THE IMPACT OF COMPETITION & GLOBALIZATION ON MANAGEMENT PRACTICES AND WORK-LIFE BALANCE

1. THE IMPACT OF COMPETITION & GLOBALIZATION ON MANAGEMENT PRACTICES AND WORK-LIFE BALANCE Nick Bloom(Centre for Economic Performance, LSE) Very grateful for support and funding from the: Economic and Social Research Council; Advanced Institute of Management; and Anglo German Foundation 21st April 2006

2. GENERAL OUTLINE • Management Practices (Bloom and Van Reenen, 2006) • Work-life Balance(Bloom, Kretschmer and Van Reenen, 2006) • Policy Implications

3. MEASURING AND EXPLAINING MANAGEMENT PRACTICES ACROSS FIRMS AND COUNTRIES Nick Bloom & John Van Reenen(Centre for Economic Performance, LSE) 21st April 2006

4. MOTIVATION: MANAGEMENT • Large persistent productivity differences across firms and • countries which people typically claim is due to “management” • But what is the role of management? • And why does it vary so much across firms and countries? • To address these questions in 2001 LSE and McKinsey1 started • an ambitious joint research project to collect the first firm level • international management data set. 1 The LSE received no funding from McKinsey – this was made possible by the generous support of the ESRC, AIM and the AGF!

5. OUTLINE • “Measuring” management practices • Evaluating the reliability of this measure • Describing management across firms & countries • Explaining management across firms & countries

6. A NEW APPROACH TO MEASURING MANAGEMENT • 1) Developing management practice scoring • Scorecard for monitoring, targets and incentives • 45 minute phone interview of (manufacturing plant) managers • 2) Obtaining unbiased responses • “Double-blind” • Managers are not informed (in advance) they are scored • Interviewers do not know company performance • 3) Getting firms to participate in the interview • Introduced as “Lean-manufacturing” interview, no financials • Endorsement of Bundesbank ,UK Treasury, Banque de France • Run by 10 MBAs (loud, pushy & business experience)

7. MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?” Note: All 18 dimensions and over 50 examples in Bloom & VanReenen (2006).

8. WE SURVEYED MEDIUM SIZED MANUFACTURING FIRMS • US (≈300), UK, France and Germany (≈150 each) • Medium sized manufacturers, typically about 500 employees • Medium sized because firm practices more homogeneous • Manufacturing because easier to measure productivity • Good response rate of 54% • Response uncorrelated with firm performance

9. ADDITIONAL CONTROLS FOR BIAS & NOISE • 8 INTERVIEWEE CONTROLS • Gender, seniority, tenure in post, tenure in firm, countries worked in, foreign, worked in US, plant location, reliability score • 3 INTERVIEWER CONTROLS • Set of analyst dummies, cumulative interviews run, prior firm contacts • 5 TIME CONTROLS • Day of the week, time of day (interviewer), time of the day (interviewee), duration of interview, days from project start

10. OUTLINE • “Measuring” management practices • Evaluating the reliability of this measure • Describing management across firms & countries • Explaining management across firms & countries

11. INTERVAL VALIDATION SUGGESTS MANAGEMENT SCORING PROCESS IS CONSISTENT Re-interviewed 64 firms with different MBA interviewers speaking to different plant managers Firm average scores (over 18 question) Correlation of 0.75 suggests interviews pretty reliable 2nd interview 1st interview

12. WE ALSO UNDERTOOK EXTERNAL VALIDATION BY COMPARING TO COMPANY ACCOUNTS Labour Productivity1 Sales Growth, (% pa) Profit Rate2, (%) Bottom 50% Top 50% Bottom 50% Top 50% Bottom 50% Top 50% Management score Management score Management score Survival Rates4, (%) Stock Market Value3 Bottom 50% Top 50% Bottom 50% Top 50% Management score Management score 1 $’000 sales per employee at 2000 prices 3 Tobins’ Q ($ value of firm per $ of assets), quoted firms only2 Return on capital employed (%) 4 (100 - % bankrupt or liquidated 12 months after 2004)

13. CONCERNS WITH OUR MANAGEMENT MEASURE? • Measurement error, but downwardly biases our results • Measurement bias (“happy manager”), but • “Double-blind” survey process scored from examples designed to try and minimise this • Run series tests in the paper and appears OK • Reverse Causality • True for validation results, but only data checking tests • In management results concentrate on more causal factors like competition, history, taxes etc…

14. OUTLINE • “Measuring” management practices • Evaluating the reliability of this measure • Describing management across firms & countries • Explaining management across firms & countries

15. FIRM LEVEL MANAGEMENT SCORES BY COUNTRY France Germany % of firms % of firms Management score Management score UK US % of firms % of firms Management score Management score

16. COUNTRY LEVEL MANAGEMENT SCORES* US Germany France UK TypicalUK managers? Bad manufacturing management - a UK tradition? “Efficient management is the single most significant factor in the American productivity advantage” [Marshall Plan Anglo-American productivity mission, 1947]

