[Cause Exploration Prizes] Business Management Capacity

This essay was submitted to Open Philanthropy's Cause Exploration Prizes contest.

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Good business management => higher productivity => economic development. What enables countries to develop a strong management class?

Summary

Is the lack of sufficient management capacity in low and middle income economies reflective of human development indicators (education, health, nutrition, etc.) or are there other factors? And how most effectively to develop this capability within a country.

It’s well acknowledged that the limited pool of competent and effective managers is a limiting factor for economic development. While there are a number of talented managers and business leaders across the developing world, the current capacities are inadequate to meet the scale of the need/opportunity. Chris Blattman, who did research on industrial development in Ethiopia^[1] indicates that one of the biggest issues faced by firms in developing countries was finding adequate management to operate their firms.^[2]

Outside of having the appropriate education and training opportunities to develop management skills, other challenges to the emergence of better managers include imperfectly competitive markets, family ownership of firms, regulations restricting management practices, and informational barriers that allow bad management practices to continue.

Many people who run SMEs in developing countries cite experiences of management theft also being an issue for pushing responsibility (especially financial) to management layers. This is often a case of weak rule of law in these countries which doesn’t penalize such behaviors on top of outsized payoffs for stealing by the employees.

Most focus on developing management talent has been on training and capacity strengthening for basic business skills. These are important but also expensive, difficult to deliver at a high quality and often ill suited to the context.

More research is needed to identify other systemic factors (informational, social, legal and technological/infrastructure), including accountability mechanisms and labor laws, that enable a motivated and rewarded management class to emerge and create more opportunities for everyone.

The Opportunity:

Differences in productivity across firms and countries are enormous. Even within the US, firms in the 90th percentile produce 4x the amount of product as those in the bottom 10th percentile on an employee basis. A study showed that only half of this can be accounted for with inputs/capital intensity. Much of the other 50% gap is determined by management practices.^[3]

Management theorists describe management as an institution that makes resources productive and leads to economic advances. It’s not only executive level management. A Gallup World Poll suggests that middle managers are key to company successes and are one of the single most important factors in driving productivity.^[4]”

Many policy makers and business leaders believe that a lack of management talent is the reason for low productivity, leading to lower rates of economic development.

It could be said that much of the “Asian development miracle” over the past 50 years wouldn’t have been possible without the management capacity within the country for large industries to thrive.

So how are companies dealing with this? Many end up bringing on expatriate staff for line management and middle management roles. A good example of this can be seen in Tanzania (where one of the authors lives and operates companies). There, the majority of companies with over 500 employees are family-run businesses owned by families of Indian descent. Often the majority (if not all) of their management positions are filled by Indian expatriate staff, which are (on the surface) more expensive due to visas, accommodation, etc and generally more difficult to find than local staff.

The lack of large firms is one of the reasons why industrialisation and overall growth is not achieving what could be possible in low income countries.

Individual focus vs systems focus

Most of the work to date has been focused on training and capacity strengthening for basic business skills. This is important. However, it's also expensive, difficult to deliver at a high quality and often ill suited to the context. Innovations here would be critical but not sufficient.

We wonder if there aren’t other structural factors that prevent companies from making the most of the management talent that does exist, and either disincentivizes or could be used to incentivize the emergence of a greater pool of talent.

These factors could be social, legal, information and technological. They may include better accountability mechanisms and tweaks to labor laws. This last one is politically difficult but key. The World bank found that labor market regulations that constrain the ability of businesses to hire, fire, pay and promote employees could reduce the quality of management practices.

The goal wouldn’t be to completely overhaul labor laws - but to find those key leverage points that would allow management talent to increase substantially.

However, there is a huge data problem.

Even in the academic economics literature, it’s difficult to find usable data.

Total factor productivity (TFP) data, a key measure in how effectively labor and capital are used, is one starting place. A World Bank report^[5] looked at firm-level data in 80 low and middle income countries and found that Moldova, Nicaragua, Ethiopia and Indonesia have the highest values among the countries surveyed, though this varies by sector. For example, Brazil has the highest average productivity among all the countries surveyed in garments and chemical industries. However, there is much to learn about why and how.

