Corporate Power in a Global Economy Ch 1

Corporate Power in a Global Economy 1. INTRODUCTION Large corporations are economic, political, environmental, and cultural forces that are unavoidable in today’s globalized world. Large corporations have an impact on the lives of billions of people every day, often in complex and imperceptible ways. Consider a consumer in the United States who purchases a pint of Ben & Jerry’s ice cream. To many people, Ben & Jerry’s represents the antithesis of “big business.” In contrast to large firms sometimes criticized for their focus on growth and profit maximization, Ben & Jerry’s is well known for its support of environmental and social causes, its involvement in local communities, and its fair labor practices. For example, the company has set a goal to obtain 100 percent of its energy from renewable sources by 20251 and advocates for campaign finance reform, LGBTQ+ rights, and fair trade. 2 But what the purchaser of the ice cream may not know is that Ben & Jerry’s is actually owned by one of the largest consumer goods companies in the world. In 2000, Ben & Jerry’s was purchased in a semi-hostile takeover by Unilever,3 a company headquartered in London. No longer an independent company, Ben & Jerry’s is now one of more than 400 brands owned by Unilever, including Hellmann’s mayonnaise, Knorr sauces, Axe personal care products, Vaseline, and Dove soap. 4 Operating in over 190 countries, 3.4 billion people use Unilever brands every day. Unilever’s annual sales of around $62 billion made it number 205 on the 2022 list of the largest corporations in the world ranked by annual revenues, with Ben and Jerry’s accounting for less than one percent of its revenues. 5 Unilever employs about 150,000 people worldwide, including the 1,000 or so who work for Ben & Jerry’s. The acquisition of Ben & Jerry’s by Unilever is but one example of the growth and increasing globalization of modern corporations. The growth of these corporations is typically measured in economic terms, using metrics such as profits, assets, number of employees, and stock prices. However, the impact of global corporations extends well beyond the economic realm. The production decisions of large firms have significant environmental implications at the national and global level. Corporations exert political influence to obtain subsidies, reduce their tax burdens, and shape public policy. Corporate policies on working conditions, benefits, and wages affect the quality of life of billions of people. Some people perceive the ascendancy of global corporations as a positive force, bringing economic growth, jobs, lower prices, and quality products to an expanding share of the world’s population. Others view large firms as exploiting workers, dominating the public During the takeover battle, an attempt was made by Ben & Jerry’s co-founder Ben Cohen to arrange the purchase of Ben & Jerry’s by a socially-responsible group of investors. The board of Ben & Jerry’s appeared willing to accept this offer, even though the price was less than that being offered by Unilever. But Unilever further increased their price and the board felt it had no other choice than to accept the offer or face lawsuits by stockholders (Kelly, 2003). 3 5 Fortune, 2023. policy process, damaging the natural environment, and degrading cultural values. Despite these differing views, one thing is for certain—global corporations are an inescapable presence in the modern world and will be so for the foreseeable future. The relevant issue is not whether corporations should play an important role in our economy and our society. Instead, we should consider how to ensure that the behavior of large corporations aligns with the broader goals of society, including both economic and non-economic goals. This module presents an overview of modern multinational corporations (MNCs). We first discuss MNCs in traditional economic terms, asking such questions as: • How many multinationals exist and where are they located? • How can we rank the world’s largest firms? • Are the world’s largest companies becoming larger over time? • What factors explain the recent growth of MNCs? We then turn to a broader perspective beyond economic terms, examining issues such as: • How do multinational corporations exert power in the political arena and have they become more powerful over time? • Have corporations taken voluntary steps to improve their social and environmental performance? The module concludes with a discussion of how the behavior of corporations can be affected by regulations at the national and international level. In the traditional economic view, corporations are entities that operate most efficiently when they aim to maximize profits. But what is efficient for a corporation or even an economy may not be what is most desirable from a broader social and environmental perspective. Ideally, all those impacted by the decisions of multinationals should be given an acknowledged voice through existing or new institutional arrangements. Realizing the full potential of MNCs to serve the welfare of society will require a mixture of voluntary initiatives, market forces, and government regulations. 2. THE ECONOMICS OF MULTINATIONAL CORPORATIONS The terms “multinational corporation,” “transnational corporation,” and “global corporation” are often used interchangeably. Similarly, terms such as “corporation,” “company,” and “firm” are used interchangeably in this module. A multinational corporation is defined here as a firm that owns and operates subsidiaries in more than one country. While a MNC does not necessarily have to be a large firm, the world’s largest firms are almost all generally MNCs. CORPORATE POWER IN A GLOBAL ECONOMY According to the United Nations Conference on Trade and Development (UNCTAD), there are over 80,000 MNCs operating worldwide. 