Economic Development and Higher Education

U-M prof: Dearth of corporations is not all bad

Jerry Davis says middle-sized city like Grand Rapids better for economic growth.

September 30, 2016
| By Pat Evans |
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Initial public offerings just aren’t cool any more, according to a new book by a University of Michigan professor.

University of Michigan Ross School of Business Professor Jerry Davis spoke at Grand Valley State University last week about the death of American corporations and his book, “The Vanishing American Corporation: Navigating the Hazards of a New Economy,” which was released earlier this year.

The number of publicly traded corporations dropped by 50 percent from 1996 to 2012, and when Davis first looked up the information in 2010, the data left him scratching his head. He was perplexed more people weren’t aware of the phenomenon and why it wasn’t more publicized.

As he continued to collect data and anecdotes, he wrote a paper on what would happen if corporations completely disappeared. While there was some doom and gloom, it’s not all bad, he said. There are pieces that need to be figured out in the future economy, like what companies will provide jobs, he said.

“I found out I wasn’t crazy, and it really is happening and in a very systematic way,” Davis said. “The costs of starting a business are a lot smaller than they used to be, and that’s why you used to go public, to help build factories, stores and railroads. You need cash to have all those large-scale structures.”

In the current economy, a startup can get most of its work done on the cheap with outsourcing, he said. He points to Vizio, which became the best-selling LCD TV company in the United States in 2010.

Vizio had a 27.6 percent market share for LCD TVs in 2010 with fewer than 200 employees. Sony, meanwhile, had a 10.1 percent market share with 150,000 employees.

“The year they became the best-selling TV, they had 196 employees in Irvine, California, and had put together a supply chain to be much cheaper than Sony and Samsung,” he said. “It’s a winning formula. If it works for TVs, where else can it work?”

A few examples Davis likes to use to show the differences in economic models: In 2005, Blockbuster had 9,000 stores in the United States with 83,000 employees, and in 2015, Netflix had 3,700 employees. Nine internet companies — including Zillow, Groupon, LinkedIn and Facebook — had 40,893 employees in 2015, nearly as many as Circuit City employed prior to its liquidation in 2009.

Davis said companies requiring fewer employees are great for customers but bad for workers.

“Uber is great. If you’re totally hammered, you can push a button, someone shows up, takes you home and takes money,” he said. “It’s a nightmare for labor, because you never get a raise, nothing you do gets you paid more, you don’t get promoted.

“You don’t go from a driver to writing an algorithm. It’s a dead-end job with no way to move up.”

Corporations are what America has built its economy on and has provided employees through generations with health care, retirement and stability, he said. Eventually, the new economic business models could lead to a frictionless economy, but until then, there’s a nightmare scenario impending.

The number of corporations disappearing is a culmination of four industries coming to tipping points he said. First, the 1990s was a boom for IPOs, he said.

“It was a 1990s fad, like parachute pants, crack, Ace of Base,” he said. “It was stuff that was popular in the 1990s but has disappeared since then, and they’re not coming back. The IPO market, I don’t think will ever recover.”

Much of the IPO increase was part of the dot-com bubble, he said. The first major decline in publicly traded companies was when the bubble burst, equating to about one-fifth of publicly traded American companies disappearing.

Davis said a lot of telecom companies also disappeared around the same time, as they discovered it wasn’t the next big thing in communications.

The third wave is a sector Grand Rapids felt more than the others: banking. In 1980, the United States had 12,000 commercial banks, Davis said. At the same time, Canada had six.

“How does that make sense?” Davis said. “American banks were all regulated at a local level. It was not an efficient model but great if you hate banks.”

As regulations were lifted in the 1990s, it “fired the gun” for banks to buy one another, Davis said. The financial crisis of 2008 further magnified the disappearance of financial institutions, he said.

During the bank consolidation, the electronics industry offshored within a three-year period, he said. Davis said as China entered the World Trade Organization, America lost 500,000 jobs in the electronics industry.

“A large number of businesses just evaporated since the 1990s, because they couldn’t make it economically in the U.S. anymore,” Davis said. “Four different sectors, for pretty different reasons, imploded and aren’t coming back.”

Davis’ conclusions aren’t exactly sunshine and rainbows for the American economy, but his thoughts about Grand Rapids are positive. He looks at Grand Rapids in a similar light to Germany.

Twenty years ago, the United States had 6,000 publicly traded companies, while Germany had 600, he said.

“It’s a giant export economy, but it’s never relied on giant corporations,” Davis said. “It’s middle-sized, family-owned businesses. Germany doesn’t have the economic problems or unemployment of the U.S. or Spain.”

He said the multitude of medium-sized, family-owned businesses and committed families to Grand Rapids likely will help the West Michigan economy weather any economic storm that might be on the horizon. Davis referenced a C. Wright Mills paper comparing Grand Rapids to Flint during Flint’s boom years, and how Mills predicted Grand Rapids would be better off in the long run, as it wasn’t tied to one corporation or industry.

The executives of large corporations often don’t weave into the social fabric of a community like what has happened in Grand Rapids, he said.

“It seemed counterintuitive at the time, but it’s created a much more durable, long-lasting economy,” he said. “There’s a mesh here that holds it together. People from different perspectives know each other have a moral suasion on each other.

“There’s a capacity to do things as a collective. I’d be much less worried here than I would be in other places across the country.”

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