This is worth exploration. Can the differences in TFP be explained through differences in management practices across firms/countries? Can research into this help us understand where the misallocation of resources lies across countries?

Who is already working on it?

Management innovation is a new area with limited research in how companies in developing countries are innovating in the core management practices to plan, organize and lead. Nonprofits such as African Managers Initiative, which focus on creating new models for training, and providing learning and coaching platforms. Educational institutions like Stellenbosch Business School are working on these areas but is limited. Management studies are often based on case studies and good data is hard to come by.

Looking at structural enablers - Orgs such as the World Economic Forum and International Institute for Management Development (IMD) have developed and shared indices that help in evaluating and comparing levels of advancement and capabilities among countries - however they tend to focus on upper-middle income and upper income countries, with India, China and Brazil sometimes included.

What could a new philanthropist do?

1. A new philanthropist could invest in answering these questions:
   1. How do the management skills and practices in Africa compare to China and India? (where the most research has been done to date). Or to competitor countries in South-East Asia, etc?
   2. Outside of education and training, what are the other factors key to enabling good management practices? (Infrastructure, labor laws, information, accountability…)
2. In answering these questions, a new philanthropist could collect and publish data available for others to use.
3. A new philanthropist could action these theories, by lobbying governments to enact change
4. A new philanthropist could work to fund and lobby to redirect current educational development funding towards more effective educational programs which are focused on increasing management capacity within a country.

Back of the napkin benefit calculation

The potential benefit is immense where increasing management capacity would act to increase overall GDP growth rates of the least developed countries and move economies towards industrialisation.

The example of Bangladesh garment manufacturing comes to mind, where 130 managers were trained in South Korea through the 1974 Multi Fibre Agreement^[6], and then subsequently moved to different firms and brought their managerial expertise along with them to allow the sector to flourish pushed along by good industrial policies. The textile industry increasing from 3.5M USD in 1981 to 28.14B USD in 2016. In part, because of this the country has flourished relative to Pakistan (see Table 1 below).

Table 1: Per Capita GDP and growth rates of Bangladesh and Pakistan 1990-2020^[7]

If 10% of this additional growth can be attributed to a better management environment which facilitates industrialisation (which we think is probably a very conservative estimate) then the benefits associated with this could be said to be 0.25% additional growth per year. If applied to many of the least developed countries this would dramatically reduce the time in which extreme poverty afflicts them and all the associated benefits that would accrue to the world, (many more capable researchers to look into longtermism problems, less political instability to reduce the chances of existential terrorist attacks, better health and safety regulations to reduce the chances of global pandemics).

Though it is hard to estimate the cost of these forms of interventions on a country by country basis, the cost to Bangladesh and the private-public partnerships which started their push towards garment manufacturing was tiny (in the millions of dollars) with the benefits to GDP over a long time period in the hundreds of billions if not trillions of dollars. (i.e. a 100,000x to 10,000,000x leverage factor).

1. ^{^}

   "Impacts of Industrial and Entrepreneurial Jobs on Youth: 5-year Experimental Evidence on Factory Job Offers and Cash Grants in Ethiopia", Christopher Blattman, Stefan Dercon & Simon Franklin, 2019

2. ^{^}

   Econtalk “Chris Blattman on Sweatshops” https://www.econtalk.org/chris-blattman-on-sweatshops/#audio-highlights

3. ^{^}

   Why do management practices differ across firms and countries? Nicolas Bloom and JOhn Reenen. 2010

^{^}

Gallup State of the Global Workforce 2022

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World Bank Total Factor Productivity https://documents1.worldbank.org/curated/en/646931468157519398/pdf/682730BRI0ESN00LIC00Productivity023.pdf 

^{^}

1974 the Multi Fibre Arrangement (MFA) and the Daewoo of South Korea https://en.wikipedia.org/wiki/Textile_industry_in_Bangladesh#1974_the_Multi_Fibre_Arrangement_(MFA)_and_the_Daewoo_of_South_Korea

^{^}

World Bank

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