# **Section 1: Management in Croatia and Why it Matters?**

The persistence in productivity differences between firms, within the same industry, is striking and puzzling. For example, labor productivity for plants in the United States at the 90<sup>th</sup> percentile, within narrowly defined four-digit manufacturing industries, is four times as high as plants at the 10<sup>th</sup> percentile. Likewise, the difference in Total Factor Productivity (TFP) is twice as high, when controlling for other factors (Syverson, 2011). These differences persist over time and are robust to controlling for plantspecific prices in homogeneous goods industries. Such TFP heterogeneity is not an artifact of the United States establishment data but is evident in several countries. As an example, the average 90<sup>th</sup> to 10<sup>th</sup> percentile TFP ratios is over 5:1 in China and India (Hsieh and Klenow, 2009). Most often within industry productivity differentials are attributed to “hard” technological innovations, as embodied in patents or in adoption of advanced equipment. Recently, Bloom et al. (2016a) provide an alternative explanation, that is, productivity differences reflect variations in management practices, which is also the approach adopted in this paper to explain the heterogeneity in performance of firms in Croatia.<sup>1</sup> Persistent differences in productivity can be explained by several other factors, such as higher quality labor and capital, differential investment in information technology and research and development (R&D), learning by doing, firm structure, productivity spillovers, regulatory behavior, and differences in competitive regime. Bloom et al. (2016a) propose that some forms of management practices are like “technology”, where management is perceived as an intangible capital in which output is monotonically increasing. Differences in managerial quality are critical in explaining the cross-country differences in income levels, productivity, innovation and firm dynamism noted in Hall and Jones (1999). For example, Bloom and Van Reenen (2010) find that differences in productivity across firms in Asia, Europe, and North and South America can be attributed to the heterogeneity in management practices across firms in these regions.<sup>2</sup> Likewise, Bloom et al. (2016a) suggest that management practices account for nearly 30 percent of the differences in TFP across countries. An important finding here is that management quality also explains at least a large share of within country heterogeneity in firm performance as well. For instance, using evidence collected through the World management surveys, Bloom et al. (2016a) find that about one-fifth of the dispersion in TFP across firms within countries is explained by differences in management quality, thereby suggesting that firm- and sector-specific factors were at least as important as the general business environment in shaping managerial performance.

> 1 Bloom et al. (2016) suggest that management practices account for about one-fifth of the dispersion in TFP across firms within countries, and nearly 30 percent of the differences across countries. Thus, firm- and sector-specific factors are at least as important as the general business environment in shaping managerial performance.

> 2 Other performance measures, such as profitability and survival rates are also positively correlated with good management practices.