As long ago as 1947, as part of the Marshall Plan, American businessmen and engineers toured Europe to work out how to improve Europe’s productivity, which had been lagging behind that of the US even before the Second World War. They concluded that ‘efficient management’ was the most significant factor in the ‘American advantage’.

Until now, economists have been held back from examining this theory by an absence of good-quality data. In a major research project undertaken at the Centre for Economic Performance, we have systematically measured management practices in more than 4,000 manufacturing firms across Europe, the US and Asia.

Overall, we find compelling evidence that better management practices are significantly associated with higher productivity, return on capital employed, sales, and growth in market share.

A conservative estimate indicates that differences in management practices account for a significant proportion – 10-30% – of the differences in productivity between firms and between countries.

We used a new survey approach in which researchers interviewed one or two senior plant-level managers at each company. They knew only that they were taking part in a ‘research’ project, but their responses were scored from 1 (worst practice) to 5 (best practice) across 18 of the key management practices in four broad areas:

  • Shopfloor operations: have companies adopted both the letter and the spirit of lean manufacturing?

  • Performance monitoring: how well do companies track what goes on inside their firms?

  • Target-setting: do companies set the right targets, track the right outcomes, and take appropriate action if the two do not tally?

  • Incentive setting: are companies hiring, developing, and keeping the right people (rather than people they could do without) and providing them with incentives to succeed?

    We found significant differences in management performance across countries. The US is at the top; Greece, India and China are the joint worst performers. Germany, Sweden and Japan are strong performers, and France, Italy and the UK are solidly mid-table.

    US firms score particularly well in people management (such as promoting and rewarding talented workers quickly). Sweden, France, Italy, Japan, and Germany do relatively better in shopfloor operations management.

    But overall, performance differences between companies in the same country are far larger than any cross-country variation. There is substantial overlap between countries: the best 35% in China and India perform better than the average European firm.

    The competitive environment and labour market flexibility are the most significant factors affecting management. The more competitors a company reported, the higher its management practice scores, and the more flexible the labour market, the better the people management practices. Both these factors help explain US companies’ overall top position in our survey.

    Firm ownership and the availability of skilled people are also associated with important differences between better-managed firms and the rest. Multinational companies are well-managed around the globe, achieving extremely good management practices in Greece, India and China despite the poor management practices of local firms.

    In contrast, family ownership combined with the traditional practice of ‘primogeniture’ – handing down the CEO position to the eldest son – is associated with particularly bad management practices. This appears to be an important issue for Europe since in the UK, France, Italy, Portugal and Greece, around 10% of manufacturing firms are family-owned with CEOs they claim have been chosen because they are the eldest sons. Only 2% of US firms fall into this category.

    Education is also crucial: 84% of managers in the highest-scoring firms were educated to degree level or higher, as were a quarter of the non-management workforce. Among the lowest-scoring firms, only 54% of managers and 5% of the wider workforce had degrees.

    Closing the gap with the US will, our research suggests, require strong competition and open labour markets, both of these leading directly to improved management performance. Multinational companies have a strong positive effect too.

    Relentless improvement in educational standards is also likely to play a major role. Better-managed firms need more highly skilled workers and they make better use of them.

  • Christos Genakos is a lecturer at Cambridge University and a research associate of the Centre for Economic Performance (CEP) at the London School of Economics, where Raffaella Sadun is a research economist.

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