Maybe the Innovation Boom Is Here, It’s Just Not Evenly Distributed


Check out these two charts from a great Wall Street Journal piece, “The Problem With Innovation: The Biggest Companies Are Hogging All the Gains,” on global productivity growth:

The point of the piece is that the innovation boom is here, it’s just not evenly distributed. Or as Andrew Haldane, chief economist at the Bank of England, is quoted as saying, “Whatever good stuff is happening at the high end is not diffusing down to the tail.” And some of that “good” stuff is technology and some is the ability to access global markets, which of course is enabled by technology. Moreover, it’s big companies that are most productive. From the piece:

Data show the most productive companies are usually the biggest. Globalization allowed them to grow bigger, while giving some specialized niche firms a big enough market to succeed. For digital titans such as Amazon, Google parent Alphabet Inc. and Facebook Inc., the benefits of scale are substantial. Not only are their customers not limited by geography, but whenever more sellers sign up in Amazon’s platform or more users join Facebook’s social network, the service they offer gets more valuable for everyone else.

Another advantage: Researchers have found that bigger firms are better at protecting their technological advantages by patenting them. Only 25 companies accounted for half of all tech-related patents filed with the European Patents Office between 2011 and 2016, official data show.

Scale makes it possible to experiment with advanced technology that is out of reach for many companies. A separate McKinsey Global Institute report, published in April, found early adopters of artificial intelligence may already have gained “an insurmountable advantage” in earnings over competitors who have yet to take the plunge.

Now there is nothing new about there being leading companies pushing the technological frontier. The concern is that innovation isn’t trickling down or diffusing to the rest of the economy. (I have previously addressed this issue here, here, and here.) Maybe there just aren’t enough tech-savvy, data-intelligence managers to go around at the moment as these high-paying multinationals gobble them up. This diffusion issue also needs more focus when discussing income inequality.

Then there’s this: If Big Tech is where the innovation is happening and is most effectively used, doesn’t it seem strange that this would be the moment to consider heavily regulating them or breaking them up? Then again, much of the anti-Big Tech movement seems more concerned with progressive politics than productivity growth.

As I wrote in a recent The Week column:

Google, Amazon, Facebook, and Apple — what Wall Street calls GAFA — are four of America’s most valuable and important companies, providing a massive benefit to consumers. Collectively they’re the Tony Stark of corporate America: They pay for everything, design everything, and make everyone look cooler. If the U.S. is going to remain the world’s technological leader against China’s challenge, GAFA will be pivotal. … What’s more, all are desperately fearful of even their core businesses one day being disrupted or displaced by new technologies. That’s one reason they spend so intensely on R&D. They’re all looking for the next big market or transformational technology — just the opposite of fat and happy monopolists who could care less about consumers and potential competitors.

Published in Economics
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  1. Misthiocracy, Joke Pending Member
    Misthiocracy, Joke Pending

    Isn’t it considered a truism that 80% of all achievement will come from 20% of participants?


    • #1
  2. Dbroussa Coolidge

    Couple of things.  First off, the second graph is interesting and also very troubling.  It shows that from the end of WWII until the 1990s Europe was knocking our socks off in productivity increases.  Now, much of that may be due to the destruction of the infrastructure in WWII and how that would skew the numbers, but you see both the US and EU start steep declines.  The EU in the mid 60s and the US in the early 2000s.  Since this is adjusted for economic cycles one wonders why this is happening.  With the EU, I think its two things.  One is the end of the reconstruction post WWII, but also that is when you see the completion of the rise of the socialist movements in Europe taking over the gov’ts and starting to enact their policies.  Even the DotCom and Y2K booms of the 90s cannot even slow down the EU decline, though it appears to have leveled off in the past couple of years (post Great Recession). 

    What explains the decline in US productivity that starts in 2002 and continues to current times?  This is harder, it could be the War on Terror, but why would that have such a massive effect on productivity?  The decline starts about the same time, but is that the cause?  One other potential explanation is that in the early 2000s home broadband became very cheap and easy to get, and with that came the explosion of the MMORPG. Yes, Everquest came out in 1999, but World of Warcraft came out in 2004 and myriad others came out in the early 2000s (Everquest II, Star Wars Galaxies).  With the iPhone rolling out in 2008 and the X-Box and PlayStation 2 hitting in early 2000s as well, the drive for entertainment as opposed to work was pretty large.  I wonder how much effect that has on the productivity drops?  A great deal I think.  This isn’t necessarily a bad thing, after all the promise of technology is that we can get our work done in less time and have more for leisure activities…but when those leisure activities are as addictive as gaming, and now social media have become it might be a bad thing.

    • #2
  3. Mark Camp Member
    Mark Camp

    James Pethokoukis: Data show the most productive companies are usually the biggest.

    This is why we ordinary Americans absolutely need to ensure that our officials have The Data.  Government economists pondered this question for years and years, drawing their paychecks but never finding the answer:

    “If some companies have high productivity (they rake in a lot of money without spending a lot) and others have low productivity (they spend a lot, but don’t rake in much money), which ones will grow big?”

    By looking at The Data, the experts have finally come up with an answer.

    • #3
  4. I Walton Member
    I Walton

    What is the regulatory cost difference per  some measure of size between the highly innovative and growing companies and the rest?   I imagine the math is not unlike the permit requirements that keep the third world third world, by making compliance, permitting and hence credit out of reach for small entrepreneurs, documented by De Soto’s The other Path.   The large digital companies already have enormous, almost infinite economies of scale,  most other producers face rising cost curves.  Compliance costs follow falling cost models so burden small companies far more than large companies.  

    • #4
  5. Pony Convertible Inactive
    Pony Convertible

    I believe a lot of this gap is due to regulation. 

    It is much harder to innovate now than it was a few decades ago because of all the bureaucracy that you have to deal with. 

    The business I’m in is medical devices. In the 60’s, an individual could invent a medical device and put it on the market with very little capital.  Today it takes tens (if not hundreds) of $millions to launch the same device.

    If you have an idea, selling that idea to a big company is often the only way to get it to market.  There is a reason we no longer have hometown banks, local hardware stores, or local anything else.  Everything is a chain that depends on large corporate overhead to deal with government regulations.

    • #5
  6. Barkha Herman Inactive
    Barkha Herman

    Misthiocracy, Joke Pending (View Comment):

    Isn’t it considered a truism that 80% of all achievement will come from 20% of participants?


    Look, look, the Pareto principle is real.

    Hint: it’s always been real.

    • #6
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