How Organizational Changes Can Increase Competitiveness: Evidence from Brazil

Productivity is a fundamental concept in business because it encompasses how employees, firms, and the economy as a whole efficiently transform their inputs into outputs. From the macroeconomic perspective, productivity is often analyzed using aggregate industry data in order to better understand the trends and drivers of economic growth. Likewise, from the microeconomic perspective, firms’ data provide insights into how business practices impact productivity. In this sense, there are many firm aspects that can explain the variation in successes and failures of firms across different sectors, from human resources to management and organization.

A new study from World Bank researchers Marcio Cruz, Maurizio Bussolo, and Leonardo Iacovone analyzes if a program designed to provide managerial coaching and capacity building to small- and medium-sized enterprises in Brazil has an effect on firms’ organization and hierarchy. The program, PEIEX, is sponsored by the Brazilian Trade and Investment Promotion Agency (Apex-Brazil) and aims to increase competitiveness and exports among small- and medium-sized firms. The authors use a merged firm-level dataset for manufacturing enterprises covering the period 2006–2010. The dataset consists of a linked employer-employee dataset from the Brazilian Ministry of Labor (RAIS), providing information about firms’ treatment and exporting status.

To measure the impact of the program, the authors focus on identifying whether firms that participated in PEIEX changed their organization by adding new employees with different knowledge, competencies, or skills. This measure is based on the framework of knowledge-based layers, which are defined as groups of workers with similar knowledge performing similar tasks. In this sense, if a firm has one layer of knowledge and hires an additional employee for that layer, then there is no change in the organizational knowledge of the firm. Whereas if a firm has one layer and hires a new employee with a different set of competences, then they assume that firms are reorganizing and expanding knowledge, which can make them more competitive. However, it is important to note that adding more layers does not imply that adding additional employees is a best practice; adding employees with specialized skills and knowledge improves the firms’ ability to solve different problems.

There are three major results from the analysis. First, the findings suggest that there is a positive and significant association between participating in the program and organizational change among the treated firms. Secondly, the authors find that firms that did not have knowledge layers before entering the program were more likely to add one layer of knowledge after the treatment; however, the effect is not significant for those firms that had two or more layers of knowledge prior to the treatment. Finally, the researchers found that those firms that became exporters after the program were more likely to add additional layers, suggesting that firms that have more layers of knowledge are more likely to be exporters.

Surprisingly, the results show that adding more layers of knowledge to the organizational hierarchy is associated with an increase in wage inequality between layers as a result of an increase in working hours. The authors conclude that firms that increase management knowledge are more likely to be highly competitive, allowing them to lower their marginal costs by using employees’ knowledge more efficiently.

From a policy perspective, the study adds to our understanding of how knowledge management can contribute to improving firms’ innovation and performance, and ultimately impact firm-level productivity. Finally, the results also provide evidence of the importance to tailor business training programs for small- and medium-sized firms in developing countries.

Article source: Cruz, Marcio, Maurizio Bussolo, and Leonardo Iacovone. “Organizing Knowledge to Compete: Impacts of Capacity Building Programs on Firm Organization.” World Bank, Policy Research Working Papers, 2016.

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