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[                    ]
BusinessSep 18th 2021 edition

Bring out the vim-o-meter
Is America Inc getting less dynamic, less global and more
monopolistic?

We test three prevailing hypotheses about American business

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Sep 16th 2021

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CONCERNS ABOUT the health of American business are many and varied.
Chief executives are chastised for their apparent short-termism.
Their companies are berated for fetishising shareholders over
everyone and everything else. Elon Musk, boss of Tesla, a maker of
electric cars, grumbles about a surfeit of business-school graduates
stifling innovation. President Joe Biden frets as much about American
companies losing out to China as Donald Trump did (albeit with less
bile). He also worries about the concentration of power among
America's biggest firms.

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All this paints a picture of America Inc that looks stodgier, more
parochial and monopolistic. If true, that would be bad news for the
spiritual home of free-market capitalism. But is it? The Economist
set out to test all three hypotheses about American business: that it
is less dynamic, less global and more concentrated. The results
appear nowhere near as bleak as the doom-sayers would have you
believe.

Start with dynamism. Scholars have long argued that it isn't what it
used to be. Ten years ago Tyler Cowen, an economist at George Mason
University, warned that the American economy was in the midst of a
"great stagnation". The reasons cited by Mr Cowen and others range
from more red tape to fewer transformative technologies such as
aeroplanes and telephones, because the low-hanging fruit had been
plucked. Symptoms of the malaise included fewer employers being
created, fewer companies going public and fewer investments made by
existing ones. The share of workers employed at firms less than a
year old fell from 4% of total employment in the 1980s to around 2%
in the 2010s. Around three-quarters of the workforce is employed by a
company that is more than 16 years old, up from two-thirds in 1992.

Economists are still debating just how great the stagnation really
was. One thing is certain, though: since the arrival of covid-19
America Inc has been anything but stagnant. Applications to start new
businesses have soared. In the first six months of 2021 around 2.8m
new firms were born, 60% more than in the same period in pre-pandemic
2019 (see chart 1). Many are small enterprises created by people
stuck at home during lockdowns. A third of the new applications were
in retail, in particular the online variety. Business starts in other
e-commerce-related areas, including trucking and warehousing, have
surged, too, notes John Haltiwanger of the University of Maryland.
The quit rate, which indicates churn in the labour market, is at a
record high. Nearly 3% of workers left their job in July, presumably
because they believe they can get a better one.

[20210918_w]

Larger contenders are also thriving. Take America's biggest startups.
CB Insights, a data firm, found that in 2019 a monthly average of
five unlisted firms became "unicorns" (ie, were valued at over $1bn).
Since the start of 2020 that figure has swelled to 12. Many older
unicorns have gone public. Airbnb, a holiday-rental firm, was the
biggest American initial public offering (IPO) of 2020. Its valuation
surged past $100bn on the first day of trading. Since January 2020
the average number of monthly IPOs has risen three-fold, to around
80. In that period American firms have raised nearly $350bn, more
than in the preceding seven years added together.

Some of the ferment comes out of necessity. A survey by the Kauffman
Foundation, a think-tank, finds that the share of new entrepreneurs
who are starting businesses because they spy an opportunity rather
than because they lost their jobs dropped from 87% in 2019 to 70% in
2020. But the "physiological shock" of the pandemic may also have led
people to re-evaluate their lives, says Kenan Fikri of the Economic
Innovation Group, another think-tank. Some of them handed in their
notice and struck out on their own.

With the Federal Reserve flooding markets with newly created cash,
investors had plenty of capital to back businesses of all sizes. Jim
Tierney of AllianceBernstein, an investment firm, observes that the
market is favouring disruptive new entrants such as Robinhood, a
broker catering to day-traders. With less than one retail trader for
every 70 at Charles Schwab, recently listed Robinhood already boasts
half the incumbent firm's market capitalisation. Small wonder
American unicorns are eager to list, says Mr Tierney.

Cheap capital is also encouraging the established beasts of American
business to boost their investment plans. American companies' real
spending on equipment, structures and software grew at an annualised
rate of 13% in the first half of the year, the fastest since 1984.
Apple, the world's most valuable company, will spend $430bn in
America over a five-year period, 20% more than it had previously
planned. Intel is splurging some $20bn a year on new microchip
factories.

If dynamism was ever in retreat, then, it no longer appears to be.
Even Mr Cowen has all but declared the great stagnation over. What
about American firms' global stature? World trade as a share of
planetary GDP peaked in 2008. In America imports and exports as a
proportion of output have declined from an all-time high of 31% in
2011 to 26%. Mr Biden's policies show a preference for jobs at home
over free trade. Covid-19 has disrupted some supply chains, prompting
a number of pundits to predict a wave of reshoring. "The era of
reflexive offshoring is over," declared Robert Lighthizer, Mr Trump's
trade representative, in the New York Times in 2020.

