Management and industrialisation in Africa

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By Daniela Scur and Nicolas Lippolis, University of Oxford


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Africa-IndustrialisaionThe manufacturing sector has traditionally been seen as an engine for development due to its high propensity for productivity gains. Worryingly, recent evidence suggests that this has not been the case in Africa.1 One important determinant of firm productivity is the quality of management practices, and new data sheds light on the state of management in some African countries.

Management around the world

For over 12 years, the World Management Survey (WMS) has been collecting data on management practices using an interview-based methodology. It defines 18 key management practices and scores them from worst practice (1) to best practice (5). The focus is on such practices as monitoring, target-setting and incentives/people management. Research using this data suggests a strong correlation between management and a series of productivity measures – such as firm size, profitability, sales growth, market value and survival. Experimental evidence further confirms a positive correlation.2 Indeed, researchers have found that the quality of management can help explain productivity differences between countries, and it is estimated that management accounts for close to a third of cross-country productivity differences.3 The WMS only surveys firms with 50 or more employees, which means a set of medium- and large-sized, more well-established firms. Although this is not a random sample relative to the full population, it is a random sample of the population of firms that have reached some scale and, arguably, have growth potential.

 

Quality of management across the world
Figure 1: Quality of management across the world
Average management score by country
relative to its per-capita GDP in PPP values
Source: authors’ calculations using data from the World Management Survey

Management practices in African countries

In 2013, the WMS project collected data (Figure 1) on seven African countries: Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Tanzania and Zambia. The data suggest that, on average, African firms tend to be poorly managed with nearly all countries occupying the bottom of the ranking among the 35 available countries. The average management score for African manufacturing firms is 2.32, as compared to 2.69 in Asia, 2.72 in Latin America, 2.97 in Europe and 3.28 in North America.

Although African countries are at the bottom of the ranking on average, scores within countries (Figure 2) are widely distributed. Although the average firm scores around 2.5 in Kenya, for example, a tail of firms scores above that, albeit thin. Thus, it is very much possible to run well-managed firms in these countries, but something is holding back the more widespread diffusion of good management.

Distribution of the quality of management in African countries
Figure 2: Distribution of the quality of management in African countries


But why don’t firms adopt best practices?

Management matters for firm productivity according to the overwhelming evidence. In areas where radical improvements in capital and labour inputs are not immediately feasible, the organisation of the available inputs via good management practices becomes even more important, as it does not necessarily require more machines or more people. So why don’t firms implement these practices?

Rivkin (2000) and Gibbons and Henderson (2013) put forward four main arguments, often referred to as the “four shuns”: perception, inspiration, motivation, persuasion. Taking each of the “shuns” and checking on the evidence in hand for African countries reveals the following:

Perception refers to managers simply not knowing they are badly managed; after all, why would anyone try to fix something they do not know needs fixing? The WMS offers some evidence on this potential mechanism by including a question that asks respondents – after chatting about their practices for over an hour – to rate the quality of the managerial structures at their firm. On average, managers in all the African countries surveyed tend to believe their practices are over one point better than they actually are, revealing a wider gap in perceptions than in other regions (the standard deviation in the full WMS sample is 0.66). This is, of course, an over-simplification and numerous caveats need to be considered. Rather than making any strong assertions, we see anecdotal evidence showing a gap in perceptions and this could be a clear policy prescription.

Inspiration revolves around those managers who do have a good “perception” of their practices and know they need to improve but may not know how to change their practices. If formal business education is linked to such managerial skills, it could be that the low supply of managers in the labour market of these firms is a source of this lack of know-how. A new survey (the Ownership Survey) has collected detailed data on the managers and CEOs of the firms in the WMS sample for African countries and finds that, on average, 64% of managers in a firm have at least a formal university degree, while only 3% of employees (including managers and non-managers) have a business degree. Additional difficulties are the lack of foreign direct investment in African manufacturing and the fact that few African firms export, as the evidence suggests that interactions with foreign investors and buyers expose firms to better practices.4 Still, even if CEOs know what is wrong, it could be they cannot find the motivation to implement changes.

Motivation points to some friction or problem holding CEOs back from implementing managerial changes. “Weak competition in product markets, agency and governance problems” are amongst the potential issues (Bloom et al. 2014). African economies are generally uncompetitive environments, with fragmented markets and most sectors dominated by a handful of large firms. Crucial to African firms is ownership: over 54% of firms in the sample are owned and controlled by families (that is, have a family who owns the majority of the shares and also have a family member acting as CEO). Family firms have their own internal agency issues that may be preventing firms from adopting best practices.5 This is, finally, related to persuasion.

Persuasion recognises that organisations are complex and require a group of agents acting in tandem to make change happen and stick. Even if CEOs are keen and eager, pressures from above or below could be generating resistance (for example, unwilling family board members or a coalition of suspicious employees).

Policy implications

Over the past decade, mainly external policies likely to improve quality of management were suggested.6 Such policies include: allowing for greater competition, reducing regulatory barriers and red tape, scrapping clientelistic tax incentives, creating incentives for skills improvement, and devising national informational strategies to diffuse knowledge on benchmarking and managerial best practices.7 The hope now is for policy makers and entrepreneurs in Africa to act in these and other ways to promote good management in their countries and firms.


To read more about this topic, explore the African Economic Outlook 2017: Entrepreneurship and Industrialisation.   



References:

Atkin, D., Khandelwal, A.K. and Osman, A. (2017) – “Exporting and Firm Performance: Evidence from a Randomized Experiment” Quarterly Journal of Economics, 132(2), 551-615.

Bloom, N., Sadun, R. and Van Reenen, J. (2016) – “Management as a Technology” NBER Working Paper No. 22327.

Bloom, N., Lemos, R., Sadun, R., Scur, D., and Van Reenen, J. (2014) – “The New Empirical Economics of Management”, Journal of the European Economics.

Bloom, N., Eifert, B., Mahajan, A., McKenzie, D. and Roberts, J. (2013) – “Does Management Matter? Evidence from India” Quarterly Journal of Economics, 128, 1-51.

Bloom, N. and Van Reenen, J. (2007) – “Measuring and Explaining Management Practices across Firms and Countries” Quarterly Journal of Economics, 122, 1351-1408.

Lemos, R. and Scur, D. (2016) – “All in the family? CEO choice and firm organization” CSAE Working Paper 2016/29

Diao, X., McMillan, M. and Rodrik, D. (2017), “The Recent Growth Boom in Developing Countries: A Structural Change Perspective” NBER Working Paper No. 23132.

Van Biesebroeck, J. (2005) – “Exporting Raises Productivity in Sub-Saharan African Manufacturing Firms” Journal of International Economics, 67(2), 373-391.


1. See Diao, McMillan, and Rodrik (2017)

2. See Bloom and Van Reenen (2007), Bloom et al, (2014), Bloom et al (2013).

3. Bloom, Sadun, and Van Reenen (2016)

4. Van Biesebroeck (2005), Atkin, Khandelwal, and Osman (2017)

5. See also Lemos and Scur (2016)

6. See Bloom et al (2014) for a review and summary.

7. A soon-to-be-released working paper will discuss these external factors as well as analyse in greater detail the “shuns” internal barriers to adoption in the African context.