The Other Aging of America: The Increasing Dominance of Older Firms

http://www.brookings.edu/research/papers/2014/07/aging-america-increasing-dominance-older-firms-litan

by luu • 12 years ago

91 55 12 years ago

zwieback• 12 years ago

Wow - didn't expect the numbers to be so high in the high-tech sector. I'd love to see the data of the last two years. It feels like the majority of activity in tech is in startups but economically that's totally untrue.

seabee• 12 years ago

To me it feels like the majority of progress and innovation in tech is in startups, but the majority of activity is uninnovative. For example, a lot gets done in the enterprise software market, though most of it is very boring and uncreative from a technical perspective.

lkrubner• 12 years ago

Related, and worth reading:

http://www.moneyandbanking.com/commentary/2014/6/23/growth-a...

excerpt:

"Market economies are characterized by high turnover of both workers and firms. This “churning” is part of the process of “creative destruction” that shifts economic activity to more productive uses. The U.S. economy has typically stood out for its level of dynamism. But recent research has highlighted the long-term slowdown in the U.S. pace of gross job creation and job destruction (see top panel below), at least part of which has been associated with the decline in firm startups"

It's easy to get a rosy view of things, reading Hacker News, as Hacker News is attached to one of the few parts of the USA business community that remains dynamic. But it is important to take a wider view. The bulk of business activity in the USA has seen a decline in dynamic new formation. The decline started around 1980 and has gotten worse over the last 30 years.

Here is another one worth reading:

http://www.brookings.edu/research/papers/2014/05/declining-b...

That one looks at specific cities.

The news is troubling and grim. The trend is more than 30 years old, and appears to be accelerating.

_delirium2• 12 years ago

Even in tech I think it's easy to overstate the level of dynamism. A lot of the buzz is around startups, but a huge amount of the industry is owned by fairly old companies.

Digging through the Forbes 500 list, there are 10 companies of the top 100 that I would consider "tech". They are (with year of founding): #5 Apple (1976), #17 HP (1939), #23 IBM (1911), #34 Microsoft (1975), #35 Amazon (1994), #46 Google (1998), #53 Intel (1968), #55 Cisco (1984), #69 Ingram Micro (1979), #82 Oracle (1977).

By decade that's: 2 from the '90s, 1 from the '80s, 4 from the '70s, 1 from the '60s, 2 pre-WW2. Looks like the '70s were a good time to do a tech startup. :)

rodgerd• 12 years ago

And the companies from the 70s (Apple, Microsoft, and Oracle) are doing their damndest to make sure they kill one from the 90s (Google).

muzz4• 12 years ago

The second paper is somewhat of a canard. There are fewer "firms" than 30 years ago largely because of fewer small players in areas like retail and construction (for example, fewer Mom-and-Pop shops and more market share to WalMart, etc).

Noah Smith wrote a good rebuttal: http://noahpinionblog.blogspot.com/2014/05/declining-us-dyna...

ThomPete• 12 years ago

It still means less jobs netto and this is only going to keep declining.

UweSchmidt• 12 years ago

Dominance of large players could be a major reason for a less dynamic economy, so your link is not really a rebuttal. Can you clarify?

michaelochurch2• 12 years ago

The bulk of business activity in the USA has seen a decline in dynamic new formation. The decline started around 1980 and has gotten worse over the last 30 years.

Income inequality seems one of those things that is "capitalistic" and beneficial, but it actually (a) provides an incentive for self-protection and corruption at the top, and (b) makes it far more likely that bad actors get away with it, because their superior resources allow them to move faster than they are discovered.

The problem is that capitalism requires inequality of results but the persistent, generational type of inequality that the world has now (and the US, post-1980s) is fundamentally anti-progressive.

Spooky23• 12 years ago

I think when you see efficiency run amok and start to look like central planning, that's a sign that something is out of equilibrium.

