The realization that firms in Croatia and particularly those in services sector (non-knowledge intensive services, specifically for Eastern Croatia) are far from the frontier in adoption of structured management practices, what can we really do about this? Next, we analyze the factors that matter for management capabilities, with the objective of building on these capabilities to bridge the gap in firm upgrading.

Firm characteristics play a key role in explaining variations in management score. Annex Tables A.6 presents the detailed regression results for all regions, excluding Slavonia, and Slavonia. In Figure 23 we present rope ladder plots from the specification including all controls and fixed effects, for all sectors, top panel, and for manufacturing (bottom, left panel) and services (bottom, right panel). _First_ , both unconditional and conditional correlations suggest that, in line with prior studies, firm size plays a key role in adoption of management practices. This is true for both regions excluding Slavonia and Slavonia, especially for manufacturing industries. Doubling the firm size is associated with an increase in the management score of about 0.1. The significance of the relationship between firm size and management score in Slavonia is mainly driven by mainly the manufacturing sector, while this relationship is insignificant in services. This implies that management capabilities are weaker for services sector across all the range of the size of distribution. Although it is true that management practices are crucial for the performance of medium and large firms, the link of management with performance usually extends throughout the size distribution in the United States and Mexico (Bloom et al., 2019a; 2019b).<sup>23</sup> _Second_ , in Croatia age is negatively correlated with management score. Adoption of structured management practices are lower among older firms. Following similar analysis in Bloom et al. (2019b) on Mexico and the work of Hsieh and Klenow (2014) regarding the life cycle of firms, this finding appears to be indicative of poor allocative efficiency among firms in Croatia where clearly, market selection is not operating perhaps due to the lack of pro-competitive conditions, especially in services. Nevertheless, the finding in Croatia is somewhat similar to that in Russia, where firms also do not improve with age (Grover and Torre), although in Croatia it is very clear that this negative association is driven by the services sector.

_Third_ , exporters have higher scores in adopting structured management practices, and significantly so in manufacturing. More precisely, the management score of a manufacturing exporter in Croatia is likely to be higher by 8 percent than an average firm. The fact that this result is mainly driven by high-tech manufacturing exporters in regions other than Croatia, where management score is likely to be 16 percent higher, points to the potential for improving management capabilities among other firms and sectors. In Eastern Croatia, this relationship between exporting and higher managerial capabilities is not significant even for manufacturing. To design interventions for improving management capabilities in Eastern Croatia, it may be crucial to examine the export composition and destination markets for firms in Slavonia and more specifically in understanding why exporters do not find it worthwhile to improve management capabilities.

_Fourth_ , firms with more than 20% of their employees having a college degree are more likely to adopt structured management practices. Education of employees matters for managerial score in all regions except in Slavonia. This is a surprising finding and may need to be explored further. It may perhaps be related to the quality of education among workers in Slavonian firms.<sup>24</sup>

> 23 In Bloom et al. (2019b), only four questions from the U.S. MOPS were selected for microenterprises. The correlation between the management score calculated with this subsample of questions and the overall management score for SMEs and large firms is 0.86, indicating that this short score is a good measure of management practices. This result is similar to McKenzie and Woodruff (2017) who find an important role for management in micro-firms in developing countries.

> 24 As annex table A.6 shows, the overall explanatory power of firm characteristics in explaining the management score is still quite limited: the most complete specification (column 8) explains only 21% of the overall variation in the management score, implying that nearly 80% of the variation in management practices is explained by idiosyncratic, firm-specific factors.

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