As shown in section 3, the WMS data provide evidence that higher management scores tend to be associated with higher productivity and firm growth. The work on management and TFP variation further suggests that management can account for a large part of the TFP gap between countries at the bottom and top ends of the GDP-per-capita distribution. This, in turn, brings forward bad management as a potential constraint on the growth of developing countries. Several teams of researchers have therefore sought to identify the main factors driving differences in average management quality across countries.
We plot a firm-level histogram of the distribution of management practices within countries in Figure 8. Interestingly, one of the features distinguishing the United States (the country with the highest average management score in our sample) is not just that the mean of the distribution is to the right of other countries, but also that the left tail of very badly managed firms is unusually thin. By contrast, the poorest countries in this sample tend to exhibit both a lower average management score, and a thicker tail of badly managed firms. This suggests that harsher selective forces may be driving badly managed firms to exit the market in the United States. A growing literature suggests that product market competition has a critical influence in increasing aggregate management quality by thinning the ranks of the badly managed, and incentivizing the survivors to improve. Bloom and Van Reenen (2007) consistently find that greater levels of competition in the product market are associated with higher management scores, both in the cross-section and in the panel dimension. Bloom, Draca, and Van Reenen (2011a) and Bloom et al. (2010b) also exploit quasi-experiments in the manufacturing and hospital sectors, and find a positive causal effect of competition on management in both sectors. These results suggest that one reason for higher average management scores in the United States is that better-managed firms appear to be rewarded more quickly with greater market share, and the worse-managed firms are forced to rapidly shrink and exit.
Firm ownership and governance may also drive variation in management practices. Those firms that are family-owned and family-managed have on average much worse management scores, while the family-owned but externally managed firms rank much better (the negative effect of family firms holds up after controlling for a host of factors such as age). Lemos and Scur (2016), using new data they collected on family characteristics of the WMS firms, suggest a causal relationship between family control and poor management. The reason appears to be that many family firms choose to appoint one of the sons to become the next CEO, regardless of merit. These results are consistent with the negative effect of family firms on performance as shown by Perez-Gonzalez (2006) and Bennesden et al. (2007).
The human capital of managers as measured by the proportion with college degrees is also strongly positively associated with management scores. It is interesting that this relationship is also true for the proportion of non-managers with a college degree, which suggests that having workers who are sufficiently educated to respond to continuous improvement initiatives, for example, is important. Conditional on other local characteristics (such as population density), proximity to a university is significantly correlated with better management scores (Feng 2013).
Finally, informational frictions may explain why some firms do not adopt good management practices. Anecdotally we find that the lack of knowledge is frequently mentioned as a constraint on the adoption of managerial practices. Some suggestive evidence on this lack of knowledge is
contained in a question we ask at the end of the management survey: “Excluding yourself, how well managed would you say your firm is on a scale of 1 to 10, where 1 is worst practice, 5 is average and 10 is best practice.” Unlike the management score, this is a purely subjective question capturing how the managers perceive the management quality in their firms. Figure 9 plots these scores against labor productivity, and shows there is no relationship between productivity and perceived management quality. This illustrates the challenge facing firms in how to upgrade their practices: managers themselves appear to be ignorant of their own firm’s management quality, or lack knowledge about what constitutes effective management practices, or both.
