Industry concentration is on the rise and formation of new companies is on the decline: whither entrepreneurs, innovation and IP?

Entrepreneurship is not synonymous with innovation, and innovation is not synonymous with intellectual property. Still, it is fair to say that significant swathes of the IP community have expressed the view that it prefers more, rather than less, entrepreneurship and innovation, and that it is good for business. The upshot is that, for several decades, IP has tied its narrative wagon to entrepreneurship and innovation, such that when storm clouds begin to hover over the state of entrepreneurship and innovation, it can be expected that concerns about the impact of these trends on IP will increase apace.

A particularly instructive report discussing the state of entrepreneurship and innovation in the U.S. was recently published by the Brookings Institution, “The state of competition and dynamism: Facts about concentration, start-ups, and related policies”. At only 40 pages, the entire report is reader-accessible. This Kat has chosen to set forth the major factual assertions made in the report together with a few Kat comments, with the hope that interested Kat readers will dig down more deeply into the report’s findings and discussion.

So here are the main factual points made in the report--
1. Firm concentration is rising, particularly in retail and finance.

2. Concentration is high in markets with large returns to scale and network effects.

3. Mergers and acquisitions have become more common.

4. Common ownership may increase effective market concentration.

5. The investment rate relative to net operating surplus has fallen by more than one-third since the early 1960s.

6. Many firms have substantial power in labor markets.

7. Employer concentration appears to be high in many local labor markets.

8. Fewer mergers are being blocked when at least five competitors would remain.

9. Start-up rates are declining across all sectors.

10. The employment share of young firms has decreased by more than one-third since 1987.

11. Businesses are taking longer to form, while business applications have declined.

12. The entrepreneurship rate has fallen by almost half for workers with a bachelor’s degree.

13. State subsidies to businesses have tripled since 1990.

14. Occupational licensing is common and associated with diminished worker mobility.

15. Health-care licensure rules vary in ways that matter for competition and mobility.
The two overarching concerns expressed in the report are increasing industry concentration and the decline in the formation of companies. On one level, these two factors would seem to feed off each other. Greater market concentration tends to drive out competing companies while increasing industry concentration makes it less likely that new firms will be established.

At the more micro level, this Kat found point number 12 in the report—" The entrepreneurship rate has fallen by almost half for workers with a bachelor’s degree”—unexpected, indeed, bordering on astonishing. Every week, it seems, the creation of a new program on innovation and entrepreneurship is being announced in some institution--business schools, law schools, and others. However, college graduates still prefer the security of a job in an established company (even better when that the company has a significant position in that industry, and even better when that industry is concentrated). The efficacy of higher education programs intended to incentivize students to consider the route of entrepreneurship would seem to be in doubt, to the extent that one can ask whether these programs are worthwhile from a cost-benefit perspective.

It also creates a certain unease from the vantage of IP. IP protection is an uncomfortable legal beast, because it confers on the owner of the right exclusive, indeed, exclusionary legal power, at least for a fixed period of time. The IP community has pushed back on the claim that IP may be impeding competition with the argument that it is an effective way to encourage new entrants to challenge the industry incumbents. But when IP efforts are directed more and more to shoring up the position of the incumbents against the challenge from a shrinking pool of potential new entrants, the competitive contribution of IP rights in the service of entrepreneurship and innovation becomes more problematic. 

On the other hand, when all is said and done, do I (or should I) care whether I am proffering my IP services to the incumbent in a concentrated industry rather than to a potentially innovative start-up, especially when such new entrants are anyway increasingly fewer in number?

By Neil Wilkof

Picture on upper right by Andrew Hecker, who has released it into the public domain.
Picture on lower left by Wilson44691 and is licensed under the Creative Commons Attribution-Share Alike 3.0 license.

Industry concentration is on the rise and formation of new companies is on the decline: whither entrepreneurs, innovation and IP? Industry concentration is on the rise and formation of new companies is on the decline: whither entrepreneurs, innovation and IP? Reviewed by Neil Wilkof on Monday, June 25, 2018 Rating: 5

2 comments:

Aloys Hüttermann said...

Dear Neil,

thank you for this very interesting post - however, since I personally have an IP definition other than most (cf. here: http://ipkitten.blogspot.com/2018/02/can-wenzhou-and-cigarette-lighters-tell.html) I would see this not so much of a problem.

Actually IP rights is something that becomes interesting for many companies when their business field as well as their personal performance is not skyrocketing anymore. As Nathan Myhrwold put it "When you grow 30% per year you dont need patents" - you may disagree with a lot with things that he does, but there he is right. It is no wonder that companies like Microsoft or Apple started filing patents on a broad scale when they had their first slump in growth (not that they were not growing, only not as fast as before).

That concentration is large when there are scale and network effects is not suprising - actually the contrary would be. Here competition law and decision of competition regulators surely were a bit outdated - Facebook should never have been allowed to buy either Instragram or WhatsApp. That at least in Europe the regulators take a closer look at this sector is a good sign and may save the IT sector from becoming a closed shop. It may also save democracy, but this is another issue.

Personally I also disagree that entrepeneurship is needed the more the better, there also can be too many startups. It is also a bit insulting to assume that companies which have been there for a while cannot innovate anymore - at least in Germany, where I live, many well-established companies have proven that they can.

Last I do not share the "moral aspect" that you bring up, as if it was somewhat of a crime to work for the big shots in a certain field.

Finally it seems to me as it would be too much of a burden to demand from IP that it helps smaller companies rather than bigger ones. Thats what direct subsidies (or tax incentives) or "incubators" etc. are for.

However, I would like to thank you for bringing this topic up, such discussions are definitely needed in a field like IP. Thank you!

Anonymous said...

Neil, One factor to keep in mind is the drop in number of startups coming out of the university sector. It would be worth considering whether this is because the founders don’t feel the need to finish the programs. Or even to start them, necessarily. This is the Peter Thiel effect.

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