HOW GOOD IS CHINESE & INDIAN MANAGEMENT? NEW EVIDENCE FROM ASIA, EUROPE AND THE US July 2008

1. 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)

2. 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

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

4. THE SURVEY METHODOLOGY • 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)

5. MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?” Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).

6. INCENTIVES - i.e. “HOW DOES THE PROMOTION SYSTEM WORK?” Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).

7. 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 (100 - 5,000 employees, median ≈ 250) because firm practices more homogeneous • Manufacturing as easier to measure productivity(currently piloting in Schools, Hospitals, Retail and Law Firms)

8. “Measuring” management practices • Evaluating the reliability of this measure • Internal/External validation • Measurement error/bias • Describing management across firms & countries • Accounting for management across firms & countries

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

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

11. EXTERNAL VALIDATION: FIRM PERFORMANCE Includes country controls. Robust S.E.s in ( ) below. Probit p-values in [ ] below

12. 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)

13. “Measuring” management practices • Evaluating the reliability of this measure • Describing management across firms & countries • Accounting for management across firms & countries

14. FIG 1. COUNTRY LEVEL MANAGEMENT SCORES

15. FIG 2. FIRM LEVEL MANAGEMENT SCORES

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

17. 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

18. THE 3 DIFFERENT MEASURES OF COMPETITION ARE ALL LINKED TO BETTER MANAGEMENT 1 1-Rents = 1- (operating profit – capital costs)/sales2 Includes 108 SIC-3 industry, country, firm-size, public and interview noise (analyst, time, date, and manager characteristic) controls3 S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry

19. FAMILY OWNERSHIP VARIES ACROSS COUNTRIES • About 1/4 of Japanese, US and Northern European firms family owned • About 3/4 of Indian firms family owned Poland Sweden China Japan France US UK Germany Italy Portugal Greece India 0 .2 .4 .6 .8 share family owned (2nd+ generation) share founder owned (1st generation)

20. 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)

21. FAMILY MANAGEMENT IS PROBLEMATIC, IN PARTICULAR PRIMO GENITURE CEO SELECTION 1 Family defined as 2nd generation or later2 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

22. 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

23. US Japan Germany Sweden UK Italy France Poland Portugal China India Greece 2.4 2.6 2.8 3 3.2 3.4 mean of domestic firms mean of multinationals MULTINATIONALS APPEAR ABLE TO TRANSPORT GOOD MANAGEMENT AROUND THE WORLD

24. France Sweden UK Poland Germany Greece Italy Portugal China US India Japan 0 .1 .2 .3 .4 .5 Foreign multinational % of firms interviewed MULTINATIONALS ARE STILL RELATIVELY UNCOMMON IN INDIA & CHINA

25. US 3.2 3 Germany UK Japan Poland Sweden Average people management 2.8 France Italy China India Portugal 2.6 Greece 2.4 0 20 40 60 World Bank rigidity of employment index LABOR MARKET REGULATIONS ARE ASSOCIATED WITH WEAKER HUMAN CAPITAL MANAGEMENT

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

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

28. COMPETITION, FAMILY FIRMS, MULTINATIONALS & LABOR REGULATIONS ACCOUNT FOR ≈ ½ COUNTRY SPREAD US Germany Sweden Japan UK France Italy Poland Portugal Greece China India 2.4 2.6 2.8 3 3.2 3.4 management predicted from competition, family %, multinationals & regulation raw management data

29. TO SUMMARIZE • 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….

30. 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)

31. MY FAVOURITE QUOTES: The traditional British Chat-Up [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….”

32. MY FAVOURITE QUOTES: The traditional Indian 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”

33. MY FAVOURITE QUOTES: The difficulties of defining ownership in Europe 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” ?” Americans on geography Interviewer: “How many production sites do you have abroad? Manager in Indiana, US: “Well…we have one in Texas…”

34. 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…]

35. BACKUP SLIDES

36. COUNTRY LEVEL RELATIVE MANAGEMENT Sweden France Relatively better at ‘operations’ management (monitoring, continuous improvement, Lean etc) Italy Germany Japan Portugal Greece UK Relatively better at ‘people’ management (hiring, firing, pay, promotions etc) China US Poland India -.4 -.2 0 .2 .4 mean of people (human capital) – operations (physical capital) management

37. 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!)