China and America dominate like never before
Twenty years ago this week the share price of a start-up run by an obsessive called Jeff Bezos had slumped by 71% over 12 months. Amazon’s near-death experience was part of the dotcom crash that exposed Silicon Valley’s hubris and, along with the $14bn fraud at Enron, shattered confidence in American business.
China, meanwhile, was struggling to privatise its
creaking state-owned firms, and there was little sign that it could create a
culture of entrepreneurship. Instead, the bright hope was in Europe, where a new single currency promised to catalyse
a giant business-friendly integrated market.
Creative
destruction (first coined by
Austrian economist Joseph Schumpeter in 1942) often makes predictions look silly, but even by these standards the
post-pandemic business world is dramatically different from what you might have
expected two decades ago. Tech firms comprise a quarter of the global stock market and the geographic mix has become strikingly lopsided.
America and, increasingly, China are ascendant,
accounting for 76 of the world’s 100 most valuable firms. Europe’s tally has
fallen from 41 in 2000 to 15 today.
This imbalance
in large part reflects American and
Chinese skill, and complacency in Europe
and elsewhere. It raises two giant questions: why has it come about? And can it
last?
In themselves, big companies are no better than small
ones. Japan Inc’s status soared in the 1980s only to collapse. Big firms can be
a sign of success but also of sloth. Saudi Aramco, the world’s
second-most-valuable firm, is not so much a $2trn symbol of vigour as of a
desert kingdom’s dangerous dependency on fossil fuels.
Even so, the right sort of giant company is a sign of
a healthy business ecology in which big, efficient
firms are created and constantly swept away by competition. It is the secret to raising long-run living
standards.
One way of capturing the dominance of America and
China is to compare their share of world output with their share of business
activity (defined as the average of their share of global stock market
capitalisation, public-offering proceeds, venture-capital funding, “unicorns”—or
larger private start-ups, and the world’s biggest 100 firms). By this yardstick,
America accounts for 24% of global gdp, but 48% of business
activity. China accounts for 18% of gdp, and 20% of
business. Other countries, with 77% of the world’s people, punch well below
their weight.
Part of the explanation is Europe’s squandered
opportunity.
Political meddling and the debt crisis in 2010-12 have
stalled the continent’s economic integration. Firms there largely failed to anticipate the shift towards the
intangible economy. Europe has no start-ups to rival Amazon or Google. But
other countries have struggled, too.
A decade ago Brazil, Mexico and India were poised to
create a large cohort of global firms. Few have emerged.
Instead, only America and China have been able to
marshal the process of creative
destruction. Of the 19 firms created in the past 25 years that are now
worth over $100bn, nine are in America and eight in China. Europe has none.
Even as mature tech giants like Apple and Alibaba try
to entrench their dominance, a new set of tech firms including Snap, PayPal,
Meituan and Pinduoduo are reaching critical mass. The pandemic has seen a burst
of energy in America and China and a boom in fundraising. Firms from the two
countries dominate the frontier of new technologies such as fintech and electric cars.
The magic formula has many ingredients. A vast home
market helps firms achieve scale quickly. Deep capital markets, networks of
venture capitalists and top universities keep the start-ups pipeline full. There is a culture that exalts
entrepreneurs. China’s tycoons boast of their “996” work ethic: 9am to 9pm,
six days a week. Elon Musk sleeps on Tesla’s factory floor.
Above all
politics supports creative destruction. America has long tolerated more disruption than cosy Europe. After 2000,
China’s rulers let entrepreneurs run riot and laid off 8m workers at state
firms.
The recent erosion of this political consensus in both
countries is one reason this dominance could prove unsustainable. Americans are
worried about national decline, as well as low wages and monopolies (roughly a
quarter of the s&p 500 index merits antitrust
scrutiny, we estimated in 2018). The Economist supports
the Biden administration’s aim to promote competition and expand the social
safety-net to protect workers hurt by disruption. But the danger is that
America continues to drift towards protectionism, industrial policy and, on the
left, punitive taxes on capital, that dampen its business vim.
In China President Xi Jinping sees big private firms
as a threat to the Communist Party’s power and social stability.
The cowing of tycoons began last year with Jack Ma,
the co-founder of Alibaba, and has since spread to the bosses of three other
big tech firms. As party officials seek to “guide” incumbent private firms in
order to achieve policy goals, such as national self-sufficiency in some
technologies, they are also more likely to protect them from freewheeling
competitors.
The more America and China intervene, the more the rest of the world should worry about
the lopsided geography of global business. In theory, the nationality of
profit-seeking firms does not matter: as long as they sell competitive products
and create jobs, who cares? But if firms are swayed by governments at home, the
calculus changes.
As globalisation unwinds, rows are already erupting
over where multinational firms produce vaccines, set digital rules and pay
taxes. European hopes of being a regulatory superpower may become a figleaf for
protectionism. Others with less clout
may erect barriers. To assert its sovereignty, India has banned Chinese
social media and hobbled American e-commerce firms. That is the worst of both
worlds, depriving local consumers of global innovations and creating barriers
that make it even harder for local firms to achieve scale.
It’s the acorns, not the oaks
It would be a tragedy if only two countries in the
world proved capable of sustaining a process of creative destruction at scale.
But it would be even worse if they
turned away from it, and other places admitted defeat and put up
barricades. The best gauge of success will be if in 20 years’ time the list of
the world’s biggest companies looks absolutely nothing like today’s.
The Economist, Jun 5th 2021