Wcce2015 198 PDF

Role of the Big Business in the Growth-Inequality Nexus
Revised: February, 2015
Juneyoung Lee*, Junhee Han**, Hyoseok Kim*, Jun-ki Park**, Keun Lee***
Department of Economics, Seoul National University,

1 Gwanak-ro, Gwanak-gu, Seoul 151-746, KOREA
* M.A. Student in Economics, Department of Economics, Seoul National University,

** Ph.D. Student in Economics, Department of Economics, Seoul National University
*** Professor, Department of Economics, Seoul National University (kenneth@snu.ac.kr)
This work was supported by the BK21Plus Program

(Future-oriented innovative brain raising type, 21B20130000013)
funded by the Ministry of Education(MOE, Korea) and National Research Foundation of Korea(NRF)
Abstract
This paper empirically analyzed the impact of big business on the growth-inequality nexus. By
using cross-country panel data, this paper used 3SLS fixed-effect regression on simultaneous
equations model to measure the effect of big business on the interaction between growth and
inequality. Company data from the Fortune Global 500 is used as a big business variable, and the Gini
coefficient and labor income share ratio are used as inequality variables. Especially, the number of the
Fortune firms in each country is used as the absolute presence variable of big business and the total
annual sales of the Fortune firms divided by each countrys total GDP is used as the relative presence
of big business, which measures the share of big businesses in each country.
The empirical findings of this paper are as follows: (1) Increase in the PPP based per capita GDP
growth rate decreases the Gini coefficient and increases labor income share, but there is no evidence
that the mitigation of income inequality facilitates economic growth. (2) Increase in the absolute
presence of big businesses in each country accelerates economic growth, and decreases labor income
share, but has no significant effect on the Gini coefficient. (3) Increase in the relative presence of big
businesses decelerates economic growth, and increases the Gini coefficient, but it also increases labor
income share.
To understand these results, especially the inequality part, we must consider that an increase in the
absolute presence of big businesses means the overseas expansion of big businesses, and an increase
in the relative presence means the higher concentration of economic power in big businesses.
Overseas expansion replaces domestic labor with foreign labor, and therefore it decreases labor
income share. However, if the overseas expansion of big businesses is accompanied by a close
cooperative partnership with SMEs, then inequality may not be changed. Also, since big businesses
hire more skilled workers and have high capital equipment ratio, an increase in the share of big
businesses increases labor income share. However, an increase in the concentration of economic
power in big businesses means that big businesses crowd SMEs out of domestic market. Therefore, as
the share of big businesses increases, overall inequality rises as well.
Considering these empirical findings and interpretations, to mitigate income inequality and
accelerate economic growth at the same time, government policies must be targeted at encouraging
big businesses to expand overseas, thereby promoting more SMEs to cooperate with those big
businesses.
Keywords: Big business, income inequality, economic growth, Fortune Global 500, Gini coefficient,
labor income share, cross-country panel data, 3SLS, simultaneous equations model, SMEs.
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1. Introduction
Since their emergence in the United States in the nineteenth century until now, big businesses
reconsidered as manufacturers that have contributed to economic growth. However, big businesses
gained economic power by taking advantage of the economies of scale and scope,(Chandler,
1990)which can exacerbate inequality. (Yun, 2009) Yet, it is still debated whether or not big
businesses increase inequality. On the other hand, it is widely acknowledged that inequality is an
important cause of social conflict that leads to political upheaval. (Esteban and Schneider, 2008)
The role of big business in inequality is very controversial, but these arguments are often either
intuitive or politically biased. Empirical studies on this issue, however, is almost nonexistent.
Moreover, numerous research papers, theoretical or empirical, examine the role of big business in
economic growth, while only few papers turn their attention to the role of big business in the
distribution of income.
Along with economic growth, inequality is an important topic of economic research. Some may
argue that absolute poverty and slow growth are more urgent issues, but high social costs may incur
due to social conflicts and political unrest caused by inequality, as shown by Esteban and Schneider
(2008) and Esteban and Ray (2011).
Historically, many efforts targeted at reducing the inequality of income. The Communist
Revolution was an attempt to close the income gap between rich capitalists and workers in a violent
manner. Social democracy in contemporary Europe is an attempt to solve this problem in a democratic
way. Regardless of these efforts, Clark (2011)suggests that between-country inequality and within-
country inequality are both increasing. Along with the growing share of economy occupied by big
businesses, rising inequality brought up discussions about the role of big business in inequality.
Therefore, this paper seeks to conduct an empirical analysis on the impact of big business on the
distribution of income. Inspired by the literature on relationship between economic growth and
inequality and the literature on the influence of big business on economic growth, we examine the role
of big business in the growth-inequality nexus.
This paper is organized as follows. Section 2 reviews the accomplishments and limits of existing
literature to set the direction of research. In Section 3 reviews theories on the impact of big business
on inequality and economic growth. Section 4 lays out an analytical framework, and Section 5
presents result. Section 6 discusses policy implications for big businesses. Section 7 presents
conclusion.
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2. Literature Review
2.1 Literature on Big Business
As mentioned above, big businesses play an important role in contemporary capitalism as they are
major producers of goods and services. Indeed, big businesses have been studied extensively since
their emergence in the early nineteenth century until recently.
A fundamental research trend confirms that big businesses are the main driver of economic growth.
Chandler (1990)argues that big businesses reap benefits from the economy of scale and scope to earn
huge profit and contribute to economic growth of business organization. Chandler (1990)also shows
that big businesses played a crucial role in the growth of advanced economies such as the United
States, the United Kingdom, and Germany. Chandler, et al. (1997) extends this argument to delineate
how big business contributes to the economic growth of other countries in the world.
Moreover, as Schumpeter (1934) and Schumpeter (1950)states, big businesses are the agents of
innovation because they can afford high cost and risk of R&D activities. There is always the risk of
failure when new goods are produced and new production processes are adopted. However, big firms
earn high profit due to the economies of scale and scope, so they can afford the risk of innovation. As
Schumpeter (1934)concludes, innovation is an important channel through which companies earn
higher profit. The Schumpeterian innovation leads to the production of higher value-added goods and
services, and it is the driver of economic growth.(Schumpeter, 1934)The Schumpeterian innovation is
also regarded as a core driver of economic growth during recent years(Lee, 2013).
The research of Chandler and Schumpeter is corroborated by other studies that followed, such as
Pack and Westphal (1986), Wardley (1991),Sanidas (2007), andFogel, et al. (2008). In particular, Pack
and Westphal (1986)take the example of South Korea to show the importance of big businesses to
emerging economies where big enterprises lead technological development. According to Sanidas
(2007), big businesses can increase export as globalization continues to advance. This approach
extends the traditional Schumpeterian theory to identify the role of big business in economic growth
in the globalized world.
Along with Chandler (1990), Chandler, et al. (1997),Schumpeter (1934), Schumpeter (1950), and
other studies, examine the impact of the absolute presence and the relative presence of big business
on economic growth by analyzing the Fortune Global 500, the Business Week 1000, and the Forbes
2000 data. The paper also compares the contribution of big businesses to growth and that of small and
medium enterprises to growth, and it analyzes how big businesses affect the variation of growth rate.
As mentioned above, many studies on big businesses, including Chandler (1990), Chandler, et al.
(1997), Schumpeter (1934), Schumpeter (1950), and Lee, et al. (2013),focus on the big businesses
'role on economic growth. However, how large businesses affect other variables, such as inequality,
has not been explained yet.
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2.2Literature on Income Inequality
Unlike most other economic concepts, inequality is philosophical by its nature. Before
approaching the issue of inequality, one must answer what is the most desirable distribution of income,
and how this question is answered determines the ones view on inequality. Nevertheless, this
philosophical question is hard to answer, and it is even harder to understand inequality from an
economic perspective.
Aside from the philosophical judgment of inequality, identifying factors related to inequality is a
much easier task, and numerous studies, such as Li, et al. (1998), Chong and Caldern (2000), Bul
(2001), Lee (2005), Carter (2007)analyze how education, trade, inflation, government expenditure,
and other institutional variables affect inequality. On the other hand, there are only few empirical
studies on how economic entities, including big business, affect income distribution.
An important topic of research on inequality is the relationship between inequality and economic
growth. First, in case of the impact of growth on inequality, Kuznets research is a classic. Kuznets
(1955) argues that inequality increases in the early stage of economic growth, then it starts to decrease
when a certain level of income level is reached. Thus, there is an inverse-shaped relationship, the so-
called Kuznets Curve, between these two variables. After the paper was published, many economists
tried to verify his hypothesis.Ahluwalia (1976), Robinson (1976), Ogwang (1995), Galor and Tsiddon
(1996)confirm the hypothesis theoretically or empirically, while more recent studies, such as
Deininger and Squire (1998) andTam (2008), cast doubts on the hypothesis.
Kaldor (1955), on the contrary toKuznets (1955), studies the impact of inequality on growth.
Kaldor states that marginal propensity to save is higher for individuals with high income, so higher
inequality is good for economic growth. However, his hypothesis is criticized by many recent studies.
For example, Alesina and Rodrik (1994)andPersson and Tabellini (1994) argue that high inequality
forces government to adopt stronger redistribution policies, thus slowing down economic growth. also
suggest that sociopolitical instability caused by inequality discourages investment an hinders

