Measuring and Explaining Decentralization across Firms and Countries

We collect original data on the degree of decentralization in several thousand firms located in the US, Europe and Asia. Specifically, we focus on the autonomy of local plant managers from their Corporate Headquarters in their decisions over hiring, investment, production and sales. We find that American and Northern European firms are much more decentralized than those from Southern Europe and Asia, both domestically and as multinationals abroad. Three factors are associated with greater decentralization. First, stronger product market competition, which arguably makes manager’s local knowledge more important because of greater time-sensitivity of decision-making. Second, higher trust in the plant’s region of location (and/or multinational’s home country), which may help to sustain effective delegation because of enhanced co-operation. And third, the prevalence of hierarchical religions, such as Catholicism and Islam, which may lead managers to have weaker preferences for autonomous decision making. These factors appear important across countries, across regions within countries, and for multinationals according to their country of ownership. If as suggested by the literature decentralization is complementary to some forms of information and communication technology, Catholic countries with lower trust and competition, like France and Italy, may benefit less from an era of rapid technological change than Protestant countries with greater trust and competition, like Sweden and the U.S. JEL No. L2, M2, O32, O33.