Journal of Economic Perspectives—Volume 24, Number 1—Winter 2010—Pages 203–224
Why Do Management Practices Differ across Firms and Countries?
Nicholas Bloom and John Van Reenen
conomists have long puzzled over the astounding differences in productivity between firms and countries. For example, looking at disaggregated data on U.S. manufacturing industries, Syverson (2004a) found thatplants at the 90th percentile produced four times as much as the plant in the 10th percentile on a per-employee basis. Only half of this difference in labor productivity could be accounted for by differential inputs, such as capital intensity. Syverson looked at industries defined at the four-digit level in the Standard Industrial Classification (SIC) system (now the North American IndustryClassification System or NAICS) like “Bakeries and Tortilla Manufacturing” or “Plastics Product Manufacturing.” Foster, Haltiwanger, and Syverson (2008) show large differences in total factor productivity even within very homogeneous goods industries such as boxes and block ice. Some of these productivity differences across firms and plants are temporary, but in large part they persist over time. At thecountry level, Hall and Jones (1999) and Jones and Romer (2009) show how the stark differences in productivity across countries account for a substantial fraction of the differences in average per capita income. Both at the plant level and at the national level, differences in productivity are typically calculated as a residual—that is, productivity is inferred as the gap between output andinputs that cannot be accounted for by conventionally measured inputs.
Bloom is an Associate Professor of Economics, Stanford University, Stanford, California. John Van Reenen is a Professor of Economics, London School of Economics, London, United Kingdom. Bloom is an International Research Fellow and Van Reenen is Director of the Center for Economic Performance, London School ofEconomics, London, United Kingdom. Both authors are also Faculty Research Fellows, National Bureau of Economic Research, Cambridge, Massachusetts. Van Reenen is Research Fellow in the Centre for Economic Policy, London, United Kingdom. Their e-mail addresses are 〈email@example.com〉 and 〈 firstname.lastname@example.org〉. email@example.com〉 firstname.lastname@example.org〉
Journal ofEconomic Perspectives
For this reason, Abramovitz (1956) labeled total factor productivity at the country level “a measure of our ignorance.” Productivity differences at the firm level have long been a measure of our ignorance, too. For example, one potential hypothesis has been that persistent productivity differentials are due to “hard” technological innovations as embodied in patents oradoption of new machinery. Although there has been substantial progress in improving our measures of technology, there remain substantial productivity differences even after controlling for such factors. In this paper, we present evidence on another possible explanation for persistent differences in productivity at the firm and the national level—namely, that such differences largely reflectvariations in management practices. As two Britishborn academics, we are accustomed to reports that blame Britain’s relatively low productivity on bad management. Indeed, this view is so common in the United Kingdom that it has generated a vibrant export industry of television shows on bad management, in wholesale ( (The Office), private services ( ), (Fawlty Towers), and the ), public sector ( (Yes,Minister). Now that The Office has been so successfully imported ). into the United States, this raises the question, is Michael Scott (the infamously bad American manager in the show) representative of U.S. firms? But while ascribing differences in productivity to management practices has long been popular for television shows, business schools, and policymakers, it has been less popular among...
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