From Bloomberg View
When people discuss what drives long-run productivity, they usually focus on technical change. But productivity is about more than robots, new drugs and self-driving vehicles. First, if you break down the sources of productivity across nations and firms there is a large residual left over (rather inelegantly named “Total Factor Productivity” or TFP for short). And observable measures of technology can only account for a small fraction of this dark matter.
On top of this, a huge number of statistical analyses and case studies of the impact of new technologies on firm performance have shown that there is a massive variation in its impact. What’s much more important than the amount spent on fancy tech is the way managerial practices are used in the firms that implement the changes.
Although there is a tradition in economics starting with the 19th-century American economist Francis Walker on the importance of management for productivity, it has been largely subterranean. Management is very hard to measure in a robust way, so economists have been happy to delegate this task to others in the case study literature in business schools.
Managers are more frequently the butt of jokes from TV shows like “The Office” to “Horrible Bosses,” than seen as drivers of growth. But maybe things are now changing.
A new generation of empirical work has grown in the last decade that has been able to quantify some key components of basic management practices. Stuff like whether firms rigorously keep track of what goes on internally, how they communicate this to employees and how this tracking is translated (or not) into sensible and stretching targets that can be used for continuous improvement. An important part of this is what human resources professionals focus on: Are these measures of performance linked to incentives over rewards and promotion? We have now run surveys in over 20,000 organizations in 34 countries and with strikingly uniform results: Namely, firms with high management scores perform better.
The graph below shows that these scores are strongly correlated with firm performance. And these correlations also persist when looking in hospitals, schools and many other places. It is even possible to run “clinical trials” injecting these management practices into firms and comparing with placebos who get only a minor dose. The impact effects in these randomized control trials are of similarly impressive magnitudes.
Now look at the management scores across countries. They are highly correlated with GDP per capita. In fact, almost a third of the cross-country gaps in productivity are explained by management practices.
So what’s holding firms back from adopting these better practices? And is there anything that can be done? Well, yes quite a lot actually.
Firms themselves can change. Multinationals are able to import better practices even in very difficult environments compared to similar, domestically owned firms. They don’t just bring more capital they also show that there is a different way to doing things. For example, auto makers could make lots of excuses for why Detroit was different from Tokyo – culture, religion, work ethic, etc. But when Toyota started producing vehicles in the U.S. using American workers but with Japanese management that was hugely more productive than the U.S. auto-makers, the excuses wore thin.
Read the full post at Bloomberg View
John Van Reenen is a jointly appointed Professor of Applied Economics at the MIT Sloan School of Management and in the Department of Economics.