“Disruption” may be the buzzword in boardrooms, but the most striking feature of business today is not the overturning of the established order. It is the entrenchment of a group of superstar companies at the heart of the global economy.
Some of these are old companies, such as General Electric, that have reinvented themselves. Some are emerging-market champions, such as Samsung, which have seized the opportunities provided by globalization. The elite of the elite, however, are high-tech wizards—Google, Apple, Facebook and the rest—that have conjured up corporate empires from bits and bytes.
The superstars are admirable in many ways. They churn out products that improve consumers’ lives, from smarter smartphones to sharper televisions. Each year they provide Americans and Europeans with an estimated $280 billion of “free” services, such as search or directions.
They have two big faults, though. They are squashing competition and they are using the darker arts of management to stay ahead. Neither is easy to solve, but failing to do so risks a backlash which will be bad for everyone.
Bulking up is a global trend. The annual number of mergers and acquisitions is more than twice what it was in the 1990s. Concentration is at its most worrying in America, however. The share of GDP generated by America’s 100 biggest companies rose from about 33% in 1994 to 46% in 2013. The five largest banks account for 45% of banking assets, up from 25% in 2000. In the home of the entrepreneur, the number of startups is lower than it has been at any time since the 1970s. More companies are dying than being born. Founders dream of selling their companies to one of the giants, rather than of building their own titans.
For many laissez-faire types this is only a temporary problem. Modern technology is lowering barriers to entry, and flaccid incumbents will be destroyed by smaller, leaner ones. Nonetheless, the idea that market concentration is self-correcting is more questionable than it once was. Slower growth encourages companies to buy their rivals and squeeze out costs. High-tech companies grow more useful to customers when they attract more users and when they gather ever more data about those users.
The heft of the superstars also reflects their excellence at less-productive activities. About 30% of global foreign direct investment flows through tax havens, and big companies routinely use “transfer pricing” to pretend that profits generated in one part of the world are in fact made in another. The giants also deploy huge armies of lobbyists, bringing the same techniques to Brussels, where 30,000 lobbyists now walk the European Union’s corridors, that they perfected in Washington. American laws such as Sarbanes-Oxley and Dodd-Frank, to say nothing of America’s tax code, penalize small companies more than large ones.
None of this helps the image of big business. Paying taxes seems to be unavoidable for individuals but optional for corporations. Rules are unbending for citizens, but up for negotiation when it comes to companies.
Nor do profits translate into jobs as once they did. In 1990 the top three carmakers in Detroit had a market capitalization of $36 billion and 1.2 million employees. In 2014 the top three companies in Silicon Valley, with a market capitalization of more than $1 trillion, had only 137,000 employees.
Anger at all this is understandable, but an inchoate desire to bash business leaves everyone worse off. Disenchantment with pro-business policies, particularly liberal immigration rules, helped the “leaves” to win the Brexit referendum in Britain and helped Donald Trump to seize the Republican nomination. Protectionism and nativism will only lower living standards. Reining in the giants requires the scalpel, not the soapbox.
That means a tough-but-considered approach to issues such as tax avoidance. The Organization for Economic Cooperation and Development countries already have made progress in drawing up common rules to prevent companies from parking money in tax havens, for example. They have more to do, not least to address the convenient fiction that different units of multinationals are really separate companies. Better the grind of multilateral negotiation, however, than moves such as the European Commission’s recent attempt to impose retrospective taxes on Apple in Ireland.
© 2016 Economist Newspaper Ltd., London (September 17). All rights reserved. Reprinted with permission.
Image credits: Saul Loeb/Agence France-Presse/Getty Images, Tobias Schwarz/Agence France-Presse/Getty Images, Tony Cenicola/The New York Times