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The contribution of management to economic growth: a review
Abstract
A review of the literature indicates that the contribution of management to economic growth has been largely obscured in theory and ignored in empirical work. In contrast, the place of the entrepreneur in the process of growth is well recognised and widely accepted. The main goal of this paper is to develop an argument for the place of management in the process of growth, and to maintain that in the modern free market economy management's role is at least as important as that of the entrepreneur Routine innovation in established firms is emphasised as a fundamental, normal part of management activity, and as such highlights the importance of management for economic growth. However, management is not homogeneous and the actions of managers differentially affect the performance outcomes of firms. Hence the quality of management, and the adoption of appropriate management practices, matters and directly impacts economic growth. In recognising that management makes a significant contribution, both in terms of ensuring efficiency in the use of factor inputs and effectiveness in terms of driving incremental innovation, new research is necessary at the firm level in order to develop this understanding.
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Note
Solow and Temin (1989, p.80) note that ‘the appropriate measure of the contribution of a particular input to the average annual rate of growth of output is given by the product of the average annual rate of growth of the input, and the elasticity of the output with respect to that input. To ask whether the growth of productive inputs “explains” the growth of output is simply to ask whether the sum of such products is equal to the rate of growth of output itself’. The excess of the rate of growth of output over the sum of these products is termed the ‘residual’. A positive residual, therefore, reflects an increase in the productivity of the economic system. Possible sources of the residual are increasing returns to scale, improved efficiency in the allocation of resources (transfer of resources from low-productivity employment to high-productivity employment; for example, from agriculture to industry), and technological progress (Solow and Temin, 1989, p.93). The main emphasis in the literature has been on technological progress.