Breaking the ‘Medici Vicious Circle’ – monopolization trends in advanced economies

On the product markets side, since 1997, more than 75 percent of the U.S. sectors experienced an increase in concentration levels as measured by the Herfindahl-Hirschman Index rising more than 50 percent on average across the U.S. economy. In line with the stock markets concentration evidence mentioned earlier, the size of the average publicly listed company in the U.S. as measured by market capitalization, went from $1.2 billion to $3.7 billion in constant dollars.

Three factors drive the above figures.

One: Entrepreneurship is on a decline. The rate of new company formations has fallen from 15 percent in 1975 to 14 percent in the 1980s, to 11 percent in 1995. In 2015, the rate was just above 8 percent. The quality of the new company formations, as measured by life expectancy of the firms and tangible returns on investment, have also deteriorated.

Two: Firms are getting larger not through organic growth in revenues, but through M&As. Over 1997-2017, average annual volumes of global M&A activities amounted to roughly one half of the entire nominal global GDP growth. At the end of May, global M&A deal flow was running double on the same period of 2017 to reach a total of $1.5 trillion of announced deals. U.S.-only deals account for about 37 percent of the global total in M&A transactions – a share that is more than 2.5 times greater than the relative share of the U.S. economy in global GDP on PPP-adjusted terms.

Three: The demise of the medium-sized firms. In the 1980s, only 20 percent of mid-cap companies had negative earnings per share. By 2015, that number stood at 50 percent.

Link here.