Is America Inc getting less dynamic, less global and more monopolistic?
CONCERNS ABOUT the health of American business are many and varied. Chief executives are chastised for their apparent short-termism. Their companies are berated for fetishising shareholders over everyone and everything else. Elon Musk, boss of Tesla, a maker of electric cars, grumbles about a surfeit of business-school graduates stifling innovation. President Joe Biden frets as much about American companies losing out to China as Donald Trump did (albeit with less bile). He also worries about the concentration of power among America’s biggest firms.
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All this paints a picture of America Inc that looks stodgier, more parochial and monopolistic. If true, that would be bad news for the spiritual home of free-market capitalism. But is it? The Economist set out to test all three hypotheses about American business: that it is less dynamic, less global and more concentrated. The results appear nowhere near as bleak as the doom-sayers would have you believe.
Start with dynamism. Scholars have long argued that it isn’t what it used to be. Ten years ago Tyler Cowen, an economist at George Mason University, warned that the American economy was in the midst of a “great stagnation”. The reasons cited by Mr Cowen and others range from more red tape to fewer transformative technologies such as aeroplanes and telephones, because the low-hanging fruit had been plucked. Symptoms of the malaise included fewer employers being created, fewer companies going public and fewer investments made by existing ones. The share of workers employed at firms less than a year old fell from 4% of total employment in the 1980s to around 2% in the 2010s. Around three-quarters of the workforce is employed by a company that is more than 16 years old, up from two-thirds in 1992.
Economists are still debating just how great the stagnation really was. One thing is certain, though: since the arrival of covid-19 America Inc has been anything but stagnant. Applications to start new businesses have soared. In the first six months of 2021 around 2.8m new firms were born, 60% more than in the same period in pre-pandemic 2019 (see chart 1). Many are small enterprises created by people stuck at home during lockdowns. A third of the new applications were in retail, in particular the online variety. Business starts in other e-commerce-related areas, including trucking and warehousing, have surged, too, notes John Haltiwanger of the University of Maryland. The quit rate, which indicates churn in the labour market, is at a record high. Nearly 3% of workers left their job in July, presumably because they believe they can get a better one.
Larger contenders are also thriving. Take America’s biggest startups. CB Insights, a data firm, found that in 2019 a monthly average of five unlisted firms became “unicorns” (ie, were valued at over $1bn). Since the start of 2020 that figure has swelled to 12. Many older unicorns have gone public. Airbnb, a holiday-rental firm, was the biggest American initial public offering (IPO) of 2020. Its valuation surged past $100bn on the first day of trading. Since January 2020 the average number of monthly IPOs has risen three-fold, to around 80. In that period American firms have raised nearly $350bn, more than in the preceding seven years added together.
Some of the ferment comes out of necessity. A survey by the Kauffman Foundation, a think-tank, finds that the share of new entrepreneurs who are starting businesses because they spy an opportunity rather than because they lost their jobs dropped from 87% in 2019 to 70% in 2020. But the “physiological shock” of the pandemic may also have led people to re-evaluate their lives, says Kenan Fikri of the Economic Innovation Group, another think-tank. Some of them handed in their notice and struck out on their own.
With the Federal Reserve flooding markets with newly created cash, investors had plenty of capital to back businesses of all sizes. Jim Tierney of AllianceBernstein, an investment firm, observes that the market is favouring disruptive new entrants such as Robinhood, a broker catering to day-traders. With less than one retail trader for every 70 at Charles Schwab, recently listed Robinhood already boasts half the incumbent firm’s market capitalisation. Small wonder American unicorns are eager to list, says Mr Tierney.
Cheap capital is also encouraging the established beasts of American business to boost their investment plans. American companies’ real spending on equipment, structures and software grew at an annualised rate of 13% in the first half of the year, the fastest since 1984. Apple, the world’s most valuable company, will spend $430bn in America over a five-year period, 20% more than it had previously planned. Intel is splurging some $20bn a year on new microchip factories.
If dynamism was ever in retreat, then, it no longer appears to be. Even Mr Cowen has all but declared the great stagnation over. What about American firms’ global stature? World trade as a share of planetary GDP peaked in 2008. In America imports and exports as a proportion of output have declined from an all-time high of 31% in 2011 to 26%. Mr Biden’s policies show a preference for jobs at home over free trade. Covid-19 has disrupted some supply chains, prompting a number of pundits to predict a wave of reshoring. “The era of reflexive offshoring is over,” declared Robert Lighthizer, Mr Trump’s trade representative, in the New York Times in 2020.