17. UK BAD AVERAGE MANAGEMENT MAINLY DUE TO THE LONG TAIL BADLY MANAGED FIRMS All firms Firms with management scores above 2 US Germany France UK US-UK gap is 0.28 points US-UK gap is 0.13 points

18. US FIRMS (MULTINATIONAL SUBSIDIARIES) ARE ALSO BETTER IN EUROPE Average management score by firm type in UK, France and Germany # in sample Domestic 379 Non-US multinational subsidiary 44 US multinational subsidiary 20

19. OUTLINE • “Measuring” management practices • Evaluating the reliability of this measure • Describing management across firms & countries • Explaining management across firms & countries

20. COMPETITION AND MANAGEMENT • Competition is strongly linked with good management • True for all three competition measures in Nickell (1996): import competition; industry rents; and # of competitors • Positive effects of competition appears to be due to two factors • “Selection” – badly managed exit more quickly • “Effort” – competition makes managers try harder

21. EDUCATION, SKILLS AND MANAGEMENT • Educations and training strongly linked with good management • True for all five measures we used: % employees with a degree; % of employees with an MBA, training days per year (managers); training days per year (non-managers); and average wages • Positive correlation appears be a combination of: • Cause: educations & training facilitates good management • Effect: educated & trained people attracted to well managed firms

22. INHERITED FAMILY FIRMS AND MANAGEMENT • Inherited “family” firms defined as 2nd generation family owned • – excludes 1st generation “founder” firms (typically well run) • Quality of management practices in inherited family owned firms • depends on who runs them • Firms with professional management typically run well • Firms with inherited family management typically run less well • Work from Columbia, Harvard, and NYU shows inherited family • management also bad for productivity and growth, particularly in • larger firms and faster growing industries • In UK and France inherited family firms typically family managed • while in the US and Germany typically professionallymanaged

23. WHY DOES FAMILY INVOLVEMENT VARY ACROSS COUNTRIES? • Historical differences • UK & France tradition of Primo Geniture: • [Oxford English Dictionary, 2005]“Feudal rule of inheritance introduced into England by the Norman Conquest. Replaced Teutonic gavelkind. Obligatory until the Statute of Wills [1540]. Still common in many places” • US and Germany tradition of equal division (Menchik, 1980) • Estate tax headline rates on family firms1: • US ≈ 50% France ≈ 25% • UK = 0% Germany ≈ 15% 1 Rate on a $25m firm. In practice these taxes are often reduced/avoided by advanced tax planning, although this involves foresight, financial costs and some control loss.

24. A FAMOUS UK INHERITED FAMILY MANAGED FIRM,WITH AN EXECUTIVE BOARD MEETING IN PROGRESS…. Note: Albert Steptoe inherited “Steptoe & Son” from his father, making him the 2nd generation, and Harold the 3rd generation

25. DO THESE FACTORS EXPLAIN THE UK-US MANAGEMENT GAP? UK-US MANAGEMENT PRACTICE GAP1 Inherited family managed firms (primogeniture) Total management Gap Competition Education(% employees with degree) Residual management gap 1 Note: (a) based on our sample of medium sized manufacturing firms; (b) 1 point on the management scale associated with about 20% higher productivity.

26. GENERAL OUTLINE • Management Practices(Bloom and Van Reenen, 2006) • Work-life Balance(Bloom, Kretschmer and Van Reenen, 2006) • Policy Implications

27. WORK LIFE BALANCE, MANAGEMENT PRACTICES AND PRODUCTIVITYNick Bloom, Toby Kretschmer and John Van Reenen(Centre for Economic Performance, LSE) 21st April 2006

28. MOTIVATION: WORK-LIFE BALANCE (WLB) • With unemployment at historically low levels increased UK focus • on quality of jobs rather than just quantity. Focus sharpened as • family friendly policies and female participation moved up the • political agenda, raising questions such as: • Are WLB and productivity trade-offs or complements? • Do competition and globalization erode employees WLB? • To address these issues the we added questions on WLB • outcomes and practices to the end of the management survey.

29. OUTLINE • Competing models of work-life balance • Measuring work-life balance and testing the models • International (and multinational) evidence

30. COMPETING MODELS OF WORK LIFE BALANCE

31. OUTLINE • Competing models of work-life balance • Measuring work-life balance and testing the models • International (and multinational) evidence

32. DEFINING OUR WLB MEASURES • WLB practice score defined averaging over 5 questions: • Working from home allowed (yes/no) • Full/part time job switching allowed (yes/no) • Job sharing allowed (yes/no) • Childcare subsidy (yes/no) • Childcare flexibility (low/medium/high) • WLB outcome measure defined by the question: • “Relative to other companies in your industry how much does your company emphasise work life balance”? (1) “much less”, (2) “slightly less”, (3) “the same”,(4) “slightly more” and (5) “much more”

33. WLB (PRACTICES AND OUTCOMES) BOTH LINKED WITH GOOD MANAGEMENT Contradicts the “Trade-Off” theorySupports the “Win-Win” theory

