Irina Levina. Decentralization of decision-making at the firm: comparative analysis of firms in 7 European countries and Russia.

Transcription

1 Irina Levina Institute for Industrial and Market Studies, National Research University Higher School of Economics Decentralization of decision-making at the firm: comparative analysis of firms in 7 European countries and Russia. The paper explores factors that influence decentralization of the decision-making at the firms in 8 countries: Germany, UK, France, Austria, Spain, Italy, Hungary, and Russia. The paper studies cross-country similarities and differences in the effect of various firm-level factors on the organization of decision-making at the firm. It is shown that not only factors that alter the relative costs and benefits of decentralization, that are traditionally considered in the literature, are important for the organization of decision-making at the firm. Individual characteristics of the CEO (belonging of the CEO to the family of owners, age and gender of the CEO) have an important influence on organization of decision-making as well. For example, for firms where CEO controls or owns the firm or is a member of the family that controls or owns the firm, probability of decentralization is significantly lower. This effect is persistent across all countries studied, and in some countries is very strong. The paper also demonstrates that there are important differences between decentralized and centralized firms. Decentralized firms are more likely to innovate, to introduce new products to the market, to export their production. Therefore, the effect of human factor (individual characteristics of the CEO) on the organization of decision-making at the firm can have important implications for firm development. 1

2 It doesn t make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do. Steve Jobs 1. Introduction During the last decades significant changes in the internal organization of firms are observed. In particular, decision-making at the firms becomes more and more decentralized, with the increasing share of strategic questions moving from the responsibility of top management to responsibility of middle and local managers. Following the observed changes, literature on decentralization of firm decision-making is quickly developing (see [Aghion et al., 2014] for a survey). In the last years a lot of theoretical works on decentralization were published. This research analyzes factors that influence the organization of decisionmaking at the firm; investigates reasons that caused the observed movement towards higher decentralization. Empirical research on firm decentralization was until recently seriously limited by the lack of comprehensive survey data. However in the last years a number of extensive firm surveys were conducted and now empirical literature on the topic is also rapidly developing. However, despite the already existing extensive research, many questions related to decentralization of decision-making at the firm are still open for further exploration and discussion by the research community. [Aghion et al., 2014] point that there is still a substantial gap between theory and empirical work on the topic, and suggest theory and empirics of the organization of the firm, in particular, organization of the decision-making at the firm, to be one of the key growth areas in economics over the next 25 years. 2

3 This paper contributes to the literature by re-examining and enlarging the range of factors that influence the organization of decision-making at the firm, providing cross-country comparison of influence of various factors on the organization of decision-making, and presenting additional evidence on the relation between organization of the decision-making and firm outcomes. In the paper data from the two extensive surveys are used: European Firms in a Global Economy run in 2010 in 7 European countries (Germany, UK, France, Austria, Spain, Italy and Hungary), and Russian Firms in a Global Economy run in 2014 in Russia. The surveys samples are representative in each of the countries covered. The surveys collect extensive information about various aspects of firm structure, organization and activities, which allows make new insights to the questions related to decentralization of decision-making at the firm. In modern theoretical literature the choice of firm governance model is based on the comparison of relative costs and benefits associated with decentralization. Empirical literature demonstrates the relation between decentralization and such factors as level of competition (see, e.g. [Bloom et al., 2010a]), complication of problems firm top management needs to deal with ([Acemoglu et al., 2007]), age of the firm ([Acemoglu et al., 2007]), quality of human capital at the firm ([Caroli, Van Reenen, 2001]), information technologies availability ([Bresnahan et al., 2002]), level of trust in the environment firm operates ([Bloom et al., 2012]). All these factors affect the organization of decision-making at the firm through their influence on the relation of costs and benefits of decentralization. Empirical analysis presented in this paper shows that not only the factors that objectively influence the relation of costs and benefits of decentralization of decision-making, but also the subjective, human factors, not related in any way to costs or benefits of decentralization, have an important influence on the organization of decision-making at the firm. It is shown that along with firm size, age, quality of human capital at the firm and 3

