There is a stark difference in firm productivity and growth between developing and advanced economies. Improving the management of firms in developing countries can help bridge this gap.
New research shows that introducing management practices to firms can have lasting impacts on their productivity and growth. When Indian firms adopted management practices, their productivity increased by 17% in the first year, and within three years, they opened more production plants. Eight years later, the impact of management on productivity persists.
For economies to achieve sustained growth in incomes and large-scale reductions in poverty, firms must be productive and dynamic enough to generate income and jobs. However, many firms in developing countries are poorly managed, impeding their productivity and growth. Scoring of management practices in manufacturing firms reveals that management is significantly worse in developing countries than in developed countries. The average management score for Indian firms, for example, is 23% lower than the score for US firms.
Although management can be complex to measure, recent research has focused on specific management practices standard in American, European, and Japanese firms in the areas of factory operations, quality control, inventory, human resources, and sales and orders. An IGC randomised controlled trial (Bloom et al., 2013) of large Indian textile firms found that the adoption of a set of management practices, introduced to them with the support of a consulting firm, raised productivity by 17% and led these firms to open more production plants. Follow-up research shows that these effects have persisted.
This brief, which focuses on large private firms, examines why management matters for economic growth – demonstrating the long-term effects of management practices on firm productivity, and recommending actions for policymakers and firms to secure these benefits.
- Management practices have lasting positive effects on firm performance and growth.
After adopting management practices, Indian firms increased their productivity by 17% and opened more production plants. The impact of these management practices on firm productivity persists eight years later.
- Management practices spread within and across large firms. These spillovers improve management in the long-run.
Within a firm, management improvements in plants that adopted management practices spilled over to plants that did not. These spillovers are the most important drivers of management improvements in the long-run.
- Key employees such as plant managers and firm directors play a vital role in driving management practices.
Manager turnover is the biggest reason for a plant dropping management practices. The time that senior executives spend managing their plants also matters, with some management practices being dropped when they had to reduce their time managing.