Monday, May 12, 2014

Has America Become Less Economically Dynamic?

It has become rather common to associate the rate of economic growth in a country with the notion of "economic dynamism".  A recent research paper from the Brookings Institute reported that the number of new firms being created has been shrinking relative to the number of firms that are exiting.  This might be mistaken for a lack of economic dynamism.  Noah Smith gives one explanation for why that might be happening which is not related to a decline in dynamism.  Big chains are replacing small retail firms, but that does not mean that our economy is less dynamic.  Frankly, the whole concept of national economic dynamism may be irrelevant in a global economy.  Multinational corporations dominate every industry.  Many of them are American corporations.  They often grow by acquiring start up companies that have developed technologies that may help them to grow.  That will contribute to the increase in firms exiting industries, but it does not imply a decline in economic dynamism.  Moreover, much of the growth in large multinational corporations occurs outside of the nation in which they are incorporated.  Much of that growth is in emerging market economies that are growing more rapidly than large nations. Their growth rate is influenced by the small base from which it started.  It makes no sense to talk about the dynamism of large nation states in a global economy dominated by multinational giants.  Large corporations may, or may not, be dynamic.  There is not much that nation states can do to enhance the dynamism of large corporations.

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