4 quality of management, industry and region firm operates in, the CEO individual characteristics (belonging to the family of owners, and in some countries even age and gender) have a significant and, in some cases, very strong, influence on the organization of decision-making. At the firms where CEO controls or owns the firm or is a member of the family that controls or owns the firm probability of decentralization is significantly lower. Wide country coverage of data used in the analysis of this paper allows examine whether various determinants of decentralization are uniform in different countries or country-specific. According to the analysis of the paper some results presented in the previous literature are not country-uniform, but hold only in some of the countries covered by the data. For example, in all 8 countries covered by data large firms are more likely to be decentralized. However higher quality of human capital at the firm, as well as higher quality of management, are associated with higher probability of decentralization only in 4 out of 8 countries: in Germany, United Kingdom, Spain, and Italy. The result that younger firms tend to be more decentralized holds, in this data, only in Austria. At the same time, the effect of human factor on the organization of decision-making is persistent across all the countries covered by data. In all the countries studied, belonging of the firm CEO to the family of owners corresponds to significantly lower probability of decentralization of decision-making. The effect of CEO belonging to the family of owners is strong in all the countries studied, still the magnitude of this effect is significantly different between the countries, with the effect being in some countries extraordinary strong. For instance, in Austria firms where CEO controls or owns the firm or is a member of the family that controls or owns the firm have on average 42 percentage points lower probability of decentralization; in Germany and Spain about 30 percentage points lower probability of decentralization. In other countries covered by data the effect is much less pronounced: it amounts to 12 percentage points in Italy, 5-6 percentage points in the United Kingdom, 4

5 France, Hungary, and Russia. The effects of CEO age and gender on the probability of decentralization are observed in 4 out of 8 countries studied (Germany, France, Spain, and Italy), and are country-specific. Finally, the paper shows that there are important systematic differences between decentralized and centralized firms. Decentralized firms are more often involved in a number of activities that, according to the literature, are complementary to higher firm productivity and efficiency. Decentralized firms are more likely to innovate, to bring new products to the market, to provide training for employees, to export, in particular, to export to remote destinations. The described differences are persistent across all countries covered by the data: in each of the countries decentralized firms demonstrate significantly higher involvement at least in some of these activities. Hereafter the paper is organized as follows. In Section 2 the literature review is presented. Section 3 describes the data. Section 4 provides econometric analysis to investigate the factors that influence the organization of decision-making at the firm. Section 5 studies differences between decentralized and centralized firms. Section 6 concludes. 2. Literature review Changes in the internal organization of firms observed during the last decades cause significant interest to the topic of decentralization of decision-making at the firm in the literature. Decentralization is associated with certain costs related to the delegation of powers from the CEO and top management to middle and local managers, whose incentives can diverge from the incentives of CEO and top management. Still, decentralization is very important for growth and development of the firms. In many works, starting from early works of [Penrose, 1959] and [Chandler, 1962], it is shown that decentralization is important for the 5

6 establishment of large firms, since time the CEO disposes is limited. The larger the firm grows, the more important decentralization becomes. Modern theoretical models of firm decentralization are usually based on the comparison of costs and benefits of decentralization. Main benefits of decentralization considered in the theoretical models are better information available to middle and local managers, quicker decision-making by middle and local managers. Main costs of decentralization are possible divergence in incentives between CEO and top management at the one hand and middle and local managers at the other hand; limited trust to middle and local managers from the CEO and top management of the firm; possible coordination problems between managers. Surveys of theoretical works on firm decentralization can be found e.g. in [Bloom et al., 2010(b); Gibbons, Roberts, 2013]. The paper [Acemoglu et al., 2007] presents a theoretical model that shows that need and importance of decentralization is higher for the firms that meet more complicated problems, operate in non-standard circumstances, face higher uncertainty. Thus, probability of decentralization is higher for the firms that operate closer to the production-possibility frontier, firms that operate in more heterogeneous environment, younger firms. Predictions of the theoretical model are supported by empirical results in the paper. In the early works related to the internal organization of firms it was stated that centralized governance is important for coordination at the firm (see e.g. [Chandler, 1977]). However, the paper [Alonso et al., 2007] provides examples of large firms that managed to achieve high level of coordination without centralization. The paper presents a theoretical model that shows that coordination can be achieved at decentralized firms. Moreover, under certain circumstances decentralized decision-making can be more effective that centralized even if coordination is highly important. 6

