Firm performance and development: an overview R´ emi Bazillier
Lesson 1: Firm performance and development, an overview Firm Performance and Development Master 2 Development Economics Univ. Paris 1 Pantheon-Sorbonne
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
R´emi Bazillier
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Management Quality Bloom et al. (2010), AER
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[email protected] http://remi.bazillier.free.fr
Bloom et al. (2013), QJE
General Outline of the course
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
1. Firm performance in developing countries, an overview (today) 2. Localization of Multinational Firms and the Global Value Chain 3. Firm performance and environmental regulations 4. Firm performance and labour regulations 5. (Corporate Social Responsibility in Developing Countries) 6. (Industrial Policy in Developing countries)
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Evaluation
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Final exam I I
Questions on different chapters Explanations of research papers presented during the course
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Outline
Firm performance and development: an overview R´ emi Bazillier
Introduction and Overview
Introduction and Overview
The Business Environment: What’s different in developing countries?
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Introduction and Overview
Firm performance and development: an overview R´ emi Bazillier
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The manufacturing sector is viewed as the leading edge of modernization and skilled job creation, and a fundamental source of various positive spillovers Industrial development is seen as a key factor of structural change I
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Traditional view: the movement of labor from traditional activities in agriculture and other primary sectors to “modern” industry was the key to raising the economy’s saving and investment rates and to fostering economic growth Of course, the expansion of non-traditional agriculture and the development of modern services can play an important role But in all cases, firms have a key role
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Introduction and Overview
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Rapidly growing countries are those with large manufacturing sectors and growth accelerations are associated with structural changes in the direction of manufacturing (Rodrik, 2006, Industrial Development: Stylized Facts and Policies) → It is therefore important to understand the role of firms, and especially manufacturing firms in developing countries
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Rodrik (2006)
Basic tendencies in developing countries
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Industrial sector promotion I
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Industrial sector remains relatively protected in most developing countries Governments also promote manufacturing growth with special tax concessions and relatively low tariff rates for importers of manufacturing machinery and equipment
Dense and unpredictable regulatory regimes I
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Institutional obstacles to doing business are in average more burdensome than in OECD countries Price controls, regulations on foreign trade, foreign currency regulations, tax regulations, policy instabiluty, and uncertainty regarding the cost of regulation
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Basic tendencies in developing countries
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Credit markets and commercial policies that favor large firms I
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Investment incentives may be available only to projects above a minimum scale Large scale producers are singled out for special subsidies Preferential access to credit (banks view large firms as relatively low risk)
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Fundamental Empirical Issues
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Do the regulatory regimes and the bias against small producers prevent small firms from growing, and thereby create losses due to unexploited scale economies? If these regimes prevent small firms from threatening the larger incumbents, do industrial sectors lack dynamism and competition? What is the role of management practices in firms performance?
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The Business Environment: What’s different in developing countries?
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries?
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Reference:
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Tybout, J. R. (2000). Manufacturing firms in developing countries: How well do they do, and why?. Journal of Economic literature, 38(1), 11-44.
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The Business Environment: What’s different in developing countries? Market Size I
Except countries like China, Brazil, India or Indonesia, the size of domestic market for manufactured products is relatively limited
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Tybout (2000)
The Business Environment: What’s different in developing countries? Market Size I
Engel effects favor basic subsistence needs over all. When transport costs are significant and the OECD countries are distant, demand for the more sophisticated manufactured goods is small
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Tybout (2000)
The Business Environment: What’s different in developing countries? Access to manufactured inputs
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries?
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The menu of domestically produced intermediate inputs and capital equipment is often limited
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Producers often have to import the needed inputs at extra expenses or choose an imperfect substitute
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The Business Environment: What’s different in developing countries? Human Capital
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries?
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Low rates of secondary education and a scarcity of technicians and scientists also affect the mix of goods manufactured and the factor proportions used to produced them O-ring effect: high-skill labour will be less productive because of the lack of complementarities
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The Business Environment: What’s different in developing countries? Other factors
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries?