6 As of 2022, there were 78 corporations with annual revenues of at least $100 billion and 1,084 firms with revenues between $10 and $100 billion.7 Considering the world’s largest 2,000 corporations as ranked by Forbes, generally with annual revenues over $1 billion, the countries with the most large corporations are: the United States (595 companies), China (297), Japan (195), South Korea (65), and Canada (58). About 74 percent of the world’s largest corporations are located in just 10 countries. MNCs are dispersed across numerous industries. The industry with the largest share of the world’s 2000 largest corporations is banking (15 percent), followed by other financial corporations (7 percent), construction (6 percent), materials (6 percent), and oil and gas (5 percent). 2.1. Ranking the World’s Largest Corporations The world’s largest MNCs can be ranked using various metrics. Tables 1a and 1b present rankings using four of the most common metrics: revenues, profits, assets, and market capitalization (company’s value based on its stock price). As might be expected, there is some overlap across different metrics. Of the top 20 firms ranked by revenues, 8 are among the largest by profits and 9 are among the largest by market capitalization. The ranking based on corporate assets shows the least overlap with the other rankings as it is comprised exclusively of banks and other financial corporations. The world’s 2000 largest firms had combined revenues of about $48 trillion in 2022. This equates to sales of over $6,050 for every individual on the planet. The world’s largest firm in 2022, by revenues, was Walmart with sales of $573 billion. The list of the world’s 20 largest corporations by revenues includes five oil and gas companies, four technology companies, and three retailers. Saudi Aramco, an oil and gas company headquartered in Saudi Arabia, is one of the top three firms by revenues, profits, and assets. A fifth metric to rank the world’s largest corporations is employment, shown in Table 2. The world’s two largest corporations by revenues, Walmart and Amazon, are also the two largest employers. While several other large employers also appear in the rankings on Tables 1a and 1b, most of the world’s largest employers are not among the top 20 companies by any of the metrics in Tables 1a and 1b. 6 OECD, 2018. Contreras and Murphy (2022). The Forbes Global 2000 list includes some corporations that only operate within their domestic markets. However, the vast majority of the Global 2000 companies are MNCs. 7 Table 1a. Ranking the World’s Largest Corporations by Revenues and Profits Ranked by Revenues Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Ranked by Profits 2022 Revenues ($ bil.) Firm Walmart Amazon Saudi Aramco Sinopec PetroChina Apple UnitedHealth Group Volkswagen CVS Health Toyota Motor ExxonMobil Berkshire Hathaway Shell Alphabet McKesson Samsung Group AmerisourceBergen Hon Hai Precision (Foxconn) Costco Wholesale ICBC 573 470 400 385 380 379 298 296 292 282 281 276 262 257 257 244 221 215 210 208 2022 Profits ($ bil.) Firm Saudi Aramco Apple Berkshire Hathaway Alphabet Microsoft ICBC China Construction Bank JPMorgan Chase Meta Platforms Agricultural Bank of China Tencent Holdings Samsung Group Bank of China Amazon Bank of America Vivendi Toyota Motor Mercedes-Benz Group Gazprom Novartis 105 101 90 76 71 54 47 42 39 37 35 34 34 33 31 29 28 27 25 24 Table 1b. Ranking the World’s Largest Corporations by Assets and Market Capitalization Ranked by Assets Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Firm ICBC China Construction Bank Agricultural Bank of China Fannie Mae Bank of China JPMorgan Chase Bank of America Mitsubishi UFJ Financial Freddie Mac BNP Paribas HSBC Holdings Japan Post Holdings Citigroup Credit Agricole Sumitomo Mitsui Financial Postal Savings Bank of China Mizuho Financial Wells Fargo Barclays Bank of Communications 2022 Assets ($ bil.) 5.5 4.7 4.6 4.2 4.2 4.0 3.2 3.2 3.0 3.0 3.0 2.6 2.4 2.4 2.2 2.0 2.0 1.9 1.9 1.8 Ranked by Market Capitalization 2022 Market Firm Capitalization ($ bil.) Apple 2,640 Saudi Aramco 2,292 Microsoft 2,054 Alphabet 1,582 Amazon 1,468 Tesla 1,039 Berkshire Hathaway 741 Meta Platforms 500 Taiwan Semiconductor 495 UnitedHealth Group 490 NVIDA 490 Johnson & Johnson 477 Visa 436 Walmart 432 Tencent Holdings 414 Proctor & Gamble 387 JPMorgan Chase 374 Samsung Group 367 Nestlé 360 ExxonMobil 360 Source: Forbes, The Global 2000. Table 2. The World’s Largest Corporate Employers, 2022 Rank Corporation Number of Employees 1 Walmart 2,300,000 2 Amazon 1,544,000 3 Hon Hai Precision (Foxconn) 827,000 4 Accenture 738,000 5 Volkswagen 642,000 6 Tata Consultancy Services 616,000 7 Deutsche Post 584,000 8 United Parcel Service 500,000 8 Kroger 500,000 8 Home Depot 500,000 11 Gazprom 468,000 12 Agricultural Bank of China 455,000 13 Target 450,000 14 China Mobile 449,000 15 ICBC 425,000 16 Teleperformance 420,000 17 PetroChina 417,000 18 Ahold Delhaize 413,000 19 Sodexo 412,000 20 Starbucks 402,000 Source: Statistica.com, “Leading 500 Fortune companies based on number of employees in 2022,” January 2023. 2.2. The Economic Scale of the World’s Largest Corporations How large are the world’s largest corporations when compared to countries or the global economy? We must realize that such comparisons need to be made carefully. Take, for example, a 2018 comparison which concluded that “157 of top 200 economic entities by revenue are corporations not countries.” 