Some Facts about Dominant Firms

German Gutierrez and Thomas Philippon, “Some Facts About Dominant Firms,” National Bureau of Economic Research, https://www.nber.org/papers/w27985

Since 2000 relative productivities have been flat or declining“…Fact 3. The relative productivity of dominant firms has not increased over the past 20 years. This fact is important because the super-star literature is motivated by the examples of Google, Facebook and Amazon. Amazon was founded in 1994, Google in 1998, and Facebook in 2004. Since these years, the stars have become neither larger nor more productive than the rest of the economy. Figure 6 in the appendix breaks down the relative productivity by sectors: manufacturing, non manufacturing, ICT-intensive and non-ICT-intensive. The trends are broadly similar to the ones in Figure 3 but Figure 6 brings some new insights. Thefirst insight is that the results are the same if we use Census data instead of Compustat. The second insight is that ICT intensive industries lag other industries. We find that non-ICT top firms doubled their relative productivity advantage in the 1970s from 19% to 38%. ICT stars experienced the same increase later, between 1985 and 2000. Since 2000, however, relative productivities have been either flat or declining…”

There is no productivity gap btw leaders and followers since 1995 “…Fact 2. The value gap between leaders and followers has not increased. 4 Are Top Firms Becoming More Productive? Panel A of figure 3 shows the relative productivity of top US firms. The left graph compares their productivity to BEA average productivity in their respective industries. We observe an increasing trend in the 1970s and 1980s. After 1995, however, relative productivity remains roughly constant. The right graph compares star firms to other firms in Compustat. This comparison is thus within a group of large firms. As expected, the productivity gap is smaller, around 10% instead of 40%, but the trends are similar. In particular, star firms’ relative productivity has not increased since 1995. Panel B figure 3 considers global stars, starting in 1990. The productivity gap on the left figure is larger than in Panel A, reflecting higher overall dispersion of productivity outside the US, a fact which is consistent with Hsieh and Klenow (2009). The global trends, on the other hand, are similar to the trends in the US. In particular the relative productivity of the global stars has declined since 2000. This basic fact is inconsistent with models that assume that star firms enjoy a growing productivity advantage….”

Size is not a defining feature of top firms“…Fact 1. The market share of dominant firms has not increased. Fact 1 is important because it appears to be inconsistent with theories that argue that today’s stars have relatively higher productivity advantages than the stars of the past. In standard models an increase in the relative productivity of the top firms leads to increase in their relative size measured by sales. Relative productivity differences could of course be present lower in the distribution of firms and in specific sectors of the economy. But Fact 1 says that size is not a defining feature of today’s top firms….”

They go on to highlight these three facts:

I though market capitalization was more compelling then sales numbers as it should be a leading indicator. This is how they interpret the market value of equity, “…Panel A of Figure 2 looks at US stars. The first plot uses the market value of equity. Across all industries the top firm is roughly 75% more valuable that its direct follower and there is no upward trend. The red circle line expands the comparison group to the top 5 firms. On average, the top firm is 1.5 times more valuable than the average of its top 4 followers. Once again, we do not see an upward trend. The right plot shows relative sales. There is no overall trend but we do see a decline in the 1990s followed by a recovery, which is consistent with the view of the 1990s as a period of fast entry and growth by relatively young companies. Panel B considers global stars and reaches similar conclusions. Consider for instance the top 10 global firms of a particular industry. The average revenues of a top-3 firm are double those of a top 4-10 firm, and its market value is about three times higher. These are large differences indeed,but they have not increased in recent years…”

Their overall conclusions, “..Our results challenge the common wisdom about dominant firms in the new economy and shed light on the productivity paradox. The paradox is often framed as a gap between tremendous innovations at large digital companies and lackluster aggregate productivity growth. Our findings suggest there might not be a paradox after all: the top firms of today are neither larger, nor more productive than the top firms of the past. In fact, their contribution to overall growth has declined in recent years, therefore explaining (some of) the paradox instead of reinforcing it. If we are correct, the most important question is to understand what has changed between the 1990s and the 2000s. During the 1990s large firms made tremendous contributions to overall growth, both internally (Hulten) and externally (reallocation). In the 2000s these beneficial effects have all but disappeared. Why are star firms not contributing as much as they used to? We do not have a definite answer but it is clear that something changed around 2000. Perhaps ideas are becoming harder to find as Bloom et al. (2018) argue. Or perhaps declining competition and rising barriers to entry have allowed incumbents to cut genuinely useful investment and innovation as Gutiérrez and Philippon (2019) argue….”

Here are their findings1)The market share of dominant firms has not increased. 2)The value gap between leaders and followers has not increased. 3)The relative productivity of dominant firms has not increased.4)Their Hulten growth contribution has decreased to approximately zero(note this is contribution of an individual firm to aggregate productivity growth equals its own productivity times its Domar weight. The Hulten contribution is defined as the Domar weight times the firm level increase in log sales per employee) 5)The contribution of top firms to aggregate labor productivity has decreased by about 40%.

They also do this exercise using market capitalization. “…Firms’ Consolidated Sales, Profits and Market ValueWe use firm-level sales, market value and employment data to identify stars. All nominal quantities are converted to US dollars using the exchange rates provided by Compustat. Compustat covers 100% of market capitalization in the U.S. and Canada; over 96% in Europe and over 88% in Asia. Data for the US starts in 1950 but provides stable coverage since 1965. Global data starts in 1987 but provides good coverage for most countries starting in 1990….”

Bottomline they find using, “…Our contribution to the literature is simply to look directly at the largest, most valuable companies in the world. We define two main sets of global stars: the top 100 firms by global sales in any given year, and the top 20 firms in each of our 25 industries. Similarly, we define two set of US stars: the top 20 firms by (global) sales and the top 4 firms within each 3-digit industry…“…We measure the evolution of dominant firms in the U.S. economy since 1960, and globally since 1990. Contrary to common wisdom, dominant firms have not become larger, have not become more productive, and their contribution to aggregate productivity growth has fallen by more than one third since 2000…”

Just an FYI, Philippon pushing back on the idea that market leaders are more productive