Are Large Headquarters Unproductive? Evidence from a Panel of Japanese Companies

Author Name MORIKAWA Masayuki  (Vice Chairman & Vice President, RIETI)
Creation Date/NO. May 2014 14-J-028
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This paper, using large panel data of Japanese companies (2001-2011), empirically analyzes the determinants of the size of headquarters and their effect on productivity. Headquarters functions, the core service sector within companies, play important roles in supporting strategic decision making in modern companies. However, it is often advocated that the downsizing of headquarters improves organizational efficiency. The size of headquarters is closely related to the issue of centralization/decentralization of decision making, and, theoretically, an optimal level of decentralization depends on various conditions. The major results of this study are as follows. First, the mean size of headquarters is stable during the sample period, but the cross-sectional dispersion of the size is very large even within a narrowly-defined industry. Second, company size, diversification of business activities, and the number of establishments are negatively related to the size of headquarters, suggesting that the growth and complication of businesses lead to decentralization of decision making. Third, the information and communications technology (ICT) network inside a company reduces the size of headquarters, although the magnitude of this effect is small. Fourth, headquarters contribute positively to the total factor productivity (TFP) of the companies. Finally, ICT network and headquarters have a complementary role in productivity.

The English version of this paper is 14-E-036.