Does management matter? Evidence from India

Abstract

A long standing question in social science is whether management matters. Certainly management differs across firms, as does performance. However, perhaps every firm chooses its management practices optimally, so that differences across firms simply reflect differences in their environments. To investigate this we run a field experiment on large Indian textile firms to evaluate the causal impact of modernizing their management practices. We do this by providing free management consulting to a set of randomly chosen treatment plants, and compare their performance to a set of control plants. We find that improved management practices led to significantly higher efficiency and quality, and lower inventory levels. These changes increased the average plant’s productivity by about 15 % and profitability by about $0.5m (24%) per year. Firms also transferred these improved management practices from their treated plants to other plants within their group. Since firms adopted these profitable management practices this raises the question of why they had not done so before. Our results suggest that informational barriers were initially important in explaining this lack of adoption. Modern management practices are a type of technology that diffuses slowly between firms. In the longer run, constraints around CEO ability and behavior are also important.