According to a recent working paper out of Harvard Business School, the more cultural trust within and surrounding a firm, the more productive it will be. That’s according to researchers Nicholas Bloom, Raffaella Sadun, and John Van Reenen.
They measured levels of trust within multinationals and compared that to the level of trust found culturally in headquarters countries and satellite location countries. Then they compared that to levels of productivity for those multinationals. What they found reveals that companies headquartered in more trusting cultures may ultimately perform better than those headquartered in less trusting cultures.
The key comes down to decentralization, they suggest – when leaders trust subordinates more, they are able to delegate more to them and ultimately expand at a faster pace. As companies in emerging markets grow more quickly, the companies that are able to leverage a trusting and decentralized corporate culture will be more successful, they suggest.
Trust and Productivity
Based on a number of empirical measures of 4000 firms globally, the researchers found, “higher levels of bilateral trust between the multinational’s country of origin and subsidiary’s country of location increases decentralization, even after instrumenting trust using religious and ethnic similarities between the countries.”
They explain that this increases productivity by increasing the efficiency of decision makers – that is, CEOs are able to delegate more decisions to subordinates they believe in, and are therefore able to focus on growth.
“As firms grow large and more complex CEOs need to increasingly decentralize decision making power to their senior management. In our data we find that larger firms are indeed significantly more decentralized and that high trust regions are able to sustain firms of large equilibrium size.”
Second, the authors continue, a greater degree of trust within companies goes along with the adoption of new technologies, “thereby increasing productivity within firms during times of rapid technological change.”
Currently global growth and rapid technological change are two trends characterizing companies around the world. Businesses should find ways to leverage these developments.
The study finds that the people in companies with headquarters in the US and Western Europe tend to be more trusting of one another (as a measure of decentralization) than those headquartered in Asia or Eastern Europe, which tend to be more centralized. Delegation is higher for companies when both the headquarters country and the subsidiary country are in high trust regions. They explain:
“We find that the level of trust prevalent in the country where the multinational is headquartered has a strong positive correlation with decentralization in the affiliate’s foreign location: in California a multinational affiliate from Sweden (a high trust country) would typically be more decentralized than a multinational affiliate from India (a low trust country).”
Finally, the authors continue, this dynamic appears to strengthen over time.
“Since the importance of decentralization appears to be growing over time (e.g. Rajan and Wulf, 2006) countries with a comparative advantage in decentralization such as the United States and Northern Europe are likely to benefit disproportionately. If the trend towards rapid technical change and greater competition in markets continues this is likely to give large productivity growth advantages to such countries.”
Based on their estimates, the researchers believe that “regions with a one standard deviation higher level of decentralization would have enjoyed about one half a percent higher growth since the mid-1990s.”
How can companies use this research to increase the effectiveness of their workforces? Obviously, cultural levels of trust are externally developed. But the research does suggest that by increasing the trust between managers and subordinates, leaders are able to delegate more and thereby increase productivity and efficiency. By actively engineering corporate workplaces that are focused on decentralizing trust, leaders can get the most from their workforces and help their companies grow.