nick bloom and john van reenen, management practices, 2010 1 firm decentralization around the world...

Nick Bloom and John Van Reenen, Management Practices, 2010 1

Firm decentralization around the world

Nick Bloom (Stanford Economics)John Van Reenen (Stanford GSB/LSE)

Lecture 8: February 2010

Nick Bloom and John Van Reenen, Management Practices, 2010

Summary of last lecture on hospitals, school and retail management

1. Huge variation in management practices seems common to every sector we have studied to date

2. The very same practices around monitoring, targets and incentives always associated with superior performance

3. Demonstrates there are basic management best practices, with the grid identifying a core set of these

4. Grid plus data useful tool for change management in that provides evidence base on key practices


• What is decentralization?

• Measurement and stylized facts

• Determinants of decentralization

• Firm Performance and decentralization


What is decentralization?

• One aspect of firm organization - how power and decision making are distributed

• Unlike basic management practices no typical “good” and “bad” – just different styles which tend to vary by country

• Why should you care:– Key in designing your business or advising others– Changing over time, generating broader economic effects,

like increased inequality and worker empowerment


Business Week The 21st Century Corporation, cover story August 21-28, 2000.

"Globalization and the arrival of the information economy have rapidly demolished all the old precepts. The management of global companies, which must innovate simultaneously and speed information through horizontal globe-spanning networks, has become a daunting challenge. Old, rigid hierarchies are out ...."

Are things really changing?


Delayering – Number of positions reporting to CEO

Source: Rajan and Wulf, 2006, 300+ large US corporations

SP

AN

year1985 1990 1995 2000

4

5

6

7

Evidence is limited, but appears yes, firms are decentralizing


Formal vs. Real Authority

• Formal authority in the organization chart (“organogram”)– E.g. Profit centres vs. cost/sales centres

• Real authority– How things actually get done. Power– http://www.youtube.com/watch?v=5FRVvjGL2C0

• Can be different across different types of decisions – e.g. pricing, products and M&A


Real authority models: Centralized

http://www.youtube.com/watch?v=wBIov_CSqyI&feature=related


e.g. Universities, but academics generally pretty inefficient

Real authority models: Decentralized



• Measurement and stylized facts




Central HQ(New York Site)

Example A: Domestic Firm2 Sites, Single Plant

Plant(Albany Site)

D, Decentralization



Example B: US Domestic FirmMulti-Site, Multi-Plants

Plant 1(Buffalo Site)

Plant 3(Scranton Site)

Plant 2(Albany Site)

D1 D2 D3


The Decentralization Survey Page


• Main measure averages the z-score (scores normalized to mean 0, standard-deviation 1) of each variable:

– Hiring senior employees (discrete, 1 to 5)

– Maximum Capital expenditure (continuous, in $)

– Introduction of new products (discrete, 1 to 5)

– Sales and marketing (discrete, 1 to 5)

Our empirical decentralization measure

Nick Bloom and John Van Reenen, Management Practices, 2010-1 -.5 0 .5mean of zorg

Sweden

US

UK

Germany

Italy

Portugal

France

Poland

China

India

Japan

Greece

-1 -.5 0 .5mean of zorg

Sweden

US

UK

Germany

Italy

Portugal

France

Poland

China

India

Japan

Greece

-1 -.5 0 .5mean of zorg

Sweden

US

UK

Germany

Italy

Portugal

France

Poland

China

India

Japan

Greece

Decentralization varies heavily across countries

Most centralized

• Asia

• Southern Europe

Least centralized

• Scandinavian countries

• Anglo-Saxon countries

Decentralization measure


Decentralization also varies across firms

Decentralization measure (higher number is more decentralized)

0.5

11

.50

.51

1.5

0.5

11

.5

-2 0 2 4 -2 0 2 4 -2 0 2 4 -2 0 2 4

China France Germany Greece

India Italy Japan Poland

Portugal Sweden UK US

De

nsity

zorgGraphs by Country where firm is located


External validation – decentralization over time

• Only prior firm decentralization measure to cross-check against we are aware of is from Hofstede

– Surveyed c.100,000 IBM employees across 50 countries during the 1970s & 1980s

– Questions on management style (autocractic/paternalistic or consultative) and preferences for delegation

– Combined into Power Distance index (1-100), low means limited (preference for) delegation


China

France

Germany

Greece

India

Italy

Japan

Poland

Portugal

Sweden

UKUS

-1-.

