Management matters: How bad management is holding back growth

What is the challenge?

Poor management practices – as measured by ability to monitor job performance, set targets, and provide performance-based incentives – can hamper private sector’s ability to innovate, exploit new technologies, and react to new challenges and opportunities. Badly managed firms can, for example, appear chaotic, with inventory and spare parts scattered around factory floors and typically no systematic quality control of products. This can significantly impact the productivity of firms and local markets. Until recently, very few studies had investigated the relationship between management and firm performance or examined the determinants of poor management in developing countries.

Addressing the problem

Several IGC projects have examined the quality of management practices in firms in India, Pakistan, Bangladesh, and Mozambique. The projects aimed to rigorously analyse the determinants of management practices and explain how practices vary across countries. The projects scored basic management practices across a range of industries and sectors, based on a Management and Organisational Practices Survey (MOPS). One project also investigated how improved management practices can improve firm performance by running a randomised control trial (RCT) in India (Bloom et al., 2013, "Does Management Matter? Evidence from India", The Quarterly Journal of Economics). 

Research results

• Management matters. Surveys found that companies with higher management scores are significantly more productive, profitable, and grow faster. Well managed firms are also larger, have more longevity, employ more skilled workers, and are more likely to export. In short, management practices are robustly linked to firm performance and economic growth.
• Management is worse in lower income countries. Firms in low and middle income countries have on average much worse management practices than firms in high income countries. This appears to be due to a large amount of very badly managed firms and a wide variation in management scores across firms.
• Improving management practices may improve firm performance. In a random sample of large Indian textile firms, adopting improved management practices raised their average productivity by 17% through improved output quality, efficiency, and reduced inventory. It also decentralised more decision-making and increased the use of computers. Similar results were found in studies in Pakistan, such that every 10% improvement in a firm’s management score was associated with a 12% increase in labour productivity.
• Bad management is driven by many factors. Ownership structures, competition, education, and informational barriers seem to be important in determining the quality of management practices

Impact on policy

Understanding the drivers of better management is crucial to develop policies that can improve the quality of management practices and in turn raise a country’s productivity. In the short term, research suggests that immediate actions to improve employees’ skills and knowledge could improve management practices. In the long run, policies that enhance competition in public and private sector and relieve some labour market regulations may help.

The MOPS methodology created by IGC researchers has been used in over 30,000 plants across the US by the US Census Bureau, and has recently been adopted by the Pakistan Bureau of Statistics to survey over 2,000 firms in Punjab and Islamabad.

In Mozambique, the National Institute for Small and Medium Enterprises (IPEME) has set up a pilot project focusing on management practices for SMEs in the construction sector.