Corporations Engage in Rivalry with Prominent Market Rivals
Superstar businesses, such as Apple, Nvidia, and Facebook, have a significant impact on the financial health of firms within the same sector. These dominant players, known for their size, scale, innovation, and market power, can both promote innovation and lead to bankruptcy for less competitive firms.
### The Increasing Pressure on Smaller Firms
Superstar firms intensify competition in their sector, squeezing profit margins and making it tougher for smaller firms to secure financing or maintain liquidity. This competitive pressure can push some smaller firms towards bankruptcy, particularly in industries with oversupply and declining margins, such as the trucking industry.
### Financing Constraints for Small Businesses
As superstar firms grow, smaller firms face increasing difficulty in obtaining financing. Limited access to affordable credit, especially in an environment of rising interest rates, weakens small businesses’ ability to weather downturns or invest for growth, increasing insolvency risk.
### The Role of Competition in Reducing Zombie Firms
Interestingly, increased competition may reduce the proportion of "zombie firms" – unprofitable firms kept afloat by cheap debt – by limiting their ability to raise funds, which reduces their continuation value. However, this does not necessarily reduce bankruptcy rates overall, as many smaller viable firms may also fail under the strain.
### Mitigating the Negative Impact
Access to flexible financing, such as credit cards or alternative forms of short-term financing, can act as a financial buffer for small businesses, helping them maintain liquidity when revenues fall. Although costly due to higher interest rates, this credit flexibility can delay bankruptcy by supporting cash flow and operational continuity.
Market structures that encourage fair competition and antitrust enforcement can also mitigate the negative impact of superstar firms. Enforcement of competition laws prevents excessive market power consolidation by superstar firms, maintaining a level playing field and reducing predatory practices that would otherwise increase bankruptcies among smaller firms.
### The Survival of Innovative Businesses
The more innovative a business is, the more likely it is to survive when facing superstar competition. Businesses that supply services or products to superstar firms were less likely to go bankrupt, suggesting that a strong focus on technology, R&D, and developing patents can help businesses weather the competition from superstar firms.
### The Future of Smaller Players
Smaller players could assess their strengths and weaknesses in terms of technology capability, innovation, supplier status, and access to credit. By understanding their exposure to superstar competition and taking steps to improve their competitive position, smaller firms can increase their chances of survival in an increasingly competitive market.
The researchers, including Regina Wittenberg Moerman, a Kellogg professor of accounting and information management, studied the influence of superstars by examining the bankruptcy patterns of thousands of publicly listed U.S. firms from 1988 to 2018. Their findings suggest that businesses in the top 10 percent of superstar exposure are 42 percent more likely to go bankrupt than those without such exposure.
However, factors like firm innovation and access to credit can mitigate this negative effect. Businesses that are accustomed to competition and product development are less likely to be affected by superstar exposure, as are firms with good access to capital, enabling them to invest in changes to withstand superstar competition.
In conclusion, superstar businesses have a significant impact on the bankruptcy rates of other firms within the same sector. Mitigation comes through flexible credit availability, market structures that encourage fair competition, and antitrust enforcement that prevents abuse of market dominance. By understanding their exposure to superstar competition and taking steps to improve their competitive position, smaller firms can increase their chances of survival in an increasingly competitive market.
Financing constraints for smaller businesses can increasingly hinder their ability to secure necessary funds, weakening their resilience in the face of competition and economic downturns, thereby raising insolvency risk. Effective competition policies, such as antitrust enforcement and fair market structures, can prevent excessive consolidation of market power by superstar firms, ensuring a level playing field and reducing predatory practices that contribute to higher bankruptcy rates among smaller firms.
In terms of personal finance, it is important for individuals to consider the potential impact of superstar businesses on the industries they invest in, as a concentration of such firms can lead to volatility and risk in investment portfolios, affecting one's financial wellbeing and long-term goals.
