Researchers used an interview-based evaluation tool that defines and scores basic management practices.
Middle-income countries have much worse management practices than firms in high-income countries, which appears to be due to a large tail of badly managed firms coexisting with firms with world-class management practices.
India’s average management quality is lowest of all countries surveyed. In the US, 2% of firms have little or no modern practices implemented, however in India this percentage is 25%.
This research presents the first in-depth look at the state of management practices in India across four sectors – manufacturing, retail, healthcare and education. Using a unique dataset measuring the quality of management practices, we find a consistent pattern of poor management in India in comparison to higher income countries across all the sectors studied. Particularly in manufacturing and retail, the low average score is mainly due to a large tail of badly managed firms, which is thin or non-existent in higher income countries. Ownership structures, competition, education and informational barriers seem to be important drivers of the quality of management practices. Finally, when looking across regions, we also find that management quality varies in tandem with levels of development.
For the past few decades, economists have documented wide differences in the productivity performance between firms within countries, even within the same narrow sector. It is believed that one likely factor is the quality of management practices at these firms, but, because of dearth of good data, it is only recently that empirical economists have started giving this topic any attention.
To address this absence of management data, the research team of the World Management Survey (WMS), at the LSE’s Centre for Economic Performance, has been refining and implementing a methodology that systematically and consistently measures the quality management practices at the establishment level. We use an interview-based evaluation tool that defines and scores a set of 18 to 23 basic management practices from one (‘worst practice’) to five (‘best practice’), depending on the sector.
Since the WMS project’s inception in 2001, we have collected management data for over 7,000 manufacturing firms, nearly 900 retail firms, 1,700 hospitals, and 1,300 schools across middle and high-income countries. We found that management practices – defined in terms of more effective monitoring, targets, and incentives – are robustly linked to firm and national performance. Furthermore, competition, ownership structure, skills, and labour market regulations play a major role in explaining variations in management practices across firms and countries.
This work finds that firms in middle-income countries have, on average, much worse management practices than firms in high-income countries. The low average management quality in middle-income countries appears to be due to a large tail of badly managed firms coexisting with firms with world-class management practices. In fact, 63% of the variation in management practices within the manufacturing management dataset is attributed to the variation within countries while only 21% to between countries.
In terms of policy impact, if we accept the link between firm management and productivity, these findings suggest that poor management practices could be a factor behind the lower levels of development of many countries. This is also an opportunity for policy development: many improvements in management practices can be effected with relatively low capital investment, which is particularly important in middle-income economies. Understanding the drivers of better management in establishments is a fruitful area for policy development.