8 The analysis further noted that Walmart, Apple, and Shell “accrued more wealth” than countries such as Russia, Belgium, and Sweden. While this seems to imply that the world is dominated not by countries, but by corporations, the metrics aren’t quite comparable. This example compares the annual revenues of corporations to the annual government revenues of countries. A government is not an economic entity like a corporation—its activities go well beyond the economic realm to include a legal and judicial system, regulatory agencies, health and education services, and so on. Further, the wealth of a country is not directly comparable to corporate assets, as it also includes publicly-owned renewable and nonrenewable natural resources.9 8 9 Global Justice Now, 2018. See, for example, World Bank, 2021. Another potentially misleading comparison between corporations and countries is to compare corporate revenues to the gross domestic product (GDP) of nations. A 2000 report making this comparison found that “of the 100 largest economies in the world, 51 are corporations.”10 The report also notes that the sales of the world’s 200 largest corporations were equivalent to 27.5 percent of world economic activity. But revenue data are not directly comparable to GDP data. National income accounts are kept in terms of value added, which is measured for firms as their sales less the amount paid to other firms for inputs. For example, the value added for an automobile company would be its revenues minus its costs for materials, such as steel, electronics, and other parts. Thus, it is not accurate to suggest that over one-quarter of world economic activity is attributed to the world’s 200 largest corporations. According to data published by the United Nations, the world’s 100 largest firms directly accounted for 4.3 percent of global economic activity in 2000 based on value added.11 So, in a direct comparison using value added, the world’s 200 largest corporations in 2000 were responsible for perhaps 6 percent of global economic activity, not 27.5 percent. A final misleading example is a 2021 analysis that used market capitalization data to assert that the world’s 50 largest companies were “proportional to 27.6% of global GDP in 2020, up from just 4.7% of global GDP in 1990.”12 But market capitalization is based on the total market value of a company’s stock, which is essentially unrelated to GDP data. Again, the inference that a relatively small number of large corporations are responsible for over 25 percent of global economic activity is misleading. Unfortunately, there are few direct comparisons between the value added of the world’s largest corporations and the world economy. As mentioned above, the UN estimated that the world’s 100 largest companies were responsible for 4.3 percent of world economic output in 2000. More recently, in 2018 the OECD calculated that all the world’s MNCs, over 80,000 companies, were responsible for 28 percent of global GDP. 13 However, the OECD did not further break down value added for just the world’s largest corporations. A 2021 analysis looked at the value-added contribution of large corporations, defined as those with at least $1 billion in global revenues, to the OECD economies. 14 It found that these approximately 5,000 large corporations were responsible for about 28 percent of the GDP among the OECD economies.15 Note that when this analysis is compared to the 2018 OECD analysis mentioned above, it suggests that MNCs overall comprise a greater share of economic activity in high-income countries than in the world as a whole. The very largest corporations, those with annual revenues greater than $100 billion (about 50 companies), contributed about 4 percent of the OECD total GDP. Further, these largest firms contribute less intensively to GDP than firms with revenues between $1 and $100 billion. 10 Anderson and Cavanaugh, 2000. UNCTAD, 2002 12 Wallach, 2021. 13 OECD, 2018. 15 Manyika et al., 2021. 11 The statistics presented in this section indicate that a small number of very large corporations do not dominate the global economy, measured as a share of GDP using valueadded. Still, the economic impact of large corporations is significant. Approximately 80,000 MNCs are responsible for about 25 to 30 percent of world economic activity. The world’s 100 largest companies are responsible for about 5 percent of global GDP. Next, we consider whether the economic significance of large corporations is increasing. 3. THE GROWTH OF MULTINATIONAL CORPORATIONS Modern large corporations are private entities under the control of corporate officers and, ultimately, shareholders who own direct stakes in the firm. The profits of a corporation are distributed to its shareholders in proportion to the number of shares they own.16 A primary objective of corporations is to make a profit for their shareholders, with other objectives generally being subordinate. Most of us take for granted this current perspective of corporations as entities seeking profits under the primary control of shareholders and corporate executives, with a limited role for governments and consumers. However, some historical context of the development of corporations in the United States illustrates that this perception is relatively recent and clashes with earlier views. 3.1. Corporate History in the United States In early America individual states chartered corporations as public, rather than private, entities.17 Up until the Civil War, American corporations were fully accountable to the public to ensure that they acted in a manner that served the public good. Corporate charters could be revoked for failing to serve the public interest and were valid only for a certain period of time. For example, in 1831 a Delaware constitutional amendment specified that all corporations were limited to a twenty-year life span. The modern definition of corporations as private entities originated in the decades following the Civil War. In 1886, the U.S. Supreme Court ruled that corporations were entitled to the same constitutional protections under the 14th Amendment as individuals. Among its numerous provisions the Amendment, ratified in 1868, grants equal protection under the law to all people, primarily intended to establish the rights of recently freed slaves. In ruling that this provision applied to corporations as well, the Court effectively granted corporations with the rights of “personhood”. Corporations were then held accountable to the public only in the sense that they must operate within the confines of the law. The power of corporations grew considerably around the end of the 19th century. State laws limiting the size of corporations were evaded by the formation of “trusts” feigning independent operation, such as those formed by John D. Rockefeller’s Standard Oil. Although public opposition to the trusts mounted, large corporations were able to grow 16 The distributed annual profits of a firm are dividends. A firm may decide to retain some of its profits to finance investments or for other reasons. 