University of Groningen – Faculty of Economics & Business
The value of cultural dimensions and previous
labour productivity in explaining variances in the
quality level of management practices.
2 ABSTRACT
In this manuscript, I examine the previous level of labour productivity as antecedent of the quality level of management practices. Moreover, I research if the cultural dimensions described by Hofstede (1980) moderate this relation. Bloom and Van Reenen (2007) discovered certain quality levels of management practices that were positively related to productivity and other performance measures. Despite the positive effects of these management practices, several firms did not adopt the highest possible level of the
management practices. I propose that both the previous labour productivity level and different cultural dimensions can be helpful in further explaining the variance in management practices levels. To examine these effects, I have done multilevel moderation and mediation analysis. Additionally, I have conducted some robustness checks with an alternative measure of culture, and the square of the previous productivity level. Results show that power distance and uncertainty avoidance are direct determinants of the level of management practices. However, none of the cultural dimensions present significant moderation results. In contrast to expectations, the level of previous labour productivity is positively related to the quality level management practices. Furthermore, the level of management practices proved to be positively related to the level of labour productivity. The alternative measures of culture did not provide any significant results, and using the square of labour productivity did not improve the model. Theoretical and practical implications are discussed in the discussion section.
3 1 INTRODUCTION
Huge differences exist in productivity between firms (Bloom & Van Reenen, 2007). Productivity is seen as the driver of growth in the economy, it has the ability to increase the standard of living, it contributes to the competiveness of companies, and is therefore of enormous importance for individuals, firms and, countries (Krugman, 1994). An increasing body of literature points to the significant influence of management practices in explaining the differences in productivity and performance levels (Bloom & Van Reenen, 2007; Huselid, 1995; Fabling & Grimes, 2015; Van Hoorn, 2014; Newman & Nollen, 1996). Bloom and Van Reenen (2007) identified quality levels of management practices that were positively related to firm-level productivity, profitability, and survival rates. In this manuscript, I will refer to these practices as management practices. This relation can be explained by positive attitudes such as job satisfaction and commitment as a result of higher levels of management practices, and these attitudes in turn have a positive impact on performance and productivity, as
employees are motivated to work harder (Kagaari, Munene & Ntayi, 2010; Huselid, 1995). The positive link between management practices and productivity can result in competitive advantages (Becker & Huselid, 2006). Therefore, there is great value in being aware of this relation and in conducting more in-depth research into this subject. This can give managers significant insights in how to employ these practices for optimal results for their firms. Despite the positive effects of management practices, several firms did not yet adopt the highest quality level of these management practices (Battisti & Iona, 2009). This leads to productivity gaps between firms (Battisti & Iona, 2009). Accordingly, it can be suggested that those firms do not use all of the possibilities available in order to achieve a higher
4 I will examine the level of productivity as an input factor. More specific, I will examine if the level of previous labour productivity is a predictor for the choice of a certain quality level of management practices. Unsatisfactory performance results namely in stress and exploration for solutions, adoption, and learning. Accordingly, this leads to change and alleviated
management action (Ocasio, 1995; Chng, Shih, Rodgers & Song, 2014). While firms are less inclined to change things when the performance level is well, managers search for solutions and adopt new practices in situations of declining performance (Ocasio, 1995; Sturdy, 2004). A higher quality level of management practices can thus be a solution for low levels of previous performance.
Second, culture causes variances in perceptions and preferences that influence organizational behaviour (Milikic, 2009; Newman & Nollen, 1996). Scholars also declared that culture influences the adoption of management practices (Sturdy, 2004). Therefore I argue that culture can moderate outcomes. The work of Hofstede (1980), which measures and conceptualizes differences in cultures across countries, helps to understand behaviour of individuals across cultures (Khatri, 2009). According to this framework, culture can be measured on different dimensions: individualism/collectivism, power distance,
masculinity/femininity, uncertainty avoidance and long/short term orientation. I will focus on power distance, masculinity, uncertainty avoidance, and long-term orientation, since, to my knowledge, they are not explicitly examined in the relationship with the management practices described by Bloom and Van Reenen (2007) and the level of previous labour productivity. Van Hoorn (2014) already examined the influence of individualism on the management practices in the World Management Survey, therefore the individualism dimension will not be incorporated in this research.
5 Previous level of labour
productivity (T-2)
Recent level of labour productivity (T0) Quality level of management
practices (T-1) Power Distance Uncertainity Avoidance Masculinity Long-term orientation FIGURE 1 Conceptual Model
By means of this manuscript, I intend to contribute to the literature in various ways. To my knowledge, the variances in management practices are not yet fully explained in the literature on management practices (Bloom & Van Reenen, 2007, etc.). Additionally, there is limited information on performance as antecedent of the level of management practices. Moreover, it is not yet known in cultural literature (Hofstede, 1980, etc.) what the moderation relation is of culture in the situation of low levels of performance. I intend to contribute to these literature gaps by examining the level of previous labour productivity as a determinant of the level of management practices, and by including the cultural dimensions as moderators. Besides, literature especially focuses on certain specific management practices at a time, and it mainly looks at the consequences of management practices and the more static determinants (e.g. Newman & Nollen, 1996; Robert, Probst, Martiocchio, Drasgow & Lawler, 2000;
Milikic, 2009; Schuler & Rogocsky, 1998). This manuscript will therefore add to these types of literatures by incorporating the more variable determinant previous labour productivity level, and by including a wider spectrum of management practices in relation to almost all cultural dimensions of Hofstede (1980).
6 country on certain cultural dimensions can hamper the adoption of a higher level of
management practices, and they should find ways to diminish this constraint. The process of adopting a higher level of management practices should thus be altered to the respective culture in which it is implemented. Finally, managers should take the results of the level of management practices on the level of labour productivity into consideration, and evaluate the costs and the benefits of adopting a higher level of management practices to achieve a higher performance.
7
2 THEORY
In this section, the relevant literature will be reviewed and in addition, hypotheses will be proposed. First, the impact of the level of management practices on the level of labour productivity will be highlighted. Second, there will be focused on the influence of the level of previous labour productivity on the quality level of management practices, and lastly the moderation relation of culture will be considered.
