Real net income after tax of top global firms up 400% since 1980

The real (inflation-adjusted) net income after tax (and interest) of the biggest global publicly-listed companies rose by 400% in the period 1980-2013. Several factors contributed to the profits surge including tax avoidance.

McKinsey Global Institute says in a 2015 report that fueled by rapid global revenue growth, declining costs, and steady gains in productivity, corporate profits have surged to 30-year highs.

We found that post-tax net profits grew from $2.0tn in 1980 to $7.2tn in 2013, rising from 7.6% to 9.8% of world GDP. Corporate net incomes (after interest payments) rose fivefold, increasing by some 70% when measured as a share of global GDP. Lower depreciation costs, lower effective tax rates, and lower interest rates in many countries have enabled corporations to transform the sharp revenue growth of the past three decades into even larger profit growth (see chart below).

The price of labour, equipment, and technology all fell. Multinationals also benefited from rising consumption, industrial investment and the growth of globalised supply chains.

Richard Freeman, the Harvard economist, wrote in a 2006 paper:

Before the collapse of Soviet communism, China's movement toward market capitalism, and India's decision to undertake market reforms and enter the global trading system, the global economy encompassed roughly half of the world's population in the advanced OECD countries, Latin America and the Caribbean, Africa, and some parts of Asia. Workers in the US and other higher income countries and in market-oriented developing countries such as Mexico did not face competition from low wage Chinese or Indian workers nor from workers in the Soviet empire. Then, almost all at once in the 1990s, China, India, and the ex-Soviet bloc joined the global economy and the entire world came together into a single economic world based on capitalism and markets.

This change greatly increased the size of the global labour pool from approximately 1.46bn workers to 2.93bn workers. Since twice 1.46bn is 2.92bn, I have called this "The Great Doubling."

McKinsey says that size matters, because large firms (those with more than $1bn in annual revenue) have an outsized economic impact — and they have been the biggest beneficiaries of this extended bull run.

The consultancy says that the global firms account for nearly 60% of global revenue and 65% of market capitalisation. Moreover, relatively few firms drive the majority of value creation: among the world’s public companies, just 10% of firms account for 80% of profits, and the top quintile earns 90%.

Companies once reinvested most of their earnings, but they are increasingly holding on to their profits. Since 1980 corporate cash holdings have ballooned to 10% of GDP in the United States, 22% in Western Europe, 34% in South Korea, and 47% in Japan. With low borrowing costs and plenty of available cash on hand, companies in some industries have engaged in a massive wave of mergers and acquisitions. The biggest names are getting even bigger.

McKinsey says firms have been increasingly substituting labour with capital. Some of the most highly valued tech firms can generate enormous profits with smaller workforces.

In 1990, the Big Three US car companies (GM, Ford, and Chrysler) generated $22bn (in 2013 dollars) in profits while employing more than 1.2m people among them. Today, the three largest US high-tech firms — Apple, Google, and Facebook — capture over twice as much in profits ($52bn) and have a combined market cap that stood at almost $1.4tn as of August 2015, but they employ only 138,500 workers directly.

Declining interest payments, tax rates, and costs have contributed to soaring corporate profits. The corporate sector’s share of US national income has more than doubled since 1980. But its growth accelerated after 1990 and has hit new heights since the Great Recession ended. In the meantime, labour’s share of US national income has steadily dropped from a high of 66% in 1990 to 61% today, with an especially steep decline since 2000.

In 1990, there were 11,500 M&A deals whose combined value was equivalent to 2% of world GDP. Since 2008, there have been some 30,000 deals a year totaling roughly 3% of world GDP.

The Economist says that the share of nominal GDP generated by the Fortune 100 biggest American companies rose from about 33% of GDP in 1994 to 46% in 2013, and the Fortune 100’s share of the revenues generated by the Fortune 500 went up from 57% to 63% over the same period.

Meanwhile the number of listed companies in America nearly halved between 1997 and 2013, from 6,797 to 3,485, according to Gustavo Grullon of Rice University and two colleagues, reflecting the trend towards consolidation and growing size. Sales by the median listed public company are almost three times as big as they were 20 years ago. Profit margins have increased in direct proportion to the concentration of the market.

On Wall Street the five biggest banks have increased their share of America’s banking assets from 25% in 2000 to 45% today.

In three-quarters of US sectors, the 50 biggest companies boosted their revenue share between 1997 and 2007, according to a 2015 paper by Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, and Peter Orszag, economist and banker. Industries from retail and finance to transportation became increasingly concentrated.

A 2016 ranking of the Top 100 global companies by market capitalisation produced by PwC, the accountancy firm, showed that US firm numbers grew from 42 in 2009 to 54 in March 2016; Eurozone numbers fell from 18 to 14 and the number of continental European firms declined from 31 in 2009 to 24; China/HK had 11 in both years; the UK dropped from 9 to 7 and Ireland has one entry: Medtronic — the American medical devices firm taht became Irish for tax purposes in 2015 .

Germany was unchanged at 5; France fell from 7 to 4 and Japan fell from 6 to 4.

Finfacts 2013: Nokia, Europe and Japan's old companies versus US young champions

Startups

Much of the innovation of the big tech firms comes via acquisitions of startups.

Most of the net new jobs in the US in any year are provided by startups but the Kauffman Foundation, the US entrepreneurship think-tank, showed last August that the share of companies that are startups employing at least one person was at the second-lowest level on record in 2013, and 20% below its pre-recession levels.

An estimated quarter of US workers require a licence to do their jobs and this requirement is typically results from restrictions at state level in return for political donations from vested interests, to regulate entry to professions.

The White House said last June:

While licensing can offer can offer important health and safety protections to consumers, as well as benefits to workers, the current system often requires unnecessary training, lengthy delays, or high fees. This can in turn artificially create higher costs for consumers and prohibit skilled American workers like florists or hairdressers from entering jobs in which they could otherwise excel.

Research shows that licensing cannot only reduce total employment in licensed professions, but also that unlicensed workers earn roughly 7% lower wages than licensed workers with similar levels of education, training, and experience. In addition, the patchwork of state-by-state licensing rules leads to dramatically different requirements for the same occupations depending on the state in which one lives, burdening workers who aim to move across state lines—including, for example, military spouses who move frequently.

The Kauffman Foundation reported this year:

The Startup Density stood at 80.4 (or 80.4 new businesses out of every 1,000 existing employer businesses) in 2013, the most recent year for which this data is available, representing approximately 406,000 new employer businesses created that year. The 2013 Startup Density fell slightly from 2012, when it was logged at 81.9 (or 81.9 new businesses out of every 1,000 existing employer businesses).

The 2013 Startup Density of 80.4 is the second lowest on record, exceeding only the 2010 Startup Density of 77.7. US Startup Density has been stuck at roughly 20% below pre-Great Recession levels for the last four years and has trended downward for some time; although we do not yet have data on how this indicator has performed in the past two years.

The Startup Density has halved since 1977.

Emerging market companies

McKinsey says many companies with their roots in emerging economies now rank among the world’s largest. Their track record is uneven, but their presence — in sheer size and numbers — is game-changing. Chinese firms already make up some 20% of the Fortune Global 500, while the share of US and Western European companies dropped from 76% in 1980 to 54% in 2013.