Is America Losing Its Small Businesses?
Amid the extensive commentary over the income gap between rich and poor, some have become troubled by a gap of another sort. They have identified a widening difference between the profitability of small businesses and large. Some commentators have tried to draw parallels between these two growing inequities. That is a tempting thing to do but simply too easy. These gaps have different causes. Those that affect business are much more straightforward. Here, two factors stand out: 1) technology has enabled some firms to gain tremendous market power and 2) the expansion in government regulation, despite President Trump’s efforts to curtail it, has imposed heavy burdens on all business but disproportionately on smaller firms. The development of fintech applications does, however, promise to level the playing field, at least some.
Statistics paint a compelling picture. According to a recent study by McKinsey & Co. the best performing decile of companies worldwide garnered 80 percent of all profits between 2014 and 2016, up from 75 percent a decade earlier. The top 1 percent garnered 36 percent of the profits. Of the more than 5,000 firms surveyed by McKinsey, fully half were troubled. Though they may have rated as solvent in a strict accounting sense, their return on capital fell far short of what investors would consider adequate. Half, then, were effectively unsustainable. A separate, larger study by Aswath Damodaran of over 25,000 firms roughly verified these findings.