Decentralization
Decentralization or decentralisation is the process by which the activities of an organization, particularly those regarding planning and decision-making, are distributed or delegated away from a central, authoritative location or group and given to smaller factions within it.[1]
See also: SubsidiarityConcepts of decentralization have been applied to group dynamics and management science in private businesses and organizations, political science, law and public administration, technology, economics and money.
In the organizational structure of a firm[edit]
In managerial economics, the principal-agent problem is a challenge faced by every firm.[137] In response to these incentive and information conflicts, a firm can either centralize their organizational structure by concentrating decision-making to upper management, or decentralize their organizational structure by delegating authority throughout the organization.[138] The delegation of authority comes with a basic trade-off: while it can increase efficiency and information flow, the central authority consequentially suffers a loss of control.[139] However, through creating an environment of trust and allocating authority formally in the firm, coupled with a stronger rule of law in the geographical location of the firm, the negative consequences of the trade-off can be minimized.[140]
In having a decentralized organizational structure, a firm can remain agile to external shocks and competing trends. Decision-making in a centralized organization can face information flow inefficiencies and barriers to effective communication which decreases the speed and accuracy in which decisions are made. A decentralized firm is said to hold greater flexibility given the efficiency in which it can analyze information and implement relevant outcomes.[141] Additionally, having decision-making power spread across different areas allows for local knowledge to inform decisions, increasing their relevancy and implementational effectiveness.[142] In the process of developing new products or services, the decentralization enable the firm gain advantages of closely meet particular division's needs.[143]
Decentralization also impacts human resource management. The high level of individual agency that workers experience within a decentralized firm can create job enrichment. Studies have shown this enhances the development of new ideas and innovations given the sense of involvement that comes from responsibility.[144] The impacts of decentralization on innovation are furthered by the ease of information flow that comes from this organizational structure. With increased knowledge sharing, workers are more able to use relevant information to inform decision-making.[145] These benefits are enhanced in firms with skill-intensive environments. Skilled workers are more able to analyze information, they pose less risk of information duplication given increased communication abilities, and the productivity cost of multi-tasking is lower. These outcomes of decentralizion make it a particularly effective organizational structure for entrepreneurial and competitive firm environments, such as start-up companies. The flexibility, efficiency of information flow and higher worker autonomy complement the rapid growth and innovation seen in successful start up companies.[146]
Criticism[edit]
Factors hindering decentralization include weak local administrative or technical capacity, which may result in inefficient or ineffective services; inadequate financial resources available to perform new local responsibilities, especially in the start-up phase when they are most needed; or inequitable distribution of resources.[173] Decentralization can make national policy coordination too complex; it may allow local elites to capture functions; local cooperation may be undermined by any distrust between private and public sectors; decentralization may result in higher enforcement costs and conflict for resources if there is no higher level of authority.[174] Additionally, decentralization may not be as efficient for standardized, routine, network-based services, as opposed to those that need more complicated inputs. If there is a loss of economies of scale in procurement of labor or resources, the expense of decentralization can rise, even as central governments lose control over financial resources.[74]
Other challenges, and even dangers, include the possibility that corrupt local elites can capture regional or local power centers, while constituents lose representation; patronage politics will become rampant and civil servants feel compromised; further necessary decentralization can be stymied; incomplete information and hidden decision-making can occur up and down the hierarchies; centralized power centers can find reasons to frustrate decentralization and bring power back to themselves.
It has been noted that while decentralization may increase "productive efficiency" it may undermine "allocative efficiency" by making redistribution of wealth more difficult. Decentralization will cause greater disparities between rich and poor regions, especially during times of crisis when the national government may not be able to help regions needing it.[175]
