How do new management practices enter a firm?


How do new management practices enter a firm?

By Jakob Schneebacher

Management and organisational capital are crucial inputs for many firms, but like other intangible assets, managerial capital is exceedingly difficult to measure accurately.

In a new ESCoE Discussion Paper, published today, we propose a novel framework for thinking about all the ways managerial capital can enter a firm, and explore what existing UK microdata has to say on the topic. By highlighting what is, and is not, possible with existing data, we hope to provide a guide for other researchers interested in managerial capital and related intangibles.

We argue managerial capital can enter a firm in three ways: embedded in other factors of production (capital or labour), through direct investments (via outright purchases, for instance of consultancy services, or in-house creation), or through learning from others the firm interacts with (suppliers, customers, or clients). As we show in the paper, this framework encompasses channels that the existing literature has focused on, but also highlights previously neglected ways management practices can enter a firm.

To measure the contributions of these channels, we combine data from the Management and Expectations Survey (MES) on management practices with other existing firm-level data. The MES offers rich data on management practices, something available for few other countries at this level of detail. Additionally, we draw on a diverse battery of questions from the Annual Purchases Survey, the UK Innovation Survey, the E-Commerce Survey, the Employer Skills Survey and the Annual Survey of Hours and Earnings.

None of these surveys were set up with the explicit purpose of measuring managerial capital accumulation, and as a result, our mapping from the theoretical framework to the available UK data is necessarily incomplete. To take an extreme example, the learning channels are almost entirely absent from the existing data. However, even for more established channels, like the purchase of management consultancy services, the match between what the questionnaire asks and what we want to measure is not perfect.

Individually, our measures for each channel do show positive and statistically significant relationships with management practices. But when combining measures across all available UK business data sources in regressions, coefficients on individual channels can change sign, size and significance. This underscores the importance of looking at managerial capital accumulation jointly if we want to disentangle individual contributions.

On the other hand, the explanatory power of our regressions of management practices on individual channels does not increase dramatically as we add more variables. This result suggests that individual managerial accumulation channels usually make for useable proxies of overall management practice investment where a direct measure is not available. In that sense, our paper vindicates a large existing literature that has done just that, particularly using occupational categories to proxy for managerial capital investment.

Finally, we conduct a simple clustering analysis on the channels of managerial capital accumulation and show that different types of businesses will generally bring novel management practices into the firm in different ways. For instance, large manufacturing firms tend to rely on software that facilitates management and in-house management training, while firms in ICT and transportation services often rely on a more management-heavy structure and highly qualified employees (both managers and non-managers).

This paper contributes to our state of knowledge on managerial capital in several ways: it establishes new facts about the ways management practices vary across firms with the investments those firms make, and the inputs they purchase; it highlights the gaps in the current UK business data landscape when it comes to managerial capital, a subset of intangible capital; and it sheds light on the trade-offs researchers have to make when navigating these gaps.

We hope that our paper will encourage other researchers to make full use of the available UK data and enable them to avoid some of the pitfalls. We think this is necessary as much is still lacking from our understanding of managerial capital. What is the causal impact of different accumulation channels on the managerial capital in the firm? How does the use of different accumulation strategies vary across countries, and what does this imply for productivity differences? And finally, how do managerial capital accumulation strategies interact with investment in the other intangibles firms rely on?

Read the full ESCoE working paper here.

Jakob Schneebacher is an economist at the Office for National Statistics.

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Jakob Schneebacher

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