A world dominated by Giants

The first paper shows that while the leading companies around world are continuously boosting their productivity with technological advance (or some kind of monopoly), the rest of the companies find it harder to catch up, or they just feel little needs to do that as we also see fewer exits by weak firms, and a decline in entry. The market function of creative destruction is somehow dying.

The second paper shows that the leading companies in US is taking a bigger market share, which cause unequal distribution of labour income.

The best vs the rest: The global productivity slowdown hides an increasing performance gap across firms

The debate of productiviey has largely been conducted from a macroeconomic perspective:
1 prospects for innovation at the global productivity frontier (e.g. Gordon 2012 versus Brynjolfsson and McAfee 2011)
2 the role of secular stagnation (Summers 2016)
3 even mismeasurement (Byrne et al. 2016).
But analyses based on aggregate data ignore the complexity that characterises contemporary economies, particularly the heterogeneity in firm productivity that exists within narrowly defined sectors (Syverson 2004).

In fact, productivity growth at the aggregate level is the result of two underlying microeconomic forces (Foster et al. 2001)
1. Heterogeneous productivity growth performance within firms;
2. The processes of creative destruction and resource reallocation whereby new firms enter the market and replace old ones, and scarce resources are continuously reallocated towards more productive activities.

Using a harmonised cross-country firm-level database for 24 countries: OECD-Orbis
(using multi-factor productivity (MFP) estimates in order to control for differences in capital deepening and the ability of frontier firms to charge higher mark-ups)
global frontier firms: top 5% of firms in terms of labour productivity levels in each year between 2001 and 2013, across all countries ->
laggards:  all other firms

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->   not so much a slowdown of productivity growth at the global frontier, as techno-pessimist accounts (Gordon 2012) would imply, but as an increasing productivity gap between the global frontier and laggard firms

Thus, this paper argues the global slowdown at the aggregate level masks a deterioration in both productivity growth within firms (1. the pace of laggard firm’s catch-up to the global productivity frontier) + a process of creative destruction (2. the extent of market dynamism and growth-enhancing reallocation).

Reason:

the increasing potential of digital technologies to create global winner-takes-all dynamics (Brynjolfsson and McAfee 2011) has helped frontier firms to increase their performance gap against laggards

evidence: in ICT services (computer programming, software engineering, data storage, and so on, an industry in which winner-takes-all patterns should be evident), global frontier firms increased their market share + MFP divergence was more pronounced

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However, the aggregate productivity is not increasing, <– aggregate MFP performance was significantly weaker in industries where MFP divergence was more pronounced –> a lowering productivity growth of laggards, as the obstacles to the productivity growth of laggards have increased

-> a) stalling technological diffusionincreasing costs like required capabilities as technological advances had increased the amount and sophistication of complementary intangible investments (for example managerial quality) that are necessary for technological adoption

-> b) market dynamism among laggardsincreasing survival of marginal (or loss-making) incumbent firms that would typically have exited in a competitive market, despite a deterioration in their relative productivity –>  adverse effects on aggregate technology adoption are reinforced by the decline in entry, which implies less indirect pressure on incumbent firms to improve their productivity (Bartelsman et al. 2004).
—-> a broader decline in the contestability of markets and growth-enhancing reallocation

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c) the best firms and the rest is much more extreme in sectors where pro-competition market reforms were slowest (market regulations remained relatively stringent: retail trade and professional services v.s.reforms were most extensive: telecommunications)
–> failure of policy to encourage the diffusion of best practices in OECD countries.

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The Fall of the Labor Share and the Rise of Superstar Firms∗

David Autor and his colleagues looked at 676 industries in the US and found that for the typical industry in each of six sectors — manufacturing, retail, finance, services, wholesale and utilities/transportation — the biggest companies are producing a larger share of output.

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This is surprising. As the world economy grows, one might expect markets to become more like the perfectly competitive textbook model, not less.
– Deregulation should allow more competition;
– Globalisation should expose established players to pressure from overseas;
– Transparent prices should make it harder for fat cats to maintain their position.
Why hasn’t competition chipped away at the market position of the leading companies? The simplest explanation: they are very good at what they do. Competition isn’t a threat to them. It’s an opportunity. “Superstar firms” tend to be more efficient: superstar firms have grown not by avoiding competitors but by defeating them. (see above)

—-> The superstar firm phenomenon is the best explanation that: the distribution of this labour income also became much more unequal during the 1980s and 1990sin the US and many other advanced economies.

(Workers, from shelf-stackers to chief executives, have seen their total share of economic value-added fall from about 66% to about 60% in the US since 1980. This decline in “labour share” is often blamed on international trade making life harder for workers and easier for footloose capital. This paper find little evidence for this idea.)

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Superstar firms, instead, seem to be the cause: Because of this profitability, more of the value added by the company flows to shareholders and less to workers. And what happens in these groups will tend to be reflected in the economy as a whole, because superstar firms have an increasingly important role.

->>> Either the US economy ends up like Amazon, or it ends up like Microsoft.
– The Amazon future is one of relentless competition, a paradise for consumers but a nightmare for workers, and with the ever-present risk that dominant businesses will snuff out competition as the mood takes them.
– The Microsoft future epitomises the economist John Hicks’s quip: “the best of all monopoly profits is a quiet life”. Microsoft in the 1990s became famous as a once-brilliant company that decided to pull up the drawbridge, locking in consumers and locking out competitors.

 

 

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