Addressing low productivity by improving firm quality of management in Turkey ISTANBUL, TURKEY CONFERENCE ON PRODUCTIVITY

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1 Addressing low productivity by improving firm quality of management in Turkey ISTANBUL, TURKEY CONFERENCE ON PRODUCTIVITY March 27, 2018

2 PRODUCTIVITY Stagnating productivity in the formal economy Regardless of the productivity measure, the pattern shows stagnation of declines in the formal economy Improvements in productivity due to within firm changes, reallocation of resources towards more productive firms, new firm entry. Decreases due to (correlation of) changes in productivity and changes in employment (cross-term) rather than hiring more workers, firms with growing productivity are shedding worker. Source: WB calculations using EIS data

3 QUALITY OF MANAGEMENT Better within firm management leads to better firm performance The average management score for Turkey (2.71) is in line with the GDP per capita level and close to other South/Central European countries. There is a narrow spread of quality of management across its firms. A big bang-buck with the right interventions. Small tail of well managed firms, indicates there is room for improvement but these are not diffused broadly which make the distribution left-swayed. Low score is a result of firms not setting targets (from financial targets to production targets) and weak management of human resources. Score is lower than neighboring countries. Firms do not set targets for the organization, thus, the organization s objectives (if any) are not linked to performance. Firms do not have a systematic approach to identifying good and bad performers and rewarding them proportionately. Source: World Bank calculations using World Management Survey, 2016

4 QUALITY OF MANAGEMENT Better within firm management leads to better firm performance Decomposing Variance of Management Quality (management) 12.52% 16.38% 9.548% 7.199% 2.942% 20.7% 30.71% Top factors that negatively affect the score of QM (manufacturing): firms characteristics (industry, size, age), ownership type (e.g. family owned), and worker education composition. On all accounts, family owned businesses perform worse than others. Especially in monitoring results and setting targets. Ownership Industry Competition Worker Education Regions Firm Characteristics Multinational Note: Shapley-Owen method used to decompose variance. Firm characteristics: log # of employees, exporter or not, # of competitors, level of hierarchy, multinational or not. Ownership: 11 types of ownership including family, government, private, joint venture, managers, private equity, and dispersed shareholders. Regions: NUTS1 level. Industry: SIC 2 digit level. Worker education: % of college degree holders among managers and non-managers Management Scores: Family/Founder Owner vs Others Multinationals are better managed than domestic firms; they monitor targets and allow more autonomy. But limited difference how multinationals-domestically firms manage people. HR practices score low, especially in the area of promoting on the basis of tenure rather than merit. Multinational-Domestic Difference in Management Scores Management Operations Monitoring Targets People Source: World Bank calculations using World Management Survey, Management Operations Monitoring Targets People

5 INNOVATION Managerial practices as a key issue for innovation To innovate and manage innovation firms need a range of capabilities related to good managerial and organizational practices. Despite the importance of QM for productivity and innovation, firms in developing countries lag behind. MQ has a direct effect on patents, and increases R&D, and the impact of R&D on productivity Low MQ can explain low returns to R&D investments in low-income countries Source: World Bank 2017, Cirera, Maloney, Sarrias 2017, Akcigit et al

6 SUMMARY Policy implications Challenges Potential Solutions Going forward Stagnant productivity Structural/institutional Firm level Workforce Next steps High concentration of: o Micro-small firms in the formal economy. o Workers in low-remunerated (manual) jobs. Formal worker shedding. Low quality of firm management, narrow distribution, and long tail of underperformers. Issues with targeting and HR management. High unemployment among higher educated people, low absorption rate. Reform doing business environment. Also address rule of law issues that incentivize family ownership. Promote fair competition, competitiveness (facilitates survival of well managed firms) and trade (FDI, GVCs). Promote investments in managerial training, and modern management practices across domains (grants and targeted interest-free loans?).. Identify and address bottlenecks that limit firm growth and worker earnings. Work with private sector and chambers (TOBB) to monitor QM, support firms (access to advisory services) to address weak areas of firm management. Offer HR practices that link performance to earnings, and link targets to outcomes. Promote upskilling of managers (better educated managers do better). Address education system weaknesses to improve skills and ensure matching to labor demand.. Finalize data collection, revise findings and finalize report. Disseminate results, including consultations with government and private sector to find best ways to embed lessons into policy. Revise potential solutions and support relevant reform effort.

7 WORLD BANK FINANCIAL SUPPORT Various financial instruments are used in Turkey Turkey Innovative Access to Finance CL: Finance-Project Loan to improve access to longer term Islamic finance for small and medium enterprises and export oriented enterprises. US$250 million intermediated by TSKB through participation banks and factoring companies targeting Small and Medium Enterprises, or SMEs and Export Oriented Enterprises, or EOEs. Turkey SME III CL: To improve access to medium and long-term finance for small and medium enterprises through lease financing. US$300 million to be intermediated by Ziraat Bank through leasing companies and banks targeting Small and Medium Enterprises (SMEs) through lease financing. Supply chain finance CL: To improve access to finance for micro, small, and medium enterprises, and longer term finance to large enterprises involved in domestic supply chains. US$200 million for the establishment and operation of a credit facility for the provision of sub-loans to MSMEs and LEs to finance the carrying out of sub-projects. World Bank also works on the policy area, mainly to promote financial inclusion and increase access to finance for development

8 THANK YOU ADDRESSING LOW PRODUCTIVITY BY IMPROVING FIRM QUALITY OF MANAGEMENT IN TURKEY Ximena V. Del Carpio Program Leader Social Inclusion Team: A. Acar, Makovec, S.Seker, T. Taskin, L.Yener