Foreign firms and foreign direct investments are crucial to the development of low-income countries: they stimulate structural transformation from agricultural to industrial production, foster technological transfers, and disseminate advanced managerial practices. A critical element of firms’ success is their ability to match with and retain productive workers. Particularly for foreign industrial firms in developing country labor markets, personnel decisions are made in a context of significant market frictions. Managers of foreign firms may not be able to extract noisy productivity signals from the pool of local workers. Delegating personnel decisions to local mid-level managers can generate principal-agent problems in an environment where asymmetric information abounds. Managers also face the challenge of selecting workers on multiple relevant dimensions: not only a worker’s productivity, but also her “suitability”: a collection of individual characteristics such as punctuality, willingness to work in routine conditions, willingness to work inside a factory, etc. Moreover, in the early stages of industrialization, workers themselves may not know their own productivity and suitability for the modern manufacturing sector.
In this project, David Yang, Munir Squires and Noam Yuchtman will conduct a field experiment in a Chinese-owned textile factory in Dar Es Salaam, one of the largest manufacturing employers in Tanzania, to answer the following questions:
- Who selects into applying for jobs at a modern manufacturing firm? Do the most productive workers select in, or are workers selected on other characteristics?
- How does worker’s self-selection respond to wage? Does higher wage generate better matches for the firm?
- How do workers’ productivity levels change as a result of experience in a modern firm? How do workers change on other relevant margins: norms, punctuality, attendance, etc.?
- To what extent are the margins of employee selection, retention, and productivity change socially determined? Does coordination with peers produce strategic complementarity in transitioning to industrial work?
Personnel policy – matching productive and suitable workers to the appropriate tasks – are central to the success of the factory with which the researchers will work as well as many other middle-sized to large enterprises in low income countries. This is particularly important and challenging for foreign firms – they are relatively inexperienced in navigating local labour markets, fully delegating worker screening to local managers could be difficult, and the workers themselves may not be accurately calibrated on their productivity and suitability in a modern production sector whose employment opportunities are rare in the local environment. The project will inform firms’ design of a combination of screening criteria, incentives, training, and social complementarity that can increase the quality of matches between modern manufacturing sector firms and workers in low income countries. While their study will focus on a particular firm, they expect similar mechanisms to apply for a range of manufacturing enterprises engaged in foreign direct investment