2.1 The Influence of Management Practices on Labour Productivity
2.1.1 Management Practices
Management is defined as using individuals to getting things done (Ng, 2011), while a practice can be defined as a combination of tools and concepts in order to complete a task (Westphal, Gulati & Shortell, 1997). Naidu (2013) defined human resource management practices as management practices focused on employees that can motivate employees, or can de-motivate employees to achieve organisational goals. I will also adopt this definition for management practices in this manuscript.
Bloom and Van Reenen (2007) described measures of management practices along eighteen dimensions and proposed that these management practices can vary in their quality. I will adopt an overall view of these eighteen management practices, as examining practices in confinement can lead to overlooking of the synergistic effects (Battisti & Iona, 2000). Firms with a high quality level of management practices can be characterized by continuous monitoring and improving processes, setting comprehensive targets, promoting good
performing workers and acting on bad performing workers. Firms with a lower quality level of management practices, in contrast, lack in tracking performance and setting effective targets, promote on the basis of tenure, and do not act on persistent bad performance workers (Bloom, Genakos, Sadun, Van Reenen, 2012).
Management practices can have several consequences. Bloom and Van Reenen (2007) proposed that a higher quality level of management practices is strongly associated with the level of productivity, positive financial consequences, and chances for firms to survive across countries. Moreover, Van Hoorn (2014) found that a higher level of management practices had a positive influence on per-capita income. Furthermore, the level of management practices also impacts several employee outcomes, such as turnover and productivity
8 in numerous employee attitudes such as job satisfaction and commitment, and those in turn have a positive impact on firm performance. Overall, these scholars thus agree on the proposition that management practices influence performance outcomes.
2.1.2 Productivity
Productivity in general has been defined as the relationship between the output and the inputs necessary to produce, and has to do with the efficiency in the use of productive factors (Maroto-Sanchez, 2012). Productivity is an important indicator of firm performance
(Matteucci, O’Mahony, Robinson & Zwick, 2005) Moreover, productivity is seen as the driver of growth in the economy and it contributes to the competiveness of companies (Krugman, 1994). However, there are large productivity differences across firms and countries (Bloom et al., 2014).
More specific, I will focus on the level of labour productivity, which is defined as the output per employee (Sargent & Rodriques, 2000). Higher labour productivity means that the process of producing outputs from inputs is done more efficiently. Specific determinants of labour productivity are capital equipment, technology and organizational changes (UK office for national statistics, 2008). Moreover, human capital, institutions, and the level of education are also described as antecedents relevant for the level of labour productivity (Miller and Upadhyay, 1997). Increasing labour productivity results in a better competitive position for the firm (Narayan & Smyth, 2009). Krugman (1994) also claimed that the ability to raise the standard of living in a country depends on the possibility to increase the output per employee. As stated before, and argued by other scholars, I argue that a higher level of
management practices increases the level of labour productivity. There are several reasons for this.
First, it leads to an enhancement of skills, knowledge and abilities of employees and it decreases retention. Scholars have stated that comprehensive recruitment and selection processes, incentive compensation, and practices focussing on performance management can improve the knowledge, skills and abilities of employees, and increase retention (Huselid, 1995). Moreover, a large body of literature confirms that these outcomes for individual employees affect outcomes for the firm such as productivity (Huselid, 1995).
Second, a higher level of management practices can have a positive influence on employee motivation and will result in them working harder, and therefore leads to a rise in productivity (Huselid, 1995).
9 employee attitudes, such as job satisfaction and commitment that result in higher performance (Kagaari et al., 2010).
Fourth, a high quality level of management practices can lead to organizational structuring which can boost participation and improvement of performance by employees (Huselid, 1995). Huselid (1995) declared that although employees are skilled, they are not able to improve performance if they do not have the opportunity to use their skills and
knowledge. Management practices of a higher quality level focus on continuous improvement and include employees in this process, and therefore are able to enhance performance.
Nonetheless, these positive results do not immediately result after adoption of a higher level of management practices. It takes time for employees to become familiar with the management practices, form opinions about the practices, and adopt behaviour and attitudes accordingly. Battisti and Iona (2009) also suggest that longitudinal data should be used to examine the lagged influence of the adoption of management practices on productivity. For this reason I will adopt a dynamic perspective on the time variables labour productivity and management practices, and I propose that the positive influence of a high level of
management practices on the level of labour productivity will be noticeable a year later. Concluding, a higher level of management practices can increase skills, knowledge and abilities of employees, reduces retention, and increases motivation and positive attitudes of employees, and these individual employee outcomes are expected to improve the level of labour productivity. Moreover, it offers a structure through which employees can contribute to performance. Therefore, the following hypothesis will be proposed:
H1: The quality level management practices are positively related to the level of labour productivity in the next year.
However, I argue that the level of labour productivity can act not merely as a
consequence of the level of management practices, but also as a determinant since there has been suggested that an inverse causal relationship exists between performance and decisions regarding management practices adoptions (Battisti & Iona, 2009). I will again take a
dynamic perspective on the time variables labour productivity and management practices, and I propose that the level of labour productivity negatively influences the quality level of
management practices a year later. Below, I will elaborate on the level of labour productivity and other antecedents as determinants of the management practices.
10 possible quality level of management practices as described by Bloom and Van Reenen
(2007). Literature proposes several antecedents that determine the level of management practices. Firms with a low quality level of management practices are more likely to be family owned and family managed firms, domestic, operating in markets with tough labour market regulation, and employing employees with a lower level of education. Firms that are
characterized by a higher quality level of management practices are more likely to be owned by private equity, multinational, employing high educated employees, operating in a market with light labour market regulation, and in a market with high product competition (Bloom & Van Reenen, 2010; Bloom et al., 2012). This can be explained by several reasons. A high level of product competition pushes firms to improve their practices and eliminates firms who do not. Moreover, labour market regulation restricts managers in their available options with respect to for example promotion and rewards. Furthermore, family-owned firms often employ primogeniture practices with disregard of thoughts about talent and performance. Additionally, multinationals employ a higher level of management practices which reflects the effect that better performing firms sooner become multinationals. Multinationals are also more superior in transferring their practices. Besides, a higher level of education leads to a higher level of management practices, since managers with a higher education are sooner aware of the positive advantages of a higher level of management practices (Bloom & Van Reenen, 2010).
