Blue area

The causes and consequences of the vast differences in productivity within and across countries have been the subject of research for decades. Recently, economists have woken up to the important role of management practices in firms to explain these differences. Working with the State Bank of Pakistan and the Pakistan Bureau of Statistics, we have conducted what is to date the largest survey of management practices in Pakistan. Almost 2,000 plant managers in Punjab were involved in face-to-face interviews, focused on three broad areas:

  • Data-driven performance monitoring practices for the collection and use of information to improve production processes.
  • The design, integration and realism of production targets.
  • Incentives for employees, including bonuses and procedures for promotion, reassignment and dismissal.

We aggregate the responses into a single summary measure of ‘structured management’ scaled from 0 to 1, where 0 represents an establishment with no structured management practices and 1 represents an establishment where such practices are fully adopted. What do we find?

First, as in other countries, there is tremendous variation in management practices across establishments – see Figure 1. But the adoption of structured management practices in Pakistan is far lower than in the United States. The average firm in Pakistan adopts 44 per cent of overall structured management practices (divided into 52 per cent of data-driven performance monitoring; and 42 per cent of incentives and targets). The comparable numbers for the United States are 64%, 67% and 62%, respectively.

The dispersion of management scores is also higher in Pakistan. The difference between the top and bottom 10 per cent of management scores is 46 per cent in Pakistan compared with 38 per cent in the United States. This chimes with previous findings that productivity dispersion is much higher in emerging economies (such as India and Mexico) than in developed countries (such as Germany and the United States). Firms that are worse managed and have lower productivity seem to exit the market more slowly in emerging economies, which could be due to weaker competition and greater protection of insiders.

Second, establishments with more structured management practices are larger and more capital-intensive. They also have better performance in terms of productivity, profits and growth. Perhaps surprisingly, the magnitude of the correlation with performance in Pakistan is similar to the United States. Maybe the methods of ‘good management’ are not so different across diverse countries as is often assumed – at least in manufacturing.

Third, as in other countries, management scores are higher in establishments that are older, that are exporters and that have more skilled managers and non-managers. But conditional on these factors, establishments owned by firms that are not publicly listed seem to have higher management scores than establishments owned by publicly listed firms. This is the opposite to what is found in more developed countries, which suggests that getting a stock exchange listing may be less related to performance than to other factors, such as business and political connections.

So where do managers in Pakistan learn about improved management practices? The most common sources reported by managers are external peers operating in the same industry such as external consultants (36 per cent) and customers (30 per cent), with trade associations, competitors and suppliers playing a lesser role. Internal sources of improved management practices such as firms’ headquarters seem to play a less important role (17 per cent), the opposite to what is found in the United States where headquarters are the most common source of learning (54 per cent).

From a policy perspective, our results imply that governments in developing countries need to remove barriers to the growth of better-managed firms and allow the least well managed to exit. From a business perspective, fostering the spread of managerial best practice through greater efforts by headquarters and more openness to ideas from consultants, suppliers and customers could yield substantial improvements to the bottom line.

Figure 1:
 The distribution of management scores in Pakistan and the United States

Pakistan Figure 1

Notes: The management score is the unweighted average of the score for each of the
 16 questions, where each question is first normalised to be on a 0-1 scale. The ten bars display the share of establishments with scores of 0-0,1, 0.1-0,2, etc.

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Notes:

  • This article appeared originally at CentrePiece, the magazine of LSE’s Centre for Economic Performance, and is based oManagement in Pakistan:
First Evidence from Punjab by Renata Lemos, Ali Choudhary, John Van Reenen and Nicholas Bloom, published by the International Growth Centre at LSE.
  • The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
  • Featured image credit: Islamabad’s Blue Area, by King Eliot (own work) via a CC BY-SA 4.0 licence, Wikimedia Commons.
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Renata LemosRenata Lemos is an economist at the World Bank Education Unit. She was a Lecturer in the Economics Department at Stanford University and a Research Associate at LSE’s Centre for Economic Performance and at Harvard Business School (PhD at Jesus College, University of Cambridge). She works on three large research initiatives: the Ownership Survey, the World Management Survey and the Executive Time Use Survey.Her research field is applied micro-economics. Her interests include topics in managerial and organisational economics, labour economics, economics of education, and development economics, with a focus on exploring differences between high, middle, and low income countries.

Ali-ChoudharyAli Choudhary is Director of the Research Department at the State Bank of Pakistan. He graduated from Kinston University in 1996 with a First Class honours degree in Economics with Politics and Languages with a distinction in spoken French and was also awarded the Jonathan Cromptom Memorial Prize. He received MSc and PhD, both in Economics, from Birkbeck College, University of London 1997 and 2001. He has lectured various courses at Birkbeck as a part-time teacher during his PhD. He has also served as a consultant to the European Commission and the World Bank before moving to the University of Surrey in 2001. Ali’s research contributes to three areas in economics: Macroeconomics, Labour Economics (in particular Executive Compensation) and the Economics of Happiness..

 

JohnVanReenenJohn Van Reenen has been the Director of the Centre of Economic Performance and a Professor of Economics at LSE since 2003. He is moving to be a tenured Professor at the Massachusetts Institute for Technology (MIT) jointly in the Department of Economics and the Sloan School of Management. His most recent publications are a book on the long-term economic effects of Brexit, on innovation and climate change and on productivity and trade.

 

Bloom_NicholasNicholas Bloom is a Professor in the Department of Economics at Stanford University, a Courtesy Professor at Stanford Business School and Stanford Institute for Economic Policy Research, and a co-Director of the Productivity, Innovation and Entrepreneurship Program at the National Bureau of Economic Research. He is a Fellow of the American Academy of Arts and Sciences and The Econometric Society, and the recipient of the Frisch Medal in 2010 and the Bernacer Prize in 2012. His research focuses on the measurement and impact of uncertainty on investment, employment and growth, and the measurement of management practices and productivity.