7 The paper [Aghion, Tirole, 1997] distinguishes between formal and real decentralization. The model presented in the paper shows that a formally centralized structure can indeed have various degrees of real centralization or real decentralization of decisionmaking. This comes from the fact that the CEO or top management of the firm are in reality limited in their ability to analyze all required information on a sufficiently large amount of projects, and thus have to rely on solutions proposed by their subordinates. Possible difference between the formal structure of the firm and its real organization highlights the importance of survey data for the empirical study of decentralization of decision-making at the firm. Till recent years, empirical research on decentralization was seriously limited by the absence of relevant survey data. During the last years several largescale firm surveys, covering, among other topics, questions of internal organization of firms, were conducted, and empirical literature on firm decentralization started to develop rapidly. Below I summarize the empirical findings on the determinants of decentralization (see [Aghion et al., 2014] for a survey). In the empirical paper [Caroli, Van Reenen, 2001] it is shown that decentralization is complementary with higher quality of human capital at the firm. The result is obtained at the data of surveys of 2000 firms in the United Kingdom and 2500 firms in France. In the paper [Bresnahan et al., 2002] data of the detailed survey of about 300 large firms in the United States are used to show the complementarity between the organizational changes at the firm, including decentralization, quality of human capital and penetration of information technologies. Analysis of the empirical paper [Bloom et al., 2010(a)] is based on data of the survey of about 4000 firms in Europe, North America and Asia. It is shown in the paper that higher decentralization is observed at the firms that operate in a more competitive environment. In the paper [Bloom et al., 2012] data of the same survey are used to demonstrate that trust is an 7

8 important determinant of the degree of decentralization at the firm: decentralization is higher at the firms with headquarters situated in the regions with higher trust. Empirical part of the paper [Acemoglu et al., 2007] is based on the data from several sources. The primary indicator of decentralization used in the paper is constructed on the basis of data on formal organizational structure of about 4000 firms in France. It is shown that, in accord with the predictions of the theoretical model, firms that operate closer to the production-possibility frontier, firms that operate in more heterogeneous environment and younger firms have higher probability to be decentralized. As a robustness check authors use also data of the surveys of about 1200 firms in France, and about 200 firms in the United Kingdom. At these data the predictions of the model are in general confirmed, however, not all the results stay statistically significant. The paper [Kastl et al., 2013] uses data of the survey of about 2500 firms in Italy to demonstrate the positive relation between the decentralization of decision-making at the firm and spending for R&D. Predictions of [Acemoglu et al., 2007] paper are not confirmed at the data on Italy used in this work. Therefore, the authors point the importance of further detailed cross-country studies of the questions related to firm decentralization. 3. Data In this paper I use data of the two surveys, European Firms in a Global Economy, and Russian Firms in a Global Economy. The survey European Firms in a Global Economy was run in 2010 in 7 European countries: Germany, UK, France, Austria, Spain, Italy, and Hungary. Sample of the survey includes about of large, medium and small (with not less than 10 persons employed) manufacturing firms in total. The sample is representative in each of the countries by firm size 8