50

.5D

ece

ntra

lizat

ion

20 30 40 50 60 70Power Distance Index (100=low power distance)

‘Power distance’ measures from 1970s & 1980s matches our 2000s decentralization data quite well

Dec

entr

aliz

atio

n

Power distance

Correlation= 0.80


China

France

Germany

Greece

India

Italy

Japan

Poland

UK US

-1-.

50

.5D

ece

ntr

aliz

atio

n

0 1 2 3 4Fiscal Decentralization Index

Fiscal decentralization (whether Governments are centrally run) looks similar – so something cultural?

Firm

Dec

entr

aliz

atio

n

Fiscal Decentralization(Arzaghi and Henderson, 2005)

Correlation= 0.83


-.4 -.2 0 .2 .4mean of zorg

Private Equity

Family, external CEO

Dispersed Shareholders

Managers

Other

Family, family CEO

Private Individuals

Founder

Government

Decentralization also varies across ownership types – with founder and government firms centralized

Decentralization measure



• Measurement and Stylized facts

• Theories & Determinants of decentralization



What do you think are the benefits and costs of decentralization?

22


Some Benefits of Decentralization

1. Saves on costs of communication and information transfer

2. Improves swiftness of reacting to market changes [e.g. because of less specialization, more multi-tasking]

3. Increase in employee involvement, so possibly more job satisfaction

23


Some Costs of Decentralization

1. More “mistakes” (e.g. co-ordination in price setting)

2. Harder to exploit returns to scale/specialization – i.e. repetition of same activities across different divisions

3. More stress from control?

24


Factors affecting Decentralization

1. Technological

2. Economic

3. Cultural/Legal


Technological Factors affecting Decentralization

• Complexity: Size, Product and Multinational status

• Learning: Age and Proximity to technological frontier

• ICT: Information costs and Communication costs


0.2

.4.6

.81

me

an

of de

cen

tra

lizatio

n

50 100 200 500 1000

Complexity: Larger Firms are more decentralized

Number of employees in the firm


Dependent variable: Decentralization of plantsForeign Multinational 0.157***

(0.058)Firm employment (in logs) 0.052**

(0.022)Plant employment (share of firm) 0.089***

(0.030)Plant Skills (% employees with a degree) 0.085*** (0.015)Observations 3,660Industry dummies (112) yesCountry dummies (12) yesOther controls (60) yes

Complexity: Multinationals (even controlling for size) are more decentralized


29

Learning: Younger firms are more decentralized


30

Learning: More technologically advanced firms (i.e. close to frontier) more likely to be decentralized


Enterprise Resource Planning 0.104* 0.116**Information technology (0.054) (0.054)

NETWORK -0.098* -0.110**Communication technology (0.053) (0.053)

Computers/Employee -0.041 -0.021 -0.031

(0.031) (0.031) (0.031)

• Information technology (IT) increase decentralization

• Communications technology (CT) decreaseas decentralization

ICT: Decentralization and the use of ICT

Notes: Controls are SIC3 dummies, country dummies, noise controls (interviewer dummies Interviewee tenure and seniority, etc.), public listing, CEO onsite, plant size,


Factors affecting Decentralization

1. Technological

2. Economic

3. Cultural/Legal


Economic Factors affecting Decentralization

• Competition• information: Improves the value of timely responses to

local conditions

• incentives: Lower risk of manager abusing autonomy as incentives more aligned with firm

• Skill: more able workers better at coping with responsibility

Competition proxies Dependent variable: Decentralization

Imports/production(three digit industry, 1995-99)

0.184***(0.073)

Lerner Index of competition (three digit industry except firm)

2.265***(1.081)

Number of competitors 0.094**(0.034)

