TTWENTY YEARS As of this week, the share price of a startup led by an obsessive man called Jeff Bezos has fallen 71% year over year. Amazon’s near-death experience was part of the dotcom crash that exposed the pride of Silicon Valley and, along with the $ 14 billion fraud at Enron, shattered trust in American businesses. China, meanwhile, was struggling to privatize its creaky state-owned enterprises, and there were few signs that it could create a culture of entrepreneurship. Instead, the bright hope was in Europe, where a new single currency promised to catalyze a giant, business-friendly integrated market.
Creative destruction often makes predictions silly, but even by those standards, the post-pandemic business world is radically different from what you might expect two decades ago. Tech companies make up a quarter of the global stock market, and the geographic distribution has become remarkably unbalanced. America and, increasingly, China are on the rise, accounting for 76 of the 100 most valuable companies in the world. Europe’s count has dropped from 41 in 2000 to 15 today.
This imbalance largely reflects American and Chinese skills, and complacency in Europe and elsewhere. This raises two giant questions: why did this happen? And can it last?
By themselves, big companies are no better than small ones. The status of Japan Inc skyrocketed in the 1980s only to collapse. Large companies can be a sign of success, but also of laziness. Saudi Aramco, the world’s second most valued company, is not so much a symbol of $ 2 billion vigor as a desert kingdom’s dangerous dependence on fossil fuels. Even so, the right kind of giant business is a sign of a healthy business ecology in which large, efficient companies are created and constantly swept aside by competition. This is the secret to raising the standard of living in the long run.
One way to capture the dominance of America and China is to compare their share of global output with their share of business activity (defined as the average of their share in global market capitalization, proceeds from public offerings, venture capital funding, “unicorns” – or larger private startups and the world’s top 100 companies). By this yardstick, America accounts for 24% of GDP, but 48% of commercial activity. China represents 18% of GDP, and 20% of turnover. Other countries, with 77% of the world’s population, strike well below their weight.
Part of the explanation is the opportunity wasted by Europe. Political interference and the debt crisis in 2010-12 blocked the continent’s economic integration. Companies have largely failed to anticipate the transition to the intangible economy. Europe has no startups to compete with Amazon or Google. But other countries have also struggled. Ten years ago, Brazil, Mexico and India were on the verge of creating a vast cohort of global companies. Few have emerged.
Instead, only America and China were able to organize the process of creative destruction. Of the 19 companies created over the past 25 years that are now worth more than $ 100 billion, nine are in the United States and eight are in China. Europe does not have one. Even as mature tech giants like Apple and Alibaba attempt to consolidate their dominance, a new set of tech companies including Snap, PayPal, Meituan and Pinduoduo are reaching critical mass. The pandemic has seen a surge of energy in America and China and a fundraising boom. Companies from both countries dominate the frontier of new technologies such as fintech and electric cars.
The magic formula contains many ingredients. A large internal market helps businesses grow quickly. Deep capital markets, venture capitalist networks, and top universities keep the startup pipeline full. There is a culture that exalts entrepreneurs. Chinese tycoons brag about their “996” work ethic: 9:00 am to 9:00 pm, six days a week. Elon Musk sleeps in the Tesla factory. Above all, politics supports creative destruction. America has long tolerated more disturbance than comfortable Europe. After 2000, Chinese leaders let entrepreneurs run wild and laid off 8 million employees in state-owned enterprises.
The recent erosion of this political consensus in the two countries is one of the reasons why this domination could prove to be unsustainable. Americans worry about national decline, as well as low wages and monopolies (about a quarter of S&P 500 deserves an antitrust review, we estimated in 2018). The Economist supports the Biden administration’s goal of promoting competition and extending the social safety net to protect workers affected by disruption. But the danger is that America will continue to drift towards protectionism, industrial policy and, on the left, punitive taxes on capital, which hamper its commercial dynamism.
In China, President Xi Jinping sees large private companies as a threat to the power and social stability of the Communist Party. The fear of tycoons started last year with Jack Ma, Alibaba’s co-founder, and has since spread to the bosses of three other big tech companies. While party officials seek to “guide” incumbent private companies to achieve political goals, such as national self-sufficiency in certain technologies, they are also more likely to shield them from free-wheeling competitors.
The more America and China intervene, the more the rest of the world should worry about the unbalanced geography of world trade. In theory, the nationality of for-profit companies doesn’t matter: as long as they sell competitive products and create jobs, whatever? But if companies are influenced by national governments, the math changes.
As globalization unfolds, feuds are already erupting over where multinational companies produce vaccines, set digital rules and pay taxes. Europe’s hopes of being a regulatory superpower can turn into a fig leaf for protectionism. Others with less influence may erect barriers. To assert its sovereignty, India has banned Chinese social media and hampered US e-commerce companies. It’s the worst of both worlds, depriving local consumers of global innovations and creating barriers that make it even harder for local businesses to grow.
It’s the acorns, not the oaks
It would be a tragedy if only two countries in the world were able to sustain a process of large-scale creative destruction. But it would be even worse if they turned away from it, and other places admitted defeat and put up barricades. The best guarantee of success will be if, in 20 years, the list of the largest companies in the world does not resemble the one today. ■
This article appeared in the Leaders section of the print edition under the title “Geopolitics and business”