However, when taking these antecedents into consideration, there are still significant differences in the levels of management practices (Battisti & Iona, 2009). I argue that the level of previous labour productivity is also an antecedent of the level of management practices, based on several arguments.
Firstly, low levels of previous productivity result in change and adoption of solutions. Declining performance such as labour productivity results in failure-induced change, search for solutions, adoption and learning (as claimed in the theory of failure-induced change). Suffering performance can activate actions by managers which usually leads to structural change (Ocasio, 1995). Also, the prospect theory highlights the idea that performance downturn leads to enhanced strategic adaptations (Kahneman & Tversky, 1979).
11 performance increases arousal, psychological drive, attention and efforts to address the
problem, and will therefore result in search and adoption of solutions (Ocasio, 1995). Thus, changes in performance will especially impact managerial behaviour, because they will take actions to decrease performance decline, and this will result in triggered decision-making and change (Chng et al., 2014).
Thirdly, declining performance leads to short-term decision-making and reliance on proven decisions. In the research of Chng et al., (2014) performance decline was positively related to reliance on short-term decisions. Attention becomes focused on pressing subjects and readily available solutions that are expected to have an immediate effect on performance, and are sooner adopted.
Fourthly, it is suggested that management practices can be seen as a solution for a problem. Sturdy (2004) proposed that in a situation of a problem (in this case low levels of labour productivity), matching solutions are examined. New innovations are adopted because they are trusted to resolve the problem. The rational view suggests that new management practices known for their effects are adopted as a solution for a problem (Daniel et al., 2012). As explained earlier, the positive effects of a higher level of practices are found by several scholars and could therefore be a solution.
Fifthly, when demand and profitability are low, managers and employees can put more time in organizational issues (Battisti and Iona, 2009). Nickell, Nicolitsas and Patterson (2001) also propose that when productivity levels are low, it is logical that firms reorganize since these reorganizations cost less than the loss in output. A low level of labour productivity means per definition that the production process is not done efficiently. In this case employees can devote time to adopting and implementing a higher level of management practices. While in the situation of high levels of productivity, employees probably devote their entire time to producing outputs as efficient as possible, and do not have the time (or the need) to focus on additional aspects, such as management practices, and they therefore have lower levels of management practices.
And at last, if a firm is performing badly, this will increase the threat of bankruptcy and dismissal. This will also lead to managers and employees motivated to decrease this threat, which can be done by an extra effort in improving productivity. Unsatisfactory performance as threat is also applicable to the context of management practices, since
managers and employees are more motivated to decrease the threat through adopting a higher level of management practices.
12 of the level of the management practices and thus can aid in explaining differences. It can be said that, following the failure-induced change perspective, suffering performance could result in the search and adoption of solutions by managers, and thus alleviated manager behaviour and change in general. In contrast, firms with satisfying performance will be less inclined to change (Ocasio, 1995). It also leads to more short-term decision-making and reliance on proven results. Furthermore, Sturdy (2004) proposed that organizations in a situation with poor performance (the problem) will look for solutions and new (or higher level) management practices will be adopted that are believed to resolve the problem. A higher level of management practices is assumingly positively related to productivity (Bloom & Van Reenen, 2007). Moreover, managers also have more time and motivation to improve the quality level of management practices as solution for unsatisfactory labour productivity. Therefore, the following hypothesis will be proposed:
H2: The level of labour productivity is negatively related to the quality level of management practices in the following year.
2.3 Culture
Several scholars suggest that culture can also assist in the explanation of adoption differences (Erumban & De Jong, 2006; Van Everdingen & Waarts, 2003; Lee, Trimi & Kim, 2013). I also argue that culture is valuable in the further explanation of the variance in the quality levels of management practices. Culture consists of “patterned ways of thinking, feeling and reacting, acquired and transmitted mainly by symbols, constituting the distinctive achievements of human groups, including their embodiments in artefact’s; the essential core of culture consists of traditional (i.e. historically derived and selected) ideas and especially their attached values” (Hofstede, 1980, p. 23). Furthermore, Hofstede proposes that culture is ‘the collective programming of the mind which distinguishes the members of one human group to another” (Hofstede, 1980, p.24).
The cultural context and perceived values influence the perceptions of individuals in a particular way, and as a consequence this may impact adoption decisions (Erumban & De Jong, 2006). Culture causes variances in perceptions and preferences that influence
organizational behaviour (Milikic, 2009). It entails that one way of doing business is preferred over another (Newman & Nollen, 1996). Moreover, several scholars claim that culture
13 As discussed earlier, the most cited work with respect to culture is the framework of Hofstede (2001). He proposed five cultural dimensions: individualism/collectivism, power distance, masculinity/femininity, uncertainty avoidance and long/short-term orientation. The individualism/collectivism dimension has received the most consideration (Van Hoorn, 2014). Van Hoorn (2014) already examined the influence of individualism on the management practices in the World Management Survey, and therefore the individualism dimension will not be incorporated in this research. For the purpose of this thesis, I will examine the influence of power distance, masculinity, uncertainty avoidance and long-term orientation. Since, to my knowledge, they have not been explicitly investigated in relation to the management practices of Bloom and Van Reenen (2007) and the level of previous labour productivity as a determinant. The different cultural dimensions highlight differing facets of culture, and therefore they often vary in their effects (e.g. Lee et al., 2013). In the next
sections, I will elaborate upon these four cultural dimensions as moderators of the relationship between the level of labour productivity and the quality level of management practices. 2.4 Power Distance
Cultural literature on power distance gave some interesting insights concerning management practices and performance indicators, and it highlights the significant influence of this dimension on organizations. Hofstede and Bond (1984) defined power distance as the extent to which unequal power distribution is expected and accepted.
