Quality of management in the Netherlands

This paper appeared earlier in Dutch in ESB (only for subscribers), October, 2018.[1]

Co-authors:
Harry Garretsen - Professor at Rijksuniversiteit Groningen (RUG)
Lotte de Haan – PhD-student at RUG
Janka I. Stoker – Professor at RUG

[1] This paper appeared earlier in Dutch as “Dieteren, J., Groenewegen, J.,Hardeman, S., Garretsen, H., de Haan, L., & Stoker, J. (2018). Managementkwaliteit in Nederland gemeten. Economisch Statistische Berichten, 103 (4765): 414-417.

For a very long time economists have considered management as an important potential driver of productivity differences between countries and firms. Already in 1887, Francis Walker, then-President of the American Economic Association (AEA), remarked that “..in works controlled by men who have a high power of administration and a marked degree of execution (..) there is much less nervous and muscular wear and tear than in works under inferior management” (Walker, 1887, p. 275). It is therefore remarkable that until recently economists paid scant systematic attention to the role of management. According to Chad Syverson “no potential driver of productivity differences has seen a higher ratio of speculation to actual empirical study” (Syverson, 2011, p. 336).

Over the past decades, this has changed. Initially for firms within narrowly defined industries, within a single country (Ichniowski et al., 1997). Later for firms within broadly defined industries across countries (Bloom and Van Reenen, 2007), and even across industries (Bloom et al., 2014). Save for a very specific semi-public industry in the Netherlands (Atlas voor Gemeenten, 2017), however, very little is known about the role of management practices in Dutch firms. This study fills this void by, in line with Bloom and Van Reenen’s methodology (2007), collecting data on management practices through double blind interviews with managers from randomly selected Dutch manufacturing firms, comparing the results internationally and relating the results to the financial performance of firms.

Since Solow (1957), it is clear that after accounting for capital and labour a large residual remains when explaining economic growth. This residual is commonly equated with technological change, which is understood to include factors such as human capital, investments in research and development, as well as innovation; see Aghion and Howitt (2008) for an overview.

These factors can only partially explain productivity differences. Aside from physical technologies – embedded in people, machines and products – social technologies can also explain productivity (Nelson and Sampat, 2001). Management is one of these social technologies.

It is often said about management practices that it is unclear ex ante what good and bad management practices entail, but since the work of Bloom, Sadun and Van Reenen (Bloom and Van Reenen, 2007; Bloom et al., 2014) this view has changed. They define management practices along four dimensions. The first dimension captures firm operations. The lean way of working serves as a best practice (Womack et al., 1991). Are processes within the firm conducted efficiently and with as little waste as possible? The second dimension is about targets: are long-term targets set and are they linked to ambitious but achievable short-term targets, or are they mainly focused on the short-term and unrealistic? The third dimension revolves around monitoring and about whether firms systematically collect and analyze performance data and use those data for continuous improvement. Finally, the fourth dimension is about people management. Note that Bloom and Van Reenen’s methodology is aimed at measuring management practices. They do not look at individual managers.

It seems obvious that management matters. First, studies by Bloom and Van Reenen (2010b) and Bloom et al. (2014) show that at the country level the quality of management practices correlate strongly with gross domestic product (GDP) per capita. This finding dovetails with the positive effect of the diffusion of new management practices on GDP that Alexopoulos and Tombe (2012) find for Canada. At the micro level, Bloom and Van Reenen (2007) and Bloom et al. (2016) also find a positive relationship between management practices and firm performance. This link holds not only for manufacturing firms, but also for retail firms, hospitals and schools (see Bloom et al. (2014) for an overview). What’s more, these correlations do not only hold for US firms, but also for firms in other countries (Bloom and Van Reenen, 2010b; Bloom et al., 2014). The question then arises: what is the quality of management practices in the Netherlands?

In order to measure the quality of management in the Netherlands, we – Rabobank and Rijksuniversiteit Groningen – have cooperated with the project team behind the World Management Survey. Just like Nicholas Bloom, Raffaella Sadun, John van Reenen and others, we have conducted double blind telephone interviews among a randomly selected sample of Dutch manufacturing firms with between 50 and 5,000 employees. Using open-ended questions, these firms have been ranked on a scale of 1 to 5 for 18 management practices that go with the four previously mentioned dimensions. We have taken an unweighted average of these 18 separate scores to arrive at scores for the separate dimensions and at the total management score. For an in-depth look at the methodology, see Bloom and Van Reenen (2007; 2010a).

