- Yesterday, I had linked to a paper by Bloom et al, and said that it would be a good place to start reading about productivity, particularly from an Indian point of view. Here are my notes from the paper:
- As per Hsieh and Klenow the ratio of TFP in Indian and Chinese firms is 5(!) between the 90th and the 10th percentile
- The quality of management, and therefore management practices, is one explanatory factor
- Economists tend to not buy into this because they assume that profit maximization implies cost minimization
- So in other words, if firms are not minimizing costs by adopting good management practices, it is because “wages are so low that repairing defects is cheap. Hence, their management practices are not bad, but the optimal response to low wages.”
- In this paper, large multiplant textile firms were split into treatment and control groups. The treatment groups were given management consulting from a top consulting group, the control groups weren’t.
- The result: “We estimate that within the first year productivity increased by 17%; based on these changes we impute that annual profitability increased by over $300,000. These better-managed firms also appeared to grow faster, with suggestive evidence that better management allowed them to delegate more and open more production plants in the three years following the start of the experiment. These firms also spread these management improvements from their treatment plants to other plants they owned, providing revealed preference evidence on their beneficial impact.”
- So why wasn’t this being done already?
- No need, because benchmarking was with local competition, who weren’t doing it anyway
- Simple lack of awareness
- A naïve belief that nothing would change by adopting these practices
- But even within local competition, why did firms not exit?
- Competitive pressures were heavily restricted
- High import tariffs
- No entry of firms by lack of external finance
- Number of male family members
- Lack of trust of professional managers (family owned businesses)
- Competitive pressures were heavily restricted
- TFP in India is about 40% that of the USA, as per Caselli 2011
- “Indian firms tend not to collect and analyze data systematically in their factories, they tend not to set and monitor clear targets for performance, and they do not explicitly link pay or promotion with performance. The scores for Brazil and China in the third panel, with an average of 2.67, are similar, suggesting that the management of Indian firms is broadly representative of large firms in emerging economies.”
- The interventions comprised of improvements in:
- Factory operations
- Quality control
- Human Resource Management
- Sales and order management
- This was done by implementing the following steps:
- A diagnostic phase
- An implementation phase (this was for only the treatment group, obviously)
- A measurement phase
- The authors carefully consider whether the Hawthorne effect was at play, and reject the possibility.
- ” In every firm in our sample, before the treatment, only members of the owning family had positions with any real decision-making power over finance, purchasing, operations, or employment. Non-family members were given only lower-level managerial positions with authority only over basic day-to-day activities. The principal reason seems to be that family members did not trust non-family members. For example, they were concerned if they let their plant managers procure yarn they may do so at inflated rates from friends and receive kickbacks.”
- “A key reason for this inability to decentralize appears to be the weak rule of law in India. Even if directors found managers stealing, their ability to successfully prosecute them and recover the assets is likely minimal because of the inefficiency of Indian courts”
- “Hence, the equilibrium appears to be that with Indian wage rates being extremely low, firms can survive with poor management practices. Because spans of control are constrained, productive firms are limited from expanding, so reallocation does not drive out badly run firms. Because entry is limited, new firms do not enter rapidly. The situation approximates a Melitz (2003)–style model with firms experiencing high decreasing returns to scale due to Lucas (1978) span of control constraints, high entry costs, and low initial productivity draws (because good management practices are not widespread).”
- There are three reasons for inefficiency:
- motivation problem
- inspiration problem
- perception problem
- I need to read Lucas (1978) and Melitz (2003) next!
I really liked Patrick OShaugnessy’s reply to a question that Kunal Shah asked on Twitter recently:
It’s not just mediocre team members at a start-up, of course, it’s everywhere. As Gulzar Natarajan pointed out in a blogpost a while ago, it is also a problem with bureaucrats in government:
Are meetings organised most effectively – in terms of their periodicity, whether clear and brief agendas are communicated in advance, what gets discussed, and how the minutes are recorded? How are the meeting outcomes followed-up? How are failures to comply addressed?http://gulzar05.blogspot.com/2021/01/management-productivity-improvements.html
The answer, by the way, is usually no, except for what gets discussed and are the minutes recorded. That part is done scrupulously, but the rest of it, not at all. Meetings are not periodic, clear and brief agendas are not sent beforehand, and worst of all, meeting outcomes are not followed up, and there is no clear understanding of what happens if failure to comply is observed.
In fact, I’d add one point to Gulzar Natarajan’s list, the meetings never end with a clear plan of action, who is responsible, and when and how a follow-up is to happen.
Here’s a point that people often miss out on they call a meeting: meetings are expensive. A meeting that lasts for an hour and involves ten people has cost the organization ten hours of work. The meeting had better have been worth the work that could have been done otherwise.*
In fact, the entire blogpost ought to be read by everybody involved in any kind of administrative set-up. Often, people in an organization have no clue about what the organizational objective is, whether work-allocation is effective or not (both in terms of the quantum of work that a person does, but also whether this person is truly equipped to do the work allocated to them), and how monitoring is done.
Human resource management is, quite simply, an alien concept.
The last paragraph from his post is worth pondering over:
While waiting for such a leader is not an institutional solution, it’s a pointer to prioritising the adoption of basic management practices. This is about the adoption of very simple and basic work, people, and situations management techniques, and not the sort of stuff one learns from management schools. Unfortunately, it’s not an area that receives any attention in conventional academic research and management consulting.http://gulzar05.blogspot.com/2021/01/management-productivity-improvements.html
And if any student reading this is wondering where to get started in this regard, here’s a good place.
* Narrator: It never is