Fact of the Week: Restricting Mergers and Acquisitions Decreases GDP by 15%, and Cutting Productivity

A recent study conducted by Nicolas Bloom and his colleagues delves into the crucial role that management quality plays in the decision-making processes of firms. Utilizing data from various sources, including the U.S. Census Bureau’s Management and Organizational Practices Survey, the Longitudinal Business Database, and the World Management Survey, the researchers sought to understand how management practices influence firms’ choices to expand, contract, acquire, or close plants.

Through the analysis of Census microdata, the researchers developed a model that examined firm- and plant-level management practices and their impact on the ability of firms to acquire and sell plants. The results of the model revealed that well-managed firms are more inclined to expand their plants, reduce their plant numbers (although overall expansion outweighs contraction), establish better-managed new plants, and enhance their management practices, productivity, and sales following the acquisition of a new plant. These findings were consistent with the empirical evidence found in the Census microdata, affirming the reliability of the model.

Moreover, the researchers utilized the model to assess the repercussions of banning mergers and acquisitions in the economy and reducing product market competition, two policy areas that have profound effects on economy-wide productivity. The study unveiled that prohibiting M&A activities could diminish gross domestic product by approximately 15 percent, as it impedes the reallocation of plants to firms with efficient management capabilities. In contrast, diminishing product market competition could lead to a 10 percent decrease in overall output by impeding the closure of inadequately managed plants and inhibiting the expansion of well-managed ones. The researchers also noted that disparities in management practices account for 19 percent of the total factor productivity variances across nations, illustrating the substantial impact that management practices can have on a nation’s economic prosperity.

In conclusion, the study underscores the pivotal role that management quality plays in shaping firms’ strategic decisions and ultimately influencing economic outcomes. The findings highlight the significance of effective management practices in driving productivity, fostering growth, and enhancing overall economic performance. By understanding and promoting sound management practices, nations can potentially bolster their wealth and prosperity on a broader scale.