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Large Firms Generate Positive Productivity and Non-Productivity Spillovers for Their Suppliers

Large Firms Generate Positive Productivity and Non-Productivity Spillovers for Their Suppliers

April 12, 2024

In recent years, neo-Brandeisian and anticorporate crusaders have advocated for an aggressive approach to antitrust with the intention of breaking up large firms. Indeed, in a 2018 article, the now-FTC chair argued for stricter antitrust enforcement to address the “market power problem” in multiple sectors caused by “just a handful of [dominant] companies.” In the present, she has followed up her advocacy efforts with actions against large tech companies, including a recent complaint against Amazon’s business practices.

However, these opponents fail to realize that using aggressive antitrust approaches to target and break up firms simply because they are large will eliminate the economic benefits that these firms provide. A recent scholarly article by Amiti and Duprez elaborates on one economic benefit that would not exist without large firms: the positive productivity and non-productivity spillovers large firms provide to their suppliers. As such, policymakers should allow large firms, especially the more efficient ones, to continue their business practices while ignoring anti-corporate calls to implement aggressive antitrust regulations that will break them up.

The authors found that large firms boost the productivity of their suppliers. Indeed, when a supplier begins a relationship with a multinational firm, a non-wholesale exporter, or a large domestic firm, their total factor productivity rises between 7 to 9 percent after four years into the relationship. Further corroborating this, the authors examined how supplying to a large, superstar firm would affect sales since a genuine increase in productivity should increase the firm’s scale and output. They concluded that a supplying firm’s sales rose about 25 percent four years after supplying to a large, multinational superstar firm and about the same amount when supplying exporters and large domestic firms.

Moreover, the authors also ran a placebo test to ensure that the productivity spillovers did indeed originate from a relationship with large, superstar firms and not just the action of starting a relationship with a new buyer. The results from the placebo test showed that “there are no significant TFP spillovers from relationships with a small firm, with all of the post-event coefficients close to zero.” In other words, large firms benefit the economy with productivity boosts to their suppliers and should not be broken up. Indeed, this should not be surprising considering that the authors also found that these large, superstar firms tend to have more knowledge that they can transfer to their suppliers.

In addition to productivity spillovers, large firms’ ability to sell to a large number of customers is also found to help their suppliers expand supply networks. First, a relationship with a superstar can help suppliers acquire more buyers. The article concluded that starting a relationship with a superstar in the top quartile with the most customers had a positive and significant impact on the number of other buyers for the suppliers. The coefficients were positive and significant for multinationals, exporters, and large domestic firms. Second, starting a relationship with a superstar can help suppliers access new potential buyers from the superstar’s network. This is partly because buyers in the network of superstar firms are easier to find (search cost is reduced) or buyers trust that a supplier provides high-quality goods and/or services since they are supplying a superstar. As such, large firms should not be broken up because they enable their suppliers to gain more buyers and reach scale economies, benefitting the overall economy.

In conclusion, policymakers should first not follow neo-Brandeisian calls to break up large companies because such actions will only hurt the economy and small firms. Large firms confer many benefits to their suppliers, whether through productivity boosts or output boosts (from relationship capability spillovers), that also subsequently benefit the economy. Large firms also provide their own benefits to the economy, such as higher productivity, higher-paying jobs, and significant development of new technologies. Second, policymakers should not follow anticorporate calls to implement aggressive antitrust regulations. This is because current antitrust laws can tackle anticompetitive conduct that firms use to gain market power. And, if firms are gaining market power because they are more productive—not because of anticompetitive measures—then antitrust laws are not applicable. Regardless of how large firms are gaining market power, the current antitrust laws are enough and do not need neo-Brandeisian, anti-corporate antitrust doctrine or practice.

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