economic growth. Moreover,Deininger and Squire (1998) present an empirical evidence that
inequality slows growth. By contrast, Li and Zou (1998) andForbes (2000) offer evidences that
inequality is positively associated with growth. Based on panel analysis, Barro (2000)shows that
inequality is negatively correlated with economic growth in under-developed economies, but it is
positively correlated with economic growth in advanced economies, and overall, there is no
significant correlation between two variables.
Another research trend is the use of simultaneous equations models to analyze the relationship
between economic growth and inequality. Exiting literature often treats the impact of economic
growth on inequality and the impact of inequality on economic growth independently, and considers
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the factors of economic growth and those of inequality separately. On the other hand, Scully (2002),
Scully (2003), andLundberg and Squire (2003) construct simultaneous equations models, which
reflect the relationship between growth and inequality and the factors of growth and inequality.
Nevertheless, these studies also have limits. Lundberg and Squire(2003) has omitted variable bias due
to the failure to incorporate some variables that affect inequality or economic growth.Scully (2002)
andScully (2003) have over-identification issue.
2.3 Direction of Research
This paper seeks to measure how big businesses affect inequality and economic growth, based on
the above-mentioned literature on big business and the growth-inequality nexus. First, using the
method of Lee, et al. (2013),which uses the Fortune Global 500 data to measure the impact of big
businesses on economic growth, this paper seeks to extend the conclusions of existing studies by
measuring the impact of big businesses on inequality. Also, this paper establishes relationship between
big business and economic growth as suggested byLee, et al. (2013) and adopts the method
ofLundberg and Squire (2003) to set up simultaneous equations models.
3. Theoretical Review of the Role of Big Business in the Growth-Inequality Nexus
3.1 The Model
We are going to see a model which gives insight of how firms with different sizes affect economic
variables such as output growth and inequality where there is a skill-based technological change.
There are two agents: households and entrepreneurs.
3.1.1Households
The households supply labor and receive wage for their work. Each household i, is assume to
consume everything they earn. Households consists of two types of workers; skilled workers and
unskilled workers. Among the total number of workers that firms hire, , fraction consists of skilled
workers hired by large firms and consequently (1 , )fraction represents skilled workers hired by
small firms. Each households are assume to spend everything they earn. Their objective function is as
follow:
Max U , =
where i represents type of workers. Once solved, the optimization yields an intra-temporal equation:
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=
3.1.2Entrepreneurs
Entrepreneurs establish firms which produce homogenous goods using capital and labor as inputs
of production with given technology. The production function will take the below form.
= ( , , )
Entrepreneurs are identical except for their initial holdings of capital stock (high or low). Those
with high level of capital stock open up large firms while those with low level of capital stock operate
medium or small firms. The main differences between them are that large firms enjoy economy of
scale due to their size of operation as Chandler (1990) suggested and large firms act as a R$\&$D
research centers that bring technological improvement in overall economy as in Romer (1986). The
production function takes well known Cobb-Douglas function and depends on the type of firms.
Formally, we have two equations for output
= ( ) ( )
= ( ) ( )

where is the production of a firm j, is technology for firm operated by entrepreneur type j,

is economy of scale parameter for a big firm, and is capitaland labor that is used by firm j
depending on their type (large or small). Before we get to the firm's objective problem, let us look at
their inputs of productions (technology, capital and labor).
3.1.2.1 Technology Process
Following Romer (1986), large firms are the driving force of technological development through
R&D research. In a perfectly competitive market, small firms are unable to conduct active R&D
research because they do not have available funds to invest. Large firms, however, can engage in
R&D research whose result is going to be uniformly distributed between 0 and 1. After the outcome
of the research is realized, it becomes available to public meaning that small firms can also utilize
newly developed technology without incurring any costs. For large firms, if there are other better
publicly available technology, they discard their own outcome of the research and utilize the better
one. That is, the best outcome of the R&D research will become baseline technology that is going to
be used by every firm at given time regardless of the type. Formally, the baseline technology can
be written as
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= ,
where , is the outcome of the R&D research by a large firm that is developed by entrepreneur
.In other words, the baseline technology at time t would be the most successful R&D research
outcome. Since large firms conduct R&D research, the more large firms, the higher baseline
technology.
Once the baseline technology is established, each firm use it to produce output. However, only
skilled labor could effectively utilize newly introduced technology. This makes sense since there are
many cases where firms cannot fully utilize given technology due to lack of knowledge. Therefore,
the actual level of technology would be
= ( )

where is effective technology for firms depending on their size (big or small), is skilled labor
hired by large firms, is a technology parameter and is total number of skilled workers at time t.
3.1.2.2 Capital and Labor
Entrepreneurs are randomly endowed high level of capital stock or low level of capital stock.
Those with high level of capital stock opens up large firms which enjoy economy of scale while those
with low level of capital stock open up small firms. For the simplicity of the model, we assume that
capital does not depreciate so that entrepreneurs do not need to worry about their maintenance cost.
They hire both skilled workers and unskilled workers as inputs of production. As mentioned above,
skilled workers can utilize technology while unskilled workers cannot. Large firms hire necessary
number of skilled workers first, then small firms hire the left over skilled workers. We assume that
there are only few number of skilled labor and abundant number of unskilled labor. This assumption is
going to shape labor supply curve for both type of workers.
3.1.2.3 Firms Problem
In this model, two types of firms produces homogenous goods using their technology, capital and
labor as described above. Since we only look at the short term equilibrium, we do not consider the law
of motion for capital. That is, firms are endowed with certain level of capital and it is assumed to be
fixed for the short duration of the time. Firms' objective function is as follow
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where W = [ , ] and L = [ , ]. is assumed to be 1. Notice that there is no fixed cost
involved in the firm's choice problem since it is does play significant role in such short term
equilibrium. Wage for workers are determined by large firms. This is assumption is to account for the
real life phenomena where most skilled workers are hired by large conglomerates. Using equation (2),
(3), (4)and (5), we can derive two first order conditions for each type of workers. First wage for
skilled workers is

