Transcript The Modern Firm in Theory and Practice Nick Bloom (Stanford Economics and GSB) Lecture 1: Productivity, firms and plants.

The Modern Firm in Theory and
Practice
Nick Bloom (Stanford Economics and GSB)
Lecture 1: Productivity, firms and plants
1
Start with class introductions
Nick Bloom, Econ 149, 2015
2
COURSE OUTLINE
• Can good management can make the world a better place?
– Raising profits, productivity & employee wellbeing
• How can we measure management?
• Use research and case studies to learn about this
Nick Bloom, Econ 149, 2015
Class Question
What are the pros & cons of case-studies
for management teaching and research?
Nick Bloom, Econ 149, 2015
4
Why care about management?
Management raises productivity (among other things)
Nick Bloom, Econ 149, 2015
5
The basics of productivity
Changes in firm productivity
Changes in aggregate (macro) productivity
Nick Bloom, Econ 149, 2015
Productivity
• Gross Domestic Production (GDP) per capita – basically
Income per person – is a key indicator of economic wellbeing
• GDP per capita increases by growth of inputs (e.g. more
capital or labor) or higher Total Factor Productivity (TFP)
GDP = Inputs + Total Factor Productivity (TFP)
e.g. Labor, capital
Nick Bloom, Econ 149, 2015
7
Class Question
How do you define
productivity?
Nick Bloom, Econ 149, 2015
8
Measuring productivity (ωi,t)
Labor Productivity:
LPi ,t  vai ,t  li ,t
Three factor TFP:
TFP  yi ,t  l li ,t  k ki ,t  mmi ,t
3
i ,t
Five factor TFP:
TFP  yi ,t  l li ,t  k ki ,t  mmi ,t  e ei ,t  c ci ,t
5
i ,t
Note: va=log(value added), l=log(labor force), k=log(tangible capital), m=log(materials,
Nick Bloom, Econ 149, 2015
e=log(energy), c=log(IT). If IT included need to remove from tangible capital.
Defining macro (or industry) productivity
Define a simple macro productivity index: Pt
Pt   si ,ti ,t
Where:
ωi,t is the productivity of establishment i in period t (i.e.
log(labor productivity) or log (TFP))
si,t is the share of establishment i in the country in period t
(i.e. the share of employment or sales in the country
employment or sales)
Nick Bloom, Econ 149, 2015
Productivity “Facts”
• Macro: Productivity varies a lot across countries & time
– Robert Solow: TFP growth at least as important as
growth of inputs in explaining economic growth
– Cross country GDP/capita differences largely due to
TFP differences
• Micro: Productivity varies hugely across firms
Nick Bloom, Econ 149, 2015
11
Large Income & TFP Differences between countries
Source: Jones and Romer (2009). US=1
Nick Bloom, Econ 149, 2015
12
In long-run most countries have enjoyed catch up
Growth with the GDP/head leader (US) but not all
Source: Maddison (2008) Data is smoothed by decade
Nick Bloom, Econ 149, 2015
13
Productivity “Facts”
• Macro: Productivity varies a lot across countries & time
– Robert Solow: TFP growth at least as important as
growth of inputs in explaining economic growth
– Cross country GDP/capita differences largely due to
TFP differences
• Micro: Productivity varies hugely across firms
Nick Bloom, Econ 149, 2015
14
Productivity Differences across firms within
countries are huge
• US Census data on population of plants
– Plant at 90th percentile has labor productivity 4x plant at the 10th
percentile, TFP 2x (Syverson, 2011)
• Not just mismeasured prices: we see these differences in
detailed industries where we measure plant prices (e.g.
boxes, bread, block ice, concrete, carbon black etc.)
Nick Bloom, Econ 149, 2015
15
For example, US ready mix concrete plants:
Low competition
Nick Bloom, Econ 149, 2015
High competition
Source: Syverson (2004)
16
Distribution of plant TFP differences even larger in other
countries – e.g. India
Why might productivity be more
dispersed in developing countries?
Source: Hsieh and Klenow (2008); mean=1
Nick Bloom, Econ 149, 2015
Class Question
• Why do we care about productivity?
Nick Bloom, Econ 149, 2015
18
Why we might care about productivity
• Increasing TFP means that the economic “pie” is bigger
so more room for
– Consumption increases
– Tax cuts
– Increases in public goods (e.g. Environmental quality)
• Harder to achieve if productivity stagnant
Nick Bloom, Econ 149, 2015
19
The basics of productivity
Changes in firm productivity
Changes in aggregate (macro) productivity
Nick Bloom, Econ 149, 2015
Class Question
What causes differences in firm productivity?
What is the evidence for these?
Nick Bloom, Econ 149, 2015
21
Increasing Firm Total Factor Productivity
• Some proximate factors:
– “Hard” technology (e.g. Research & Development)
– Skills (e.g. Expansion of college education)
– Management (a technology & a skill?)
• Some deeper factors “driving” the above
– Competition
– Globalization
– Regulations & government policies
– Legal
– Culture
Nick Bloom, Econ 149, 2015
22
The basics of productivity
Changes in firm productivity
Changes in aggregate (macro) productivity
Management
Nick Bloom, Econ 149, 2015
Increasing Aggregate Total Factor Productivity
• Within Firms (from prior slide)
– The same firms become more productive (e.g. new
technology spreads quickly to all firms, like Internet)
• Between Firms (“Schumpeterian” view)
– Low TFP firms exit and resources are reallocated to
high TFP firms > creative destruction
Nick Bloom, Econ 149, 2015
24
An aside on Schumpeter – here he is
Nick Bloom, Econ 149, 2015
Famous quotes from Schumpeter
“The fundamental impulse that keeps the capital engine in motion
comes from the new consumers’ goods, the new methods of production
and transportation, the new markets... [The process] incessantly
revolutionizes from within, incessantly destroying the old one,
incessantly creating a new one. This process of Creative Destruction is
the essential fact of capitalism.”