Observations 2,497 3,587 3,587

Competition: Firms facing more competition are more decentralized

Notes: Other controls are SIC3 dummies, 12 country dummies, noise controls (interviewer dummies Interviewee tenure and seniority, etc.), public listing, CEO onsite, plant size,

35

0.1

.2.3

.4.5

me

an

of de

cen

tra

lizatio

n

20 40 60 80 100

Skill: Firms with more skilled workers are more decentralized

Proportion of employees with a college degree


Legal and Cultural Factors affecting Decentralization

• Trust– In high trust areas (e.g. Sweden) managers likely to

be trusted to carry out more activities

• Rule of Law– In good rule of law areas (e.g. US) top management

less worried about theft by middle management

• Religion– Evidence that firms from areas with more centralized

religions tend to be more centralized (causal?)

36


Trust and decentralization

• How to measure trust? World Value Survey has question:

“Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people?”

Trust by region of the country defined as % of people answering “yes” to first part of the trust question

• Experiments show this question linked with trust/trusting behavior (Glaeser et al, 2000, Sapienza et al, 2007)


Trust by country (means and regional spreads)0

.2.4

.6.8

PortugalFrance

GreecePoland

ItalyGermany

UKIndia

JapanUS

ChinaSweden

The graph shows median level of trust. The vertical bars denote minimum and maximum levels.


Trust (region) 1.196*** 0.825*** 0.732**

(0.429) (0.290) (0.298)

Rule of law (country) 0.473***

(0.102)

Observations 3549 3549 3549

Country dummies no no yes

Other controls no no yes

Trust, rule of law and decentralization

Notes: Other controls are SIC3 dummies, noise controls (interviewer dummiesInterviewee tenure and seniority, etc.), public listing, CEO onsite, plant size, competition


Also look at multinationals as another test of trust

• Could worry about bias due to trust proxying for other country/regional variables

• So look at affiliates of foreign multinationals and investigate whether trust in their home country also matters

• Bilateral trust: (on average) how much do people in the multinational’s home country trust people in the country where the subsidiary is located (Eurobarometer Survey)



Example A: Domestic Firm2 Sites, Single Plant

Plant(Phoenix Site)

D, Decentralization


Plant 1(Lund Site)

Global HQ(Tokyo Site)

French CHQ(Paris Site)

Example DJapanese MNE

Sweden CHQ(Stockholm Site)

Plant 2 (Lyon Site)

Do not observe D

Observe D Observe D


Trust (region of location)

0.609 0.563 0.446

(0.592) (0.843) (1.908)

Trust (country of origin) 0.749*** 0.152

(0.301) (0.152)

Trust (bilateral from origin cty to location cty)

1.809***

(0.768)

Full set of controls Yes Yes Yes

Regional dummies No No No

Country origin dummies No No No

Clustering Region Region Origin country

Observations 867 867 280

Decentralization and trust in multinational firms



• Measurement and Stylized facts




Does decentralization matter for performance?

• Short run: generally depends on firms circumstances (e.g. country, industry and technology)

• Short run: one recent factor that has been rapidly affecting this is IT. Evidence that impact of IT on productivity much higher in better managed and more decentralized firms

• Long run: to be large you need some decentralization, so key for growth (Penrose 1959 and Chandler 1962)


-.00

50

.005

.01

.015

.02

Rel

ativ

e P

rodu

ctiv

ity G

row

th (3

ys d

iffer

ence

s)

Low IT, Low Org Low IT, High Org High IT, Low Org High IT, High Org

Productivity growth and IT

• “High Org” = more decentralized

• IT and decentralization appear complementary


Wrap-up

• Decentralization varies heavily by country and ownership

• Northern European and US firms decentralized, and Southern European and Asian being centralized

• Founder, family and government very centralized

• Factors driving this appear to be both economic – competition, technology and skills – but also cultural around trust, rule-of-law and even religion

• In short-run decentralization is a choice variable depending on circumstances, but necessary for growth in long-run

nick bloom and john van reenen, management practices, 2010 1 firm decentralization around the world...

Documents

basic management practices

decentralization slide

change management

retail management

key practices

firm decentralization

management of global

decentralized slide