OECD Forum Network | James Bessen | Jan 24, 2023

Image: Unsplash/Braden Collum

For all the talk of disruptive innovation, start-ups have become less likely to displace dominant industry leaders because the new technology has become much more proprietary

• Large firms across many industries are hiring to build a new generation of systems to meet heterogeneous customer needs. These systems have made leading firms more dominant in their markets, suppressing the risk of disruption and slowing the growth of innovative rivals. These systems also contributed to the slowdown in productivity growth, to increased social division, and to an increasing inability of government to regulate major firms.
  • Walmart systems manage over 100,000 items per store—far more than traditional department stores, they adjust inventory to respond quickly to changing consumer demand, and they use advanced logistics to get these items to the stores quickly and efficiently.
  • Amazon, of course, handles an order of magnitude greater selection.
  • Big banks use extensive consumer transaction data to tailor offers of credit card and home equity lines to individual borrowers and to target the marketing to them.
  • Google and Facebook provide data-driven targeting of Internet advertising.
  • Automobiles and airplanes are now built on large software systems that provide unprecedented features and functions, including many subtle changes in performance.

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• Impact: Across sectors, these top firms within each industry have increased their market shares. Their dominance has also become more persistent, that is, leading firms today are far less likely to be “disrupted”
  • And the investment shift is huge. In the United States, firms are now investing a quarter of a trillion dollars a year in software development alone.
  • A prominent reason that small productive firms are not growing as quickly is that they lack access to the same technology used by the dominant firms.
  • This lack of access limits the growth of new firms, but it also affects workers. These systems require workers in a variety of occupations (not just STEM) to perform new tasks in different ways.  A major source of growing wage inequality is rising differences in pay of workers across different firms—those firms with the technology pay substantially more for comparable jobs.
• Some dominant firms have chosen to open up their platforms to the public for a fee. 
  • Amazon chose to “unbundle” their technology, creating AWS, the first cloud service, and launching the cloud industry. By providing access to advanced technology, the cloud has promoted the growth of productive startups and opened opportunities for diverse workers to gain new skills.

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