Managerial quality and worker productivity in developing countries

Does causation exist? Evidence from experimental studies

Although existing studies have found that managerial quality is strongly correlated with firm performance, it is less clear whether a causal link exists. Chances are that it is more profitable or easier for better-performing firms to adopt standard management practices. Alternatively, it may be that omitted determinants of productivity, such as institutional organization, have also contributed to differences among managerial practices.

To explore the potential causality, most research exploits management interventions that provide consulting or training services to randomly chosen firms, and compares their performance to a set of control firms. Since the two sets of firms are essentially similar prior to the intervention, any subsequent differences should reflect the causal impact of improved managerial quality. Disappointingly, most evidence from randomized experiments among microenterprises suggests only modest effects, if any, of business training on productivity. For example, one such study finds that the most commonly used business training course offered among female entrepreneurs in Sri Lanka has little impact on business profits, sales, or capital stock [5]. The recent study mentioned above, which assesses evidence from several training programs in microenterprises in seven developing countries, concludes that most of the training programs have insignificant impacts on outcomes due to a lack of impacts on improvement of business practices [3]. The authors argue that more intensive training programs may be needed.

A 2013 study reports the results of a management field experiment on large Indian textile firms, which provided professional and intensive consulting services on management practices to a set of randomly chosen treatment plants [6]. It finds that such consulting services lead to improvements in basic management practices, such as inventory management and cleaning of workspaces. Moreover, these improvements induce a 17% increase in productivity within the first year and lead to increases in firm size in the three years following the intervention. These results indicate that basic management practices can be imparted under certain circumstances, and that a causal link does exist between managerial quality and firm productivity. The generalizability of these results likely relies on the existing organizational structure and the size of the firms receiving management consulting, as well as the quality of the services provided. Additionally, the cost–benefit analysis reveals that the program is cost-effective. Specifically, the authors impute a total increase in annual profits of around $325,000 per plant, exceeding the actual costs of $250,000.

Another study evaluated the effects of a supervisory skills training program for garment factory supervisors in Cambodia, which aims to improve supervisor–worker relations by teaching supervisors effective leadership and communication skills [7]. In this research, supervisors were randomly chosen to enroll in a four-day, six-hour-a-day training course. Survey responses and factory administrative data were used to examine whether trained supervisors had better relationships with workers and whether workers’ productivity was higher if supervisors were trained. Two facts stand out in the results. First, the training program has an overall positive impact on both the perception of job satisfaction and employee productivity. Second, training managers at different levels can have very different effects. In particular, training direct (lower-level) supervisors is more important for improving the “soft” dimensions of the work environment, such as job satisfaction and day-to-day guidance, while training indirect (higher-level) supervisors matters most for “hard” dimensions, such as improved productivity. Evidence from this study suggests that managerial skills are indeed teachable and do matter for both productivity and labor relations.

A related study provides additional evidence that managerial skills are teachable and can be acquired through learning [8]. In particular, it focuses on other general “soft” skills, such as communication, time management, and problem solving. Although these skills are not directly relevant for production, they do have a statistically significant and economically meaningful impact on worker productivity. The results show that female workers who have been randomly chosen to participate in the training program exhibit improved soft skills in key dimensions and substantially higher productivity up to nine months after program completion. The program is proven to be cost-effective, and it increases the likelihood of retention and promotion among treated workers.

Managerial quality and productivity: Potential mechanisms

Emerging evidence demonstrates that, at least in large industrial firms in developing countries, intensive business training and consulting can improve managerial quality and generate considerable increases in productivity. This causal link raises further questions about the specific mechanisms at play and the role of management. In particular, how should researchers and policymakers think about management? What are the potential mechanisms through which improved managerial quality enhances firm productivity and profitability?

Some researchers view management as a factor of production, for example, as an intangible capital stock [9]. Meanwhile, since many studies have found spillover effects of management both within and across firms, some other researchers argue it may be more appropriate to think of management as a technology that raises total factor productivity [1]. Based on original survey data on over 11,000 firms in 34 countries, a group of researchers in the latter category find empirical results that are in line with the predictions of a “Management as a Technology” model [1], (as seen in Figure 1).

However, management may also matter in ways other than productivity. For example, management may also affect the demand faced by firms, prices of raw materials, cost of finance, and the willingness of banks to lend [3].

