Are Large Headquarters Unproductive? Evidence from a panel of Japanese companies

Headquarters play an important role in modern companies, but the downsizing of headquarters is often advocated as a way to improve organizational efficiency. The size of headquarters is closely related to the centralization/decentralization of decision making, and a theoretically optimal level of (de)centralization depends on various conditions. Using a panel of more than 40,000 Japanese companies for the period 2001-2011, this paper empirically analyzes the determinants of the size of headquarters functions and their effect on productivity. The major results of this study are as follows. First, the cross-sectional dispersion of the size of headquarters functions is very large even within an industry. Second, company size, diversification of business activities, and the number of establishments are negatively related to the size of headquarters functions, suggesting that the growth and complication of businesses lead to decentralization of decision making. Third, the information and communications technology (ICT) network inside a company reduces the size of headquarters functions, although the magnitude of this effect is small. Fourth, headquarters functions contribute positively to a company's total factor productivity (TFP). Finally, ICT network and headquarters functions have a complementary role in productivity.