Monday , August 19 2019
Home / Microeconomic Insights / How management practices drive firms’ performance in the long run: evidence from the Marshall Plan

How management practices drive firms’ performance in the long run: evidence from the Marshall Plan

Summary:
Summary Boosting firms’ long-run performance: evidence from the Marshall Plan There is a growing body of evidence from economic research of the importance of better management practices in driving improvements in firms’ performance. But since these innovations have been implemented fairly recently, it is unclear whether the effects persist over the long run. This research explores the long-run effects of management on firms’ performance using evidence from a unique historical episode: the US Technical Assistance and Productivity Program, implemented in Italy in the 1950s as part of the Marshall Plan. The program involved sponsored training trips for European managers to learn modern management

Topics:
Dermot Watson considers the following as important:

This could be interesting, too:

Alex Catling writes Providing low-cost labor market information to assist jobseekers

Alex Catling writes Understanding the Average Impact of Microcredit

Alex Catling writes Market power and the Laffer curve

Dermot Watson writes How management practices drive firms’ performance in the long run: evidence from the Marshall Plan

Summary

Boosting firms’ long-run performance: evidence from the Marshall Plan

There is a growing body of evidence from economic research of the importance of better management practices in driving improvements in firms’ performance. But since these innovations have been implemented fairly recently, it is unclear whether the effects persist over the long run.

This research explores the long-run effects of management on firms’ performance using evidence from a unique historical episode: the US Technical Assistance and Productivity Program, implemented in Italy in the 1950s as part of the Marshall Plan. The program involved sponsored training trips for European managers to learn modern management practices at US firms, as well as subsidized loans to European businesses to purchase technologically advanced US machines.

Because of budget cuts in the program, not all Italian firms that wanted assistance were able to get it. This provides an opportunity to compare the performance of firms that applied for and eventually received the management or technology transfers (‘treated’ firms) with the performance of firms that applied for the same transfers but did not receive them (comparison firms).

The results show that firms that sent their managers to the United States were more likely to survive. Treated firms also had higher sales, employment, and productivity than companies that applied but did not get the management transfer due to the budget cuts. These effects were large and grew over time for at least 15 years after the program.

The technology transfers also boosted firms’ performance, but the gains did not persist. Nevertheless, there was a complementarity between management and technology. The positive effects on firms that received the combined transfers were significantly larger than the sum of the single transfers. This is consistent with evidence showing that spending on technology by itself can have limited or even negative effects on firms’ performance if it is put into badly managed firms.

While the program had an effect on all firms, the impact varied based on their characteristics. For example, the impact of the business training program was mainly experienced by larger firms with initially lower productivity prior to the training. This suggests that it helped less productive Italian businesses to catch up with the others.

What’s more, the impact of the program was relatively larger for companies with fewer than 50 employees. But firms that did not apply for the program were, on average, smaller and less productive than firms that applied for it.

Italy in the 1950s was comparable to some of today’s developing countries, where business training and technology transfers are among the most common forms of active support for small and medium-sized firms. Such policies are usually evaluated over a limited number of months or years and using relatively small samples, so it is useful to know that they may well be notably long-run effects. In addition, firms today that are most in need in business training and technology transfers might be the least willing to participate in programs of this kind.

Main article

Economists have long speculated about why there are large differences in productivity across both firms and countries. One explanation is that they reflect variation in management practices, which raises the question of whether management training can improve firms’ performance. This research examines the long-run effects of such training, using evidence from the US Productivity Program (1952-58) in Italy, part of the Marshall Plan to rebuild post-war Europe. Analyzing newly collected data on over 6,000 firms followed for two decades, the study shows that training improved performance in the short term, thanks to the implementation of state-of-the-art management practices. There were also long-term payoffs, thanks to changes in firms’ organization and access to credit markets, which amplified the initial effects of the program.

In a typical US manufacturing industry, establishments in the top tenth of the productivity distribution are about twice as productive as those in the bottom tenth (Syverson, 2011; Foster et al, 2008). In developing countries such as India and China, the ratio is over fourfold, even larger than in the United States (Hsieh and Klenow, 2009). These differences between plants are highly persistent, contributing to significant disparities in economic performance over time and across countries.

While the popular press and business schools have long stressed the importance of good management, empirical economists have had relatively little to say about management practices. A major problem has been the absence of high-quality data on a large scale that follow the same firms over time.

Moreover, the choice of whether to adopt management practices is made by firms themselves. Better managed firms are more productive (Bloom and Van Reenen, 2007), but at the same time, more productive firms adopt better management practices.

A recent body of experimental evidence has emerged showing that better management tends to have positive effects on firms’ performance (see Bloom et al, 2013; Bruhn et al, 2018 and the survey in McKenzie and Woodruff, 2013). But since the improvements have been implemented fairly recently, whether these effects persist over the long run is unclear.

In my research, I have been studying the long-run effects of management on firms’ performance, using evidence from a unique historical episode, the US Technical Assistance and Productivity Program in Italy.

During the 1950s, as part of the Marshall Plan, the United States sponsored training trips for European managers to learn modern management practices at US firms. The program also issued subsidized loans to European businesses to purchase technologically advanced US machines.

Italian firms applying for the Productivity Program

In Italy, small and medium-sized manufacturing firms from five geographical regions could apply for this program (see Figure 1, Panel A). They could decide whether to send their managers to the United States (‘management transfer’), whether to purchase US machines (‘technology transfer’), or whether to do both (combined management and technology transfers).

But in 1952, after all firms’ applications had been submitted and reviewed, the United States unexpectedly cut the program’s budget, and only firms from five smaller Italian provinces – one in each of the original regions – eventually participated (see Figure 1, Panel B).

