HOW GOOD IS CHINESE & INDIAN MANAGEMENT? NEW EVIDENCE FROM ASIA, EUROPE AND THE US July 2008 Nick Bloom (Stanford) Christos Genakos (Cambridge) Raffaella Sadun (LSE) John Van Reenen (LSE)

MOTIVATION Large persistent productivity spread across firms and countries UK productivity gap with the US going back 100 years China and India 10% to 20% of US GDP per capita Could this be in part because of differences in management? Historically there has been no international management data New project measuring and explaining management practices across firms and countries

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

1) Developing management questions Scorecard for 18 monitoring, targets and incentives practices ≈45 minute phone interview of manufacturing plant managers 2) Obtaining unbiased comparable responses (“Double-blind”) Interviewers do not know the company’s performance Managers are not informed (in advance) they are scored Run from LSE, with same training and country rotation 3) Getting firms to participate in the interview Introduced as “Lean-manufacturing” interview, no financials Official Endorsement: Bundesbank, PBC, CII & RBI, etc. Run by 51 MBAs types (loud, assertive & business experience) THE SURVEY METHODOLOGY

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).

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).

MANAGEMENT SURVEY SAMPLE Interviewed about 5000 firms across Asia, Europe & the US Obtained 44% coverage rate from sampling frame (with response rates uncorrelated with performance measures) Medium sized manufacturing firms: Medium sized ( ,000 employees, median ≈ 250) because firm practices more homogeneous Manufacturing as easier to measure productivity (currently piloting in Schools, Hospitals, Retail and Law Firms)

1.“Measuring” management practices 2.Evaluating the reliability of this measure a) Internal/External validation b) Measurement error/bias 3.Describing management across firms & countries 4.Accounting for management across firms & countries

INTERVAL VALIDATION OF THE SCORING 1 st interview 2 nd interview Re-interviewed 222 firms with different interviewers & managers Firm average scores (over 18 question) Firm-level correlation of 0.627

EXTERNAL VALIDATION OF THE SCORING Performance measure ln(capital) ln(materials) management (average z-scores) ln(labor) other controls Use most recent cross-section of data (typically 2006) country c Note – not a causal estimation, only an association

Dependent variable Sales (in Ln) Sales (in Ln) ROCE Sales growth Tobin Q (in Ln) Exit Estimation 1 OLS Probit Firm sampleAll QuotedAll Management (0.026) (0.028) (0.923) (0.013) (0.075) [0.026] Ln(Labor) (0.024) (0.021) (1.069) (0.015) (0.109) [0.045] Ln(Capital) (0.013) ( (0.010) (0.086) [0.045] Ln(Skills) (% with degree) (0.014) (0.505) (0.073) (0.050) [0.231] Ind. dummiesNoYes Noise controlNoYes Firms EXTERNAL VALIDATION: FIRM PERFORMANCE Includes country controls. Robust S.E.s in ( ) below. Probit p-values in [ ] below

EXTERNAL VALIDATION – ROBUSTNESS Main performance results significant in all main regions: Anglo-Saxon (US and UK) Northern Europe (France, Germany, Sweden & Poland) Southern Europe (Portugal, Greece and Italy) East Asia (China and Japan)

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

FIG 1. COUNTRY LEVEL MANAGEMENT SCORES

FIG 2. FIRM LEVEL MANAGEMENT SCORES

1.“Measuring” management practices 2.Evaluating the reliability of this measure 3.Describing management across firms & countries 4.Accounting for management across firms & countries Competition Ownership: Family firms & Multinationals Labor market regulations OUTLINE

COMPETITION & MODELS OF MANAGEMENT Three ways that competition may improve management Selection – badly run firms more likely to exit Effort – forces badly run firms to try harder to survive Learning – more firms in the market to learn from

Competition proxies Dependent variable: Management Import penetration (SIC-3 industry, ) (0.033) “1-Rents” measure 1 (SIC-3 except firm itself, ) (0.721) # of competitors (Firm level, 2004) (0.023) Observations Full controls 2,3 Yes THE 3 DIFFERENT MEASURES OF COMPETITION ARE ALL LINKED TO BETTER MANAGEMENT 1 1-Rents = 1- (operating profit – capital costs)/sales 2 Includes 108 SIC-3 industry, country, firm-size, public and interview noise (analyst, time, date, and manager characteristic) controls 3 S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry

FAMILY OWNERSHIP VARIES ACROSS COUNTRIES India Greece Portugal Italy Germany UK US France Japan China Sweden Poland share family owned (2 nd + generation) share founder owned (1 st generation) About 1/4 of Japanese, US and Northern European firms family owned About 3/4 of Indian firms family owned

FAMILY INVOLVEMENT IN FIRMS IN THEORY HAS AMBIGUOUS EFFECTS ON MANAGEMENT Ownership but not management probably positive Concentrated ownership so better monitoring Management probably negative Family experience and knowledge will be good, but Smaller pool to select CEO from Less incentives for non-family managers (only family members usually take top positions) Less incentives for family manager (family members usually guaranteed top position)