Case in point: Wal-Mart. Wal-Mart used to be a great store -- until they won their commanding market position. In many areas, it's a gas station, CVS or Wal-Mart. Now they skinflint everything... they understaff, don't merchandise product, and have a shopping experience something like DMV.

And it isn't just the retail end that's a problem. Because of that dominant position, they've squeezed out the distributors that provided the supply chain to the retail economy.

Real competition is messy and inefficient on it's surface.

ArkyBeagle2• 12 years ago

But that's natural. The innovator in retail is now Amazon. Wal-Mart was innovative when Sam hisownself ran it, and a little past that. The trope is that Sam had a daily report ( presumably on green fanfold paper ) on his desk every day. Very much a tech leader in the pre-Internet network sense.

I lived in a town that had no Wal-Mart and then it did. Before, you had to drive to downtown or a retail area across town and the stores closed basically at dark.

If you went to Penney's, it had hardwood floors, the clerk sent your transaction up a pneumatic tube to the cashier and got your change out of the same pneumatic tube. Banks still use these at drive in lanes.

Only the precursor to Wal-Mart - Gibsons - was open past 6:00ish ( I don't remember the exact figure ). You had to conform to the store's schedule. Mom would send orders with Dad to fill on lunch, back before we had two cars ( this was late '60s, early '70s ).

People invoke competition, but competition really only works out when the new guy has twice to ten times the impact that the incumbent has. Something has to cover switching costs.

WalterBright2• 12 years ago

Part of the problem is related to a change in the bankruptcy laws. This is documented in the 1992 book "America What Went Wrong".

Before 1978, bankruptcy laws were set up so when a business could no longer pay its bills, it declared bankruptcy. The business was dissolved, and its assets sold off and the proceeds given to the creditors.

In 1978, this was fundamentally changed to the idea that a bankrupt company could continue to operate with a judge acting as CEO. It's hard to imagine a person less qualified to run a huge corporation than a judge with absolutely zero expertise in business, finance, or the field the company is in. The result was ineptness, and a general looting of the company's assets by the lawyers.

The process of creative destruction was severely blunted by this, and the economy has suffered the consequences ever since.

(The book is rather hysterical, and its conclusions silly, but it well documents what the change in bankruptcy laws did.)

judk4• 12 years ago

That description does not match what I see with "reorganizations" of bankrupt companies.

And assets being lootedby lawyers doesn't sound much worse than assets being looted by auction

ggchappell• 12 years ago

It's easy to get a rosy view of things, reading Hacker News, as Hacker News is attached to one of the few parts of the USA business community that remains dynamic.

But isn't YC focused on proving some idea and then getting acquired? YC is thus primarily a pipeline for the enlargement of older, established companies, not a mechanism for creating new companies that will be viable in the long term.

So, if we consider the trend mentioned in these articles to be a problem (and clearly you do), then wouldn't YC -- and, by association, HN -- be more a part of the problem than part of a solution?

protonfish• 12 years ago

This seems like another symptom of the widening income gap. You need money to start a new venture and the average worker no longer has much to spare. Meanwhile large corporations have increased power and influence acquire/stifle competition.

mhb• 12 years ago

Or it could be a symptom of an increasingly risk-averse society which encourages its government to promulgate ever more regulations to keep us "safe". Big/rich companies are favored by that, so the causality isn't obvious.

muzz4• 12 years ago

Or it could be that there are fewer anti-monopoly laws, and that's resulted in huge megacorporations, especially in areas like banking.

watwut• 12 years ago

Americans tend to be incredibly risk-averse when it comes to physical risks and terrorism, but they seem much less risk averse when it comes to money. Given the same personal financial risk, Americans seem more likely to start risky business.

rayiner4• 12 years ago

The U.S. is a lot less regulated, in practical terms, than it was 30-40 years ago. Entire industries have been deregulated, like transportation, communications, etc, and enforcement in areas like antitrust, etc, is less. Agencies like EPA, OSHA, NLRB, etc, area shadow of what they were in the 1970's.

