Documentos de Trabajo 12

Productivity: The Management Enhancement Strategy for Chile

Andrea Tokman R.

Productivity: The Management Enhancement Strategy for Chile Andrea Tokman R. September 2010

Introduction
The nineties were called the Golden Decade of growth, because of its historically good economic performance. Growth rates between 1992 and 1997 averaged an annual 7.9% and GDP per capita doubled, leading us to believe that the road to development was well paved for the Chilean economy. Estimating the year of arrival to the developed world became the new national hobby. Unfortunately, events in the last decade produced an important change in mood. Growth between 1998 and 2009 plummet to 3.3 and GDP per capital grew only 26%. The promised development stage moved farther away in time. The greatest disappointment comes from the driving factors of growth. While in the nineties both transpiration (factor utilization) and inspiration (increased factor productivity) were pulling the economy, during the 2000`s total factor productivity growth dropped substantially (Graph 1). Even though factor utilization was in fact increasing, the efficiency in their use remained at the levels of the early nineties. Without efficiency gains, the high sustainable growth rates required for the transition towards development are unattainable. Graph 1. Growth contributing factors 1992-2008
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-2 1992-1997 1998-2003 Total Factor Productivity Capital Labor 2004-2008

Source: Chile Economic Survey 2010, OECD. But, why isnt efficiency improving if we were so successful in doing so in the nineties? Most probably, it has to do with changing stages of institutional maturity of the Chilean economy. We have reaped all the returns of the structural reforms of the seventies and eighties. The efficient resource relocation between more and less productive industries has concluded. The macroeconomic stability obtained is important, but in no case sufficient to keep productivity improving. Now, the next reforms are more specific to within firm operations and management efficiency and not just reassignment between them. This involves a whole new set of reforms and requires understanding the limiting factors to further obtain efficiency gains and the policy actions to be taken to alleviate such barriers. That is what motivates this paper. The study of the internal firm practices and how they correlate with productivity can guide the design of the new set of reforms necessary to give productivity a second boost. The main findings are that firm improvements will involve enhancing management practices, incorporating new technologies to production processes and increasing labor competencies of floor 2

workers and managers. Policies that promote entrepreneurial innovation and a culture that values continuous improvement and technological upgrades will be crucial to reversing the stagnation of productivity within firms. Intensifying product market competition, internationalization of domestic firms and attracting more foreign direct investment are also important policies to foster increased efficiency. Finally, association between firms, cluster formation, training and socialization of best practices, are a must for the desired spill over to the rest of the economy.

Micro Institucional Framework

The aggregation of plants with widely varying performance constitutes the basis for economy-wide competitiveness advantages that are not fully accounted for by inputs and technology differentials. One often neglected factor is management itself. Its inherently private nature, together with the difficulties in measurement, leads policy makers to disregard it. However, important publicly modifiable contexts influence what goes on inside the plants and, through them, what happens to the economys aggregate outcomes. Economic theory has considered the firm as a black box, within which productive agents act rationally to maximize profits and react optimally to changes in conditions. Under such framework, there is no need to understand how firms operate. However, the evidently diverse reaction of firms to equivalent stimuli has motivated the development of the modern microeconomic theory of the firm and the impressive growth of the management and business administration field. Acknowledging that firms react differently does not imply that they are not acting rationally. It just calls for the need to consider elements that go further than changing observable market conditions, some of which lie within the firms organizational structure. Such elements are crucial determinants of the way firms act and react, and therefore important determinants of its outcome and performance. One of the main proponents of the micro-institutional theory with rational agents is O. Williamson (1985). His studies on the firms institutional setting, such as within firm markets, have been fundamental to the development of this increasingly important branch of economic theory. A similar approach, but with a systemic view, is led by D. North (1990) in the study of institutional changes as determinants of economic development of countries. Management and Business field studies have also contributed to the development of the theory with case studies of administration strategies followed by specific productive agents of varying sizes in different economic settings.

Measuring Management Practices

A severe limitation to further development of the micro institutional field comes from the lack of empirical studies based on universally comparable data. The complexity of designing measures that can grasp differences that significantly affect plant performance has been the main stumbling block. Most of the work done up to date on the plants internal organization and way of operation lies on specific case studies with varying degrees of deepness and scope, but inevitably not wide enough to consistently depict the true state of management in an economy as a whole. The methodology developed by Professors Bloom and Van Reenen from London School of Economics, has greatly contributed to advance in the understanding and testing of theoretical 3

hypothesis linking internal organization and outcomes. The application of the methodology in Chile 1 constitutes an additional step to the development of the field as a whole and an important opportunity for the country to measure up against other countries to draw on causes and consequences of the current state of its management competence. The international study of management practices in more than 6000 plants in 17 countries has illuminated critical elements inside the plants black box that significantly induce productivity and profitability growth and survival differences between plants. These elements have also been proven to have a substantial correlation with the internal and external contexts under which the business takes place. Market competition, labor regulation, and inheritance laws, are some of the critical external factors identified that have given a new air to the productivity enhancing agenda.

1.1.

The instrument used to measure management practices is based on an open ended script that guides a telephone interview with the plant manager. A highly trained analyst, with education background on business, conducts a conversation around four main management areas and assigns grades from 1 to 5 to 18 specific subjects. The four main areas evaluated are Operations, Monitoring, Targets and Incentives (Box 1).

The Survey Instrument and data gathering process

Closed questions on organization structure, ownership, size, human capital and others are collected to control for plant type. The analyst also reports important interview quality information such as duration of the interview and knowledge and disposition of the manager (Box 2).

The application of the instrument in Chile was done by the Instituto de Polticas Pblicas at the Universidad Diego

Portales and Expansiva, with funding from the Economics Ministry, the Economics and Business School at Universidad Diego Portales and the World Bank. McKinsey & Co and Sofofa contributed through technical assistance and training.

The plants interviewed during the second semester of 2009 were drawn from the National Institute of Statistics Plant Directory for 2006. The universe of plants was randomly distributed between 5 highly trained analysts 2 (box 3). The process involves several calls to identify who the manager is and emailing additional information to prove the legitimacy of the study. One third of the contacted plants 3 rejected being interviewed, while two third accepted (graph 3.1). The endorsement by the government (Ministry of Economics) and the manufacturers association (SOFOFA) was crucial in obtaining this high response rate. Equally important was the intense training process 4 that introduced the analysts to the most effective ways of contacting the right managers and convincing them to accept being part of the study and remain in the conversation until all points were covered. Training was also fundamental to the alignment of scoring criteria within Chilean analysts and between them and the international analysts. All very important for reducing biases that may arise from the application of the survey instrument.

Analysts try to book as many telephone interviews as possible since they are paid on a per-completed interview basis.

The target sample size was achieved without covering the complete directory of plants, leaving 30% of it untouched. Also 13% of the plants in the directory were discarded as not useful for the study (out of business, not manufacturing and wrong contact information, were the main reasons).

