What can business schools do to drive up the UK’s productivity?
By Professor Keith W Glaister
The short answer to this question is that business schools should begin to recognise the role of management in determining productivity and hence economic growth, and build a research programme that leads to a better understanding of the relationship between management practice and growth which can then inform teaching and practice.
The contribution of management to productivity, which underpins economic growth, has been largely obscured in theory and ignored in empirical work. In contrast, the place of the entrepreneur in the process of growth is well recognised and widely accepted. It is necessary to rebalance this perspective and to show that in the modern free market economy, management’s role is as least as important as that of the entrepreneur.
In formal growth models there is no explicit role for either entrepreneurs or managers in contributing to economic growth. Despite this there is a long held view that entrepreneurs are important in promoting economic growth, basically from the establishment of new firms and from the introduction of innovations. In contrast, little has been acknowledged regarding the role of management in economic growth.
Small firms, as opposed to large firms, are often regarded as driving innovation, usually because the small-firm population contains new entrants. However, as reported by the UK’s Department of Business Innovation and Skills (BIS, 2011, p. 97), very few SMEs undertake R&D activities. SMEs perform less innovation than large firms across a range of dimensions covering product innovation, process innovation, non-technological innovation, new-to-market product innovations and collaboration in innovative activities. It is clear from recent work that doubt exists on the ability of entrepreneurs to deliver growth more effectively than established firms (Shane, 2009; Haltiwanger et al. 1999; van Praag and Versloot, 2007), irrespective of whether entrepreneurs establish new firms or whether they engage in innovation. This signals the need for a modern understanding of the role of management in established firms in promoting economic growth.
While the function of the entrepreneur and the role of entrepreneurs in economic growth have been relatively well delineated, the same is not the case for managers. However, it appears that what has been claimed for the entrepreneur in terms of generating economic growth can also be said for the function of management. It is not enough to say that growth is a function of capital, labour and technology. There must be some element or factor which combines these in the right proportions, sets the task, and sees to its accomplishment.
Management ‘connotes a constellation of functions including specifically the management of risk and uncertainty, planning and innovation, co-ordination, administration and control, and routine supervision of the enterprise; it connotes also the integrated hierarchy of the persons who are primarily concerned with exercise of these functions - the managerial resources’ Harbison (1956, p. 378). Management is therefore a broader concept than entrepreneurship, however, it subsumes aspects of the entrepreneurial function, in particular the assumption of risk and uncertainty.
Economic growth can result from either the increased efficiency or increased effectiveness of management, or both. Over time economic growth has outstripped the rate of increase of factor inputs which indicates there has been improved efficiency of operations. It is likely that there is room for improvement in efficiency even in the best-run companies. However, this requires deliberate action on the part of management. More output can be obtained from given plant, equipment and labour in the short run as a consequence of increased managerial effort.
The role of routine, bureaucratised management of innovation is core to Baumol’s (2004) model of the driver of economic growth in the capitalist economy. For Baumol, it seems indisputable that innovation accounts for much of the capitalists system’s enviable growth record and he argues that in the modern economy pricing is not the primary competitive issue for management, rather the focus is on the redesign of current products, the development of new products, and the adoption of more productive production processes (Baumol, 2004: 153). Consequently, it is innovation, not price setting, to which management gives priority in important sectors of the economy and that competitive pressures have transformed a major portion of innovation activity from an entrepreneurial to a managerial affair.
It should be recognised that innovation occurs in all sectors of the economy (see Dodgson and Gann, 2010, p. 15). Moreover, most innovations are incremental improvements - ideas used in new models of existing products and services, or adjustments to organisational processes and as such is a normal part of management in many different kinds of sector. Indeed, the historical record indicates that much of an economy’s productivity growth is attributable not only to dramatic breakthroughs, but perhaps even more to the accumulation of small improvements and minor technical modifications of preexisting products and processes (Rosenberg, 1982, p. 62-70; Mokyr, 1989, p. 28; McCloskey, 1989, p. 66; Blaug, 1999, p. 110). This sort of improvement is most typically provided by corporate R&D activities. This means that an economy’s routine R&D investment, instigated and controlled by the managers of firms, contributes materially to economic growth.
A necessary prerequisite for management to make a contribution to economic growth is that management makes a difference to the productivity performance of firms. In others words management must matter. Management, however, is not homogeneous and some firms will be managed in a way that has a more beneficial impact on growth than are others. This also implies that management is capable of improving and raising its performance level to the benefit of economic growth, which in turn raises questions about how this may be achieved.
Empirical studies show that there are very large differences in productivity across both firms and countries (Foster et al., 2008; Hsieh and Klenow (2009). An obvious explanation for these productivity differences lies in variations in management practices. Although there is a paucity of empirical evidence specifically bearing on this matter, some early studies of firm productivity included management in their set of explanatory factors (e.g., Lieberman et al., 1990). More recently research has identified the importance of management. For instance, Nallari and Bayraktar (2010) with data from 45 developing countries found that productivity at the micro level is driven by research and development, the capacity utilisation rate, and adoption of foreign technology, all of which involve management decisions, although management is an unmeasured input. More concretely, Bloom et al. (2012), report a regression of gross domestic product (GDP) per capita on management practices across 17 countries that yields an R-squared of 0.81.
Differences in the quality of management and the adoption of different management practices helps explain differences in output among firms. In turn improvements in the quality of management and management practices may explain why growth proceeds faster than is accounted for by factor inputs (Kindleberger, 1965, p. 132). The fact that efficiency levels vary between firms implies that the discovery and dissemination of new and best management practices are important. For instance, Bloom et al. (2013) conclude that their results suggest that firms were not implementing best practices on their own because of lack of information and knowledge, suggesting that training programs for basic operations management and demonstration projects could be helpful. Birkinshaw et al. (2008), stress the importance of new management practices intended to further organisational goals, i.e. the innovation of management in order to further firm success. This discussion also highlights the role business schools can perform in identifying and disseminating best management practice, in order to improve the efficiency and effectiveness of managers as a way of promoting economic growth (Thorpe and Rawlinson, 2013).
