In Business, the Fear of Bigness Seems Misplaced

By TOM PETRUNO

Dec. 7, 1997 12 AM PT

For nearly as long as there have been large corporations, there has been fear of their power over the economy and over individual lives.

This century began with the trust-busting movement to curb the Rockefellers and their pals. In 1961, President Eisenhower, in his famous farewell address, warned the American people against the dangers of an unbridled “military-industrial complex.”

And in Norman Jewison’s 1975 film “Rollerball,” the world of the future (2018, specifically) is depicted as a bleak place in which multinational corporations have supplanted governments. The corporate hierarchy has eliminated war and poverty, but it also exercises enormous control over peoples’ lives, including the channeling of their frustrations and hatred into the brutal and bloody spectator sport of Rollerball.

Fast-forward to the present. Corporate mergers in the 1990s have proceeded virtually unimpeded by government. (Antitrust? What’s that?) U.S. blue-chip companies have extended their franchises into the far corners of the Earth. And since 1994 their stocks have become some of the world’s most sought-after shares--as demonstrated again on Friday, when the blue-chip Standard & Poor’s 500 index rose 1.1% to a record high of 983.79, surpassing the previous peak reached Oct. 7.

Yet with 20 years to go till the era of Jewison’s movie, we still appear a long way from corporate-controlled Rollerball, Rupert Murdoch’s pending purchase of the Los Angeles Dodgers notwithstanding.

Even so, the debate over bigness--and how big is too big for corporate entities--continues in many different forums.

The Japanese, with their huge and troubled banking system, question whether their major banks now are too big to be permitted to fail because the consequences would be too devastating for their struggling economy. (We’ve heard the same debate over U.S. big banks, of course.)

Union Pacific, the largest U.S. railroad, has made the lives of many importers and exporters miserable with a horrible tangling of Los Angeles port traffic because the railroad has failed to integrate itself smoothly with the Southern Pacific line, which Union Pacific bought last year.

And imagine you’re the owner of a small hardware store in the Southland, and you read last week about the expansion plans of Home Depot, which already is the 50th-biggest U.S. company in sales ($19.5 billion last year). Home Depot plans to open 61 new stores in California by 2001 in a major grab for market share.

Meanwhile, for beleaguered Southeast Asia, the threat of a new push by foreign multinational companies into those markets looms, as the countries’ deeply devalued currencies have made the region the equivalent of a bargain-basement for rich foreign investors.

Too much power in the hands of a shrinking number of businesses?

The December issue of Atlantic Monthly magazine offers some provocative ideas on the future of the multinational corporation and its place in the world.

In Robert Kaplan’s cover story, “Was Democracy Just a Moment?” the author argues that the world is evolving beyond the concepts of the nation-state and democracy as Americans understand it. He sees the rise of the multinational corporation as “nothing less than the vanguard of a new Darwinian organization of politics” that reaches easily across borders and supplants the role of government in many nations--raising difficult questions about accountability.

Kaplan’s imagery isn’t Rollerball-style chilling, but he uses some statistics that aim in that direction. Of the world’s 100 largest economies, he says, half are companies, not countries; the world’s 500 largest companies now account for 70% of global trade.

Yet slicing the data further gives more insight. As the accompanying chart shows, the 10 largest industry groups within Fortune magazine’s tally of the world’s 500 biggest firms are dominated not by a handful of companies, but in many industries by two dozen or more players. And this is just the top of the list: There are, in most industries, many smaller companies that compete with the giants.

Still, what constitutes undue concentration in an industry is open to interpretation. So those who reject the idea that corporate bigness has become worrisome simply point to the end result.

One hundred years ago, large companies were rightly feared because many exercised monopoly powers by restricting output to control prices--in steel, oil, etc.

That is the polar opposite of what bigness has brought in the 1990s, which is much more the Home Depot model: greater supply and cheaper prices. “These companies aren’t operating as monopolies; they’re operating in very competitive markets,” says Richard McKenzie, professor of enterprise and society at UC Irvine.

Indeed, pricing power--or the lack of it, in almost every industry--has become a far greater concern on Wall Street than the fear that any one multinational company might be threatening monopoly.

For many investors, the continuing appeal of U.S. multinational companies (and the thing driving their stocks) isn’t that they can control prices, but that they have been able to prosper in spite of that lack of control--by becoming vastly more efficient, by staying focused on their main businesses, and by using the spread of capitalism in the 1990s to expand their presence worldwide.

In terms of meeting people’s needs, “multinationals are rising above governments,” says L. Roy Papp, manager of the blue-chip Papp America-Abroad stock mutual fund in Phoenix. But he chooses to see in this great opportunity for investors, rather than some great peril for democracy.

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Giant Industries, Giant Players

Here is a breakdown of the 10 largest industry groups within Fortune magazine’s 1997 listing of the 500 largest companies worldwide. The banking industry had the greatest number of companies on the Global 500 list (69 in all), and they accounted for 11% of the Global 500’s total revenues. The oil refining industry, with 31 companies on the list, had the largest share of the Global 500’s earnings. The Global 500’s top 10 industries, by revenue:

Industry (number of firms): Banking (69)

1996 revenues (billions): $1,253

Share of total: 11.0%

1996 earnings (billions): $38.3

Share of total: 9.5%

Industry (number of firms): Motor vehicles and parts (27)

1996 revenues (billions): $1,177

Share of total: 10.3%

1996 earnings (billions): $28.3

Share of total: 7.0%

Industry (number of firms): Trading (22)

1996 revenues (billions): $1,121