The training was conducted by Daniela Scur who was the project director in the Canadian retail and manufacturing waves of the study. She spent three weeks in Santiago training and supervising the project. We also had training from McKinsey and Co. on lean manufacturing and the domestic industry.

Graph 3.1 Response rates (percentage of complete plant directory)

1.2.

Some of the biases that training tried to minimize come from plants or managers not randomly chosen due to arbitrary selection, either by the analyst or self selection by the manager itself. For example, managers more prone to answering the interview are probably more sensitive to the issue and apply better management practices in their plants than those who reject talking about them. Plants with poor management practices have managers that are often times involved in urgent problem solving and have very little time to spend on other activities, let alone answering a long phone call for academic purposes. Interviewers also introduce additional biases: analysts might only call plants they know; they might assign better grades to plants because of a preconceived idea based on marketing or public performance data; some analysts may be more/less strict in assigning grades and a country team as a whole may have a more/less lenient grading method (box 4). This last issue is crucial for unbiased country comparisons.

Bias control and international calibration

Several procedures based on the past experience in other countries were applied to minimize biases and improve the quality of the Chilean data. Some are the same while others are adaptations to the ones implemented elsewhere (box 4): (1)Double-blind interviews minimize the selection by recognition or preconceived ideas of analysts. (2)Not telling managers that they are graded reduces the pressure to try to answer correctly and the open ended conversation helps pin point a more truthful approximation of what really happens inside the plant. (3)In terms of aligning criteria and producing best results, 88% of the interviews were doublescored by a second analyst 5 and 100% of them were reviewed thoroughly by a supervisor. The international sample has a 70% rate of doublescoring, thus we are pretty confident that our data is well checked in this sense. The scorer and doublescorer data are highly correlated (0.92), which is an additional sign of a well aligned group of analysts (graph 3.2). Graph 3.2 Average management score by main and doublescoring analyst
Score and Doublescores
4 3,5

2,5

Doublescore 3

Correlation 0.92

2,5

3 RunningScore

3,5

The main and doublescoring analysts listen and grade the interview simultaneously. Then, shortly after finishing, they meet and discuss the interview and grades to make sure they all heard and understood the same. Most of the time a supervisor is also present in the listening, grading and reviewing process.

Another validation exercise implemented in some countries consists on cross interviewing the same plant but with different analysts and managers to check for the coherence between scores. Our validation drill was an adaptation of the above. We visited 50 plants and interviewed another manager in-site while touring the facilities and many times talking to other workers as well. The scoring of the live interview was done by an analyst that had not listened to the original phone interview. Our exercise checks several items related to the information obtained: (1) how information changes with the specific person being interviewed (2) how information changes when talking by phone and face to face (3) how information changes when looking at the plant (some plants were filthy and disorganized but the phone interview did not mention it either because the manager found it normal or didnt want to be judged for it). The plants visited were randomly chosen from the group of plants with complete phone interviews and located in the Santiago metropolitan area. The distribution of visited firms covers plants in the complete score spectrum, even if on average it is somewhat tilted to the left (graph 3.3). The correlation between the phone and visit scores is high (0.81), validating the coherence of the original instrument and its way of implementation (graph 3.4) 6. Graph 3.3 Phone and visit score distributions
Histogram for Management Scores in Visited Sample
.6 0 .2 .4

2 visits

3 phone

The outlier in the graph (low phone but high visit score) was a case of a badly chosen plant manager for the phone interview. The interview validation data records him as not well informed and poorly disposed towards providing information of the plant. The unusually short duration of the interview supports the low quality assumption made about the phone data in this particular case.

Graph 3.4 Phone and visit score correlations

Scores: Phone and Visit
5 Visit score 3 4

Correlation 0.81

1,5

2,5

3 Phone Score

3,5

Note: the green line represents the 45 line. Finally, a valid international comparison requires well calibrated analysts. Extremely indulgent or strict analysts bias the country grade, resulting in misleading country comparisons. To reduce this possibility a highly qualified Canadian analyst 7 conducted 30 interviews to Canadian plants while the Chilean team listened and graded via skype. A reviewing process was conducted after every interview with a Chilean supervisor and the Canadian analyst leading the discussion 8. The team produced a total of 90 doublescores and each analyst graded at least 10 Canadian interviews. The high level of coincidence and correlation between scores is another quality supporting factor for the Chilean data (graph 3.5). Graph 3.5 Canadian analyst scores and Chilean doublescores
Score and Doublescores
4 2,5 Doublescore 3 3,5

45 2 2,5 3 RunningScore 3,5 4

7 8

Recommended by the Canadian consultant and professor Bloom.

An alternative to hiring the Canadian analyst would have been to conduct the interviews by Chilean analysts. Unfortunately the language proficiency of the team was not as high as desired and they had a very difficult time trying to get an interview (maybe the accent was putting managers off?).

Note: the green line represents the 45 line.

Sample characteristics
Between September and December 2009, 321 Chilean manufacturing plants were interviewed, 275 of which came from firms with 100 or more workers. This is a reasonable size sample given the size of the economy (graph 4.1). The other 46 plants have more than 50 and less than 100 workers in the firm. This group of smaller sized firms was included, because they represent an important part of Chiles manufacturing sector (7% of total yearly manufacturing sales and 14% of total manufacturing labor force according to ENIA 2007). However, the design of the measurement instrument limits its applicability to smaller sized firms because many of the practices measured do not make sense in very small plants and thus is not as accurate as desired. For that reason, most of the countries in the international sample only interview firms with more than 100 workers and use those scores for any international comparison. Most of the analysis that follows does the same. Graph 4.6 Number of plants interviewed with firm employment greater than 100
UK USA Brazil China India Australia Canada Germany France Chile Sweden Poland Ireland Italy Greece Portugal Japan 0
762 695 559 524 517 382 344 336 312 275 270 231 194 188 171 140 122

200

400

600

800

Even if there is no sample stratification process, the plants interviewed appear to be chosen randomly (at least on observables) and do not discretionally represent subgroups of the Plant Directory from which they were drawn. In terms of size, the distribution of the 284 9 interviewed plants in the 100 and more range of the Directory does not significantly over represent any specific firm size measured by number of employees or sales volume (table 4.1). If anything, the sample covers slightly more plants in the 200 to 999 employees range and those with more than 600.000UF yearly sales (approximately 24million dollars). Table 4.1 Sample characteristics: sales and number of employees
Size Distribution 50 to 100 +100 employees Plant Directory 714 964 Sample 32 284 % Rep Directory %Rep Sample

The number does not match the 275 plants mentioned earlier because the employee number considered here is the one reported in ENIA 2006 and not the one obtained from our survey. Matched Directory information (sales, employees, regional, juridical and sector distribution) is available for 316 (284+32) of the 321 plants interviewed.

