A long-standing question in social science is to what extent differences in management cause differences in firm performance. To investigate this we ran a management field experiment on large Indian textile firms.
We provided free consulting on modern management practices to a randomly chosen set of treatment plants and compared their performance to the control plants. We find that adopting these management practices had three main effects.
- First, it raised average productivity by 11% through improved quality and efficiency and reduced inventory.
- Second, it increased decentralisation of decision making, as better information flow enabled owners to delegate more decisions to middle managers.
- Third, it increased the use of computers, necessitated by the data collection and analysis involved in modern management.
Since these practices were profitable, this raises the question of why firms had not adopted these before. Our results suggest that informational barriers were a primary factor in explaining this lack of adoption. Modern management is a technology that diffuses slowly between firms, with many Indian firms initially unaware of its existence or impact. Since competition was limited by constraints on firm entry and growth, badly managed firms were not rapidly driven from the market.