9 and industry. However, country sub-samples differ by size. About firms were surveyed in each of Germany, France, Spain, Italy; about firms were surveyed in the UK; about 450 firms in Austria and Hungary. Questions of the survey cover various aspects of firm structure, organization and activities. Firm CEOs or top managers answered to the questions of the survey. A similar survey Russian Firms in a Global Economy was conducted in 2014 in Russia. Sample of the survey includes about of large, medium and small (with not less than 10 persons employed) manufacturing firms in Russia. The sample is representative by firm size and industry. Many questions of the survey repeat or are similar to the questions of the European survey. As in Europe, these were firm CEOs or top managers who answered to the questions of the survey. Questions cover various aspects of firm structure, organization and activities. Both surveys include the question about decentralization of decision-making at the firm. The question is formulated as follows: With reference to strategic decisions which of the following statements better describe your firm situation? Answer choices: 1) Decisions in your firm are centralized: the CEO/owner takes most decisions in every area; 2) Decisions in your firm are decentralized: managers can take autonomous decisions in some business areas. I use answers to this question to construct a binary variable for firm governance decentralization. The question has very high response rate: more than 96% of the firms surveyed (that is firms) responded to the question. Question about decentralization is worded in a rather mild form: according to the question, firms where managers can take autonomous decisions at least in some business areas are considered to be decentralized. However, even with this mild definition, share of decentralized firm in the sample is rather low, just about 25% of the firms surveyed. This 9

10 shows that the centralized mechanism of firm governance is still prevalent in European countries and in Russia. Distribution of the share of decentralized firms by countries and size groups is shown in Table 1. As it is seen from the table, popularity of decentralization of decision-making at the firms differs significantly between the countries covered by the data. The highest share of decentralized firms is observed in Spain (39% of all firms surveyed), UK (38%) and Austria (35%). In Germany share of decentralized firms constitutes 29%, in France 22%. In Russia, Hungary and Italy share of decentralized firms is the lowest among the countries studied: in Russia it is 17% of the firms surveyed, in Hungary 16%, in Italy 15%. The gap in the share of firms with decentralized decision-making between Italy (country with the lowest share of decentralized firms in the sample) and Spain (country with the highest share of decentralized firms in the sample) amounts to 24 percentage points. Table 1 also demonstrates a strong tendency to higher decentralization of decisionmaking at larger firms. While share of decentralized firms constitutes only 21% among firms with employees, it grows up to 35% among firms with employees, and reaches 41% among firms with more than 250 employees. However, even among the largest firms with more than 250 persons employed, decentralized firms still constitute less than half from total number of firms. 4. Determinants of decentralization: cross-country similarities and differences In this section results of the econometric analysis aimed at revealing the firm-level factors that influence organization of decision-making at the firm are presented. In the regressions presented in this section, probability of decentralization of decision-making is 10

11 explained by the factors that, according to the previous literature, can affect the choice of firm governance model through their influence on the relation of costs and benefits of decentralization (such as firm size, quality of human capital at the firm, quality of management, age of the firm), and, moreover, by factors that are not related in any way to costs or benefits of decentralization, however can be important for the organization of decision-making because of subjective, human motives (namely, the individual characteristics of the CEO: belonging of the CEO to the family of owners, CEO age and gender). Regression analysis is run for each country separately to allow comparison of the results between the countries, analysis of persistence of the results with respect to the country. In the probit regressions presented in Table 2, probability of firm decentralization is explained by available from the data firm-level factors which, according to the literature, can have an effect on decentralization: size of the firm, quality of human capital at the firm, quality of management, age of the firm, industry and region the firm operates in; and by such individual characteristics of the CEO as CEO belonging to the family of owners and CEO age. Columns in the Table present country-level regressions. Marginal effects are shown in the columns. < Insert Table 2 here > As we see from Table 2, firm size is an important predictor of probability of firm decentralization in all the countries considered. The larger the firm the more likely its decision-making is decentralized. However, results about the relation of quality of human capital at the firm, quality of management, age of the firm to probability of decentralization, demonstrated in the earlier literature (see, e.g., [Caroli, Van Reenen, 2001; Bresnahan et al., 2002; Acemoglu et al., 2007]) in this data turn to be country-specific. Higher quality of human capital at the firm, measured through the share of employees with higher education, is associated with higher probability of decentralization. However, 11

