THE IMPACT OF COMPETITION & GLOBALIZATION ON MANAGEMENT PRACTICES AND WORK-LIFE BALANCE Nick Bloom (Centre for Economic Performance, LSE) Very grateful

THE IMPACT OF COMPETITION & GLOBALIZATION ON MANAGEMENT PRACTICES AND WORK-LIFE BALANCE

Nick Bloom(Centre for Economic Performance, LSE)

Very grateful for support and funding from the: Economic and Social Research Council; Advanced Institute of Management; and Anglo German Foundation

2121stst April 2006 April 2006

A. Management Practices (Bloom and Van Reenen, 2006)

B. Work-life Balance(Bloom, Kretschmer and Van Reenen, 2006)

C. Policy Implications

GENERAL OUTLINE

MEASURING AND EXPLAINING MANAGEMENT PRACTICES ACROSS FIRMS AND COUNTRIES

Nick Bloom & John Van Reenen(Centre for Economic Performance, LSE)


MOTIVATION: MANAGEMENT

Large persistent productivity differences across firms and

countries which people typically claim is due to “management”

• But what is the role of management?

• And why does it vary so much across firms and countries?

To address these questions in 2001 LSE and McKinsey1 started

an ambitious joint research project to collect the first firm level

international management data set.

1 The LSE received no funding from McKinsey – this was made possible by the generous support of the ESRC, AIM and the AGF!

1. “Measuring” management practices

2. Evaluating the reliability of this measure

3. Describing management across firms & countries

4. Explaining management across firms & countries

OUTLINE

A NEW APPROACH TO MEASURING MANAGEMENT

1) Developing management practice scoring

• Scorecard for monitoring, targets and incentives

• 45 minute phone interview of (manufacturing plant) managers

2) Obtaining unbiased responses

• “Double-blind”

•Managers are not informed (in advance) they are scored

•Interviewers do not know company performance

3) Getting firms to participate in the interview

• Introduced as “Lean-manufacturing” interview, no financials

• Endorsement of Bundesbank ,UK Treasury, Banque de France

• Run by 10 MBAs (loud, pushy & business experience)

Score (1): Measures tracked do not indicate directly if overall business objectives are being met. Certain processes aren’t tracked at all

(3): Most key performance indicators are tracked formally. Tracking is overseen by senior management

(5): Performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools

MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?”

Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).

WE SURVEYED MEDIUM SIZED MANUFACTURING FIRMS

• US (≈300), UK, France and Germany (≈150 each)

• Medium sized manufacturers, typically about 500 employees

•Medium sized because firm practices more homogeneous

•Manufacturing because easier to measure productivity

• Good response rate of 54%

•Response uncorrelated with firm performance

ADDITIONAL CONTROLS FOR BIAS & NOISE

8 INTERVIEWEE CONTROLS

• Gender, seniority, tenure in post, tenure in firm, countries worked in, foreign, worked in US, plant location, reliability score

3 INTERVIEWER CONTROLS

• Set of analyst dummies, cumulative interviews run, prior firm contacts

5 TIME CONTROLS

• Day of the week, time of day (interviewer), time of the day (interviewee), duration of interview, days from project start





OUTLINE

INTERVAL VALIDATION SUGGESTS MANAGEMENT SCORING PROCESS IS CONSISTENT

1

2

3

4

5

1 2 3 4 5

`

1st interview

2nd i

nte

rvie

w

Re-interviewed 64 firms with different MBA interviewers speaking to different plant managers

Firm average scores (over 18 question)

Correlation of 0.75 suggests interviews pretty reliable

97.8

99.3

16.5

18.15.0

6.4

1.271.82

148169

Labour Productivity1

1 $’000 sales per employee at 2000 prices 3 Tobins’ Q ($ value of firm per $ of assets), quoted firms only2 Return on capital employed (%) 4 (100 - % bankrupt or liquidated 12 months after 2004)

Bottom 50% Top 50%Management score

Sales Growth, (% pa)


Survival Rates4, (%)


Stock Market Value3


Profit Rate2, (%)


WE ALSO UNDERTOOK EXTERNAL VALIDATION BY COMPARING TO COMPANY ACCOUNTS

CONCERNS WITH OUR MANAGEMENT MEASURE?

