Management Matters

February 2nd, 2009

Joint with Michelle Alexopoulos

Canadian Productivity Lags the US

0.7

0.72

0.74

0.76

0.78

0.8

0.82

0.84

0.86

0.88

1987

1989

1991

1993

1995

1997

1999

2001

2003

TFP Labour Productivity per Hour

Source: Rao, Tang, and Wang (2008); Industry Canada.

Possible Sources of TFP Differences

– Technology and Human Capital• Science and Engineering Capability• R&D incentives

– Efficiencies• Distortionary policies• Industrial structure• Organizational Capability

Is Intangible Channel Important?

– Go over the Weil (2009) thought experiment:

• TFP = efficiency x technology

• At US TFP growth rate of 0.66%, even being a decade behind the US technology would mean a relative TFP of only 0.94, but we have 0.75 value

• Thus, must be efficiency difference

Could Managerial Skills be Important?

– Differences in formal education of business leaders between Canada and US:

• 50% of Canadian tech. company managers are S&E compared to the 43% in US

• 30% have post-secondary degrees, compared to 50%• Proportion of top-100 Canadian firms with MBAs is 50%

higher in the US

Could Managerial Skills be Important?

Table 1: First University Degrees per 100 24-year-old population (2003)

Country NS&E All Other Country NS&E All Other

Finland 17.3 37.3 Russia (’99) 8.6 17.3

Taiwan 16.4 27.4 Japan 8.2 25.6

Australia 13.6 36.8 Canada 7.6 22.4

UK 12.8 27.4 Germany 6.1 13.2

South Korea (’02)

12.5 18.3 US 5.6 28

France 11.7 31.3 China 2.6 2.4

Italy 8.8 23.7 India (’90) 1.0 3.2Note: NS&E = Natural Science and Engineering; Source: Exhibit 10, Martin and Milway (2007).

Could Managerial Skills be Important?

Finlan

dIce

land

Swed

enJap

an

New Ze

aland

Denmark

Singa

pore

United St

ates

Norway

Chinese Ta

ipei

Canad

aFra

nceKorea

Belgium

OECD To

tal

Austria

Luxembourg

German

y

Russian

Federa

tionEU

15EU

25EU

27Ire

land

United Kingd

om0

2

4

6

8

10

12

14

16

18

Researchers per Thousand Total Employment

Could Managerial Skills be Important?

Tota

l

Bach

elor

's

Mas

ter's

Doct

or's

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1.4000

1.6000

1.8000

Business Degrees Granted per 1000-Population

Managerial Skills Channel

– Production Efficiencies• Work rules• Team structures• Morale

– Coordination Efficiencies• Multi-plant problem• Information transmission

Measurement Issues• Current Research (all case studies)

– Specific management techniques (TQM, Quality Circles, BPR) and specific firm performance (ROA or ROE)

– Possession of certain degrees and firm performance following US telecom. deregulation

• Business and Economics do far better than science and engineering (in sense of "strategic ability")

• Gap in Literature– Aggregate effects potentially quite different

• General equilibrium feedbacks (diminishing returns, factor market connections, industrial structure)

– Need an aggregate measure of "managerial skill"

Bibliometric MeasuresFigure 2: Adjusted Article Counts from BSP Database

0

100

200

300

400

500

600

700

Year

QC &

BPR

Cou

nts

0

200

400

600

800

1000

1200

1400

TQM

Cou

nts

Quality Circles Reengineering TQM

Source: Author’s calculations from Business Source Premier online database.

Bibliometric Measures

• Problem: results sensitive to database choice

Library of Congress MeasureFigure 3: Selected Library of Congress Book Counts

LOC Book Counts

• Library of Congress Catalogue Records for Management-Related Items might be such a measure:– Largest book database– Stardardized LOC Classification System– Profit motive suggests publication dates close to

moments of high interest in a subject (new technique innovation)

Does LOC Do Well?Table 2: Timeline of Selected Management Innovations*

Management Technique Creation Date Mainstream Adoption First BookScientific Management 1911 1910-1912 1911

Human Relations 1913-1924 1923-1924 1913Quality Control 1922-1924 1924 1922

Management by Objectives 1954 1954-1957 1954Project Management 1956-1958 1963 1964

Theory X and Theory Y 1957 1960 1960Managerial Grid 1962 1964 1964

SWOT 1963 1971 1971Experience Curve 1965 1968 1968

Just-In-Time 1972 1980-1982 1985Quality Circles 1974 1982 1980

Five Forces Analysis 1979 1979 1980On-Minute Management 1982 1982 1982

Total Quality Management 1982 1991 1982Business Process Reengineering 1990 1993-1995 1993

*Detailed source information for these dates may be found in Appendix A

The Data

• 1929-2002 LOC Catalogue (manually download/manipulated ….. *sigh*)– Mainly HD, HF, T, and TS classes

• TFP series calculated in standard Solow-residual fashion from BEA and Global Insight databases (split sole-proprietor income proportional to aggregate labour/capital split)

Empirical Specification

• Vector Auto-Regressions:

)ln( tX

4

1i-t ))ln(X(

ii t

32

210 ttt

t

tt Mgmt

TFPX

)ln( tZ

4

1i-t ))ln(Z(

ii t

32

210 ttt

t

tt Mgmt

GDPZ

Regression ResultsVariable Coefficient ( Standard Error)

Ln(TFPt) Ln(GDPt)

Ln(Mgmtt-1)0.0610**(0.0168)

0.0593**(2.1867)

Ln(Mgmtt-2)-0.0264(0.0221)

-0.0137(-0.3961)

Ln(Mgmtt-3)0.0390**(0.0185)

0.0604**(2.1195)

Ln(Mgmtt-4)0.0365**(0.0169)

0.0477(1.8396)

Dep. Var. Lags? Yes YesObservations 70 70

10% increase in new management titles associated with 0.6% increase in TFPPerspective: roughly $80 billion in first year

Impulse responses

RESPONSE OF LNTOTMAN

RESPONSE OF LNTFP1

LNTOTMAN SHOCK

LNTOTMAN SHOCK

LNTFP1 SHOCK

LNTFP1 SHOCK

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.05

0.00

0.05

0.10

0.15

0.20

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.05

0.00

0.05

0.10

0.15

0.20

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.010

-0.005

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.010

-0.005

0.000

0.005

0.010

0.015

0.020

0.025

0.030

Impulse responses

RESPONSE OF LNTOTMAN

RESPONSE OF LNGDP

LNTOTMAN SHOCK

LNTOTMAN SHOCK

LNGDP SHOCK

LNGDP SHOCK

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

0.04

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

0.04

Variance Decompositions

Table 5: Variance Decomposition of GDP

Horizon

(Years)

Forecast Standard

Error

GDP Mgmt

1 0.02651 100.00 0.000

2 0.03699 96.044 3.956

5 0.05075 59.837 40.163

10 0.06137 44.900 55.100

Table 6: Variance Decomposition of TFP

Horizon

(Years)

Forecast Standard

Error

TFP Mgmt

1 0.01731 100.000 0.000

2 0.02583 90.229 9.771

5 0.03701 52.465 47.535

10 0.04361 42.901 57.099

Results Summary

– Endogeneity Problems?• None of the results hold for drama, music, history,

fiction books (or any other category we attempted).– Suggests reverse causation less of a concern?

– Omitted Variables?

– Am I missing something?