The answer is: yes.
From sunspots to the degree of democracy, over the past two centuries economists singled out a great variety of “factors” that try to explain why some societies prosper and others not. Here is a list of some of the most popular: Max Weber’s “work ethic”; physical investment; education; good fiscal, monetary and other macroeconomic policies; “good institutions” (predictable “rules of the game”, low prevalence of corruption, etc.); a favorable “business environment”; cultural traditions; the degree of ethnic fragmentation; the degree of “trust”; climate; geography – landlocked countries and small islands being handicapped. Many other “explanatory factors”, (or various combinations) have been tested in econometric models of various kinds. Important as they are for some countries and some historical periods, none of these factors (taken alone or in combination) “explain” economic growth universally or else the debate wouldn’t have been going on for generations. What I find astounding is that the quality of management, by which I mean how well firms, government institutions, nonprofit organizations are being run, is almost nowhere to be found. Not even micro-economists who are not focused on development have paid a lot of attention to the quality of management.
Yet, as common sense and casual observation strongly suggest, poor management does hinder development. A handful of researchers are focusing on the issue. [1] Unsurprisingly, they find “evidence that firms in developing countries are often badly managed, which substantially reduces their productivity.” [2] This goes for advanced economies as well as developing countries – they find a strong association between quality of firm management and standards of living. [3] In another study, they interviewed 181 managers and physicians in the orthopedic and cardiology departments of U.K. hospitals[4] and found that management scores were significantly associated with better performance (indicated by improved survival rates from emergency heart attack admissions and other kinds of general surgery as well as shorter waiting lists). What a surprise!
As Bloom et al. put it, mildly, “there is skepticism in the economics profession as to whether management matters” (AER, 2010). Why is this? Economics posits that “markets work”, including the market for managers. In a “perfect market” market, poor managers ineluctably will fall by the wayside and be replaced by better ones. This might be the case ”generally and in most instances” in highly advanced economies such as Singapore, but certainly goes against daily articles about failing managers of major firms, who stayed in control for years. It certainly is not so in the developing world, as evidenced in India by Bloom and his colleagues. In sum, as in the old “let us assume we have a can opener” joke, the economics profession seems to believe that good managers can be taken for granted.
That does not explain, however, why business schools, where a lot of research, including economics research, is being done, do not focus on the importance of good management, even thought the raison d’ëtre of business schools is to produce management talent. In the words of a very senior faculty of one of the world’s top ten business schools: “The subject is being ignored because anyone working at a business school knows how essential good management is to the world’s welfare. Why spend money studying this if the answer is already well-known?”
If I am correct, research on the impact of good management is so scarce because it has fallen between conceptual (economic theory) and dogmatic (“we know this already”) stools. If so, this should be great news to thousands of aspiring researchers who are in search of virgin territory to conquer. Learned journals should be thrilled to consider publishing such research, as it would be totally leading-edge. Huge research opportunities should exist for economics and business schools around the world, including lots of innovative joint research between faculty of schools in high-income and in developing countries. [5]
Low-hanging fruit, lots of kudos to be earned.
[1] Most signally, Nicholas Bloom, Aprajit Mahajan, David McKenzie, John Roberts , John van Reenen and their colleagues.
[2] Why Do Firms in Developing Countries Have Low Productivity? By Nicholas Bloom, Aprajit Mahajan, David McKenzie, and John Roberts, American Economic Review: Papers & Proceedings 2010, 100:2, 619–623
[3] See Bloom, Nicholas, and John Van Reenen. 2007. “Measuring and Explaining Management Practices across Firms and Countries.” Quarterly
Journal of Economics, 122(4): 1351–408.
Bloom, Nicholas, and John Van Reenen. 2010. “Why Do Management Practices Differ across Firms and Countries?” Journal of Economic
Perspectives, 24(1): 203–24.
Bloom, Nicholas, Raffaella Sadun, and John Van Reenen. 2009. “The Organization of Firms across Countries.” National Bureau of Economic Research Working Paper 15129.
[4] "The impact of competition on management quality: evidence from public hospitals", (2011), LSE/Stanford mimeo with Nicholas Bloom, Carol Proper, Stephan Seiler and John Van Reenen.
[5] A related unexplored research area is the impact of management education on the quality of management, but that is for another story.