34. WLB (PRACTICES AND OUTCOMES) ARE NOT LINKED TO COMPETITION Examined a range of competition measures and found no evidence for any link between WLB and competition In fact the correlation was typically positive but insignificant Competition appears not to make firms treat their employees worse - presumably if they did employees would leave for the competitors! Contradicts the “Trade-Off” theoryNo implications for the “Win-Win” theory

35. WLB PRACTICES AND PRODUCTIVITY ALSO UNRELATED WLB and productivity are strongly positive correlated But of course WLB and productivity both are linked with good management - controlling for management eliminates the correlation between productivity and WLB Firms provide the productivity maximising amount of WLB for their employees firms Contradicts the “Trade-Off”Contradicts the “Win-Win” theory

36. MODELS OF WORK LIFE BALANCE Consistent with a more “Free-market” view

37. OUTLINE • Competing models of work-life balance • Measuring work-life balance and testing the models • International (and multinational) evidence

38. THE FRENCH ADOPT THE NICEST WLB PRACTICES AND THE AMERICANS THE TOUGHEST COUNTRY LEVEL WLB AVERAGE SCORES* France UK Germany US * Sum of scores for allowances and flexibility over: working-from home, job-sharing, full/part time switching, childcare flexibility, childcare subsidies

39. INTRIGUINGLY, US MUTLINATIONALS IN EUROPE ADOPT LOCAL “NICER” WLB PRACTICES For management practices US firms bring over their better management practices with them to Europe But for work-life balance practices US firms adopt the “nicer” local European approach Since these WLB practices are typically not regulated suggests US firms are choosing nicer WLB practices in Europe, which in turn suggests Europeans value this more Working for a US multinational in Europe is typically good for employees

40. ALSO NO EVIDENCE THAT “GLOBALIZATION” IS BAD FOR WLB EITHER We find a very strong positive link between firm size and WLB, noting that large firms are also typically much more globalized Also find no evidence multinationals reduce employees WLB, and in fact the correlation is positive but insignificant Suggests employees belonging to more globalized firms do not suffer (and probably gain) in terms of their WLB Working for larger globalized firms (in Europe and the US) is typically good for employees WLB

41. GENERAL OUTLINE – OVERVIEW TWO PAPERS • Management Practices(Bloom and Van Reenen, 2006) • Work-life Balance(Bloom, Kretschmer and Van Reenen, 2006) • Policy Implications

42. COMPETITION IS GOOD Well known that competition benefits consumers – more choice and lower prices We find that competition also raises productivity by improving management practices And we find no evidence – as many have claimed – that competition harms workers work-life balance Continue to pursue the successful policy agenda of increasing competition in the UK

43. “GLOBALIZATION” APPEARS GENERALLY GOOD Multinationals (especially US ones) are typically higher productivity, better managed and pay their workers more Larger firms and multinationals also appear not to harm (and if anything improve) the WLB of their employees Trade is also an important factor is raising competition Continue to push for open and globalized UK markets at home and in Europe

44. POLICY IMPLICATIONS FOR INHERITANCE TAX – FIRST SOME BACKGROUND • Standard assets (savings, housing etc) • 40% inheritance tax above a £275,000 threshold • Private companies (typically family firms) • 0% inheritance tax, and no cap on this relief • Exemption introduced in Budgets from 1979 to 1992 • Rationale that inherited family firms help the economy 1 A £1m family firm has 16 employees on average. Taxing firms with >£1m will exclude most family shops, pubs, small businesses etc.

45. POLICY IMPLICATIONS FOR INHERITANCE TAX • Inherited family management is associated with poorer • management and productivity in medium & larger firms. • So there may be benefits from capping the inheritance tax • exemption for private companies: • Increase productivity by removing a distortion in favour of family inheritance in larger firms1 • Improve intergenerational equality - which is bad in the UK by international standards - by taxing large inheritances • Raise revenue – for example a £1m cap could raise £250m Consider reforms for a more neutral inheritance tax 1 90% of family firms worth less than £1m. An average £1m firm has 16 employees.

46. AND FINALLY…………..

47. MANAGEMENT RESEARCH NEXT STEPS • This summer follow up a second survey wave on 3000 firms to: • Extend to more countries: • Europe: Italy, Poland, Sweden and Greece • India • Extend to more industries • Pilots in Retail, Education (Schools) and Health (Hospitals) • Extend to look at organisational structure and use of IT • Quotes to finish……..

48. THE WEIRD WORLD OF MANUFACTURING • Spoke to companies making….. • Plastic balls to stop birds nesting on water near airports (reported no competitors) • European sex-toys (few exports – aimed at domestic “tastes”) • ….and an amazing array of people • “I spend most of my time walking around cuddling and encouraging people - my staff tell me that I give great hugs” • “……….…..[long silence]………….sorry I just got distracted by a submarine surfacing in front of my office window”

49. BACK-UP

50. Why Should Management Practices Vary? • Two models - not mutually exclusive • “Optimal choice of management practices” • Another factor of production (like advertising) • No “better” or “worse” style of management – depends on firm’s circumstances • Exogenous managerial inefficiency (Lucas 1978) • Strictly “better” or “worse” styles of management • Well managed firms strictly better performing • Empirically we find some support for both