W HY RETAIL ? HHI OF SALES , C OMPUSTAT US FIRMS .18 .16 .14 .12 - PowerPoint PPT Presentation

I NTANGIBLES , INVESTMENT , AND EFFICIENCY Nicolas Crouzet 1 Janice Eberly 2 1 Kellogg School of Management, Northwestern University 2 Kellogg School of Management, Northwestern University & NBER TPRI competition conference July 2018

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) 1 / 11

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) - Low (physical) investment, relative to Q Guti´ errez and Philippon (2017), Alexander and Eberly (2017), Fernald et al. (2017) 1 / 11

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) - Low (physical) investment, relative to Q Guti´ errez and Philippon (2017), Alexander and Eberly (2017), Fernald et al. (2017) This paper: explore a joint explanation for these two trends 1 / 11

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) - Low (physical) investment, relative to Q Guti´ errez and Philippon (2017), Alexander and Eberly (2017), Fernald et al. (2017) This paper: explore a joint explanation for these two trends - Productivity gains among industry leaders, associated with shift in investment toward non-physical ( intangible ) capital 1 / 11

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) - Low (physical) investment, relative to Q Guti´ errez and Philippon (2017), Alexander and Eberly (2017), Fernald et al. (2017) This paper: explore a joint explanation for these two trends - Productivity gains among industry leaders, associated with shift in investment toward non-physical ( intangible ) capital - Illustration in the retail sector: 1 / 11

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) - Low (physical) investment, relative to Q Guti´ errez and Philippon (2017), Alexander and Eberly (2017), Fernald et al. (2017) This paper: explore a joint explanation for these two trends - Productivity gains among industry leaders, associated with shift in investment toward non-physical ( intangible ) capital - Illustration in the retail sector: 1. stable markups 1 / 11

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) - Low (physical) investment, relative to Q Guti´ errez and Philippon (2017), Alexander and Eberly (2017), Fernald et al. (2017) This paper: explore a joint explanation for these two trends - Productivity gains among industry leaders, associated with shift in investment toward non-physical ( intangible ) capital - Illustration in the retail sector: 1. stable markups 2. growth in productivity, particularly among largest firms Foster, Haltiwanger & Krizan (2006) 1 / 11

O VERVIEW Two salient macro trends, since mid-1990’s - Increasing business concentration Guti´ errez and Philippon (2018) (”market power”); Autor et al. (2017) (”productivity gap”) - Low (physical) investment, relative to Q Guti´ errez and Philippon (2017), Alexander and Eberly (2017), Fernald et al. (2017) This paper: explore a joint explanation for these two trends - Productivity gains among industry leaders, associated with shift in investment toward non-physical ( intangible ) capital - Illustration in the retail sector: 1. stable markups 2. growth in productivity, particularly among largest firms Foster, Haltiwanger & Krizan (2006) 3. closely correlated growth in intangible capital 1 / 11

W HY RETAIL ? HHI OF SALES , C OMPUSTAT US FIRMS .18 .16 .14 .12 1990 1995 2000 2005 2010 2015 All Excluding retail Excluding retail and oil & gas Sales HHI in retail: . 14 in 1990; . 36 in 2015. Oil & gas 2 / 11

T HE INVESTMENT GAP IN RETAIL 0 -.05 -.1 -.15 1990 1995 2000 2005 2010 2015 year point estimate +/- 2 s.e. ( I / K ) i , t = α i + δ t + X ′ i , t β + ǫ i , t ) ′ X i , t ≡ ( Q i , t − 1 , ( CF / K ) i , t − 1 3 / 11

P ROXIMATE CAUSES 4 / 11

P ROXIMATE CAUSES - Increasing market power of incumbents? 4 / 11

P ROXIMATE CAUSES 1.5 .35 .3 1.45 .25 1.4 .2 1.35 .15 1.3 .1 1990 1995 2000 2005 2010 2015 Markup (LHS) HHI (RHS) Sales Markup ≡ Cost of goods sold 4 / 11

P ROXIMATE CAUSES - Increasing market power of incumbents? - Productivity gains, especially among industry leaders? 4 / 11

P ROXIMATE CAUSES - Increasing market power of incumbents? - Productivity gains, especially among industry leaders? = ⇒ rising concentration 4 / 11