Measurement error, but downwardly biases our results

Measurement bias (“happy manager”), but

• “Double-blind” survey process scored from examples designed to try and minimise this

• Run series tests in the paper and appears OK

Reverse Causality

• True for validation results, but only data checking tests

• In management results concentrate on more causal factors like competition, history, taxes etc…





OUTLINE

0.2

.4.6

.81

1.2

Den

sity

1 2 3 4 5

0.2

.4.6

.81

1.2

Den

sity

1 2 3 4 5

0.2

.4.6

.81

1.2

Den

sity

1 2 3 4 5

0.2

.4.6

.81

1.2

Den

sity

1 2 3 4 5

FIRM LEVEL MANAGEMENT SCORES BY COUNTRY

France

UK US

Germany

Management score Management score

Management score Management score

% o

f fi

rms

% o

f fi

rms

% o

f fi

rms

% o

f fi

rms

COUNTRY LEVEL MANAGEMENT SCORES*

3.07

3.14

3.31

3.35US

Germany

UKTypical UK managers?

Bad manufacturing management - a UK tradition?

“Efficient management is the single most significant factor in the American productivity advantage”[Marshall Plan Anglo-American productivity mission, 1947]

France

UK BAD AVERAGE MANAGEMENT MAINLY DUE TO THE LONG TAIL BADLY MANAGED FIRMS

All firms Firms with management scores above 2

3.07

3.14

3.31

3.35US

Germany

UK

France

3.23

3.34

3.34

3.36

US-UK gap is 0.28 points

US-UK gap is 0.13 points

3.58

3.25

3.13

US FIRMS (MULTINATIONAL SUBSIDIARIES) ARE ALSO BETTER IN EUROPE

Average management score by firm type in UK, France and Germany

Domestic

Non-US multinational subsidiary

US multinational subsidiary

# in sample

379

44

20





OUTLINE

COMPETITION AND MANAGEMENT

Competition is strongly linked with good management• True for all three competition measures in Nickell (1996):

import competition; industry rents; and # of competitors

Positive effects of competition appears to be due to two factors• “Selection” – badly managed exit more quickly• “Effort” – competition makes managers try harder

EDUCATION, SKILLS AND MANAGEMENT

Educations and training strongly linked with good management• True for all five measures we used: % employees with a

degree; % of employees with an MBA, training days per year (managers); training days per year (non-managers); and average wages

Positive correlation appears be a combination of:• Cause: educations & training facilitates good management• Effect: educated & trained people attracted to well

managed firms

INHERITED FAMILY FIRMS AND MANAGEMENT

Inherited “family” firms defined as 2nd generation family owned– excludes 1st generation “founder” firms (typically well run)

Quality of management practices in inherited family owned firmsdepends on who runs them• Firms with professional management typically run well• Firms with inherited family management typically run less well

Work from Columbia, Harvard, and NYU shows inherited familymanagement also bad for productivity and growth, particularly inlarger firms and faster growing industries

In UK and France inherited family firms typically family managedwhile in the US and Germany typically professionally managed

WHY DOES FAMILY INVOLVEMENT VARY ACROSS COUNTRIES?• Historical differences

• UK & France tradition of Primo Geniture:

[Oxford English Dictionary, 2005] “Feudal rule of inheritance introduced into England by the Norman Conquest. Replaced Teutonic gavelkind. Obligatory until the Statute of Wills [1540]. Still common in many places”

• US and Germany tradition of equal division (Menchik, 1980)

• Estate tax headline rates on family firms1:

• US ≈ 50% France ≈ 25%

• UK = 0% Germany ≈ 15%1 Rate on a $25m firm. In practice these taxes are often reduced/avoided by advanced tax planning, although this involves foresight, financial costs and some control loss.

A FAMOUS UK INHERITED FAMILY MANAGED FIRM,

WITH AN EXECUTIVE BOARD MEETING IN PROGRESS….