FAMILY MANAGEMENT IS PROBLEMATIC, IN PARTICULAR PRIMO GENITURE CEO SELECTION Dependent variable: Management Family 1 largest shareholder (0.023) (0.043) Family 1 largest shareholder & family CEO (0.025) (0.049) Family 1 largest shareholder, family CEO & primo geniture (0.043) (0.046) Observations Family defined as 2 nd generation or later 2 Based on question: “How was management of the firm passed down: was it to the eldest son or by some other way?”. Note includes SIC-3 digit, country, skills, firm size and public controls

IN PRACTICE FAMILY CEO FIRMS ARE OFTEN NOT WELL MANAGED ON AVERAGE Distribution of firm management scores by ownership. Overlaid dashed line is approximate density for dispersed shareholders, the most common US ownership type

US Japan Germany Sweden UK Italy France Poland Portugal China India Greece mean of domestic firmsmean of multinationals MULTINATIONALS APPEAR ABLE TO TRANSPORT GOOD MANAGEMENT AROUND THE WORLD

MULTINATIONALS ARE STILL RELATIVELY UNCOMMON IN INDIA & CHINA Foreign multinational % of firms interviewed France Sweden UK Poland Germany Greece Italy Portugal China US India Japan

LABOR MARKET REGULATIONS ARE ASSOCIATED WITH WEAKER HUMAN CAPITAL MANAGEMENT China France Germany Greece India Italy Japan Poland Portugal Sweden UK US Average people management World Bank rigidity of employment index

QUANTIFYING EFFECTS OF COMPETITION, OWNERSHIP & LABOR REGS ON MANAGEMENT ACROSS FIRMS EXPLAINS ~ ½ VARIATION ACROSS COUNTRIES EXPLAINS ~ ½ VARIATION

“GOOD DOMESTIC” (MANY COMPETITORS, NOT PRIMO GENITURE FAMILY FIRM) AND MULTINATIONALS 5.9% firms in tail 18.1% firms in tail Tail is a score ≤ 2. In the whole sample 9.6% of firms are in the tail. N=1244 N=2899 “BAD DOMESTIC” (FEW COMPETITORS OR PG FAMILY)

COMPETITION, FAMILY FIRMS, MULTINATIONALS & LABOR REGULATIONS ACCOUNT FOR ≈ ½ COUNTRY SPREAD US Germany Sweden Japan UK France Italy Poland Portugal Greece China India raw management data management predicted from competition, family %, multinationals & regulation

Product market competition, family management, multinationals and labor regulation account for about 50% lower Indian management scores Policy implications for India are reasonably standard: liberal product markets (competition) and capital markets strong rule of law (to promote external CEOs) reduced labor regulations Currently organizing a field experiment with Berkeley and the World Bank in India to investigate these issues further Quotes…. TO SUMMARIZE

HOW GOOD IS CHINESE & INDIAN MANAGEMENT? NEW EVIDENCE FROM ASIA, EUROPE AND THE US June 2008 Nick Bloom (Stanford) Christos Genakos (Cambridge) Raffaella Sadun (LSE) John Van Reenen (LSE)

MY FAVOURITE QUOTES: [Male manager speaking to an Australian female interviewer] Production Manager: “Your accent is really cute and I love the way you talk. Do you fancy meeting up near the factory?” Interviewer “Sorry, but I’m washing my hair every night for the next month….” The traditional British Chat-Up

Production Manager: “Are you a Brahmin?’ Interviewer “Yes, why do you ask?” Production manager “And are you married?” Interviewer “No?” Production manager “Excellent, excellent, my son is looking for a bride and I think you could be perfect. I must contact your parents to discuss this” The traditional Indian Chat-Up MY FAVOURITE QUOTES:

Interviewer: “How many production sites do you have abroad? Manager in Indiana, US: “Well…we have one in Texas…” Americans on geography Production Manager: “We’re owned by the Mafia” Interviewer: “I think that’s the “Other” category……..although I guess I could put you down as an “Italian multinational” ?” The difficulties of defining ownership in Europe

MY FAVOURITE QUOTES: The bizarre Interviewer: “[long silence]……hello, hello….are you still there….hello” Production Manager: “…….I’m sorry, I just got distracted by a submarine surfacing in front of my window” The unbelievable [Male manager speaking to a female interviewer] Production Manager: “I would like you to call me “Daddy” when we talk” [End of interview…]

BACKUP SLIDES

COUNTRY LEVEL RELATIVE MANAGEMENT mean of people (human capital) – operations (physical capital) management India Poland US China UK Greece Portugal Japan Germany Italy France Sweden Relatively better at ‘operations’ management (monitoring, continuous improvement, Lean etc) Relatively better at ‘people’ management (hiring, firing, pay, promotions etc)

FIRM LEVEL VARIATION MEANS LARGE DATA SETS ARE IMPORTANT FOR RESEARCH ON MANAGEMENT PRACTICES Case studies provide rich firm-level details, but large data sets are also important to guard against outlier points (think Enron!)