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Source: Bajgar et al., “Intangibles and Industry Concentration: Supersize Me,” OECD Science, Technology and Industry Working Papers, December 2021.
Commentary: Many big businesses, given the benefits that come from economies of scale, are investing more dollars into intangible assets than tangible ones. Tangible assets include more traditional capital expenditures such as buildings, machinery, and equipment, whereas intangible assets are not direct physical property acquired. They include business R&D, software, and workforce training. Leading firms in consolidated industries are investing increasing amounts in these intangibles due to their scalability. Intangible assets like software can be fully adopted across a big business at far lower marginal cost than tangible assets (or even zero cost), making investing in them better for large-scale operations.
In a recent working paper, economists at the OECD produced new findings on the benefits to both innovation and to consumers that market consolidation can yield. Their econometric analysis over enterprise data from the ORBIS database shows a strongly positive association between consolidation and intangible investment. Greater business R&D as well as workforce training not only leads to greater innovations, but also greater outcomes for consumers. Widely adopted intangibles help lower firms’ marginal costs, which helps consolidated firms pass along lower final costs to consumers. The report finds that a 10 percentage-point increase in an industry’s concentration associates with a 2.3 percent reduction in industry prices. Policymakers should not default to maligning growth in big business and instead support the unique investment-incentives of consolidated firms and the benefits they offer to consumers and the larger innovation-driven economy.