Economists have long puzzled over why there are such striking differences in productivity across both firms and countries. For example, GDP per capita in the US is about ten times that of India. A natural explanation for these productivity differences lies in variations in management practices. Until recently, however, there has been little rigorous evidence about exactly how much difference good management makes to productivity, let alone whether (and how) badly-managed firms could be improved. In a recent randomized experiment with textile firms in India, we caused five months of intensive management consulting to be provided, aimed at improving the management of these low-productivity firms. This intervention led to large improvements in management practices, which in turn resulted in improvements in quality, efficiency and productivity. This work has received substantial policy, media, and academic attention.
The purpose of this proposal is to return unannounced to these same firms, over one year since we last collected data from them, to measure whether good management practices "stick", to identify what factors determine persistence in management practices, whether firm owners are able to transfer successful practices over to other plants, to find additional outcomes of changes in management, and to estimate the medium-term effects of better management on firm productivity. This link between good management and productivity is of large importance for several reasons. First, from a cost-benefit point of view, whether it would be worth it to the firm to buy productivity-enhancing consulting services at market rates depends critically on how long the benefits last. Second, knowledge of whether improvements in management persist (or decay) is important for understanding the root causes of persistent poor management. For example, if the underlying cause is lack of information, then once these practices are introduced (and their embedded information communicated), they should persist without further investment. Instead, if the cause is a lack of incentive structures, then once external monitoring of these practices stops, these practices may revert back to their previous standards. Both the cost-benefit and persistence reasons also feed into the policy conclusions to be drawn from this exercise -- namely, how to determine the proper investment policy for the economic development of low-productivity firms and nations.
The research proposed here is of strong relevance to policy, both international and domestic. Within India, the project has received the endorsements of the Director General of the Confederation of Indian Industry and the General Manager of the Reserve Bank of India (India's Central Bank) and some funding for the first stage of the work from a prominent Indian entrepreneur, demonstrating strong Indian policy and business interest. The World Bank contributed over $150,000 to the first stage of this work and its support for the project demonstrates strong policy interest from international organizations. The Asian Development Bank (ADB) cites the study in their annual flagship publication and argues that such studies should "pay off well given the [large] impact SMEs [Small and Medium Enterprises] can have on aggregate productivity and employment [in Asia and the Pacific]."
This research has generated strong interest in the US business context as well. The results have been included in courses for managers in the USA via the Stanford Business School and the paper resulting from the first study has been extensively discussed by undergraduate and MBA-level business-school students as well as US business executives. Lessons learned from can be extended to other low-productivity areas -- both in the US and abroad -- that currently lag but could clearly benefit from a transfer of best practices.
There is by now a consensus that there exist huge differences in productivity levels between firms and across countries. Understanding the source of these differences in performance is a crucial economic issue as is learning how to improve the productivity of firms in less developed countries. To investigate this we ran a management field experiment on large Indiantextile firms. We provided free consulting on management practices to an experimentally chosen set of treatment plants and compared their performance to a set of control plants. To our knowledge, these are the first set of experimental results documenting the casal link from management practices to firm productivity. We find that adopting these management practices raised productivity by 17% in the first year through improved qualityand efficiency and reduced inventory, and within three years led to the opening of more production plants. These are substantively large numbers and so a natural question is why had the firms not adopted theseprofitable practices previously? Our results suggest that informational barriers were the primary factor explaining this lack of adoption. Also,because reallocation across firms appeared to be constrained by limits on managerial time, competition had not forced badly managed firms to exit. The project has had a significant policy impact and has been presented at a range of policy seminars such as at the World Bank, the Asian Development Bank, The Department for International Development and the Inter-American Development Bank. It has also presented directly to students and business-people from developing countries. The project has also received significant media coverage from a range of publications. We also shot a video of the project and have loaded this, plus photos, and other media materials and questionnaires onto a website that is available to the general public here: http://worldmanagementsurvey.org/?page_id=179. The material has already been used to teach business school students in the United States.