I expect that power distance negatively moderates the relation between the level of previous performance and the quality level of management practices one year later. I will elaborate on several arguments.
Firstly, power distance makes employees more passive. Kahtri (2009) concluded that firms operating in a high power distance culture were associated with employee passivism with respect to decision-making and a submissive attitude, limited discretion, and mainly vertical communication.
14 concerns and disagreement sooner (Khatri, 2009). I expect that managers are the ones who recognize the problem of declining productivity and decide on the appropriate corrective measures, such as the level of management practices, since it is their responsibility to take these types of decisions. In a high power distance culture those managers also have the authority to make those decisions without resistance, and they can do this in a short period of time (Khatri, 2009). Contrasting, in low power distance cultures adoption of a higher level of management practices will probably be a more complex process, since there are more people and contrasting views involved, and it takes longer to make decisions.
Third, a higher level of management practices can result in preferred outcomes in high power distance cultures, and therefore managers will be more motivated to increase the quality level. I argue that a higher level of practices can be seen as a tighter control of employees and therefore underline authority and inequality. Due to those practices I also expect a higher level of conformity. Employees in high power distance cultures conform more and are less independent (Matusitz & Masambira, 2013). Conformity also leads to more predictable and controllable behaviour (Doney, Cannon & Mullen, 1999). These concepts are all characteristics of a high power distance culture (Matusitz & Masambira, 2013).
In short, I expect managers operating in high power distance cultures to more easily adopt new practices that they believe to be a solution for low levels of productivity, because the employees are more passive, and there is a situation of centralized decision making and less chance for the participation of employees. Moreover, a higher level of management practices can result in preferred outcomes in high power distance cultures (e.g. control and conformity), and therefore I expect managers are more inclined to adopt these practices. H3a: the relation between the level of previous labour productivity and the quality level of management practices in the following year is moderated by power
distance.
2.5 Masculinity/Femininity
The masculinity/femininity dimension and management practices have been examined by several scholars (Newman & Nollen 1996; Milikic, 2009; Schuler & Rogocsky, 1998; Andreassi, Lawter, Brockerhoff & Rutigliano, 2014). This dimension indicates the separation of roles between the sexes. In masculine cultures, traditional masculine values control the whole society and gender roles are clearly distinct, while in feminine cultures emotional gender roles overlap (Hofstede, 2016).
15 previous performance and the quality level of management practices a year later for four reasons.
First, masculine cultures emphasize performance and achievement, and therefore I expect they also focus more on the levels of labour productivity. Characteristics are for
example the high importance of performing, competition, achieving and showing off (Milikic, 2009; Erumban & De Jong, 2006). This is translated to the workplace by emphasizing
performance-based rewards, recognition, and management by objectives and advancement (Neman & Nollen, 1996; Schuler & Rogocsky, 1998). In contrast, feminine cultures are characterised by social relations, quality of life, importance of the environment and caring for others (Milikic, 2009).
Second, since masculine cultures value achievement and improvements of employees, a higher level of management practices should appeal to them since these management
practices are characterized by continuous improvement and enhancing performance. Erumban and De Jong (2006) furthermore propose that masculine cultures also focus on training and improvements of individuals.
Third, masculine cultures are more triggered by failure, and therefore I expect they react sooner on declining performance. Failure is viewed as less important in feminine
cultures (Newman & Nollen, 1996). Wang, Rieger and Hens (2016) also found that masculine cultures are more loss averse. This is reflected in that masculine cultures’ children are thought to be ambitious, and the best is set as the norm, while in feminine cultures children are taught to be modest and the average score is set as the norm. Given that masculine cultures are also more achievement oriented and masculine countries are correlated to national fear and depression, they argued that masculine cultures set higher norms, are less involved in reappraisal of regulating emotions, and consequently are more loss aversion sensitive.
Fourth, masculine firms are more open towards innovativeness, and therefore I expect they are more inclined to change and adopt a higher level of management practices. Literature found a positive relationship between achievement and motivation, and innovativeness (Van Everdingen & Waarts, 2003). Masculine firms are also proven to be more innovative
(Erumban & De Jong, 2006).
16 cultures and therefore the following hypothesis is presented:
H3b: the relation between previous level of labour productivity and the quality level of management practices in the following year is moderated by masculinity.
2.6 Uncertainty Avoidance
Individuals in high uncertainty avoidance cultures are often afraid for uncertain and unstructured situations. Therefore plans, procedures, and strategies are regularly present and help to endure with displeasure accompanying uncertain situations (Newman & Nollen, 1996). In contrast, individuals working in a culture low on uncertainty avoidance take more risk and are more accepting of differing behaviour and opinions (Milikic, 2009).
I argue that uncertainty avoidance moderates the relationship between the level of previous labour productivity and the quality level of management practices based on several reasons.
Firstly, increasing uncertainty avoidance leads to an inclination towards increasing authority, control and structure. Literature states that managers of countries high on this dimension saw their organization more as an authority structure. Moreover, they also
responded more forcefully and extreme on uncertainty with redesigns and training. Leaders in cultures ranking high on uncertainty avoidance try to control their teams and employees, and they are expected to behave as specified, while in cultures scoring low on uncertainty
avoidance there is more room for deviation in behaviour (Offermann & Hellman, 1997). Furthermore, these managers saw uncertainty more as a crisis than others and thus implemented solutions characterized by structuring that should decrease uncertainty.
Furthermore, Lee et al., (2013) claim that cultures low on uncertainty avoidance accept high levels of uncertainty and do not attempt to control it. Cultures ranking high on uncertainty avoidance, on the other hand, sooner engage in events to reduce uncertainty.
Second, uncertainty avoidance is positively related to loss aversion and accordingly, I expect that they are more triggered by low performance levels and failure. Uncertainty-avoiding people are not tolerant for uncertainty and show a higher level of anxiety and fear, thus they are more inclined to take actions in the sight of potential losses, and they are more loss averse (Wang et al., 2016). Individuals in high uncertainty environments also strive for high achievement and order, and are more negative about the future (Matusitz & Masambira, 2013).
