Management Practices in Croatia: Drivers and Consequences for Firm Performance

Abstract

Embedding management and operational practices survey in a broader firm capabilities survey, this paper finds that an average firm in Croatia scores 0.532 on structured management practices, which is farther from the frontier (0.615 in the United States). This average, however, masks the wide heterogeneity in management practices among firms. Relative to advanced countries, a large share of firms in Croatia are badly managed. Management is particularly worse in services and more so in non-knowledge intensive services. Better managed firms show superior performance: improving the management score from the 10th decile to the 90th decile is expected to improve sales per employee by 36 percent, profits by 33 percent and the probability to innovate by 11 percent. Likewise, better managed firms more likely use sophisticated technologies and have a higher probability of accessing external finance. What drives firms to improve their management practices? As elsewhere in the world, global linkages of firms matter. However, unlike the evidence in advanced countries, management capabilities in Croatia is negatively associated with firm age, especially in services, indicating the possibility of allocative inefficiency, where learning and selection mechanism does not weed out the badly managed firms perhaps due to the lack of pro-competitive forces.