Management quality and its measurement
Bloom and Van Reenen (2007) measured the quality of firm management by three dimensions:
Monitoring practices: The collection and processing of production information;
Target-setting practices: The ability to set coherent, binding, short-term and long-term targets; and
Incentive practices: Merit-based pay, promotion, hiring, and firing.
These three measures can be aggregated to a combined score of overall management quality. Later work extended this scoring method to firms in emerging markets, including China (Bloom and Van Reenen 2010). Their Chinese firm sample overlaps with our productivity data for 564 Chinese firms sampled in 2006, 2007, 2008, and 2010. We found that larger firms, and particularly foreign-owned firms, had high average management scores. SOEs have lower average management quality.
We regressed the observed management score for the 564 firms onto characteristics like ownership type and firm size. Then we extrapolated from these determinants of management quality to the full sample, to create a variable that measures predicted management score. Finally, we interacted firm response to minimum wage shocks with the predicted management score, and repeated the previous panel regressions.
Figure 4 shows the firms’ incremental TFP growth as a function of the triple interaction of the firm exposure to the minimum wage shock, the minimum wage increase, and the management score.
Figure 4 The residual plot shows the firm productivity response for 29,998 firm events in which a Chinese firm experiences a more than 20% increase in the minimum wage, 2002-2008
The horizontal axis shows the triple interaction between the impact function IF(ws/wmin), the (log) minimum wage increase and the predicted management score (Mgmt_Score). To keep the figure simple, we plotted only those 29,998 firm-year observations for which the minimum wage increase was larger than 20%. For the same minimum wage exposure (or value of the impact function) and the same large minimum wage increase, a firm observation with a low predicted management score will tend to be on the left. Those with a high predicted management score will be to the right. The positive slope coefficient in Figure 4 illustrates that the positive productivity response to the labour cost shock tends to be, ceteris paribus, larger for firms with a higher predicted management quality. The slope coefficient has been estimated for the full sample of firm-year observations, where all single and double interaction terms are also included.
This evidence indicates better-managed firms adapt better to adverse competitive shocks, and suggests that management quality matters for this adaptability. It is difficult to reconcile the heterogeneous response of Chinese firms with so-called efficiency wage theories. These assign the productivity increase directly to the motivational effects of higher minimum wages. Such motivational effects should operate independently of management practice, or firm governance.
Private and foreign firms may differ in unobservable dimensions which increase their adaptability compared to SOEs. Yet, in this case, external factors and constraints mostly disadvantage private and foreign firms. Therefore, we believe that differences in the internal management practice represent a plausible explanation for the highly heterogeneous productivity response among Chinese firms. So, there’s good news for authors of airport economics books: Chinese firm evidence supports your claim that management practice matters.
References
Bloom, N., and J. Van Reenen (2007), “Measuring and Explaining Management Practices across Firms and Countries”, Quarterly Journal of Economics, 122(4), 1351-408.
Bloom, N. and J. Van Reenen (2010), “Why do Management Practices Differ across Firms and Countries?”, Journal of Economic Perspective, 24(1), 203-24.
Wang, G., H. Hau, and Y. Huang (2016), “Firm Response to Competitive Shocks: Evidence from China’s Minimum Wage Policy”, SFI research paper no. 16-47.
Leibenstein, H. (1966), “Allocative Efficiency vs. ‘X-Efficiency’”, American Economic Review, 56 (3), 392-415.
Syverson, C. (2011), “What Determines Productivity?”, Journal of Economic Literature, 49(2), 326-65.
|