During the 1950s, as part of the Marshall Plan, the US subsidized loans to help European firms purchase technology and sponsored training trips for managers from abroad to US firms. Here, Michela Giorcelli of UCLA uncovers the significant long-term effects of this so-called Productivity Program for the Italian firms that participated in it—and in doing so illuminates larger questions about the drivers of firm performance.
In a typical four-digit manufacturing industry in the United States, establishments at the 90th percentile of total factor productivity (TFP) are about twice as productive as those at the 10th percentile. This dispersion appears even larger in developing countries: for instance, Indian and Chinese firms display 400 percent productivity spread between the 10th and 90th percentile. These very large differences between plants are highly persistent, contributing to significant disparities in economic performance over time and across countries.
While the popular press and business schools have long stressed the importance of good management, empirical economists have had relatively little to say about management practices. A major problem has been the absence of high-quality data on a large scale that follow the same firms over time. Moreover, the choice of whether to adopt management practices is made by firms themselves. Better-managed firms are more productive, but, at the same time, more productive firms adopt better management practices.
In my paper “The Long-Term Effects of Management and Technology Transfers,” I study the long-run effects of management on firm performance, using evidence from a unique historical episode, the United States Technical Assistance and Productivity Program in Italy. During the 1950s, as part of the Marshall Plan, the US sponsored training trips for European managers to learn modern management practices at US firms. The program also issued subsidized loans to European businesses to purchase technologically advanced US machines. In Italy, small and medium-sized manufacturing firms from five geographic regions could apply for this program (Figure 1, Panel A) and could decide whether to send their managers to the US (hereafter, management transfer), to purchase US machines (technology transfer), or to do both (combined management and technology transfers). However, in 1952, after all firm applications had been submitted and reviewed, the US unexpectedly cut the program’s budget, and only firms from five smaller Italian provinces—one for each of the original regions—eventually participated in it (Figure 1, Panel B). I therefore compare the performance of firms that applied for and eventually received the management or the technology transfer (treated firms) with that of firms applying for the same transfer, but not receiving it due to the budget cut (comparison firms).
I use newly assembled panel data, collected from numerous historical archives, on the population of 6,065 Italian firms eligible to apply for the Productivity Program. For each firm, I collected and digitized balance sheets from 5 years before to 15 years after the Productivity Program and linked them to firms’ application records.
I find three key results: First, firms that sent their managers to the US were more likely to survive. For instance, the survival probability of treated firms is 90 percent after 15 years, compared to 68 percent for comparison firms (Figure 2, Panel A). Treated firms had also higher sales, employment, and productivity than companies that applied but did not get the management transfer due to the budget cut. These effects were large and grew over time for at least 15 years after the program. Their productivity jumped by 15 percent within one year, and continued to grow without reaching a plateau, with a cumulative increase of 49.3 percent in 15 years (Figure 2, Panel B).
Second, the technology transfer also boosted firm performance, but the gains did not persist. The productivity of treated firms rose gradually in the first 10 years, relative to the technology comparison group, but then flattened out. Third, there was a complementarity between management and technology. The effects on firms that received the combined management and technology transfers were significantly larger than the sum of the single transfers. For instance, their productivity increased by an additional 12.1 percent in 15 years, relative to the sum of the other two transfers.
What changed in the firms that received the managerial training? More than 90 percent of them adopted the new American managerial practices within 3 years and were still implementing them 15 years later. Specifically, these companies started regularly maintaining their machines and tracking their sales and orders. They also improved working and safety conditions, organized training classes for managers and other workers, and invested in market research, branding, and advertising. In the longer run, changes in firm organization and access to the credit market amplified the initial effects of the program. Improved performance led firms to increase the number of plants and the manager-to-worker ratio, and to be more likely to become professionally managed (instead of remaining family-managed). Improved performance also gave firms greater access to credit market, which, in turn, allowed them to invest more in physical capital.
Despite the large and positive effects of adopting US management practices, spillover effects on firms that did not participate in the Productivity Program appear extremely limited. This evidence generates a natural question: why did not those start implementing the new management practices, imitating treated firms? Lack of information might be an explanation: excluded firms might not have been aware of the adoption of such practices by treated firms. Moreover, non-participating firms may have thought these practices were not profitable, attributing the success of treated firms to other factors, for example, networking effects. Or, even if they were aware of the importance of such practices, they might not have known how to implement them without training from US experts. Moreover, treated firms had no incentive to discuss the details of their business with potential competitors, especially given their small dimension. Finally, labor mobility in Italy during the 1950s and 1960s was extremely low. For instance, 88 percent of managers who visited the US were still working in the same firms 15 years after the intervention. As a result, knowledge spillovers were modest. These findings suggest that, while management practices could be taught and transferred, they remain confined with adopting firms.
This research offers some insights for public policy. Italy in the 1950s was comparable to some of today’s developing countries, where business training and technology transfers are among the most common forms of active support for small and medium-sized firms. However, such policies are usually evaluated over a limited number of months or years and using relatively small samples. In contrast, the Productivity Program provides evidence on a large and heterogenous number of firms in both the short run and the long run. Another advantage of this research is that I am able to observe all firms, including eligible non-applicants, whereas in most settings only applicant firms are observed. Firms that did not apply for the Productivity Program were, on average, smaller and less productive than firms that applied for it, suggesting that firms with more need for business training and technology transfers might not want to participate in such programs.
Michela Giorcelli is an Assistant Professor in the Department of Economics at the University of California Los Angeles and a Faculty Research Fellow at the NBER. Her interests lie at the intersection between Economic History, Labor Economics and Economics of Innovation. Her research primarily focuses on the determinants of productivity and innovation in the 20th century.
Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.