12 according to results presented in the Table, the relation is statistically significant only in 4 out of 8 countries covered by the data, namely in Germany, Spain, Italy, and the United Kingdom. In France, Austria, Hungary, and Russia no statistically significant relation is observed. Similar situation is observed with respect to the relation between the quality of management at the firm and probability of decentralization. Better quality of management is approximated in the analysis by a dummy variable which gets the value of 1 if some of the executives at the firm have at least one year of foreign experience. According to the results presented in the Table, better quality of management is associated with higher probability of decentralization. However, this result also is statistically significant only in the same 4 countries: Germany, Spain, Italy, and the United Kingdom. For the age of the firm I use dummy for young firms in the analysis (according to the predictions of [Acemogly et al., 2007] at the young firms demand for decentralization is higher as young firms face more unfamiliar and complicated problems, and higher uncertainty. However, according to results presented in Table 2, in the data used in this analysis statistically significant relation between the young age of the firm and probability of decentralization is observed only in Austria. In Austria young firms (founded less than 6 years ago) are significantly more likely to be decentralized. The effect is very strong: probability of decentralization for young firms is 27 percentage points higher than for elder firms. However, for other 7 countries covered by the data no statistically significant relation between age of the firm and probability of decentralization is revealed. At the same time, the effect of firm CEO belonging to the family of owners on the probability of decentralization is statistically significant in all countries covered by the data, and in some countries is extraordinary strong. According to the results presented in Table 2, firms where CEO owns or controls the firm or is a member of family that owns or controls the firm have significantly lower probability of decentralization of decision-making. Size of the 12

13 effect differs greatly depending on the country. The most prominent effect is observed in Austria. In this country, belonging of the CEO to the family of owners decreases probability of decentralization of the firm by 43 percentage points. In Germany and Spain the effect is also very large: firms where CEO belongs to the family of owners have 31 percentage points lower probability of decentralization in Germany and 29 percentage points lower probability of decentralization in Spain. In other countries covered by the data the effect is not so outstandingly high, however is still important and statistically significant. Belonging of the CEO to the family of owners decreases probability of decentralization by 12 percentage points for firms is in Italy; by 5-8 percentage points in the UK, France, Russia and Hungary. Finally, according to the results presented in Table 2, even gender of the CEO has a significant relation to the probability of firm decentralization in some countries. In France for firms run by male CEOs probability of decentralization is about 10 percentage points lower; in Italy about 6 percentage points lower. In other countries covered by the data no statistically significant relation between the CEO gender and probability of firm decentralization is revealed. In the regressions presented in Table 3, one more individual characteristic of the CEO is added to the list of explanatory variables: CEO age, namely, the dummy variables for the CEO being 55 or more years old. Introduction of this variable to the regressions increases multicollinearity to some extent therefore in the baseline version of regressions, presented in Table 2, this variable is not used. < Insert Table 3 here > However, in the regressions presented in Table 3 almost all results stay the same. Larger firms have higher probability of decentralization in all countries considered. Higher quality of human capital at the firm and higher quality of management are associated with higher probability of decentralization in Germany, Spain, Italy, and the UK. Younger firms 13

14 are more likely to be decentralized only in Austria. However, for Austria the effect is very strong. Individual characteristics of the CEO are important. Firms where CEO controls or owns the firm or is a member of the family that controls or owns the firms have significantly lower probability of decentralization. The effect is statistically significant in all the countries considered except Hungary (in Hungary disappearance of statistical significance can be related to increased multicollinearity and relatively low size of the sample). In some countries (namely, Austria, Germany, and Spain) the effect of CEO belonging to the family of owners on the probability of firm decentralization is extraordinarily strong. Finally, both, age and gender of the CEO influence the organization of decision-making at the firms in some countries. Firms run by males have lower probability of decentralization in France and Italy. Firms run by elder CEOs have 7 percentage points higher probability to be decentralized in Germany; however, 4 percentage points lower probability to be decentralized in Spain. Results presented in this section demonstrate that not only the factors related to costs or benefits of decentralization, but also the subjective, human factors influence significantly the organization of decision-making at the firm. Individual characteristics of the CEO, such as the belonging of the CEO to the family that owns the firm, CEO age and gender, have an important effect on the organization of decision-making. Some of the factors related to firm decentralization turn to be country specific. However, the analysis reveals two factors that affect significantly the probability of decentralization in all the countries considered. First, larger firms have higher chances to be decentralized. Second, firms where CEO owns or controls the firm or is a member of the family that owns or controls the firm have lower, in some countries much lower, chances to be decentralized. 14