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Infrastructure I I
Relatively limited in developing countries Production techniques are directly affected, as are the costs of servicing distant markets
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Volatility
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Governance
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm sizes and Scale efficiency
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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One fundamental characteristic: the dualism I
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Large number of microenterprises and a handful of modern, large scale factories produce similar products side by side Small producers frequently operate partly or wholly outside the realm of government regulation and rely heavily on informal credit market and internal funds for finance They are relatively labor intensive, so they account for a larger share of employment than output
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The Size Distribution
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Tybout (2000)
The Size Distribution
Firm performance and development: an overview R´ emi Bazillier
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The emphasis on small-scale production correlates negatively with (i) per capita income levels across countries and (ii) within countries through time What accounts for this phenomenom? I
The role of regulations and taxes: I
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Rauch (1991): extension of the Lucas’s (1978) model of the firm size distribution with heterogeneous worker/entrepreneurs He shows that when large firms face higher unit input costs, the most talented entrepreneurs operate big firms to exploit their productivity advantage The extra-profit they ear from being big more than cover the higher input costs they must pay Less talented entrepreneurs stay small and informal The size distribution exhibits a missing middle because it never pays to be just large enough to attract enforcement
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The Size Distribution I
Empirical evidence on the role of regulations and taxes: I
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Lower urbanization and poor transportation networks I
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De Soto (1989) on Peru in the 1980s: he argued that many entrepreneurs remained small to avoid excessive regulation Gauthier and Gersovitz (1997) on Cameroon: small firms remained informal and avoided taxes while large firms were influential enough to obtain special treatment Little, Mazumdar and Page (1987) on India Small, diffuse pocket of demand lead to small-scale localized production In many countries, small-scale producers are located in rural areas, absorbing workers when seasonal effects reduce agricultural employment
The abundance of unskilled labor and the lack of long-term finance The volatility in the business environment (regulatory and macro-economics)
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Are small firms scale efficient?
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Is scale inefficiency a serious problem in developing countries? I
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Ratio of average to marginal cost is estimated above 1.10 for the typical plant But potential efficiency gains from incrases in plant size are probably much smaller that suggested
Various methodologies with very heterogenous results I
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Social cost-benefits ratio, multi-factor productivity measures based on estimated production functions Returns to scale ? Measurement error problems, omitted variables, agregation bias and simultaneity bias...
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Are small firms scale efficient?
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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To illustrate this, we will focus on two articles: I
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Sleuwaegen, L., Goedhuys, M. (2002). Growth of firms in developing countries, evidence from Cote d’Ivoire. Journal of Development Economics, 68(1), 117-135. Soderbom, M., Teal, F. (2004). Size and efficiency in African manufacturing firms: evidence from firm-level panel data. Journal of Development Economics, 73(1), 369-394.
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Sleuwaegen, L., Goedhuys, M. (2002). Growth of firms in developing countries, evidence from Cote d’Ivoire. Journal of Development Economics, 68(1), 117-135
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The size structure of firms is highly dualistic I
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In Ivory Cost: 74% of employment in manufacturing takes place in firms with less than 10 employees, 4% in firms employing between 10 and 99 employees and large firms accounts for employment in manufacturing. → The missing middle Ivory Coast’s size distribution of firms was largely shaped in its early post-independence period, when the development of a solid and modern industrial base was expected to come from large-scale investments by the state and foreign investors.
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Sleuwaegen, L., Goedhuys, M. (2002). Growth of firms in developing countries, evidence from Cote d’Ivoire. Journal of Development Economics, 68(1), 117-135 I
Specification and test of a model that hypothesises that the growth of firms in Ivory Coast manufacturing follows a learning process that is strongly moderated by the particular environmental and institutional context of a developing country. I
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In the absence of well functioning markets, initial firm size and formal registration together with persisting efficiency differences strongly affect the firms’ growth performance As demand density and the availability of resources vary strongly with location, ownership and sector of activity in developing countries, these structural features are hypothesised to exert a further impact on the growth opportunities of firms
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Sleuwaegen, L., Goedhuys, M. (2002). Growth of firms in developing countries, evidence from Cote d’Ivoire. Journal of Development Economics, 68(1), 117-135 Data
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Survey conducted in 1995 and 1996 in the framework of the World Bank project RPED 185 firms for which historical data on sales, employment and other structural variables are availaible Firms active in one of the four main industrial sectors: agro-industries, textile, wood working and metal working Both formal and informal firms firms are defined as ‘formal’ if they are registered, fulfill all tax obligations and respect labour and other regulations.
