A long-standing question is whether differences in management practices across ﬁrms can explain differences in productivity, especially in developing countries where these spreads appear particularly large. We ﬁnd that adopting these management practices raised productivity by 17% in the ﬁrst year through improved quality and efﬁciency and reduced inventory, and within three years led to the opening of more production plants. Why had the ﬁrms not adopted these proﬁtable practices previously? Our results suggest that informational barriers were the primary factor explaining this lack of adoption. Also, because reallocation across ﬁrms appeared to be constrained by limits on managerial time, competition had not forced badly managed ﬁrms to exit.
Practice adoption rates. Key performance metrics: Quality, inventory, output, total productivity. Long-run effects of management intervention: Number of plants, number of employees, number of looms per plant.
In the short run, adoption of good management practices by firms that received support to implement the recommendations is more than twice that of firms that only received the initial diagnostic service. Firms that only received the diagnostic typically didn’t adopt the more complex practices like daily quality meetings, formalising monitoring processes or defining roles and responsibilities. In the short run, receiving support to implement the recommendations led to quality defects being cut by about a third, inventory being reduced by about a sixth and output increasing by an average of 9.4 per cent. These improvements led to an average increase of 16.6 per cent in productivity and raised annual profitability by about US$325,000.