Tuesday, July 27, 2010

Does Product Market Competition Lead Firms to Decentralize?

Posted by D. Daniel Sokol

Nick Bloom (Stanford Econ), Raffaella Sadun (Harvard Business School), and John Van Reenen (LSE Econ) ask Does Product Market Competition Lead Firms to Decentralize?

ABSTRACT: There is a widespread sense that over the last two decades firms have been decentralizingdecisions to employees further down the managerial hierarchy. Economists have developed arange of theories to account for delegation, but there is less empirical evidence, especiallyacross countries. This has limited the ability to understand the phenomenon ofdecentralization. To address the empirical lacuna we have developed a research program tomeasure the internal organization of firms - including their decentralization decisions - acrossa large range of industries and countries. In this paper we investigate whether greater productmarket competition increases decentralization. For example, tougher competition may makelocal manager's information more valuable, as delays to decisions become more costly. Sinceglobalization and liberalization have increased the competitiveness of product markets, oneexplanation for the trend towards d! ecentralization could be increased competition. Of coursethere are a range of other factors that may also be at play, including human capital,information and communication technology, culture and industrial composition. To tacklethese issues we collected detailed information on the internal organization of firms acrossnations. The few datasets that exist are either from a single industry or (at best) across manyfirms in a single country. We analyze data on almost 4,000 firms across twelve countries in Europe, North America and Asia. We find that competition does indeed seem to foster greaterdecentralization.


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