Chief executives are unlikely to be feeling enthusiastic about the rise of the Democratic Socialists of America (DSA), a left-wing political organisation whose members have recently won a slate of nominations to represent the Democratic Party in November’s midterm elections. Last month the DSA published a manifesto that decried the power of corporate America and called for “public ownership of the largest corporations”.
Most Americans do not share the DSA’s enthusiasm for widespread nationalisation, but many do feel a great
Chief executives are unlikely to be feeling enthusiastic about the rise of the Democratic Socialists of America (DSA), a left-wing political organisation whose members have recently won a slate of nominations to represent the Democratic Party in November’s midterm elections. Last month the DSA published a manifesto that decried the power of corporate America and called for “public ownership of the largest corporations”.
Most Americans do not share the DSA’s enthusiasm for widespread nationalisation, but many do feel a great deal of antipathy towards large companies. In a survey published in April, just 15% of Americans told Gallup that they had confidence in big business, a hair above the all-time low. It is not that business in general is reviled: more than 70% of Americans express confidence in small firms. Since Gallup began asking, the gap between the two has been wider only once. Indeed, the easiest way to make an industry sound sinister these days is simply to add the adjective “big”: big pharma, big food, big tech, big oil.
From one angle the suspicion makes sense. Scale begets power: over prices, over workers, over suppliers, perhaps over whole markets. Yet being able to bemoan the supposed evils of big business is something of a privilege. Policymakers have long thought that economic growth was generated by a country’s nimble, dynamic and innovative small businesses, rather than its lumbering juggernauts. That view, however, is being challenged by a growing body of literature which argues it is big business that really matters when it comes to making countries more prosperous.
In 2023 the World Bank overhauled its enterprise surveys, which quiz thousands of firms on hundreds of characteristics, widening coverage to include a number of major economies that had previously been missing. The latest release, in May, was the first to include all the new data. “What comes through very clearly across all the 164 economies: in high-income economies, firms grow bigger,” says Jorge Luis Rodriguez Meza, who runs the World Bank’s enterprise surveys.
Across rich economies, the oldest firms—those aged over 25 years—are on average two-thirds larger, based on number of employees, than they were when aged between one and five years. In sub-Saharan Africa and other poor economies, they are one-third larger. This result echoes—at much greater scale—the findings of a seminal paper published in 2014, which followed the fortunes of manufacturing plants in America, India and Mexico. It found that 40-year-old American plants employed almost eight times the number of workers as five-year-old ones. In Mexico, the ratio was just over two. In India, older plants employed fewer workers. The poorest countries are not distinguished from the rich ones by an excess of small firms, argues Mr Rodriguez Meza, so much as they are by a “missing top”, where there are too few large firms.
That matters because the gap in economic performance between rich and poor places runs through their firms. Across the OECD, a club of mostly rich countries, the productivity of small and medium-size enterprises (SMEs) averages just two-thirds that of large firms. A country’s firm-level labour productivity moves almost one-for-one with its GDP per person. This suggests that a country does not get rich off the back of small businesses. Instead, it has to create an environment in which those firms can get big—requiring robust property rights, functioning capital markets and a government free from corruption.
In a recent paper based on the World Bank data, Diego Restuccia of the University of Toronto also points out that in poor countries there are far greater disparities in productivity even among firms of a similar size, suggesting that the market in these places does a poor job of disciplining unproductive businesses. Bigness, in other words, is not a sufficient condition for high productivity. State-owned enterprises, common in poor countries, are often cosseted. In rich economies, good firms grow while bad ones wither.
The findings have prompted soul-searching at the World Bank itself. The institution has long focused on helping SMEs, says Mr Rodriguez Meza, viewing them as “the good guys”. Now he concludes that “SMEs themselves don’t really matter if they cannot grow.” America should count its blessings.
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