Day 2: Framework Session – Management Capacity and Productivity

The session focused on understanding whether developing countries are held back by firm management.

There is evidence that management practices in developing countries are weak by global standards. If this is related to productivity – also much lower in developing countries – we could improve GDP per capita via better management practices.

John Van Reenen presented evidence from the World Management Survey.

Overall, the evidence suggests that management practices are critical to productivity, and this was backed-up by firm-level case studies where some firms were injected with better management practices and productivity increased.

The question, then, is what holds back management and how can policy change it?

One aspect is that foreign multinationals consistently achieve good management practices wherever they are located. A second aspect is competition: firms which feel more exposed to competition have better management. Ownership is also important: family-run firms typically have much worse management. Also, higher human capital and education, not just of management but of employees, is correlated with better performance. Interestingly, self-assessments of performance are not linked to productivity – suggesting managers do not know accurately how well or badly the firm is managed.

What are the policy implications? First, openness to foreign direct investment can be one avenue to improve management. Secondly, consider fostering better competition: regulation and competition commissions. Third, succession planning for family firms, as well as abandoning tax incentives which may be in place that favour keeping firms family-run. Fourth, the importance of education and human capital has been highlighted, although it remains a general challenge. Finally, there is a role for providing advice and information to firms.

Broadly, what perhaps prevents firms from adopting better practices? Trust outside the family and the rule of law are important – although hard to change.

Dr Louis Kasekende, deputy governor of the Bank of Uganda, offered a perspective from Africa: the average Ugandan firm is much smaller than the average size in Van Reneen’s sample. His question is how important are better practices for smaller firms, and do they have different barriers compared to larger firms? He asked what, specifically, are the policies they could adopt for improving small firms’ productivity.

However, knowledge to answer this question remains uncertain. Moving forward, research is likely to explore how management practices can be better adopted in developing countries, and what more focused policy options may be.

By Charles Beck, Country Economist, IGC South Sudan