+ (1 ) =
( + )
Wage for unskilled workers is

(1 ) =
( + )
The first part of the right side of wage equation for skilled workers can be regarded as premium that
they receive due to their ability to utilize technology. For the simplicity of the model, we are going to
rewrite the above equation as

= +

= (1 )
where and = .

3.2 General Equilibrium
The model features a simple short term general equilibrium which has the following decision rules.
1. Given wage ( , ), households decide how much to consume and how much to work
depending on their type (high or low skilled worker).
2. Given wage ( , ), firms decide how much to hire and produce output depending on their type
(large or small)
3. Wage ( , )is determined at the intersection of the labor demand equation and the labor supply
equation from solving households' optimization problem and firms' optimization problem respectively.
Using a simple log utility function, the labor supply equation (1) can be written as
where the labor demand equation is represented in equation (6) and (7) depending on the type of
workers. Figure (1) depicts labor market equilibrium for both skilled workers and unskilled workers.
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As discussed above, due to the scarcity, skilled labor has inelastic labor supply while unskilled labor
has very elastic labor supply. Due to the wage premium received by skilled workers for their ability to
utilize technology, labor demand for skilled labor is much higher than that of unskilled labor.
[Figure 1]
3.3 Economic Growth and Inequality
Let us discuss how the model features economic growth and distribution. Throughout the academic
history, there has been many ways to measure economic growth. For the analysis, we are going to
look at the total output as a measure of economic growth. The aggregate supply is calculated as the
sum of output produced by big firms and small firms. Namely,

= , + ,

where is the number of big firms, is number of small firms.For the inequality, it is broken
down to within group difference (wage difference between skilled and unskilled workers) and
between group difference (entrepreneurs and workers).The wage difference is calculated by
The labor share is the fraction of income that goes to workers. That is,
+
. =

We are going to look at how change in (1) number of large firms and change in (2) exploitation by
large firms is going to affect three variables of interest which are discussed above: total output, labor
share (inequality between the group) and wage difference between workers (inequality within the
group).
3.4The Response
3.4.1 Change in the Number of Large Firms
3.4.1.1 Wage Difference
As shown above, increase in the number of large firms would increase baseline technology raising
labor supply curve. [Figure 2] represents the overall change in the labor market using the labor supply
and demand equations (6), (7), (8) and labor market assumption for different type of workers. Since
both wage premium and baseline technology is positively affected by increase in , labor demand
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for skilled labor shifts further than that of unskilled labor. Due to their shape of labor supply, change
in would result in more work opportunities for unskilled workers and higher wage level for skilled
workers which represented as a and b respectively.
[Figure 2]
3.4.1.2 Aggregate Output
The effect of increase in the number of large firms on the supply side of the aggregate output can be
analyzed as below (detailed calculation can be found in the appendix)

= +

where represent change in out level due to the increase in the number of large firms and is
change in the output due to the technological improvement as number of large firms increase.
Although the latter term is always positive, the former term could be negative depending on the
structure of the economy. In other words, if number of small firms fall dramatically as number of
large firms rise, might be negative. However, we suggest thatthe effect should be big enough to
make the right side of the equation positive. Aggregate demand would also get affected by change
in . For unskilled workers, they would consume more since there are more opportunities to work
and for skilled workers, their consumption would go up because they enjoy higher wage level. Overall,
both aggregate supply curve and aggregate demand curve shifts out.
3.4.1.3 Labor Share
The effect of the change in the number of large firms on labor share can be summarized as below.
.
= , + ,

where , represent benefits received by total labor while , is the adjusted total benefits which is
the sum of workers and entrepreneurs, if it is positive, it means that workers are taking more share of
the pie and vice versa. However, it is unlikely that this value is positive. We hypothesize the labor
share would go down as increase in number of large firms because of they enjoy economy of scale. If
there are only small firms, it would be plausible for the labor share to increase or at least stay the same.
However, in the presence of large firms, large fraction of the pie would go not go to the workers.
3.4.2 Change in the Exploitation
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3.4.1.1 Wage Difference
If big firm decides to hire more skilled workers, small firms would not be hire as much since the
number of skilled labor is limited. [Figure 3] shows how the labor market changes using the labor
supply and demand equations (6), (7), (8) and labor market assumption for different type of workers.
As you can see from the figure, only labor market for skilled workers are affected by it. Change in
or ratio of skilled labor hired by large firms would affect two market in different direction. For
unskilled labor market, labor demand function shifts in (a') whereas for skilled market, it shifts out (b').
This is because increase in the demand for skilled labor would lower relative demand for unskilled
workers.
[Figure 3]
3.4.1.2 Aggregate Output
The impact of change in on aggregate supply is as follow.
The first term on the right side represent change in total output from big firms due to increase in
while the second term is the change in the total output produced by small firms. Although a single big
firm do perform better than few small firms combined due toeconomy of scale or spill-over effect, at
the aggregate level, we suggest that small firms have much higher role in economic development than
large firms because big firms only constitute small fraction of the whole economy. In other words, big
firms are unable to extract full benefits from small firms due to variety of reasons such as concavity
on their production function. Aggregate demand would increase for skilled workers but it falls for
unskilled workers.
3.4.2.3 Labor Share
The effect of the change in on labor share is
.
= , + ,

where , represent change in labor share due to the change in the labor market while , is
change in labor share due to the change in the goods market. As discussed above, , is negative
since total output falls as changes. For, , however, it is not very clear. Although there is an
obvious increase in the skilled workers due to their wage increase, total unskilled labor hired by firms
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creates negative pressure on the labor share. We believe that the overall effect on the labor share
would be positive since there are two forces that affect labor share positively. That is, even though the
effect of the increase in wage for skilled labor is offset by the decrease in employment of unskilled
labor, the labor share is like to rise because there is negative pressure on the total output.
3.5 Summery
The above result can be summarized as
Output Labor Share Wage Difference

