From the Wall Street Journal, July 26:
Your suspicions are correct: The biggest companies in every field are pulling away from their peers faster than ever, sucking up the lion’s share of revenue, profits and productivity gains.
Economists have proposed many possible explanations: top managers flocking to top firms, automation creating an imbalance in productivity, merger-and-acquisition mania, lack of antitrust regulation and more.
But new data suggests that the secret of the success of the Amazons, Googles and Facebook s of the world—not to mention the Walmart s, CVSes and UPSes before them—is how much they invest in their own technology.
There are different kinds of IT spending. For the first few decades of the PC revolution, most companies would buy off-the-shelf hardware and software. Then, with the advent of the cloud, they switched to services offered by the likes of Amazon, Google and Microsoft . Like the difference between a tailored suit and a bespoke one, these systems can be customized, but they aren’t custom.
IT spending that goes into hiring developers and creating software owned and used exclusively by a firm is the key competitive advantage. It’s different from our standard understanding of R&D in that this software is used solely by the company, and isn’t part of products developed for its customers.
Today’s big winners went all in, says James Bessen, an economist who teaches at Boston University School of Law and who recently wrote a new paper on the policy challenges of automation and artificial intelligence. Tech companies such as Google, Facebook, Amazon and Apple—as well as other giants including General Motors and Nissan in the automotive sector, and Pfizer and Roche in pharmaceuticals—built their own software and even their own hardware, inventing and perfecting their own processes instead of aligning their business model with some outside developer’s idea of it.
The result is our modern economy, and the problem with such an economy is that income inequality between firms is similar to income inequality between individuals: A select few monopolize the gains, while many fall increasingly behind. Might it eventually be the case that the biggest firms aren’t just dominant, but all-encompassing?
The measure of how firms spend, which Mr. Bessen calls “IT intensity,” is relevant not just in the U.S. but across 25 other countries as well, says Sara Calligaris, an economist at the Organization for Economic Cooperation and Development. When you compare the top-performing firms in any sector to their lesser competition, there’s a gap in productivity growth that continues to widen, she says. The result is, if not quite a “winner take all” economy, then at least a “winner take most” one.
That productivity gap correlates with the increase in spending on proprietary IT, says Mr. Bessen. In 1985, firms spent on average 7% of their net investment (which includes software, new buildings, R&D and the like) on proprietary IT, according to data from the Bureau of Economic Analysis. In 2016, about 24% of U.S. firms’ net investment went into proprietary IT. That’s nearly $250 billion in a single year, and almost matches their outlay for R&D and capital expenditures.
This also has implications for wages—the rise in the wage gap since 1978 is almost entirely attributed to an increase at more-productive firms that occurred as pay at less-productive firms remained relatively static, according to the National Bureau of Economic Research....MUCH MORE