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Sleuwaegen, L., Goedhuys, M. (2002). Growth of firms in developing countries, evidence from Cote d’Ivoire. Journal of Development Economics, 68(1), 117-135
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview
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General growth function g in size and age: G=
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R´ emi Bazillier
St0 = g (St , At ) St
(1)
The Business Environment: What’s different in developing countries?
This functional relationship is moderated through a set of institutional and firm specific variables X : G = g (St , At )e bX
Introduction and Overview
(2)
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE
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Second order logarithmic expansion of a generalised function relating growth to size and age: log(St0 ) − log(St ) = a0 + a1 log(St ) + a2 [log(St )]2 + a3 log(At ) d n X +a4 [log (At )]2 + a5 log(St )x log(At ) + bi Xi i=1
Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Empirical Model
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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The partial derivatives gs = (d ln G /d ln S) and ga = (d ln G /d ln A) allow to test for alternative theories of firm growth I
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If gs = 0 → Gibrat (1931)’s law on proportionate effect: firms grow each year following a random drawing from a distribution of growth rates. If gs < 0 and ga < 0: Learning models of firm growth and efficient scale arguments
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Variables
Firm performance and development: an overview R´ emi Bazillier
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Initial firm size, firm age Time inefficiency (INEFF): The variable measures the distance of an individual firm’s output level from its best practice output level (derived from the estimation of a stochastic frontier production function at the sector level) I
Average technical efficiency: 0.47
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Formally registered firms (FORMAL)
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Sector and location (moderators of growth relationship)
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Firm specific measure of capital and related services (the share of the cost of electricity, water, fuel and telephone in total sales)
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Capital and technology sourcing from abroad
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Endogeneity of FORMAL
Firm performance and development: an overview R´ emi Bazillier
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Two-Stage Least-Squares procedure as proposed by Barnow et al. (1981) I
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“In doing so, we explicitly take into account sectoral variations and find support that firms run by professional managers as well as the more efficient, larger and older firms choose to be formally registered (consistent with the theoretical model of Rauch, 1991).” Probit equation explaining the probability that a firm is formally registered then OLS estimates with the predictor ENTRFIRM equals one if the firm is an entrepreneurial firm, i.e. is owned by one or more individuals who at the same time manage the firm; HIGHEDUC equals one if the entrepreneur has received higher formal education of academic or equivalent level. Valid Instrument?
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
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Learning effects seem to be at work I I
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Younger firms seem to grow faster than older ones Learning is a strong factor driving growth in a firm’s initial years of operation The negative relationship between growth and age does not hold for firms that start at a large scale I
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These findings suggest that startup size has an important effect on the subsequent growth performance of firms Firms starting at a larger size, i.e. about 45 employees or more, tend to regress less fast in growth rate as they grow older firms that start small tend to grow fast in the initial years but the growth rate flattens out rapidly Larger entrants on the contrary enjoy a better reputation from the start and face growth opportunities that improve over time despite that they quickly attain an efficient scale of operations, an effect that dampens their need to grow
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Attrition bias
Firm performance and development: an overview R´ emi Bazillier
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Only surviving firms are included in the dataset
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As failure is more common among smaller firms, the selection bias could affect the estimated firm size-growth relationship
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The authors argue that “firms that started at a smaller scale have actually grown into a larger than their hypothetical size while the opposite holds for firms that started at a larger scale”
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They argue that it implies that the actual growth rate of firms starting small is relatively larger and corroborates the estimated negative size-growth relationship
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Formal firms tend to grow faster (by 0.26) I
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Transactional advantages
Capital intensive firms grow faster (they reap additional scale economies) Geographical location has an impact (external scale economies and urbanisation economies) Foreign ownership: NS
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Comparison with Germany
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Obstacles to growth: the owners’ and managers’ perceptions
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Obstacles to growth: the owners’ and managers’ perceptions
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Soderbom, M., Teal, F. (2004). Size and efficiency in African manufacturing firms: evidence from firm-level panel data. Journal of Development Economics, 73(1), 369-394.