Number of Large Firms + - +
Exploitation - + +
We hypothesize that the increase in the number of large firms would have positive effecting the
economic growth while increase in the or exploitation lowers economicgrowth. If it is the case,
increase in the number of large firms would lower labor sharewhile the wage difference is unaffected.
Change in the concentration ratio is going to raise both labor share and wage difference. For the
empirical analysis, we are going to test this hypothesis.
4. Review of Empirical Analysis
4.1 Analytical Method
This paper divides the period from 1993 to 2012into four 5-year periods, and uses the data of
countries that have companies in the Fortune Global 500 list. The impact of big businesses on
inequality and growth is measured by fixed-effect panel regression and 3SLS fixed-effect panel
regression.
Many studies on the distribution of income, such asChong and Caldern (2000), Bul (2001), use
ordinary linear square (OLS) estimation. However, OLS regression cannot identify time-invariant
characteristics, so omitted variable bias may occur. On the other hand, fixed-effect regression and
random-effect regression, as shown byLee (2005),Carter (2007), and Rodrguez-Pose (2012), control
such time-invariant characteristics. Fixed-effect panel analysis are widely used in empirical studies on
economic growth, such as andLee, et al. (2013).
Lundberg and Squire (2003)use 3SLS panel analysis to analyze a simultaneous equations model.
However, their model fails to include certain variables that are known to affect economic growth and
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inequality, which implies the possibility of omitted variable bias. The models of Scully
(2002)andScully (2003) have an over-identification issue. Therefore, it is important to avoid omitted
variable bias and over-identification when constructing a simultaneous equations model.
Fixed-effect panel regression fails to eliminate the endogeneity between regressors and error term.
However, such endogeneityis removedin3SLS panel regression because regressors that are included in
only one of two equations serve as instrumental variables.
4.2 Variable selection and Data Collection
4.2.1 Big Business Variable
Following the method ofLee, et al. (2013), the number of big businesses and their annual sales are
collected from the Fortune Global 500,which is one of the oldest lists that rank companies and uses
the dollar amount of annual sales as a standard of deciding the rank. Recently, other lists also rank big
companies in the world, including the Business Week 1000 and the Forbes 2000. However, these lists
have a limited coverage, as the Business Week 1000 covered only 25 advanced countries until 2003
and the Forbes 2000 was first published in 2004 (Lee, et al., 2013). On the contrary, the Fortune
Global 500 has ranked companies of all sectors and all countries since 1994 (Lee, et al., 2013). As Lee,
et al. (2013) states, the Fortune Global 500 is based on the dollar amount of annual sales that is
affected by the difference in accounting principle and the fluctuation of exchange rate. However, these
issues are ignored for the simplicity of the analysis.
The Fortune Global 500 defines the nationality of a company as the location of its headquarter.
Therefore, companies that have headquarters in multiple countries are excluded from our sample,
although we are aware of the criticism that many big businesses are in fact multinational companies
that engage in economic activity in multiple countries (Lee, et al., 2013). Because this paper seeks to
analyze how big businesses make extra profit through R&D and innovation and how the increased
profit is distributed, the country classification from the Fortune Global 500 is used without further
adjustment.
This paper examines the impacts of the absolute presence of big business (number of companies)
and the relative presence of big business (total sales revenues a share of GDP) on income distribution
and economic growth. Ideally, it is more accurate to use the sum of value-added as a share of GDP to
measure the relative presence of big business. Nevertheless, there is a practical obstacle. Since firms
balance sheet does not show how much value is added by the firm, the total amount of value-added
must be extrapolated from existing financial data. However, this method is not relevant because this
paper covers companies in the Fortune Global 500 during the last two decades. Therefore, total sales
revenue as a share of GDP is used as a proxy for the relative presence of big business.
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Despite of the difficulty of obtaining value-added from existing data, it is possible to estimate the
value-added by calculating each industrial sector's average ratio of value-added to revenue from
samples. Then, the value added by the Fortune companies can be estimated by multiplying each
companys sales by the estimated ratio. This study estimates the value-added to revenue ratio from the
case of Korean public corporations, and then examines the relevance of using sales revenue as a share
of GDP as a proxy for relative presence of big business. [Table 1] shows sales-to-GDP ratio and
value-added-to-GDP ratio of each countrys Fortune Global 500 companies in 1994 and 2009.
[Table 1]
The correlation between two ratios is 0.96, which implies that using sales-to-GDP ratio as a proxy
for relative presence of big business will not incur a serious problem.
Also, regarding that the number of the Fortune companies and their relative share of economy
both affect economic growth, which is shown by Lee, et al. (2013),putting these two variables
together in the same regression equation allow each variable to serve as a control variable of the other.
Then, an increase in the relative presence of big business with the fixed absolute presence of big
business can be interpreted as an increase in the economic power held by big business. Considering
that the competitiveness of big businesses lies on the economy of scale and scope (Chandler, 1990), it
is necessary to analyze how changes in big businesses economic power affect growth and inequality.
Moreover, inspired by the discovery of a quadratic relationship between economic growth and the
relative presence of big business(Lee, et al., 2013),this study seeks to examine if inequality, as well as
economic growth, has a quadratic relationship with the relative presence.
4.2.2 General Description of the Fortune Variable
[Table 2] shows the number of the Fortune Global 500 companies in major economies and their
sales as a share of GDP.
[Table 2]
The table shows that number of big businesses in each economy and their sales as a share of GDP
varies greatly as economic condition changes over time. This pattern is shown in both advanced and
developing economies. In case of Japan, the number of the Fortune companies reached 150 in the
mid-90s, while it declined by more than half as Japan suffered from a long recession. The annual sales
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of Japanese Fortune companies as a share of GDP also dropped. On the other hand, with China
growing rapidly, the number of Chinese companies in the Fortune Global 500 and their sales as a
share of GDP are increasing dramatically. In case of Korea, the number of the Fortune companies is
increasing n general, except temporary decline during the Asian Foreign Exchange Crisis in 1997 and
the Global Financial Crisis in 2008. The number of the Fortune companies also increased in
developing economies, such as Brazil, India, and Russia, keeping pace with the speed of economic
growth.
The Fortune Global 500 companies are the largest among big businesses, so their sales as a share
of GDP is remarkable. Indeed, the Fortune Global 500 companies account for a significant portion of
national economy; at least 2.5% of GDP is accounted for by the Fortune companies. In particular, our
fixed-effect panel analysis using five-year average data shows that if the number of the Fortune
companies increase by 10%, then their sales as a share of GDP also increases by 9.74% (Appendix 2).
The result is relevant to the conclusion that the Fortune Global 500 companies account for a
significant portion of national economy.
4.2.3 Income Distribution Variable
The Gini coefficient and the labor income share ratio are used as an indicator of income
distribution. The Gini coefficient is the most appropriate indicator for time-series panel analysis
because it is most widely used and therefore easily accessible. There are two ways to calculate the
Gini coefficient; making 0 as the complete equality and 1 as the complete inequality, and making 0 as
the complete equality and 100 as the complete inequality. This paper uses the second method.
One challenge with using the Gini coefficient is that each country (or region) uses different
standards when compiling micro data to calculate the Gini coefficient. Although some databases, such
as Luxemburg Income Study, collect the Gini coefficient data, but they cover only a limited number of
countries. The World Income Inequality Database by UNU WIDER collects data from various sources,
but it has not been updated since 2008. Other international institutes, including OECD, Euro stat,
offices of national statistics, and regional research institutes like SADLAC and TransMonEE, offer
the Gini coefficient data, but these sources often do not specify the methods they use. Moreover,
regarding that inequality is politically sensitive, each country may have an incentive to choose a
standard that is the best interest of its administration.
Until recently, many attempts have been made to overcome these limits. One of the most
outstanding achievements is the Standardized World Income Inequality Database(SWIID)constructed
by Solt (2009). SWIID allows cross-country comparison by collecting and recalculating the Gini
coefficient data with missing-data multiple-imputation algorithm. Of course, criticisms against SWIID
16
state that the database only rearranges existing data instead of collecting micro data. Nevertheless, it is
the only available database that allows us to perform cross-country panel analysis.
Along with the Gini coefficient, this study uses the labor income share ratio as an indicator of
income distribution. The ratio presents how much labor income accounts for total GDP, so it is rather
a national account than an indicator of income distribution. Recently, however, a wide range of
literature uses the labor income share ratio as an indicator of inequality by comparing it with the
capital income share ratio. In particular, the labor income share ratio is important to analyzing how
factor income changes due to innovations driven by big businesses.
4.2.4Other Variables Related to Inequality
Other variables that affect inequality are based on the existing literature on inequality. The rate of
economic growth and income level are consistently mentioned in various studies(Ahluwalia, 1976,
Galor and Tsiddon, 1996, Kuznets, 1955, Ogwang, 1995, Robinson, 1976).As Kuznets states, income
level and inequality may have a U-shaped relationship (Braulke, 1983).However, the economies that
have the Fortune companies are usually middle-income or high-income countries, so using income
level as a regress or may not be relevant. Therefore, following the model of Lundberg and Squire
(2003), the rate of economic growth is used as a variable that represents economic growth.
Human capital, or education, is another important variable related to inequality, as mentioned
byRillaers (2001) andCroix and Doepke (2003). In this study, the ratio of population older than fifteen
years old that received secondary education is used as a variable for education. Also, as shown
byBul (2001), inflation rate is another important factor of inequality.Alesina and Rodrik (1994)
show that government expenditure is a tool for redistributing wealth. In this paper, GDP deflator is
used as an indicator of inflation and government expenditure as a share of GDP as an indicator of
redistribution policy. To consider the role of investment on the adoption of new technology that
affects inequality, which is mentioned byHe and Liu (2008), total investment as a share of GDP is also
included in the regression. Lastly, to control the characteristics that come from the size of each
country, population size is included. Trade affects inequality, as stated by Jaumotte, et al. (2013), so
the amount of trade as a share of GDP and the amount of stock transactions as a share of GDP are
additional control variables to account for the impact of international trade and financial transactions
on inequality. Lastly, when the Gini coefficient is used as a dependent variable, the number of
population is used to control properties related to population size, such as re-distributional policy.
When the labor income share ratio is used as a dependent variable, the contribution ratio of value
added by industrial sector to GDP is used to control properties related to industrial structure of each
country.
17
As Chong and Caldern (2000) mention, various institutional variables affect inequality directly
or indirectly, but it is not easy to quantify those variables. Lee (2005)comes up with a conclusion after
taking these factors into account, andLundberg and Squire (2003) also include institutional variables
in their model. However, it is not easy to include all the sociopolitical factors in a model. Amore
feasible way is to treat these variables collectively by including a country-dummy variable to control
country-specific institutional factors. Thus, by using fixed-effect panel model, we can control
institutional factors.
4.2.5Other Variables Related to Economic Growth
The growth of per capita GDP (PPP) is used to measure economic growth. Based on the Solow
model and the models suggested by Mankiw, et al. (1992)andLee, et al. (2013), the portion of
population older than fifteen years old that received secondary education, investment as a share of
GDP, inflation, government expenditure, population growth, and per capita GDP in the previous
period are included in the growth model.
Factors that affect economic growth are already standardized by an extensive volume of existing
literature. However, Rime (2007) mentions that education is positively correlated with economic
growth in the early stage of economic growth, while the correlation becomes negative after a certain
level of development is reached. This perspective needs to be considered when determining the
factors of growth, because it contradicts the general consensus that education leads to the
accumulation of human capital that ultimately facilitates growth, as stated by Lucas (1993).
4.3Regression Models
Reflecting the above discussions, basic standard regression model is constructed as follows.

