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And these investments bore fruit. Since the 1980s, the top four firms in each industry have increased their market share by 4% to 5% in most industries. my research It shows that most of this increase is due to investments in proprietary software.

This greater industry dominance of the top firms is accompanied by a corresponding reduction in the risk of disruption, a possibility that has obsessed corporate executives since Clayton Christensen’s founding. The Innovator’s Dilemma It came out in 1997. By the time Christensen wrote his book, deterioration was increasing. But since about 2000 – when top firms started investing in proprietary systems – this trend has waned sharply. In a given industry, the probability of a top ranked firm (as measured by sales) falling out of one of the top four places within four years has dropped from 20% to 10%. Here, too, dominant firms’ investments in their internal systems are largely responsible for the change. While some new technologies are disrupting entire industries (think of what the internet does to newspapers or DVDs), others are now suppressing the disruption of dominant firms.

How does this happen and why does it seem to affect most of the economy so much? Because these business systems address a major shortcoming of modern capitalism. Beginning in the late 19th century, innovative firms discovered that they could often produce dramatic cost savings by producing on a large scale. The exchange significantly lowered consumer prices, but there was a trade-off: for companies to reach these large volumes, products and services had to be standardized. Henry Ford famously declared that car buyers could have “any color as long as it was black.” Retail chains have achieved their efficiencies by offering a limited number of products to their thousands of stores. Finance companies offered standard mortgages and loans. As a result, the products had a limited feature set; the selection of stores was limited and slow to respond to changing demand; and many consumers were unable to obtain credit or obtained credit only on costly and unsuitable terms.

The software changes the equation by partially circumventing these limitations. This is because it reduces the costs of managing complexity. With the right data and the right organization, software allows businesses to tailor products and services to individual needs, offering greater variety or greater product features. This allows them to have the best competitors and dominate their market. Walmart stores offer much more choice than Sears or Kmart stores and respond more quickly to changing customer needs. Sears has long been the king of retail; Now Walmart and Sears are in bankruptcy. When Toyota detects new consumer trends, it quickly produces new models; smaller auto companies cannot afford the billions of dollars required to do so. Similarly, only Boeing and Airbus will be able to produce highly complex new jumbo jets. The top four credit card companies have the data and systems to achieve maximum profits and market share by effectively targeting offers to individual consumers; dominate the market.

These software-enabled platforms have allowed top firms to consolidate their dominance. They also slowed the growth of competitors, including innovative startups.

Various evidence supports the idea that initial growth has slowed significantly. One sign is how long it takes venture-backed startups to receive funding: From 2006 to 2020, the median age of a startup venture increased from 0.9 to 2.5 years. The median age of a late-stage venture increased from 6.8 to 8.1 years over the same period. among companies that Acquired, the average time from initial financing to purchase tripled from just over two years in 2000 to 6.1 years in 2021. For companies that went public, the story was similar. But the clearest evidence of the slowdown is what happens when firms become more productive.

Large firms use large-scale technologies that make it difficult for startups to grow.

A key feature of dynamic economies, which economist Joseph Schumpeter calls “creative destruction,” is that more productive firms—with better products, lower costs, or better business models—grow faster and eventually replace less productive incumbents. But after 2000, on average, firms with a given level of productivity grew only half as fast as firms with the same level of productivity grew in the 1980s and 1990s. In other words, the effect of productivity on growth is less than before. And when productive firms grow more slowly, they are less likely to “take a leap” and displace industry leaders – a hallmark of disruption. Last year, Research With my colleague Erich Denk, I directly attributed the diminishing impact of productivity growth to larger firms’ greater industry dominance and investment in software and other intangibles.

Another opinionStrongly expressed by congressional investigators at hearings and in a staff report released in 2020, he attributes the decline in economic dynamism to a different source: the weakening of the government’s antitrust policy since the 1980s. On this account, competition is reduced by allowing large firms to outrun their competitors. The acquisitions have made these firms more dominant, particularly in Big Tech, and have led to a decline in both the emergence of new technology firms and venture capital financing for early-stage firms. But in fact, the market penetration rate of new tech firms has only modestly dropped from the phenomenal rise of the dot-com boom, and early-stage venture capital funding is at record levels today, with twice as much funding as it was in 2006. and four times the deposited amount. The problem isn’t that big firms are preventing startups from entering markets or raising funds; The problem is that large firms use large-scale technologies that make it difficult for startups to grow. Moreover, large firms like Walmart and Amazon have grown mainly by adopting superior business models, not by acquiring competitors. Indeed, the purchasing rate of dominant firms has declined since 2000.

Of course, such acquisitions sometimes affect the startup environment. Some researchers defined So-called “kill zones” where Big Tech makes acquisitions to curb competition and venture capital is harder to find. But other researchers Find that beginners often respond by moving their innovative activity to a different app. Also, the prospect of being bought by a large firm often encourages people to start new ventures. Indeed, despite what happened to Nuance, the number of speech recognition and natural language processing startups entering the market has quadrupled since 2005, with 55% of them receiving venture capital investments.

The slowdown in the growth of innovative startups is not just a problem for a few thousand companies in the technology sector; The headwinds blowing against companies like Nuance are responsible for problems affecting the health of the entire economy. researchers The U.S. Census Bureau has shown that slower growth of productive firms explains much of the slowdown in overall productivity growth, a figure that measures the amount of output the economy produces per capita and serves as a rough index of economic well-being. . My own work has also shown that it plays a role in increasing economic inequality, greater social division, and diminishing government effectiveness.

What will it take to reverse the trend? Stronger antitrust enforcement may help, but changes in economic dynamism are driven by new technologies rather than mergers and acquisitions. A more fundamental problem is that the most important new technologies are proprietary and accessible only to a small number of large companies. In the past, new technologies have spread widely, either through licensing or as firms independently develop alternatives; this allowed more competition and innovation. The state sometimes assisted in this process. Bell Labs developed the transistor, but was forced by antitrust authorities to widely license the technology, creating the semiconductor industry. Similarly, IBM created the modern software industry when, in response to antitrust pressure, it began selling software separately from computer hardware.

We see similar developments today, even without government intervention. Amazon, for example, has opened up its proprietary IT infrastructure to build the cloud industry, which has strongly improved the prospects of many small startups. But the antitrust policy can be used to encourage or force larger firms to open their proprietary platforms. Relaxing restrictions on employee mobility by non-compete agreements and intellectual property rights could also encourage further diffusion of technology.

It will be difficult and time consuming to strike the right balance of policies – we do not want to reduce incentives for innovation. But the starting point is to recognize that technology is taking on a new role in today’s economy. A force that once caused disruption and competition is now used to suppress them.

James Bessen is a lecturer at Boston University Law School and author of the forthcoming book. New Goliaths: How Companies Are Using Software to Dominate Industries, Kill Innovation, and Undermine Regulationfrom which this article is adapted.