The productivity of women- and men-led enterprises: In search of a fair comparison

When comparing the performance of women-led and men-led firms, we often start with the assumption that they operate under the same conditions and therefore have the same “production possibilities” available to them — the “homogeneity” assumption. But does that assumption really hold? Research shows that, unlike men, women in business face a variety of unique barriers. They often start with less initial capital, have limited access to finance, deal with mobility restrictions, shoulder greater family responsibilities, and navigate cultural norms that discourage work outside the home. These factors mean that the “production possibilities” available to men and women in business can be vastly different.
 

Questioning the Homogeneity Assumption

Given these disparities, can we meaningfully compare the efficiency of women- and men-led firms, or does the homogeneity assumption obscure critical differences? At a minimum, we should try to separate the part of the efficiency gap that is due to environmental constraints—factors outside managers’ control—from the part due to pure managerial efficiency, which is within their control. Doing so allows for a fairer comparison between women- and men-led firms and improves our understanding of what truly drives the gender-based gap in firm performance.

Metafrontier Analysis: A Method to Isolate Differences

Recent developments in productivity estimation, such as metafrontier analysis, suggest a way to isolate efficiency differences due to managerial factors versus external or environmental factors. In this approach, productivity or efficiency is measured by a firm’s distance in the inputs-outputs space from the efficiency frontier defined by the most efficient firms. The closer a firm is to this frontier, the more efficient it is.

The metafrontier analysis proceeds in two steps:

1. Within-Group Efficiency: All women-led firms are compared to each other, and the best performing firms are identified. The efficiency of a woman-led firm is captured by how close it is to this group frontier, representing its “within-group” efficiency. Since all women-led firms face a roughly similar environment, the “within-group” inefficiency of a firm is attributed to its poor management practices relative to the best-performing women-led firms. A similar exercise is conducted separately for men-led firms.
2. Global Efficiency Frontier: A global or overall efficiency frontier is obtained as the outer envelope of the “within-group” frontiers identified in the first step.  This is the global frontier also called the metafrontier. The difference between the metafrontier and a “within-group” frontier is called the “technology gap” for the relevant group. A bigger technology gap means that the best performing firms within the group are further away (less efficient) from the best performing firms globally, and this gap is likely due to the environmental factors beyond the control of the firm managers.

Findings from India

In our ongoing research, we apply the metafrontier analysis to a representative sample of 225 registered hotels in India using data from the World Bank’s Enterprise Survey conducted in 2022. There are 26 women-led hotels and 199 men-led hotels. We use a measure of efficiency based on the Data Envelopment Analysis (DEA), assuming variable returns to scale and hotels minimizing inputs to obtain a given level of output. Output is measured by the annual revenue of the hotel while the inputs include the total annual labor cost, number of rooms, and the annual operational costs as proxied by electricity expenditure.

Figure 1 shows the efficiency scores for hotels with a woman top manager and man top manager. The overall efficiency (“within” and “across” groups) of a woman-led hotel is lower at 39%, compared to 46% for men-led hotels. This implies that the average woman-led hotel can reduce all its inputs by 61% (=100-39%) and still maintain the same output. The corresponding reduction in inputs for the average man-led hotel is lower at 54%. However, this overall difference masks the main reason for the gap. The lower efficiency of women-led hotels is entirely due to the external environmental factors. As shown in Figure 1, the technology gap for men-led hotels is only 2%. That is, on average, men-led hotels operating on their group frontier could reduce all inputs by 2% by following the most efficient hotels globally while maintaining the same output. In contrast, the most efficient hotels within the group of women-led hotels could reduce all inputs by 36% by adopting the practices of the globally most efficient hotels.

However, women-led hotels perform better than men-led hotels in terms of within-group efficiency (54% vs. 47% in figure 1). In other words, conditional on the available production set or technology determined by the environmental factors, women managers operate more efficiently than men managers of hotels in India. As a result, the overall gender gap in efficiency is entirely due to the environmental factors. 

Summary of Key Findings

The homogeneity assumption that women- and men-led firms operate under the same conditions is flawed. Women face unique barriers that affect their business performance, including less initial capital, limited access to finance, and greater family responsibilities. Metafrontier analysis helps isolate efficiency differences due to managerial factors versus external factors. In India, women-led hotels have lower overall efficiency due to external environmental factors but perform better in within-group efficiency. Achieving gender parity requires policies that improve the working environment for women managers, including better access to finance, supportive infrastructure, family support programs, cultural change, and networking opportunities. By addressing these issues, we can create a more equitable business environment that allows both women- and men-led firms to thrive.