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Three prominent issues on firms in developing countries:
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency
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Technology differences may be an important factor explaining factor choces across firms of different size (Pack, 1976, 1982) Firms in developing countries lack the technical capacity to perform well Larger firms are more capital-intensive than smaller ones due to factor prices differing by firm size.
Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Numerous studies based on plant-level data I
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(Pitt and Lee, 1981; Martin and Page, 1983; Corbo and de Melo, 1986; Chen and Tang, 1987; Tybout, 1991; Tybout and Westbrook, 1995; Clerides et al., 1998; Lundvall and Battese, 2000) Two of these studies use data for sub-Saharan Africa where it has been argued that the problems of technical inefficiency are likely to be most important.
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview
Technology, factor choice and efficiency
R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries?
Yit = Ait F (Zit )
(3)
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE
Ait total factor productivity Zit n order vector of inputs, which function is continuous, strictly increasing and quasi-concave
Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Technology and factor choice
Firm performance and development: an overview R´ emi Bazillier
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Factor demand is linked to firm’s technology and factor prices Heterogenous factor intensities across firms. Two hypothesis: I
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In the first, technology is homothetic and the relative cost of capital decreases with size. In this case, large firms choose more capital per employee than small ones because capital is relatively cheaper. In the second, a nonhomothetic technology can lead to factor choices varying while factor prices are constant. Again, large firms have higher capital- labour ratios, but this is caused by the non-homothetic technology rather than by heterogeneous factor prices.
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Technical efficiency
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Eq. (1) represents the “frontier” (or best practice) production function
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Firms that use Ait and Zit inefficiently, however, will not achieve their maximum potential output. Different methods to compute inefficiency scores:
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Stochastic frontiers (based on econometrics methods) Data envelopment analysis (DEA) (based on mathematical programming) Here choice of stochastic frontiers because DEA is very sensitive to measurement errors (and therefore not very well suited to survey datas)
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview
Technical efficiency
R´ emi Bazillier Introduction and Overview
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Authors argue that it is reasonable to assume that inefficiency is approximately constant over the time-span during which the firm is observed: firm-specific time-invariant effect I
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The Business Environment: What’s different in developing countries?
No assumptions about the distribution of inefficiency and they allow the inefficiency to be freely correlated with the arguments of the production function Inefficiency: Ui = exp(−µi )
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Yit = Ait F (Zit )Ui e
it
(4)
Allocative efficiency
Firm performance and development: an overview R´ emi Bazillier
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In production theory, allocative efficiency conventionally reflects the ability of the firm to use optimal factor combinations, given their respective prices. I
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A related but distinct form of allocative inefficiency occurs when as a result of price differentials firms of differing size select different factor combinations I
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That is, the firm would be allocatively inefficient if it was to choose a point on the isoquant at which the isocost line is not tangential.
Explained by noncompetitive factor markets or differential taxation on firms of differing size
The authors propose propose to investigate the potential importance of such allocative inefficiency by examining how large are the differences in technology choice that can be attributed to differences in factor prices.
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview
Production function
R´ emi Bazillier Introduction and Overview
I
Choice af an explicit functional form of the production function F
I
Translog production function (Christensen et al. 1971):
ln Fit =
X j
βj ln Xjit + 1/2
XX k
βkm ln Xkit ln Xmit
m
βrs = βsr for all s, r Xj is the jth input in the production process β: parameters to be estimated
(5)
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
P
k
βkm = 0, m = 1, 2, ..., J (homotheticity)
P Pk βkm = 0, (m = 1, 2, ..., J) j βk = 1 (constant return to scale) βkm = 0, k = 1, 2, .., J, m = 1, 2, ..., J (Cobb-Douglas form)
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier
I
I
Two definitions of the dependent variable: gross output and value-added Four inputs: L, labour, K physical capital, M raw material inputs, I indirect inputs I
I
Because value-added is defined as output minus costs for raw material and indirect inputs, only labour and capital as inputs in the value-added specification
Role of human capital: I
I
The log production function is augmented with αhit , where α is a parameter to be estimated and hit a vector of human capital variables (employees years of education, tenure, age and age squared) Similar specification to that of a stylised Mincerian earning functions
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
ln Yit =
X j
βj ln Xjit + 1/2
XX k
βkm ln Xkit ln Xmit
m
+αhit + µi + δt + it δt : time-effect to capture common shocks to the firms over time.
