The pandemic will make big companies more dominant than ever

The Covid-19 pandemic will likely leave us with an economy in which larger companies play an expanded role, representing a higher share of both employment and revenue. The stock market illustrates the phenomenon: the biggest firms have seen smaller stock market declines, on average, than smaller ones have. It’s the corporate version of the Matthew effect: the strong get stronger.

This shift began before the pandemic came along. From 1995 to 2013, the share of U.S. workers employed by firms with 10,000 or more employees increased to about 28%, from 24%. McKinsey has found that “superstar” firms (whose average revenue is seven times the median) raised their employment share to 30% in 2014-16, from 28% in 1995-97. There’s been much debate over why this is happening, especially the role that higher productivity plays. The International Monetary Fund recently concluded that “technology-driven changes in the structure of many product markets” have made a bigger difference than have individual countries’ regulations or antitrust policies.

The trend may be accelerated now because, during the pandemic, bigger companies are less likely to run aground: They are perceived to have more liquidity than smaller companies do, and to be more spread out geographically. The pandemic has hit small and medium-sized businesses, which often have little cash on hand, very hard — and government policy responses so far may be insufficient to avoid a cascade of resulting bankruptcies. It’s entirely possible that many small companies won’t survive, or return after the crisis subsides. At the same time, Covid-19 has hit different regions with varying force, policy responses have also varied, and these differences are likely to continue through the summer and beyond. Because larger companies are more diversified across markets, they’re better able to survive shocks whose force varies from place to place.

Another reason the pandemic will hasten the growing dominance of large companies is that it will push supply chains to become vertically integrated, as larger firms exert more control over their supply and smaller companies in the chain need help. The crisis has exposed the vulnerabilities of depending on other companies for crucial supplies; many larger ones may be inclined to move production in house while also diversifying their geographic locations. At the same time, as many smaller suppliers face financial distress, they will find it more attractive to combine with larger companies. Antitrust authorities have often viewed this kind of vertical integration more favorably than horizontal mergers between companies in the same business — especially if a supply chain is in danger of collapse. (A caveat is that increased nationalism may impede certain potential combinations.)

One more reason that larger companies may now expand their market shares is simply that, during a crisis, people trust them more. Workers are more comfortable accepting jobs at bigger firms, where employment appears more secure, while customers are more trusting of products and services from larger companies, whose name brands seem safer. Both kinds of trust allow larger firms to grow. Note that, as a result of the pandemic, the social value of two sectors with numerous large firms — biopharma and technology — may come to be viewed more favorably.

Conventional wisdom suggests that smaller companies can benefit when economic activity shifts to the virtual world, as it has been with people staying home and as it likely will remain even after the pandemic ends, because they are more nimble in using information technology. In reality, the effect may be the opposite, because larger companies are often positioned to use IT better than smaller ones do. Indeed, one analysis of pre-pandemic trends in productivity concluded, “It is sometimes argued that information technology ‘levels the playing field’ by providing inexpensive tools to small and young firms. This paper finds that much of the impact of IT may be, instead, to tilt the playing field in favor of those firms who are able to use it most effectively.”

The stock market reaction to the pandemic highlights the financial strength that comes with size: Among the top 1% of publicly traded firms ranked by their 2019 revenue — those with more than $52 billion — the weighted-average total stock return so far this year has been minus 9%. For companies with revenue of $200-550 million, the return has been closer to minus 40%. As we emerge from the Covid-19 pandemic, the size distribution of companies will probably continue to shift toward large.