Original source
Why Do Firms in Developing Countries Have Low Productivity? (2010)
Research synthesis article · American Economic Review: Papers & Proceedings · 100(2), 619–623
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Owner Time-Constraint Bottleneck via Centralized Decision-Making
Owner Centralization and Decision-Making Delegation Barriers
"In the BEMMR textile firms, every purchase order typically required the sign-off from the owner, even orders for a $25 spare part."
Credit Frictions and Entrepreneurial Talent Misallocation
"Second, even if financing is not such a constraint for existing (large) firms, financing obstacles are likely to limit the extent to which individuals with better managerial talent, but low capital, can start and grow enterprises to compete with badly managed firms."
Data System Deficits and Managerial Expropriation Risk
"Since firms in developing countries do not have good data systems for measuring outputs, inputs, inventories, and spares, the opportunity for undetected theft is much greater."
Family-Occupied Executive Layers and Managerial Skill Disincentives
Nepotistic Executive Succession and Managerial Skill Deprivation
"A third reason is the promotion opportunities for managers in developing countries are limited because the top managerial layers in almost all firms are filled by family members of the owner because outsiders are not trusted. This reduces the incentives for mid-level managers to develop their decision-making skills, or for firm owners to train them to make important decisions."
Financial Barriers to Talented Entrepreneurial Entry
"...financing obstacles are likely to limit the extent to which individuals with better managerial talent, but low capital, can start and grow enterprises to compete with badly managed firms. Coupled with the inability of better managed firms to delegate and thus to grow beyond a certain size, this lack of competition from new entrants who are short of financing will keep productivity low..."
Hierarchical Information Latency and Operational Disruption
"This illustrates one problem with hierarchical decision making, which is the large time delays in processing information, leading to losses from unfixed problems."
Size-Dependent Credit Constraints and High Marginal Returns to Capital
Microenterprise High Marginal Returns to Capital
"They found this increased capital stock and firm profits, with an implied real return to capital of five percent per month."
Informational Ignorance Barrier to Management Adoption
Managerial Information and Practice Awareness Deficits
"The initial evidence in BEMMR suggests that one major reason is the firms were simply not aware of many modern manufacturing practices."
Kinship-Bound Firm Expansion and Delegated Governance
Kinship Delegation as Firm Expansion Constraint
"Revealingly, the number of brothers and sons of the firm's owner is an excellent predictor of firm size in the BEMMR sample, because the owners trust relatives and so will delegate decisions to them (unlike a professional manager)."
Management Practice Deficit in Developing Countries
Quality Control and Management Practice Adoption
"Introducing systems to measure quality defects and analyze the data enabled firms to correct the causes of defects quickly, reducing average defects levels by over 50 percent in the first three months alone."
Hierarchical Decision Delays and Operational Downtime
"The plant managers did not have the authority to order parts to repair this equipment, and since the owners were often traveling on business, these problems would persist."
Managerial Overconfidence and Self-Assessment Bias
"When asked to evaluate the quality of their own management practices, firm managers typically rate them as above average, suggesting they are unaware of their own deficiencies."
Primogeniture Selection Penalty in Family Firms
"Family firms that pass down the CEO position by primogeniture—to the eldest son—typically perform significantly worse in terms of management practices compared to family firms that hire professional managers."
Product Market Competition and Bad Practice Selection
Low Competition and Management Distribution Thick Tail Persistence
"The lower level of average management practices in developing countries occurs because of a persistent, thick tail of badly managed firms. In the United States badly managed firms appear to improve or exit, while in developing countries they do not."
Rule-of-Law Deficit and Expropriation Fear
Rule of Law Infrastructure and Managerial Expropriation Risk
"One is poor rule of law, as the owners typically fear that managers will steal from them if given greater autonomy, and they will not be able to punish them without an effective legal system."
Standardized Management Scoring and Global Practice Stochastic Dominance
"They find that developing countries like Brazil, China and India have significantly lower average management scores than firms in the United States, Japan and Western Europe. In fact, the whole distribution of practices across firms in developing countries is typically stochastically dominated by the distribution in rich countries."
Trade Protectionism and Inefficient Firm Preservation
"Trade protectionism, through high import tariffs, insulates domestic firms from foreign competition, thereby enabling poorly managed domestic firms to remain profitable and stay in business."