How a Small Share of Firms Drive Economic Growth
My guess is that everyone would be happier if economic growth was evenly distributed, so that everyone’s income rose in lockstep. Instead, growth is a disruptive process, with some firms and sectors rising while others decline. As a wise economist once put it, the process growth could in theory be like “yeast,” with everything expanding at once, or like “mushrooms,” with spurts of growth in cerain areas. But most of the time, it’s mushrooms.
A team from the McKinsey Global Institute writes about the mushrooms in “The power of one: How standout firms grow national productivity” (May 6, 2025). The thesis, as stated in the subtitle: “National productivity growth is a matter of few firms taking bold strategic action rather than millions of firms raising efficiency.” For the relatively short time frame they analysis in this study, from 2011 to 2019, this seems likely to be true.
The authors have a dataset of 8300 firms across the US, UK, and German economy, all with at least 50 employees and many with more than 500 employees, and focused in four sectors: retail, automotive and aerospace, travel and logistics, and computers and electronics. They refer to this limited group of companies in each country as a “lab economy.” define a “Standout” firm as a company where the productivity growth in that single company, by itself, adds at least 0.01% to the productivity growth of the entire set of companies for the lab economy in one country. Conversely, they define a “Straggler” firm as a single company that, by itself, subtracts at least 0.01% of productivity growth from the entire economy. Of courses, most firms are between these extremes.
Two conclusions frm the report seem worth emphasizing, in part as explanations for why the US economy has been outperforming the UK and German economies.
First, a relatively small number of Standouts and Stragglers can drive the overall productivity growth patterns of an economy. The report notes: “Fewer than 100 firms in our sample of 8,300—a group that we have dubbed Standouts—accounted for about two-thirds of the positive productivity gains in each of the three country samples we analyzed. … To give a sense of how important a single firm can be, just another dozen or so of the largest Standouts could have doubled productivity growth in their entire country. … In the United States, for instance, 44 Standouts—5 percent of sample firms, accounting for 23 percent of employment share—generated 78 percent of positive productivity growth. … US Standouts included household names like Apple, Amazon, The Home Depot, and United Airlines.
Second, the US has a higher proportion of Standouts relative to Stragglers, compared to the UK and Germany: “US productivity growth from 2011 to 2019 was faster than that of the other countries in our sample at 2.1 percent, compared with 0.2 percent in Germany and close to zero in the United Kingdom. … The US sample had three times more Standouts than Stragglers, while the German and UK samples had almost even numbers.”
Third, US Standouts are more likely to grow and expand, while US Stragglers are more likely to contract, compared with the UK and Germany: “Firms in the US sample had more reallocation of employees from less productive to more productive firms. Leaders grew faster, and underperforming firms more swiftly restructured or exited. In the United States, Standouts include scalers (firms far above average sector productivity that contribute by gaining employees) and restructurers (firms with below-average sector productivity that contribute by losing employees). In Germany and the United Kingdom, this was not the case. Rather, these countries preserved underperforming firms as Stragglers. Frontier firms scaling and gaining share added 0.6 percentage point to productivity growth in the United States, and unproductive firms exiting contributed an additional 0.5 percentage point. Overall, dynamic reallocation, including reallocation across subsector boundaries, added 0.9 of 2.1 percentage points—slightly less than half—to productivity growth in the US sample. In contrast, the contribution of reallocation was negligible in Germany and the United Kingdom. This may be explained by the fact that the United States has highly dynamic factor markets, allowing for quick entry and exit as well as fast scale-up and restructuring.
I’ll add that over longer time periods, the “standout” firms will change, and gradual gains by all of the intermediate firms will loom larger. As the report notes, “The millions of MSMEs [micro, small, and medium sized enterprises] outside our sample collectively contributed up to 30 percent of productivity growth in the four sectors in the national statistics. Indeed, a handful of them may emerge as the Standouts of tomorrow.”
Perhaps the bigger lesson is that all nations claim that they want dynamic standout “superstar” firms (for previous discussions of the role of such firms, see here and here). But then, when those dynamic firms start expanding, they create economic disruption and start driving other competitors out of business. At that point, political pressure will arise to rein them in. But sustained economic growth, at least in the short- and medium-run, is typically mushrooms, not yeast.
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