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Thursday, March 16, 2006

Primogeniture as a Source of Productivity Differences

Hal Varian recently discussed productivity differences between the U.S. and the U.K. and noted:

It appears that United States companies are much farther up the learning curve .... Professors Bloom, Sadun and Van Reenen looked at 7,500 establishments in Britain and found that in terms of value added per worker, American multinational corporations were 23 percent more productive than the average in Britain. ...

He cites differences in the use of information technology as a major factor in the productivity differences. Perhaps there's another reason as well:

London School of Economics/McKinsey study says the best way to ruin a UK family business is to give it to an eldest son, by Finfacts Team: Research published today by the Centre for Economics Performance at the London School of Economics and McKinsey the consultancy, suggests that the best way to ruin a UK family business is to give it to an eldest son. The research into the gap between the UK's productivity performance and that in the US, France and Germany found ... that half of the difference between British companies and their overseas competitors ... could be explained by the prevalence in Britain of second or later generation family-run companies. If those were removed from the analysis, British performance did not look nearly so bad.

Nick Bloom, one of the authors, urges the UK Government to scrap the 100 per cent inheritance tax relief given to large family businesses. Bloom says that if tax relief were to be capped at £1m, it would spur productivity growth, save taxpayers £250m a year and avoid entrenching poor management in Britain's boardrooms. "Can you imagine if the current England football team was picked from the sons of the team in 1966? We wouldn't win anything."...

Family firms exist across the world so why single out the UK? From our survey of manufacturing, it turns out that the UK has a high number of firms that are both family-owned and family-managed. The ... number of family-owned firms is about 30% in the UK, France and Germany and 10% in the United States. ... the majority are managed by the family in the UK and France, but not in Germany. Moreover, ... about half of all these family firms in the UK reported handing down CEO control by primogeniture – that is, to the eldest son.

    Posted by on Thursday, March 16, 2006 at 06:14 PM in Economics, Technology | Permalink  TrackBack (1)  Comments (8)

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