Before the pandemic some data were indeed hinting that corporate America was becoming less global. Dealogic, a research firm, estimated that cross-border mergers and acquisitions by American firms as a share of domestic M&A activity declined from 16% in 2014 to 9% in 2019. In the past 18 months, however, this figure has jumped back to around a fifth, thanks in part to all that cheap capital. Other indicators of internationalism have barely budged. Kearney, a consultancy, tries to capture the extent of reshoring by looking at the total value of manufactured goods imported from a list of 14 trading partners, including China, Vietnam and Malaysia, relative to American manufacturing output. Between 2018 and 2020 this ratio has stayed stable at around 13%.
Some companies are, it is true, adapting their supply chains. They are seriously considering moving manufacturing out of China, says Jan Loeys of JPMorgan Chase, a bank. But those companies are mostly eyeing nearby countries, often in addition to rather than instead of their Chinese suppliers. American imports from Taiwan rose by 35%, or $11bn, in the first seven months of 2021, compared with the same period in 2019. But those from China increased by nearly as much in dollar terms.
Americans also continue to sell a lot to foreigners. The Economist looked at the share of revenue earned overseas by non-financial firms in the Russell 3000, a broad index of American firms. Some industries, such as professional services, have seen their domestic share of sales increase, as lockdowns around the world hampered foreign contracts. Others, such as entertainment, have become more reliant on foreign sales; Netflix now books 54% of its revenue abroad, up from 40% a few years ago. Imax, a cinema chain, has made over two-thirds of its revenue this year from Asia, compared with two-fifths in 2017.
Overall, the median firm’s foreign sales as a share of its total has stayed flat at 15%. So has the revenue-weighted average, which has oscillated around 35% (see chart 2). Two in five firms make more than half of their sales abroad, a share that has also remained more or less constant in the past four years. CEOs fall over themselves to signal international ambition during earnings calls. On July 27th Tim Cook, who runs Apple, named 14 countries where the iPhone-maker’s sales reached a record high for the third quarter. “I could go on…It’s a very long list.” On the same day Kevin Johnson, boss of Starbucks, said he was “very bullish” about the coffee-pedlar’s prospects in China.
The third area of concern is market concentration. In 2016 we published an analysis that divided the American economy into around 900 sectors covered by the five-yearly economic census. Two-thirds of them had grown more concentrated between 1997 and 2012. The weighted-average market share of the top four firms in each sector had risen from 26% to 32%. The latest census data up to 2017 show that the trend did not reverse. But nor did it accelerate. Although concentration edged up in around half of industries between 2012 and 2017, the weighted-average market share across all sectors remained at 32%.
More recent census data will not be published for years. So we looked at the market share of the top four firms in the Russell 3000. In seven of the ten sectors, the revenue-weighted market concentration was a bit higher in the past 12 months than in 2019. Similarly, Bank of America, which has tracked the Herfindahl-Hirschman index, a gauge of market concentration, for firms in the Russell 3000 since 1986, reports that it hit a new high in 2020.
This could be because deep downturns like last year’s covid recession tend to favour large firms with healthy balance-sheets. Big tech in particular has benefited from the pandemic shift to all things digital. America’s five tech titans—Alphabet, Amazon, Apple, Facebook and Microsoft—notched up combined revenues of $1.3trn in the past 12 months, 43% higher than in 2019. They are America’s five most valuable companies, accounting for 16% of its entire stockmarket value—considerably higher than the 10% attributable to the five biggest firms in the past 50 years, according to calculations by Thomas Philippon of New York University’s Stern School of Business.
In hard-hit industries, meanwhile, cash-rich survivors are snapping up struggling rivals, fuelling an M&A bonanza. Between January and August American companies announced deals worth almost $2trn. The sectors which saw the biggest rise in concentration were those disrupted by covid-19, such as real estate and consumer goods (where the top four’s share has jumped by around four percentage points since 2019). Some big firms are getting a larger slice of a shrinking pie. Among energy-services companies, such as Haliburton, the strongest four increased their market share from 59% to 75%, even as sectoral sales fell by a quarter.
All this would be worrying—were it not for concomitant trends. The tech giants, for example, are increasingly stomping on each other’s turf. Nearly 40% of the revenues of the big five now come from areas where their businesses overlap, up from a fifth in 2015. Facebook wants to become an e-merchant, Amazon is getting into online ads, Google and Microsoft are challenging Amazon in the computing cloud, and Apple is reportedly building a search engine.
Such oligopolistic competition is not ideal, perhaps, but much better than nothing. And money flowing to newly listed disruptors and to corporate capital budgets implies that companies and investors are spying fresh opportunities for future profits, including at the expense of incumbents, should they become complacent. American business could use some more pep here or there—who couldn’t? But it does not scream sclerosis, either. ■
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An early version of this article was published online on September 13th 2021
This article appeared in the Business section of the print edition under the headline “Bring out the vim-o-meter”