= + + , + + + + + (3.1)

= +
+ , + + + + + (3.2)
ineq is the log of the Gini coefficient. growth is average annual growth rate of per capita
GDP(PPP). fortune is the variable that represents large business. The log of (the number of the
Fortune companies in each country +1) and the log of (the Fortune companies sales as a share of each
countrys GDP +0.0001) are used. X is a group of control variables that are included in both (3.1) and
(3.2), such as the log of the share of population of age fifteen or order that received secondary
education (ledu), government expenditure as a share of GDP (lgov), the log of inflation measured by
GDP deflator, the log of total investment as a share of GDP. To test the robustness of result in theopen
economy case, the log of trade as a percentage share of GDP (ltrade) and stock transaction as a
18
percentage share of GDP (lstock) are included as well. Y is the log of total population (lpop) which is
included only in (3.1). When the labor income share ratio is a dependent variable, value-added by
industry as a share of GDP (ind) is used. Z is a group of control variables only in (3.2), which includes
the growth rate of population (popgr) and per capita income in the previous period (linigdp). is a
term that represents time-invariant characteristics of each country. is a dummy variable that controls
time-variant characteristics. is the error term.
(3.1) is used when the impact of big business on inequality is measured, and (3.2) is used when the
impact on economic growth is measured.(3.1) and (3.2) construct a simultaneous equations model.
Regression on the simultaneous equations model allows us to measure the impact of big business on
the growth-inequality nexus. However, this method estimates only the direct impact of big business on
growth and inequality. Constructing a reduced from model to eliminate endogenous variables on the
right hand side of each equation is generally used to address the indirect impact of big business on
inequality and growth. However, due to the nonlinearity of the coefficients of the reduced form model,
we cannot conduct significance test on those coefficients. Instead, Lundberg and Squire
(2003)presents a regression outcome that ignores the nonlinearity constraint of reduced form by
considering the reduced from as an independent simultaneous equations model, a model they call a
quasi-reduced form.
Therefore, following the method of Lundberg and Squire (2003), this paper uses 3SLS fixed-effect
panel regression on the following simultaneous equations model.

= + + + + + + + (3.3)

