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The Organization of Firms Across Countries

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Author Info
Nick Bloom
Raffaella Sadun
John Van Reenen

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Abstract

We argue that social capital as proxied by regional trust and the Rule of Law can improve aggregateproductivity through facilitating greater firm decentralization. We collect original data on the decentralization ofinvestment, hiring, production and sales decisions from Corporate Head Quarters to local plant managers inalmost 4,000 firms in the US, Europe and Asia. We find Anglo-Saxon and Northern European firms are muchmore decentralized than those from Southern Europe and Asia. Trust and the Rule of Law appear to facilitatedelegation by improving co-operation, even when we examine "bilateral trust" between the country of originand location for affiliates of multinational firms. We show that areas with higher trust and stronger rule of lawspecialize 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 moredecentralization which fosters higher returns from information technology (we find IT is complementary withdecentralization). Finally, we find that non-hierarchical religions and product market competition are alsoassociated with more decentralization. Together these cultural, legal and economic factors account for fourfifthsof the cross-country variation in the decentralization of power within firms.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0937.

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Date of creation: Jun 2009
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Handle: RePEc:cep:cepdps:dp0937

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Related research
Keywords: decentralization; trust; Rule of Law; social capital; theory of the firm;

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Find related papers by JEL classification:
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Maria Guadalupe & Julie Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," NBER Working Papers 14491, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Pinelopi K. Goldberg & Amit Khandelwal & Nina Pavcnik & Petia Topalova, 2008. "Multi-product Firms and Product Turnover in the Developing World: Evidence from India," NBER Working Papers 14127, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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