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Instrumental Variables approach
Firm performance and development: an overview R´ emi Bazillier
I
Lagged values as instruments
I
First differences
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Lagged variables in levels are likely to be weak instruments for contemporaneous differences
I
I
They follow Blundell and Bond and combine the differenced equation with a levels equation to form a system of generalised method of moments (GMM) estimator Lagged levels as instruments for contemporaneous differences and lagged differences as instruments for contemporaneous levels
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Data I
Panel data on manufacturing firms in Ghana (1991-1997)
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier
I
I I
I
Introduction and Overview
OLS translog and Cobb-Douglas give similar results No strong evidence of nonhomotheticity and variable returns to scale
Within I I
I
The production function disintegrates .. It is because the differencing procedure exacerbates the bias caused by measurement errors in the explanatory variables → instrumental variables may be needed
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
Here, reject the simpler Cobb-Douglas model in favour of the translog specification I
I
only 44% of the observations fulfil quasi-concavity and 69% comply with monotonicity Within results are still not satisfactory
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
For all estimators, we can easily accept the hypothesis that technology is homothetic
I
→ technology is not the reason why we observe differing factor intensities over the size range
I
No evidence for variable returns to scale
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
I
Estimation of the fixed effects based on the output production function (Cobb-Douglas, system GMM)
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Allocative inefficiency
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
I
The dispersion of productivity differed little from those observed in other economies → no empirical support for the notion that there are atypically large inefficiencies in the sector No evidence that technology is nonhomothetic → it is not differences in technology which explains differences in factor choices across firms of different size
I
But capital-labour ratio does increase with size
I
→ What is the potential size of allocative inefficiency if these differences do reflect differences in factor prices?
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
I
I
I
To investigate the relation between capital intensity and firm size, a partial linear model is estimated using semiparametric approach While the regression shows that the capital intensity adjusted for quality increases with size, the pattern is nonlinear. The positive correlation between size and capital intensity is strongest for firms between 10 and 90 employees I
I
Within the (10,90) range, the average slope of the regression line is about 0.8, indicating that a 1% increase in the labour force is associated with a 0.8% ˝ increase in the capitalUlabour ratio.
Based on these regressions, they use the predicted values of capital intensity and calculate the implied capital stock values for given values of labour
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The figure implies that firms with 200 employees have up to five times higher relative labour to capital costs than firms with 21 employees. These differences in relative factor prices imply a substantial dispersion of factor choices.
Firm performance and development: an overview
Labour and Capital Cost differentials
R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency
ln wit = γhit + σ1 ln Lit + σ2 (ln Lit )2 + ηt + ωi + νit
(6)
Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Summary I
A very simple functional form, the Cobb-Douglas, adequately represents the production technology I
I
I
I
˝ The implication of the acceptance of the CobbUDouglas functional form is that the technology is homothetic so that differences if factor choices over firms of differing size is not a reflection of differences in technology
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries?
Measure of human capital does not appear to be quantitatively very important in determining productivity
Firm sizes and Scale efficiency
Dispersion in technical efficiency is similar to what is found in other countries Evidence that there is substantial allocative inefficiency
Management Quality
I
Large firms facing higher relative labour costs than smaller firms use a much more capital-intensive technology and operate with costs 20-25% higher than those which would occur if factor prices differentials across firms of differing sizes could be eliminated
Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Bloom et al. (2010), AER Bloom et al. (2013), QJE
Outline
Firm performance and development: an overview R´ emi Bazillier
Introduction and Overview
Introduction and Overview
The Business Environment: What’s different in developing countries?
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Management Quality
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
In Soderborn and Teal (2004): “we have also recognised that there may be an unobserved dimension of labour quality that varies across firms” (p. 390)
I
If it is time-invariant, this will be captured by the firm fixed effect
I
What can be this unobserved dimension of labour quality?
