06/27/23

💼 The Size of Firms and the Nature of Innovation

Think income inequality in countries is bad (and getting worse)? Take a look at firm concentration: According to a recent study on “100 Years of Rising Corporate Concentration,” the top 1% of firms in the US raked in 80% of all sales. A massive disparity that is increasing over time – another core driver of what we have called “The Great Bifurcation.” Firms either orient themselves towards fully vertically integrated “super-firms” or focus on specific niche markets with a high level of modularity (i.e., most components of their value chain are outsourced). With this comes a shift in innovation potential – a recent meta-analysis found that the larger the firm, the more incremental and less disruptive innovation happens inside the firm. In essence: Startups disrupt, and incumbents innovate.