15 5. Are there any differences in performance between decentralized and centralized firms? This section provides some statistics to explore whether there are systematic differences in performance between decentralized and centralized firms. Table 4 presents mean values of several parameters related to firm performance, calculated separately for decentralized firms and for firms with centralized decision-making for each of the countries covered by the data. Namely, Table 4 looks at the share of firms that implement innovations (either product or process); share of firms that introduce new (with respect to the market) products to the market; share of firms that provide training for their employees; share of firms-exporters; share of firms (among the exporters) that export their production to remote destinations. < Insert Table 4 here > According to the literature, all the parameters Table 4 looks at are complementary to firm productivity and efficiency. Involvement in innovations is positively related to firm productivity and efficiency (see e.g. [Mohnen, Hall, 2013] for a survey). Respectively, these are more efficient firms which are more likely to introduce new products to the market. Training of employees increases firm productivity (see e.g. [Dearden et al., 2006]). According to the Melitz theory of firm self-selection into export, firms-exporters, that managed to enter foreign market, are on average more productive (see [Melitz, 2003]). Similarly, among the exporters, firms that age engaged in more complicated forms of export, e.g. firms that export to remote destinations, tend to be more productive (see e.g. [Navaretti et al., 2012]). For each of the listed parameters in each country Table 4 presents the mean value of the parameter for centralized firms, mean value of the parameter for decentralized firms, and the estimated level of statistical significance of difference in means between decentralized and centralized firms. Estimate of the level of statistical significance of difference in means is 15

16 obtained from the regression analysis under the basic control for log employment at the firm, dummy for young age of the firm, industry and region firm operates in. It is seen from the Table that decentralized firms overperform centralized ones by each of the considered parameters. In all countries considered, decentralized firms are more likely to be involved in innovations, to introduce new products to the market, to provide training for employees, to export. Not all differences between decentralized and centralized firms are statistically significant. However, in each of the studied countries at least some differences are statistically significant, and in all those cases decentralized firms demonstrate better performance than centralized ones (recall that estimate of the level of statistical significance of differences between decentralized and centralized firms is performed under the basic controls for firm size, age, industry, and region). In some cases differences between decentralized and centralized firms are very impressive. For example, in Hungary probability to be involved in product or process innovations is for decentralized firms 22 percentage points higher than for centralized ones; probability to introduce new products to the marker 24 percentage points higher. In Austria share of exporters is 21 percentage points higher among decentralized firms than among centralized firms; in Germany 18 percentage points higher. Table 4 demonstrates also many other sizable differences. To summarize, there are important differences between the decentralized and centralized firms. Decentralized firms are more likely to innovate, to bring new products to the market, to provide training for employees, to export, in particular, to export to remote destinations. The described differences are persistent across all countries considered: in each of the countries decentralized firms demonstrate significantly higher involvement at least in some of the listed activities. 16

