Across industries and across countries, a small number of “superstar” firms are pulling away from the competition. They’re more productive. They’re more profitable, more innovative and they pay better. But why are these companies doing so well?
One answer shows up in study after study: information technology. In a new paper, James Bessen of Boston University provides evidence of that linkage, and of its importance.
Bessen compared measures of industry concentration from the U.S. Census to the share of workers in an industry in IT-related roles. Industries with a higher share of IT workers saw more concentration between 2002 and 2007, even after controlling for M&A activity and several other variables. In separate analyses, he links IT adoption to higher output per worker and higher profit margins.
But why is IT leading to winner-take-all competition? Bessen’s research raises two possibilities. It could be because “software development typically requires large upfront fixed costs,” meaning that firms that are already pretty large are the ones who can afford to invest. Big companies like Wal-Mart can spread those costs out over lots and lots of products sold.
Or maybe the firms succeeding with IT know something their competitors don’t. Perhaps, as OECD economist Chiara Criscuolo wrote in 2015, “Some firms clearly ‘get it’ and others don’t.”
In their new book “Capitalism Without Capital,” Jonathan Haskel and Stian Westlake argue that these are two sides of the same coin. They document that physical investment (machines, factories, equipment) has declined relative to intangible investment (software, data, employee training, management). And they argue that the economic properties of intangibles lend themselves to the emergence of superstar firms.
Intangibles often involve considerable upfront investment, then are cheaper to scale. And intangibles complement each other. For instance, research has shown that IT is more effective when paired with good management. Getting the most out of, say, analytics software also requires well-designed processes and effective managers; the two are more valuable together than either would be on its own.
(Walter Frick is a senior editor at Harvard Business Review.)