Schumpeter (p. 83, 1942)
Although probably his most famous quote was:
“Early in life I had three ambitions. I wanted to be the greatest
economist in the world, the greatest horseman in Austria, and the best
lover in Vienna. Well, I never became the greatest horseman in
Austria“
To which the (un-attributed) response was:
“Those we knew Schumpeter as an Economist, Lover or a Horseman
presumed his skills were in the other two fields”
Nick Bloom, Econ 149, 2015
Creative destruction is important, and is driven by
massive ongoing churn in the economy
About 20% of jobs are created and destroyed in the private
sector every year. About 80% of this turnover occurs
within the same SIC-4 digit industry
This is robust across countries (US, Europe, Asia and SA)
A linked (but distinct concept) is turnover in “employment”
which is about 40% a year
Nick Bloom, Econ 149, 2015
Turnover in “Jobs” versus “Employment” example
Nick Bloom, Econ 149, 2015
Note: Employment flow=14, Job flow=4
Back to increasing aggregate TFP - the within and
between channels are well known to cricket fans
Within batsman
(each batsman improves)
Between batsman (more time for your best batsman, to
raise your “batting average”)
Nick Bloom, Econ 149, 2015
29
Particularly Important Class Question
(David, double grade this one thanks)
• Which country is the best in the world
at Cricket?
Nick Bloom, Econ 149, 2015
30
Formally decomposing productivity into
within and between effects (1/2)
Productivity growth for a balanced panel of establishments
can be broken down into three terms:
Pt  Pt 1   si ,ti ,t   si ,t 1i ,t 1
  si ,t 1 (i ,t  i ,t 1 ) Within term
  ( si ,t  si ,t 1 )i ,t 1 Between term
  ( si ,t  si ,t 1 )(i ,t  i ,t 1 ) Cross term
Reallocation
Within term is included in representative agent models, while
the between and cross terms would not be
Nick Bloom, Econ 149, 2015
Formally decomposing productivity into
within and between effects (2/2)
Allowing for entry and exit requires two more terms:
Pt  Pt 1   si ,ti ,t   si ,t 1i ,t 1
  si ,t 1 (i ,t  i ,t 1 ) Withinterm
  ( si ,t  si ,t 1 )i ,t 1 Between term
  ( si ,t  si ,t 1 )(i ,t  i ,t 1 ) Cross term
 s
Entry
i ,t
 s
Exit
i ,t
( i ,t
Entry
  i ,t
Average
( i ,t   i ,t
Exit
Average
) Entry term
) Exit term
This is the Bailey, Hulten and Campbell (1992) decomposition
Nick Bloom, Econ 149, 2015
Total reallocation (between, entry and exit) accounts
for about ½ of manufacturing TFP growth
*
Source: John Haltiwanger
Nick Bloom, Econ 149, 2015
*Combines
-0.08 “between” and 0.34 “cross”
This is probably even an underestimate
(A) Treats all reallocation within establishments as “within” growth
• Large establishments in balanced panel (500 employees)
(B) Reallocation terms most likely to be downward biased by miss
measured prices (Foster, Haltiwanger and Syversson, 2008)
So in manufacturing re-allocation of factors probably accounts for
the majority of productivity growth
Following trade liberalizations about half of productivity gains due
to shrinking/exit of less productive plants (e.g. Pavcnik, 2002)
Caveat: Reallocation is not immediate (e.g. trade dislocation). So
many oppose trade as these are losers as well as winners
Nick Bloom, Econ 149, 2015
Reallocation (including entry) accounts for almost
all Retail TFP growth
1
0.8
Continuing
Establishments
Net entry
0.6
0.4
0.2
0
Retail
Source: Foster, Haltiwanger & Krizan (2000 and 2006)
Nick Bloom, Econ 149, 2015
The basics of productivity
Changes in firm productivity
Changes in aggregate (macro) productivity
Management
Nick Bloom, Econ 149, 2015
What about management?
• Case studies of management:
– Toyota and British Leyland
– Goldman Sachs and Lehman Brothers
• Obviously management matters but
– how to generalize?
– how much does it matter?
– what causes the differences?
Nick Bloom, Econ 149, 2015
37
Class Question
• What are the areas of management, do
any have best practices?
Nick Bloom, Econ 149, 2015
38
Class Question
How would you
test if these best
practices exit?
Would you be
happy with case
studies (books)?
Nick Bloom, Econ 149, 2015
39
Class Wrap-Up
1. Productivity is a key driver of economic welfare – more output
for consumption, education, health etc from the same inputs
2. Across firms and countries we see massive variations in
productivity (4x differences in both cases is common)
3. Productivity can be raised within each firm through a variety of
channels (skills, R&D, better management etc)
4. Productivity can be raised in countries also by creative
destruction (productive firms grow, unproductive firms shrink).
5. The US has a lot of creative destruction, but developing
countries often do not, so have even higher TFP spreads (and
lower growth)
Nick Bloom, Econ 149, 2015