The world's biggest businesses were doing fine until Covid-19 arrived. Now they're doing even better.
The top 50 companies by value added $4.5 trillion of stock market capitalization in 2020, taking their combined worth to about 28% of global gross domestic product. Three decades ago the equivalent figure was less than 5%.
That's just one measure of how superstar firms have come to dominate the world economy, according to a new study by Bloomberg Economics that maps out their changing role. The findings provide ammunition for policymakers bent on reining in the giants—including a US government that's seeking to rally global support for higher levies on corporate profits.
The biggest companies generally post fatter margins and pay less in taxes than they did in decades past, the Bloomberg Economics study shows. Their median effective tax rate of 35% in 1990 had dwindled to only 17% last year—while profit margins headed in the opposite direction, soaring from 7% to 18% over the same period. They also devote a smaller portion of their earnings to job-creating investments: In 1990, IBM—at the time the world's biggest publicly listed company—devoted 9% of its revenue to capital expenditures. Fast-forward to 2020, when Apple—its replacement in the top spot—spent just 3%.
The advantages superstar firms enjoy became all the more glaring during the pandemic, which is one reason why the issue of how to tame them has vaulted up the political agenda in so many countries. Tech giants such as Amazon.com Inc. have business models that are tailor-made for a year of social distancing, unlike Main Street competitors dependent on foot traffic. And government rescues worked best for the biggest companies, which benefited from central bank backstops that kept borrowing costs low and stock prices high. In contrast, patchwork relief efforts for small businesses left many struggling to pay their bills.
In the US, President Joe Biden's administration is seeking to raise corporate taxes as part of a wider effort to halt the long drift to inequality. He wants to reverse at least some of the cuts implemented by his direct predecessor, Donald Trump. He's also pushing for a global tax deal that would make it harder for the biggest companies to lower their bills by shifting profits to low-tax jurisdictions.
That practice spread as corporations grew bigger. A 2019 study by the International Monetary Fund found that as much as 40% of what on paper looks like foreign direct investment is "phantom investment into corporate shells with no substance and no real links to the local economy."
In a speech in April, Treasury Secretary Janet Yellen cited a global "30-year race to the bottom on corporate tax rates." She said agreement among Group of 20 countries on a global minimum charge will create "a more level playing field in the taxation of multinational corporations."
The US push has drawn resistance from nations such as Ireland, whose low corporate tax rate has encouraged multinationals including Apple Inc. and Google owner Alphabet Inc. to set up regional headquarters there. After initial signs the US might want a 21% minimum rate, the Biden administration has now proposed 15%—a sign of the compromises required to achieve consensus on a contentious issue.
In 1990, there were no Chinese businesses among the top 50 exchange-traded companies; last year there were 8. China's gains have come largely at the expense of European enterprises, whose presence on the list has shrunk from 15 to 7 over the period.
Alongside the shifting geography of the world economy, the Bloomberg Economics study also captures a profound change in what the biggest companies do. Technology dominates the top of the list, and fossil fuel companies—with the exception of Saudi Arabia's flagship Aramco—have dropped off.
The extraordinary growth of tech companies in particular is what's spurring government action. They're in the crosshairs of politicians and regulators almost everywhere. That includes China, where regulators blocked a proposed initial public offering by Jack Ma's Ant Group, slapped record fines on affiliates including Alibaba Group Holding, and have extended the crackdown to other tech giants like Tencent Holdings.
Europe has been working on ways to tax companies such as Amazon and Alphabet based on where they operate, rather than where they're based. The idea led to tension with the US under Trump, but with the Biden team in place, there's hope for a deal.
In the US, there's bipartisan support for a tougher approach to Big Tech that goes far beyond tax rates. It's one area where Biden looks set to stick with the policies of his predecessor. The president has nominated Lina Khan, a Columbia Law School professor and author of a landmark paper accusing Amazon of monopolistic behavior, to a key job on the Federal Trade Commission. The FTC is already seeking to break up Facebook Inc. in a lawsuit begun under Trump, and the Department of Justice has filed a monopoly case against Alphabet.
Amazon "has built its dominance through aggressively pursuing growth at the expense of profits," a strategy that the economics of internet platform markets encourages, Khan wrote in 2017. "Under these conditions predatory pricing becomes highly rational." For his economic council, Biden has tapped Tim Wu, another Columbia law professor whose 2018 book, The Curse of Bigness, calls for more aggressive use of antitrust law. The growing interest in that agenda has drawn comparisons with the classical age of US trustbusting more than a century ago, when politicians led by Theodore Roosevelt broke up monopolies in oil, railroads, and other industries and subjected the corporate titans of the day to tougher regulation.
Back then, as today, politicians from both parties worried that corporate wealth and power had become concentrated to a degree that was antidemocratic and that a failure to halt the trend might open the way to more radical and populist demands in a society riven by wealth inequalities and a sharp urban-rural divide.
Many of the concerns driving governments are specific to tech and its growing influence in all areas of life, including free speech and the vast amounts of personal data companies accumulate. But others relate to bigness in general, which creates market power: the ability to stifle competitors, strong-arm suppliers, milk customers, and shape regulation.
There's also a growing body of research showing the increased dominance of superstar firms has placed workers at a disadvantage. Many economists have attributed the slow US wage growth of the pre-pandemic decades at least in part to waning competition. Some tech companies have business models that allow them to scale up without adding many staff. Others, Amazon and Alibaba among them, employ huge numbers of workers but often in low-skill and low-paid jobs—though Amazon, after defeating an attempt to form a union at an Alabama warehouse, has announced pay increases across the board.
Another measure of the growing might of superstar firms is the increased profit margins that Bloomberg Economics documented, which would likely be even wider if some companies weren't sacrificing short-term income for gains in market share that will deliver larger payoffs in the years ahead.
Economists studying the problem of bigness have concluded it shows up at levels below the world's top 50, too. For example, a 2018 study found that three-quarters of US industries saw an increase in concentration over the previous two decades, with the market dominated by fewer and bigger companies.
With fat profits, light tax bills, and limited need for capital or even workers, the new generation of megafirms poses challenges for monetary and fiscal policy, too. The supply-side argument that lower taxes spur growth by fueling hiring and investment—never particularly well supported by the data—now looks even more tenuous. And the idea that central banks can achieve the same effect with lower interest rates takes a hit when the megacorporations have amassed so much cash they don't need to borrow. In 2020 the top 50 companies were sitting on a cash pile of $1.8 trillion, enough to fund their entire capital spending for the year more than five times over.
Amid all the concerns triggered by the emergence of superstar firms, the Bloomberg Economics study offers one finding that may be more reassuring. In each of the last three decades, about half of the top 50 spots in the corporate rankings have turned over.
That doesn't necessarily say much about the prospects for newcomers trying to break into an industry. It may merely reflect an economy's changing contours, such as the generational shift from Big Oil to Big Tech. But it does show that market dynamism is still at work and that getting to the top is no guarantee of staying there.
Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.