Nick Bloom, 147, 2011 Economics of Human Resources Nick Bloom (Stanford Economics) Lecture 5: Power...
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Transcript of Nick Bloom, 147, 2011 Economics of Human Resources Nick Bloom (Stanford Economics) Lecture 5: Power...
Nick Bloom, 147, 2011
Economics of Human Resources
Nick Bloom (Stanford Economics)
Lecture 5: Power and decentralization
1
Nick Bloom, 147, 2011
• What is decentralization?
• Measurement and stylized facts
• Determinants of decentralization
• Firm Performance and decentralization
Nick Bloom, 147, 2011
What is decentralization?
• One aspect of firm organization - how power and decision making are distributed
• Unlike basic management practices no typical “good” and “bad” – just different styles which tend to vary by country
• Why should you care:– Key in designing your business or advising others– Changing over time, generating broader economic effects,
like increased inequality and worker empowerment
Nick Bloom, 147, 2011 4
Business Week The 21st Century Corporation, cover story August 21-28, 2000.
"Globalization and the arrival of the information economy have rapidly demolished all the old precepts. The management of global companies, which must innovate simultaneously and speed information through horizontal globe-spanning networks, has become a daunting challenge. Old, rigid hierarchies are out ...."
Are things really changing?
Nick Bloom, 147, 2011 5
Delayering – Number of positions reporting to CEO
Source: Rajan and Wulf, 2006, 300+ large US corporations
SP
AN
year1985 1990 1995 2000
4
5
6
7
Evidence is limited, but appears yes, firms are decentralizing
Nick Bloom, 147, 2011
Formal vs. Real Authority
• Formal authority in the organization chart (“organogram”)– E.g. Profit centres vs. cost/sales centres
• Real authority– How things actually get done. Power– http://www.youtube.com/watch?v=5FRVvjGL2C0
• Can be different across different types of decisions – e.g. pricing, products and M&A
Nick Bloom, 147, 2011
Real authority models: Centralized
http://www.youtube.com/watch?v=wBIov_CSqyI&feature=related
Nick Bloom, 147, 2011
e.g. Universities, but academics generally pretty inefficient
Real authority models: Decentralized
Nick Bloom, 147, 2011
• What is decentralization?
• Measurement and stylized facts
• Determinants of decentralization
• Firm Performance and decentralization
Nick Bloom, 147, 2011
Central HQ(New York Site)
Example A: Domestic Firm2 Sites, Single Plant
Plant(Albany Site)
D, Decentralization
Nick Bloom, 147, 2011
Central HQ(New York Site)
Example B: US Domestic FirmMulti-Site, Multi-Plants
Plant 1(Buffalo Site)
Plant 3(Scranton Site)
Plant 2(Albany Site)
D1 D2 D3
Nick Bloom, 147, 2011
• Main measure averages the z-score (scores normalized to mean 0, standard-deviation 1) of each variable:
– Hiring senior employees (discrete, 1 to 5)– Maximum Capital expenditure (continuous, in $)– Introduction of new products (discrete, 1 to 5)– Sales and marketing (discrete, 1 to 5)
Our empirical decentralization measure
Nick Bloom, 147, 2011-1 -.5 0 .5mean of zorg
Sweden
US
UK
Germany
Italy
Portugal
France
Poland
China
India
Japan
Greece
-1 -.5 0 .5mean of zorg
Sweden
US
UK
Germany
Italy
Portugal
France
Poland
China
India
Japan
Greece
-1 -.5 0 .5mean of zorg
Sweden
US
UK
Germany
Italy
Portugal
France
Poland
China
India
Japan
Greece
Decentralization varies heavily across countries
Most centralized • Asia• Southern Europe
Least centralized• Scandinavian countries • Anglo-Saxon countries
Decentralization measure
Nick Bloom, 147, 2011
Decentralization also varies across firms
Decentralization measure (higher number is more decentralized)
0.5
11
.50
.51
1.5
0.5
11
.5
-2 0 2 4 -2 0 2 4 -2 0 2 4 -2 0 2 4
China France Germany Greece
India Italy Japan Poland
Portugal Sweden UK US
De
nsity
zorgGraphs by Country where firm is located
Nick Bloom, 147, 2011
External validation – decentralization over time• Only prior firm decentralization measure to cross-check against
we are aware of is from Hofstede– Surveyed c.100,000 IBM employees across 50 countries
during the 1970s & 1980s– Questions on management style (autocractic/paternalistic
or consultative) and preferences for delegation– Combined into Power Distance index (1-100), low means
limited (preference for) delegation
Nick Bloom, 147, 2011 Power distance
China
France
Germany
Greece
India
Italy
Japan
Poland
Portugal
Sweden
UKUS
-1-.
50
.5D
ece
ntra
lizat
ion
20 30 40 50 60 70Power Distance Index (100=low power distance)
‘Power distance’ measures from 1970s & 1980s matches our 2000s decentralization data quite well
Dec
entr
aliz
atio
n
Correlation= 0.80
Nick Bloom, 147, 2011
China
France
Germany
Greece
India
Italy
Japan
Poland
UK US
-1-.
50
.5D
ece
ntr
aliz
atio
n
0 1 2 3 4Fiscal Decentralization Index
Fiscal decentralization (whether Governments are centrally run) looks similar – so something cultural?