I
Management Quality may be an answer
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Bloom, Mahakan, McKenzie, Roberts, (2010) “Why Do Firms in Developing Countries have low productivity?”, American Economic Review
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Bloom, Mahakan, McKenzie, Roberts, (2010) “Why Do Firms in Developing Countries have low productivity?”, American Economic Review I
They find evidence that firms in developing countries are often badly managed, which substantially reduces their productivity
I
This appears particularly important in larger firms (100+ employees)
I
Financial constraints are a binding factor for growth, notably in smaller firms
I
Chang-Tai Hsied and Peter Klenow (2009, QJE) show that productive firms in India and China do not expand as rapidly
I
It may be explained by a mix of financial factors (particularly for smaller firms) and organizational factors (particularly for larger firms
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Management practices
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
Impact of management on productivity I
Chandler (1994) suggests that the United States and Germany pulled ahead of the rest of Europe in the early ˇ 1900s due to superior management, while ToyotaSs management system is credited with its productivity advantage over US auto firms.
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Comparing management practices across countries is not an easy task
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
The measurement issue I
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Bloom and Van Reenen (2007 and 2010) have collected data on management practices in medium and large (100 - 5000 employees) manufacturing firms across countries These surveys use double-blind techniques to score firms on: (i) monitoring practices (the collection and processing of production information), (ii) target-setting practices (the ability to set coherent, binding short- and long-run targets), and (iii) incentive practices (merit-based pay, promotion, hiring and firing) They find that developing countries like Brazil, China and India have significantly lower average management scores than firms in the US, Japan and Western Europe
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Bloom and Van Reenen (2010), “Why Do Management Practices Differ Across Firms and Countries”, Journal of Economic Perspectives
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Bloom and Van Reenen (2010), “Why Do Management Practices Differ Across Firms and Countries”, Journal of Economic Perspectives
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Bloom and Van Reenen (2010), “Why Do Management Practices Differ Across Firms and Countries”, Journal of Economic Perspectives
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Source: Bloom and Van Reenen (2010), “Why Do Management Practices Differ Across Firms and Countries”, Journal of Economic Perspectives
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
The lower level of average management practices in developing countries occurs because of a persistent, thick tail of badly managed firms
I
In the US, badly managed firms appear to improve or to exit, while in developing countries they do not
I
It may be explained by low competition and high levels of family ownership in developing countries, which leads to the survival of many badly-run firms
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Bloom, Eiffert, Mahajan, McKenzie and Roberts (2013), “Does Management Matter? Evidence from India”, The Quarterly Journal of Economics
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries?
I
Firms in the Indian Textile Industry I
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TFP in India is about 40% of that of the US (Caselli 2011) Indian firms are typically poorly managed Textile production; 22% of manufacturing employment
An experiment on 28 plants operated by 17 firms in the woven cotton fabric industry
Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The selection of firms for the field experiment
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
The sample firms were randomly chosen from the population of all publicly and privately owned textile firms around Mubai (100-1000 employees)
I
Focus on firms in the towns of Tarapur and Umbergaon. Sample of 66 potential subject firms All of these firms were then contacted by telephone by a partnering international consulting firm which offered free consulting
I
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34 firms expressed an interest and 17 agreed to commit senior management time to the consulting program (the project firms)
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
First issue: Selection
Firm performance and development: an overview R´ emi Bazillier
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The authors compared the project firms with the 49 nonproject firms and found no significant differences (at least in observables) They conducted a detailed ground-based survey of every textile firm around Mumbai? They found that the 17 project firms were not significantly different in terms of preintervention observables from the 96 nonproject firms that responded to the survey Potential issue that selection into the experimental sample was driven by unobservables I
“Nevertheless, because typical policy efforts to offer management training to firms will also rely on firms volunteering to participate, we believe our estimate of the effect of improving management is policy relevant for the types of firms that take advantage of help when it is offered.”
