Why A Handful Of Companies Leave The Rest In The Dust
Rising income inequality causes a lot of concern. Inequality across companies does not; we tend to view it in a more benign light, as the natural consequence of competition. But inequality across firms is rising and could hold back living standards and exacerbate social tensions.
Productivity growth has decelerated sharply across advanced economies. Labor productivity measures how much an economy can produce with a given labor force; it determines our ability to improve living standards. Faster productivity growth fuels faster wage growth and rising per capita incomes. When productivity slows to a crawl, living standards stagnate.
Recent technological innovations have enormous potential to boost productivity, as they scale across industries; the recent acceleration in investment moves us in that direction. An excellent OECD study highlights an additional challenge, however: The difference in performance between the best companies and the rest has been widening. The best, those at the “global frontier” of efficiency, are 3-4 times more productive than the rest.
Innovation is alive and well; it is just more unequally distributed.
This massive divergence in productivity is not due to differences in “capital deepening”; it is not that the most productive firms are investing more in equipment. The key to faster productivity growth is the ability to combine new technologies with the right human capital and to change a firm’s operations, processes and managerial practices to exploit the new opportunities. This is a lot harder than buying newer, better machines. And this is where few firms today succeed and most end up lagging behind.
Today’s new technologies are a lot more powerful, but they are a lot harder to deploy: they require a profound change in mindset and operations. This is especially true for digital-industrial innovations: the OECD shows that the divergence is greater for sectors which rely more intensely on information and communication technologies.
This breakdown in the diffusion of innovation across firms holds back economic growth. Manufacturing firms at the global frontier employ more people, pay higher wages and enjoy higher profitability margins. If other firms struggle to catch up, we will create fewer higher paying jobs.
Companies in advanced economies are suffering from greater inequality of opportunities. Much like for individuals, inequality of opportunities is the most pernicious: it reduces economic dynamism and cements inequality of outcomes. The OECD analysis finds that the same firms tend to stay in the lead for longer, and fewer new firms make it to the top. Inequality in the corporate sector is becoming entrenched.
What can we do to fix this? Companies need to invest more time and effort in understanding how to change operations and processes to leverage the new technologies. Digital industrial innovations require a fundamental change—they are not an incremental add-on. Governments must start from the basics: ensure a flexible business environment that helps companies adapt with greater speed and less cost and friction. Greater labor mobility, less protectionism, fewer barriers to investment and to corporate restructuring are a priority. Education, training and upskilling are equally important.
If we don’t reduce inequality of opportunity across companies, it will be a lot harder to reduce inequality across individuals.