Why so little R&D money?

In recent years, U.S. corporations have been paying out more cash to shareholders rather than investing. (Xaume Olleros/Bloomberg)

By Max Ehrenfreund

It’s is one of the most important yet least understood sources of ordinary Americans’ economic frustration: U.S. companies aren’t investing as much as they used to.

When corporations don’t invest or invest less, they put fewer people to work building factories, making equipment and conducting research. But investment has slumped in recent years, and researchers say there isn’t any obvious or consensus reason for the investment slowdown.

Now, two economists at New York University, Germán Gutiérrez and Thomas Philippon, think they might have at least a partial explanation. In a paper published this week by the National Bureau of Economic Research, they argue that increasing concentration of economic power in the hands of relatively few behemoth corporations — in some cases to the point where companies enjoy a near monopoly — could explain the pattern: The big firms, unconcerned about their competitors, simply have no need to invest in staying ahead.

“It explains a big chunk of why investment is low in the U.S. today,” Philippon said.

In separate research, the two economists found that market power has not become more concentrated in Europe. As a result, European markets are now more competitive than those in the United States — a remarkable shift in a country where free markets have long been not just a point of pride, but also a priority for national economic policy. “It’s a complete reversal,” Philippon said.

Read the rest on Wonkblog.

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