The Organization of Firms Across Countries

Nicholas Bloom (), Raffaella Sadun () and John van Reenen ()

CEP Discussion Papers from Centre for Economic Performance, LSE

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.

Keywords: decentralization; trust; Rule of Law; social capital; theory of the firm (search for similar items in EconPapers)
JEL-codes: L2 M2 O32 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-soc
Date: 2009-06
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Related works:
Working Paper: The organization of firms across countries (2009)
Working Paper: The Organization of Firms Across Countries (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0937

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