Firm
Dec
entr
aliz
atio
n
Fiscal Decentralization(Arzaghi and Henderson, 2005)
Correlation= 0.83
Nick Bloom, 147, 2011
-.4 -.2 0 .2 .4mean of zorg
Private Equity
Family, external CEO
Dispersed Shareholders
Managers
Other
Family, family CEO
Private Individuals
Founder
Government
Decentralization also varies across ownership types – with founder and government firms centralized
Decentralization measure
Nick Bloom, 147, 2011
• What is decentralization?
• Measurement and Stylized facts
• Theories & Determinants of decentralization
• Firm Performance and decentralization
Nick Bloom, 147, 2011
Some Benefits of Decentralization
1. Saves on costs of communication and information transfer
2. Improves swiftness of reacting to market changes [e.g. because of less specialization, more multi-tasking]
3. Increase in employee involvement, so possibly more job satisfaction
22
Nick Bloom, 147, 2011
Some Costs of Decentralization
1. More “mistakes” (e.g. co-ordination in price setting)
2. Harder to exploit returns to scale/specialization – i.e. repetition of same activities across different divisions
3. More stress from control?
23
Nick Bloom, 147, 2011
Factors affecting Decentralization
1. Technological
2. Economic
3. Cultural/Legal
Nick Bloom, 147, 2011 25
0.2
.4.6
.81
me
an
of de
cen
tra
lizatio
n
50 100 200 500 1000
Complexity: Larger Firms are more decentralized
Number of employees in the firm
Nick Bloom, 147, 2011
27
Learning: More technologically advanced firms more likely to be decentralized
Nick Bloom, 147, 2011 28
Enterprise Resource Planning 0.104* 0.116**Information technology (0.054) (0.054)
NETWORK -0.098* -0.110**Communication technology (0.053) (0.053)
Computers/Employee -0.041 -0.021 -0.031
(0.031) (0.031) (0.031)
• Information technology (IT) increase decentralization
• Communications technology (CT) decreaseas decentralization
ICT has a mixed impact on decentralization
Notes: Controls are SIC3 dummies, country dummies, noise controls (interviewer dummies Interviewee tenure and seniority, etc.), public listing, CEO onsite, plant size,
Nick Bloom, 147, 2011
Factors affecting Decentralization
1. Technological
2. Economic
3. Cultural/Legal
Nick Bloom, 147, 2011 30
0.1
.2.3
.4.5
me
an
of de
cen
tra
lizatio
n
20 40 60 80 100
Skill: Firms with more skilled workers are more decentralized
Proportion of employees with a college degree
Nick Bloom, 147, 2011
Legal and Cultural Factors affecting Decentralization• Trust
– In high trust areas (e.g. Sweden) managers likely to be trusted to carry out more activities
• Rule of Law– In good rule of law areas (e.g. US) top management
less worried about theft by middle management
31
Nick Bloom, 147, 2011
Trust and decentralization
• How to measure trust? World Value Survey has question:
“Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people?”
Trust by region of the country defined as % of people answering “yes” to first part of the trust question
• Experiments show this question linked with trust/trusting behavior (Glaeser et al, 2000, Sapienza et al, 2007)
Nick Bloom, 147, 2011
Trust (region) 1.196*** 0.825*** 0.732**(0.429) (0.290) (0.298)
Rule of law (country) 0.473***
(0.102)
Observations 3549 3549 3549
Country dummies no no yes
Other controls no no yes
Trust, rule of law and decentralization
Notes: Other controls are SIC3 dummies, noise controls (interviewer dummiesInterviewee tenure and seniority, etc.), public listing, CEO onsite, plant size, competition
Nick Bloom, 147, 2011
Also look at multinationals as another test of trust
• Could worry about bias due to trust proxying for other country/regional variables
• So look at affiliates of foreign multinationals and investigate whether trust in their home country also matters
• Bilateral trust: (on average) how much do people in the multinational’s home country trust people in the country where the subsidiary is located (Eurobarometer Survey)
Nick Bloom, 147, 2011
Central HQ(New York Site)
Example A: Domestic Firm2 Sites, Single Plant
Plant(Phoenix Site)
D, Decentralization
Nick Bloom, 147, 2011
Plant 1(Lund Site)
Global HQ(Tokyo Site)
French CHQ(Paris Site)
Example DJapanese MNE
Sweden CHQ(Stockholm Site)
Plant 2 (Lyon Site)
Do not observe D
Observe D Observe D
Nick Bloom, 147, 2011
Trust (region of location)
0.609 0.563 0.446
(0.592) (0.843) (1.908)
Trust (country of origin) 0.749*** 0.152
(0.301) (0.152)
Trust (bilateral from origin cty to location cty)
1.809***
(0.768)
Full set of controls Yes Yes Yes
Regional dummies No No No
Country origin dummies No No No
Clustering Region Region Origin country
Observations 867 867 280
Decentralization and trust in multinational firms
Nick Bloom, 147, 2011
• What is decentralization?
• Measurement and Stylized facts
• Determinants of decentralization
• Firm Performance and decentralization
Nick Bloom, 147, 2011
Does decentralization matter for performance?
• Short run: generally depends on firms circumstances (e.g. country, industry and technology).
• Long run: to be large you need some decentralization, so key for growth (Penrose 1959 and Chandler 1962)
Nick Bloom, 147, 2011 40
Wrap-up
• Decentralization varies heavily by country and ownership• Northern European and US firms decentralized, and
Southern European and Asian being centralized• Founder, family and government very centralized
• Factors driving this appear to be both economic – competition, technology and skills – but also cultural around trust and institutional (rule-of-law)
• In short-run decentralization is a choice variable depending on circumstances, but necessary for growth in long-run