Management in India and China

Nick Bloom and Rebecca Homkes have an interesting piece on the quality of management practices in India and China.

For my take on their study, and several other related studies done by Bloom and various co-authors, see my piece in The Mint online, where I examine the question, Does Management Matter?

Here are the points that struck me in reviewing the studies:

It looks like we are moving toward a significant new quantification of management practice. When academics start tackling these issues, it tends to get taken beyond what is sufficient for consulting firms’ practice. The tool used in the studies for evaluating management practices combines 18 dimensions of management practice grouped into four areas: operations, monitoring, targets and incentives. As one might expect, the soft skills like communication, leadership and inspiration are missing, as they are harder to objectively assess.

The first important result is that the index of managerial practice constructed in this relatively objective and quantifiable manner turns out to be strongly correlated with the economic performance of firms. In short, firms with better management practices do better in terms of their productivity and profits.

Second, there is a huge variation in the quality of management practices, within and across countries. But the variation within countries is much greater than across them, so individual companies are not by any means trapped by the national environments in which they operate.

Third, there are observable factors that help explain the variability of management practice. International and domestic competition both improve management practices. Multinational firms tend to have better management practices. And firms with better-educated managers also have better practices. Ownership also matters, in a specific manner: family owned and managed firms where succession is by primogeniture seem to do worse.

Fourth, the variation within India was greater than in other countries, with relatively large proportions of very good and very bad firms. In addition to the family-owned firms run by eldest sons, government firms in India also have very poor management practices. At the other end of the distribution, the top 10 percent of Indian firms in the sample were better managed than 75 percent of US firms surveyed. Interestingly, the spread of productivity across Indian plants is also much greater than that in China. This suggests that something in the business environment in India permits more heterogeneity in practices and outcomes. Lack of competition, and lack of opportunities for entry and exit, would explain this heterogeneity.

Fifth, the impact of improved management practice is comparable to that of large increases in labor or capital inputs. So, management does matter.

Sixth, the studies also indicate that managers themselves tend to over-estimate how good their practices are (and Indian and Chinese managers are the most over-optimistic).