In a new paper published by the National Bureau of Economic Research, Ufuk Akcigit and Sina T. Ates find that while a number of factors, including lower interest rates and greater industry concentration, have contributed to a decline in overall business dynamism, the biggest killer is the increase in patenting activity and resultant decline in knowledge diffusion:
In the past several decades, the U.S. economy has witnessed a number of striking trends that indicate a rising market concentration and a slowdown in business dynamism. In this paper, we make an attempt to understand potential common forces behind these empirical regularities through the lens of a micro-founded general equilibrium model of endogenous firm dynamics. Importantly, the theoretical model captures the strategic behavior between competing firms, its effect on their innovation decisions, and the resulting “best versus the rest” dynamics. We focus on multiple potential mechanisms that can potentially drive the observed changes and use the calibrated model to assess the relative importance of these channels with particular attention to the implied transitional dynamics. Our results highlight the dominant role of a decline in the intensity of knowledge diffusion from the frontier firms to the laggard ones in explaining the observed shifts. We conclude by presenting new evidence that corroborates a declining knowledge diffusion in the economy. We document a higher concentration of patenting in the hands of firms with the largest stock and a changing nature of patents, especially in the post-2000 period, which suggests a heavy use of intellectual property protection by market leaders to limit the diffusion of knowledge. These findings present a potential avenue for future research on the drivers of declining knowledge diffusion. [Emphasis added]
The authors found that the decline in knowledge diffusion, thanks in large part to strategic patenting or strategic acquisition of smaller firms’ patents, the state-enforced monopoly on ideas widens the gap between “the best” and “the rest”.
Using a counterfactual analysis (i.e. holding observed variables constant relative to 1980 terms in their models), the authors found that while the other channels “can rarely account for more than 10 percent of the observed trends, the knowledge diffusion channel accounts for more than 70 percent of most symptoms of declining business dynamism and at least 50 percent of all considered trends [such as young firm employment share, profits vs labor as a share of GDP, etc.].”
The paper also contains empirical verification an under-appreciated factor that contributes to innovation: the “inverted-U” relationship between competition and innovation. In a hyper-competitive market, profits are so low that it isn’t worth it for any given firm to invest in a new innovation. In the other extreme, “leader” firms are so far ahead they have no need to innovate.
As calls for renewed antitrust activism, particularly to break up the big tech companies, are growing louder and more numerous these days, we would be well advised to consider the ways in which government policy is now actively encouraging and buttressing industrial concentration. IP policy is a good place to start.