= + + + + + + + (3.4)
(3.3) and (3.4) eliminate the endogenous variables of the right hand side of (3.1) and
(3.2).Housman test is used to test whether fixed-effect model is more relevant than random-effect
model. Lastly, Hansen-Saran over-identification test is used to test the relevance of instrument
variables and identify over-identification problem.
5. Empirical Result
5.1 Impact of Big Business when the Gini Coefficient Isa Dependent Variable
5.1.1 Fixed-effect Panel Analysis
[Table 3] shows the regression outcome from fixed-effect panel regression on how the number of
the Fortune Global 500 companies affects the Gini co efficient and economic growth.
19
[Table 3]
In (C1), the log of the Gini coefficient is used as a dependent variable, and the log of the number
of the Fortune companies and their sales as a share of GDP are used as independent variables. (C1sq)
is identical to (C1) except that square of the Fortune companies sales as a share of GDP is included as
an additional independent variable. Per capita GDP growth rate is used as a dependent variable in (C2)
and (C2sq). (C2) and (C2sq) use the same independent variables as (C1) and (C1sq), respectively.
It is shown that 1%p increase in per capita GDP growth rate reduces the Gini coefficient by 0.92%
in (C1) and 0.86% in (C1sq), at 1% significance level. On the other hand, the change of the Gini
coefficient does not affect economic growth, as shown in (C2) and (C2sq). This result is consistent
with the previous result except (A3) in that growth reduces inequality while inequality has no net
effect on growth.
According to (C1), 10% increase in the number of the Fortune companies increases the Gini
coefficient by 0.37% at 10% significance level, while it is not statistically significant in (C1sq). On
the other hand, in (C2) and (C2sq), 10% increase in the number of the Fortune companies raises per
capita GDP growth rate by 0.32%p at 1% significance level. On the other hand, the impact of the
Fortune companies sales as a share of GDP on inequality and growth turns out to be insignificant in
any case.
When growth equation and inequality equation are regressed independently, the analysis fails to
identify the impact of the relative presence of big business on growth and inequality. However, the
impact becomes more evident in simultaneous equations model.
[Table 4] shows the result of fixed effect panel analysis on the simultaneous equations model.
[Table 4]
Before estimating the coefficients of big business variables, it must be verified that the log of the
Gini coefficient and per capita GDP growth rate are quadratic functions of the log of the sales of the
Fortune companies as a share of GDP. A standard model (C3a) is constructed by including the number
of the Fortune firms, their sales as a share of GDP, and their square terms as regressors. Then, a
significance test on the constrained model is conducted by setting the coefficient of the square term of
the Fortune companies relative presence in each equation as zero. First, in case of (C3b), when
growth equation is constrained, 2 (1) is 0.32 and p-value is 0.57. Thus, constrained model is more
relevant than unconstrained model. On the other hand, when inequality equation is constrained,
unconstrained model is more relevant than constrained model (2 (1) is 4.61 and p-value is 0.031).
When constraint is imposed to growth equation and inequality equation together, constrained model
20
turns out to be less relevant (2 (2) = 4.75, p-value = 0.093). Therefore, it can be conclude that when
analyzing the influence of the absolute presence and the relative presence of large business on growth
and inequality, (C3b) is most relevant, where the square of relative presence is excluded from growth
equation.
(C3b) shows that 1%p increase in per capita GDP growth rate reduces the Gini coefficient by 0.89%
at 5% significance level, and 10% increase in the Gini coefficient raises per capita GDP growth rate
by 1.58%p at 5% significance level, implying that strong growth promotes equality while inequality
may facilitate growth.
On the other hand, 10% increase in the number of the Fortune companies, given the Fortune
companies sales as a share of GDP, increases the Gini coefficient by 0.29% at 10% significance level
and increases per capita GDP growth rate by 0.34%p at 1% significance level. This outcome shows
that an increase in the number of the Fortune companies is beneficial to growth but detrimental to
equality.
In inequality equation, the coefficients of the log of the Fortune companies sales as a share of
GDP and that of its squared term are significant at 10% level and 5% level, respectively. The Gini
coefficient is minimized when the relative share is about 6.5%. In growth equation, 10% increase in
the Fortune companies sales as a share of GDP, given the number of the Fortune companies, reduces
per capita GDP growth rate by 0.1%p, which is significant at 5% level. It shows that an increase in
large businesses sales as a share of GDP is detrimental to growth and equality. The conclusion seems
to contradict the earlier conclusion that higher relative presence of large business is associated with
stronger growth, but it is because this model includes both the number of large businesses and their
sales as a share of GDP as regressors.
The result tells us that increasing the number of large businesses, whether or not their relative
share is fixed, is beneficial to economic growth but makes income distribution more unequal. On the
other hand, increasing the economic power of large businesses by raising their relative share of
economy without increasing their number slows down economic growth and reinforces inequality.
Including trade share ratio and stock transaction ratio in the regression does not affect the result
significantly, thus proving the robustness of regression. ([Table 4A])
The result is consistent with the conclusion of Lee, et al. (2013) that there is a quadratic relation
between large businesses relative share of economy and economic growth and that growth slows
down eventually as the relative share increases beyond the inflection point. Considering that the
relative share of economy that maximizes growth rate is very close to zero and that the Fortune
companies sales share ratio is significantly large, the conclusion that big businesses relative share
affects growth linearly is also consistent with that of Lee, et al. (2013).
Also, when each equation is analyzed individually, the impact of big businesses on inequality and
economic growth, and the impact of inequality on economic growth are not revealed. However, these
21
impacts are identified in the simultaneous equation model. It implies that the role of large businesses
on growth and inequality becomes more evident when the relationship between growth and inequality
are taken into account.
5.1.2. Estimation of Quasi-Reduced Form
The result of regression on the quasi-reduced form suggested by Lundberg and Squire (2003) is
summarized in [Table 5].
[Table 5]
In inequality equation of (QC3), the coefficients of the Fortune companies sales as a share of
GDP and of its squared term are both significant at 5% level, while the coefficient of the number of
the Fortune companies is not. Also, based on the result of (QC3), Fortune companies relative share
that minimizes the Gini coefficient is 4.0%, which is almost identical with 4.1%, which is calculated
from (5.17). In growth equation, the coefficient of Fortune companies sales as a share of GDP is not
significant. However, 10% increase in the number of Fortune companies raises per capita GDP
growth rate by 0.35%p, which is significant at 1% level. Including trade share ratio and stock
transaction ratio in the regression does not affect the result significantly, thus proving the robustness
of regression. ([Table 5A])
Analysis of the quasi-reduced model implies that increasing the number of large businesses while
fixing their relative share of economy is positively associated with economic growth. However,
increasing their relative share, and thus enhancing their economic power, exacerbates inequality.
5.2 Impact of Big Business when the Labor Income Share Ratio is a Dependent Variable
5.2.1 Fixed-effect Panel Analysis
[Table 6]shows the result of fixed-effect panel analysis that measures how the number of the
Fortune companies and their sales as a share of GDP influences growth rate and labor income share
ratio.
[Table 6]
In (D1), the log of labor income share is used as a dependent variable, and the log of the number
of the Fortune companies and their sales as a share of GDP are used as independent variables. (D1sq)
22
is identical to (D1) except that square of the Fortune companies sales as a share of GDP is included as
an additional independent variable. Per capita GDP growth rate is used as a dependent variable in (D2)
and (D2sq). (D2) and (D2sq) use the same independent variables as (D1) and (D1sq), respectively.
It is shown that the impact of economic growth on labor income share ratio is not statistically
significant; labor income share ratio also has no significant impact on economic growth.
In (D1) and (D1sq), 10% increase in the number of the Fortune companies reduces labor income
share ratio by 0.67% and 0.63%, respectively, at 1% significance level. In (D2) and (D2sq), 10%
increase in the number of the Fortune company raises per capita GDP growth rate by 0.34%p at 1%
significance level.
The impact of change in economic power held by big business is statistically significant only in
(D1) and (D2). 10% increase in the economic power held by big business raises labor income share
ratio by 0.29% and reduces per capita GDP growth rate by 0.1%p, significant at 5% level and 1%
level, respectively.
[Table7]shows the result of fixed-effect panel analysis on simultaneous equations model to
estimate how the number of the Fortune companies and their sales as a share of GDP affect labor
income share ratio and growth rate.
[Table 7]
The table shows that 1% increase in per capita GDP growth rate increases labor income share by
0.57% at 10% significance level, while an increase in labor income share ratio does not affect
economic growth. 10% increase in the number of the Fortune companies reduces labor income share
by 0.69% at 1% significance level, and increases per capita GDP growth rate by 0.44%p at 1%
significance level.
10% increase in the Fortune companies sales as a share of GDP increases labor income share ratio
by 0.29% at 1% significance level and reduces per capita GDP growth rate by 0.13%p at 5%
significance level. This result is robust when trade and stock transaction variables are included.
([Table 7A])
5.2.2. Estimation of Quasi-Reduced Form
[Table 8] shows the result of 3SLS fixed-effect panel analysis on quasi-reduced simultaneous
equations model.
[Table 8]
23
10% increase in the number of the Fortune companies reduces labor income share ratio by 0.36%
and increases per capita GDP growth rate by 0.34%p, both at 1% significance level. On the other
hand, 10% increase in the Fortune companies sales as a share of GDP raises labor income share ratio
by 0.21% at 10% significance level and reduces per capita GDP growth rate by 0.08%p at 5%
significance level. This result is robust when trade and stock transaction as a share of GDP are
included. ([Table 8A])
6. Implications on Policies with Regard to Big Business
According to the quasi-reduced from analysis, which takes both direct impact and indirect impact
of big business on economic growth and inequality into account, increasing the number of the Fortune
companies promote economic growth, while it has no impact on the Gini coefficient and reduces labor
income share ratio. Enhancing economic power held by big business slows down, or at most has no
influence on, economic growth, while increases the Gini coefficient and labor income share at the
same time.
Interpreting this result requires an understanding that big businesses affect inequality as their
innovations shift the distribution of factor income. The Gini coefficient measures how current income
distribution is apart from the perfectly egalitarian status, and thus it is an indicator of inequality.
However, labor income share ratio measures how much labor income accounts for GDP, and labor
income includes both high-wage earners and low-wage earners. That is, even if high-profile workers
involved in R&D activities and low-profile workers involved in simple, repetitive tasks belong to
different income brackets, the income of high-profile workers and the income of low-profile workers
are both defined as labor income.
With fixed number of big business, an increase in big businesses sales as a share of GDP, which
indicates their economic power, also increases labor income share ratio. Big businesses tend to
specialize in sectors with high capital-labor ratio, so if their economic power increases, then the
overall capital-labor ratio also increases. This raises average productivity of labor, thus increasing
labor income share. Also, big businesses tend to hire more skilled workers, so the Gini coefficient
may increase if big businesses hold more economic power.
On the other hand, one way of increasing the number of big businesses without enhancing their
economic power is by expanding their business overseas with affiliated small and medium enterprises
(SMEs). That is, big businesses can develop new products in cooperation with SMEs, and move
production line to foreign countries to reduce costs of producing their new products. This will raise
profit ratio and capital income share ratio, thus reducing labor income share ratio. This type of
expansion does not increase production of domestic SMEs, so it has no impact on the Gini coefficient.
24
What is the meaning of this outcome and its implication on policies? Consider a case in which the
number of big business increases with their relative share fixed, and a case in which the big business
relative share increases with their number fixed. The former is the case described above; large
enterprises expand overseas with SMEs, thus increasing their share of global market. The latter is the
case in which large enterprises increase their share of domestic market, thus crowding-out SMEs. The
former case is more desirable than the latter, because it facilitates economic growth without seriously
damaging the overall inequality, although it may slightly decrease labor income share ratio. Therefore,
policies should be targeted at promoting the former scenario..
25
7. Conclusion
Big businesses are regarded as an important driver of economic growth(Chandler, 1990, Chandler,
et al., 1997), and a great volume of research has been done on big businesses However, their role on
inequality has not been scrutinized so far. Moreover, existing literature on the relationship between
growth and inequality has limitations.
This study attempts to analyze the impact of the number of big businesses and their sales as a
share of GDP on economic growth and inequality, using the Fortune Global 500 data. Fixed-effect
panel analysis and 3SLS fixed-effect panel analysis on simultaneous equations show that increasing
the number of the Fortune companies facilitates growth and reduces labor income share ratio, but it
has no impact on inequality. On the other hand, big business economic share has a U-shaped
(quadratic) relation with the Gini coefficient, and enhancing their economic share increases the Gini
coefficient and reduces labor income share. Given that a decrease in the Gini coefficient and an
increase in labor income share indicate an improvement in inequality, the regression outcome implies
that there is no evidence that absolute presence of big business and relative presence of big business
consistently improves or worsens inequality. On the other hand, regression on simultaneous equations
shows that economic growth reduces inequality, while improved inequality does not accelerate
economic growth.
This paper confirms the conclusion of Lee, et al. (2013) that the absolute presence big businesses
is good for economic growth and goes even further by understanding the role of big business within
the growth-inequality nexus. Also, it is suggested that government policies on big business should be
targeted at giving big businesses an incentive to expand in foreign markets with SMEs, which will
increase the number of big business without increasing their domestic market share.
As mentioned by Chandler (1990) and _ENREF_9Chandler, et al. (1997), big businesses are
important to economic growth, and they are major innovators, whose role is emphasized by
Schumpeter (1934)and Schumpeter (1950). Their importance will continue to increase in the
globalized world, as suggested by Sanidas (2007). Therefore, research on big businesses will become
more important in the field of economics, and the impact of big businesses on economy should be
studied from various perspectives. This paper is an extension of such attempts, and we expect that
more future studies related to big businesses will be produced.
26
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[Figure 1] Labor market for skilled workers and unskilled workers
30
[Figure 2] Change in the labor market equilibrium for skilled workers and unskilled workers
due to change in number of large firms
31
[Figure 3] Change in the labor market equilibrium for skilled workers and unskilled workers
due to change in exploitation
32
[Table 1] Estimation of sales and value-added of the Fortune Global 500 companies of major
economies
1994 2009
Country
Sales/GDP Value Added/GDP Sales/GDP Value Added/GDP
Brazil 5.3 1.3 19.6 5.9
China 7.4 1.4 39 10.3
Germany 41.7 14.7 56.5 17.2
France 54.4 21.5 78.7 26.3
England 42.8 16.3 71.6 26.9
India 2.5 0.3 18.1 3.1
Ireland 0 0 20.8 6.4
Italia 21.6 7.4 30.6 11.9
Japan 79.6 27.7 58 17.8
Mexico 8.7 1.8 12.6 4.1
Malaysia 0 0 32.4 3.4
Russia 0 0 22.1 5.3
Turkey 6.3 1.5 4.7 1.1
Taiwan 6.5 2 55.3 13.3
United States 41.8 15.7 49.4 14.2
Korea 31.6 7.6 57.5 13.9
Average 21.9 7.5 39.2 11.3
33
[Table 2] Number and sales/GDP of the Fortune Global 500 companies of major economies
Country 1994 1997 2000 2003 2006 2009 2012

