There is much discussion about “superstar” firms and “superstar effects” in reaction to the rapid growth of very large global companies. This has been accompanied by a growing body of research examining various aspects and drivers of superstar effects in the economy. Yet questions remain, and much of the evidence is still inconclusive as well as incomplete. Our research aims to fill some of the empirical and data gaps, take a global perspective, and examine the issue beyond just firms.
We assess the extent to which a superstar effect can be observed in the global economy in three arenas—firms, sectors, and cities—and inspect the dynamics, including churn and changing characteristics, in each of these arenas. We also examine what characteristics, similarities, differences, and linkages can be observed across firms, sectors, and cities and what economic effects and questions they raise for further research. At the same time, we draw some preliminary implications for leaders.
We find superstars exist not only among firms but among sectors and cities as well, although the trend is most evident among cities and firms. Relative to peers, superstars share several common characteristics. In addition to capturing a greater share of income and pulling away from peers, superstars exhibit relatively higher levels of digitization; greater labor skill and innovation intensity; more connections to global flows of trade, finance, and services; and more intangible assets than do their peers. Yet there are some variations. We find a higher churn rate among superstar firms compared to cities, indicating higher levels of persistence among superstar cities.
1. We focus on economic profit for firms and extend our analysis to cities and sectors of economic activity
Although a variety of definitions exist, we define superstar to mean a firm, sector, or city that has a substantially greater share of income than peers and is pulling away from those peers over time.
For firms, our metric is economic profit, a measure of a firm’s invested capital multiplied by its return above the cost of capital. We focus on economic profit rather than revenue size, market share, or productivity growth because these other metrics have a risk of including firms that are simply large and might not create economic value.
For sectors, our metric includes gross value added and gross operating surplus accruing to various types of activities (such as production, sales, and services) that cut across business establishments such as factories, laboratories, and retail stores. In part, a sector perspective provides an indication of the size of superstar profits in relation to the entire economy—at $3.5 trillion in pretax earnings, superstar firms’ earnings represent 13 to 15 percent of the entire global pool of economic surplus and 22 to 25 percent of all corporate earnings worldwide (Exhibit 1).
For cities, our metric includes GDP and personal income per capita. These measures allow us to discover which economic activities are becoming more valuable over time, where the benefits flow, and what linkages exist, if any, among sector activities and superstar firms and cities.
2. The dynamics of firms
For firms, we analyze nearly 6,000 of the world’s largest public and private firms, each with annual revenues greater than $1 billion, that together make up 65 percent of global corporate pretax earnings. In this group, economic profit is distributed along a power curve, with the top 10 percent of firms capturing 80 percent of economic profit among companies with annual revenues greater than $1 billion. We label companies in this top 10 percent as superstar firms.
The middle 80 percent of firms record near-zero economic profit in aggregate, while the bottom 10 percent destroys as much value as the top 10 percent creates. The top 1 percent by economic profit, the highest economic-value-creating firms in our sample, account for 36 percent of all economic profit for companies with annual revenues greater than $1 billion.
Over the past 20 years, the gap between superstar firms and median firms—and also between the bottom 10 percent of firms and median firms—has widened. Today’s superstar firms have 1.6 times more economic profit on average than superstar firms 20 years ago. Today’s bottom-decile firms have 1.5 times more economic loss on average than their counterparts 20 years ago, with one-fifth of them (a growing share) unable to generate enough pretax earnings to sustain interest payments on their debt. The growth of economic profit at the top end of the distribution is thus mirrored at the bottom end by growing and increasingly persistent economic losses, suggesting that in addition to firm-specific dynamics, a broader macroeconomic dynamic might be at work.
Superstar firms continue to be displaced from the top 10 percent and the top 1 percent. Indeed, some firms have risen from the bottom 10 percent to higher deciles—a few all the way to the top 10 percent. In each of the past two decades (corresponding to a business cycle), nearly 50 percent of all superstar firms fell out of the top 10 percent during the business cycle, and when they fell, 40 percent fell to the bottom 10 percent.
The top 1 percent is also contestable, with two-thirds being new entrants to this top rank in the latest cycle. There is also some variation by sector and geography. Superstar firms from emerging economies, for instance, have a higher churn rate of 60 percent compared to 40 percent for firms from developed economies.
Overall, after adjusting for the growth of M&A activity since the 1990s, we find no evidence of an economy-wide reduction in churn over time. In other words, contestability has remained about the same.
Superstar firms are diverse and getting more so over time. They come from all regions and sectors and include global banks and manufacturing companies, long-standing Western consumer brands, and fast-growing US and Chinese tech firms (Exhibit 2 and Exhibit 3).
The sector and geographic diversity of firms in the top 10 percent and the top 1 percent by economic profit is greater today than 20 years ago. The 575 superstar firms in our analysis exhibit widely acknowledged markers of successful firms: they include 315 of the world’s 500 largest firms by market capitalization, 230 of the world’s 500 most valuable brands, 188 of the world’s 500 best employers (as rated by their employees), and 53 of the world’s 100 most innovative companies.
3. The dynamics of sectors
For sectors, we analyze 24 sectors of the global economy that encompass all private-sector business establishments. We find that 70 percent of gains in gross value added and gross operating surplus have accrued to establishments in just a handful of sectors over the past 20 years. This is a contrast to results in previous decades, in which gains were spread over a wider range of sectors.
While the superstar effect is not as strong for sectors as it is for firms, the superstar sectors over the past 20 years we have identified include financial services, professional services, real estate, and two smaller (in gross value added and gross operating surplus terms) but rapidly gaining sectors: the pharmaceuticals and medical-products sector and the internet, media, and software sector.