P ROXIMATE CAUSES Revenue per employee (1990 $ '000) Multi-factor productivity (base 1990 = 100) 200 150 .35 .35 140 180 .3 .3 130 .25 .25 160 120 .2 .2 140 110 .15 .15 120 .1 100 .1 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 HHI (RHS) - Revenue per employee is a firm-level average, weighted by sales - Multi-factor productivity is an (aggregate) output-based measure, from KLEMS 4 / 11

W HAT HAPPENED IN RETAIL ? 1.9 .35 1.8 .3 1.7 .25 1.6 .2 1.5 .15 1.4 1.3 .1 1990 1995 2000 2005 2010 2015 Inventory coverage (months, LHS) HHI (RHS) - 1990’s & early 2000’s: faster payment systems, more accurate pricing, better inventory management ( Walmart ) Foster, Haltiwanger and Krizan (2006) 5 / 11

W HAT HAPPENED IN RETAIL ? 1.9 .35 1.8 .3 1.7 .25 1.6 .2 1.5 .15 1.4 1.3 .1 1990 1995 2000 2005 2010 2015 Inventory coverage (months, LHS) HHI (RHS) - 1990’s & early 2000’s: faster payment systems, more accurate pricing, better inventory management ( Walmart ) Foster, Haltiwanger and Krizan (2006) - late 2000’s & early 2010’s: development of online retail platforms and distributed retail systems ( Amazon ) 5 / 11

W HAT HAPPENED IN RETAIL ? 1.9 .35 1.8 .3 1.7 .25 1.6 .2 1.5 .15 1.4 1.3 .1 1990 1995 2000 2005 2010 2015 Inventory coverage (months, LHS) HHI (RHS) - 1990’s & early 2000’s: faster payment systems, more accurate pricing, better inventory management ( Walmart ) Foster, Haltiwanger and Krizan (2006) - late 2000’s & early 2010’s: development of online retail platforms and distributed retail systems ( Amazon ) - requires intangible “know-how”, not only investment in new physical capital 5 / 11

P RODUCTIVITY VS . MARKET POWER Jeff Bezos (09/28/2011) 6 / 11

I NTANGIBLES AND PRODUCTIVITY S ECTOR - WIDE 200 20 180 15 160 10 140 5 120 1990 1995 2000 2005 2010 2015 Revenue per employee (1990 $ '000, LHS) Intangible share of total assets (%, RHS) Acquisition flows 7 / 11

I NTANGIBLES AND PRODUCTIVITY A T THE 3- DIGIT NAICS SUBSECTOR LEVEL 0 Log of intangible/total assets -2 -4 -6 -8 4.5 5 5.5 6 Log of revenue/employee Simple correlation : 0 . 49 OLS slope, with industry-clustered s.e.: 1 . 222 ( 0 . 346 ) Investment gap with intangibles 8 / 11

I NTANGIBLES AND PRODUCTIVITY A T THE 3- DIGIT NAICS SUBSECTOR LEVEL — INCLUDING CAPITALIZED R&D 0 Log of intangible/total assets -2 -4 -6 -8 4.5 5 5.5 6 Log of revenue/employee Simple correlation : 0 . 57 OLS slope, with industry-clustered s.e.: 1 . 432 ( 0 . 320 ) Investment gap with intangibles 9 / 11

I NTANGIBLES AND PRODUCTIVITY A T THE 3- DIGIT NAICS SUBSECTOR LEVEL — INCLUDING CAPITALIZED R&D AND CAPITALIZED SG&A 0 Log of intangible/total assets -1 -2 4.5 5 5.5 6 Log of revenue/employee Simple correlation : 0 . 37 OLS slope, with industry-clustered s.e.: 0 . 211 ( 0 . 088 ) Investment gap with intangibles 10 / 11

C ONCLUSION In the US retail sector - Higher concentration - Large productivity gains, esp. among industry leaders - Despite this fact, physical investment remains low - But higher productivity strongly correlated with intangible investment 11 / 11

C ONCLUSION In the US retail sector - Higher concentration - Large productivity gains, esp. among industry leaders - Despite this fact, physical investment remains low - But higher productivity strongly correlated with intangible investment Unanswered questions - How widespread is this phenomenon, beyond retail? - Does intangible investment only lead to productivity gains, or could it serve to increase market power? brand value 11 / 11

P LAN M ORE