17 Information on the history of corporations in America is drawn from Derber (1998), Korten (2001), and Hertz (2001). larger by pitting states against each other. In 1889, New Jersey passed the first law allowing one corporation to own equity in others. This initiated a period in which states including New Jersey, New York, Delaware, and others battled to attract large corporations by removing restrictions such as limitations on corporate size and mergers. The most permissive state remained New Jersey; by 1900, 95 percent of the nation’s large corporations had moved their headquarters to that state. A strong populist movement arose in response to growing corporate power. Antitrust laws, that aim to control corporate power, were eventually passed in 1890 and in 1914, leading to the breakup of several large corporations, including Standard Oil. During the 20th century, the resolve to enforce anti-trust regulation waxed and waned. Corporate power was kept in check following the Great Depression as the federal government reasserted its claim that corporations should exist to serve the public good. Keynesian economics, which often justified an active government role in economic policy, became the dominant macroeconomic paradigm. The power of corporations was also kept in check by a strong labor union movement that peaked in the 1950s. The tide again shifted in the 1970s as Keynesian economic policies failed to control the twin ills of high unemployment and high inflation. Conservative politicians, particularly Ronald Reagan in the U.S. and Margaret Thatcher in England, fostered the growth of large corporations by relaxing enforcement of antitrust laws, reducing corporate tax rates, and ushering in a wave of deregulation. As a result, corporate mergers and acquisitions increased dramatically in the 1980s and especially 1990s, reaching levels five to ten times higher than in the 1970s.18 The dominant role of free-market capitalism in the global economy was secured with the fall of the Soviet Union and other Eastern Bloc countries near the end of the 20th century. American businesses such as Coke, McDonalds, and Levis quickly expanded into new markets in previously-Communist countries. A “Washington consensus” emerged that aligned major economic institutions, such as the World Bank and World Trade Organization, with the ideology of free trade and privatization. This consensus generated a fertile field for the world’s largest corporations. Numerous trade barriers have been removed through international agreements such as the World Trade Organization agreements, the Trans-Pacific Partnership, and the North American Free Trade Agreement (replaced by the United States-Mexico-Canada Agreement, which took effect in 2020). Thus, modern corporations are able to take advantage of preferential treatment by nations, reminiscent of the battle between U.S. states to attract businesses 100 years ago, further discussed below. Corporate power was further enhanced in the United States with the 2010 Supreme Court ruling in the controversial Citizens United case. This ruling stated that corporations could spend an unlimited amount of money on campaign advertising as long as they aren’t directly coordinating with a candidate or political party. For more on the Citizens United case, see Box 1. Most recently, in 2017 the Tax Cuts and Jobs Act reduced the top federal 18 Holmstrom and Kaplan, 2001. corporate tax rate in the U.S. from 35 to 21 percent, further strengthening corporate power. We’ll discuss corporate taxation in more detail later in the module. BOX 1: THE U.S. SUPREME COURT’S 2010 CITIZENS UNITED VS. FEDERAL ELECTION COMMISION RULING In 2008 Citizens United, a conservative nonprofit, created a film highly critical of thenpresidential candidate Hillary Clinton. 19 However, airing the film would have been a violation of the 2002 Bipartisan Campaign Reform Bill (BCRB), which prohibited corporations, nonprofits, and labor unions from making election-related communications immediately prior to elections and from advocating for the election or defeat of a particular candidate at any time. Citizens United sued the government, asserting that the BCRB prohibition violated their free speech protection under the First Amendment. In a 5-4 decision the Supreme Court ruled in favor of Citizens United, essentially allowing corporations and interest groups unlimited expenditures to influence elections as long as they don’t directly coordinate with candidates or political parties. Hailed as a victory for corporate speech, President Barack Obama responded that the ruling “gives the special interests and their lobbyists even more power in Washington.” In a dissenting opinion, Justice John Paul Stevens wrote that ruling was “a rejection of the common sense of the American people, who have recognized a need to prevent corporations from undermining self-government.” The Citizens United ruling led to the organization of “super PACs”—independent political action