The Strategist

NBER: Economic activities of US mega-companies have not grown in 60 years

02/19/2019 - 11:42

Contrary to popular belief, American “superstar companies” have not become larger and more productive over the past 60 years, and since 2000 their contribution to overall productivity growth has decreased by almost 40%, the National Bureau of Economic Research Bureau (NBER) said in a report. Bureau analysts suggest that the reasons for this may be a decrease in competition due to the influence of big business on government regulation, as well as a shortage of new ideas capable of increasing the productivity of already established giants.

Phillip Pessar via flickr
Phillip Pessar via flickr
According to the popular “optimistic” view, “superstar companies” are becoming bigger and more productive, and distancing further and further from the rest of the economy. However, the real evidence of this is much weaker and more indirect than is commonly believed, according to Herman Gutierrez and Thomas Philippon from the Leonard N. Stern School of Business at New York University. Although some researchers have documented an increase in the gap in the productivity of employees of “advanced” and “lagging” firms, it will be a mistake to automatically assume that Google and Facebook are demonstrating outstanding productivity growth. The problem lies in the rest of the economy. In reality, the “economic footprint” of the largest US private companies has not grown over the past 60 years, according to NBER.

The authors of the report analyzed the long-term data on two groups of “stars”: the 20 largest companies by market capitalization for each year and the four leaders in each of the 62 industries accounted for by official statistics (248 in total). At the same time, the nature of the “superstars” changed over time: while in the 1950s these were primarily production companies (General Motors, General Electric), then in the 1960s IBM took the stage, in the 1990s - Microsoft and Walmart, and recent years there were digital giants such as Google, Amazon and Facebook.

From the point of view of employment, the “stars” have not grown, the NBER notes. In the 1960s, the top twenty accounted for 4% of all people employed in the economy. In the 1990s, their share fell to 2%, and then returned to the previous indicator, largely due to the rise of Walmart. Industrial four leaders showed more stable figures: they provided about 8% of all employment. To surprise of the researchers, the ratio of “stars” to GDP turned out to be relatively stable: given that about a third of the consolidated revenues accounted for exports (and this figure grew over time), their domestic sales relative to the overall size of the economy did not grow.

At the same time, contribution of “stars” to productivity growth has not only declined by almost 40% since 2000, but has changed its character: most of it was not provided by internal growth, but by the effect of redistribution (if the leading company demonstrates greater revenue performance, it can contribute to overall productivity growth by simply investing more resources). This is partly due to the growing importance of the non-production sectors: in a service economy, innovation can be created to reach and attract new customers, rather than to reduce the cost of existing services. Nonetheless, the contribution of “non-star” companies to the overall growth in productivity was higher. Since 2000 they accounted for most of it, and it went on up to the drop during the “great recession”; since 2013, the “stars” have been able to slightly increase their contribution.

Thus, although the American "star companies" have always been large and productive, the current leaders do not yet reach their predecessors, and the turning point came in 2000, the NBER states. Beware of a clear answer, the researchers suggest that reducing competition and increasing barriers to entry to the market due to the increasing complexity of regulation allowed the major existing players to reduce investment and innovation, while the amount of dividends and share repurchases increased. Another assumption made by the authors looks even more cautious: after 2000, the economy had a shortage of new ideas capable of influencing productivity in the way innovations did at the end of the 20th century.


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