What comes first to mind when we hear the words “technology adoption”? Answers tend to range widely, from a new machine, to a resistant seed variety, to an online payment method, but they rarely include organisational practices. However, besides using new inputs or processes for the production of goods and the delivery of services, we can also improve firm productivity by changing its “management technology”.
Governments have recognised the importance of management capabilities, and identified a positive relationship between good business practices and firm productivity. Randomised controlled trials (RCTs) allow us to gather even stronger evidence by testing for a cause-effect link between management practices and business outcomes, and evaluating if and how good practices can be best taught. In particular, RCTs have shown that management practices matter for sales, profit and business growth both in the short and in the long run, and have identified interventions that can improve management, often in remarkably cost-effective ways.
Management matters - and can be taught
To demonstrate the importance of management practices for productivity, Bloom et al. (2013) provided free management consulting services to randomly chosen plants of Indian textile manufacturing firms in 2008, teaching modern management practices such as quality control procedures, inventory management and Human Resource Management (HRM) practices. This intervention increased plant productivity by 17% by the end of the first year, and over a three-year period led to the opening of more production plants in the treated plants as compared to the control plants. In 2017, the authors revisited the firms that participated in their original experiment to see whether the effect of their intervention persisted. They found a large and significant gap both in management practices and in performance between the treatment and the control plants, despite spillovers in practices between plants, and the fact that about half of the management practices adopted in the original experimental plants had been dropped (Bloom et al. 2018). 1
Whereas the Indian trial involved large firms concentrated in the same sector, an RCT with over 400 businesses in Mexico confirmed that access to private, local consulting services can also improve the managerial practices of micro, small and medium-sized enterprises across different industries. The intervention improved firms’ marketing and financial accounting practices, with a positive impact on productivity and a persistent large increase in the number of employees even 5 years after the programme (Bruhn et al. 2018). 2
While these results certainly prove the importance of management practices for firm growth, we caution against treating them as panacea (the provocatively titled Bloomberg opinion piece “Management Consultants Might Be the Best Foreign Aid” comes to mind). A case in point is the trial that randomly assigned micro-enterprise owners in Ghana to work with consultants: despite temporary improvements in their business practices, business owners soon reverted back to their pre-trial behaviour, and experienced no business growth as a result (Karlan et al. 2015).
Cost-effective interventions
While the interventions in India and Mexico were successful, they were also quite costly as they involved extensive individual management consulting delivered by private firms. Encouragingly, recent studies have identified more cost-effective solutions to improving firms’ management practices.
First, researchers have demonstrated that the intervention need not happen on a one-on-one basis to be effective: in a trial among Colombian auto parts manufacturers, small-group based management consulting was found to yield similar improvements in management practices as individual consulting, at a significantly lower cost (Iacovone, Maloney, and Mckenzie, 2018). 3
Second, we may not even need to hire consultants at all: there seems to be great promise in facilitating peer-to-peer knowledge sharing for better management. In a trial among owner-managers of young Chinese firms, researchers found that those firms whose managers were randomly assigned to attend regular meetings with their peers achieved significantly higher management scores, and also greater profit than those assigned to a “no-meeting” condition, demonstrating the potential of business networks for information sharing (Cai and Szeidl 2018). 4 An RCT among urban retail shop owners in Indonesia demonstrated that in-person interaction may not even be necessary: a handbook of local best practices coupled with “experiential learning modules” (a documentary video on the experiences of highly successful peers, and/or light in-shop assistance on the implementation of the handbook) led to improved managerial practices compared to the control group and to the group who only received the handbook (Dalton et al. 2019).
Business training or personal initiative?
Despite the success of the above-described programmes, it may be valuable to extend the content of the interventions beyond formal business practices. Depending on the types of businesses that need support, a psychology-based programme may achieve better results than a traditional business training programme.
This was the case in an RCT conducted in Togo, where microenterprise owners were randomised into receiving either no intervention, business training (accounting and financial management, marketing, human resource management, and formalisation), or personal initiative training (teaching a mindset of self-starting behaviour, innovation, identifying and exploiting new opportunities, goal-setting, planning and feedback cycles, and overcoming obstacles). Personal initiative training increased firm profits by 30% compared to the control group, whereas traditional training only led to a statistically insignificant 11% increase in profits (Campos et al. 2017). In addition, personal initiative training may be particularly beneficial for female entrepreneurs, and as such, can help close the gender gap in entrepreneurship (Mensmann et al. 2018).