Third, taken the last two arguments together, I argue that a higher level of
17 they will be sooner adopted in the case of low levels of labour productivity. A higher level of management practices can namely lead to a higher level of control over employees, and a higher level of labour productivity, and these stable, prescribed practices can decrease the ambiguity and increase structuring.
In conclusion, firms operating in high uncertainty countries are more loss averse and are more inclined to increase the authority, control and structuring. Hence, they will adopt a higher level of management practices since it can enhance structuring, and can be seen as an action against failure. The following hypothesis is proposed:
H3c: the relation between the level of previous labour productivity and the quality level of management practices in the following year is moderated by
uncertainty avoidance. 2.7 Long-term Orientation
The long-term orientation dimension is recently added (2001) to the Hofstede model (Van Everdingen & Waarts, 2003). It focuses on the country’s orientation to the future (Dwyer, Mesak & Hsu, 2005). Cultures high on this dimension can be characterized by long-term employment and a long-long-term, steady view on fixing problems (Newman & Nollen, 1996). These types of cultures value patience, perseverance and obedience, and duty to a larger goal (Van Everdingen & Waarts, 2003). Firms operating in cultures with a short-term orientation focus on stability and values that emphasize the past and the present (Dwyer et al., 2005).
I propose that firms with a short-term orientation will be more likely to react to recent productivity problems than firms operating in a long-term orientation culture for three
reasons.
Firstly, long-term orientation firms will be reluctant to innovativeness and change because of values of tradition and commitment (Lee, et al., 2013). In contrast, short-term orientation leads to less emphasis on tradition, and therefore to more openness to new ideas (Erumban & De Jong, 2006).
Second, firms with a short-term orientation also tend to focus more on the past than on the future (Van Everdingen & Waarts, 2003) and accordingly past results (such as
unsatisfactory labour productivity) will be more an incentive for change.
18 In sum, for firms operating in a short-term orientation culture, low levels of previous performance will probably be more an incentive to adopt higher levels of management practice since they focus more on the past and the present. Moreover they are more open to change and are sensitive to trends, and they will therefore probably sooner engage in adopting higher levels of management practices as well. In contrast, firms with long-term orientation are less inclined to change and do not focus on the past, therefore they are less likely to respond to low levels of previous labour productivity. Following these arguments, the next hypothesis is presented:
H3d: the relation between the level of previous labour productivity and the quality level of management practices in the following year is moderated by long-
term orientation.
Concluding, I propose a conceptual model as presented in Figure 1. I expect that low levels of previous labour productivity will be seen as an incentive to adopt a higher quality of the management practices a year later. Moreover, I expect that the cultural dimensions
moderate the relation between the level previous labour productivity and the level of management practices. The dimensions power distance, masculinity, uncertainty avoidance and long-term orientation are expected to moderate the relation between the previous level of productivity and the quality level of management practices. Moreover, the positive
relationship between the quality level of management practices and the level of recent
19 3 METHODOLOGY
In this section, the procedures and measures will be illustrated and the data analysis will be outlined.
3.1 Sample
Different databases were used to gather data from different firms across different countries. The sample comprised of 779 firms across eighteen countries operating in the manufacturing industry. Data was used over the years 2006 to 2012.
3.2 Measures
3.2.1 Management practices. Data on management practices is retrieved from the World
Management Survey. It encompasses 18 separate scores. The survey collected information via telephone, without managers knowing they were being scored. The interview was targeted at plant managers who possessed overall knowledge. The management practices were scored from one (worst practice) to five (best practice) on each of the 18 management practices. Examples of the questions are ‘What kind of KPIs would you use for performance tracking?’ and ‘What kind of time scale are you looking at with your targets?’
3.2.2 Labour productivity. Labour productivity measures were extracted from ORBIS. Gal
(2013) defined labour productivity as:
Labour productivity = 𝒍𝒐𝒈𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆𝒔𝑻𝒐𝒕𝒂𝒍 𝒓𝒆𝒗𝒆𝒏𝒖𝒆
Instead of total revenue, operating revenue was used because there was no data on total revenue available. Data was available from 2006 to 2016. Two variables of labour productivity were used: labour productivity on T-2 and labour productivity on T0. Moreover, for the robustness check the model is re-examined with the labour
productivity square. The same basic measure of labour productivity is used, only the square is computed.
3.2.3 Cultural dimensions. The cultural dimension measures deviate from Hofstede’s
methodology (1980). Hofstede measured these dimensions in an IBM’s international
20 spending more than needed)’.
Furthermore, for the robustness checks I also incorporated the cultural measures of the GLOBE project. House, Hanges, Javidan, Dorfman and Gupta (2004) identified nine cultural dimensions: performance orientation, institutional collectivism, gender egalitarianism, uncertainty avoidance, in-group collectivism, future orientation, humane orientation, assertiveness, and power distance.
3.2 Data Analysis
Data is analysed for firms in countries that participated in both the World Management Survey and the Value Survey Module, which was the case for all the countries. I
complemented the dataset with cultural dimension measures, some control variables and labour productivity was computed. Moreover, lagged variables were created for management practices (t-1) and labour productivity (t-2) and the dataset was restructured per firm. I also standardized the variables to make regression and comparison possible.
In the first step of the data analysis, descriptive statistics were derived. Moreover, correlations between the variables are examined. Furthermore, I have conducted regression analysis and moderation analysis to test the causality between the variables. This analysis is done in Stata, looking at the multilevel mixed effect, where firm, industry and country were used as structure.
Next, some additional robust checks were done. First, I retested the cultural hypothesis using the GLOBE measures of culture (House et al., 2004). Scholars criticized the model of Hofstede, as it contains inconsistencies in the theory and methodology (Ailon, 2008). Therefore it is useful to test the model with other measures of culture, which would also be more recent. House et al. (2004) described dimensions similar to Hofstede (1980); power distance correspondents with power distance, masculinity with gender egalitarianism (in the opposite direction), uncertainty avoidance with uncertainty avoidance, and long-term orientation with future orientation. In addition, I examined whether there was a quadratic instead of a linear relation between the level of labour productivity and the level of management practices.
