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The Organization of Firms Across Countries

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  • Nick Bloom
  • Raffaella Sadun
  • John Van Reenen

Abstract

We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. To help identify causal effects, we look within multinational firms, and show that higher levels of bilateral trust between the multinational's country of origin and subsidiary's country of location increases decentralization, even after instrumenting trust using religious and ethnic similarities between the countries. Trust raises aggregate productivity through two channels: (1) trust facilitates reallocation between firms by allowing more efficient firms to grow as CEOs can decentralize more decisions and (2) trust complements the adoption of new technologies, thereby increasing productivity within firms during times of rapid technological change.

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

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