committees that can raise unlimited funds for political goals but do not directly contribute to candidates. Money raised by super PACs has increased dramatically in recent election years, as shown in Figure 1 (note that fundraising increases during presidential election years). As of the 2022 election cycle, there were about 2,500 super PACs, with 61 percent classified as having a conservative viewpoint and 34 percent with a liberal viewpoint.20 While super PACs must disclose their donors, they can accept contributions from “dark money” nonprofit groups that are not required to disclose who their donors are. Consequently, corporations, wealthy individuals, and even foreign entities can channel money through dark money groups to influence American elections. Citizens United could be reversed through a constitutional amendment, though that is very unlikely to happen. However, according to a 2018 survey, three-quarters of Americans (66 percent of Republicans and 85 percent of Democrats) support reversing the decision. 21 Other options to reduce the influence of the Citizens United ruling include public funding of elections and legislation to require corporations and other donors to report all contributions that are funneled to super PACs. 19 Citizens United vs. FEC, Wikipedia, https://en.wikipedia.org/wiki/Citizens_United_v._FEC. OpenSecrets.org, “Outside Spending by Super PACs”. 21 Balcerzak, 2018. 20 Figure 1. Money Raised by Super PACs, by Election Cycle 4,000 3,500 Million Dollars 3,000 2,500 2,000 1,500 1,000 500 0 2010 2012 2014 2016 2018 2020 2022 Election Year Source: opensecrets.org, “Outside Spending, by Super PACs”online database. 3.2. Traditional Explanations of the Growth of Large Corporations Most of the world’s largest corporations started as surprisingly small enterprises. Unilever began as a soapmaking company started by two brothers in 1885. Ford Motor Company began in a small factory in Detroit in 1903. Wal-Mart opened with a single store in Arkansas in 1962. How have some firms become so large? The two traditional economic explanations for the growth of firms have been economies of scale and economies of scope. Economies of scale arise when a firm lowers its per-unit production costs of a particular product by producing in greater quantity. Division of labor through specialization is one reason per-unit costs decrease as production increases. Adam Smith described in the 18th century how a pin factory can increase its output significantly if each worker repeatedly performs a specific task in the production process rather than having each worker independently make complete pins from scratch. In modern MNCs, economies of scale exist not only because of division of labor but by combining, and often replacing, human labor with mechanized production. Investment in large-scale production equipment and the latest technologies is generally very expensive. These may be affordable only to large firms with substantial financial reserves or access to credit. Thus, firms that are already large can gain a further advantage over smaller competitors. For some products, per-unit costs continue to fall as firms become larger. In such cases, we would expect that a few very large firms would eventually come to dominate the market. This has occurred in industries such as automobile production and petroleum exploration and refining—notice the presence of several such firms in Table 1. We should realize that large corporations have not arisen in all markets. In some industries, the minimum efficient scale, the level of production where average per-unit costs tend to reach their minimum level, is relatively small. This generally occurs for services that are provided in-person directly by the supplier, such as home and auto repair services, childcare, and education.22 Small firms may actually have an advantage over large firms in many instances. While large firms such as McDonald’s and Burger King have come to dominate the low-price restaurant market, brand name franchises and chains are generally absent when it comes to upscale restaurants. One reason is that many customers of higher-priced restaurants seek a special “local” experience that a franchise could not offer. Economies of scope arise when a firm can lower per-unit costs by expanding the variety of products it makes. Typically, a firm will expand its product line by making goods similar to those already being produced, which allows the firm to take advantage of existing marketing networks or production facilities. For example, a cell phone service provider may expand into providing Internet services or an ice cream producer may add yogurt to its product line (as was done by Ben & Jerry’s). Firms may also achieve economies of scope through the production of unrelated products. An example is the conglomerate General Electric, which produces such diverse goods as aircraft engines, home appliances, medical equipment, and wind power turbines, as well as providing financial services to businesses and consumers. Conglomerates can achieve economies of scope through managerial efficiency, financing flexibility, political power, or the centralization of research and marketing. 