Does Product Market Competition Lead Firms to Decentralize?

There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address this empirical lacuna we have developed a research program to measure the internal organization of firms—including their decentralization decisions—across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local managers’ information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital (Eve Caroli and John Van Reenen 2001), information and communication technology (Timothy Bresnahan, Erik Brynjolfsson, and Lorin Hitt 2002), culture (Bloom, Sadun, and Van Reenen 2009), and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few datasets that exist are either from a single industry or (at best) across