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The Organization of Firms Across Countries

68 Pages Posted: 21 Jul 2009  

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Raffaella Sadun

Harvard University - Strategy Unit; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

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Date Written: July 2009

Abstract

We argue that social capital as proxied by regional trust and the Rule of Law can improve aggregate productivity through facilitating greater firm decentralization. We collect original data on the decentralization of investment, hiring, production and sales decisions from Corporate Head Quarters to local plant managers in almost 4,000 firms in the US, Europe and Asia. We find Anglo-Saxon and Northern European firms are much more decentralized than those from Southern Europe and Asia. Trust and the Rule of Law appear to facilitate delegation by improving co-operation, even when we examine "bilateral trust" between the country of origin and location for affiliates of multinational firms. We show that areas with higher trust and stronger rule of law specialize in industries that rely on decentralization and allow more efficient firms to grow in scale. Furthermore, even for firms of a given size and industry, trust and rule of law are associated with more decentralization which fosters higher returns from information technology (we find IT is complementary with decentralization). Finally, we find that non-hierarchical religions and product market competition are also associated with more decentralization. Together these cultural, legal and economic factors account for four fifths of the cross-country variation in the decentralization of power within firms.

Suggested Citation

Bloom, Nicholas and Sadun, Raffaella and Van Reenen, John, The Organization of Firms Across Countries (July 2009). NBER Working Paper No. w15129. Available at SSRN: https://ssrn.com/abstract=1434643

Nicholas Bloom (Contact Author)

Stanford University - Department of Economics ( email )

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HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Raffaella Sadun

Harvard University - Strategy Unit ( email )

Harvard Business School
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Boston, 02163
United States

HOME PAGE: http://people.hbs.edu/rsadun

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

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United Kingdom

HOME PAGE: http://cep.lse.ac.uk/_new/staff/person.asp?id=1758

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)

Stanford Graduate School of Business ( email )

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United States

Institute for Fiscal Studies (IFS) ( email )

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United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

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