The shift in global surplus to today’s superstar sectors amounted to nearly $3 trillion in 2017 alone across the G-20 countries. As today’s superstar sectors have gained share of gross value added and gross operating surplus globally, other sectors, such as infrastructure, consumer goods, and capital goods, have lost share. In addition to global superstar sectors, we identify regional superstar sectors in which the dynamics are more localized. Regional superstar sectors include automobile and machinery production in China, Germany, Japan, and South Korea; construction in China, India, and the United States; hospitality services in France, Italy, and the United Kingdom; and, recently, resource production in Canada and the United States.
Today’s superstar sectors share one or more of the following attributes: fewer fixed capital and labor inputs, more intangible inputs, and higher levels of digital adoption and regulatory oversight than other sectors (Exhibit 4). With the exception of real estate, superstar sectors are two to three times more skill intensive than sectors declining in share of income in the G-20 countries are.
In addition, superstar sectors tend to have relatively higher R&D intensity and lower capital and labor intensity than other sectors do. The higher returns in superstar sectors accrue more to corporate surplus rather than labor surplus, flowing to intangible capital, such as software, patents, and brands. Although some superstar sectors have stronger multiplier effects on economic growth than declining sectors do, their gains are more geographically concentrated compared to sectors in relative decline. For instance, gains to internet and media activities are captured by just 10 percent of US counties, which account for 90 percent of GDP in that sector.
4. The dynamics of cities
For cities, we analyze 3,000 of the world’s largest cities, each with a population of at least 150,000 and GDP (adjusted for purchasing power parity) of at least $125 million, that together account for 67 percent of world GDP. By our definition, 50 cities, including Boston, Frankfurt, London, Manila, Mexico City, Mumbai, New York, Sydney, Sao Paulo, Tianjin, and Wuhan, are superstars (Exhibit 5). The 50 cities account for 8 percent of global population, 21 percent of world GDP, 37 percent of urban high-income households, and 45 percent of headquarters of firms with more than $1 billion in annual revenue. The average GDP per capita in these cities is 45 percent higher than that of peers in the same region and income group, and the gap has grown over the past decade.
Emerging-market superstar cities have increased their contribution to global GDP by 30 to 40 percent in the past decade, while advanced-economy superstar cities have increased their share of global GDP by 20 to 30 percent. Over the past decade, we find a 25 percent churn rate among superstar cities as some advanced-economy cities, such as Rome, San Diego, and Vienna, have been displaced by emerging-market cities, such as Jakarta, Kuala Lumpur, and New Delhi, with stronger income and population growth relative to peers in the same region and income group. The growth of superstar cities is fueled by gains in labor income and wealth from real-estate and investor income, yet many show higher rates of income inequality within the cities than peers do.
Superstar cities share some characteristics in addition to their economic size and incomes. Of the 50 superstar cities, 31 are ranked among the most globally integrated cities, 27 among the world’s 50 most innovative cities, 26 among the world’s top 50 financial centers, and 23 among the world’s 50 “digitally smartest” cities. Additionally, 22 of the superstar cities are national and regional capitals, and 22 are among the world’s largest container ports.
At the same time, a notable number of superstar cities (and not just the city-states) have a disproportionate share of their national income given their share of the population. In addition to the 50 global superstars, we identify more than 75 regional superstar cities that are smaller but share many of these characteristics and could become global economic hubs in the future.
5. Questions for further research and preliminary implications
Our analysis so far raises questions for further research. For instance, we find that many suggested explanations of the superstar effect, such as productivity growth, technological or regulatory advantage, and intangible investments, do not fully or individually account for the phenomenon. What combination of factors leads to the emergence of superstar firms, sectors, and cities? How much of the superstar effect among firms is due to changes in the macroeconomy, including changes in value associated with different types of inputs and outputs, or to the wider accessibility of large global markets and low interest rates? How much is due to firm-specific investments in R&D and intangibles? What is the economic impact, both positive and negative, of superstars on innovation and competition, jobs and wages, investment and productivity, growth of smaller firms, consumer surplus, and overall prosperity and inclusive growth?
We also find linkages among firms, sectors, and cities that might be reinforcing superstar status and that raise the question of whether a “superstar ecosystem” might exist. For example, superstar sectors generate surplus mostly to corporations rather than to labor, driving a geographically concentrated wealth effect in superstar cities with a disproportionate share of asset-management activity and high-income-household investors. Labor gains from superstar sectors are also concentrated in narrow geographic footprints, often in superstar cities, and accrue mostly to high-skill workers.
But counter observations also raise questions. For example, why do some superstar sectors but not others produce superstar firms? What explains superstar firms in declining sectors? Why do some superstar sectors and firms thrive despite their low digital intensity, low R&D intensity, or low levels of cross-border trade and investment activity?
While further research is needed to inform implications properly for companies and policy makers, these findings already suggest some competitiveness and value-creation imperatives for companies and raise questions policy makers should consider. For example, for companies, it is easy to fall and possible to rise; productivity matters (but is not enough), as do inorganic growth, intangibles, and attracting talent; and while being in the right sector and geography helps, being in a declining sector can be overcome. Ultimately, though, for companies, value creation matters more than size for its own sake.
The growth of superstar firms, sectors, and cities also creates policy questions beyond the causes of superstars and their effects on competition and market structure. These considerations include implications for inclusive economic growth that can support and sustain broad-based employment and wage growth.
The findings in this paper are by no means the last word on the topic of superstars. Indeed, we have highlighted questions that require further research to inform smart policies by policy leaders and winning strategies by business leaders, all with the goal of not only value creation but also more inclusive growth and shared prosperity.
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