The debate about superstar firms and superstar effects has been intensifying, partly in response to the rapid growth of global US tech companies. However, scratch the surface and the superstar phenomenon may not be quite what it seems. Wider dynamics may be at play.
In our recent research at the McKinsey Global Institute, we examined the superstar phenomenon across firms, as well as sectors and cities. We define superstar to mean a firm, sector, or city that has a substantially greater share of income than peers and is pulling away from those peers over time. Yes, we found that a superstar dynamic is occurring for firms, cities and, to a lesser extent, sectors. In this article, we will focus mostly on firms, but with some brief commentary on sectors and cities at the end.
We analyzed nearly 6,000 of the world’s largest public and private firms with annual revenues above $1 billion. These firms make up two thirds of global corporate pretax earnings (EBTDA) and revenues. To analyze the superstar dynamics of firms, our metric was economic profit, a measure of a firm’s profit above and beyond opportunity cost. (To do this, we take the firm’s returns, deduct the cost of capital, and multiply by the firm’s total invested capital.) We focus on economic profit rather than revenue size, market share, or productivity growth because these other metrics risk including firms that are simply large and may not create economic value.
The top 10% of the firms we analyzed — the superstars by our metric — create 80% of all the economic value, meaning they account for 80% of economic profits. The top 1% accounts for 36% of all the economic value created by public and private corporations worldwide. The bottom 10% destroy roughly as much economic value as the superstar firms create. The distribution of economic value is also getting more skewed over time, and at both ends. Superstar firms create 1.6 times more economic profit on average today compared to 20 years ago. But this is also mirrored by firms in the bottom 10%, which account for 1.5 times more economic loss today than 20 years ago.
Contrary to popular perception, these superstar firms are not just Silicon Valley tech giants. They come from all regions and sectors and include global banks and manufacturing companies, long-standing Western consumer brands, and fast-growing U.S. and Chinese tech firms. In fact, both the sectoral and the geographic diversity of superstar firms is greater today than 20 years ago. The superstars tend to be more involved in global flows of trade and finance, more digitally mature, and they dominate the lists of the most valued companies, the most valued brands, the most desirable places to work, and the most innovative companies.
But uneasy should lie the head that wears the crown: Nearly half of superstar firms are displaced from the superstar top decile in every business cycle. Among the top 1% today, two-thirds of firms are new entrants that were not in the top 1% a decade ago. The high degree of churn among superstar firms cuts both ways: when superstar firms fall, 40% of them fall to the bottom decile with large economic losses; at the same time many firms have also risen from the bottom decile, in some cases all the way to the top. The rate of churn at the top has remained the same over the last 20 years.
A few key characteristics distinguish superstar firms from the rest, that perhaps others could learn from. They spend 2-3 times more on intangible capital such as R&D, have higher shares of foreign revenue, and rely more on acquisitions and inorganic growth than median firms. The greater economic profit and loss at both ends of the distribution is driven by greater scale and invested capital, not by increasing returns to capital. Some bottom-decile firms share many of these characteristics, such as size and even investments, suggesting that size alone is not sufficient; what sets superstar firms apart is their ability to select and execute on their bold investments well.
Superstar dynamics go beyond firms and can be observed among cities too, and to a lesser extent among sectors. We find that a handful of sectors account for 70% of value added and surplus across the G-20 group of major economies. These “superstar” sectors include financial services such as banking, insurance, and asset management, professional services, internet and software, real estate, and pharmaceuticals and medical products. The disproportionate gains to these sectors is in contrast to the previous 15-20 years when gains in surplus and value added were more widely distributed across sectors of activity. Today’s superstar sectors tend to have higher R&D intensity, higher skill intensity and lower capital and labor intensity than other sectors. The higher returns in superstar sectors accrue more to corporate surplus more than labor and flow to intangible capital such as software, patents, and brands.
For cities, we analyze nearly 3,000 of the world’s largest cities by population that together account for 67% of global GDP. Using our metric of GDP and personal income per capita, we identify 50 top superstar cities. They include cities such as Boston, Frankfurt, London, Manila, Mexico City, Mumbai, New York, Sao Paulo, Sydney, Tianjin, and Wuhan. These 50 cities account for 8% of global population, 21% of world GDP, 37% of urban high-income households, and 45% of headquarters of firms with more than $1 billion in annual revenue. The average GDP per capita in these cities is 45% higher than that of peers in the same region and income group, and this gap has grown over the past decade. The churn rate of superstar cities is half that of superstar firms. Often when superstar cities fall, they tend to be advanced economy cities, replaced by a developing economy city.
The link between superstar firms, sectors, and cities is complex. Some superstar firms benefit from being in “superstar” sectors of activity, particularly those in which value-added gains go to gross operating surplus (an economic measure that represents the income earned by capital). Yet many superstar firms endure even as their sector sees declining shares of value added and surplus. “Superstar” sectors’ gains tend to be more geographically concentrated, and mostly in large cities, many of which are superstar cities. For instance, gains to internet, media, and software activities are captured by just 10% of U.S. counties, which account for 90% of GDP in that sector. These cities see faster income growth than population growth, resulting in demand for high-skill, high-wage workers and limited supply—an escalating war for talent. Superstar firms and sectors also create strong wealth effects for investors, asset managers, and home owners, and these wealth effects are also concentrated among superstar cities.
While more research needs to be done to understand the full implications of superstars in the global economy, we believe enough evidence exists to give corporate decision makers some food for thought. Superstar status remains contestable, it’s easy to fall from the top, and possible to rise — even from bottom all the way to the top. Size matters, but it is not enough; value creation matters more than size for its own sake. Productivity can help; but it is not enough to achieve superstardom. Being in the right sector and geography can help; but this too can be overcome. Acquisitions, bold investment in intangible assets, and attracting talent can ultimately make the difference.