22 4. RESULTS
In this part the descriptive data, the correlations, and the results on regression and moderation analysis are presented. Additionally, the results on the robustness checks are discussed.
4.1 Descriptive Data
In Table 1 the descriptive data is given for the main variables.
TABLE 1
Descriptive Data
Variable Mean Minimum Maximum Std. Deviation
Management Practices (-1 year) 2,88 1 5 0.75 Labour Productivity(-2 year) 2.34 -4.87 4.61 0.43 Labour productivity 2.34 -4.87 4.61 0.43 Power Distance 55.56 22 81 18.17 Masculinity 59.64 5 95 10.87 Uncertainty Avoidance 58.04 29 100 22.44 Long-term orientation 48.85 20 88 22.76 4.2 Correlations
23 3. Labour Productivity (year 0) 0.76** 0.31** 4. Power Distance -0.38 ** -0.31** -0.38** 5. Masculinity 0.19** 0.06** 0.19** -0.09** 6. Uncertainty Avoidance -0.16** 0.05** -0.16** 0.07** -0.19** 7. Long-term Orientation 0.29** -0.13** 0.30* 0.40** 0.33** -0.13** ** p<0.01 4.3 Regression Analysis
First hypothesis 1 is tested which argued that a higher level of management practices would have a positive influence on the level of labour productivity in the following year. The level of labour productivity is significantly related to the level of management practices a year ago (b =.10, SE = .02, p < .01). Thus hypothesis 1 is confirmed. Results are presented in Table 3.
TABLE 3
Results Regression Analysis H1 Labour productivity (year 0) Management Practices (-1 year) 0.10 (4.51)** Size -0.09 (2.23)* Labour Dismissal Index -0.98
(2.67)** Labour Regulation Index 0.65
24 (2.58)**
N 1,018
* p<0.05; ** p<0.01
Second, hypothesis 2 is tested by conducting linear regression analysis as well. It states that the level of labour productivity is negatively related to the level of management practices a year later. The level of labour productivity was significantly related to the level of management practices a year later (b =.20, SE = .03, p < .01). Hypothesis 2 was not confirmed since this relation was positive instead of negative. Results are presented in Table 4.
TABLE 4
Results Regression Analysis H2 Management Practices (-1 year) Labour Productivity (-2 year) 0.20 (5.77)** Size 0.12 (2.58)** Labour Dismissal Index 0.30
(1.31) Labour Regulation Index -0.32
(1.73) Rule of Law 0.16 (2.12)* Control of Corruption 0.19 (1.08) Age -0.05 (1.63) Listed -0.39 (2.04)* Unlisted -0.33 (1.98)* N 779 * p<0.05; ** p<0.01 4.4 Moderation Analysis
25 two of the cultural dimensions as predictors were significant; power distance (b = -.96, SE = .36, p < .01) and uncertainty avoidance (b = .41, SE = .15, p < .01). Results are presented in Table 5.
TABLE 5
Results Moderation Analysis Model 1 Management Practices (-1 year) Labour Productivity (-2 year) 0.20 (5.64)** Power Distance -0.96 (2.68)** Masculinity -0.12 (1.44) Uncertainty Avoidance 0.41 (2.81)** Long-term Orientation 0.13 (1.82) Size 0.14 (3.11)** Labour Dismissal Index 1.42
(3.19)** Labour Regulation Index -1.42
(3.19)** Rule of Law -0.53 (1.96)* Control of Corruption 0.06 (0.30) Age -0.06 (1.75) Listed -0.34 (1.73) Unlisted -0.32 (1.92) N 779 * p<0.05; ** p<0.01
26 uncertainty avoidance contribute as direct predictors. Hypothesis 3a, 3b, 3c and 3d, which predicted the cultural dimensions as moderators between the level of previous labour productivity and the quality level of management practices were not significant. Results of this second model are presented in Table 6.
TABLE 6
Results Moderation Analysis Model 2 Management Practices (-1 year) Labour Productivity (-2 year) 0.18 (3.16)** Power Distance -1.04 (2.78)** Labour Productivity (-2 year)*Power Distance -0.06 (1.23) Masculinity -0.13 (1.63) Labour Productivity (-2 year)*Masculinity -0.02 (0.69) Uncertainty Avoidance 0.46 (2.93)** Labour Productivity (-2 year)*Uncertainty Avoidance 0.02 (0.40) Long-term Orientation 0.13 (1.80) Labour Productivity (-2 year)*Long-term Orientation -0.00 (0.04) Size 0.14 (3.12)** Labour Dismissal Index 1.45
(3.07)** Labour Regulation Index -1.47
27 Listed -0.34 (1.76) Unlisted -0.32 (1.92) N 779 * p<0.05; ** p<0.01 4.5 Robustness Checks
Some robustness checks are done to validate the findings. First, I examined whether a quadratic rather than a linear relationship between the level of labour productivity and the quality level of management practices exists. The same significant relations are found; however the relationships are less strong. Results of hypothesis 1 with labour productivity square are presented in Table 7 and the results of hypothesis 2 with labour productivity square are presented in Table 8.
TABLE 7
Results Regression Analysis H1 with Labour Productivity Square Labour Productivity Square (year 0) Management Practices (-1 year) 0.10 (3.92)** Size -0.09 (2.16)* Labour Dismissal Index -1.03
(2.86)** Labour Regulation Index 0.68
28
TABLE 8
Results Regression Analysis H2 with Labour Productivity Square Management Practices (-1 year) Labour Productivity square (-2 year) 0.19 (5.57)** Size 0.12 (2.62)** Labour Dismissal Index 0.28
(1.22) Labour Regulation Index -0.30
(1.64) Rule of Law 0.17 (2.21)* Control of Corruption 0.19 (1.09) Age -0.06 (1.67) Listed -0.39 (1.99)* Unlisted -0.32 (1.93) N 779 * p<0.05; ** p<0.01
Next, I will use the measures of House (2004) on the cultural dimensions. The results considerable differ from the results of the Hofstede (1980) measures of culture. In the first model none of the cultural dimensions was a significant predictor. When taking the second model into consideration, also no significant relations emerged with the cultural dimensions. It can be concluded that the earlier mentioned results can therefore not be validated with these measures of culture. Results are presented in Table 9 and 10.
