A long-standing question in Economics is whether differences in performance across firms can be explained by differences in management practices, especially in developing countries where the spread between the best and worst firms is particularly large. Two major constraints have limited research on this topic. First, firms endogenously decide whether to adopt management practices, so it could be that higher-productivity firms find it more profitable to make such adoption. Second, there is lack of data measuring both the management practices adoption and firm performance over time.
In her paper “The Long-Term Effects of Management and Technology Transfer”, Professor Michela Giorcelli examines the long-run effects of the adoption of management practices on firm performance, using evidence from a unique historical episode, the US Productivity Program in Italy. During the 1950s, as part of the Marshall Plan, the US administration sponsored training trips for European managers to learn modern management practices at US firms. This was part of America’s efforts to help Europe recover after the war and to prevent the much-feared spread of communism in the 1950s. Visiting Italian managers participated in formal training and seminars in addition to more informal visits to U.S. firms to shadow managers. The Productivity Program also gave Italian firms loans to purchase state-of-the-art machines from the United States.
Professor Giorcelli assembled new panel data, collected from numerous historical archives, on more than 6,000 Italian firms from 5 years before to 15 years after the Productivity Program.
Her results indicate that businesses that participated in the Productivity Program largely increased sales and productivity, and stayed in business longer than comparable companies that were not part of the program. The training also boosted firms’ success much more than the newer machines. While the machinery purchases did make firms more productive, the effects only lasted about 10 years – the plausible lifespan of a machine. Without local know-how to repair foreign machines, malfunctions and disrepair likely spelled the end of their benefit.
In contrast, the trainings had a compounding effect on business success, with impacts increasing over time and persisting even 15 years after the program ended. Professor Giorcelli documents the program helped managers use better firm organization and make better investment decisions – investing in new plants or new machines, for example – which made their production more efficient. The result was a virtuous cycle of higher profits and profit-enhancing investments. Finally, she finds that management and technology have a complementary effect on firm productivity.
Did the positive effect of the program spill-over to other firms that were not part of it? Professor Giorcelli finds little evidence of such effects, a result that could be explained by the competition among firms and the very limited labor mobility that prevented managerial knowledge diffusion.
Professor Giorcelli’s research raises parallels for development aid now, since the income levels in Italy post-World War II are similar to some of today’s developing countries. As nongovernmental and international organizations seek to spur economic growth through support to small businesses, computer literacy or financial management training may prove much more effective in lifting people out of poverty than just giving them the latest technology.