Note: Albert Steptoe inherited “Steptoe & Son” from his father, making him the 2nd generation, and Harold the 3rd generation

-0.01-0.28

-0.08

-0.11

-0.08

Total management Gap

Inherited family managed firms (primogeniture)

Competition Education(% employees with degree)

Residual management gap

DO THESE FACTORS EXPLAIN THE UK-US MANAGEMENT GAP?UK-US MANAGEMENT PRACTICE GAP1

1 Note: (a) based on our sample of medium sized manufacturing firms; (b) 1 point on the management scale associated with about 20% higher productivity.

A. Management Practices(Bloom and Van Reenen, 2006)



GENERAL OUTLINE

WORK LIFE BALANCE, MANAGEMENT PRACTICES AND PRODUCTIVITY

Nick Bloom, Toby Kretschmer and John Van Reenen(Centre for Economic Performance, LSE)


MOTIVATION: WORK-LIFE BALANCE (WLB)

With unemployment at historically low levels increased UK focus

on quality of jobs rather than just quantity. Focus sharpened as

family friendly policies and female participation moved up the

political agenda, raising questions such as:

• Are WLB and productivity trade-offs or complements?

• Do competition and globalization erode employees WLB?

To address these issues the we added questions on WLB

outcomes and practices to the end of the management survey.

1. Competing models of work-life balance

2. Measuring work-life balance and testing the models

3. International (and multinational) evidence

OUTLINE

COMPETING MODELS OF WORK LIFE BALANCE

Trade-Off Theory

Win-Win Theory

Evidence

WLB correlation with:

Management Negative Positive ?

Competition Negative Ambiguous ?

Productivity Negative Positive ?




OUTLINE

DEFINING OUR WLB MEASURES• WLB practice score defined averaging over 5 questions:

– Working from home allowed (yes/no)– Full/part time job switching allowed (yes/no)– Job sharing allowed (yes/no)– Childcare subsidy (yes/no)– Childcare flexibility (low/medium/high)

• WLB outcome measure defined by the question:– “Relative to other companies in your industry how much does

your company emphasise work life balance”?

(1) “much less”, (2) “slightly less”, (3) “the same”,(4) “slightly more” and (5) “much more”

WLB (PRACTICES AND OUTCOMES) BOTH LINKED WITH GOOD MANAGEMENT

Contradicts the “Trade-Off” theorySupports the “Win-Win” theory

2.9

3

3.1

3.2

3.3

3.4

3.5

3.6

Very Low Low Average High Very High

Work-Life Balance Outcomes

Man

agem

ent

Qu

alit

y

WLB (PRACTICES AND OUTCOMES) ARE NOT LINKED TO COMPETITION

Examined a range of competition measures and foundno evidence for any link between WLB and competition

In fact the correlation was typically positive but insignificant

Competition appears not to make firms treat their employeesworse - presumably if they did employees would leave for thecompetitors!

Contradicts the “Trade-Off” theoryNo implications for the “Win-Win” theory

WLB PRACTICES AND PRODUCTIVITY ALSO UNRELATED

WLB and productivity are strongly positive correlated

But of course WLB and productivity both are linked with goodmanagement - controlling for management eliminates thecorrelation between productivity and WLB

Firms provide the productivity maximising amount of WLB fortheir employees firms

Contradicts the “Trade-Off”Contradicts the “Win-Win” theory

MODELS OF WORK LIFE BALANCE

Trade-Off Theory

Win-Win Theory

Evidence

WLB correlation with:

Management Negative Positive Positive

Competition Negative Ambiguous Zero

Productivity Negative Positive Zero

Consistent with a more “Free-market” view




OUTLINE

THE FRENCH ADOPT THE NICEST WLB PRACTICES AND THE AMERICANS THE TOUGHEST

2.54

1.87

1.84

1.53

France

UK

US

Germany

COUNTRY LEVEL WLB AVERAGE SCORES*

* Sum of scores for allowances and flexibility over: working-from home, job-sharing, full/part time switching, childcare flexibility, childcare subsidies

INTRIGUINGLY, US MUTLINATIONALS IN EUROPE ADOPT LOCAL “NICER” WLB PRACTICES

For management practices US firms bring over their better management practices with them to Europe