TABLE 9
Results Moderation Analysis with Alternative Culture Measure Model 1 Management Practices (-1 year) Labour Productivity (-2 year) 0.19 (5.35)** Power Distance House 0.06
(0.90) Masculinity House -0.46
29 House (0.05) Long-term Orientation House 0.12 (1.24) Size 0.12 (2.49)* Labour Dismissal Index -0.21
(0.63) Labour Regulation Index 0.28
(0.73) Rule of Law 0.51 (1.70) Control of Corruption 0.36 (1.55) Age -0.06 (1.55) Listed -0.31 (1.53) Unlisted -0.30 (1.73) N 692 * p<0.05; ** p<0.01 TABLE 10
Results Moderation Analysis with Alternative Culture Measure Model 2 Management
Practices (-1 year)
Labour Productivity (-2 year) 0.15
(3.29)** Power Distance House 0.06
(0.73) Labour Productivity (-2
year)*Power Distance House
-0.01 (0.09) Masculinity House -0.49 (1.78) Labour Productivity (-2 year)*Masculinity House 0.09 (1.21) Uncertainty Avoidance House -0.00
30 (1.43) Labour Productivity (-2 year)*Long-term Orientation House -0.03 (0.93) Size 0.12 (2.50)* Labour Dismissal Index -0.18
(0.52) Labour Regulation Index 0.26
31 5. DISCUSSION
This section begins with the discussion of the results. Moreover, implications are outlined, and finally, limitations and ideas for future research are suggested.
5.1 Discussion of Results
Hypothesis 1 stated that an increase in quality management practices was positively related to the level of labour productivity. This hypothesis was supported.
Hypothesis 2 argued that a low level of previous labour productivity leads to a higher level of management practices in the following year. This hypothesis was not confirmed. Although the relation was significant, it was positive instead of negative.
None of the moderator hypotheses (3a, 3b, 3c & 3d), which argued that the cultural dimensions moderated the relation between the level of previous labour productivity and the quality level of management practices, were significant. Nonetheless, two of the cultural dimensions proved to be direct predictors of the level of management practices.
The second robustness check which employed alternative measures of culture of House et al., (2004) did not provide any significant results.
5.2 Theoretical Implications
By means of this manuscript, I intended to contribute to several gaps in literature in various ways. The main gap in the literature on management practices is that the variance in the level of management practices is not yet fully explained. Moreover, there is limited information available on previous performance as predictor of the level of quality management. Furthermore, to my knowledge, the effect of culture as moderator on the relation between the previous level of labour productivity and quality level of management practices is yet unknown in cultural literature. Besides, research specifically focuses on the effects of a few cultural dimensions on some management practices, and therefore does not provide a comprehensive overview of the situation. I intended to contribute to these gaps by incorporating a wider selection of management practices and almost all cultural dimensions, examining the level of previous labour productivity as determinant of the level of
management practices, and by including the cultural dimensions as moderator.
In the following paragraphs I will elaborate on the theoretical implications of the results.
32 positive impact on the level of labour productivity. This is in line with earlier research
although another way was used to compute labour productivity was used (Bloom & Van Reenen, 2007). Hence, management practices are indeed valuable in explaining differences in performance.
The second hypothesis, however, was not accepted. Instead of a negative relation, in which a lower level of labour productivity would lead to a higher level of management practices, this relation turned out to be positive. A possible explanation could be that firms which experienced a higher level of productivity, might have more financial means to spend than firms that experienced lower productivity. These financial means can be used to increase and improve the level of management practices. Furthermore, while a failure-induced change approach was followed in this manuscript, critics propose that the threat-rigidity theory might be a better approach. They suggest that a decrease in performance will discourage strategic adaptations and limit information processing, as decline can be seen as threat which can trigger rigid psychological reactions (Chng et al., 2014). Thus, in the situation where a firm experiences lower levels of productivity, they will be less inclined to adopt a higher level of management practices than in firms with satisfactory performance.
Moreover, none of the cultural dimensions proved to be a moderator. Hence, the cultural dimensions have no value in explaining management practices differences in combination with previous labour productivity.
Nonetheless, the power distance dimension and the uncertainty avoidance dimension were significant predictors. Uncertainty avoidance had a positive effect on the level of management practices. This is in line with some of the arguments mentioned for uncertainty avoidance as moderator. However, power distance presented a negative relation. However, this was not in alignment with the arguments given in the theory section. There could be several reasons for this negative relation. Some scholars argue that power distance is negatively related to innovation, since it harms the spread of innovation, sharing of
information, and communication across different levels in the organization (Kaasa & Vadi, 2010). Furthermore, organizations operating in countries high on power distance are less open to new ideas (Erumban & De Jong, 2006). Therefore, it could be expected that firms operating in high power distance cultures are less open to adopting a higher level of management
33 management practices do not match with their national culture, with respect to power
distance, they can be less inclined to adopt a higher level of management practices.
Furthermore, Milikic (2009) proposed that in high power distance cultures, jobs are broader defined, plans are less clearly specified, and there is more vagueness about what is expected from employees. This is a result of centralized power. In addition, managers in this situation have more freedom to give employees tasks and employees rely more on guidance, which reduces the need for formalization. Hence, perhaps there is less need and preference for management practices in high power distance cultures, as the tasks and management
processes are more clearly specified. Considering their significant influence as determinants, this means that both power distance and uncertainty should be included in future research when management practices are examined.
The other cultural dimensions, masculinity and long-term orientation, have no significant influence in combination with labour productivity and management practices. Additionally, Khatri (2009) argued that power distance was a more important dimension than others, due to its significant effect on employee behaviour, structure, and processes in the organization. Furthermore, perhaps the uncertainty avoidance dimension was especially important because its high level of risk-aversion and the ability of management practices to decrease uncertainty. Besides, in other research concerning adoption, the power distance and uncertainty avoidance dimensions provided the most significant results as well (Erumban & De Jong, 2006).
