Media Briefings

Good Management Is Good For The Environment

  • Published Date: May 2010

Well-managed firms are substantially more energy-efficient than badly managed firms. That is the central finding of research by Nick Bloom, Ralf Martin and colleagues, published in the May 2010 issue of the Economic Journal. The authors conclude that improving management may provide a way both to increase economic growth and to reduce environmental damage.

Their results suggest that policies aimed at improving management practices – such as encouraging competition by removing barriers to market entry, reducing trade barriers and promoting multinational ownership – will also improve environmental outcomes.

While this particular research focuses on the UK, the potential appears far greater in developing countries such as Brazil, China and India, where there is a huge tail of badly managed – and presumably energy-wasteful – firms.

The study uses extensive survey data on management practices to examine whether well-managed firms are more or less energy-efficient than badly managed firms. The results show that going from the 25th to the 75th percentile of management practices – moving from ‘bad’ to ‘good’ management – is associated with a 17.4% reduction in energy intensity.

The reduction in energy intensity associated with good management is large: given that carbon dioxide emissions are growing at about 3% a year globally, a 17.4% reduction is equivalent to about five years’ growth.

The main reason that better management reduces energy use is that modern management systems, like Toyota’s ‘lean manufacturing system’, explicitly promote waste reduction. In contrast, badly run firms are simply not able to achieve energy efficiency – think of the Soviet-era factories with their terrible management practices producing huge amounts of pollution.

So how can governments help firms to improve management practices and reduce energy use? The researchers identify several key factors that appear to play an important role in shaping management practices – and which can also play an important role in reducing pollution while delivering economic growth.

Product market competition is associated with significantly better management practices. In particular, the tail of badly managed firms shrinks in highly competitive markets. Badly managed firms appear to improve their management practices or exit in competitive markets.

Thus, the highly competitive product markets in the United States have led to almost no badly managed firms left in operation. In contrast, many product markets in Brazil, China and India have limited competition due to entry barriers, trade regulations and high transport costs, enabling badly managed firms to survive.

Multinational status also appears to play an important role in determining firms’ management practices. Multinationals tend to be well-run whether they are located in Brazil, India or the United States.

In other work, the researchers show that the affiliates of US multinationals located in Europe are able to use their managerial advantage to make better use of information technology to raise productivity. Multinationals seem to be excellent vehicles for transporting productive and energy-efficient management practices across countries.

ENDS

Notes for editors: ‘Modern Management: Good for the Environment or Just Hot Air?’ by
Nick Bloom, Christos Genakos, Ralf Martin and Raffaella Sadun is published in the May
2010 issue of the Economic Journal.

Nick Bloom is at Stanford University. Christos Genakos is at Cambridge University. Ralf
Martin is a research economist at the Centre for Economic Performance. Raffaella Sadun is
at Harvard Business School.

For further information: contact Ralf Martin on 020-7955-6975 (email:
r.martin@lse.ac.uk); or Romesh Vaitilingam on 07768-661095 (email:
romesh@vaitilingam.com).