ArkyBeagle2• 12 years ago

Economists call an aversion to risk "liquidity preference". You don't even need regulation to cause this.

at-fates-hands• 12 years ago

>> Meanwhile large corporations have increased power and influence acquire/stifle competition.

Actually most large corporations tend to shrink in poor economic times. They also tend to lay more people off, reduce spending and hiring and hunker down to weather to storm. I could post a dozen stories about company layoffs over the past 5 years. Many small and medium sized companies who have smaller workforces, will simply go under.

Target laid of 1,100 employees in January Cargill laid off 900 employees in March of this year Microsoft just announced it would lay off 14% of its employees in July Intel laid off 1,500 employees in April of this year

When the economy is poor, people don't get poor and corporations get rich. It simply doesn't work like that.

digikata• 12 years ago

Also the dropping of pensions, and increase in cost of healthcare. It used to be that some portion of people could get 20 yrs in a their first company then have the option of having a fairly secure foundation from which to take risks.

PaulHoule2• 12 years ago

One thing I've noticed is that vc backed companies in my field don't last more than 5yrs. Maybe 2/3 get acquired, 1/3 get shut down, but I see so few survivors I won't offer a probability estimate.

Iftheshoefits• 12 years ago

The goal of VC backed companies today is to cash out as much "value" (ROI) as possible, as soon as possible. VC firms aren't meant to last; they're meant to enrich (a very select few).

PaulHoule2• 12 years ago

It is funny to compare today to the old days, say the 1980s, when public investors made fortunes investing in companies like AAPL and MSFT. These were startups that became "old companies".

Compare that to FB, we have to wait another 20-30 years to really know, but it's hard to see FB growing the way AAPL and MSFT did.

michaelochurch2• 12 years ago

This is damning data, proving that the "startup revolution" of the past 20 years and of the Valley is a fraud. Of course, many of us already knew this, but it's nice to see data that proves our point.

The main role of the VCs, at this point, is not to empower companies but to fund the competition (an extortion dynamic: "take our terms or we throw 'rocket fuel' to your competitors, who might crash and burn but will take you down before they do"). Subtle distinction. Management-wise, VCs take away far more than they add. The money (ahem, other peoples' money) that they infuse should be a commodity, but they're going to fight as hard as they can to make it not so. Thus, they've created a "startup" economy in which they:

    * Build crappy "throwaway" companies not built to last, with the hope
      that one will latch on to a genuine new technical idea and go 100x. 
    * Increase the entrepreneurial activity of one sector, slightly,
      in one location while draining the rest of the country and society.

Also, the power of the VC oligarchy is enhanced by the fact that bank loans (the traditional way of starting a business) are completely broken at this point. Getting a bank loan requires personal liability, which makes it a non-starter for anything that might actually fail.

Business is becoming a generational aristocracy at this point. You don't need to look any further than the absurd propping-up of boy kings Lucas Duplan and Evan Speigel. (They even look like Joffrey Baratheon!) I don't have any prima facie dislike for capitalism. In fact, it's a necessary core component of any advanced society. But corporate capitalism is a dinosaur and it's time to go Yucatan on its ass.

scarmig• 12 years ago

I love that I can tell the author of a comment by the end of the first sentence =)

Spot on, though. I would take a bit issue with your last point: imagining a good capitalism and a bad capitalism, and saying the issue is just we just got dealt a bad capitalism, is strikingly similar to socialists who say the same about the USSR--"but that wasn't real socialism!" Especially since many people approve of capitalism as it exists today and would argue that this is how it's supposed to be.

I'd also question terming it a dinosaur. The distinguishing characteristic of corporate capitalism is an amazing ability to adapt, survive, co-opt possible threats, and shift costs onto individuals outside the system. It's the most robust creature on the planet right now.

arbuge• 12 years ago

VCs and the entrepreneurs who work with them have made themselves wealthy in large part through starting companies which ultimately get acquired. This includes many of their investments that IPO but get acquired later on.

This situation does not seem to me to be incompatible with the dominance of older firms discussed in the article - the ones doing most of the acquiring.