17 These differences can in part reflect higher demand for decentralization from the firms involved in more complicated production process or more complicated activities. Firms that innovate, develop new products, participate in international trade can have higher necessity to decentralize decision-making because of more complicated problems they face in course of their operation and development. However, the relation between decentralization and productivity can work in the opposite direction as well. Firms that decentralized decisionmaking can have more managerial resources, more minds and ideas to find the optimal solutions, higher involvement and, thus, motivation of middle and local management and of other employees, etc., which allows them to operate and develop better. Therefore, decentralized firms can demonstrate higher involvement in a number of activities that are on average complementary to higher productivity and efficiency, such as innovation, export, etc. In Section 4, the strong influence of human factor (individual characteristics of the CEO) on firm decentralization was demonstrated. According to the results of Section 4, this influence of subjective and perceptional human factor on the organization of decision-making at the firm can have important negative implications for firm productivity and efficiency, and, respectively, for firm development. 6. Conclusion During the last decades significant changes in the internal organization of the firms are observed. Firms are becoming more and more decentralized with the persistently growing share of strategic decisions moving from the responsibility of top management to the responsibility of middle and local management and other employees. This paper explores the factors that influence decentralization of decision-making at the firms in 8 countries: Germany, UK, France, Austria, Spain, Italy, Hungary, and Russia. The paper studies cross-country similarities and differences in the effect of various firm-level 17

18 factors on the organization of decision-making at the firms. The analysis is based on the data from two extensive firm surveys: European Firms in a Global Economy run in 7 European countries in 2010, and Russian Firms in a Global Economy run in Russia in The surveys collect extensive information about various aspects of firm structure, organization, and activities. The versatile firm-level information provided by the surveys allows making new insights to the questions related to decentralization of the firm. Previous empirical research on firm decentralization reveals factors that influence the organization of decision-making at the firm through altering the relation of costs and benefits of decentralization. There are firm size, complexity of problems firm needs to solve, quality of human capital and quality of management at the firm; competition in the environment firm operates in, etc. In this paper it is shown that not only the factors related to costs and benefits of decentralization are important for the organization of decision-making at the firms. The paper shows that the subjective human factor has an important influence on the organization of decision-making as well. It is shown that individual characteristics of firm CEO, such as belonging of the CEO to the family of owners, as well as age and gender of the CEO affect significantly probability of firm decentralization. Namely, for firms where CEO controls or owns the firm or is a member of the family that control or own the firm probability of decentralization is significantly lower. This effect is observed in all the countries covered by the data, and in some countries it is extraordinarily strong. For example, in Austria firms where CEO controls or owns the firm or is a member of the family that controls or owns the firm have on average 42 percentage points lower probability of decentralization; in Germany and Spain about 30 percentage points lower probability of decentralization. Firms run by man have lower probability of decentralization in some of the countries studied. The effect of CEO age depends on the country. 18

19 Data exploited in this paper cover 8 countries, which allows provide cross-country comparison of the determinants of firm decentralization. It is shown in the paper that some results presented in the previous literature are not country-uniform, but hold only in some of the countries covered by the data. For example, in all 8 countries covered by data larger firms are more likely to be decentralized. However, higher quality of human capital at the firm, as well as higher quality of management, are associated with higher probability of decentralization only in 4 out of 8 countries: in Germany, United Kingdom, Spain and Italy. The result that younger firms tend to be more decentralized holds in this data only in Austria. At the same time, in all the countries studied, belonging of the firm CEO to the family of owners is associated with significantly lower probability of decentralization of decisionmaking. The effects of CEO age and gender on probability of decentralization are observed only in some of the countries. Finally, the paper shows that there are important differences in performance between the decentralized and centralized firms. Decentralized firms are more likely to innovate, to bring new products to the market, to provide training for employees, to export, in particular, to export to remote destinations. The described differences are persistent across all countries considered: in each of the countries decentralized firms demonstrate significantly higher involvement at least in some of the listed activities. In some cases differences between decentralized and centralized firms are very impressive. Therefore, the demonstrated in the paper influence of human factor (individual characteristics of the CEO) on the organization of decision-making at the firm can have important implications for firm productivity, efficiency, and development. 19

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22 Tables Table 1. Share of decentralized firms by countries and size groups Spain (2764 obs.) UK (2000 obs.) Austria (393 obs.) Germany (2845 obs.) France (2872 obs.) Russia (1950 obs.) Hungary (441 obs.) Italy (2922 obs.) Total: 39% 38% 35% 29% 22% 17% 16% 15% employees (11172 obs.) 35% 34% 27% 23% 20% 13% 14% 14% employees (2019 obs.) 52% 52% 56% 40% 30% 15% 20% 20% employees (1454 obs.) 57% 44% 70% 49% 27% 22% 16% 22% more than 250 employees (1542 obs.) 64% 40% 58% 58% 30% 24% 29% 32% 22

