Management practices boosted business performance in COVID-19 by facilitating remote work: Evidence from Italy
The outbreak of the COVID-19 pandemic necessitated extreme measures limiting freedom of movement, prompting most countries to impose lockdowns on non-essential economic activities. Western industrialized countries had not witnessed an event of such magnitude since the Spanish Flu, so the policy measures were new and unprecedented.
Italy was the first country to introduce these measures. The first official case of COVID-19 was discovered on February 21, 2020. Initially, the restrictions were limited to 11 municipalities in Lombardy and Veneto, which were declared “red zones”,1 soon after, the government issued a series of emergency decrees (DPCM). On March 8, the red zone status was extended to 15 additional provinces and, within three days, the social distancing measures were applied to the whole country (‘stay at home’ campaign). Sunday March 22 marked the introduction of the nationwide lockdown, consisting of the closure of factories producing all goods and services except those on an essential goods list or those forming part of chains of related value. Businesses were still allowed to pursue activities that could be done through remote work.
While in other countries companies could anticipate lockdowns based on the Italian example (Buchheim et al. 2020), the measure came as a complete surprise to Italian companies. Evidenced by the sharp decline in business sales forecasts in the weeks following the first widespread social distancing measures (March 8) and the announcement of national lockdown (March 22).
Figure 1 Sales growth by week of response to the 2020 Survey of Industrial and Service Firms (INVIND)
Remarks: The sample is made up of 1803 companies that responded to the INVIND 2020 survey of the Bank of Italy. The blue bars represent the average sales growth expected in 2020 year-over-year (YoY), while the red line represents the average sales growth in 2019 year-on-year. The vertical lines correspond to the dates of the announcement of widespread social distancing restrictions in Italy (March 8) and the nationwide lockdown (March 22).
In a recent article (Lamorgese et al. 2021), we study the role of management practices in the response of Italian companies to COVID-19. While management practices are strongly correlated with business performance in normal times (Bloom and Van Reenen 2007), it is not initially clear that management practices have necessarily helped businesses respond to the COVID-19 shock. 19. While they can provide companies with tools and information to better guide their strategy, they can also impose undue structure and constraints when flexibility is valuable.
Figure 2 plots the evolution of the average sales growth expected in 2020 by response week separately for companies whose management is above and below the average of the calculated score.2 Before confinement, there is no difference in expected sales between the two groups. However, following the lockdown announcement, best-run companies reported significantly smaller declines in expected sales (Chart 2).
Figure 2 Sales growth during the evolution of COVID-19, by management score
Notes: The y-axis of the chart shows the smoothed values of average year-over-year sales growth from the INVIND 2020 survey over the weeks reported on the x-axis for companies in two groups: those whose the management score is above average and those with a lower score. The outcome variable is calculated using kernel-weighted local polynomial regressions of expected year-over-year sales growth for the firm’s response week. The bands shown are 95% confidence intervals and the vertical lines correspond to the dates of the announcement of widespread social distancing restrictions in Italy (March 8) and the nationwide lockdown (March 22).
Following the lockdown, managerial practices are associated with lower expected sales declines: a one standard deviation increase in management score increases expected sales growth by 2.4%, or about 30% of the average decline ( -8.3%). The conclusion is further confirmed using the first information on the growth in sales achieved.3 In our analysis, we control for a rich set of firm characteristics that are generally correlated with management practices and that could also affect shock response, including size, productivity, export status, human capital, and adoption of technology. Our results are extremely robust: even assuming that the effects of each of these characteristics differ before and after confinement, the estimated coefficient of managerial practices during confinement remains unchanged.
Increased adoption of remote working by better managed companies
A short ad hoc survey conducted by the Bank of Italy on the impact of COVID-19 on businesses shows that the channels through which the COVID-19 shock has affected business operations (lack of demand, labor problems work, finances, etc.) are orthogonal to our management measure, limiting the fear that the shock is systematically correlated with management practices. This implies that the difference in performance is due to the differential responses to the COVID shock of the best run companies. Looking at the strategies companies put in place to counter the shock, management is positively and significantly associated with increases in the share of employees engaged in remote working in 2020, controlling for the corresponding share in 2019. Specifically , we find that the tracking and incentive components of the management score drive outcomes.
Remote work may require more supervision and incentives
Our results suggest that remote work may be easier to implement for firms with structured management practices, particularly the monitoring and incentive components of management. Managers’ monitoring of the levels at which employees are meeting previously set goals can prove useful during the pandemic, as it allows for a smooth transition to remote working without the need to implement additional organizational changes. . Additionally, when managers cannot track worker input through direct tracking, performance-based incentive practices – that is, practices that set goals, measure results and reward workers accordingly – can be helpful.
The implications of our study are particularly relevant for small and medium-sized enterprises, which have suffered disproportionately from the pandemic, while large enterprises have adapted more quickly to remote working (Bartik et al. 2020, Taneja et al. 2021). Modern management practices are standardized and relatively inexpensive to implement (Bloom et al. 2013). Although not all work can be done remotely (Adam-Prassl et al. 2020, Baldwin 2020 and Gottlieb et al. 2021), such practices can help mitigate some of the declines in worker productivity seen in remote environments. remote work (Morikawa 2021).
Authors’ note: The opinions expressed in this column are those of the authors only. They do not necessarily represent the views of the Bank of Italy.
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1 Red zone status has limited mobility to and from the 11 listed municipalities and imposed social distancing measures: it has closed schools, suspended social events, closed retail stores selling non-essential goods and services, instituted quarantine for people affected by the virus, and enforced the use of masks and other personal protective devices.
2 To measure management practices in companies, we adopt the survey instrument of Bloom et al. (2019), where companies are scored on the use of management practices in three distinct dimensions: oversight, goals and incentives, together to generate an overall standardized measure of the adoption of structured management within the company.
3 The growth in sales achieved for the first three quarters of 2020 compared to the same period of the previous year is collected by the Bank of Italy through the SONDTEL survey.