THE ORGANIZATION OF FIRMS ACROSS COUNTRIES
Nicholas Blooma , Raffaella Sadunb John Van Reenenc June 3rd 2009

Abstract We argue that social capital as proxied by regional trust and the Rule of Law can improve aggregate productivity through facilitating greater firm decentralization. We collect original data on the decentralization of investment, hiring, production and sales decisions from Corporate Head Quarters to local plant managers in almost 4,000 firms in the US, Europe and Asia. We find Anglo-Saxon and Northern European firms are much more decentralized than those from Southern Europe and Asia. Trust and the Rule of Law appear to facilitate delegation by improving co-operation, even when we examine “bilateral trust” between the country of origin and location for affiliates of multinational firms. We show that areas with higher trust and stronger rule of law specialize in industries that rely on decentralization and allow more efficient firms to grow in scale. Furthermore, even for firms of a given size and industry, trust and rule of law are associated with more decentralization which fosters higher returns from information technology (we find IT is complementary with decentralization). Finally, we find that non-hierarchical religions and product market competition are also associated with more decentralization. Together these cultural, legal and economic factors account for fourfifths of the cross-country variation in the decentralization of power within firms.

JEL No. L2, M2, O32, O33. Keywords: decentralization, trust, Rule of Law, social capital, theory of the firm Acknowledgements: Helpful comments on earlier drafts of the paper have come from detailed discussions with Abhijit Banerjee, Bob Gibbons, Avner Greif, Oliver Hart, Bengt Holmstrom, Andrei Shleifer, Julie Wulf, Luigi Zingales and participants at seminars in Duke, the Hague, Harvard, HBS, LBS, Mannheim, MIT, Stanford, Tokyo, UC Merced, USC, Warwick and Wharton. We would like to thank the