To validate the results, alternative measures of the cultural dimensions of House et al., (2004) were employed. Nevertheless, these alternative measures did not provide any
significant results as moderator or as direct predictor. Oh, Piepier and Gerhart (2010)
provided evidence that measures of the GLOBE project did not have more predictive power. Rather the measures of Hofstede explained more variance in variables. Moreover, both did made use of an entirely different research approach, through which differing measures were obtained. In this manuscript, the Hofstede dimensions also proved to be better in achieving significant results. This could have an implication for culture research in general, namely that these different types of cultural measurement might not be suited as alternatives, and do, in fact, measure other things.
5.3 Practical Implications
34 Furthermore, managers should be aware of cultural preferences and values towards practices, and they should make decisions based on them, without trying to force the practices upon employees, since this gives unwanted consequences such as resistance. It has also been argued that higher performance is achieved when management practices match with the national culture (Newman & Nollen, 1996). Accordingly, it could be beneficial to adapt practices to the national culture.
Moreover, managers should be conscious about the possibility that their countries level of power distance and/or uncertainty avoidance can hamper/promote the adoption of a higher level of management practices, and they should find ways to diminish this constraint. Power distance was negatively related to the level of management practices, while uncertainty avoidance was positively related to the level of management practices. Thus, especially the power distance dimension should be considered when wanting to adopt a higher level of management practices. For example, to overcome the negative effect of high power distance, managers could be informed about the positive advantages of a higher level of management practices, such as more control and conformity of employees. Moreover, in countries high on uncertainty avoidance, this cultural level could be used as an advantage when adopting a higher level of management practices. Focus can be given to the benefits of a higher level of management practices, such as stability, control, and more structuring. The process of adopting a higher level of management practices should thus be altered to the respective culture in which it is implemented.
Finally, managers should take the results of the level of management practices on the level of labour productivity into consideration. They should evaluate and balance the costs and benefits of adopting a higher quality level of management practices, and they should make decisions based on the outcomes. Thus, when experiencing low levels of labour productivity managers could adopt a higher level of management practices as a partial solution.
5.4 Limitations and Future Research
There are also several limitations of this manuscript, and these could be improved in future research. Some are highlighted in this section.
First, culture is measured on the country level. However, there are substantial cultural differences between firms operating in the same country. Scholars like Beugelsdijk,
35 practices less effective. As the conclusions of this study are based on the average cultural measures in a country, it is important to note that there might be considerable differences between firms. The results can therefore not be generalized to all firms. In future research, within country cultural variation could be incorporated as well.
Second, in this study, a mainly cultural approach is adopted towards management practices. However, several scholars describe the value of the institutional approach. For example, the presence of labour unions, varieties of capitalism, and legal origin, can have a profound effect on management practices (Festing & Sahakiants, 2010; Chowdhury and Mahmood, 2012; Van Hoorn, 2014). Thus, while some institutional control factors are taken into account (such as labour regulation index), the focus on the cultural aspects is mainly one-sided. In future research more institutional variables should be included.
Third, this manuscript also contains some practical limitations concerning the data and analysis. One of them is the limited sample of firms operating in a certain industry in a
particular country. In addition, limited data was available of management practices in
following years. Furthermore, only secondary quantitative data is used. It would be helpful to do some extra qualitative case studies for a deeper understanding of the preferences and motivations of employees and managers. These limitations could be fixed in future research. Fourth, levels of the different constructs are measured with a time period of one year in between. This can be improved in the future by examining the differences of one construct over a certain time period. In this case the failure-induced change approach could be a more suitable option, as it adopts a more dynamic approach. Moreover, the time span of a year is somewhat arbitrary, and more examination should be done regarding the effects with respect to time.
Fifth, several determinants for the level of management practices and the level of productivity are described in the theory part. Especially ownership type was a determinant described by a lot of scholars. Unfortunately, it was not possible to obtain data on these determinants, and therefore they are not included as control variables. In the future these determinants should be incorporated.
Sixth, this research can be given more depth by examining the effects on the different subgroups described by Bloom and Van Reenen (2007) or by looking at the individual
practices. For example, several authors argue that some practices are more culture-bound than others, however, there are mixed results (Khatri, 2009). Moreover, it could be possible that certain practices have a stronger relation to productivity.
36 practices (Newman & Nollen, 1996). Future research could use the Hofstede (1980)
framework and the management practices described by Bloom and Van Reenen (2007) for this research and examine the effectivity outcomes.
Eight, in this manuscript it is assumed that a higher level of management practices leads to several individual employee outcomes such as attitudes, preferences, and behaviour. However, little attention in this manuscript is given to how this would work exactly. Future research could make a more in-depth examination of the individual employee outcomes as mediator on the level of management practices and labour productivity.
Finally, although this manuscript contributes to the explanation of variance in the level of management practices and productivity, future research should be conducted for further explanations of these differences.
37 6. CONCLUSION
There are significant differences between firms with respect to the quality level of management practices they adopt. Bloom and Van Reenen (2007) argued that these
differences could further explain the productivity differences between firms. Differences in the level of management practices are examined in the past. However, the findings of previous research only explained the differences for a small part. Therefore, the aim of this research was to further explain the variance in the level of management practices between firms. Hence, I have examined whether the previous level of labour productivity was an antecedent of the quality level of management practices. Moreover, I have tested if this relation was moderated by the cultural dimensions of Hofstede (1980). In summary, it can be argued that culture is valuable to examine in combination with management practices to explain differences in the level of management practices. The cultural dimensions power distance and uncertainty avoidance were significant determinants of the level of management practices, although there were no significant moderator effects. Besides, the previous level of labour productivity had a significant positive influence on the level of management practices, and the level of management practices in turn had a significant positive influence on recent level of labour productivity. In conclusion, this manuscript hopefully aided in further
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