Does Product Market Competition Lead Firms to Decentralize?
Stanford University - Department of Economics; London School of Economics - Centre for Economic Performance (CEP); National Bureau of Economic Research (NBER)
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)
January 11, 2010
Harvard Business School Strategy Unit Working Paper No. 10-052
There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address the empirical lacuna we have developed a research program to measure the internal organization of firms - including their decentralization decisions - across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local manager’s information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital, information and communication technology, culture and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few data-sets that exist are either from a single industry or (at best) across many firms 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 greater decentralization.
Number of Pages in PDF File: 12
Date posted: January 11, 2010