Management Strategy and Organization

In our ongoing series of presentations on “New Sources of Economic Growth,” we are excited to present the focus for the third week: “Management Strategy and Organization.”

Throughout the workshop, we have explored a wide range of topics crucial to understanding and cultivating economic growth. These include:

I. Fundamentals of Economic Growth

II. Strategy and Strategic Foresight

III. Management Strategy and Organization

IV. Economic Complexity

V. Innovation Policy

This week we review material related to management and organization. Management is a way to enhance total factor productivity and contribute to economic growth. It is also an effective mechanism for the diffusion of innovations across organizations. Average management practices are strongly correlated with GDP per capita across countries. Cross country studies have shown that management practices explain 22% of differences in total factor productivity. We care about management because it is a determinant of productivity, and it contributes to: 1) the production of more and better goods and services; 2) it increases the welfare for workers; 3) it increases profits for firms; and 4) it benefits consumers with better goods and services.

We reviewed insights from the World Management Survey, a research program with two decades with interviews to more than 20,000 managers across the world. The objective of the World Management Survey is to understand the determinants and implications of management practices around the world. The strategy has been to: 1) measure management practices; 2) describe the international patterns of management and its relationship with the firms’ performance; and 3) explore which factors explain the difference in the management practices between countries and industries. The interviews measure four big areas of management practices: 1) operations; 2) monitoring; 3) goals; and 4) incentives. The methodology was designed and implemented carefully to guarantee that the interviews provide reliable information.

We reviewed evidence about the following conclusions:

  1. Firms with “better” management practices have better performance. This relationship, between management and performance, is observed in a wide range of dimensions: they are bigger, more productive, grow faster, and have higher survival rates. 
  2. Managerial practices vary widely among firms and countries. A large part of the difference in the average score is due to the relative number of firms in the extremes.
  3. Firms and countries specialize in different management styles.
  4. Competition is positively correlated with management practices.
  5. Competition reduces productivity dispersion.
  6. Generally, multinational firms are well managed in each country. These firms tend to bring with them their managerial practices in the countries where they operate.
  7. Firms that export (but that do not produce) in other country are better managed that firms that do not export, but they are worse managed than multinational firms.
  8. Family-owned firms that designate a family member (especially the eldest son) as CEO generally are badly managed.
  9. Public firms are generally poorly managed, while firms that are listed in the stock market or that have private capital are generally better managed.
  10. Firms that use human capital more intensively, measured by the education of their workers, have better management practices (without implying causality).
  11. A strict pro-worker labor regulation promotes more use of monitoring, while a pro-firm legal framework is associated with a better use of incentives.  

We also review evidence from the US Census Bureau Management and Organizational Practices Survey (MOPS). The U.S. Census Bureau is conducting MOPS to better understand current and evolving management and organizational practices and to assist in identifying determinants of establishment and productivity growth. There have been three rounds of MOPS in 2010, 2015 and 2021 (results for 2021 were released on April 26, 2023). We review the share of respondents of each option within each of the questions that evaluate managerial practices related to 1) operations; 2) monitoring; 3) goals; and 4) incentives. We observe the following:

  1. On average, management practices worsen from 2015 to 2021. 
  2. Larger firms have, on average, better management practices.
  3. Even without controlling for survival, there is no clear relationship between age and management score.
  4. Better management practices are positively associated with higher intensity in the use of information technologies (IT) measured in terms of larger IT expenses and more on-line sales.
  5. Better management practices are related to better performance measured in terms of higher productivity, profitability, and employment growth.
  6. There is a wide dispersion in the quality of managerial practices in the surveyed establishments: only 18% of the establishments have adopted 75% or more of the most advanced practices, while 27% have adopted less than half of those practices.
  7. Better managerial practices are more common in establishments that export, are larger (or are part of large firms), have higher innovation rates and have workers with higher education levels. 
  8. There are important regional differences in the degree of adoption of managerial practices across the U.S. 
  9. Between 2005 and 2010 there was an increase in the adoption of good management practices in the surviving firms, especially of information and indicators generation and analysis.

We emphasize that management practices are applicable to any type of organization, including private and public firms, in production and services. Evidence shows that management practices have contributed to improving health and educational services in different countries.

Asking why don’t firms adopt better managerial practices, we explain that the main reason is lack of information: 1) either because firms had never heard about those practices (lack of information); or 2) because they believe that those practices are not relevant (incorrect information). Inclusive, many times, despite overcoming the information barriers, better managerial practices are not correctly implemented due to lack of time and/or management ability.

We provide an overview of organizational economics which is the application of economic logic and methods to understand the nature, design and performance of organizations, especially managed ones like business firms. We review 1) the roots of organizational economics; 2) the modern foundations of organizational economics; 3) we review the emergence of the field in the last 40 years; 4) we reviewed the structure of the Handbook if Organizational Economics (Gibbons and Roberts, 2013) to suggest how existing work in organizational economics has begun to address many of relevant topics for business organization and economic growth.

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