What’s Good for Big Business Not Good for Economy

by Kathy Grear 04/02/2009

In 1953, during a Senate Armed Services Committee hearing to determine whether he would become U.S. secretary of defense, Charles E. Wilson famously stated that keeping his existing 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.”  A study by a University of Arkansas 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 in the Sam M. Walton College of Business. “Our results, especially those linking economic growth to the demise of old, big businesses and not merely the rise of new ones, supports the notion that sustained economic growth entails new corporate giants arising and undermining the old leviathans.”

Fogel and colleagues Randall Morck at the University of Alberta and Bernard Yeung at New York University 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.

To ensure robust results, Fogel and her colleagues controlled for each country’s initial economic and human capital endowment, size and quality of government, development of countries’ financial systems and degree of economic openness.

The researchers’ main finding supports Austrian economist Joseph Schumpeter’s notion of “creative destruction,” the classic argument 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.”

Less creative destruction happens as a result of many factors: when governments consume a larger share of the economy, when banks dominate financial systems more than stock markets, when civil codes hold sway, when red tape is denser and when the global economy is less involved, the study showed.

The researchers also found that in low-income countries, slow growth was linked to the persistent dominance of state-controlled enterprises. This finding led the researchers to speculate that state intervention had a negative effect on growth. The researchers’ study was published in the Journal of Financial Economics. •