149 175 185 189 162 139 132
United States
(39.9) (46.2) (53.5) (50.7) (53.0) (48.4) (52.9)
149 112 104 82 67 71 62
Japan
(80.8) (68.5) (64.1) (50.7) (55.3) (58.4) (57.9)
5 8 15 13 16 11 9
Canada
(9.2) (16.0) (30.6) (21.3) (26.7) (20.4) (15.8)
44 42 34 34 37 37 29
Germany
(41.7) (49.1) (62.3) (56.3) (63.3) (57.0) (60.4)
42 39 37 37 38 39 31
France
(68.5) (61.8) (75.9) (69.5) (80.3) (79.6) (78.0)
33 35 33 35 33 29 26
United Kingdom
(42.1) (46.1) (56.2) (57.6) (62.2) (70.5) (64.4)
11 13 8 8 10 11 8
Italy
(21.5) (22.0) (22.9) (19.8) (27.0) (30.6) (34.8)
8 12 11 11 14 10 14
Korea
(31.6) (54.7) (52.3) (41.3) (51.7) (57.4) (69.2)
2 2 0 1 6 8 6
Taiwan
(6.5) (6.8) (0.0) (4.4) (35.3) (55.3) (60.4)
3 4 12 15 24 46 89
China
(7.4) (6.7) (22.7) (21.8) (30.9) (39.0) (60.3)
2 5 3 3 5 7 8
Brazil
(5.3) (8.9) (8.3) (11.0) (15.5) (19.0) (19.7)
1 1 1 4 6 8 8
India
(2.5) (3.4) (4.7) (9.8) (15.5) (17.3) (20.2)
0 1 2 3 4 6 7
Russia
(0.0) (5.9) (12.4) (14.4) (17.8) (22.2) (24.2)
34
[Table 3] Fixed-effect panel analysis (Inequality variable: the Gini coefficient)
Model (C1) (C1sq) (C2) (C2sq)