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100 to 199 200 to 499 500 to 999 1000 or more Sales distribution by stratum (+100 emp) 2.401 to 15.000 UF 15.001 to 25.000 UF 25.001 to 50.000 UF 50.001 to 100.000 UF 100.001 to 300.000 UF 300.001 to 600.000 UF 600.001 to 1.200.000 UF 1.200.001 or more UF

463 346 104 46 Plant Directory 2 2 15 52 228 183 176 301

129 105 35 15 Sample 0 0 2 10 62 51 66 93

48% 75% 30% 44% % Rep Directory 0% 0% 2% 5% 24% 19% 18% 31%

45% 81% 33% 43% %Rep Sample 0% 0% 1% 4% 22% 18% 23% 33%

Geographic composition of the plants is also similar to the one in the Directory. More than half of the sample is in the Metropolitan area and the rest are spread more or less evenly across the rest of the country except for the VIII region that concentrates a higher proportion of plants in the Directory and a slightly lower proportion in the sample (table 4.2).The distribution by sector also parallels the Directory quite nicely. One third are plants in the Foods and Beverage sector, followed by the Chemicals and Rubber Products sector, which is slightly over represented in the sample. The legal organization of the firms is also in line with that of the Directory. Most of the firms surveyed are closed corporations. Table 4.2 Sample characteristics: regional and sector distribution and legal organization
Regional Distribution (+100 emp) I II II IV V VI VII VIII IX X XI XII Metropolitan Area (RM) Distribution by juridical organization Individual Owner Limited Company Closed Corporation Open Corporation Cooperative Public Others Distribution by ISIC sector (+100 emp) Manufacture of food products and beverages Manufacture of textiles, wearing apparel and footwear Plant Directory 24 36 21 14 53 42 54 143 23 80 6 15 448 Plant Directory 4 270 549 89 6 29 12 Plant Directory 316 86 Sample 6 8 3 4 19 15 16 30 6 25 2 5 145 Sample 0 68 178 26 2 5 5 Sample 91 23 % Rep Directory 3% 4% 2% 1% 6% 4% 6% 15% 2% 8% 1% 2% 47% % Rep Directory 0% 28% 57% 9% 1% 3% 1% % Rep Directory 33% 9% %Rep Sample 2% 3% 1% 1% 7% 5% 6% 11% 2% 9% 1% 2% 51% %Rep Sample 0% 24% 63% 9% 1% 2% 2% %Rep Sample 32% 8%

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Manufacture of wood and products of wood Manufacture of cellulose, paper, publishing and printing Manufacture of chemical and chemical products and rubber Non-metallic mineral products Manufacture of basic metals and metal products Manufacture of machinery and equipment Manufacture of transport equipment Miscellaneous manufacturing

94 58 143 36 137 49 16 24

19 18 49 12 39 17 7 9

10% 6% 15% 4% 14% 5% 2% 3%

7% 6% 17% 4% 14% 6% 2% 3%

Management and Performance

The quality and relevance of the study of management practices relies on its careful data gathering process described above, but more importantly on its ability to capture management practices that make a difference for economic outcomes. International studies have proven its unequivocal relationship with performance. However, the direction of the causal relationship is not established and could go either way or both ways at the same time. For example, good management may improve performance, but it could also be the case that when plants are bigger and have better outcomes, they can invest more in improving management practices. The latest strand of the international study conducted by Bloom and Van Reenen, provides important new validation to the direct causal relationship hypothesis by performing controlled experiments modifying management practices in Indian textile plants that significantly enhanced management score and economic outcomes (Bloom, Eifert, Mahajan, McKenzie and Roberts, 2009). The Chilean data also confirm the strong correlation between management and performance 10. Better management practices have higher gross and added value of production per worker, profits and sales (graph 4.2). Plants in the top quartile of the management distribution more than double per employee value added and gross production value of the bottom 25%. Profits in the top quartile are almost five times as large as those in the quartile of worst managed plants (graph 4.3). Graph 4.7 Management practice and performance measures

I am thankful to the Instituto Nacional de Estadisticas for matching the management survey data with performance data from the ENIA 2007, and performing the statistical analysis required for this section of the paper.

10

12

Sources: ENIA 2007 and management survey. Graph 4.8 Management and Performance of top and bottom quartiles

Sources: ENIA 2007 and management survey. Regression analysis also confirms the strong correlation between management and performance. Production function estimates report a statistically significant coefficient for 13

management as an additional production factor. The ordinary least squares estimates for sales, value added, gross production value and profits, controlling for interview quality presented in table 4.1 are also statistically relevant and in some cases even larger than the uncontrolled coefficient. The introduction of additional plant and company controls (nominated general controls in the table) reduces the management coefficient and remains statistically different from cero only in the sales and profit regressions 11. However, keep in mind that the estimates are an indication of association and not a proof of causality. Nevertheless, better management practices are strongly associated with higher profits and sales. Table 4.3
Sales Management ln(k/L) noise control general controls observations 1 2 0,89 (0,14) 0,82 (0,15) 0,37 (0,06) 0,34 (0,06) no yes no no 234 231 Value Added Gross Value of Production Profits 3 4 0,38 (0,16) 0,35 (0,17) 0,43 (0,06) 0,41 (0,06) no yes yes yes 209 207 3 4 1 2 0,46 (0,15) 0,45 (0,17) 0,27 (0,10) 0,31 (0,11) 0,35 (0,06) 0,34 (0,06) 0,46 (0,04) 0,44 (0,04) no yes no yes yes yes no no 234 231 233 230 3 4 1 2 0,02 (0,12 0,09 (0,13) 0,32 (0,09) 0,35 (0,10) 0,46 ) (0,05 0,44 (0,05) 0,53 (0,04) 0,51 (0,04) no ) yes no yes yes yes no no 229 226 238 235 3 4 1 2 0,12 (0,11) 0,18 (0,12) 1,07 (0,15) 0,97 (0,17) 0,51 (0,04) 0,49 (0,04) 0,48 (0,06) 0,45 (0,06) no yes no yes yes yes no no 234 231 213 211

Note: All dependent variables are expressed in log`s and as a per employee ratio. Except profit, which is not a ratio. Noise controls include a measure of interview reliability based on disposition and knowledge of manager, duration of interview in minutes and management selfscore. General controls include type of ownership (family-gov-shareholder), plantsize in number of employees, employees with higher eduaction, number of direct competitors, fraction of sales sold abroad, dummy for multinational and hours worked.