But for work-life balance practices US firms adopt the “nicer” local European approach

Since these WLB practices are typically not regulated suggests US firms are choosing nicer WLB practices in Europe, which in turn suggests Europeans value this more

Working for a US multinational in Europe is typically good for employees

ALSO NO EVIDENCE THAT “GLOBALIZATION” IS BAD FOR WLB EITHER

We find a very strong positive link between firm size and WLB, noting that large firms are also typically much more globalized

Also find no evidence multinationals reduce employees WLB, and in fact the correlation is positive but insignificant

Suggests employees belonging to more globalized firms do not suffer (and probably gain) in terms of their WLB

Working for larger globalized firms (in Europe and the US) is typically good for employees WLB

A. Management Practices(Bloom and Van Reenen, 2006)



GENERAL OUTLINE – OVERVIEW TWO PAPERS

COMPETITION IS GOOD

Well known that competition benefits consumers – more choice and lower prices

We find that competition also raises productivity by improving management practices

And we find no evidence – as many have claimed – that competition harms workers work-life balance

Continue to pursue the successful policy agenda of increasing competition in the UK

“GLOBALIZATION” APPEARS GENERALLY GOOD

Multinationals (especially US ones) are typically higher productivity, better managed and pay their workers more

Larger firms and multinationals also appear not to harm (and if anything improve) the WLB of their employees

Trade is also an important factor is raising competition

Continue to push for open and globalized UK markets at home and in Europe

Standard assets (savings, housing etc)• 40% inheritance tax above a £275,000 threshold

Private companies (typically family firms)• 0% inheritance tax, and no cap on this relief

•Exemption introduced in Budgets from 1979 to 1992

•Rationale that inherited family firms help the economy

POLICY IMPLICATIONS FOR INHERITANCE TAX – FIRST SOME BACKGROUND

1 A £1m family firm has 16 employees on average. Taxing firms with >£1m will exclude most family shops, pubs, small businesses etc.

Inherited family management is associated with poorermanagement and productivity in medium & larger firms.

So there may be benefits from capping the inheritance tax exemption for private companies:

• Increase productivity by removing a distortion in favour of family inheritance in larger firms1

• Improve intergenerational equality - which is bad in the UK by international standards - by taxing large inheritances

• Raise revenue – for example a £1m cap could raise £250m

POLICY IMPLICATIONS FOR INHERITANCE TAX

1 90% of family firms worth less than £1m. An average £1m firm has 16 employees.

Consider reforms for a more neutral inheritance tax

AND FINALLY…………..

MANAGEMENT RESEARCH NEXT STEPS

This summer follow up a second survey wave on 3000 firms to:

• Extend to more countries:

• Europe: Italy, Poland, Sweden and Greece

• India

• Extend to more industries

• Pilots in Retail, Education (Schools) and Health (Hospitals)

• Extend to look at organisational structure and use of IT

Quotes to finish……..

THE WEIRD WORLD OF MANUFACTURING

Spoke to companies making…..

• Plastic balls to stop birds nesting on water near airports (reported no competitors)

• European sex-toys (few exports – aimed at domestic “tastes”)

….and an amazing array of people

• “I spend most of my time walking around cuddling and encouraging people - my staff tell me that I give great hugs”

• “……….…..[long silence]………….sorry I just got distracted by a submarine surfacing in front of my office window”

BACK-UP

Why Should Management Practices Vary?

Two models - not mutually exclusive

•“Optimal choice of management practices”

• Another factor of production (like advertising)

• No “better” or “worse” style of management – depends on firm’s circumstances

•Exogenous managerial inefficiency (Lucas 1978)

• Strictly “better” or “worse” styles of management

• Well managed firms strictly better performing

•Empirically we find some support for both

0.2

.4

.6

.8

11.2

Density

1 2 3 4 5Average management score across questions and interviews - note dropping lean3

0.2

.4

.6

.8

11.2

Density

1 2 3 4 5Average management score across questions and interviews - note dropping lean3