In summary, the perspective of the relative contribution to economic growth has been skewed towards the entrepreneur, to the relative neglect of the contribution from managers. While it is recognised that the entrepreneur has made a major contribution to capitalist growth, in the modern economy there are limits to the delivery of economic growth through the establishment of new firms or radical innovation from sole entrepreneurs. Rather, management makes a significant contribution to economic growth, both in terms of ensuring the efficient use of factor inputs and being effective in driving innovation. While it is useful to distinguish between the functions of the entrepreneur and that of the manager, it should be recognised that the two are aligned, and what traditionally has been presumed to be the focus of the entrepreneur in the modern economy should also be seen as the role of the manager. Although management is a broader concept than entrepreneurship, it may be argued that much of what has been termed ‘entrepreneurship’ can in fact be viewed as normal management activity.
There is a dearth of research on the management skills and practices necessary to promote innovation and to provide more output from given inputs, and thereby economic growth. Further research is required which involves asking questions about factor use not just about factor accumulation. Where management practice provides a dynamic force producing economic growth, it is necessary to examine this driving force at the level of the firm. This involves amassing data at the firm level and extracting the maximum amount of insight. It should be clear that a more careful examination of the role of management has the potential to make a real contribution to our understanding of the determinants of growth and particularly developing best management practice as a normal part of management activity. Rather than simply emphasising the importance of the small business sector as the cradle of growth and locating the source of innovation only in the heroism of the entrepreneur, a better focus would be to recognise the routine role of managers in generating economic growth. There is a fundamental role for business schools to engage in a research programme that produces a better understanding of the relationship between management practice, productivity and growth. By identifying good management practice business schools can use the output of this research to inform teaching and disseminate best practice. In this way the general level of productivity level will improve, with beneficial effects on economic growth.
Professor Keith W Glaister
Professor of International Business, Warwick Business School
These issues are discussed at greater length in:
Glaister, K.W. (2014) The contribution of management to economic growth: a review, Prometheus: Critical Studies in Innovation, Vol. 32, Issue 3, pps. 227-244.
Baumol, W.J. (2004) The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism, Princeton University Press, Princeton, NJ.
Birkinshaw, J., Hamel, G. and Mol, M.J. (2008) ‘Management innovation’, Academy of Management Review, 33(4), pp. 825-845.
BIS (2011) Innovation and Research Strategy for Growth. Department of Business Innovation and Skills. BIS Economics Paper No 15.
Blaug, M. (1999) ‘The concept of entrepreneurship in the history of economics’ in Blaug, M., Not Only an Economist: Recent Essays, Edward Elgar, Cheltenham.
Bloom, N., Genakos, C., Sadun, R. and Van Reenen, J. (2012) ‘Management practices across firms and countries’, Academy of Management Perspectives, 26(1), pp. 12-33.
Bloom, N., Eifert, B., Mahajan, A., McKenzie, D. and Roberts, J. (2013) ‘Does management matter? Evidence from India’, The Quarterly Journal of Economics, 128(1), pp.1-51.
Dodgson, M. and Gann, D. (2010) Innovation A Very Short Introduction, Oxford University Press, Oxford.
Foster, L., Haltiwanger, J. and Syverson, C. (2008) ‘Reallocation, firm turnover, and efficiency: selection on productivity or profitability?’ American Economic Review, 98(1), pp. 394–425.
Haltiwanger, J., Lane, J., and Speltzer, J. (1999) ‘Productivity differences across employers: The roles of employer size, age, and human capital’, American Economic Review, 89(2), pp. 94-98.
Harbison, F. (1956) ‘Entrepreneurial organization as a factor in economic development’, Quarterly Journal of Economics, 70(3) pp. 364-379.
Hsieh, C-T. and Klenow, P. (2009) ‘Misallocation and manufacturing TFP in China and India’, Quarterly Journal of Economics, 124(4), pp. 1403–1448.
Kindleberger, C.P. (1965) Economic Development, McGraw-Hill, New York.
Lieberman, M.B., Lau, L. J. and Williams, M. D. (1990) ‘Firm-level productivity and management influence: a comparison of U.S. and Japanese automobile producers’, Management Science, 36 (10), pp. 1193-1215.
McCloskey, D (1989) ‘The Industrial Revolution 1780-1860: A Survey’ in Mokyr, J. (ed), The Economics of the Industrial Revolution, Rowman and Littlefield, Lanham, MD, pp. 53-74.
Mokyr, J. (1989) ‘The Industrial Revolution and the New Economic History’ in Mokyr, J. (ed), The Economics of the Industrial Revolution, Rowman and Littlefield, Lanham, MD, pp. 1-51.
Nallari, R. and Bayraktar, N. (2010) ‘Micro efficiency and macro growth’, World Bank, Policy Research Working Paper 5267.
Rosenberg, N. (1982) Inside the Black Box: Technology and Economics, Cambridge University Press, Cambridge.
Shane, S. (2009) ‘Why encouraging more people to become entrepreneurs is bad public policy’, Small Business Economics, 33(2), pp.141-149.
Thorpe, R. and Rawlinson, R. (2013) The Role of UK Business Schools in Driving Innovations and Growth in the Domestic Economy, Chartered Association of Business Schools.
Van Praag, C.M. and Versloot, P. H. (2007) ‘What is the value of entrepreneurship? A review of recent research’, Small Business Economics, 29(4), pp. 351-382.