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By Emily Miller
With transportation costs declining and free trade agreements spanning the globe, international trade is flourishing. The latest major multilateral agreement, the Trans-Pacific Partnership (TPP), is the largest free trade agreement in history. It includes the United States and eleven other nations in the Asia-Pacific region, which together represent 40 percent of the global economy. Still, no country symbolizes the rapid growth of cross border trade better than China. Though not part of the TPP, China pulls its weight in international trade as the largest export economy in the world, singlehandedly accounting for 12 percent of global exports.
Burgeoning trade has captured the attention of researchers. Open markets can swell profits for companies as they expand their customer base overseas – but not all companies chose to export and those that do have varying levels of success. What explains these differences? It is well-established that successful exporters are typically larger and more productive than their non-exporting counterparts. Stanford Center on Global Poverty and Development Faculty Affiliate Nick Bloom and co-authors are exploring a lesser understood area and provide the first evidence on the importance of management practices for firms' export performance.
Using Chinese and U.S. survey data of businesses, Bloom and co-authors show that better managed businesses are more successful exporters. Good management makes companies more likely to export, more profitable in their export activity, and better able to produce high quality goods. Managerial competence includes designing and implementing realistic production targets, monitoring progress through data collection and analysis, and using incentives to reward high performers and improve low performers.
Management influences companies’ exporting activities through impacts on efficiency and quality. First, good management can identify ways to assemble inputs more cheaply and thereby make production more efficient. Second, effective management can support production of high quality goods through the ability to source high quality inputs, ensure quality control, and supervise assembly of complex products. Bloom and co-authors find that exporting companies with superior management tend to use more imported inputs, as well as more varied, more expensive, and higher quality inputs. Typically these are imported from a set of richer and more diverse countries. In addition, better-managed exporters tend to earn higher profits, sell a wider range of products, and export to more destinations. Taken together, good management practices help exporting firms to more efficiently produce more complex and higher quality goods.
“Long since the work of Henry Ford and Edward Deming have engineers and managers tried to focus on the importance of product quality for export success. The incredible growth of firms like Toyota – which focus relentlessly on product quality – have highlighted how better managers aim at higher quality products, leading to export success,” Bloom noted in an interview.
Interestingly, Bloom and co-authors find that management practices appear to have a greater effect on exports than on domestic sales. This could be because different products are sold domestically and abroad. If companies offer higher quality goods to richer consumers in foreign markets, the more complex production processes of these goods might require better management.
As trade reforms continue across the globe, Bloom and co-authors speculate that management know-how may shape the impact. Their research suggests that export performance depends not only on open borders, but also on the ability of companies to manage complex production processes and source inputs from a variety of countries. Well-managed companies may stand to benefit disproportionately as trade barriers are relaxed.
This article was first published on November 25, 2015.