Ever Bigger Firms?

G. Meeks and J. G. Meeks

European Review, 2005, vol. 13, issue 4, 511-523

Abstract: When the grandfather of modern economics, Adam Smith, was preparing his Wealth of Nations almost a quarter of a millennium ago, the workforce of businesses would typically be counted in single or double figures. Now the world's biggest firms, such as Wal-Mart, have a payroll of well over a million, bigger than the population of some entire nations. This paper reviews some of the reasons for this growth, and considers whether it might continue forever. Powerful evidence exists of potential scale economies, in business functions from R&D to finance, and industries from pin production to pharmaceuticals. And these do indeed translate into remarkable performance records for some industrial giants. But surprisingly, on average, bigger firms do not enjoy above average profitability and, on the whole, giant firms are not gaining on the world economy. This paper reviews some of the market and managerial constraints on size, and considers innovative efforts – ranging from the New Zealand dairy industry to the McDonald's chain – to reconcile global-level scale economies in some functions with local autonomy in others. In passing, the paper notes a disturbing array of incentives tempting some managers to expand their empire, even when that is not in the shareholders' interest.

Date: 2005
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