? Reallocation appears limited: Owners take all decisions as they worry about managers stealing. But owners time is constrained – they already work 72.4 hours average a week – limiting growth. As a result firm size is more linked to number of male family members (corr=0.689) than management scores (corr=0.223) Entry appears limited: capital intensive due to minimum scale (for a warping loom and 30 weaving looms at least $1m) Trade is restricted: 50% tariff on fabric imports from China

Nick Bloom, Labor Topics 247, Why don’t these firms improve themselves (even worthwhile reducing costs for a monopolist…)? Asked the consultants to investigate the non-adoption of each of the 38 practices, in each plant, every other month Did this by discussion with the owners, managers, observation of the factory, and from trying to change management practices. Find this is primarily an information problem - Wrong information (do not believe worth doing) - No information (never heard of the practices)

Nick Bloom, Labor Topics 247, Summary Management matters in Indian firms – large impacts on productivity and profitability from more modern practices Primary reason for bad management appears to be lack of information and slow learning, which limited competition allows to persist Potential policy implications A) Competition and FDI: free product markets and encourage foreign multinationals to accelerate spread of best practices B) Training: improved basic training around management skills C) Rule of law: improve rule of law to encourage reallocation and ownership and control separation