3.3. The International Mobility of Multinational Corporations While these conventional factors explain the growth of many large corporations, the most notable competitive advantage of MNCs in recent years is international mobility—the ability of a firm to transfer resources across national borders. In the decades following World War II, the “internationalization” of corporations, primarily American, took place through the establishment of foreign affiliates intended to serve the markets in which they were located. For example, Ford established Ford of Europe in 1967 to produce vehicles for European consumers. With falling trade barriers and lower transportation costs, firms increasingly look abroad not only for new markets to sell their products but also for low-cost production opportunities. MNCs that take advantage of cheap foreign labor gain an advantage over less mobile firms that remain dependent on higher-cost domestic labor. Low-cost foreign 22 An exception, of course, is the provision of education through electronic media. At least currently, education is primarily provided through in-person contact. labor is a major factor explaining the growth of multinationals in such sectors as electronics and apparel. Savings from low-cost foreign production are increasingly achieved through contracts with external suppliers, a trend commonly referred to as outsourcing. The outsourcing of production jobs to foreign countries is perceived by many to be a primary reason for the loss of traditional “blue collar” jobs in industrial countries. Relying on subcontractors offers MNCs several advantages. First, with short-term contracts and no large capital investments firms can quickly shift to contracts in other countries if even lower costs are possible. Second, corporations can avoid some responsibility for instituting fair labor practices and meeting environmental standards by claiming these are at least jointly the duty of the subcontractors. Consider that 80 to 90 percent of a typical consumer goods company’s environmental impacts are generated through its subcontractors, not its direct operations.23 4. ASSESSING THE POWER OF LARGE CORPORATIONS The most difficult problem in assessing the economic and political power of large corporations, and determining whether this power is increasing, is that a commonlyaccepted metric measuring corporate power does not exist. Several metrics may be used to measure corporate power and track changes over time, but different metrics yield different conclusions. In this section, we present several of the most common metrics of corporate power and discuss their implications. 4.1. The Relative Economic Scale of Multinational Corporations By some, but not all, measures the economic magnitude of the world’s largest firms is increasing relative to the rest of the global economy. First, we compare the combined revenues of the world’s 25 largest corporations to total global economic production, known as gross world product (GWP), over time. As we see in Figure 2, by this metric the world’s very largest firms are not clearly increasing in size relative to the global economy. The revenues of the world’s largest firms relative to global production remained constant from 1995 to 2005, fell in response to the global financial crisis in 2010, increased significantly in 2015, but has fallen since then. In other words, there is no clear trend regarding the relative economic magnitude of the world’s 25 largest firms. But realize that the comparison in Figure 2 is not a direct comparison based on value added. As discussed previously, a 2021 analysis directly compares the contribution of large firms (with annual revenues in excess of $1 billion) in the OECD, based on value added, to the total OECD economy.24 The authors conclude that “the share of overall economic activity attributable to large corporations has grown in the past 25 years.” They calculate that large firms were responsible for 17 percent of the OECD’s economy in 1995. By 2018, large 23 24 Bové and Swartz, 2016. Manyika et al., 2021. firms were responsible for 27 percent of the OECD’s economy—a significant increase. However, this analysis may be overstating the growth of large corporations. Solely due to price inflation, more firms exceeded the $1 billion revenue threshold in 2018 than in 1995. Consider that in nominal terms (i.e., unadjusted for inflation) economic production in the OECD more than doubled between 1995 and 2018. Thus, assuming there were more “large” firms by revenue in 2018 as a result of inflation, this would not necessarily indicate an increasing share of total economic production can be attributed to large firms. Figure 2. Combine Revenues of the World’s 25 Largest Firms Relative to Global Economic Production, 1995-202225 Combined Revenues as a Percentage of GWP 8.5 8.0 7.5 7.0 6.5 6.0 1995 2000 2005 2010 2015 2020 2022 Year Sources: Firm revenues from various editions of the Fortune Global 500. Gross world product from the World Bank’s World Development Indicators database. A 2023 comparison used market capitalization to conclude that the very largest firms in the United States are growing relative to other firms.26 The author notes that the top five firms comprise more than 20 percent of the entire value of the stock market—the highest share since the 1960s and more than double the percentage from the early 2010s. Further, the top five companies are larger than the next five by the largest margin since the 1980s. Growth at the very top is attributed to firms’ ability to capture the benefits of government recovery efforts, especially during the COVID-19 pandemic. Note that this figure does not indicate that the world’s 25 largest firms contribute about 8 percent to the global economic production, as discussed above. Instead, the chart merely presents a possible metric to measure the relative size of the world’s 25 largest companies to the world economy. 26 Sharma, 2023. 25 CORPORATE POWER IN A GLOBAL ECONOMY Another 2023 analysis supports the conclusion of increasing corporate concentration among the largest firms in the United States. 