In defence of big business

{"text":[[{"start":null,"text":""}],[{"start":4.5,"text":"Small businesses are lionised the world over. Family restaurants, plucky start-ups and independent cafés are routinely hailed by politicians on both the left and right as the lifeblood of the economy. Economists also extol the virtues of backing small and medium-sized enterprises (SMEs)."}],[{"start":25.6,"text":"Big business gets a frostier reception. Large corporations are increasingly viewed with scepticism — either as a force to be restrained or a resource to be tapped for tax revenue. The share of Americans with a positive view of them has fallen from close to 60 per cent in the early 2010s to just over one-third today, according to Gallup. "}],[{"start":null,"text":""}],[{"start":46.25,"text":"Inequality, high-profile corporate scandals and growing concern about market concentration have all contributed to the souring opinion. Yet, despite the affection lavished on their smaller counterparts, big businesses do much of the heavy lifting in raising economic prosperity."}],[{"start":62.35,"text":"Globalisation and technological advances have increased the returns to scale, allowing firms to grow larger. Research spanning 10 rich-world economies over more than a century finds that sales, profits and equity capital have become increasingly concentrated in the largest firms within countries. Importantly, significant churn means the largest firms of the past are not the same companies that dominate in the present."}],[{"start":87,"text":"This suggests that big business is not merely a US aberration or prima facie evidence of lax antitrust regulation, but a feature of modern global capitalism."}],[{"start":null,"text":""}],[{"start":97.15,"text":"And firm size matters for domestic economic growth. A study from the World Bank — which has long championed SMEs as engines of development — shows that high-performing economies tend to have a larger share of employment in big, competitive firms. Lower-income countries, by contrast, suffer from a significant shortage of large companies — a “missing top” — with their firms often growing less as they age."}],[{"start":121.45,"text":"Big companies are both a product of a healthy business environment, which enables expansion, and a key contributor to growth. Scale supports higher wages, better benefits and training, while making firms more likely to export and adopt international quality standards, the World Bank finds. In rich nations, SMEs are on average two-thirds as productive as the largest firms."}],[{"start":143.75,"text":"In turn, improvements in how big firms operate can ripple through the wider economy, thanks to their large workforces, customer bases and supply chains."}],[{"start":null,"text":""}],[{"start":153.4,"text":"Indeed, large businesses are engines of innovation. Consider Big Tech. In 2024, Amazon, Alphabet, Microsoft, Meta and Apple invested $227bn in research and development (R&D), exceeding the US federal government’s non-defence R&D budget as well as the annual R&D spending of most countries, according to the Information Technology and Innovation Foundation. "}],[{"start":179.5,"text":"Deep pockets allow big companies to finance costly research, absorb failures and initiate undertakings whose returns might be years away. For instance, in 2016, Alphabet’s experimental X Development division reported quarterly losses of $859mn pursuing moonshot projects, from internet-delivery balloons to glucose-monitoring contact lenses."}],[{"start":203.15,"text":"The benefits of R&D are spread widely. A 2004 study by Nobel Prize-winning economist William Nordhaus estimates that innovators captured just 2.2 per cent of the social surplus generated by US technological advances between 1948 and 2001. The rest accrued to consumers via better products and lower prices."}],[{"start":null,"text":""}],[{"start":225.5,"text":"Recent research by the McKinsey Global Institute reinforces the idea that prosperity hinges on a small number of extraordinary companies making leaps rather than incremental improvements across millions of small firms. "}],[{"start":238.95,"text":"The think-tank’s analysis of roughly 8,300 large US, UK and German companies found that fewer than 100 “standout” firms accounted for around two-thirds of the positive productivity gains in each country between 2011 and 2019. Even if the sample included the gamut of smaller firms, a handful of large “standouts” would still account for more than half of productivity growth."}],[{"start":263.4,"text":"Crucially, these gains need not come from major technological breakthroughs, but bursts of improvements made at scale. Think Tesco embarking on a multibillion-pound cost-cutting programme, United Airlines optimising route networks, General Motors retreating from unprofitable markets or Amazon expanding its fulfilment network."}],[{"start":284.54999999999995,"text":"Indeed, the majority of “standouts” in McKinsey’s sample are large incumbents achieving productivity gains over time, while 20 per cent are scalers, such as Apple and Amazon, and 10 per cent are smaller disrupters. "}],[{"start":null,"text":""}],[{"start":297.19999999999993,"text":"None of this means bigger is always better. The US productivity advantage over the UK and Germany arises to a large extent because American laggards are more likely to be forced into restructurings or exits. Competitive markets are key."}],[{"start":310.1499999999999,"text":"Size also brings economic and political power that can be abused by suppressing emerging rivals, squeezing workers and suppliers or bending regulation in incumbents’ favour. Competition and regulatory authorities, therefore, have the essential but difficult job of keeping markets open and contestable and technological progress safe. "}],[{"start":332.24999999999994,"text":"Still, size itself is too often treated as evidence of market failure. And efforts to address this risk overlooking the economic benefits of scale for productivity, innovation and economic resilience. "}],[{"start":345.74999999999994,"text":"Small businesses deserve much of the affection they receive. They experiment, create jobs and provide the pool from which exceptional companies and ideas can emerge. But policy should support scaling and competition, while allowing large standouts to thrive. After all, the most transformative small businesses tend not to stay small. "}],[{"start":366.59999999999997,"text":"Send your thoughts via the comments, [email protected] or on X @tejparikh90."}],[{"start":373.9,"text":"Food for thought"}],[{"start":376.45,"text":"Do your childhood neighbours influence your career choices and later-life earnings? This study reckons so."}],[{"start":382.65,"text":"Free Lunch on Sunday is edited by Harvey Nriapia"}],[{"start":null,"text":""}],[{"start":391.7,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1791126365_1790.mp3"}