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A Nation With Larger Establishments Could Mean Higher Economic Productivity

A Nation With Larger Establishments Could Mean Higher Economic Productivity

May 3, 2024

Neo-Brandeisian, anti-corporate proponents advocate for aggressive regulation and the breakup of large firms using the justification that these firms exercise market power to the detriment of the economy and small businesses. Indeed, in a recent report, Representative Nydia Velazquez (D-NY) called for the revival of a series of past Congressional bills that target technology companies based on their size because it would level the playing field for small businesses. She notes that these bills “would prohibit large technology companies from preferencing their own first-party product…[while] others would break up large technology firms, discontinuing their ability to operate multiple lines of business.” Similarly, FTC Chair Khan has called for more aggressive regulations and the breakup of large companies when she argued for the revival and enforcement of “structural separations [that] place clear limits on the lines of business a firm can engage.”

However, neo-Bradeisians fail to realize that breaking up or aggressively regulating large firms will hurt an economy’s productivity. This is because only large firms can reasonably have large establishments. A recent study of West Germany by Kovalenko and colleagues concluded a positive relationship between establishment size and productivity. Moreover, the study rationalized their findings with the argument that smaller establishments are generally less productive than their larger counterparts, further showing why large firms are important. As such, given the evidence, policymakers should ignore neo-Brandeisian advocacy efforts to break up large firms while refraining from enacting policies that target firms based on size.

The authors found that large establishments could lead to higher productivity as measured by GDP per capita. Indeed, the study showed “a positive and statistically significant relationship between productivity and average establishment size” at the regional level. When the average establishment size declined by two employees from 1990 to 2000, West Germany’s GDP per capita also declined between 2,000 to 3,000 euros (2015 prices) depending on the type of regression model used. Further corroborating this finding, the authors also used GDP per hour worked as a measure of productivity and found that the decline in establishment size of two employees resulted in a decrease of about 0.8 euros to 1 euro per hour worked, depending on the regression model. In contrast, GDP per capita increased by about 3,000 euros when the average establishment size increased starting in the mid-2000s. To check the robustness of their results, the authors also used establishments in local commuting zones instead of counties and found that the relationship between productivity and establishment size remained positive. Given these findings, breaking up large firms can end up harming a nation’s productivity. This message is supported by the authors who assert that “economies with larger firms tend to be more productive.”

The authors further showed the importance of large firms in the economy when they bolstered their findings with other studies. For instance, they note that Pagano and Schivardi and Bartelsman et al. found that average firm size is positively correlated with productivity growth. Meanwhile, another study by Bento and Restuccia also found that average firm size is positively correlated with GDP per capita. Other studies by Guner et al. and Gourio and Roys also showed that the reduction in establishment size reduces output and output per worker. Moreover, the authors also showed the importance of large firms when they rationalized their findings with the argument that smaller establishments tend to be less productive than their larger counterparts, causing the economy to suffer from lower productivity. Indeed, they assert that “the existence of scale effects…provide productivity gains for larger establishments.” As such, when “productive firms stay or become inefficiently small…[they reduce] aggregate productivity.” Given this, large firms should not be broken up because they could potentially boost an economy’s productivity. In contrast, smaller firms may actually hurt it. This is partly why the authors assert that “there may be an association between the decline in average establishment size and the productivity slowdown in Germany.”

Policymakers should ignore neo-Brandeisian calls to aggressively regulate or break up large companies because, yet, another study has shown how large firms can benefit the economy—another study showed that large firms offer productivity spillovers to their small suppliers. In this study by Kavalenko and colleagues, large establishments (which only large firms can offer) can potentially boost a nation’s productivity, a key driver of economic growth and the standard of living. For the United States, this is a critical finding because the nation has faced a stagnating average productivity growth of 1.4 percent in the past 15 years. As such, large firms could be the key to boosting this stagnating growth rate and adding trillions to the nation’s GDP. Indeed, a study by McKinsey notes that if U.S. productivity growth rates can return “to its long-term trend of 2.2 percent annual growth…$10 trillion [could be added] to cumulative GDP over the next ten years.” Given the benefits that large firms could offer, policymakers should refrain from all regulations targeting firms based on their size and instead promote size-neutral regulations.

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