What’s Good for Big Business Not Necessarily Good for National Economy
In 1953, during a Senate Armed Services Committee hearing to determine whether he would become U.S. secretary of defense, Charles E. Wilson stated that keeping his job as head of General Motors would not constitute a conflict of interest because “what was good for our country was good for General Motors, and vice versa.” New research by a business researcher suggests the opposite – that a stable group of large corporations is associated with slower economic growth, particularly in high-income countries.
“Our findings raise the possibility that big business in some economies might be excessively stable, and that this is inimical to economic growth,” said Kathy Fogel, assistant professor of finance. “Our results, especially those linking economic growth to the demise of old, big businesses and not merely the rise of new ones, support the notion that sustained economic growth entails new corporate giants arising and undermining the old leviathans.”
Fogel and her colleagues compared rosters of 44 countries’ top-ten businesses in 1975 and 1996. The researchers found that economies whose big businesses changed less exhibited slower real per-capita gross domestic product growth, slower capital accumulation growth and slower total factor productivity growth from 1990 to 2000.
The researchers’ main finding supports Austrian economist Joseph Schumpeter’s notion of “creative destruction,” stating that growth occurs in capitalist economies because upstart, innovative firms arise and ruin oversized and stagnant corporations.
“Our results persisted after numerous robustness checks,” Fogel said. “Big business stability retained a negative relation to all three growth measures, consistent with Schumpeter’s view of upstart firms undermining inefficient and doddering behemoths.”