Figure 1 shows how the Netherlands performs relative to other countries in terms of management practices. For every country where the World Management Survey has been conducted, the average score for the manufacturing sector has been determined. The Netherlands ranks sixth, with a score of 3.04 on a scale of 1 to 5. The Netherlands performs better in terms of management practices than Great Britain, Australia and France, but worse than Canada, Japan, Sweden, Germany, and the United States. The quality of Dutch management practices is reasonable, but there is sufficient room for improvement.

Looking at the underlying dimensions, Dutch firms do especially well when it comes to operations, or lean management practices: they even lead the international ranking there (table 1). Dutch firms perform less well on monitoring (7^th), targets (9^th) and people management (8^th). Especially on the last two dimensions the gap between the Netherlands and the respective leaders Sweden, Japan and the United States is substantial.

Especially in the areas of targets and people management Dutch firms have much to gain. The dimension targets is about maintaining a balance between financial and non-financial targets, having the interests of different stakeholders expressed in the targets and having sufficiently ambitious targets that are not too strenuous and that are supported by all layers of the organization. People management is about attracting, retaining and developing talent in the organization.

There are also large differences between Dutch firms (figure 2). Scores within one standard deviation from the mean fall between 2.50 and 3.58. In comparison, 2.50 is the average score for manufacturing firms in India, and no country in the World Management Survey comes even close to an average score of 3.58. When it comes to the distribution of firm productivity in the Netherlands, there is a thin upper tail followed by a long lower tail (Groenewegen, 2017, NCOF, 2017). For management practices, we can distinguish between three groups: a substantial group of laggards with below-average management practices, a large pack of firms with average management practices and small group of leading firms with above-average management practices.

Quality of management practices correlates strongly with firm performance. Table 2 shows the results of a regression of management quality on firm performance indicators. Firm-level data are obtained from the Amadeus database maintained by Bureau van Dijk. Revenue per employee and quality of management practices correlate positively, both when no controls are included (model 1) and when we control for capital intensity and several other controls (model 2). Quality of management also correlates with profit per employee, both with (model 3) and without controls (model 4).

The fact that management matters becomes even clearer when we consider the size of the coefficients: improving the quality of management practices with one point on the five-point scale that we use would result in an increase in revenue and profit per employee of respectively 27 and 42 log points (model 2 and 4). This implies that increasing the quality of management practices of the average Dutch manufacturing firm to the level of the average Swedish or German manufacturing firm is accompanied by four percent higher revenue per employee and seven percent higher profit per employee.

We cannot conclude anything about causality from these results. Yet experimental studies in developing countries do provide evidence that better management leads to greater firm performance (Bloom et al., 2013). Whether this is also the case in the Netherlands, is unknown. It would therefore be a good idea to also conduct management experiments in the Netherlands. These could take the shape of policy experiments that have been proposed in the Netherlands in the area of innovation (Roelandt and Van der Wiel, 2017), or they could be similar to recent experiments about the effect management advice and management advice networks on firm performance (Chatterji et al., 2018).

So far management practices were not in the spotlight in the Netherlands when policymakers discussed drivers of firm productivity. In the government SME action plan (Ministerie van Economische Zaken & Klimaat, 2018), which forms the basis for many government policies aimed at helping firms become more productive, attention is heaped on human capital, digitalization and innovation, but no mention is made of management practices.

Within firms management practices also appear to be undervalued: almost every manager that we interviewed views the quality of management practices within his or her firm as above average (figure 3). The distribution of self-scores shows much less variance than objective scores (figure 2). The two are only weakly correlated. Apparently, many firms have difficulty accurately judging the quality of their own management practices.

It is important to raise more awareness about the quality of management practices and its importance for raising productivity. The Netherlands does well internationally in terms of management quality, but can do better. Through government policy and firm action management can become more of a priority when it comes to boosting productivity. First by putting the role of management practices firmly on the productivity agenda and second by supporting (policy-) experiments in this area.

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