Manufacturing management quality in Chile

Aggregate Management Quality (18 score average)
The average Chilean plant stands 12th place in the 17-country management ranking. On average, Chilean plants are better managed than the average Brazilian, Indian, Greek and Chinese plants and statistically equivalent to Portuguese, Irish and Polish plants (graphs 5.1) 12. This relative position is consistent with the countries income and competitiveness levels (graphs 5.2) 13 and may be signalling the relevance of management practices as a driving force of GDP. Alternatively, it may be that as countries get richer, they employ more sophisticated technologies and organizational structures, and concentrate in more elaborated products, hence need better management. For example, Brazil and China have a high concentration on textiles and leather products, which are low skilled labor intensive sectors that get a modest management score even in the world best management countries. The difference is that they only represent a low proportion of the manufacturing sector in the developed economies (4% in USA vs 15% in Brazil and 20% in China). If all countries had the same sector composition of their industrial production as the US, Chiles relative position in the world ranking would not change. Fixed effects estimates

The coefficients for the controls are not reported as it is not possible to do precise inference of their individual contribution but should not be eliminated from the estimations even if they are collinear, because they are part of the true model. Excluding them would gain efficiency at a cost of less consistency, not a very healthy trade-off.
12

11

Fixed effect cross country management regression without controls. Number of observations 6022.

The correlation between management and per capita GDP across the sample of 17 countries is 0.72. A regression on the eleven OECD nations with good manufacturing productivity data in Bloom (2010) yields an R-squared of 0.66, confirming that management practices have an important effect.

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that control for sector and plant characteristics- also place Chile in a similar place, above China and statistically equivalent to Brazil, India, Greece, Poland and Portugal 14. Graph 5.9 Average management practice country ranking
USA Sweden Germany Japan Canada Australia France Italy UK Poland Ireland Chile Portugal Brazil India Greece China 0
3.33 3.18 3.18 3.15 3.13 3.02 3.00 2.99 2.98 2.88 2.87 2.82 2.79 2.69 2.67 2.65 2.64

Graph 5.10 Management, per capita GDP and competitiveness

3,4
USA

3,4

USA

3,2

Sweden Germany Japan Canada

3,2

Sweden Germany Japan Canada

Management 3

Gestin 3

Italy

Australia France UK

Italy

Australia France UK

Poland

Ireland

Poland

Ireland

2,8

Chile
Brazil

2,8

Portugal

Portugal Brazil India

Chile

India China

2,6

2,6

Greece

Greece

China

10000

20000 30000 GDP per capita (IMF 2008 PPP)

40000

4,5 5 Competitiveness (WEF 2010)

5,5

Chiles management quality becomes a reference to other less developed countries when only multinationals are considered (graph 5.3). This comparison between multinationals in different host countries is another way of isolating part of the impact of different organizational structures, sector composition and technological sophistication. The correlation of management quality and country income disappears and the differences between countries shortens. Regardless of the country context, good practices are successfully reproduced in other countries. We will return to this point later in the paper.

The controls included are type of ownership (family, government and shareholder dummies), number of workers in the plant, percentage of workers with higher degree, number of competitors, production sites abroad, multinational dummy and averaged hour worked.

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Graph 5.3 Management quality in multinationals

US Canada Japan Brazil Germany Chile Sweden Italy Poland Ireland Australia Greece India Great Britain France Portugal China 2,8
3.45 3.36 3.33 3.28 3.28 3.22 3.21 3.19 3.17 3.16 3.14 3.11 3.11 3.11 3.1 3.07 2.86

3,2

3,4

3,6

One important element to keep in mind is that Chile is a tiny country with relatively smaller sized plants. Even within the sample of firms with more than 100 employees, the average Chilean plant size is 50 employees less than that of the average plant in the rest of the world sample 15. Thus, given the evidence of lower management scores provided by the subsample of smaller firms interviewed in Chile, the comparison of arithmetic averages may be unfair as the measurement instrument may pick up efficient management practices required by larger firms but not necessarily relevant for smaller ones. The lower limit of 100 employees for the international plant comparison is based on that same assumption. But even within the 100+ employees sample, there might be some bias in the instrument induced by plant size that could explain part of the positive correlation between size and management, apart from the theoretical effects from size to management and vice versa. However, there are some very well managed small plants and if we weigh the scores by plant size, Chiles relative position does not change much (moves up one step in the international ranking) (graph 5.4 and 5.5). Graph 5.4 Management and firm size Graph 5.5 Firm size weighted management score
US Canada Japan Germany Sweden Ireland Australia France Italy Great Britain Chile Portugal Poland Brazil India Greece China 0 1 2 mean of management
3.44 3.41 3.4 3.33 3.33 3.3 3.18 3.18 3.13 3.12 3.03 3 2.98 2.88 2.83 2.76 2.73

1000

2000 3000 Emp of firm as declared in interview Fitted values

4000

5000

management

Averages mask important within country differences. In fact, a very small portion of the variance comes from between country differences while most of it is explained by within industries differences. This plant heterogeneity drives aggregate country competitiveness and growth. A
15

The world average plant size is 292.

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country with large plant heterogeneity, with high concentration of very badly managed ones, results in a different outcome and, to a certain extent, in different policy implications, than one with homogeneously mediocre plants. In general most countries show a wide distribution of plants, with plants both at the best and worst management ranges (graph 5.6). Graph 5.6 Management distribution by countries and compared to Chile
Chile
1

Australia

Brazil

Canada

China

,5

France
1

Germany

Great Britain

Greece

India

,5

Ireland
1

Italy

Japan

Poland

Portugal

,5

Sweden
1

US

,5

Note: The solid line represents the Chilean distribution. The difference in management quality between the best and the worst Chilean plant is surprisingly low. Moreover, there are very few Chilean plants in both tails of the distribution. The only other country with a highly compressed distribution is China (graph 5.7). Countries with better management quality have smaller differences between plants, while countries with bad average management like India, have an important group of very badly managed firms but a few that are outstanding, even when compared to the best of the developed countries. Graph 5.7. Average management quality and difference between worst and best plant
3,8
India Ireland Greece

Dif. between worst and best 3 3,2 3,4 3,6

Brazil Poland UK

Australia France Portugal Italy

Japan Sweden USA Germany Canada

2,8

Chile
China

2,6

2,8

3 Management

3,2

3,4

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From an optimistic perspective, even though almost 80% of the Chilean plants are worst managed than the average American plants 16, there are no plants in Chile managed as badly as the worlds worst. Only one plant falls in the worlds worst managed decile, while most of the countries near Chiles average ranking position have a significantly higher representation in the bottom 10% of the distribution 17. That is, Chile`s worst managed plants are relatively better managed than the worst plants in most of the other countries with similar average management quality (graph 5.8). Graph 5.8. Worst managed plants: average for the first decile of the distribution
2,4

USA

Management at first decile 2 2,2 1,8

Sweden Japan Germany Canada

Australia France UK

China

Chile
Poland

Italy

1,6

India Brazil Greece Portugal Ireland

2,6

2,8

3 Management

3,2

3,4

When a fat lower tail -many badly managed firms- is encountered, the policy mission consists on having the plants at the end of the scale move upwards. This is done through a mix of strategies that involve training and promoting the introduction of best practices, intensification of domestic/international competition and reduction of barriers to the creation and destruction of firms (both burocratic and cultural). Chiles lack of deficiently managed plants is proof that these strategies have been implemented quite successfully resulting in the desired efficient resource relocation process that shrinks the lower tail of the distribution. The argument being that low productivity plants only remain active in countries with low competitive pressure, but are forced to improve or close in countries with highly competitive markets. The association found between the fraction of plants with management below 2 or management of the worst plants (first decile) with the intensity of competition index illustrates the point (graph 5.9). Graph 5.9 Worst managed plants and competition intensity

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62% if the world average is used.

