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Conclusion: The most powerful force behind the rise of the new giants is technology. But two other forces are pushing in the same direction: globalisation and r

Conclusion: The most powerful force behind the rise of the new giants is technology. But two other forces are pushing in the same direction: globalisation and regulation. - Premise (support) - Big companies benefit from supply chain economies of scale/network effects (Pankaj Ghemawat calculates that America’s top 1,000 public companies now derive 40% of their revenue from alliances, compared with just 1% in 1980) - R&D in countries with cheaper cost of labor/materials (PwC, an accountancy giant, produces an annual survey of the world’s 1,000 most innovative companies. It found that last year those that deployed 60% or more of their R&D spending abroad enjoyed significantly higher operating margins and return on assets, as well as faster growth in operating income, than their more domestically oriented competitors) - Regulation inevitably imposes a disproportionate burden on smaller companies because compliance has a high fixed cost (Nicole and Mark Crain, of Lafayette College, calculate that the cost per employee of federal regulatory compliance is $10,585 for businesses with 19 or fewer employees but only $7,755 for companies with 500 or more) - Small companies can't game the tax code like large companies can (The country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319 pages long. Big organisations can afford to employ experts who can work their way through these mountains of legislation; indeed, Dodd-Frank was quickly dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric has 900 people working in its tax division. In 2010 it paid hardly any tax) - Large companies have a "buffer" during poor economic periods and can simply buy out smaller companies (the mortality rate for all American listed companies over a five-year period is as high as 36%, but for companies worth more than $1 billion it is only half that) I was surprised not to see a mention of the evolution of the legal treatment of corporations discussed, as well as a discussion of the decline of unions and the weakening of the average employee's bargaining power. But otherwise a better article than I was expecting from the economist.

gtrubetskoy 10y ago
I think an alternative way of looking at is that in a way "the deck is stacked" not in favor of start ups. I remember how in the late nineties no one worth their salt would ever agree to work for a behemoth because a start up was more fun, more opportunity to make money and learn something. Not sure whether it's the protracted poor economic period, or policy, or global trade, or all of those things, but I do believe that the world is better off favoring small over large and we should strive in that general direction.
- AStellersSeaCow 10y ago
  I agree that the shine has worn off startups, but don't agree with the reasoning. Startups were great in the 90s because VCs and investors were desperately hurling money at businesses that they didn't even remotely understand. Why work long hours in a stuffy traditional office at MSFT or IBM when you could make more at a carnival-like startup where you spend more time playing foosball than working? Nowadays that equation is somewhat reversed. Most startups expect crushingly long hours, and typically pay considerably less than the tech giants and have vastly lower total compensation. There's still the slim chance of a huge payday, but the expected earnings are far lower. And while there's still plenty of "keep doubling down on legacy tech" at the giants, there's also way more genuine innovation than there used to be, whereas startups are the output of tech industry magnetic poetry sets as often as not: "instagram for urban farmers", etc. In the end I also agree that we should push for facilitating more new companies, and the article underlines a lot of the hurdles we need to lower or remove. The big questions in my mind: whether that can be done in a way that doesn't just further empower the big established players, and whether anyone has the political willpower to hamstring successful, generally well-liked companies to increase competition.
  - roymurdock 10y ago
    This is a good observation. I'd wager that an increasing number of startups these days are executed with an acquisition by BIGCO as their exit goal (inversely proportional to the frequency of startup IPOs). The startup is a more involved test than a whiteboard exercise, as it credibly demonstrates that you have the management skills and network to assemble a team and onboard a few customers. I think facilitating the creation of new, smaller companies is less about removing hurdles which, in the case of tax/legal regulations are mostly there as a (failing) mechanism of equitably redistributing wealth; it's more about waiting for (or moving towards) the explosion of the next paradigm-shifting tech platform that will actually allow the next generation of weirdos and mavericks to build/deliver supremely useful products/services. Color me skeptical on Facebook/Snapchat/Twitter...but I think we'll look back on this period as a time when biohackers/wetware were truly ahead of their time.
Kurimo 10y ago
The regulation one is interesting because the reason those regulation bills have to be so big is to try to cover all the legal tricks big companies use to weasel out of them. I think the article should have emphasized more that the acts highlighted only really impact companies that are publicly traded. I don't know of any company with "19 or fewer" employees that is publicly traded.
- nickff 10y ago
  Many regulations which only directly impact large companies also force small companies to comply, because the large companies need their supplies/suppliers to be compliant as part of the regulation. I work at a company in this position (most significantly with the Dodd-Frank conflict metals reporting requirements).
LeifCarrotson 10y ago
> General Electric has 900 people working in its tax division. In 2010 it paid hardly any tax) It was penalized in two ways: First, it had to pay for those 900 people. Second, it had to organize its finances in such a way to take advantage of that tax code. The purpose of the tax code is (ostensibly) to reward behaviors which society values, in proportion to the value they could provide in general government revenue and the amount required to cause those behaviors. Maybe this is a good thing.
- woodandsteel 10y ago
  >First, it had to pay for those 900 people. That is less (probably far less) than it saved in not paying taxes. Otherwise it wouldn't spend money on them. >The purpose of the tax code is (ostensibly) to reward behaviors which society values But if corporate lobbyists have gotten loopholes inserted in the tax code, which they do all the time, then the corporations can behave in ways that obey the letter of the law but are bad for society.

