Industry concentration is on the rise and formation of new companies is on the decline: whither entrepreneurs, innovation and IP?

Entrepreneurship is not synonymous with innovation, and innovation is not synonymous with intellectual property. Still, it is fair to say that significant swathes of the IP community have expressed the view that it prefers more, rather than less, entrepreneurship and innovation, and that it is good for business. The upshot is that, for several decades, IP has tied its narrative wagon to entrepreneurship and innovation, such that when storm clouds begin to hover over the state of entrepreneurship and innovation, it can be expected that concerns about the impact of these trends on IP will increase apace.

A particularly instructive report discussing the state of entrepreneurship and innovation in the U.S. was recently published by the Brookings Institution, “The state of competition and dynamism: Facts about concentration, start-ups, and related policies”. At only 40 pages, the entire report is reader-accessible. This Kat has chosen to set forth the major factual assertions made in the report together with a few Kat comments, with the hope that interested Kat readers will dig down more deeply into the report’s findings and discussion.

So here are the main factual points made in the report--

1. Firm concentration is rising, particularly in retail and finance.

2. Concentration is high in markets with large returns to scale and network effects.

3. Mergers and acquisitions have become more common.

4. Common ownership may increase effective market concentration.

5. The investment rate relative to net operating surplus has fallen by more than one-third since the early 1960s.

6. Many firms have substantial power in labor markets.

7. Employer concentration appears to be high in many local labor markets.

8. Fewer mergers are being blocked when at least five competitors would remain.

9. Start-up rates are declining across all sectors.

10. The employment share of young firms has decreased by more than one-third since 1987.

11. Businesses are taking longer to form, while business applications have declined.

12. The entrepreneurship rate has fallen by almost half for workers with a bachelor’s degree.

13. State subsidies to businesses have tripled since 1990.

14. Occupational licensing is common and associated with diminished worker mobility.

15. Health-care licensure rules vary in ways that matter for competition and mobility.

The two overarching concerns expressed in the report are increasing industry concentration and the decline in the formation of companies. On one level, these two factors would seem to feed off each other. Greater market concentration tends to drive out competing companies while increasing industry concentration makes it less likely that new firms will be established.

At the more micro level, this Kat found point number 12 in the report—" The entrepreneurship rate has fallen by almost half for workers with a bachelor’s degree”—unexpected, indeed, bordering on astonishing. Every week, it seems, the creation of a new program on innovation and entrepreneurship is being announced in some institution--business schools, law schools, and others. However, college graduates still prefer the security of a job in an established company (even better when that the company has a significant position in that industry, and even better when that industry is concentrated). The efficacy of higher education programs intended to incentivize students to consider the route of entrepreneurship would seem to be in doubt, to the extent that one can ask whether these programs are worthwhile from a cost-benefit perspective.

It also creates a certain unease from the vantage of IP. IP protection is an uncomfortable legal beast, because it confers on the owner of the right exclusive, indeed, exclusionary legal power, at least for a fixed period of time. The IP community has pushed back on the claim that IP may be impeding competition with the argument that it is an effective way to encourage new entrants to challenge the industry incumbents. But when IP efforts are directed more and more to shoring up the position of the incumbents against the challenge from a shrinking pool of potential new entrants, the competitive contribution of IP rights in the service of entrepreneurship and innovation becomes more problematic. 

On the other hand, when all is said and done, do I (or should I) care whether I am proffering my IP services to the incumbent in a concentrated industry rather than to a potentially innovative start-up, especially when such new entrants are anyway increasingly fewer in number?

By Neil Wilkof

Picture on upper right by Andrew Hecker, who has released it into the public domain.

Picture on lower left by Wilson44691 and is licensed under the Creative Commons Attribution-Share Alike 3.0 license.