Greece, Portugal, Ireland, Brazil, Italy and India have 4,1%, 3,6%, 2,6%, 2,1%, 2,1%, and 1,9% of their sample plants in the bottom 10% of the world distribution. In Chile, that figure is 0.37%.

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Average management of the first decile of the distribution 2 2,2 1,6 1,8 1,4

Proportion of plants with management score below 2 10 15 20 25 0 5

USA Sweden Canada Japan

Greece

Germany

India Brazil Ireland Portugal Poland

Australia France UK China Italy Poland

Chile

Chile
UK France China Australia Sweden Canada Japan USA

Italy

Brazil Greece Ireland Portugal

India

Germany

4,5

5,5 Intensity of Competition

6,5

4,5

5,5 Intensity of Competition

6,5

Source: Management scores from Chile survey and intensity of competition index from World Economic Forum, Doing Business 2009. On the competition front, Chile has worked in reducing internal barriers to competition with very little intervention in free market forces and a modern institutional arrangement that foresees and penalizes threats to competition (Tribunal de Defensa de la Libre Competencia). Moreover, the country has a very open economy, with a myriad of free trade agreements and unilateral reductions of trade barriers, leading to important competition through international forces (both from imports and competing exporting countries). The intensity of competition index presented in the previous graph, as estimated by the World Economic Forum, gives proof of our good position from an international perspective. Firms that do not improve through competitive pressure have to be able to close, and that is easier in some countries than in others. Using the same data source, Chiles ease of closure and bankruptcy is not as good as one would like (given the countries income level) and has been moving downwards in the international ranking. The lack of differentiation between normal closures and fraudulent bankruptcies put a heavy weight on entrepreneurs that are stigmatized for their failure and shunned out of the financial markets for some time before they can start again. A culture that heavily penalizes failure is also a strong barrier to healthy turnover in plants of low productivity. Important legal modifications are still pending in this area. When they come, they will additionally avoid the survival of badly managed firms. Exposing the lagging plants to better management techniques and indoor help to their introduction was the key element in the Indian textile intervention and the results were impressive and significant. In Chile, this line of intervention is done through information dissemination of best practices by Sofofa (industrial private organization) and FOCAL and FAT programs in Corfo that co finance consulting costs for improved management practices. There are also important resources involved in creating clusters and association between firms that promote the spillover of information on best practices between them. For example, the PROFO project financed by CORFO helps prepare groups of firms to work together in the development of the business. PDP project prepares projects in which larger firms assist technically their suppliers to increase their productivity through the implementation of state of the art management techniques. These

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interventions have had varying degrees of success in moving the less productive firms towards the leaders. On a more pessimistic front, the encouraging lack of deficiently managed plants is obscured by the scarceness of extremely well management ones. Less than 3% of the Chilean plants have management scores above 4. This proportion is 5 times larger in the US 18. Also, the best 10% of the Chilean plants have a relatively low management score, only above China 19 (graph 5.10). Graph 5.10. Best managed plants: 10th decile average and proportion of plants with score above 4
Average management quality of the 10th decile USA Japan India Australia Ireland Canada Greece UK Germany Sweden France Italy Poland Brazil Portugal Chile China 3
4.5 4.46 4.3 4.3 4.23 4.21 4.14 4.12 4.12 4.11 4.1 4.09 4 3.95 3.9 3.89 3.44

USA Japan Canada Sweden Germany Italy Australia Ireland Greece UK Poland India France Brazil Chile Portugal China
5

16 12 9.6 7.8 7.7 6.4 5.8 5.7 5.3 5.2 5.2 4.8 3.8 3.8 2.9 2.1 .19

3,5

4,5

10

15

These are preoccupying findings that point towards more structural limitations to management, which will require more effort and time to solve than when dealing with a country with at least some star performers. The existence of star performers reveals the feasibility of applying best practices in the country and directs the policy objective towards promoting their reproduction. In Chiles case, we need to find ways to push the best plants over the edge to become world class and find what inhibits their continual improvement. It is not just a problem of not knowing what works (information, benchmarking) or having the necessary managerial capital with the right incentives (agency problem solved). If that were the case, the multinationals working in Chile should be able to fully reproduce the best practices from abroad, but they dont. Even if most (80%) of the best plants in Chile are multinationals and given the important improvement in the international ranking position when only multinationals were considered, top rated multinationals are not as highly scored as the best plants in the world. What is limiting Chiles ability to have outstandingly managed firms? Is market regulation or culture inhibiting good practices? Is floor workers human capital a restrictive factor? Is there a management style that works well in Chile but is not similar to that observed in other countries? These are the type of questions that arise from the data collected and will be further analyzed below.
18

China is the only country with no plants in the 4-5 range. All other countries have a higher representation of their sample in the higher end of the distribution. The best 10% of Chilean plants are worst than 21% of the American plants and 17% of the Japanese ones. Chiles top 1 plant is of inferior quality than 172 (of the 5748) plants interviewed in the rest of the world.
19

20

Management Styles: Targets, Incentives and Monitoring

Countries have strengths and weaknesses in different management areas, or favour different management styles (box 5 and graph 5.11). The management literature may explain these differences as a shifting and finding of the right paradigm for each specific country context, which is consistent with Bloom and Van Reenen (2010) exploration of country regulations as important determinants. Also sector specificities may be linked with management specialization: Skill intensive sectors require extra care in efficiently managing incentives, while unskilled intensive sectors will normally promote performance monitoring tools. However, a plant that is good in one dimension of management tends to be good in all.

