Managers often get a bad rap, viewed as unnecessary layers of bureaucracy that gum up creativity and innovation. Numerous studies have highlighted their importance, however, and the latest of these comes from Yale research into the effect of professional management (or lack thereof) on the prospects of Indian firms.
“There’s been growing evidence that managerial services might be the key missing input for many firms in poor countries,” the researchers say. “Our analysis confirms that the absence of managerial delegation is a significant factor in why successful Indian businesses fail to grow, which reduces the overall productivity of the country’s economy.”
Supporting growth
The researchers explain that in developed countries, family-owned firms, including Ford and Walmart, managed to grow in part because they delegated crucial operations to outside managers. This practice doesn’t happen as often in developing countries, with family firms preferring to keep managerial tasks within the family.
The researchers developed a quantitative model to explore the differences in growth between firms in developed and developing countries. The model utilized plant-level data from both the US and India, with the model aiming to take account of various barriers that may restrict growth in India, such as less access to startup capital.
In India, the researchers found that over 90% of manufacturing businesses have less than four employees, with these firms making up over half of all employment. In the US, however, two-thirds of manufacturing employment is concentrated in larger firms with at least 100 employees. Indeed, only one in three firms have less than four employees.
Lack of selection
In India, the researchers found that the economy suffers from the creative destruction that sees successful firms swallow up their less successful peers. Instead, unproductive firms survive, due in part to the fact that successful firms don’t expand. The researchers believe this is largely because of the low productivity of outside managers in the country.
They argue that if Indian businesses used outside managers as effectively and efficiently as their American counterparts, it would provide a boost to the Indian economy of around 11%.
The researchers suggest there is a strong link between the quality of outside managers and various factors that affect the growth of the firm, including access to capital. If Indian firms had American standards of management, the average firm would grow by 3%, they explain. By contrast, if American firms were managed as poorly as their Indian peers, their size would shrink by 15%.
“The complementarity between the efficiency of delegating managerial tasks and other aspects affecting firm growth, such as access to credit, is one of our key results,” the researchers conclude. “For improvements to managerial quality to have a large effect, other factors hindering growth must be addressed. If you repair a punctured tire, you still can’t drive if your other tires are flat.”
