Lack of managers keeps India's businesses small

January 14, 2021

In today's economy, American businesses often tap into professional management to grow, but most firms in India and other developing countries are family owned and often shun outside managers. A new study co-authored by Yale economist Michael Peters explores the effects that the absence of outside professional management has on India's businesses and the country's economy.

The study, published in the American Economic Review, uses a novel model to compare the relationship between the efficiency of outside managers and firm growth in the United States and India. It shows that the lack of managerial delegation factors significantly into why businesses in India tend to stay small and has wider implications on the country's economy, constraining innovation, economic growth, and per capita income.

"There's been growing evidence that managerial services might be the key missing input for many firms in poor countries," said Peters, associate professor of economics in Yale's Faculty of Arts and Sciences. "Our analysis confirms that the absence of managerial delegation is a significant factor in why successful Indian businesses fail to grow, which reduces the overall productivity of the country's economy."

By growing, companies generate employment, promote innovation, and contribute to a countries' economic productivity, the researchers say.

In developed countries, family-owned firms such as Walmart, Ford Motor Co., and the Lego Group, which all emerged from humble beginnings, grew into corporate behemoths, with hundreds of thousands of employees, by delegating key operations to outside managers. But businesses in developing countries rarely hire managers outside the owners' families, the researchers note.

Peters and his co-authors, Ufuk Akcigit of the University of Chicago and Harun Alp of the University of Pennsylvania, focused their analysis on this disparity between developed and developing countries' firm sizes. They created a quantitative model that centers the role of managerial delegation in firm growth. It incorporated plant-level data from the United States and India and was calibrated to recognize that business in India might face higher barriers to growth, such as having less access to start-up capital, than U.S. businesses.

In India, more than 9 out of 10 of manufacturing businesses have fewer than four employees, and those small firms account for more than half of total employment. In contrast, two-thirds of U.S. manufacturing employment is concentrated in establishments with at least 100 employees, and only one-third of firms have fewer than four employees, according to the study.

The researchers found that India's economy suffers from "a lack of selection" -- the process of creative destruction through which successful businesses expand while unproductive firms close or are swallowed up by competitors -- allowing unproductive businesses to survive because successful businesses do not expand. Their analysis showed that the low productivity of outside managers in India, which they estimate to be substantially lower than in the United States, is one cause of the lack of selection and has negative consequences for India's economy.

If Indian businesses used outside managers as efficiently as U.S. businesses, it would boost economic productivity in India and increase the country's per capita income by about 11%, according to the study.

The study found a strong complementary relationship between the quality of outside managers and other factors affecting firm growth, such as access to capital or credit. Increasing the efficiency of managerial delegation to U.S. standards would increase average firm size by 3%, the researchers said. In contrast, if U.S. businesses had to operate with management practices common in India, the country's average firm would shrink by about 15%. This disparity between the U.S. and India shows that the productivity of outside managers is not the only determinant of firm growth and that other forces prevent successful Indian businesses from expanding, Peters explained.

"The complementarity between the efficiency of delegating managerial tasks and other aspects affecting firm growth, such as access to credit, is one of our key results," said Peters, who is affiliated with Yale's Economic Growth Center. "For improvements to managerial quality to have a large effect, other factors hindering growth must be addressed. If you repair a punctured tire, you still can't drive if your other tires are flat."
-end-
A link to the paper and a detailed summary of its findings is available on the Economic Growth Center's website.

Yale University

Related Economic Growth Articles from Brightsurf:

How religion can hamper economic progress
Study from Bocconi University on impact of antiscientific curricula of Catholic schools on accumulation of human capital in France during the 2nd Industrial Revolution could hold lessons on impact of religion on technological progress today.

More economic worries mean less caution about COVID-19
Workers experiencing job and financial insecurity are less likely to follow the CDC's guidelines for COVID-19, such as physical distancing, limiting trips from home and washing hands, according to a Washington State University study.

New insights into colorectal cancer: Growth factor R-spondin suppresses tumor growth
R-spondin, which enhances the growth of healthy cells in the gut, suppresses the growth of intestinal adenoma cells, thus reducing the formation of intestinal tumors.

Harvard research identifies business travel as driver of economic growth
Research from Harvard Kennedy School's Growth Lab finds a direct link between a country's incoming business travel and the growth of new and existing industries.

Evolutionary theory of economic decisions
When survival over generations is the end game, researchers say it makes sense to undervalue long shots that could be profitable and overestimate the likelihood of rare bad outcomes.

Economic alien plants more likely to go wild
An international team of researchers led by University of Konstanz ecologist Mark van Kleunen has compiled a global overview of the naturalization success of economic plants, showing that economic use in general, as well as the number and nature of economic uses, are crucial to their establishment in the wild.

Economic growth is incompatible with biodiversity conservation
A study involving more than 20 specialists in conservation ecology and ecological economics highlights the contradiction between economic growth and biodiversity conservation.Adopting limits to international trade in resources or reducing and sharing the work, are some of the seven alternative proposals that the article notes to stop biodiversity loss.

China's carbon emissions growth slows during new phase of economic development
Scientists from from the Academy of Mathematics and Systems Science, together with collaborators, recently revealed that China's annual carbon emissions growth declined significantly from 10% during the 2002-2012 period to 0.3% during the period from 2012-2017.

Study suggests economic growth benefits wildlife but growing human populations do not
Analysis shows that while national-level economic growth and social development -- including more women in government -- are associated with more abundant wildlife, growing human populations are linked to wildlife decline.

Renewable and nonrenewable energy in Myanmar's economic growth
An international group of scientists including a researcher from Ural Federal University developed a mathematical model that describes the influence of regenerative and non-regenerative energy sources on the economic growth of Myanmar.

Read More: Economic Growth News and Economic Growth Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.