Academic journal article Journal of Small Business Management

The Effect of Management Policies on Plant-Level Productivity: A Longitudinal Study of Three U.S. and Mexican Small Businesses

Academic journal article Journal of Small Business Management

The Effect of Management Policies on Plant-Level Productivity: A Longitudinal Study of Three U.S. and Mexican Small Businesses

Article excerpt

To determine the influence of various management policies on productivity, various production functions of three small firms in labor-intensive, production-oriented industries are estimated econometrically and compared. Results from modified Cobb-Douglas functions indicate that the most important management-influenced factors are those related to job specialization, asset maintenance and technology policies, and changes in organizational structure. In addition, the results indicate that productivity is significantly related to a firm's overall profitability.

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Introduction

A popular topic of research in the small business and entrepreneurship literature deals with uncovering the relationship between firm-specific factors that are typically under the control of management and the firm's resulting performance. While important progress has been made in understanding many of these relationships, the vast majority of this work has employed accounting-based variables, such as return on investment, as measures of firm performance. However, while accounting-based variables provide a broad measure of success for small-business activity, there are clear limitations for research purposes, particularly when investigating closely held firms. These limitations include financial reporting accuracy, differences in accounting methods, and the owner's discretionary control over various expenses.

When attempting to determine the effect of certain factors such as organization structure, employee management policies, and investment decisions on business performance, several researchers have argued that measures of productivity may be a better indicator of performance (Rauch and Frese 2000), especially for the small production-oriented firm (for example, Aw 2002; Murray and Gerhart 1998; Cooper, Sinha, and Sullivan 1995). As Reid and Smith (2000) argue, the early performance of small manufacturing firms that involve value-added transformations of materials should be measured by variables that tie more directly to this dynamic input-output process than typical accounting measures.

Another problem inherent in the vast majority of empirical studies of entrepreneurial and small-business performance lies in the use of cross-sectional annualized data, which may miss the important shorter-term dynamics and nuances of the management-performance relationship. In response, there has been an increasingly loud call for more statistically based longitudinal studies of small-business performance dynamics (for example, Patton, Marlow, and Hannon 2000; Rauch and Frese 2000; Murray and Gerhart 1998).

This study examines the effect of various management-controlled factors on productivity at the plant level. However, by its very nature, plant-level productivity studies typically require a much more in-depth analysis of specific firms than cross-sectional studies. Thus, we take a case approach by focusing on the details of three production-oriented small firms, each with fewer than 30 employees, followed over multiyear time periods. Two of the firms are located in the United States and one firm in Mexico. The firms under investigation present an ideal research setting because during the time examined they progressed through a number of phases including dramatic growth (and in two cases, subsequent contraction), the infusion of significant capital and equipment at specific points in time, and in two cases, an organizational restructuring. The relationship between productivity and financial accounting performance is also investigated for two of the firms.

Plant-Level Productivity

The issue of productivity is of great concern for managers and economists alike. Yet in spite of hundreds of studies examining productivity at the industry and national economy level, we have only limited insight into the dynamics of production and the specific factors that actually improve productivity at the firm level. …

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