Recent Research: ITIF explains the argument for consolidation and bigger business

Why the U.S. Economy Needs More Consolidation, Not Less, a recent paper from the Information Technology & Innovation Foundation (ITIF), explains from an economics perspective the advantages of scale economy for improving an industry’s overall efficiency and productivity. Not all industries see significant economies of scale as firms grow, ITIF research points out. In fact, one in four sectors in the 938 NAICS industries do not, ITIF reports, suggesting—but not discussed, that some public policies designed to improve the performance of these small business-oriented sectors may be beneficial. Policy recommendations included in the report are intended to discourage the federal government from refining regulations governing mergers, acquisitions, and potential monopolizing effects from increased consolidation in those 710 sectors where increased consolidation yields greater efficiency and corporate receipts.

Many advocates for innovation-driven entrepreneurship and TBED may wince at the mention of consolidation as a positive, perhaps forgetting that mergers and acquisitions present the dominant exit strategy for startup innovation-focused companies within the portfolios of accelerators, university commercialization offices, and venture capital organizations. The M&A pathway, coupled with the small number of IPOs in a given year, are the easiest way for angels, seed, and early-stage investors and nonprofit VDOs to recoup any return on their investment. Replicating and growing the cycle of startup creation, risk funding coupled with small business assistance, and successful exit over time is an important ingredient for sustaining a local culture supporting innovation and entrepreneurship. 

So, one may see the value of some consolidation within selected sectors as useful for supporting regional innovation. However, academic research and on-the-ground evidence from many areas of the country over the nation’s history since the late 1880s through the ‘too-big-to-fail’ 2008 Great Recession have shown the detriments of too much consolidation and too great a focus on corporate efficiency and productivity measures. Most or many U.S. antitrust and financial regulations originated out of proven negative societal impacts from too much consolidation.

ITIF presents an economic argument for easing these controls to improve sector-level performance and efficiency. Public policy affecting the business of business must also consider other societal goals, externalities and market failures in its design. For effective regional TBED initiatives, we need to find the appropriate balance between supporting innovation-driven entrepreneurship, national industrial competitiveness, and greater well-being.

Why the U.S. Economy Needs More Consolidation, Not Less: https://itif.org/publications/2024/05/06/why-us-economy-needs-more-cons…