27 The paper tracked the concentration of three metrics among U.S. corporations over several decades: revenues, profits, and assets. The authors compared the share of these metrics attributed to the largest 1 and 0.1 percent of firms. All metrics displayed increasing concentration. For example, from the 1930s to the 1950s the largest one percent of firms owned about 73 percent of all corporate assets. By the 2010s, this had risen to 97 percent. In the 1960s, the largest one percent of firms captured about 60 percent of all corporate profits, which had grown to about 80 percent in 2020. Similar growth in concentration for all three metrics was found looking at just the largest 0.1 percent of firms. Several hypotheses are explored to explain the increasing concentration, including economies of scale, globalization, and regulatory changes. The authors conclude that economies of scale is the explanation most consistent with the observed data, but that their “results do not rule out that some large firms may have expanded their territories by unduly exerting power and influence” and “that regulatory policies or business environments have been more favorable to larger companies in recent years.” 4.2. Corporate Price Markups A 2019 analysis by the International Monetary Fund defined corporate power as a firm’s ability to increase their price markup—the difference between a product’s selling price and its production cost, expressed as a ratio. 28 Thus, a higher price markup equates to higher profits per unit sold. The authors looked at data from over one million companies in 27 high- and middle-income countries from 2000 to 2015. The three main conclusions from their analysis are: 1. Corporate market power increased “moderately” in high-income countries, with companies’ average markups increasing by 8 percent. The growth of corporate power in middle-income countries was less evident, with markups increasing by only 2 percent. 2. The increase in corporate power was “fairly widespread across advanced economies and industries” but particularly concentrated in nonmanufacturing industries and industries using digital technologies. 3. Rising markups were associated with a slight decline in business investment, leading to slower macroeconomic growth. While the negative macroeconomic effects of corporate power have been minimal so far, the authors warn that “further increases in the market power of these already-powerful firms could weaken investment, deter innovation, reduce labor income shares, and make it more difficult for monetary policy to stabilize output.” 27 28 Kwon et al., 2023. Díez et al., 2019. The authors assert that policymakers should act to ensure a level playing field for existing and new companies. Their policy recommendations include reducing the barriers to entry for new firms, antitrust regulations, and reforming corporate taxes. 4.3. Industry Concentration The relative dominance of a small number of firms in an industry is commonly measured using industry concentration ratios, which calculate the revenues of the largest firms in an industry as a percentage of total industry revenues. The most common concentration ratios are based on the largest four, eight, and twenty firms in an industry. For example, a four-firm concentration ratio of 0.62 means that the largest four firms in the industry account for 62 percent of all industry revenues. As a rule of thumb, if the four-firm concentration ratio in an industry is above 0.40, the industry is considered to be an oligopoly—dominated by a small number of powerful, interrelated firms. Table 3 shows the change in four-firm concentration ratios in the United States between 2002 and 2017 for select industries. By about a two-to-one margin, more industries are becoming more concentrated over time, with a particular increase in concentration in cellular communications and air travel. However, concentration ratios have declined in several industries, most significantly in brewing, automobile manufacturing, and credit card issuing. A more comprehensive analysis of industry concentration ratio trends in the United States from 2002 to 2017 finds that overall concentration peaked in 2007 and has declined slightly since then. 29 The authors conclude that “there is no evidence that the growth of “Big Tech” or the antitrust policies of the Bush and Obama Administrations led to a general increase in industrial concentration in the U.S. economy.” However, this study was sponsored by the U.S. Chamber of Commerce, a lobbying group funded primarily by multinational corporations, and thus may not reflect unbiased research. A 2019 peer-reviewed journal article reached the opposite conclusion. It found that since the late 1990s over 75 percent of U.S. industries have experienced an increase in concentration.30 The authors found that profit margins tended to increase in industries that became more concentrated. Further, increasing concentration was not associated with higher production efficiency, leading the authors to conclude that “product markets have undergone a shift that has potentially weakened competition across the majority of industries” in the U.S. These results align with those from a 2016 analysis by The Economist, which found that two-thirds of American industries became more concentrated between 1997 and 2012.31 Further, revenues in “fragmented” industries, where the top four firms received less than one-third of total industry revenues, dropped from 78 percent of total national revenues to 58 percent—indicating an increasing share of all business revenues are flowing to industries dominated by a few large firms. 29 Kulick and Card, 2022. Grullon et al., 2019. 31 Anonymous, 2016. 