Graph 5.11 Management Types: Deviation from world averages

Deviation of Mean Scores
Greece Brazil Portugal China India Italy Chile France Australia Ireland Poland Sweden Great Britain Japan Germany Canada US -0,4 -0,2 Monitoring 0 Targets 0,2 0,4 Incentives

21

There are some countries that clearly have a knack for one management dimension (graph 5.11). Italy is a world leader in targets management but trails importantly behind in talents/incentives management. Poland in turn, is extremely bad in monitoring performance (only better than India, Brazil and China), but above average in both talents and targets management. Unfortunately, Chile is worse than average in every management dimension measured. Within that inferior management quality, targets are the worst. Its country ranking position for targets management is one step below that of the average score, while monitoring is exactly at the same position and talents management puts Chile one step above (table 5.1). 5.12 Management Distribution by Types
,8

Density ,4 ,6

Total Management

Targets Incentives

Performance Monitoring

,2

3 management

Graph 5.1. Management score by management type

Management type MONITORING TARGETS INCENTIVES Ranking Position 12 13 11 Score 3,0 2,7 2,7 Average World Score 3,2 2,9 2,8

As expected, there is a wide dispersion within plants in the three broad management categories. The relatively bad targets management is driven by a large proportion of plants with very bad practices and no plants with good target setting practices (graph 5.12). On average, the difficulty level of the targets is Chiles worst area, with many managers proudly stating that targets are met almost always and that it raises the workers morale. But as workers and managers dont feel pushed by them, they are practically never used as a productivity enhancing tool (table 5.2). Most plants have short and medium term targets that hardly ever represent steps towards a longer run target. Very few know much about longer term targets; let alone what they are based on. One distinctive element of the Chilean interviews is that the crisis was not mentioned as a reason for not having longer goals, while it was repeatedly mentioned in the Canadian plants. In general, targets are mostly financial/operational and based strictly on the previous year results. The few non-financial targets are not too inspiring and most have a clear correlate with cost 22

saving (for example, increase the use of there own recycled material by 20%, or reduction of the accident rate). The few plants with challenging non-financial goals are normally multinationals with goals set by top executives abroad and hardly ever inspiring to the floor level workers. Performance monitoring is an interesting area to study because the best evaluated firms are found to have this area as their best managed. Only this management category has a fatter upper tail, and the relative ranking position is in general better in this category than in others. On the negative side, the weakest area is the way meetings are structured and the type of information and conversations in them. Most plants have routine meetings, but many times they do not review the most relevant information and problems are not analyzed systematically. Many times it is just a social gathering with no clear agenda, no previous preparation by the attendees and limited information available to get to the root of the problems scrutinized. Table 5.2. Management in the 18 dimensions measured
Question Rationale for modern manufacturing techniques Performance tracking Process documentation Introduction of modern manufacturing techniques Performance review Performance dialogue TOTAL MONITORING Question Targets interconnection Targets time horizon Targets breadth Performance clarity and comparability Targets are stretching TOTAL TARGETS Question Creating talent Consequence management Attracting talent Retaining talent Instilling a talent mindset Promoting high performers Rewarding high-performance TOTAL INCENTIVES Rank 9 11 11 12 13 16 12 Rank 12 14 14 14 15 13 Rank 5 7 11 11 12 13 14 11 Score 3,1 3,3 3,1 2,7 3,1 3,0 3,0 Score 2,9 2,7 2,7 2,5 2,7 2,7 Score 3,0 3,2 3,0 2,4 2,4 2,9 2,1 2,7 International Average 2,9 3,4 3,2 2,8 3,4 3,2 3,2 International Average 3,0 3,1 3,0 2,6 3,0 2,9 International Average 3,0 3,2 3,1 2,5 2,4 3,0 2,5 2,8

Incentives management is the best evaluated area for the Chilean plants. The distribution is compressed with high homogeneity between plants and very few outstanding plants either at the best and worst extremes of management quality. What is interesting is that the best evaluated area deals with having a known and useful process for taking care of poor performers: the process 23

normally has clear time allowances for improvement and final termination as a resource used within a reasonable time frame (less than a year). There are set consequences for noncompliance with commitments in the improvement plan and responsibility is most of the time assigned to specific individuals. However, the good evaluation of the stick part of the incentives process does not have a mirror image in the carrots section. There are no formal/intentional processes to identify star performers and reward them accordingly. There is little upward movement within the plants and the whole process rests in the managers will and time.

Management and Human Capital

Human capital is thought to crucially influence management practices 20. It therefore comes with no surprise that the data finds a clear correlation of better managed plants and higher education level of both managers and employees (graph 6.1). What is not clear is whether this is because educated managers and workers are able to implement better management techniques or because good management practices attract skilled employees by means of better working conditions and pay. Graph 6.13 Management Score and Percentage of Employees and Managers with Higher Education Degree
Percentage with higher degree 20 40 60 80 0 100

1-2

2-3 3-4 Total management Non-managers Managers

4-5

What is more surprising is Chiles relatively high level of professionalization in the manufacturing sector (graph 6.2). Both at the employee and the manager level, Chilean plants have a significant proportion of workers with higher education degree 21. Everything else equal, one would expect this to lead to better management practices than other countries with less educated work forces. Another interesting element is that while in most countries the correlation of management with human capital appears stronger for non-management workers, it is managers human capital what most strongly correlates with management in Chile 22. However, the data does not validate a strong education-management correlation and the most probable explanation has to do with varying degrees of education quality (graph 6.3). Chiles low
20 21

Bloom and Van Reenen 2006, Bartel et al (2005), Ichinowski et al. (1997), Lazear (2000) and Black and Lynch (2001).

Also, the unreasonably high proportion of managers with higher education might be a data problem as in most cases the answer was referring only to formal managers, excluding supervisors (even though there is a comment on the access file that warns against that). However, in multinationals the managers may have included supervisors as well. This is true for all three types of management (incentives, targets and monitoring), as well as for overall management

22

score.

24

quality of education (as measured by PISA test scores) is a more significant element in the explanation of varying levels of management by countries, confirming that having workers and managers with degrees do not contribute as much to their management potential if the quality of those degrees is bad. Graph 6.14
Degree of Non-managers
Southern Europe Brazil Canada Great Britain China Australia Ireland Germany Chile France US Italy India Sweden Poland Japan 0 10 20 mean of degree_nm 30

Degree of Managers
Great Britain China Canada Sweden Australia Ireland Italy Southern Europe France US Germany Poland Japan Brazil India Chile 40 50 60 70 mean of degree m 80 90

Graph 6.15 Pisa test results and management 23

3.4
United States

3.2

Sweden Germany Italy France

Japan Canada

Australia

Poland

2.8

Chile

Brazil

2.6

400

450 pisa mean

500 Fitted values

550

Management and Property

Firm property has been linked with management practices in the literature for decades. Chilean family owned plants are on average worst managed than dispersed ownership firms (graph 7.1). This pattern is also visible in most of the countries of the sample (graph 7.2) and confirmed by complete sample management regressions were government, family and shareholder property dummies are -0.23, -0.13 and 0.14, respectively (all statistically significant). It is expected that family firms have a better alignment of the owners and managers objectives (principal-agent problem is reduced) and are able to pass changes easily due to property concentration, both positive elements for good management. However, they lack the ability to
23

The graph is picking up, partly, level of income. Unfortunately, there are not enough degrees of freedom to purge this

effect.

