The rate of birth of US startups has almost halved in three decades while in the US and elsewhere, the number of big firms that dominate global business sectors has fallen to a low level in recent times.
Business dynamism - - the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over - - is crucial to an economy and according to a recent paper [pdf] published by the Brookings Institution, a Washington DC-based think-tank, research has firmly established that this dynamic process is vital to productivity and sustained economic growth. Entrepreneurs play a critical role in this process, and in net job creation.
Business churning and new firm formations in the US have been on a persistent decline during the last few decades, and the pace of net job creation has been subdued. This decline has been documented across a broad range of sectors in the US economy, even in high-tech.
Ian Hathaway and Robert E. Litan, the authors say: "Here, the geographic aspects of business dynamism are analyzed. In particular, we look at how these trends have applied to the states and metropolitan areas throughout the United States. In short, we confirm that the previously documented declines in business dynamism in the U.S. overall are a pervasive force throughout the country geographically.
In fact, we show that dynamism has declined in all fifty states and in all but a handful of the more than three hundred and sixty US metropolitan areas during the last three decades. Moreover, the performance of business dynamism across the states and metros has become increasingly similar over time. In other words, the national decline in business dynamism has been a widely shared experience."
The authors say that while the reasons explaining this decline are still unknown, if it persists, it implies a continuation of slow growth for the indefinite future, unless for equally unknown reasons or by virtue of entrepreneurship enhancing policies (such as liberalized entry of high-skilled immigrants), these trends are reversed.
I have previously written that in many global business sectors, there are just a few dominant players: Industrial chemicals: BASF and Bayer of Germany compete against themselves and their main global rivals are Dow Chemical and DuPont of the US; Smartphones are dominated by Samsung and Apple; Flat screen TVs by Korean and Japanese companies; SAP of Germany, Europe’s only significant software firm competes against Oracle of the US; Volkswagen, Toyota and GM dominate the car market; Siemens of Germany’s main competitor in the supply of conventional power plants, sophisticated healthcare equipment, is General Electric of the US; Big pharmaceutical firms in Europe are concentrated in the UK, France, Germany, Switzerland, Denmark and Sweden.
PSA Peugeot Citroën of France has been dependent on the Western European
market for 75% of its sales; the bigger Volkswagen Group sells 40% of its output
there and a third of 9.3m units in Asia Pacific - - mainly China.
In Europe Ryanair, EasyJet and Norwegian, dominate the low fares airline market while in Southeast Asia, Air Asia and Lion Air do.
Eric Garland, a strategic trends analyst and author, says on the Harvard Business Review blog that one of the most powerful trends has to be the consolidation of multiple economic sectors toward a handful of firms with hegemonic power over their industry. Much of this is driven by the needs of the financial sector, which itself has consolidated massively. This paper by the Richmond Fed shows how from 1960 to 2005, the US financial services sector went from 13,000 of independent banks to half that number, while the top ten banks grew from 20% market share to 60%. As of 2013, the top ten banks had 70% of the market.
Garland warns on the impact on entrepreneurship:
A study [pdf] published by the Kauffman Foundation last February notes:
In recent weeks we reported that Apple had acquired 24 firms in the past eighteen months.
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