The biggest companies in the world were doing well until the arrival of Covid-19. Now they are doing even better.
The top 50 value-added companies $ 4.5 trillion in market capitalization in 2020, bringing their combined value to around 28% of global gross domestic product. Three decades ago, the equivalent figure was less than 5%.
This is just one measure of how superstar companies have come to dominate the global economy, according to a new Bloomberg Economics study that describes their changing role. The findings provide ammunition for policymakers determined to subdue the giants – including a U.S. government seeking to rally global support for higher levies on corporate profits.
Larger companies tend to have higher margins and pay less tax than they have in recent decades, according to the Bloomberg Economics study. Their median effective tax rate of 35% in 1990 had fallen to just 17% last year, while profit margins moved in the opposite direction, from 7% to 18% over the same period. They also spend a smaller portion of their income on job-creating investments: in 1990, IBM – then the world’s largest publicly traded company – spent 9% of its income on capital spending. Fast forward to 2020, when Apple – its number one replacement – spent just 3%.
The benefits enjoyed by corporate superstars became even more glaring during the pandemic, which is part of the reason why the question of how to tame them has raised the political agendas of so many countries. Tech giants such as Amazon.com Inc. have tailor-made business models for one year of social distancing, unlike Main Street competitors who rely on foot traffic. And government bailouts have worked better for larger companies, which have benefited from central bank backings that have kept borrowing costs low and stock prices high. In contrast, disparate relief efforts for small businesses have left their bills hard to pay.
In the United States, President Joe Biden’s administration is seeking to raise corporate taxes as part of a larger effort to end the long drift towards inequality. He wants to undo at least some of the cuts implemented by his direct predecessor, Donald Trump. He’s also pushing for a global tax deal that would make it harder for bigger companies to lower their bills by shifting profits to low-tax jurisdictions.
This practice spread as businesses grew. A 2019 study by the International Monetary Fund found that up to 40% of what on paper looks like foreign direct investment is “phantom investment in corporate shells with no substance and no real connection to it.” local economy ”.
In a speech in April, Treasury Secretary Janet Yellen referred to a “30-year global race to lower corporate tax rates”. She said that an agreement between the Group of 20 countries on a global minimum royalty will create “a more level playing field in the taxation of multinational corporations.”
The US push has drawn resistance from countries like Ireland, whose low corporate tax rates have encouraged multinationals, including Apple Inc. and the owner of Google Alphabet Inc., to set up regional headquarters there. After the first signs the United States might want a minimum rate of 21%, the Biden administration has now offered 15% – a sign of the compromises needed to reach consensus on a contentious issue.
In 1990, no Chinese company was among the top 50 listed companies; last year there were 8. China’s gains came largely to the detriment of European companies, whose list presence fell from 15 to 7 over the period.
Along with the changing geography of the global economy, the Bloomberg Economics study also captures a profound shift in what the biggest companies do. Technology dominates the top of the list, and fossil fuel companies – with the exception of Saudi Arabia’s flagship Aramco – have fallen.
The extraordinary growth of tech companies in particular is what prompts the government to act. They are in the crosshairs of politicians and regulators almost everywhere. This includes China, where regulators blocked an initial public offering proposed by Jack Ma’s Ant Group, imposed record fines on affiliates including Alibaba Group Holding, and extended the crackdown to other tech giants. like Tencent Holdings.
Europe has been working on ways to tax companies like Amazon and Alphabet based on where they operate, rather than where they are based. The idea has led to tensions with the United States under Trump, but with the Biden team in place, there is hope for a deal.
In the United States, there is bipartisan support for a tougher approach to Big Tech that goes far beyond tax rates. This is an area in which Biden appears ready to stick to the policies of his predecessor. The president has appointed Lina Khan, a professor at Columbia Law School and author of a landmark article accusing Amazon of monopoly behavior, to a key position in the Federal Trade Commission. The FTC is already seeking to dismantle Facebook Inc. in a lawsuit filed under Trump, and the Justice Department has filed a monopoly lawsuit against Alphabet.
Amazon “has built its dominance by aggressively pursuing growth at the expense of profits,” a strategy that the internet platform market economy encourages, Khan wrote in 2017. “Under these conditions, predatory pricing becomes very rational.” For his economic advice, Biden turned to Tim Wu, another Colombian law professor whose 2018 book, The curse of greatness, calls for a more aggressive use of antitrust law. The growing interest in this agenda drew comparisons with the classic age of American confidence over a century ago, when politicians led by Theodore Roosevelt broke monopolies in oil, railways and d other industries and subjected the titanic companies of the time to more stringent regulations. .
Then, as now, politicians from both parties feared that corporate wealth and power had been concentrated to an undemocratic degree and that failure to reverse the trend could pave the way for more claims. radical and populist in a society torn apart by wealth inequalities. and a clear urban-rural divide.
Many of the concerns of governments are specific to technology and its growing influence in all areas of life, including free speech and the vast amounts of personal data accumulated by businesses. But others have to do with bulkiness in general, which creates market power: the ability to stifle competitors, powerful suppliers, dairy customers, and regulation.
There is also a growing body of research showing that the increased dominance of superstar companies has put workers at a disadvantage. Many economists attributed the slow growth in wages in the United States in the decades leading up to the pandemic, at least in part, to declining competition. Some tech companies have business models that allow them to grow without adding a lot of staff. Others, Amazon and Alibaba among them, employ large numbers of workers but often in low-skilled, low-paying jobs – although Amazon, after failing to form a union in an Alabama warehouse, announced salary increases at all levels.
Another measure of the growing power of superstar companies is the increase in profit margins documented by Bloomberg Economics, which would likely be even greater if some companies did not sacrifice short-term earnings for market share gains that will deliver profits. more important in the years to come. .
Economists who study the problem of lump have concluded that it is also at levels below the world’s top 50. For example, a 2018 study found that three-quarters of U.S. industries have seen an increase in concentration over the previous two decades, with the market dominated by fewer and larger companies.
With big profits, small tax bills, and a limited need for capital or even workers, the new generation of mega-corporations also pose challenges for monetary and fiscal policy. The supply-side argument that lower taxes spur growth by fueling hiring and investment – never particularly well supported by the data – now looks even more tenuous. And the idea that central banks can achieve the same effect with lower interest rates takes a hit when mega-corporations have amassed so much liquidity that they don’t need to borrow. In 2020, the top 50 companies had a $ 1.8 trillion cash stack, enough to fund all of their capital spending for the year more than five times.
Amidst all the worries about the emergence of superstar companies, the Bloomberg Economics study offers a result that may be more reassuring. In each of the past three decades, about half of the top 50 spots in the business rankings have turned.
That doesn’t necessarily say much about the prospects for newcomers trying to break into an industry. It may simply reflect the changing contours of an economy, such as the generational shift from Big Oil to Big Tech. But it shows that the dynamism of the market is still at work and that reaching the top is not a guarantee of staying there.