gtrubetskoy 10y ago

I think an alternative way of looking at is that in a way "the deck is stacked" not in favor of start ups. I remember how in the late nineties no one worth their salt would ever agree to work for a behemoth because a start up was more fun, more opportunity to make money and learn something. Not sure whether it's the protracted poor economic period, or policy, or global trade, or all of those things, but I do believe that the world is better off favoring small over large and we should strive in that general direction.

AStellersSeaCow 10y ago
I agree that the shine has worn off startups, but don't agree with the reasoning. Startups were great in the 90s because VCs and investors were desperately hurling money at businesses that they didn't even remotely understand. Why work long hours in a stuffy traditional office at MSFT or IBM when you could make more at a carnival-like startup where you spend more time playing foosball than working? Nowadays that equation is somewhat reversed. Most startups expect crushingly long hours, and typically pay considerably less than the tech giants and have vastly lower total compensation. There's still the slim chance of a huge payday, but the expected earnings are far lower. And while there's still plenty of "keep doubling down on legacy tech" at the giants, there's also way more genuine innovation than there used to be, whereas startups are the output of tech industry magnetic poetry sets as often as not: "instagram for urban farmers", etc. In the end I also agree that we should push for facilitating more new companies, and the article underlines a lot of the hurdles we need to lower or remove. The big questions in my mind: whether that can be done in a way that doesn't just further empower the big established players, and whether anyone has the political willpower to hamstring successful, generally well-liked companies to increase competition.
- roymurdock 10y ago
  This is a good observation. I'd wager that an increasing number of startups these days are executed with an acquisition by BIGCO as their exit goal (inversely proportional to the frequency of startup IPOs). The startup is a more involved test than a whiteboard exercise, as it credibly demonstrates that you have the management skills and network to assemble a team and onboard a few customers. I think facilitating the creation of new, smaller companies is less about removing hurdles which, in the case of tax/legal regulations are mostly there as a (failing) mechanism of equitably redistributing wealth; it's more about waiting for (or moving towards) the explosion of the next paradigm-shifting tech platform that will actually allow the next generation of weirdos and mavericks to build/deliver supremely useful products/services. Color me skeptical on Facebook/Snapchat/Twitter...but I think we'll look back on this period as a time when biohackers/wetware were truly ahead of their time.

Kurimo 10y ago

The regulation one is interesting because the reason those regulation bills have to be so big is to try to cover all the legal tricks big companies use to weasel out of them. I think the article should have emphasized more that the acts highlighted only really impact companies that are publicly traded. I don't know of any company with "19 or fewer" employees that is publicly traded.

nickff 10y ago
Many regulations which only directly impact large companies also force small companies to comply, because the large companies need their supplies/suppliers to be compliant as part of the regulation. I work at a company in this position (most significantly with the Dodd-Frank conflict metals reporting requirements).

LeifCarrotson 10y ago

> General Electric has 900 people working in its tax division. In 2010 it paid hardly any tax) It was penalized in two ways: First, it had to pay for those 900 people. Second, it had to organize its finances in such a way to take advantage of that tax code. The purpose of the tax code is (ostensibly) to reward behaviors which society values, in proportion to the value they could provide in general government revenue and the amount required to cause those behaviors. Maybe this is a good thing.

woodandsteel 10y ago
>First, it had to pay for those 900 people. That is less (probably far less) than it saved in not paying taxes. Otherwise it wouldn't spend money on them. >The purpose of the tax code is (ostensibly) to reward behaviors which society values But if corporate lobbyists have gotten loopholes inserted in the tax code, which they do all the time, then the corporations can behave in ways that obey the letter of the law but are bad for society.