More evidence through Business Basics
IGL is very pleased to be partnering with the UK Department of Business, Energy and Industrial Strategy (BEIS) and Innovate UK to support the Business Basics Fund (BBF) that sits within the wider Business Basics Programme. The programme embraces an experimental approach to generating much-needed further evidence on management practices by supporting a range of projects that test innovative ways of encouraging small and medium-sized enterprises (SMEs) to take up productivity-boosting ways of working. With the first experiments already in the field, we have already gathered valuable insights that Luke Nightingale (BEIS) shared with participants at the IGL2019 conference. For more details, stay tuned for future blog posts summarising initial results and lessons learned from the first funding round, coming soon!
For those interested in running their own trial a third funding round has now opened. Within this competition up to £2 million is available for trials looking at how SMEs could be encouraged to adopt technology, including those that can limit their exposure to late payments, such as automated payment processes. Management practices cannot be the sole focus of this third round, however projects could explore the alignment with technology adoption - e.g. does realising the benefits from technology adoption also require support to improve wider business practices.
References
Abay, Kibrom A., Garrick Blalock, and Guush Berhane. 2017. “Locus of Control and Technology Adoption in Developing Country Agriculture: Evidence from Ethiopia.” Journal of Economic Behavior & Organization 143 (November): 98–115.
Atkin, David, Azam Chaudhry, Shamyla Chaudry, Amit K. Khandelwal, and Eric Verhoogen. 2017. “Organizational Barriers to Technology Adoption: Evidence from Soccer-Ball Producers in Pakistan.” The Quarterly Journal of Economics 132 (3): 1101–64.
Beaman, Lori, and Andrew Dillon. 2018. “Diffusion of Agricultural Information within Social Networks: Evidence on Gender Inequalities from Mali.” Journal of Development Economics 133 (July): 147–61.
Beaman, Lori, Dean Karlan, Bram Thuysbaert, and Christopher Udry. 2013. “Profitability of Fertilizer: Experimental Evidence from Female Rice Farmers in Mali.” The American Economic Review 103 (3): 381–86.
BenYishay, Ariel, and A. Mushfiq Mobarak. 2019. “Social Learning and Incentives for Experimentation and Communication.” The Review of Economic Studies 86 (3): 976–1009.
Bloom, Nicholas, Benn Eifert, Aprajit Mahajan, David McKenzie, and John Roberts. 2013. “Does Management Matter? Evidence from India.” The Quarterly Journal of Economics 128 (1): 1–51.
Bloom, Nicholas, Aprajit Mahajan, David McKenzie, and John Roberts. 2018. “Do Management Interventions Last? Evidence from India.” Working Paper Series. National Bureau of Economic Research.
Bruhn, Miriam, Dean Karlan, and Antoinette Schoar. 2018. “The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico.” Journal of Political Economy 126 (2): 635-687.
Cai, Jing, and Adam Szeidl. 2018. “Interfirm Relationships and Business Performance.” The Quarterly Journal of Economics 133 (3): 1229–82.
Campos, Francisco, Michael Frese, Markus Goldstein, Leonardo Iacovone, Hillary C. Johnson, David McKenzie, and Mona Mensmann. 2017. “Teaching Personal Initiative Beats Traditional Training in Boosting Small Business in West Africa.” Science 357 (6357): 1287–90.
Chatterji, Aaron, Solene Delecourt, Sharique Hasan, Rembrand Koning. 2019. “When does advice impact startup performance?” Strategic Management Journal 40: 331– 356.
Dalton, Patricio S., Haki Pamuk, Ravindra Ramrattan, Daan van Soest, and Burak Uras. 2018. “Payment Technology Adoption and Finance: A Randomized-Controlled-Trial with SMEs.”
Dalton, Patricio S., Julius Rüschenpöhler, Burak Uras, and Bilal Zia. 2019. “Local Best Practices for Business Growth.”
