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KENAN INSIGHTS Money: Tech and the Changing Geography of Wealth March 2020 | kenaninstitute.unc.edu/insights

Executive Summary POLICY TAKEAWAYS

With the election cycle well underway, the deep political divisions cutting • Local economic development across the United States are on full display. These divisions largely reflect policies have not been successful the nation’s growing economic inequality driven by the changing geographic for most of the U.S. population distribution of wealth that has taken place over the past few decades. With because these policies tend to much of the wealth now concentrated in technology and financial clus- focus on generating increasing re- ters such as San Francisco, Seattle, Boston and New York, manufacturing turns to a place, finding the right strongholds mostly located in industrial niche or smart special- the nation’s heartland have ization and attracting established been left behind. Emerging Emerging research from Mary- companies or enabling entrepre- research from Maryann Feld- ann Feldman of the Kenan Insti- neurs. man of the Kenan Institute tute shows that technology and • If the U.S. is to address its wors- shows that technology and fi- finance firms have contributed ening regional income disparities, nance firms have contributed to regional income disparities reversing the rise of monopoly to regional income disparities across America. power will be critical. Local eco- across America. Three trends nomic development initiatives in are driving this disparity: held-back regions are bound to be ineffective against the unre- 1. Many top technology companies exhibit a winner-take-all dynamic that stricted power of regions that are creates monopoly power, which in turn makes certain locations invin- home to tech monopoly clusters. cible by amplifying the benefits companies gain by clustering together • From both national and inter- geographically. national perspectives, reducing 2. These monopolies inhibit local economic development in other places monopoly power is tricky because by imposing what can be considered a “tax” on economic activity, while these tech monopolies have be- also restricting dissemination and customization of technology. come a key element of the U.S.’s 3. The financial sector feeds this dynamic by favoring geographically international competitiveness. concentrated big-tech monopolies at the expense of other places and • The monopolies themselves are industries. politically powerful and their symbiotic relationship with the The rise of technology monopolies financial sector gives Wall Street and the monopolies a common In 1980, the highest concentration of well-paid workers was in Gary, Indi- interest in the status quo. How- ana, followed by Detroit, Michigan, and Washington, D.C. In 2016, Washing- ever, with further research and ton, D.C., held the top spot, followed by San Francisco-San Jose, New York informed policy steps, regulation and Boston. From 1980 to 2016, these three metropolitan areas, along with of monopoly power and the finan- secondary hubs in banking and technology, saw the largest increases in the cial system may offer the best share of workers earning incomes exceeding the 80th percentile nationally, path to economic revival in Amer- while income in most of the industrial heartland declined. ica’s held-back cities and regions. The Role of Tech Monopolies in Mapping the Geography of Wealth | kenaninstitute.unc.edu/insights

Today, an outsized proportion of high-paying jobs is concen- addition, because tech monopolies are valuable industries to trated in places where firms have achieved monopoly status, their home bases, government has limited motivation to regu- defined as increased market power and the ability to com- late them (Iammarino 2018). mand prices that far exceed the cost of providing a service or good. Consider, for example, Apple, Google and Facebook in Concentrated benefits, widespread costs Silicon Valley; Microsoft and Amazon in Seattle; and Qualcomm in San Diego. Companies tend to cluster near other companies that are in related industries, to benefit from proximity to a pool of skilled Feldman and her co-authors attribute the increasing preva- labor, knowledge spillovers and access to specialized suppli- lence of monopolies to three factors: ers and customers. While this clustering tendency has been observed for more than a century, monopolies can amplify the (1) The platform nature of digital technology: Digital tech- effect. In the winner-takes-all world of digital platform monop- nologies benefit from situations in which a growing number of olies, the value of access to a highly talented workforce and users increases the product’s value to the consumer and/or better market intelligence can make the difference between decreases the costs to the producer (Evans 2003; Gawer 2010; market dominance and irrelevance (Rosen 1981; Sattinger Rochet and Tirole 2006). Digital platform monopolies make 1979). As a result, such firms derive a great deal of value from their money by controlling access to previously open networks. proximity to skilled labor and knowledge spillovers, making This affects not only consumers of digital services, but also geographic concentration critical. potential producers of such services. (2) Extended IP rights: Like digital platforms, firms based on The geographic concentration of tech monopolies has many IP rights such as patented software, algorithms, genetic codes economic implications for communities. Areas with technolo- and business models have grown, in terms of both their mar- gy clusters have experienced rocketing real estate costs, rising ket power and their geographic concentration. For these firms, homelessness and transportation problems. On the other clustering near other IP-based firms helps lower marginal hand, places lacking tech monopolies have been not just left costs and facilitate the global reach of the monopoly. behind, but held back. Today’s technology monopolies collect (3) Loss of regulatory oversight: The growth of monopoly revenues that effectively are a tax on almost all business ac- power occurred under the reinterpretation of anti-trust law tivities in most parts of the world. For example, intermediaries pioneered by Robert Bork in 1967. Previously, monopoly like Airbnb, Trip Advisor, Booking.com, Expedia (Microsoft) and power was assessed based on trade restraint; Bork’s interpre- Uber all take significant slices of revenue from many thou- tation required evidence of harm to consumers. As the Bork sands of globally dispersed small businesses. This situation interpretation gained popularity in the 1990s, the number redistributes wealth from around the world to the sharehold- of antitrust cases pursued by the Federal Trade Commission ers and employees of the platform companies found in a few dried up, allowing more monopolies to grow unchecked. In privileged places.

