Management and Firm Dynamism

Bloom, Nicholas; Hartley, Jonathan S.; Sadun, Raffaella; Schuh, Rachel; Van Reenen, John

doi:10.59576/sr.1157

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Management and Firm Dynamism

Abstract: We show better-managed firms are more dynamic in plant acquisitions, disposals, openings, and closings in U.S. Census and international data. Better-managed firms also birth better-managed plants and improve the performance of the plants they acquire. To explain these findings, we build a model with two key elements. First, management is a combination of firm-level management ability (e.g. CEO quality), which can be transferred to all plants, and plant-level management practices, which can be changed through intangible investment (e.g. consulting or training). Second, management both raises productivity and also reduces the operational costs of dynamism: buying, selling, opening, and closing plants. We structurally estimate the model on Census microdata, fitting our key dynamic moments, and then use it to establish three additional results. First, mergers and acquisitions raise economy-wide management and productivity by reallocating plants to firms with higher management ability. Banning M&A would depress GDP and management by about 15 percent. Second, greater product market competition improves both management and productivity by reallocating away from badly managed plants. Finally, management practices account for about a fifth of the cross-country productivity differences with the U.S.

JEL Classification: L2; M2; O32; O33;

https://doi.org/10.59576/sr.1157