IMF urges policymakers to consider rising power of big successful companies

The International Monetary Fund (IMF) has said that rising power of big successful companies across the world could lower capital investment, weaken productivity and reduce people's take-home pay.

While the rising corporate market power has had a fairly limited negative economic impact so far, it could take a bigger toll on growth and people's income if left unchecked.

"Policymakers around the world need to ensure a level playing field among all companies, including new ones. This means lowering domestic barriers to entry, for example, by reducing administrative burdens on start-ups and reducing barriers to trade and foreign direct investment -- especially in services," the IMF said in a blog post on Thursday (local time).

 

It also means strengthening some features of competition law and policies such as the role of market examinations, reforming corporate taxes to tax the excess returns on capital derived from market power, and ensuring that intellectual property rights encourage ground-breaking innovations more than incremental ones.

The IMF survey of nearly one million companies from 27 advanced and emerging market economies since the early 2000s shows that firms' average price markup -- the ratio of a company's product price to its production cost -- has increased moderately.

Across advanced economies, average markups increased by eight per cent since 2000 but by less than two per cent in those emerging economies covered by the analysis. This increase in market power has taken place in most industries, but it has been driven by a small fraction of companies.

Research shows that companies with the highest markups -- those in the top 10 per cent -- raised theirs by over 30 per cent, while markups have been largely flat among the remaining 90 per cent of companies.

"These high-markup companies vary in size but perform better than others," the IMF said. "On average, they are about 50 per cent more profitable, over 30 per cent more productive and use 30 per cent more intangible assets like patents or software than others."

That is because in many markets, the rising market power of the more productive and innovative companies has been helped by their superior ability to exploit proprietary intangible assets, network effects (when a product or service gains additional value as more people use it), and economies of scale (reduced costs per unit as output increases).