The Rise of Monopolies Where were the good jobs? 1980 Where are the good jobs? 2016

Share of employed persons earning above the 80th percentile of the national distribution (typically, 0.20) By commuting zone (CZ); areas scaled by population

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Finance further feeds monopolies

The financial sector plays an important role in the geogra- In a competitive market, increased dependence on financing phy of wealth because it facilitates the movement of capital can indicate increased efficiency of financial markets because away from firms with lower returns, which tend to operate in capital is moved from less productive uses to more productive more competitive markets, to firms with monopoly power or ones (Rajan and Zingales 1998). However, the same does not monopoly prospects. In effect, this means finance flows to hold true in a market with monopoly power. If higher returns places with monopolies at the expense of those without. This are gained by investing in monopolies, commercial banks situation has resulted from a shift in which companies have are incentivized to strip assets from perfectly viable firms to become significantly more dependent on financing. From the finance monopolies. When monopolies are found in clusters, 1970s until the year 2000, the typical medium or large Ameri- this dynamic increases the inflow of capital to monopoly firms can firm was largely self-financing, paying some of its cash flow and the places in which they invest (Myrdal 1957), inhibiting out to shareholders and using a greater portion for capital opportunities for growth or economic revival elsewhere. This expenditure. Since 2000, many firms have paid substantially dynamic is further intensified by the growing industrial and more of their cash to shareholders or to acquire other firms, geographical concentration of commercial banking. with average payouts approximately equaling capital expendi- ture – resulting in companies relying more heavily on financ- ing.

OTHER RESOURCES KEY REFERENCES KEY REFERENCES (CONT.) KEY REFERENCES (CONT.) More Kenan Insights at BrEvans, D. 2003. “Some Em- Jensen, Michael C., and William Rosen, Sherwin. 1981. “The Eco- kenaninstitute.unc.edu/insights pirical Aspects of Multi-Sided H. Meckling. 1976. “Theory of nomics of Superstars.” American Platform Industries.” Review the Firm: Managerial Behavior, Economic Review 71: 845–58. of Network Economics 2: 3. Agency Costs and Ownership Sattinger, Michael. 1979. “Differ- OUR EXPERTS https://doi.org/10.2202/1446- Structure.” Journal of Financial ential Rents and the Distribution 9022.1026. Economics 3 (October): 305–60. of Earnings.” Oxford Economic Professor Maryann P. Feldman Papers 31 (1): 60–71. UNC Kenan Institute Gawer, A. 2010. “The Organiza- Manne, Henry. 1965. “Mergers . [email protected] tion of Technological Platforms.” and the Market for Corporate 919.962.0649 Research in the Sociology of Control.” Journal of Political Econ- Organizations 29: 287–96. omy 73: 110–20. INSTITUTE PUBLICATIONS Fama, Eugene F. 1980. “Agency Rajan, Raghuran G., and Regional Income Disparities, Problems and the Theory of the Luigi Zingales. 1998. “Financial Monopoly & Finance Firm.” Journal of Political Economy Dependence and Growth.” 88 (2): 288–307. American Economic Review 88 (3): Common Ground: How to 559–86. Pursue a Mixed Strategy for Eco- Iammarino, Simona, Philip nomic Development and Come McCann, and Raquel Ortega Rochet, J., and J. Tirole. 2006. Out Ahead Argilés. 2018. “International “Two-Sided Markets: A Progress Business, Cities and Competive- Report.” The RAND Journal of Eco- Evidence-Based Economic De- ness: Recent Trends and Future nomics 37: 645–67. https://doi. velopment Policy Challenges.” Competitiveness Re- org/10.1111/j.1756-2171.2006. view 28 (3): 236–51. https://doi. tb00036.x. More Research at org/10.1108/CR-10-2017-0070. kenaninstitute.unc.edu/research

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