30 Table 3. Four-Firm Industry Concentration Ratios in the United States Concentration Concentration Industry Ratio, 2002 Ratio, 2017 Change Home Centers 0.91 0.96 ↑ Breweries 0.91 0.69 ↓ Tobacco Manufacturing 0.87 0.92 ↑ Petrochemical Manufacturing 0.85 0.74 ↓ Breakfast Cereals 0.78 0.82 ↑ Automobile Manufacturing 0.76 0.58 ↓ Credit Card Issuing 0.76 0.56 ↓ Major Household Appliances 0.70 0.71 ↑ Department Stores 0.66 0.73 ↑ Cellular Communications 0.63 0.86 ↑ Music Publishing 0.55 0.57 ↑ Pharmacies and Drug Stores 0.53 0.69 ↑ Television Broadcasting 0.50 0.53 ↑ Cable Programming 0.49 0.62 ↑ Motion Picture Production 0.49 0.44 ↓ Soft Drink Manufacturing 0.46 0.53 ↑ Audio and Video Equipment 0.43 0.31 ↓ Investment Banking 0.41 0.44 ↑ Passenger Air Travel 0.34 0.69 ↑ Pharmaceutical Manufacturing 0.34 0.36 ↑ Supermarkets 0.33 0.36 ↑ Footwear Manufacturing 0.32 0.42 ↓ Commercial Banking 0.30 0.25 ↓ Natural Gas Distribution 0.18 0.24 ↑ Insurance Carriers 0.14 0.16 ↑ Sources: 2002 and 2017 Economic Census, U.S. Census Bureau. Little research is available on trends in global industry concentration. A 2017 paper studied global concentration across numerous industries in 2006 and 2014. 32 The authors found that in contrast to a trend of increasing concentration in the U.S., global concentration ratios generally declined, by an average of four points. The authors note that “while larger firms may be dominating their industries domestically, they are competing vigorously on an international level with foreign firms.”33 32 33 Freund and Sidhu, 2017a. Freund and Sidhu, 2017b. 4.4. Corporate Political Expenditures The two main political tools available to large corporations seeking favorable treatment are political donations and lobbying. While corporations in the United States cannot directly contribute to political candidates, they can donate to organizations that then support specific candidates and policies, often without having to disclose their expenditures (see Box 1): Many of these corporate political contributions occur in the dark. Much corporate political spending may never be disclosed to shareholders, employees, or the public. This means that shareholders may lack any meaningful way to evaluate whether to sell their stock to avoid indirectly supporting candidates with views diametrically opposed to their own.34 Based on the available data, according to the nonprofit group Open Secrets the top industrial donors in the United States include the finance, insurance, and real estate industry ($1.6 billion in political donations during the 2021-2022 election cycle), the communications and electronics industry ($338 million), and the health industry ($278 million).35 Lobbying involves attempts to legally influence political decisions through communication with politicians and other government employees. While lobbying occurs across the world, it is often unregulated. Even among the richer OECD nations, lobbying is regulated in only about one-third of countries.36 The United Sates, where lobbying is to an extent regulated, is the world’s leader in lobbying expenditures. As shown in Figure 3, lobbying expenditures in the U.S. rose steadily in the 2000s, leveled off during the early 2010s, and have risen again since then. In 2022, total lobbying spending in the U.S. surpassed $4 billion for the first time. A few studies have attempted to measure the effectiveness of lobbying. A 2009 journal article analyzed the impact of U.S. multinational corporations’ lobbying for a provision of a 2004 law that allowed them to repatriate 37 foreign-earned profits at significant tax savings.38 The authors found that firms spent a total of $283 million lobbying for this specific provision. As a result, these firms were able to accrue a tax savings of $62.5 billion—a rate of return on their lobbying investment of 22,000 percent! A 2016 article studied the impact of corporate lobbying for favorable energy policies in the United States.39 The author found that lobbying did not have a dramatic effect on the likelihood that a specific policy would be enacted. For example, $3 million spent on 34 Edwards, 2022a. OECD, 2013. 37 Repatriating foreign-earned income allows the firm to bring this money back to their home country once their tax obligations are met. 38 Alexander et al., 2009. 39 Kang, 2016. 36 lobbying would increase the probability that a particular policy would be enacted by an average of only 1.2 percent. However, lobbying was still highly financially lucrative to firms, with an estimated rate of return of 137 to 152 percent. While this is a significantly lower rate of return than the 22,000 percent noted above, it is still much higher than standard rates of return for large companies of around 10 percent. Figure 3. Lobbying Expenditures in the United Sates, 2000-2022 Lobbying Expenditures ($ billion) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2000 2005 2010 2015 2020 Source: Open Secrets, Lobbying Data Summary A 2019 report looked at the effectiveness of lobbying in the United States to secure federal funding through contracts and grants. 40 The analysis found that firms during 2014 to 2017 were able to secure $399 billion in federal funding with $2 billion in lobbying expenditures. Most of this funding ($393 billion) was through contracts, so a rate of return on lobbying would need to be based on the profits earned from the contracts. If the profit ratio was a reasonable 10 percent, then the implied lobbying rate of return would be about 20:1, or 2,000 percent. Finally, a 2021 report looked at the relationship between lobbying and industrial concentration in three industries in the U.S.: internet companies, pharmaceuticals, and oil and gas production.41 The results show that increasing industrial concentration leads to higher lobbying expenditures and vice versa. The author summarizes the research on the effectiveness of corporate lobbying: Corporate lobbying works. A number of studies show that the amount spent on lobbying positively impacts a firm’s equity returns and market share. Firms that engage in lobbying also appear to have lower effective tax rates than those that do not. Moreover, a growing body of scholarship suggests that lobbying can directly benefit individual firms or sub-industries through tax breaks or government contracts. 40 41 Andrzejewski and Smith, 2019. Showalter, 2021.