Hello Friends,
And happy Friday!
Today, a macro view of global economic value creation that only McKinsey does so well.
Originally a 9min read, synthesised in 4min below:
The role of companies in the 21st century economy and their responsibilities to stakeholders
We have evidence all around us that societal expectations of business are shifting. I found it striking that 87 percent of people who were asked about the role of companies declared that they should create value for multiple interests, not just make profits. Understanding these shifts is particularly important in the context of Generation Z, who are polarized on these questions, both as consumers and employees.
When a corporation creates $1 of value, where does it go?
We looked at 5,000 companies with revenues above $1 billion over a 25-year period.
In Organisation for Economic Co-operation and Development [OECD] countries, $61 trillion of gross value is added every year; $44 trillion of that, or 72 percent, is generated by the business sector.
That value represents the revenue minus intermediate costs to produce the products and services.
While the share of total value that businesses add varies between 70 percent and 75 percent among different countries, the essential picture has been remarkably stable over time.
The percentages are higher for some economic benefits.
Business, for example, contributes 85 percent of lab or productivity growth and 85 percent of technology investment.
Between 1995 and 2018, the contribution of large corporations to their home countries’ economies rose by ten percentage points in terms of share of GDP.
The value flows from corporations to households through eight different pathways.
If you take a dollar of revenue that the average corporation generates, 25 cents of that flows through as lab or income: wages, salaries, and other benefits to employees.
Seven cents of that dollar goes to capital income, meaning dividends, share buybacks, and interest payments to debtholders.
Six cents goes to investment—earnings that are retained to be invested in new productive assets—and four cents to production and corporate taxes.
The remaining 58 cents goes to supplier payments, which then result in lab or income, capital income, investment, and tax pathways for those supplier companies.
There are three additional pathways.
One is consumer surplus, which represents consumers’ willingness to pay higher prices than companies charge them for goods and services. That value is an additional 40 cents per dollar of revenue, so a very substantial contribution to households.
Then you have two sets of spillovers beyond the purely economic.
Negative spillovers include, for example, carbon emissions, land use, and impact on biodiversity.
Of course, there are positive spillovers as well, such as productivity gains in the broader economy when a company’s innovations become more widely adopted.
That productivity rate has slowed down materially, from a 1.1 percent annual increase for the 1995–2005 decade to 0.2 percent for the more recent decade.
The world has become less effective at combining capital and lab or in innovative ways to create economic gains, but this is a subject of debate among economists.
The most striking is the declining share of value going to lab or income versus capital income. It’s a trend we have observed for quite some time.
In addition, capital income is usually concentrated in top-income households.
Another change I would highlight is the reduction in supplier payments to small and medium-size enterprises.
Small and medium-size enterprises [SMEs] account for a lot of employment in local communities.
On the plus side, the consumer surplus that almost everybody, in all income brackets, has benefited from has increased.
However, we also have price increases—as much as 50 percent relative to inflation in some areas—that are putting education, healthcare, and some other services out of reach of lower-income households.
We ran an analysis that clustered 150 sub sectors of companies into eight archetypes of companies that do similar things and have similar impact on the world.
You have the Discoverers—companies that push the scientific frontier.
They have high R&D expenditure, a lot of intangible capital, and high capital-income pathways.
Think pharmaceutical firms, but also household-product companies with differentiated offerings and innovation-driven brands.
Next are the Technologists.
This group includes internet, media, and retail companies as well as hardware and software.
The Experts are businesses that harness human capital more than anything else to deliver services and on average offer higher wages than a typical corporation.
These include business-services companies as well as private hospitals and education institutions.
The Deliverers are retailers, distributors, restaurant chains—businesses that take inputs from elsewhere and sell them widely.
The rise of these institutions has had a significant societal impact.
The Makers are relatively capital-intensive manufacturers that nonetheless account for a large share of employment: aerospace, defense, and automotive, but also construction and engineering companies.
The Builders create, use, and operate the physical infrastructure the world revolves around and include utility and mining companies.
The Fuelers are predominantly oil, gas, and coal producers.
The Financiers are banks, insurance, and real-estate companies that price assets and provide capital.
They have a different presence around the world.
Makers are more prevalent in Germany and Korea than in most other OECD countries.
Technologists are more prevalent in the US.
The UK has numerous Financiers, Fuelers, and Discoverers relative to the average OECD economy.
The most striking element is the relative decline of Makers, which have been the preeminent archetype in the OECD.
They represent 30 percent of the total lab or income, so they are central to employment, and 26 percent of R&D, so the decline of Makers may be part of the reason for the rise of capital income over lab or income.
We see a big global shift of Makers to non-OECD economies.
The growth is coming from the Financiers, Experts, Deliverers, and Technologists. This reinforces two messages we have tried to convey:
Rising capital income, which comes from Financiers and Technologists.
A polarization of wages because Deliverers provide the lowest wages.
Thanks for reading, and have an increasingly productive weekend,
V