The contribution of star firms to productivity has fallen by a third since 2000, but their revenue as a percentage of US GDP and employment has remained stable over time
Large firms such as tech giants Google, Apple, Amazon and Facebook dominate not only headlines but also the landscape of the global economy. Their growing dominance has led to fears of increased market concentration and anti-competitive behaviour. Some of these firms have already fallen foul of regulatory authorities in the US.
Conventional wisdom would suggest that as these firms become more dominant, they should become more productive and more important for the US economy. But according to a new Center for Economic Policy Research study by Germán Gutiérrez and Thomas Phillipon, this may not be the case.
Surprisingly, the authors find that contribution of top firms to the US economy has actually decreased over time. Consolidating data from various sources including the CRSP-Compustat merged database, which covers all public and some private firms in the US economy, the authors identify certain "star firms".
The authors define economy-wide star firms as the top 20 firms by market value in any given year and industry-wide stars as the top four firms by market value in each industry. They find that the contribution of star firms to aggregate productivity growth has actually fallen by a third since 2000, while their revenue as a percentage of gross domestic product (GDP) and employment, has remained stable over time.
The authors observe that the profile of the top firms in the economy has also changed over time: from mostly manufacturing firms in the past to high-tech firms currently.
They attribute these results to a fundamental change in the US economy since the 2000s. They argue that barriers to entry and exceedingly complex regulations, because of lobbying, seem to benefit larger firms. The ensuing decline in competition has meant that there is a declining need for investment and innovation. These results suggest that anti-trust crusaders in the US are justified in checking the rise of these dominant firms.