25

attract the best workers to the higher positions and have less degrees of liberty to change the organization structure without hurting family traditions (i.e. primogeniture), thus hurting their ability to run the plants efficiently. In most of the plants interviewed there is a marked predisposition towards the staus quo, and change is viewed as a threat to a known path that has proven to be useful in the past. They are in general very reticent to innovation. Some consider that their firm has a social mission with the community and should not hurt it by making changes that imply unemployment, or even changes in employment conditions. The lack of renovation and competition for the higher management positions are in the basis for the slower innovation and dynamism of the family owned firms. The data clearly indentifies worst management in family owned and managed firms (this is true in Chile and in most of the other countries in the sample). Successful family firms are those that transit fast from their initial form towards opening up to the stock market. Having the entrance to stock market as a mission is a powerful aligning mechanism that forces all non efficiency considerations to be ignored. Policies that promote firms to move towards a more dispersed ownership type, with the efficiency pressure that comes from the evolution of their stock prices, is desirable from a productivity point of view. Tax systems that do exactly the contrary, like the Indian one, are artificially enlarging the proportion of family owned firms and the tail of badly managed firms. Fortunately, the presence of family owned firms in Chiles manufacturing sector is not as high as in India (74% vs 33%). This is especially important because management of these firms is significantly worse in Chile than in most of the world, placing the country in the second to last position in the international ranking of family owned firms (table 7.1). Graph 7.1 Management score dispersion by property type
.8 0 .2 .4 .6

2
Family & Founder

3 management
Private Individuals

5
Dispersed Shareholders

Graph 7.2 Management score dispersion by country and property type

26

4,50 4,1 4,00 3,50 3,1 3,00 2,50 2,00 1,50 1,00 0,50 0,00 Dispersed Shareholders Private Individuals Family, ext CEO Family, Fam CEO US Founder Government 3,5 3,2 2,9 2,7 2,7 3,2 3,3 3,1 2,8 2,5 2,4 3,1 2,7 3,2 3,0 2,6

Chile

Int Sample

Table 7.1. Distribution of management by property type

media Private Individuals USA Dispersed Shareholders Family & Founders Private Individuals Chile Dispersed Shareholders Family & Founders Private Individuals Total Dispersed Shareholders Family & Founders 3,19 3,46 3,16 2,71 3,11 2,50 2,89 3,20 2,75 ranking 2 1 1 15 14 16 % muestra 15,7% 45,0% 28,2% 21,5% 42,9% 33,5% 16,3% 31,8% 38,5%

Moreover, there is a wide variance between management practices of family owned firms in the world with outstanding firms that despite being family owned, manage to be world class. Indian, Brazilian and Greek best family firms are managed as good as their best firms and similar to the best US firms. Chiles best family firm, however, is the worst of the best managed family firms in every other country. Thus, again the composition effect is important when comparing overall management quality between countries. The average management score of countries like India are pulled down by the relatively large percentage of family owned firms, even if most of them are relatively better managed than the average family firm elsewhere. If all countries had the same property distribution as India, then India would have an average management quality score of 2.9 and its relative position in the world ranking would move up 5 steps. In this scenario, Chiles position would move to the last place. Graph 7.3 Distribution of plants by ownership

27

Moreover, the management distribution for Chilean plants is to the left and more compressed than that of the world average and US distributions for all three types of prevailing ownership. Its average score within each subcategory of ownership places the country in the bottom end of the country spectrum. Thus confirming a mediocre evaluation of Chiles management quality even within property arrangements that are most favourable for the implementation of best practices.

Management and Markets

Plants that trade internationally have better management practices than those that only serve domestic markets (graph 8.1) 24. This is a natural consequence of the implied increased pressure to improve management of firms that compete internationally. It is also the reflex of a natural selection of firms that are sufficiently efficient to become international. The differences in management between domestic and exporting firms are large, but what is even more impressive is the huge distance from the practices in multinational firms (graph 8.1)25. Multinationals push the overall management distribution upwards substantially 26. The country ranking that only considers multinationals places Chile in the 6th place (graph 5.3), but its relatively low representation within the sample (26% vs. 74% in France and 82% in Sweden) explains its much lower overall position (12th place). If all the countries had the same proportion of domestic, exporting and multinational firms as Sweden, Chiles relative position would move up to the seventh place in the international ranking, in a tie with Italy.

Graph 8.1. Management and markets

24 25

This is consistent with the theory of competitive pressure and the findings in Helpman, Melitz and Yeaple (2004).

Regression analysis of management scores finds a positive and significant coefficient for multinationals; even alter controlling for plant/firm size, sector, human capital and country. 71% of the plants in the tenth decile are multinationals and 88% of the plants with score above 4 are multinationals.

26

28

g
.8

Domestic, no exports
.6

2.58

.4

Domestic, exports

2.71

.2

Multinational
0

3.22

2
Domestic, no export

3 management
Domestic, export

4
Multinational

2,4

2,6

2,8 3 mean of management

3,2

3,4

Within each type of plants, as ordered by market orientation, Chiles management distribution appears to be better than that observed on all other analysis cuts. In general, we have seen a distribution to the left of the world average distribution, however when comparing plants that export and not, and multinationals, we find that Chile fares very similar to the world average (table 8.1). Unfortunately, even here, the distribution is more compressed than the others, especially in the upper side, confirming the lack of best managed plants, even within multinationals. Table 8.1. Management distribution by market orientation

Note: the good relative position in domestic firms with no exports is due to the inexistence of such type of firms in the most developed nations, thus the comparison group is limited to a subgroup of countries with lower overall management score. Why are multinationals better managed than the rest of the firms and why dont other domestic firms copy them? First, theres the causality issue present in all the analysis up to now. It may well be the case that good management is what led them to become multinationals. Then, the question is how they manage to replicate their business models in other countries. In part, the fluid and transparent flow of information via benchmarking and best practice is crucial both to the replication process and to the inability of others to follow as the information does not flow to other firms as transparently. Also, the size of multinationals induce competitive internal markets that tend to enhance manager productivity due to the threat of others taking his/her position in the company and to the availability of spaces to move up in the organizational ladder. The same reason is behind a better hiring process, since there is a market, there are good opportunities for promotion, and pay and perks are normally higher. Also, bigger companies have more space for 29

reassignments of workers, allowing a more efficient use of them by placing them were they are most productive.