Duflo, Esther, Michael Kremer, and Jonathan Robinson. 2011. “Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya.” The American Economic Review 101 (6): 2350–90.
Dupas, Pascaline. 2014. “Short-run subsidies and long-run adoption of new health product: Evidence from a field experiment.” Econometrica: Journal of the Econometric Society 82 (1): 197–228.
Emerick, Kyle, Alain de Janvry, Elisabeth Sadoulet, and Manzoor H. Dar. 2016. “Technological Innovations, Downside Risk, and the Modernization of Agriculture.” The American Economic Review 106 (6): 1537–61.
Engle Warnick, James C., Javier Escobal, and Sonia C. Laszlo. 2011. “Ambiguity Aversion and Portfolio Choice in Small-Scale Peruvian Farming.” The B.E. Journal of Economic Analysis & Policy 11 (1): 83.
Giné, Xavier, and Dean Yang. 2009. “Insurance, Credit, and Technology Adoption: Field Experimental Evidence from Malawi.” Journal of Development Economics 89 (1): 1–11.
Giorcelli, Michela. 2019. “The Long-Term Effects of Management and Technology Transfers.” The American Economic Review 109 (1): 121–52.
Harrison, Glenn W., and John A. List. 2004. “Field Experiments.” Journal of Economic Literature 42 (4): 1009–55.
Iacovone, Leonardo, William F. Maloney, and David J. Mckenzie. 2018. “Improving Management with Individual and Group-Based Consulting : Results from a Randomized Experiment in Colombia.” 133230. The World Bank.
Iacovone, Leonardo; David J. Mckenzie. 2019. “Shortening Supply Chains : Experimental Evidence from Fruit and Vegetable Vendors in Bogota (English).” Policy Research working paper; no. WPS 8977
Islam, A, Ushchev, P, Zenou, Y and Zhang, X. 2018. 'The Value of Information in Technology Adoption: Theory and Evidence from Bangladesh'. London, Centre for Economic Policy Research.
Karlan, Dean, Ed Kutsoati, Margaret McMillan, and Chris Udry. 2011. “Crop Price Indemnified Loans for Farmers: A Pilot Experiment in Rural Ghana.” The Journal of Risk and Insurance 78 (1): 37–55.
Karlan, Dean, Ryan Knight, and Christopher Udry. 2015. “Consulting and capital experiments with microenterprise tailors in Ghana.” Journal of Economic Behavior & Organization 118: 281-302,
Lee, Jean, Jonathan Morduch, Saravana Ravindran, Abu Shonchoy, and Hassan Zaman.
2018. “Poverty and Migration in the Digital Age: Experimental Evidence on Mobile Banking in Bangladesh,” NYU working paper.
Liu, Elaine M. 2013. “Time to Change What to Sow: Risk Preferences and Technology Adoption Decisions of Cotton Farmers in China.” The Review of Economics and Statistics 95 (4): 1386–1403.
Mensmann, Mona, Michael Frese, Francisco Campos, Markus Goldstein, Leonardo Iacovone, Hillary Johnson, and David McKenzie. 2018. “Closing the Gender Gap – Personal Initiative Training and Female Business Performance.” Proceedings: A Conference of the American Medical Informatics Association / ... AMIA Annual Fall Symposium. AMIA Fall Symposium 2018 (1): 10669.
- 1. A remarkable (non-experimental) study provides another piece of evidence for the long-run impact of management training (Giorcelli 2019). An unexpected budget cut allows the author to compare Italian firms who successfully applied for US study trips for managers provided by the Marshall Plan with similar firms who applied for the programme but were excluded due to the cut. Results show that management training improved survival and performance - and the positive impact persisted for over 15 years!
- 2. It is worth pointing out that trials offering in-class management training rather than consulting have found limited impact of their intervention on actual business performance, despite improvements in the treated firms’ managerial practices.
- 3. Firm data from this trial were rather noisy, but administrative records provided some evidence that the group treatment increased firm size, whereas this was not the case for the individual treatment.
- 4. A trial in India that involved 100 high-growth tech firms highlights an important caveat to peer learning: the advice that peers provide depends on their own management style and thus it is of varying quality (Chatterji et al. 2018).