Innovation
Startups plunge as small number of big firms dominate key global business sectors
By Michael Hennigan, Finfacts founder and editor
May 21, 2014 - 7:09 AM

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.

Big Firms

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.

What is interesting about VW’s total average 2012 head count of 550,000 with 237,000 employed in Germany, an additional 173,000 were employed across Europe.

Outside the United States, the global premium car market is dominated by 3 German companies: Audi, BMW, Daimler and Toyota’s Lexus [I’m not including the real pricey market including VW’s Porsche - - Ferdinand Porsche was the founder of VW - - and the Italian sports car manufacturer Lamborghini that has been part of the Volkswagen Group since 1998. Today, some 950 employees work at its headquarters in Sant’Agata Bolognese. In 2012, Lamborghini delivered more than 2,000 vehicles].

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:

IGiant firms seek the services of similarly large vendors. New, small entrants into the market will be at pains to form relationships with such firms, and the power imbalance is effectively a monopsony — sell to us at our price, on our invoice terms, or get lost. Trying to sell into a world of enormous corporate cartels is considerably more difficult than it was forty years ago, when every sector in America was smaller, more diverse and more dynamic...For entrepreneurs, why start something new in such an environment? The current tech boom might serve as a counterexample, but consider that for most venture-backed companies, the ultimate exit plan is for sale of the firm to an existing behemoth, not continued independent operations."

A study [pdf] published by the Kauffman Foundation last February notes:

IFrom about 2002, the number of high-tech young firms continues to decline, while there  is a modest increase in the number of young firms overall. The impact of the Great Recession on entrepreneurship is evident after 2007, with sharp declines in the number of young businesses both in the high-tech sector and in the economy as a whole. The number of young high-tech firms fell to 79,034 in 2011, marking a 19.2% drop from 2007. By contrast, the number of young firms for the entire private sector fell by 18.3% during the same period."

In recent weeks we reported that Apple had acquired 24 firms in the past eighteen months.

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