I compare the performance of firms that applied for and eventually received the management or technology transfers (‘treated’ firms) with the performance of firms that applied for the same transfers but did not receive them due to the budget cuts (comparison firms).

I use newly assembled panel data, collected from numerous historical archives, on the population of 6,065 Italian firms eligible to apply for the program. For each firm, I collected and digitized balance sheets from five years before to 15 years after the program and linked them to firms’ application records. Importantly, before the budget cuts, treated and comparison firms were very similar in their characteristics.

Figure 1:
Regions and provinces selected for the Productivity Program, 1950-52
Panel A: Initial areas eligible for the program
Panel B: Final areas eligible for the program

How management practices drive firms’ performance in the long run: evidence from the Marshall Plan

Notes: Regions chosen for the Productivity Program in 1950 (Panel A) and provinces selected after the US budget cuts in 1952 (Panel B). Only firms located in treatment provinces eventually received US transfers, conditional on having applied for the program.

Effects of management and technology transfer

I find that firms that sent their managers to the United States were more likely to survive. For example, the survival probability of treated firms was 90% after 15 years, compared with 68% for comparison firms (see Figure 2, Panel A).

Treated firms also had higher sales, employment, and productivity than companies that applied but did not get the management transfer due to the budget cuts. These effects were large and grew over time for at least 15 years after the program. Their productivity jumped by 15% within one year, and continued to grow without reaching a plateau, with a cumulative increase of 49.3% over 15 years (see Figure 2, Panel B).

Figure 2:
Effects of the Productivity Program on firm survival and productivity
Panel A: Treated firms more likely to survive
Panel B: Treated firms had higher productivity

How management practices drive firms’ performance in the long run: evidence from the Marshall Plan

Notes: Estimated survival probability (Panel A) and difference in revenue based total factor productivity (Panel B, TFPR). TFPR is output after controlling for non-managerial inputs such as labor and capital.

The technology transfers also boosted firms’ performance, but the gains did not persist. The productivity of treated firms rose gradually in the first ten years, relative to the technology comparison group, but then flattened out. Hence, in the long run, firms with access to better machines were no better off than their counterparts outside the program.

Interestingly, there was a complementarity between management and technology. The positive effects on firms that received the combined management and technology transfers were significantly larger than the sum of the single transfers. This is consistent with a large body of work showing that spending on technology by itself can have limited or even negative effects on firms’ performance if it is put into badly managed firms (see Bloom et al, 2007, on the impact of information technology).

Finally, firms that eventually participated in the program were systematically more likely to engage in exporting. Conditional on being exporters before the start of the program, firms that sent their managers to the United States had higher export revenues.

Characteristics of firms that benefited

While the program had an effect on all firms, the impact varied based on their characteristics. For example, I show that the impact of the business training program was experienced most in larger firms with initially lower productivity prior to the training. This suggests that it helped less productive Italian businesses to catch up with the others.

By contrast, for the technology transfer alone, the results are largely driven by companies that were initially more productive. These firms significantly improved their performance even in the short run, which suggests that firms lagging behind might not have been able to take full advantage of technologically advanced machines.

In terms of firm size, smaller firms faced higher adjustment costs in introducing new management practices. But in the long run, these costs faded out and the impact of the program was relatively larger for companies with fewer than 50 employees. In contrast, the impact of the technology transfer, both in the short and long run, was greater for larger firms. Those firms were more similar in size to US firms employing technologically advanced machines before the program.

What changed in the firms that received the management training? More than 90% of them adopted the new US management practices within three years and were still implementing them 15 years later. Specifically, these companies started regularly maintaining their machines and tracking their sales and orders. They also improved working and safety conditions, organized training classes for managers and other workers, and invested in market research, branding, and advertising.

In the longer run, changes in firm organization and access to the credit market amplified the initial effects of the program. Improved performance led firms to increase the number of plants and the manager-to-worker ratio, and to be more likely to become professionally managed (instead of remaining family-managed). Improved performance also gave firms greater access to credit market, which, in turn, allowed them to invest more in physical capital.

Despite the large and positive effects of adopting US management practices, spillover effects on firms that did not participate in the program appear extremely limited. This evidence generates a natural question: why did other firms not start implementing the new management practices, imitating treated firms?

Lack of information might be an explanation: excluded firms might not have been aware of the adoption of such practices by treated firms. Moreover, non-participating firms may have thought that these practices were not profitable, attributing the success of treated firms to other factors, for example, networking effects.

Alternatively, even if they were aware of the importance of such practices, they might not have known how to implement them without training from US experts. At the same time, treated firms would have had no incentive to discuss the details of their business with potential competitors, especially given their small size.

Finally, labor mobility in Italy during the 1950s and 1960s was extremely low. For example, 88% of managers who visited the United States were still working in the same firms 15 years after the intervention. As a result, knowledge spillovers were modest. These findings suggest that while management practices could be taught and transferred, they remained confined with adopting firms.

Insights for public policy

This research offers insights for public policy. Italy in the 1950s was comparable to some of today’s developing countries, where business training and technology transfers are among the most common forms of active support for small and medium-sized firms. But such policies are usually evaluated over a limited number of months or years and using relatively small samples. In contrast, the Productivity Program provides evidence on a large and heterogeneous number of firms in both the short and long run.

Another advantage of this research is that I am able to observe all firms, including eligible non-applicants, whereas in most settings only applicant firms are observed. Firms that did not apply for the Productivity Program were, on average, smaller, and less productive than firms that applied for it. This suggests that firms with more need for business training and technology transfers might not want to participate in such programs.

This article summarizes ‘The Long-term Effects of Management and Technology Transfers’ by Michela Giorcelli, published in the American Economic Review in January 2019.

Michela Giorcelli is in the Department of Economics at the University of California, Los Angeles.
Further reading

Leave a Reply

Your email address will not be published. Required fields are marked *