Professor Kevin Fox
When it comes to lifting productivity, best management practices can bring significant results.
Stanford economist Nicholas Bloom and his collaborators put this to the test in an Indian study where they offered free consulting on management practices to randomly chosen textile plants and compared their performance to a set of control plants.
They found that adopting these management practices raised productivity by 17% in the first year through improved quality, efficiency and reduced inventory, and within three years led to the opening of more production plants.
In the Indian case, the management consultants started from a low base. So there are unlikely to be those sorts of dramatic productivity gains to be achieved in Australia. But it does provide evidence that good management practices are effective and that business education does matter.
There’s a famous line among economists that says productivity growth is an index of our ignorance – the leftover bit of output growth that we haven’t been able to explain by the input growth. In fact, there are many factors that we struggle to understand in pin-pointing the drivers of productivity. We have an information shortfall.
How can we address this? Better data to analyse would be a good starting point.
The Australian Bureau of Statistics (ABS) should be strongly supported in its productivity program but the detailed data it collects needs to be made more accessible to Australian academic researchers. Unfortunately, the legislation under which the ABS presently operates prohibits this.
It’s a wasteful situation. Our researchers are partly funded by taxpayers yet they regularly have to use data from other countries and try to infer what it might mean in terms of Australian policy.
We are able to get big-picture aggregate numbers for industry sectors but we need to know more about what’s happening at the level of individual firms because it’s from here that productivity springs. This will involve an understanding of how firms are responding to incentives, what talent they have, their approach to innovation and what they understand about best managerial practice.
If we get a clearer view of what’s going on at a firm level, we should be able to design more effective policies, such as how to develop the talent, innovation and firm organisation that will better facilitate the diffusion of best practice in management.
Which brings us back to education. Institutions such as the Australian School of Business can provide an essential foundation in core business skills along with an understanding of the modern business context through research-led teaching.
Such training facilitates the capacity to foresee and react appropriately to changes in the operating environment, including financial crises, making the most of scarce resources and using incentives to effectively manage the workforce.
In the same way that technological breakthroughs can raise productivity and hence welfare, raising the level of management practice in Australia can assist in securing Australia’s future.
Professor Kevin Fox is the Head of School at the School of Economics at the Australian School of Business and Director of Centre for Applied Economic Research (CAER) at UNSW.