Big Firms Benefitted from Covid-19, Small Firms Did Not

The Covid-19 pandemic has battered small firms much more than hyperscalers or “large, superstar firms,” McKinsey data suggests. Between the third quarters of 2019 and 2020, “large superstar firms lost no revenue” while competitors experienced a decline of 11 percent, McKinsey says.

Looking at a range of revenue-related metrics and information technology investment, McKinsey researchers found that “advances appeared concentrated among large superstar firms, particularly in the United States.”

“This was true across many sectors, but particularly pronounced in professional, scientific, and technical services, IT, electronic manufacturing and healthcare,” McKinsey notes. 

source: McKinsey

The McKinsey analysis included items such as spending on research and development, investment, mergers and acquisitions activity as short-term proxies for the range of potential drivers that could accelerate productivity. 

The issue is what happens longer term as applied technology either does, or does not, positively affect revenue growth. A productivity paradox has existed in the past, where increased information technology spending does not produce a measurable increase in productivity. 

“Before the pandemic, productivity growth had not always fully translated into broad-based growth in wages and consumption,” McKinsey notes. 

Beyond that, the impact of “technology for labor” shifts “could, over the longer term, dampen employment and incomes, and hasten labor-market polarization and propensity to spend,” McKinsey says. 

The point is that after a short-term economic rebound driven by economic reopening, longer term economic growth is not so clear. We should see growth, but how much is less clear. Many ICT investments operate on the cost side of the business model, not necessarily the revenues side of the model. 

But cost for one entity always is revenue for another. Substituting machines for labor often is good for firms, but bad for employees and therefore reduces aggregate demand. Higher productivity is seen as a good thing. 

Whether recent investments produce higher productivity remains to be seen. Whether such gains outweigh potential negative changes in demand is another question.