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How technology is slowing innovation

And these investments have paid off. Since the 1980s, the top four companies in each industry have increased their market share in most sectors from 4% to 5%. My research shows that investments in proprietary software have largely increased this.

This further dominance of the industry by top companies is accompanied by a corresponding reduction in the risk that they will be disrupted, a possibility that has plagued corporate managers since the time of Clayton Christensen. The Innovator’s Confusion Released in 1997. By the time Christensen wrote his book, the distraction was growing. But since about 2000 – when top companies began investing in proprietary systems – the trend has been sharply declining. In a given industry, the chances of a high-ranking firm (measured by sales) slipping out of one of the top four positions in four years have dropped from 20% to about 10%. Here, too, investments by influential companies in their internal systems are largely responsible for change. While some new technologies are disrupting entire industries વિચારો think of what the Internet has done to newspapers or DVDs અન્ય others are now suppressing the disruption of influential companies.

How does this happen, and why does it obviously affect the economy so much? This is because these business systems eliminate one of the major shortcomings of modern capitalism. Starting in the late 19th century, innovative companies discovered that they could achieve dramatic cost savings by producing on a large scale. The shift led to a dramatic drop in consumer prices, but one trade-off came: companies needed to standardize products and services in order to receive those large quantities. Henry Ford famously declared that car buyers could have “any color as long as it’s black.” Retail chains have achieved their functionality by offering a limited set of products in their thousands of stores. Finance companies offer standard mortgages and loans. As a result, the products had limited feature sets; The choice of stores was limited and was slow to respond to changing demand; And many customers could not get credit or just get it on terms that were expensive and did not suit their needs.

The software replaces the equation by partially removing these limitations. This is because it reduces the cost of managing the complexity. With the right data and the right organization, the software allows businesses to tailor products and services to individual needs, providing more diversity or more product features. And this allows them to be the best competitors, dominating their markets. Walmart stores offer a much larger selection than Sears or Kemart stores, and they respond quickly to changing customer needs. Sears has long been the king of retail; Now there is Walmart, and Sears is in bankruptcy. Toyota quickly produces new models while exploring new consumer trends; The small car companies can’t afford the billions of dollars they take to do that. Likewise, only Boeing and Airbus can manage to build extremely complex new jumbo jets. The top four credit card companies have the data and systems to effectively target offers to individual consumers by maximizing profits and gaining market share; They dominate the market.

These software-enabled platforms have allowed top companies to increase their dominance. They have also slowed the growth of competitors, including innovative startups.

Various pieces of evidence support the idea that startup growth has slowed significantly. One indication is how long it takes for venture-backed startups to raise funds: From 2006 to 2020, the average age of startups in the seed-round funding phase increased from 0.9 years to 2.5 years. During the same period, the average age of late stage startups increased from 6.8 years to 8.1 years. Among the companies that were acquired, the average time from first lending to acquisition tripled, from slightly more than two years in 2000 to 6.1 years in 2021. This story was the one that came out in public. But what happens when companies become more productive is clear evidence of a recession.

Large companies are using large-scale technology that makes it difficult for startups to grow.

A key feature of dynamic economies, which economist Joseph Schumpeter calls “creative destruction” is that more productive companies જે those with better products or lower costs or better business models તેઓ grow faster than less productive executives. Displaces them. But after 2000, on average, companies with a given level of productivity grew at half the speed of companies with similar levels of productivity in the 1980s and 1990s. In other words, productivity has less impact on growth than ever before. And when manufacturing companies grow more slowly, they “leapfrog” industry leaders and displace them – the identity of the disruption. Last year, research I conducted with my colleague Erich Dank linked the declining impact of productivity improvement to the greater dominance of large companies in the industry and their investments in software and other abstract items.

Another opinion strongly asserted by congressional investigators at the hearing in the Employees’ Report, published in 2020, is that the decline in economic dynamism is due to a different source: the government’s no-confidence policy has weakened since the 1980s. In this account, large companies are allowed to acquire their competitors by reducing competition. The acquisitions have made these companies more influential, especially in Big Tech, leading to a decline in both the emergence of new tech companies and venture capital funding for start-up companies. But in fact, the rate at which new tech companies enter the market is only a modest drop from the extraordinary boom of the dot-com boom, and early-stage venture capital lending is at record levels, double the lending today compared to 2006. And four times the amount invested. The problem is not that big companies are preventing startups from entering the markets or getting funding; The problem is that large companies are using large-scale technology that makes it difficult for startups to grow. In addition, large companies such as Walmart and Amazon have developed by adopting a better business model rather than buying competitors. Indeed, the rate of acquisitions by influential companies has declined since 2000.

Of course, such acquisitions sometimes affect the startup landscape. Some researchers have identified the so-called “kill zone”, where Big Tech makes acquisitions to close the competition and it becomes difficult to find venture capital. But other researchers find that startups often respond by moving their innovative activity to a different application. Moreover, the prospect of acquisition by a large firm often encourages people to look for startups. Indeed, despite what happened to Nuance, the number of speech-recognition and natural-language-processing startups entering the market has quadrupled since 2005, with 55% of these startups receiving venture capital investment.

The slowdown in the growth of innovative startups is not just a problem for a few thousand companies in the tech sector; Headaches against companies like Nuance are responsible for problems affecting the health of the economy as a whole. U.S. Researchers at the Census Bureau have shown that slower growth in manufacturing companies is responsible for much of the slowdown in overall productivity growth, a figure that measures the output per capita produced by the economy and serves as a rough index of economic well-being. However, my own work has also shown that it contributes to growing economic inequality, further social segregation, and declining government effectiveness.

What will it take to reverse the trend? Strong distrust implementation may help, but changes in economic dynamics are more driven by new technologies than mergers and acquisitions. A more fundamental problem is that the most important new technologies are proprietary, accessible to only a small number of large corporations. In the past, new technologies have spread widely, either through licensing or as companies independently developed alternatives; This led to more competition and innovation. The government sometimes helped in this process. Bell Labs developed the transistor but was forced to license the technology extensively by unreliable authorities, creating the semiconductor industry. Similarly, IBM formed the modern software industry when, in response to the pressure of distrust, it began selling software separate from computer hardware.

Today we are seeing some similar developments even without government action. Amazon, for example, opened up its own IT infrastructure to create the cloud industry, which has greatly improved the prospects for many small startups. But the no-confidence policy can be used to encourage or coerce larger companies to open their proprietary platforms. Non-competitive agreements on employee mobility and the loss of intellectual property rights controls may also encourage further dissemination of technology.

It will be difficult to come up with the right balance of policies, and it will take time-we do not want to reduce the incentives for innovation. But the starting point is that technology has played a new role in today’s economy. At one time the force of disruption and rivalry was running, now it is being used to suppress them.

James Besson is a lecturer at the Boston University School of Law and the author of the forthcoming book The New Goliaths: How Corporations Use Software to Dominate Industries, Kill Innovation and Undermine Regulation, from which this essay is adopted.

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