# **Section 1: Why Management Matters?**

Differences in managerial quality are critical in explaining cross-country differences in income levels, productivity, innovation and firm dynamism. For example, Bloom and Van Reenen (2010) attribute differences in productivity across firms in Asia, Europe, and North and South America to the heterogeneity in management practices across firms in these regions. Other performance measures, such as profitability and survival rates, are also positively correlated with good management practices. In a follow-up study, Bloom, Sadun and Van Reenen (2012) further suggest that such heterogeneity in management accounts for up to half of the TFP gap between the U.S. and other countries. A novel finding of their work is that cross-country variation in management practices is in-fact smaller than heterogeneity between firms in the same country, suggesting that firm- and sector-specific factors were at least as important as the general business environment in shaping managerial performance. Nonetheless, differences in management is also correlated with competition, labor market flexibility, education and ownership structure.

Although the realization that management can drive firm performance dates back to Adam Smith’s discussion of the pin factory and the division of labor, which was revived by Francis Walker (1887), measurement of management practices had been elusive until recently. In the last decade or so, considerable efforts have been made to close this measurement gap. Bloom and coauthors offer one of the most comprehensive methodologies relating management practices to productivity. Surveying plant managers of medium sized firms on 18 specific management practices in four broad areas: operations, monitoring, targets, and incentives in the United States, United Kingdom, France, and Germany, Bloom and Van Reenen (2007) document that higher-quality management practices (as measured by higher scores) are correlated with several measures of productivity and firm performance, including labor productivity, total factor productivity (TFP), return on capital, Tobin’s Q, sales growth, and the probability of survival. For example, spanning the interquartile range of the management score distribution corresponds to a productivity change of between 3.2 and 7.5 percent.

Evidence suggests that the link between management and firm performance is in fact causal. For example, field experiments that provided consulting on management practices to a set of randomly selected large Indian firms found that relative to control plants which received no consulting services, the treated ones witnessed an increase in productivity by 17% in the first year through improved quality, efficiency and reduced inventory. Within three years of treatment, these firms were also more likely to expand production by establishing new production plants. In a related study, Giorcelli (2019) exploits a natural experiment to discern the effects of a management training program in the context of the Marshall Plan. In the 1950s, Italian firms visited the United States to receive management training under this plan. An unexpected budget cut forced the program to reduce the number of beneficiaries within the set of eligible firms and training was offered to a few randomly selected firms. Results show that Italian firms that sent their managers to the training program in the United States witnessed an increase in firm performance for at least 15 years after the treatment when compared to the set of eligible firms that were left out because of the budget cut.

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