Can Better Management Raise Growth and Reduce Pollution?
Funding Year: 2010
Research Areas: Sustainability
This project explores how better management practices in industrial plants can improve both energy efficiency and productivity. Stanford's Precourt Energy Efficiency Center will provide 50 percent of the funding for this project.
The environmental debate is often couched in terms of tradeoffs. Politicians can regulate to reduce pollution, but this will reduce economic growth and cost their voters jobs. Given the short-term focus of politics, these are difficult trade-offs to make, particularly after a major global recession. As a result, progress on climate change has been frustratingly slow. However, there is a scenario in which policymakers can increase growth and reduce pollution. The basic idea is that better management practices appear to both increase productivity and improve energy efficiency. This is because well-managed firms continuously strive for ways to increase profits by cutting costs. They do this by eliminating any source of inefficiency, including wasted energy and materials. For example, anyone visiting a Toyota factory quickly learns the word muda, the Japanese word for waste. Toyota is obsessed with eliminating any sources of waste, to continuously reduce costs and raise profits. Not surprisingly Toyota factories are the most energy efficient in the industry, producing cars using 20 percent less energy than most of their U.S. and European rivals.
This relationship between good management and energy efficiency goes beyond individual case studies like Toyota. A 10-year analysis of 10,000 firms in 17 countries found that well-managed firms use significantly less energy per unit of output than badly managed firms. This is not only statically significant, but quantitatively important: going from the 25th to the 75th percentile of management practices moving from bad to good management is associated with a 17.4 percent reduction in energy intensity. Given that carbon dioxide emissions are growing at about 2 percent a year globally, a 17.4 percent reduction is equivalent to about nine years growth. And this result is also extremely robust to a wide range of controls for industry, region, firm size and demographics.
An ongoing field experiment that provides five months of intensive management consultancy to a set of randomly selected large textile firms in India has found that introducing very basic management practices has a large impact on firm productivity (details and references). Researchers also noticed that firms had improved their energy efficiency as a result of the intervention.
This project will collect detailed energy use data on our experimental firms and introduce a set of energy reduction experiments on firms to explicitly aim to reduce energy use.
Nicholas Bloom, Eberle Professor of Economics, Senior Fellow at the Stanford Institute for Economic Policy Research and Professor, by courtesy, of economics at the Graduate School of Business