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Five Things You Thought You Knew About Big Business vs. Small Business… But Didn’t

Five Things You Thought You Knew About Big Business vs. Small Business… But Didn’t

September 24, 2018

“Big business” has come under withering attack in recent years from across the political spectrum. Conservatives criticize large corporations for enlisting “big government” in what they view as “crony capitalist” machinations. Liberals decry big companies for allegedly exploiting their workers, ripping off consumers, and hurting hardworking small business owners. And pretty much everyone believes that small businesses are the real engines of job creation and innovation in America. Yet, much of what people assume to be true about big business is completely wrong. Here are five of the most egregious examples:

1. Small businesses are the economy’s job engine, right?

Wrong. Ever since MIT researcher David Birch wrote in the late 1970s that small businesses create the lion’s share of new jobs in the economy, this assertion has taken on mythic proportions. President Barack Obama’s 2013 budget summed up the view: “Small businesses are the engine of job growth in our economy.” At the same, time we are a fed a steady diet of stories about how large corporations, run by rapacious CEOs with nicknames like “Chainsaw Al” Dunlap and “Neutron Jack” Welch, ruthlessly slash jobs to pad their profits and bonuses.

It is true that small firms create a lot of jobs, but they also destroy almost as many, because they are much more likely than big firms to go out of business or shrink. This is why from 1993 to 2010, small firms with fewer than 20 employees were responsible for 29 percent of gross job creation but only 15 percent of net job gains. In contrast, firms with more than 500 employees were responsible for 26 percent of gross job gains but 38 percent of net job gains. This is also why almost two-thirds of new jobs since 1990 have been in firms with 500 or more employees, even though those firms employed just 42 percent of workers. And regarding “Chainsaw Al”: As of 2015, really big establishments—those with 5,000 or more employees—were 4 times less likely to lay off workers than those with fewer than 250 employees.

2. Small businesses are innovative dynamos, aren’t they?

Small firms are nimble, hungry, and innovative. Large corporate giants are sluggish, risk-averse, copiers. Or so goes the conventional wisdom. The entrepreneur Sam Hogg sums up this view when he writes, “Startups require innovative entrepreneurs, and that typically isn’t in a job description for a large company.”

But in fact, large firms, on average, are more innovative than small firms. Boeing, not a small company, developed the world’s first carbon fiber jet aircraft, the 787. Apple developed the first smartphone decades after it was a Silicon Valley startup. In fact, the top 1.5 percent of patenting firms, all of them large, received 48 percent of U.S. patents issued from 1999 to 2008. Only a tiny fraction of the nation’s 6 million small firms patent or innovate. This is why small firms account for just 16 percent of business spending on R&D, while the largest firms (those with more than 25,000 workers) account for 36 percent.

Big firms also are more efficient at translating research and development into innovation. As economists Cohen and Keppler write, “By applying the fruits of their R&D over a larger level of output, larger firms not only have a greater incentive to undertake R&D than smaller firms but they also realize a greater return from their R&D than smaller firms.” Likewise, business professors Anne Marie Knott and Carl Vieregger find that the larger the firm, the bigger the bang for the R&D buck it gets.

3. Size doesn’t matter when it comes to business efficiency, does it?

Critics of big business have long argued that these firms are no more efficient than small firms. Barry Lynn, director of the Open Markets Institute, dismisses arguments and data about the superior efficiency of larger firms as “metaphysics.” Open Markets Fellow Matt Stoller, goes even farther, asserting a nefarious plot to defend business size, when he tweets, “I’m increasingly convinced the biggest con in business history is the notion of ‘economies of scale.” For these critics, the only way firms get big is by manipulating markets and crushing erstwhile competitors, all while being enabled by a captured government. For Nell Abernathy and co-workers from the Roosevelt Institute firm size is “the product of distinct political and policy choices.”

In fact, if there is an economic finding more solid than the fact that in many industries firms gain economies of scale as they get bigger, then it’s hard to imagine what it might be. Economists and consultants have long studied the benefits of scale. In one of the earliest studies on this, Perspectives on Experience, the Boston Consulting Group found that “costs appear to go down on value added at about 20 to 30 percent every time product experience doubles.” Another study found that most plant and firm acquisitions increase productivity, concluding, “the market for corporate assets facilitates the redeployment of assets from firms with a lower ability to exploit them to firms with higher ability.” This is why U.S. government data show that, controlling for industry and the amount of capital employed, large firms are 16.6 percent more productive than smaller firms. This higher productivity is why in 2015 workers employed by large firms earned on average 54 percent more than workers in companies with fewer than 100 workers.

4. Big business has monopolized the U.S. economy, hasn’t it?

Given a few high-profile mergers in the last decade, many claim that the economy is now dominated by oligopolies—industries controlled by a few behemoths, to the detriment of workers and consumers. Senator Elizabeth Warren (D-MA) paints a near apocalyptic picture: “Today, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector.” Barry Lynn and Phillip Longman write that “the degree of consolidation in many industries today bears a striking resemblance to that of the late Gilded Age.… In nearly every sector of our economy, far fewer firms control far greater shares of their markets than they did a generation ago.”

In fact, the vast majority of industries remain highly competitive. Industry-level data from the U.S. Census Bureau shows that in 41 percent of 792 industries covered, the market share held by the top four firms either fell or remained flat from 2002 to 2012 (the latest year for which data are available). And most of the industries that did get more concentrated saw gains like those in waste management and remediation services, where the largest four firms’ market share went from 6 percent to 8 percent. In fact, less than 10 percent of industries had their top four firms controlling more than 40 percent of the market in 2002 and increasing their market share by 2012. And even if the firms increased it to 60 percent, this means that on average each firm has just 12.5 percent market share, hardly evidence of monopoly power.

5. Big businesses’ profits are obviously at record levels, yes?

Financial news shows regularly tout earnings reports showing that some big company has earned massive profits for a quarter. This leads people to believe that large corporations must be highly, even obscenely, profitable. Liberal pundit Robert Reich thinks so, writing in 2015 that increased concentration has “resulted in higher corporate profits, higher returns for shareholders, and higher pay for top corporate executives and Wall Street bankers.”

But in fact, big companies are less profitable on average than small companies. In 2013, corporations with receipts of less than $500,000 enjoyed 7.1 percent net income as a share of receipts, while the largest corporations—those with receipts of $250 million or more—had net incomes of just 6.8 percent. And large corporations are no more profitable today than they were a half century ago. According to the U.S. Bureau of Economic Analysis the average corporate profit rate from 1965 to 1966 was 13.6 percent, slightly higher than the average profits for 2015 through the third quarter of 2016 (13.3 percent).

Robert D. Atkinson (@RobAtkinsonITIF) is the president of the Information Technology and Innovation Foundation. Michael Lind is a visiting professor at the University of Texas Johnson School of Public Affairs. They are co-authors of the new book “Big Is Beautiful: Debunking the Myth of Small Business” (The MIT Press).

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