ChuckFrank• 12 years ago

Great comment. Excellent insight. And like you say, don't hold your breath on Clinkle.

pessimizer• 12 years ago

The stability of incumbents is an inevitable result of government corruption.

edit: The first company that is successful in a space will accumulate the money and the clout to keep competitors out of the industry and influence regulation to protect their position. The only worry such a company has is that a larger, more incumbent company in a related industry will undercut them by taking a loss, either through expensive lobbying or aggressive underpricing.

Since Reagan, the US has openly been reducing taxes and extending subsidies and bailouts to the largest companies, and finance/media rules have been gradually dismantled enabling politicians to take better advantage of indirect payments.

The reason incumbents have been more successful since 1980 is a direct result of government corruption, and is no different than similar patterns within other corrupt economies.

edit2: I forgot the incumbent option of buying the competition though the furious M&A that has also increased steadily during the same period, along with increasing weakness of antitrust legislation which encourages the behavior.

It's sad that we live in a time (due to computing and the internet) when starting or expanding a new or small business is less capital intensive than it has been in history, yet the incumbents have used regulation to make themselves more entrenched than they've been in nearly 100 years.

rayiner4• 12 years ago

The stability of incumbents is an inevitable result of government corruption.

I strongly disagree.

What makes it hard to compete with Microsoft in the consumer PC/office suite space? What makes it hard to compete with Apple or Samsung in the phone/tablet space? What makes it hard to compete with Amazon in the retail space, or Oracle in the DB space? IBM in the IT consulting space? Intel in the desktop CPU space? Google in the search space? Are these companies protected by "government corruption?"

Large companies have certain disadvantages, but in general have overwhelming advantages. Take Apple or Intel, who can throw massive money at manufacturing R&D. An upstart competitor simply can't build a similar product at a similar price point. Take Microsoft, which can exploit massive network effects, or Amazon, which can exploit tremendous efficiencies of scale in logistics. Even in the purely online world, there are benefits to scale, either network effects like Facebook's, or being able to deliver better results because of the sheer volume of data a company like Google has access to.

Consolidation is the natural direction of a market economy, because at the end of the day the market favors efficiency and scale, and Wal-Mart is efficient in a way thousands of little mom & pops aren't. Indeed, if anything, technology accelerates the effect. It's much easier, in a world with internet, instant messaging, etc, to run a 100,000+ employee company efficiently than it was say 50 years ago. As technology gets better, the equilibrium point at which diseconomies of scaling bigger outweigh economies of scaling bigger gets pushed further out.

nitrogen2• 12 years ago

Patent lawsuits.

twobits• 12 years ago

The stability of incumbents is an inevitable result of government corruption.

It's a two way street. Are the incumbents so sad to kill off smaller, dangerous competitors, by being bffe with the politicians?

In general, the problem is not big gov. The problem is not big biz. Its "BIG".

triangleman• 12 years ago

I have not had a chance to read the paper, but I would be surprised if the findings really tell us about some new trend in the U.S. economy.

Here are the 30 companies that were in the Dow Jones Industrial Average, 30 years ago [1], with an asterisk indicating the companies that are still in the DJIA:

  Allied-Signal Incorporated
  Aluminum Company of America
  American Can
  * American Express Company
  * American Telephone and Telegraph Company
  Bethlehem Steel
  * Chevron Corporation (formerly Standard Oil of California)
  E. I. du Pont de Nemours and Company
  Eastman Kodak Company
  * Exxon Corporation
  * General Electric Company
  General Motors Corporation
  Goodyear
  Inco
  * International Business Machines
  International Harvester
  International Paper Company
  * McDonald’s Corporation
  * Merck & Co., Inc.
  * Minnesota Mining & Manufacturing
  Owens-Illinois Glass
  Philip Morris Companies Inc.
  * Procter & Gamble Company
  Sears Roebuck & Company
  Texaco Incorporated
  Union Carbide
  United Technologies Corporation
  U.S. Steel
  Westinghouse Electric
  Woolworth

Only 10 of the 30 companies are still in the Down Jones. Some of these companies may be represented in merged companies under new names, but you can still see the huge change in the makeup of the U.S. economy compared to 30 years ago.

