Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

Abstract

Delegating managerial tasks is essential for firm growth. Most firms in developing countries, however, do not hire outside managers but instead rely on family members. In this paper, we ask if this lack of managerial delegation can explain why firms in poor countries are small and whether it has important aggregate consequences. We construct a model of firm growth where entrepreneurs have a fixed time endowment to run their daily operations. As firms grow large, the need to hire outside managers increases. Firms’ willingness to expand therefore depends on the ease with which delegation can take place. We calibrate the model to plant-level data from the United States and India. We identify the key parameters of our theory by targeting the experimental evidence on the effect of managerial practices on firm performance from Bloom et al. (2013). We find that inefficiencies in the delegation environment account for 11 percent of the income per capita difference between the United States and India. They also contribute to the small size of Indian producers, but would cause substantially more harm for US firms. The reason is that US firms are larger on average and managerial delegation is especially valuable for large firms, thus making delegation efficiency and other factors affecting firm growth complements. (JEL D22, G32, L25, L26, O14)

A manufacturing renaissance? Industrialization trends in the developing world

“…In some countries, such as Viet Nam, structural change is found to be related to an expansion of jobs at registered firms (McCaig and Pavcnik 2018). In other developing Asia countries such as India, jobs might mainly be created at small firms (Akcigit et al 2021). In sub-Saharan Africa, the 2010s dummy is significantly negative for registered firms (see column 6).…”

The IT Revolution and Southern Europe’s Two Lost Decades

“…As noted previously, we consider management ef ciency as an exogenous primitive in our analysis. However, Section B.2 in the online appendix lays out a stylized model, building on Akcigit et al (2016), which shows how these differences can be microfounded by differences in human capital, trust, family values or judicial institutions.…”

“…6 More generally, our paper builds on the extensive literature on the IT Revolution (see, among many others, Stiroh 2002, Syverson 2011and Akerman et al 2015. It also relates to a number of studies on the role of management ef ciency for cross-country TFP differences (Guner et al 2015, Akcigit et al 2016, Bloom et al 2016, which however do not consider IT. Finally, our model shares some similarities with Bustos 5.…”

Achieving Scale Collectively

“…Finally, we note that it remains a puzzle why more profitable firms do not formally take over smaller and less productive firms, and instead engage in rental relationships with them. There could be many constraints leading to this, such as contracting frictions or a limited span of control (Bloom et al, 2010;Akcigit et al, 2021). While our survey (and our model) is not designed to answer these important questions, we note that through the rental market, firms de facto already exploit at least some of the productivity benefits of consolidation, which substantially limits the impact of any such constraints on productive efficiency.…”