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EBRD Transition Report 2014 – Management quality and the productivity of manufacturing firms

TRANSITION REPORT 2014 Innovation in Transition

Management quality and the productivity of manufacturing firms

Besides innovation, there are other ways of improving firm-level labour productivity. Firms can make better use of their excess capacity (provided there is any) or improve their management practices. BEEPS V offers valuable insight into the role of these factors in manufacturing firms.21

Recent studies show that there is a strong correlation between the quality of management practices and firms’ performance, and this also applies to transition countries and other emerging markets. Furthermore, a lack of managerial skills is one explanation for the low productivity of state-owned and formerly state-owned firms.22

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In a management field experiment looking at large Indian textile firms, improved management practices resulted in a 17 per cent increase in productivity in the first year through improvements in the quality of products, increased efficiency and reduced inventories.23 This suggests that improving management practices may be a relatively low-cost and low-risk way of boosting firms’ productivity across the transition region.

BEEPS V includes a subset of questions on management practices taken from the Management, Organisation and Innovation (MOI) survey conducted by the EBRD and the World Bank.24 These questions look at core management practices relating to operations, monitoring, targets and incentives. They range from dealing with machinery breakdowns to factors determining the remuneration of workers. On the basis of firms’ answers, the quality of their management practices can be assessed and given a rating, which can then be used to explain productivity levels (see Box 2.2 for details).

Estimates suggest that improving the average firm’s management practices from the median to the top 12 per cent is associated with a 12 per cent increase in labour productivity, everything else being equal (see Table 2.3). The estimated impact on productivity is larger still when process innovation is also accounted for (standing at 19 per cent). Despite these sizeable effects, estimated returns to better management practices tend to be somewhat lower than returns to innovation, regardless of the type of innovation.

There are significant differences across regions in terms of the role played by improved management practices in boosting firms’ productivity. In EU member states, candidate countries and potential candidate countries (in other words, the CEB and SEE regions), where the quality of management practices tends to be higher, returns to further improvements in management practices are lower than returns to process innovation (see Chart 2.4). In the SEE region, process innovation is associated with an increase in labour productivity of more than 150 per cent. This may be largely due to the upgrading of production facilities with the aim of being more competitive in the EU market.

On the other hand, in less developed countries, where the quality of management is generally lower, returns to better management practices are much higher than returns to process innovation. In the EEC region, for example, better management practices are associated with a 40 per cent increase in labour productivity, whereas the introduction of a new process is associated with a mere 6 per cent increase. In Russia returns to better management and process innovations are estimated at 32 and 2 per cent respectively.

These findings raise the question of why firms in these regions (and less developed countries more generally) do not adopt better management practices. The recent management field experiment looking at large Indian textile firms suggests that this may be due to information barriers. Firms might not have heard of some management practices, or they may be sceptical regarding their impact.25 Improvements to certain management practices – particularly those relating to underperforming employees, pay or promotions – may also be hampered by regulations or a lack of competition (since competition could force badly managed firms to exit the market).

Training programmes covering basic operations (such as inventory management and quality control) could be helpful, but suitable consultancy or training services offering such products may not exist in a given market or may be geared towards large firms, making them too expensive for SMEs.26

The EBRD’s Business Advisory Services (BAS) and Enterprise Growth Programme (EGP) promote good management practices in micro, small and medium-sized enterprises (MSMEs) in the transition region, providing direct support to individual enterprises.27 Box 3.4 analyses links between the use of consultancy services, innovation, management practices and productivity in the transition region.

TABLE 2.3
Labour productivity, innovation, capacity utilisation and management practices 
  Log of labour productivity   

Product innovation (cleaned)

 

0.575***

     

(0.073)

     

Process innovation (cleaned)

 

 

0.178***

   
 

(0.062)

   

Product or process innovation (cleaned)

 

   

0.415***

 
   

(0.073)

 

Non-technical innovation
(organisational or marketing innovation)

     

0.226***

     

(0.059)

Management quality

 

0.115***

0.176***

0.132***

0.135***

(0.037)

(0.037)

(0.037)

(0.037)

Capacity utilisation

 

0.004**

0.003*

0.004**

0.007***

(0.002)

(0.002)

(0.002)

(0.002)

Log of fixed assets per employee

 

0.178***

0.191***

0.179***

0.197***

(0.015)

(0.015)

(0.015)

(0.015)

Source: BEEPS V, MENA ES and authors’ calculations.
Note: This table reports regression coefficients for firm-level innovation, management quality, capacity utilisation and capital intensity in the manufacturing sector, reflecting the impact on the dependent variable firm-level productivity, which is measured as turnover (in US dollars) per employee in log terms. The results are obtained by estimating a three-stage CDM model by ALS, where productivity is linked to innovation, and innovation, in turn, is related to investment in R&D. For a detailed description and the set of control variables included, refer to Box 2.1. Standard errors are reported in parentheses below the coefficient. ***, ** and * denote statistical significance at the 1, 5 and 10 per cent levels respectively.

CHART 2.4

Source: BEEPS V, MENA ES and authors’ calculations.
Note: This chart reports the impact of firm-level process innovation and firms’ management quality by region, reflecting the impact on firm-level productivity, which is measured as turnover (in US dollars) per employee in log terms. The results are obtained by estimating a three-stage CDM model by ALS, where productivity is linked to innovation, and innovation, in turn, is related to investment in R&D. For a detailed description and the set of control variables included, refer to Box 2.1. The reported coefficients for process innovation are significant at the 1 per cent level in the CEB region, the SEE region and Russia, and at the 5 per cent level in the EEC region. The reported coefficients for management scores are significant at the 1 per cent level in the EEC region and Russia, and at the 5 per cent level in Central Asia. Other reported coefficients are not significantly different from zero.