This is not to say that income inequality is not a big problem, but I believe that it's premature to say that the U.S. economy has lost its dynamism and competitiveness.

[1] http://en.wikipedia.org/wiki/Historical_components_of_the_Do...

Retric• 12 years ago

Globalization killed several of those, but that's not a recent change. 4 being steel or aluminum companies.

Walmart seems to be the only real disruption on that list.

AT&T was split up and now occupies 2 spaces (AT&T, Verizon). Texico is part of Cheveron which is still on the DOW. So one split and one merge.

Several like Philip Morris are on the S&P 500. (allied-signal incorperated = Honneywell, E I du Point = DoPont, Goodyear, GM, union carbide is part of DOW, Owens-Illinois)

PS: If anything the average age significantly increased.

supercanuck• 12 years ago

* Next to E. I. du Pont de Nemours and Company which is DuPont.

mikeyouse• 12 years ago

That list is entirely misleading, of your non-asterixed list:

- Allied Signal purchased Honeywell (but adopted their name) and is currently a $72B company.

- Alcoa is still a $20B company.

- American Can became Primerica, which was the foundation of Citigroup which is a $150B company.

- Bethlehem Steel was mostly shuttered but is still operating under foreign ownership.

- Dupont is still a $60B company.

- Kodak we all know, but still a $1B company.

- GM had its issues but still employs over 200,000 people directly and is a $55B company.

- Goodyear is still a $7B company.

- Vale Inco is still a $75B company.

- International Harvester was merged into Navistar which is still a $4B company.

- International Paper still employs over 60,000 people and is a $21B company.

- OI is still a $5B company.

- Phillip Morris rebranded / merged to form Altria group which is an $80B company.

- We all know Sears' issues, but they're still a $4B company.

- Texaco's production operations were merged into Chevron ($250B company) and their retail operations were merged into Shell ($150B company).

- Dow Chemical bought Union Carbide for almost $10B and the combined company is today worth $60B.

- United Technologies is still a $100B company.

- US Steel is still a $5B company.

- Westinghouse bought CBS and rebranded to CBS Corp. ($35B company) and sold off its power business overseas and the rest of its electrics business to Toshiba.

- Woolworth rebranded to Foot Locker and is still worth $7B.

So maybe two on the list no longer exist, but the vast majority are still massive companies collectively employing millions of people with hundreds of billions (trillions?) in revenue. Their inclusion on or exclusion from the DJIA doesn't mean much about their competitiveness or their success.

bjones53• 12 years ago

I was disappointed that the article didn't acknowledge the impact globalization has likely had on the increasing number of 'Older Firms'. Global markets bring massive opportunities, but large corporations are better positioned to succeed in a global marketplace. Global markets also means global competition - for jobs and for entrepreneurs.

juliangamble• 12 years ago

Firms spend much more of their time on survival. Arguably they have incorporated the market-based cycles of creation and destruction inwardly. ie they have absorbed this cycle.

In technology we see this in two areas:

1. In Outsourcing and the rise of contractors http://en.wikipedia.org/wiki/Business_process_outsourcing_to... http://en.wikipedia.org/wiki/Information_technology_outsourc... This enables the business to spend money on product maintenance and product development. Then the business can shut this off when cashflow stops. (But the firm keeps going!)

2. We see the rise of Product Management http://en.wikipedia.org/wiki/Product_management This is a kind of 'management science' devoted to starting, maintaining and stopping products. (But the firm keeps going!)

The point I'm making is that firms are getting older because they can incorporate the cycles of creation and destruction internally. You might argue this is good for the shareholder in the medium term.

thomasmarriott• 12 years ago

Scale is underrated. Cumulative advantage.

The Other Aging of America: The Increasing Dominance of Older Firms

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