Company size: Big is back

The Economist: Company size: Big is back

Corporate giants were on the defensive for decades. Now they have the advantage again.

… Today the balance of advantage may be shifting again [Toward big firms]. To a degree, the financial crisis is responsible. It has devastated the venture-capital market, the lifeblood of many young firms. Governments have been rescuing companies they consider too big to fail, such as Citigroup and General Motors. Recession is squeezing out smaller and less well-connected firms. But there are other reasons too, which are giving big companies a self-confidence they have not displayed for decades.

Of course, big companies never went away. There were still plenty of first-rate ones: Unilever and Toyota continued to innovate through thick and thin. And not all start-ups were models of success: Netscape and Enron promised to revolutionise their industries only to crash and burn. Nevertheless, the balance had shifted in favour of small organisations.

The entrepreneurial boom was supercharged by two developments. Deregulation opened protected markets. Some national champions, such as AT&T, were broken up. Others saw their markets eaten up by swift-footed newcomers. The arrival of the personal computer in the 1970s and the internet in the 1990s created an army of successful start-ups. Steve Jobs and Steve Wozniak founded Apple Computer in 1976 in the Jobs family’s garage. Microsoft and Dell Computer were both founded by teenagers (in 1975 and 1984 respectively). Larry Page and Sergey Brin started Google in Stanford dorm rooms.

But deregulation had already begun to go out of fashion before the financial crisis. …

The article addresses other reasons for the shift, but I think the article highlights something I believe to be grossly misunderstood. It is common wisdom that, in general, big corporations want deregulation. It frees their grubby little hands to pursue more profit.

In reality, regulation is often an asset to big corporations. (It is not true in every industry or for every firm, but it is frequently the case.) Regulation creates a barrier to entering the industry for newcomers … that is, it limits competition. The big existing firms take a financial hit in their compliance efforts, but there is a disproportionately higher impact on smaller firms and newcomers. Furthermore, since the regulations are crafted by a handful of people in D. C., money spent on lobbyists and cozy relationships with lawmakers is much less risky than competing against innovative newcomers. Yet the ones in the public square who rail against the presence of big corporations are frequently the same ones calling for the most regulation. Business regulation is essential but attempts to manage industries through legislation generally favor big corporations.