Ownership Changes, Management and Efficiency: Evidence from Rwanda's Coffee Industry

Abstract: Markets in developing countries are characterized by long tails of inefficient and poorly run firms and by significant misallocation of assets – two symptoms that the market process that normally reallocates poorly run assets to better managed firms does not function well. This paper provides a detailed study of the Rwanda coffee industry, a context characterized by widespread inefficiencies and that has seen in recent years a process through which large multi-national groups have been integrating backward and acquiring a significant number of mills. Preliminary difference-in-difference results suggest that, controlling for mill and year fixed effects, a mill acquired by a foreign group improves productivity and profitability. Using a uniquely detailed survey panel we document how foreign groups change mills performance. Foreign groups change managers upon acquisition, recruit younger, more educated and higher ability managers and pay these managers a significantly higher salary, even conditional on manager characteristics. These “better” managers explain about half of the better performance associated with foreign ownership. Relative to other managers changes, managers of foreign groups attempt to implement more changes after being in charge of the mill, enjoy more autonomy from owners, but face more resistance from mill’s other constituencies. Domestic-owned groups have also expanded but are, in general, not associated with improvements in performance. We discuss implications for organizational change and for fostering market development in emerging countries.