Experimental evidence from Indian textile plants suggests that, in the short term (within the first year), improved managerial practices lead to higher productivity through improved quality and efficiency and reduced inventory [6]. For example, measuring, classifying, and tracking defects allows firms to rapidly address quality problems, resulting in huge reductions in defects. Better records and storage practices lead to a significant fall in inventory and dead stock. In the longer term (three years following the start of the intervention), firm size increased for the treated firms because the adoption of management practices allowed owners to oversee more production activities and delegate more decisions to their plant managers. These findings underscore two main takeaways. First, it is important for impact evaluation studies of management practices to look beyond the short and medium term to analyze long-term business outcomes, including longevity and business growth. Second, better management may only help on a larger scale, implying that policy interventions that target larger firms may be more desirable.

A recent study identifies another channel through which management matters [4]. Specifically, it finds that productivity suffers in response to higher indoor air pollution exposure (due to reductions in the short-term physiological and cognitive functioning of workers), but that supervisors of higher managerial ability are able to mitigate such productivity loss through frequent task reallocation and replacement of underperforming workers. Using hourly data on production, the study finds that lines supervised by managers with higher managerial quality scores exhibit higher productivity. This demonstrates that supervisors of higher management ability matter, in that they are better able to deal with shocks (i.e. short-term spikes in the cost of effort) to worker productivity.

A 2015 study on Bangladesh documents how a management practice that encourages information sharing and knowledge exchange within a firm could increase productivity [10]. Since different lines in Bangladeshi garment factories may start producing the same style of product on different days, when a given line starts producing a new product, there may be others that have already acquired relevant production experience. The study’s author ran a randomized experiment in which random pairs of workers were instructed by their supervisors to share production knowledge and experience when one worker started producing a garment that the other had already produced. The results suggest that the intervention has a nontrivially positive impact on the initial productivity of the later-starting workers. Therefore, managerial quality may affect productivity by providing a better environment for organizational learning.

Barriers to the adoption of management practices and the take-up of training?

A common research question in this field is “why are firms not taking more advantage of business training and consulting programs if they are profitable?” Speculative evidence points to information barriers as the primary factor [6]. In particular, it appears that many firms do not believe that simple and widespread practices can improve profits. Additionally, there is a lack of awareness of less common practices among firm owners.

Misalignment of incentives within firms could be another barrier to the adoption of seemingly profitable management practices or training programs [11]. A study conducted in Pakistan examined the introduction of a new cutting technology that reduces total costs of soccer ball production by 1%. The authors randomly allocated the new technology to a subset of soccer ball producers, but found a surprisingly low take-up rate. Additional evidence suggests that the lack of adoption was mainly due to the resistance of influential employees who feared that the new technology could lead to reductions in their effective wage, and thus strategically misinformed owners about the value of the technology. After a one-time incentive payment to these key employees, take-up of the new technology rose immediately.

In other cases, even if managers have full information and are willing to make changes to their management practices, it can be difficult for them to do so. One reason for this is challenges due to informal norms. A study from Bangladesh noticed that women are extremely underrepresented in supervisor positions in the Bangladeshi garment sector [12]. Although female workers account for 80% of the workforce, 95% of supervisors are male. Most workers, including female workers, believe men are more effective supervisors than women. However, a test on skill and professional knowledge revealed that the perception does not match reality: female workers who were chosen to be promoted as supervisors tended to be as qualified as male workers. To correct the misallocation of managerial talent, the authors conducted an experiment that provided training services to both male and female workers selected by the factory. As a result, the probability of being promoted or tried out as a supervisor increased among female trainees. However, the promotion of women led to changes in team dynamics. In particular, the resistance of line workers (including female workers) to their new female supervisors caused decreases in the lines’ initial productivity. Moreover, promotion of female workers demotivated male workers and increased their attrition rates, as they became more pessimistic about later promotion.

Another related study used a marketing experiment to explore the demand for training services in the Bangladeshi garment sector [13]. The authors reached out to selected garment factories through phone calls to assess their interest in a training program for line supervisors. The overall take-up turned out to be extremely low. Consistent with prior studies, the authors find one of the primary reasons for non-adoption is that decision makers do not believe in the training’s effectiveness. Additionally, pulling supervisors off the line to train them leads to short-term decreases in productivity, especially in the garment sector where production pressure is high and managers are severely time constrained. Moreover, firms are unwilling to invest because they are afraid trained supervisors will leave the factory after completing the training.