1. Empirical Management Conference,
Management Practices in Croatia: Drivers & Consequences for Firm Performance
Arti Grover, Leonardo Iacovone and Pavel Chakraborty
Empirical Management Conference,
December 12, 2019

2. Two firms (in Croatia) An example
Low-tech manufacturing sector, Zagreb
Firm B
44 employees
Founded in 2005
Value Added: 82.1 million Kuna
VA per employee: 1.87 million Kuna
Firm A
40 employees
Founded in 1998
Value Added: 9.5 million Kuna
VA per employee: 237,500 Kuna
8 times bigger

3. WHAT MAKES FIRM B MORE PRODUCTIVE?
Total Factor Productivity has been labeled as “the measure of our ignorance” (Abramovitz, 1956)

4. Outline of the presentation
Measuring Management practices
Benchmarking management capabilities in Croatia
Management and firm performance
Drivers of Management Practices
Policy Conclusions

5. Management matters for firm performance: Global Evidence
TFP dispersion across firms can be very high: ratio of 90th to 10th percentile of firm productivity can range from 3 (US) to 5 (China, India) (Hsieh and Klenow, 2009)
There is evidence that management practices can explain at least a part of it – 22% of the 90th to 10th firm labor productivity in US (Bloom et al., 2019)

6. Management matters, but why is there Skepticism?
Bloom et al. (2013) detail two reasons for skepticism:
Skepticism #1: Management is a complex phenomenon, so measurement is particularly hard
Response: focus on management practices – more narrow definition
Skepticism #2: “Optimal” management practices may not be the same across countries/firms. Firms are always profit maximizing, and the practices they choose are a result of that – not a cause.
Response: look at cases of random variation in management; there should be no association with profit or productivity if variation is always optimal.

7. FIRM CAPABILITIES SURVEY IN CROATIA

8. MOPS in Croatia: Modules & Questionnaire
US Census Bureau MOPS 2015: Modules A (Management practices) and E (Background characteristics)
Additional modules/questions:
Training of managers and operational staff
Innovation and technology use
Access to finance
Government programs: participation by firms in such programs

9. MOPS in Croatia: Sampling
Sampling frame: FINA/Bisnode dataset, (all tax registered firms)
Sector: All manufacturing and services industries. (high-tech and low-tech manufacturing; knowledge and non-knowledge intensive services)
Size : employees for manufacturing and for services (choosing a higher threshold was costly in terms of firm count)
Interview count: 727 firms
Classifying sectors:

10. Benchmarking Structured Management Practices

11. Benchmarking Structured Management Practices: Manufacturing

12. Benchmarking Structured Management Practices: Manufacturing
An average firm adopts 53.8% of structured management practices; larger gaps in monitoring performance

13. Benchmarking Structured Management Practices: Services

14. CROATIA VERSUS US
Croatia: 42% score below 0.5; 3.5% have a score over 0.75
US: 18% have a score over 0.75

15. CROATIA VERSUS RUSSIA
Large share of poorly managed firms compared to the US, but better relative to Russia

16. Sectors: manufacturing versus services
Compared to manufacturing, services firms are poorly managed

17. Sub-components of management Practices
Compared to incentives and targets, firms use less of the performance monitoring practices

18. Structured Management Practices and Firm Performance

19. Does management drive firm performance?
Production function estimation:
Y it = A it K it α L it β I it γ e δM it e μ X it
Dividing by labor and taking logs: log Y it L it =α log K it L it +γ log I it L it α+β+γ−1 log L it +δ M it +μ X it + f i + τ t u it ,
productivity term (Ait) is substituted by fixed effects f i , time dummies τ t and a stochastic residual uit.

20. Management and firm performance in Croatia
Productivity
Profit
Firm performance rises with increase in each quartile of management score

21. Firm performance rises with increase in each quartile of management score
Innovation
Technology adoption

22. Improving management score from 10th to 90th percentile: associated with sales/emp. by 36%; profits by 33% ……

23. …11% higher likelihood of introducing new products or processes; 20% higher likelihood of adopting sophisciated technology

24. Why Firms Don’t Adopt Structured Management Practices

25. Why firms don’t adopt structured management practices?
Information asymmetry:
Not certain that they will benefit
Don’t know that they have poor management quality
Don’t know how to do it
Unsure about the quality of service providers
Underdeveloped market for business development services:
Availability of management service providers (breadth)
Providers of management services highly heterogeneous (depth)

26. Why firms don’t adopt structured management practices?

27. What Drives Adoption of Structured Management Practices?

28. What drives better management practices
Regions and sectors
Foreign ownership or supplier to foreign firms?
Exporters?
Size?
Age?
Managers’ and workers’ education?

29. What drives better management practices in Croatia?
Unlike the US, management does not improve with firm age

30. What drives better management practices in Croatia?
Management score for exporter is likely to be higher by 8 percent than an average firm.

31. Conclusions
Structured management practices in Croatia father from frontier economies such as the U.S.
Practices relating to data driven performance monitoring pulls down the overall score in Croatia.
Large heterogeneity in adoption of structured management practices
Better management practices associated with superior firm performance
Firm size, foreign linkages and the education level of non-managers explain this variation while firm age is negatively associated with management practices – suggesting a lack of pro-competitive forces

32. What Does this Mean for Policy?

33. Policy recommendations
Allocative efficiency:
Lack of relationship with firm age is an indication of a lack of learning and selection mechanism operating in Croatia.
Business to Business linkages:
firms with foreign linkages more likely to be better managed.
Capabilities of firms:
Tight association of managerial capabilities with performance for firms in Croatia and Russia
Capabilities to design better incentives for human resources and have clear targets (explicit, formal, frequent practices)
Instruments include financial incentives (e.g. vouchers, grants or fiscal incentives); inducement and recognition awards, and various kinds of extension and advisory services.

34. Some lessons from the survey in Croatia Credits: Šime Smolić (Asst
Some lessons from the survey in Croatia Credits: Šime Smolić (Asst. Professor/ Survey Specialist)

35. How are problems resolved in Croatia’s firms?
What response best describes what happened in the company when a problem arose in its processes?

36. Manager’s response
Somehow the problem was solved, we hired new people, but you can’t just prevent someone of having (more) children!

37. How are problems resolved in Croatia’s firms?
What response best describes what happened in the company when a problem arose in its processes?

38. manager’s response
There are workers on the market but they don’t like to work. We are that kind of people here!

39. Monitoring performance
Were scoreboards placed to show the production and other key indicators of performance in the company?

40. Manager’s response
All scoreboards are in my head!

41. Thank you!

42. ANNEX

43. Survey in Croatia Data for 727 firms – face to face interviews
Stratified by sectors and regions
Size threshold: (manufacturing); (Services)
Response rate: 17 percent

44. MOPS in Russia: Modus Operandi and Challenges
Method for interviewing:
Face to face with Computer assisted personal interviewing (CAPI)
Challenges:
Cost per interview: ~$110 per survey
Only 13,000 firms with over 10 employees – expected response rate is low (~10%)
Counterparts interested in the lagging region but not enough firms to sample from (about 1300)
Agreement from counterparts to support the survey in entire Croatia

45. Components of structured management in
Data driven performance monitoring
Incentives and targets

46. Management and firm performance: Comparing coefficient estimates across countries

47. TECHNOLOGY IN PROCUREMENT AND QUALITY CONTROL