For example, Ford’s production line cut the time to assemble a car to 90 minutes, down from 12 hours; Apple’s iPhone ushered in the era of the smartphone; Amazon pioneered online commerce.
That’s why we created the abrdn Innovation Index – to try to identify the next generation of these ‘innovation superstars’.
The first paper in a new research series – Identifying the most productive US-listed firms – analyses historical data (from 2000 to 2019) for the Russell 3000 Index.
Why productivity?
As economists, we decided to use ‘productivity’ as a proxy for innovation at the company level. Doing so has the advantage of filtering out much of the noise inherent in other measures of success, giving us a cleaner read on the rewards from innovation.
As economists, we decided to use ‘productivity’ as a proxy for innovation at the company level
Economy-wide productivity gauges how efficiently all inputs – such as workforce and capital – are used to produce a given level of output. Productivity is therefore essentially a ratio between everything that goes into the production process and what comes out.
The theory is essentially the same at the level of individual companies. How efficiently are they using their employees, machinery, buildings, technology and other forms of physical capital to create products or services? How does this performance compare across companies, sectors and time periods?
In the study, we focused on three aspects of productivity:
- Product innovation (e.g. the iPhone)
- Process innovation (e.g. production line assembly)
- Business model innovation (e.g. ride sharing)
Here’s what we found:
Six key takeaways
- Wide distribution of productivity across sectors, led by highly-productive companies. We found a relatively large number of highly-productive firms, suggesting there’s a sizeable vanguard of strong performers in the Russell 3000 Index.
These so-called ‘frontier’ firms seem to be monopolising the successful technological advances or business model changes that are often behind long-term success.
- Productivity gaps across and within sectors. Productivity differs across sectors. In general, companies that sell goods exhibit higher levels of productivity, while a number of services companies deliver lower average productivity.
Exceptions not withstanding – we saw surprisingly poor performance of machinery manufacturing firms and better-than-anticipated results for wholesale/retail companies – in general performance is, at least in part, correlated to sector.
Despite these sector patterns, there’s as much variation in performance within sectors as there is across sectors. This means we should not rule companies out if they sit in poorer performing sectors.
- Little change at the productivity frontier. We define the ‘productivity frontier’ as the top 10% of the productivity distribution within each sector.
The most productive companies tend to maintain their position at the top of the pile. Our findings also imply little mobility between the best and ‘the rest’, at least over the short term (see Chart 1).
Chart 1: Persistence at the productivity frontier and in productivity growth
Source: abrdn, Refinitiv, OECD, as of 2019
- Gap between best and ‘the rest’ growing. Our study seems to support the wider research literature that shows the top 10% of companies increasing their productivity lead.
While there are limitations to this review, we found the top performers in our sample push further ahead over a 20-year period. This is despite some measurement difficulties for the services sector.
- Aggregate firm-level productivity slowdown, tracking wider economy. We found declining productivity growth in the companies that make up the Russell 3000 Index.
While productivity can be bumpy on a year-on-year basis, it has visibly slowed from the growth rates seen in the mid-2000s. This suggests there may be less diffusion of innovation throughout the corporate ecosystem.
- Positive correlation between productivity and returns. We found a positive correlation between our productivity measure and excess equity returns. This suggests that those firms that are able to increase their level of productivity might well generate stronger returns.
However, it’s also important to understand the other factors which contribute to these success stories.
What this means for investors
It’s clear there are huge and growing gaps in productivity between companies, signalling the success or otherwise of innovation efforts.
The benefits of breakthroughs – be they process, product or business model – are not spreading through the economy, but stay captive within a smaller group of firms.
The ability to identify these ‘innovation superstars’ means potential investment opportunities that are worth further investigation.