Which country has the best management practices?

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Business Matter

By Manish Shah

Why are there differences in productivity between countries? Nicholas Bloom and John Van Reenen have answered this question in their paper Why do Management Practices Differ across Firms and Countries. They used an evaluation tool developed by an international consulting firm that measures management practices in three key areas. First is monitoring-how effective a company is in tracking what goes on within the firm and using this information for continuous improvement. Second is targets-how well a company sets goals, tracks outcomes and takes actions if the goals are not achieved. Third is incentives-how effective a company is in hiring and retaining its best employees.

Bloom and Van Reenen conducted over 6,000 firm interviews with companies around the globe. The results indicated that on average companies from United States had the best management practices. US companies were followed by companies from Germany, Sweden, Japan and Canada. At the bottom of the heap were Greece, Portugal, India and China.

Bloom and Van Reenen concluded that factors such as labor regulation, multinational status, ownership and education affected the adoption of good management practices. Labor market regulations are a major impediment for companies to hire, fire and promote employees. They can reduce the ability of firms to implement good management practices. Family firms owned and operated by descendants of the founder are generally the worst managed. This is because the eldest son, regardless of talent, is promoted to be the CEO of these companies. Govern-ments like the UK provide strong tax subsidies to family-run-and-owned firms, which propagates the practice of passing on the baton to the successive generations of the same family. Multinationals are better managed than domestic firms because only the best managed firms have the opportunity to expand overseas. In addition, the multinationals adopt good management practices from overseas. The education level of management and workers is strongly correlated to the high management performance. Educated management is aware of effective management practices. Also, it is easier to  implement new management practices when the workforce is educated.

Two factors that have contributed to the higher productivity of Indian firms are multinational status and highly educated workforce. How-ever, Indian firms still have to contend with the negative effects of labor regulations and nepotism in family owned firms.

Manish Shah is the former president of Midwest Law Printing in Chicago. He also worked at Intel, PwC and Motorola. He has an MBA from Kellogg Graduate School of Management, and a MS in Computer Science from Illinois Institute of Technology. He can be reached at manishshahus@yahoo.com.

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