23 Table 2. Decentralization of decision-making at the firm: country-level probit regressions Decision-making at the firm is decentralized Austria Germany Spain Italy Hungary Russia France UK Employment, log Share of employees with higher education, % Some managers worked abroad for at least 1 year Age of the firm: less than 6 years CEO owns or controls the firm or is a member of the family that owns or controls the firm CEO gender: male 0.078** 0.082*** 0.093*** 0.026*** 0.030* 0.033*** 0.026*** 0.045*** (0.033) (0.010) (0.015) (0.009) (0.017) (0.008) (0.010) (0.016) *** 0.004*** 0.001* ** (0.002) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) *** 0.064** 0.070*** * (0.067) (0.022) (0.028) (0.022) (0.051) (0.037) (0.027) (0.031) 0.267** (0.116) (0.037) (0.046) (0.027) (0.060) (0.033) (0.041) (0.039) *** *** *** *** * *** *** ** (0.074) (0.024) (0.023) (0.016) (0.037) (0.022) (0.019) (0.025) ** ** (0.141) (0.036) (0.039) (0.023) (0.060) (0.030) (0.041) (0.052) Observations 383 2,730 2,685 2, ,617 2,774 1,884 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 23

24 Table 3. Decentralization of decision-making at the firm: country-level probit regressions, continued Decision-making at the firm is decentralized Austria Germany Spain Italy Russia Hungary France UK Employment, log Share of employees with higher education, % Some managers worked abroad for at least 1 year Age of the firm: less than 6 years CEO owns or controls the firm or is a member of the family that owns or controls the firm CEO gender: male CEO age: 55 years or more 0.079** 0.081*** 0.093*** 0.026*** 0.033*** 0.031* 0.026*** 0.044*** (0.033) (0.010) (0.015) (0.009) (0.008) (0.017) (0.010) (0.017) *** 0.004*** 0.001** ** (0.002) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) *** 0.065** 0.069*** * (0.067) (0.022) (0.028) (0.022) (0.037) (0.051) (0.027) (0.031) 0.263** (0.114) (0.038) (0.045) (0.026) (0.034) (0.059) (0.041) (0.039) *** *** *** *** *** *** ** (0.074) (0.024) (0.023) (0.016) (0.022) (0.038) (0.020) (0.025) ** ** (0.146) (0.036) (0.040) (0.023) (0.030) (0.059) (0.041) (0.052) *** * (0.065) (0.019) (0.022) (0.013) (0.026) (0.034) (0.020) (0.024) Observations 382 2,717 2,685 2,844 1, ,771 1,866 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 24

25 Table 4. Some differences between decentralized and centralized firms Austria Germany Spain Italy Russia Hungary France UK C D Diff C D diff C D diff C D diff C D diff C D diff C D diff C D diff Share of firms implementing innovations (either product or process) 73% 77% 59% 71%***66% 74%***65%75%***45%54% * 50% 72%***58%60% 63% 71% ** Share of firms putting to the market products new with respect to the 37% 51% 23% 37%***20% 24% ** 33%37% 32%37% 22% 46%***31%33% 41% 45% market Share of firms providing training for employees 74% 90% ** 78% 91%***81% 86% 52%66%***28%37% 58% 76% ** 80%83% 69% 78%*** Share of exporters 51% 72% ** 40% 58%***49% 62%***66%76%***14%20% 55% 66% 48%55% 55% 62% Share of firms (among the exporters) exporting to remote destinations 33% 32% 46% 57% ** 45% 54% ** 55%59% 16%15% 14% 12% 54%62% ** 63% 71% C centralized firms; D decentralized firms; diff level of statistical significance of difference in means between decentralized and centralized firms 25