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
The Management Consulting Intervention (the Treatment)
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier
I
The diagnostic phase (one month): I I
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The implementation phase (four months): I
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All treatment and control plants Evaluating the current management practices The consultant assigned to each plant worked with the plant management to put the procedures into place, fine-tune them, and stabilize them so that employees could readily carry them out Only provided to treated plants
The measurement phase: I
Collection of performance and management data from all treatment and control plants
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier
I
17 firms agreed to participate (25 plants eligible)
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Randomization at the firm-level: 6 firms were randomly chosen to be the control firms and one eligible plant from each of them to be the control plants The remaining 11 firms were the treatment firms
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4 plants were randomly chosen for the first wave (sept 2008) Second wage (april 2009): a random plant from each of the remaining seven treatment firms + three more plants selected at random from the treatment firms with multiple plants
11 treatment firms, 14 treatment plants, 6 control firms (with each a control plant)
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Impact of the Treatment
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Main results
Firm performance and development: an overview R´ emi Bazillier
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All plants started off with low baseline adoption rates of the set of management practices (consistent with data on poor management quality in India) The intervention did succeed in changing management practices I
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The treatment plants increased their use of the 38 practices by 37.8 percentage points on average by August 2010, when the main wave ended (an increase from 25.6% to 63.4%). These improvements in management practices were also persistent. The management practice adoption rates dropped by only 3 percentage points, on average, between the end of the first wave in August 2010 (when the consultants left) and the start of the second wave in August 2011.
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Main results
Firm performance and development: an overview R´ emi Bazillier
I
Not all practices were adopted I
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The firms appeared to adopt the practices that were the easiest to implement and/or had the largest perceived short-run pay-offs, like the daily quality, inventory, and efficiency review meetings.
the treatment plants’ adoption of management practices occurred gradually and nonuniformly I
“Initially many directors were skeptical about the suggested management changes, and they often started by piloting the easiest changes around quality and inventory in one part of the factory. Once these started to generate improvements, these changes were rolled out and the firms then began introducing the more complex improvements around operations and human resources.”
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Main results
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
I
The control plants, which were given only the one-month diagnostic, increased their adoption of the management practices, but by only 12 percentage points, on average I
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This is substantially less than the increase in adoption in the treatment firms, indicating that the four months of the implementation phase were important in changing management practices However, it is an increase relative to the rest of the industry around Mumbai (the nonproject plants), which did not change their management practices on average between 2008 and 2011.
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Main results
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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The nonexperimental plants in the treatment firms also saw a substantial increase in the adoption of management practices. I
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In these five plants, the adoption rates increased by 17.5 percentage points by August 2010 This increase occurred because the directors of the treatment firms copied the new practices from their experimental plants over to their other plants.
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Impact of the Treatment on Plant Performance
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Impact of the Treatment on Plant Performance
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Long-run effects of the management intervention
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
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Number of Plants: I
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Easy to measure and recollect so could be accurately collected over time for the entire set of firms in the 2011 survey Not influenced by changes in loom technologies that made comparing plant-level output over time difficult
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Impact of the Treatment on Plant Performance
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Are the Improvements in Performance due to Hawthorne Effects? Hawthorne effects involve the possibility that just running experiments and collecting data can improve performance, raising concerns that our results could be spurious I Authors argue it is unlikely to be the case: I
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Both sets of plants got the initial diagnostic period and the follow-up measurement period, with the only difference being the treatment plants also got an intensive consulting during the intermediate implementation stage while the control plants had briefer but nevertheless frequent visits from the consultants collecting data → Neither the treatment nor control plants were told that two groups existed, so they were not aware of being “treatment” or “control” plants The improvements in performance took time to arise and they arose in quality, inventory, and efficiency, where the majority of the management changes took place, and in the longer run led to treatment firms opening additional plants these improvements persisted after the implementation period
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Conclusions
Firm performance and development: an overview R´ emi Bazillier
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A randomized experiment that provided managerial consulting services to textile plant in India
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Improvements in management practices led to improvements in productivity of 17% within the first year from improved quality and efficiency and reduced inventory and appear to have been followed by a longer-run increase in firm size
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It appears that competition did not drive these badly managed firms out of the market because the inability to delegate decisions away from the owners of the firm impeded the growth of more efficient firms and, thereby, interfirm reallocation. Firms had not adopted these management practices before because of informational constraints
Introduction and Overview The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
Firm performance and development: an overview R´ emi Bazillier Introduction and Overview
Next lecture: Localization of Multinational firms and the Global Value Chain
The Business Environment: What’s different in developing countries? Firm sizes and Scale efficiency Sleuwaegen and Goedhuys (2002), JDE Soderbom and Teal (2004), JDE
Management Quality Bloom et al. (2010), AER Bloom et al. (2013), QJE