Before the pandemic some data were indeed hinting that corporate
America was becoming less global. Dealogic, a research firm,
estimated that cross-border mergers and acquisitions by American
firms as a share of domestic M&A activity declined from 16% in 2014
to 9% in 2019. In the past 18 months, however, this figure has jumped
back to around a fifth, thanks in part to all that cheap capital.
Other indicators of internationalism have barely budged. Kearney, a
consultancy, tries to capture the extent of reshoring by looking at
the total value of manufactured goods imported from a list of 14
trading partners, including China, Vietnam and Malaysia, relative to
American manufacturing output. Between 2018 and 2020 this ratio has
stayed stable at around 13%.

Some companies are, it is true, adapting their supply chains. They
are seriously considering moving manufacturing out of China, says Jan
Loeys of JPMorgan Chase, a bank. But those companies are mostly
eyeing nearby countries, often in addition to rather than instead of
their Chinese suppliers. American imports from Taiwan rose by 35%, or
$11bn, in the first seven months of 2021, compared with the same
period in 2019. But those from China increased by nearly as much in
dollar terms.

Americans also continue to sell a lot to foreigners. The Economist
looked at the share of revenue earned overseas by non-financial firms
in the Russell 3000, a broad index of American firms. Some
industries, such as professional services, have seen their domestic
share of sales increase, as lockdowns around the world hampered
foreign contracts. Others, such as entertainment, have become more
reliant on foreign sales; Netflix now books 54% of its revenue
abroad, up from 40% a few years ago. Imax, a cinema chain, has made
over two-thirds of its revenue this year from Asia, compared with
two-fifths in 2017.

[20210918_w]

Overall, the median firm's foreign sales as a share of its total has
stayed flat at 15%. So has the revenue-weighted average, which has
oscillated around 35% (see chart 2). Two in five firms make more than
half of their sales abroad, a share that has also remained more or
less constant in the past four years. CEOs fall over themselves to
signal international ambition during earnings calls. On July 27th Tim
Cook, who runs Apple, named 14 countries where the iPhone-maker's
sales reached a record high for the third quarter. "I could go
on...It's a very long list." On the same day Kevin Johnson, boss of
Starbucks, said he was "very bullish" about the coffee-pedlar's
prospects in China.

Power dynamics

The third area of concern is market concentration. In 2016 we
published an analysis that divided the American economy into around
900 sectors covered by the five-yearly economic census. Two-thirds of
them had grown more concentrated between 1997 and 2012. The
weighted-average market share of the top four firms in each sector
had risen from 26% to 32%. The latest census data up to 2017 show
that the trend did not reverse. But nor did it accelerate. Although
concentration edged up in around half of industries between 2012 and
2017, the weighted-average market share across all sectors remained
at 32%.

More recent census data will not be published for years. So we looked
at the market share of the top four firms in the Russell 3000. In
seven of the ten sectors, the revenue-weighted market concentration
was a bit higher in the past 12 months than in 2019. Similarly, Bank
of America, which has tracked the Herfindahl-Hirschman index, a gauge
of market concentration, for firms in the Russell 3000 since 1986,
reports that it hit a new high in 2020.

This could be because deep downturns like last year's covid recession
tend to favour large firms with healthy balance-sheets. Big tech in
particular has benefited from the pandemic shift to all things
digital. America's five tech titans--Alphabet, Amazon, Apple, Facebook
and Microsoft--notched up combined revenues of $1.3trn in the past 12
months, 43% higher than in 2019. They are America's five most
valuable companies, accounting for 16% of its entire stockmarket
value--considerably higher than the 10% attributable to the five
biggest firms in the past 50 years, according to calculations by
Thomas Philippon of New York University's Stern School of Business.

In hard-hit industries, meanwhile, cash-rich survivors are snapping
up struggling rivals, fuelling an M&A bonanza. Between January and
August American companies announced deals worth almost $2trn. The
sectors which saw the biggest rise in concentration were those
disrupted by covid-19, such as real estate and consumer goods (where
the top four's share has jumped by around four percentage points
since 2019). Some big firms are getting a larger slice of a shrinking
pie. Among energy-services companies, such as Haliburton, the
strongest four increased their market share from 59% to 75%, even as
sectoral sales fell by a quarter.

All this would be worrying--were it not for concomitant trends. The
tech giants, for example, are increasingly stomping on each other's
turf. Nearly 40% of the revenues of the big five now come from areas
where their businesses overlap, up from a fifth in 2015. Facebook
wants to become an e-merchant, Amazon is getting into online ads,
Google and Microsoft are challenging Amazon in the computing cloud,
and Apple is reportedly building a search engine.

Such oligopolistic competition is not ideal, perhaps, but much better
than nothing. And money flowing to newly listed disruptors and to
corporate capital budgets implies that companies and investors are
spying fresh opportunities for future profits, including at the
expense of incumbents, should they become complacent. American
business could use some more pep here or there--who couldn't? But it
does not scream sclerosis, either. #

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An early version of this article was published online on September
13th 2021

This article appeared in the Business section of the print edition
under the headline "Bring out the vim-o-meter"

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