MANY COMPETITORS AND NO (PG) FAMILY CEO

FEW COMPETITORS AND/OR (PG) FAMILY CEO

2.7% firms in tail1

9.0% firms in tail1

1 Tail defined as a score ≤ 2. In the whole sample 6.9% of firms are in the tail.

N=415

N=317

CONTINGENT MANAGEMENT PRACTICES

Dependent VarHC

Management

FC Manage

ment

HC-FC Manage

ment

HC-FC Manage

ment

HC-FC Manage

ment

Level Firm Firm Firm Firm Industry

Ln (% degrees)i

firm level

0.220

(0.039)

0.100(0.043)

0.120(0.043)

Ln (ave wage)i

firm level0.337

(0.122)

Ln (% degrees)j

Industry level (US)

0.281(0.169)

Standard Errors Robust Robust Robust Robust Clustered

Firms 732 732 732 424 732Note: “HC management” average z-score of the 3 most human capital focused questions (questions 13, 17 and 18). “FC management” average z-score of the 3 most fixed capital focused questions (1, 2 and 4). “HC-PC management” is the difference of these two measures.

ADDITIONAL CONTROLS FOR BIAS & NOISE

8 INTERVIEWEE CONTROLS

• Gender, seniority, tenure in post, tenure in firm, countries worked in, foreign, worked in US, plant location, reliability score

3 INTERVIEWER CONTROLS

• Set of analyst dummies, cumulative interviews run, prior firm contacts

5 TIME CONTROLS

• Day of the week, time of day (interviewer), time of the day (interviewee), duration of interview, days from project start

Dependentvariable

Sales(in Ln)

Sales(in Ln)

Sales(in Ln)

ROCE Tobin Q (in Ln)

Sales growth

Exit

Estimation1 OLS OLS OLS OLS OLS OLS Probit

Firms All All All All Quoted All All

Managementi

0.085(0.025)

0.034(0.011)

0.042(0.012)

2.469(0.688)

0.250(0.075)-

0.018

(0.006)

-0.200[0.026]

Ln(Labor) it

0.999(0.014)

0.539(0.021)

0.540(0.021)

2.172(1.202)

0.209(0.109)

-0.022

(0.011)

0.233[0.045]

Ln(Capital) it

0.103(0.013)

0.104(0.013)

-0.148(0.899)

-0.029(0.086)

0.024

(0.008)

-0.158[0.045]

Ln(Materials) it

0.362(0.020)

0.354(0.020)

-0.439(0.723)

0.130(0.050)

-0.010

(0.007)

-0.084[0.231]

Controls1 No Yes Yes Yes Yes Yes Yes

Noise controls No No Yes Yes Yes Yes Yes

Observations 6,267 5,350 5,350 5,089 2,635 4,777 709

Firms 732 709 709 690 374 702 709

EXTERNAL VALIDATION: PRODUCTIVITY & PROFIT

1 Includes country, year, SIC3 industry, skills, hours, firm-age, and public/privateRobust S.E.s in ( ) below. For probit p-values in [ ] below

Score (1) Goals are either too easy or impossible to achieve; managers low-ball estimates to ensure easy goals

(3) In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" not held to the same rigorous standard

(5) Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rational

TARGETS - i.e. “HOW TOUGH ARE TARGETS?”


Score (1) People are promoted primarily upon the basis of tenure

(3) People are promoted upon the basis of performance

(5) We actively identify, develop and promote our top performers

INCENTIVES - i.e. “HOW DOES THE PROMOTION SYSTEM WORK?”


34

56

7S

ales

per

em

ploy

ee

-2 -1 0 1 2Management Score

bandwidth = .8

Lowess smoother

FAMILY OWNERSHIP PROBIT

Dependent variableFamily owned, family CEO & primo geniture1

Country = UK0.109

[0.015]

Country = France0. 096[0.042]

Country = Germany0.058

[0.303]

Log (employees)-0.022[0.012]

Log (firm-age)0.052

[0.017]

Industry controls Yes

Observations 718

1 Marginal effects, p-values in [ ] brackets underneath

Documents

THE IMPACT OF COMPETITION & GLOBALIZATION ON MANAGEMENT PRACTICES AND WORK-LIFE BALANCE Nick Bloom (Centre for Economic Performance, LSE) Very grateful