Management practices and policy implications for increased productivity

Economic development relies heavily on giving a new boost to productivity in Chilean plants. The last decade has been marked by stagnant levels of efficiency that pose a threat to the transition towards development. The gains obtained from the structural reforms of the seventies and eighties have been capitalized and a new strategy is called for. This strategy comes from within the plants and requires the policy makers to switch their mindset and observe the processes that occur inside the production lines. This change in perspective goes against the traditional position of not mingling with private affairs unless there is something public about them (i.e. externalities, market failure, etc). Also, it is a challenging new path as it entails recovering information normally unavailable to the external observer. This paper takes a systematic approach to the study of internal plant processes and empirically highlights how plant performance and social and economic development of the country are critically related to management practices. With the new detailed information, intervention policies can be designed and, thanks to the measurement instrument, their impact evaluated, as a means towards the desired enhanced productivity. The general results of the study are not surprising: Better managed plants have better economic outcomes and overall management quality in Chiles manufacturing sector is in line with its income and competitiveness level. Becoming a developed nation is impossible unless we have the quality of management that the countries with higher income have. One interesting characteristic of the Chilean plants is that they are more homogeneous than plants in most of the other countries studied. The difference between the best and the worst managed plants is small. There are a couple of good news: no plants are very badly managed, signalling an efficient relocation process induced by intense competition in products markets and not too many limits to firm creation and destruction 27; family owned plants, that normally are badly managed everywhere are also inefficiently managed in Chile, but represent a lower proportion of all firms compared to countries like India, Brazil and Italy (33%, vs. 74%, 62% and 63% respectively). The bad news is the inexistence of world class plants that can set the rhythm and pace to the other plants and worst of all, we ignore it. Policy makers and managers know very little about their own management quality, limiting their ability to identify gaps that can lead to improved efficiency. The lack of a realistic view of their own ability to manage plants efficiently, leads managers to operate under false premises of unnecessary calmness and auto complacency (Graph 9.1). This threatens the continued improvement process and points towards the need for managers and policy makers to get involved in creating better ways of recollecting comparable
Chiles intensity of competition level (10th place in world ranking according to WEF), labor rigidity (7th, based on World th th Bank indices) and difficulty of opening a new business (12 place according to time, and 13 according to amount of transactions, based on WEF) are all coherent with Chiles relative position in the sample of countries studied and de quality of management in the least efficient plants.
27

30

information that can be used to evaluate the real quality and deficiencies of management, and the possible ways to solve them. Graph 9.1. Management score and self assessment
Chile Brazil Greece Canada Portugal Ireland India Australia Germany USA Italy China UK Sweden Japan Poland France 2,5 3 Self assesment 3,5 Management Score 4

The unreasonably high self assessment of management quality is also a sign of deficiently prepared managers. Firms will not improve on their own; the managers must lead the way. They need to be familiar with best practices and how to implement them. Apparently the high percentage of managers with higher degrees is not enough to guarantee such level of competencies. Workers and managers are not receptive enough to the importance of effective management techniques and will require changes in their initial education as well as on the job training to acquire the necessary skills for this essential change. Investment in general human capital and specific skills for workers and managers are a responsibility assumed both inside and out of the firm. Outside of the firm, a good understanding of the real quality of the education and training programs and the essential characteristics of workers that will be able to produce value to the firm, is a must. Good business schools should be able to produce good managers with the required know how but most importantly with the mindset towards continuous improvement. The government, through its different agencies, has a role to play: A role in guaranteeing quality and equitable access to the programs; a role in cofinancing specific training programs for strategic positions in specific industries; a role in identifying the tools required by productive plants; and a role in providing the information to the education market so that jointly they can find ways to provide them. There must be important changes inside the firms too. A realistic appraisal of the quality of their management and recognition of its relevance for performance, are crucial. This requires giving workers and managers the tools for the efficient identification of weak spots and the ability to design strategies to improve them. The study shows that there are many areas for improvement in the Chilean plants, but the large deficiencies in target definition, their rational and internal consistency call for special attention devoted to them. Family firms face important challenges. Family own and run firms are consistently worst managed than other private and public firms, and more so in Chile. Owners and managers must realize that in order to remain competitive they will have to invest in long run plans for management excellency. Important positions should be assigned according to merit and talent and not by family ties.

31

Among the best managed firms, there is a large percentage of multinationals. The fact that they can reproduce in part their international expertise in spite of different domestic contexts is a good example for domestic firms. Their presence contributes to improving domestic management quality by bringing the latest techniques that have proven successful in the rest of the world and showing that they can be applied in Chile. Increased association/interaction between multinationals and domestic firms will result in greater spillovers to the rest of the industry and is a desirable line of coordinated action of government and firms. The relatively low representation of multinationals in the Chilean sample -26% vs 82% in Swedenpoints to another policy modifiable context. The local industry gain from multinational presence will be greater the greater their presence. The limitations of the small size of the domestic market and its geographic isolated position have been successfully surmounted by policies and campaigns that attract foreign direct investment. There is still some more work that can be done to further attract FDI. A just and clear treatment to international firms, within a robust legal framework and non-discriminating efficient institutions, have been key to compensating for size and geographic disadvantages and should be further improved. Larger firms are better managed too, and thus we should have policies that promote firms to grow and expand to international markets. This will bring important benefits to the growing plant but also to the domestic smaller ones. The internationalization will provide a new set of references against which to measure up and ideas on ways to improve. The intensified competition will force managers to be more realistic and eager to find better ways to manage their plants. Unfortunately, increasing internationalization of domestic plants and entrance of international plants is not enough, even if the domestic plants were able to follow them. The fact that the best plants are not as good as the best in the world is limiting our potential. This is the most pressing and important policy decisions required. The challenge is very tough and the interventions are intense. The pro-competition, openness, regulation, and education policies are key to keeping the lower tail in check and pushing them towards to better ones. However, it is not enough. We need to find ways to make the best firms cross the frontier and become world leaders. Then the rest of the firms will follow because we have already paved the way for them.

32

References
Bartel, A., Ichinowski, K. and Shaw, K. (2005) How does information technology really affect productivity? Plant-level comparisons of product innovation, process improvement and worker skills NBER Working Paper 11773. Black, S. and Lynch, L. (2001), How to Compete: The Impact of Workplace Practices and Information Technology on Productivity, Review of Economics and Statistics, 83(3), 434445. Bloom, Nicholas, Benn Eifert, Aprajit Mahajan, David McKenzie, and John Roberts. 2010. Does Management Matter? Evidence from India. http://www.stanford.edu/~nbloom/DMM.pdf Bloom, Nicholas, and John Van Reenen. 2007. Why Do Management Practices Differ across Firms and Countries? http://www.stanford.edu/~nbloom/JEP.pdf Bloom, Nicholas, and John Van Reenen. 2007. Measuring and Explaining Management Practices Across Firms and Countries. Quarterly Journal of Economics, 122(4): 13411408. http://www.stanford.edu/~nbloom/MeasuringManagement.pdf. Bloom, Nicholas, and John Van Reenen. 2006. Measuring and Explaining Management Practices Across Firms and Countries. Centre for Economic Performance Discussion Paper 716. Ichinowski, C., Shaw, K. and Prenushi, G. (1997), The Effects of Human Resource Management: A Study of Steel Finishing Lines, American Economic Review, 291-313. Lazear, Edward (2000) Performance pay and productivity, American Economic Review, 90, 1346- 1361. North, D.C. 1990. Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. Williamson, Oliver E. 1985. The Economic Institutions of Capitalism: Firms. Markets, Relational Contracting. New York: Free Press. Winston, Gordon C.

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