Log of Gini Log of Gini GDP per capita GDP per capita
Dependent Variable
Index (0~100) Index (0~100) growth rate growth rate
GDP per captita -0.924*** -0.856***
growth rate (-2.94) (-2.73)
-0.033 -0.035
Log of Gini index (0~100)
(-1.03) (-1.07)
Log of number of 0.037* 0.027 0.032*** 0.032***
Fortune firms (1.71) (1.25) (4.31) (4.17)
Log of Fortune -0.001 0.051 -0.008 -0.004
sales share to GDP (-0.08) (1.44) (-1.60) (-0.34)
Log of square of Fortune 0.009 0.001
sales share to GDP (1.64) (0.42)
Log of total secondary -0.150** -0.146** -0.030 -0.030
schooling rate (% ) (-2.05) (-2.02) (-1.44) (-1.44)
Log of government -0.041 -0.039 -0.044** -0.044**
expenditure (% of GDP) (-0.56) (-0.53) (-2.11) (-2.10)
Log of inflation 0.012 0.010 -0.005 -0.005*
(% , GDP deflator) (1.17) (0.98) (-1.70) (-1.72)
Log of gross capital -0.012 0.000 0.025* 0.026*
foramtion (% of GDP) (-0.27) (0.00) (1.95) (1.99)
Log of average -0.443*** -0.444***
population (-3.57) (-3.62)
Log of GDP per capita -0.086*** -0.086***
of previous period (-6.48) (-6.44)
-0.011** -0.011**
Population growth
(-2.57) (-2.59)
11.85*** 11.89*** 1.080*** 1.099***
Constant
(5.89) (5.98) (5.94) (5.83)
Obeservations 118 118 118 118
Countries 39 39 39 39
R-Sqauared (within) 0.432 0.454 0.710 0.710
R-Sqauared (between) 0.265 0.271 0.306 0.306
Hausman (33.48)*** (36.71)*** (49.03)*** (47.80)***
Note1) *** : 1% significance level , ** : 5% significance level, * : 10% significance level
Note2) Coefficients of time and country dummy variables are omitted.
Note3) Values in the parantheses are t statistics or chi-square statistics.
35
[Table 4] 3SLS fixed-effect analysis on simultaneous equations (Inequality variable: the Gini
coefficient)
Model (C3a : C1sq & C2sq) (C3b : C1sq & C2)

Log of Gini GDP per capita Log of Gini GDP per capita
Dependent Variable
Index (0~100) growth rate Index (0~100) growth rate
GDP per captita -0.869** -0.885**
growth rate (-2.52) (-2.57)
0.179** 0.158**
(2.00) (2.02)
Log of number of 0.027 0.035*** 0.029* 0.034***
Fortune firms (1.64) (4.73) (1.73) (4.92)
Log of Fortune 0.050* -0.016 0.045* -0.010**
sales share to GDP (1.89) (-1.39) (1.79) (-2.20)
Log of square of Fortune 0.009** -0.001 0.008**
sales share to GDP (2.15) (-0.57) (2.08)
Log of total secondary -0.146*** 0.023 -0.144*** 0.018
schooling rate (% ) (-2.65) (0.79) (-2.62) (0.68)
Log of government -0.040 -0.030 -0.039 -0.031
Log of inflation 0.010 -0.006* 0.011 -0.006**
(% , GDP deflator) (1.17) (-1.93) (1.22) (-2.04)
Log of gross capital 0.000 0.029** -0.001 0.030**
foramtion (% of GDP) (0.01) (2.30) (-0.02) (2.49)
Log of average -0.445*** -0.456***
population (-4.76) (-4.98)
-0.013*** -0.013***
Population growth
(-3.48) (-3.60)
13.03*** 0.047
Constant
(7.59) (0.12)
Obeservations 118 118
Countries 39 39
R-Sqauared 0.989 0.812 0.989 0.826
Hansen-Sargan (0.79) (1.14)
36
[Table 4A] 3SLS fixed-effect analysis on simultaneous equations (Inequality variable: the Gini
coefficient. Openness variables included)
Model (C3bT) (C3bS)

Dependent Variable
GDP per captita -0.810*** -0.895***
growth rate (-2.23) (-2.59)
0.172** 0.046
(2.12) (0.71)
Log of number of 0.028* 0.032*** 0.028* 0.036***
Fortune firms (1.66) (4.58) (1.65) (6.19)
Log of Fortune 0.043* -0.009* 0.051* -0.011*
Log of square of Fortune 0.008** 0.009**
schooling rate (%) (-2.73) (0.87) (-2.66) (0.50)
Log of government -0.026 -0.041*** -0.045 -0.021
Log of inflation 0.012 -0.007** 0.009 -0.002
(%, GDP deflator) (1.38) (-2.42) (1.08) (-0.79)
Log of gross capital -0.004 0.033*** -0.004 0.020**
foramtion (% of GDP) (-0.12) (2.71) (-0.11) (1.98)
0.027 -0.022**
Log of trade (% of GDP)
(0.90) (-1.98)
Log of stock trade -0.002 0.005***
(% of GDP) (-0.35) (3.30)
Log of average -0.455*** -0.467***
population (-4.81) (-4.23)
-0.015*** -0.014***
Population growth
(-3.87) (-4.32)
12.910*** 13.465*** 0.513*
Constant (omitted)
(7.44) (6.49) (1.74)
Countries 39 37
R-Sqauared 0.989 0.823 0.989 0.884
37
[Table5] Quasi-reduced form analysis (Inequality variable: the Gini coefficient)
Model (QC3)
Dependent Variable Log of Gini Index (0~100) GDP per capita growth rate
Log of number of -0.009 0.035***

Fortune firms (-0.46) (6.16)
Log of Fortune 0.059** -0.006
sales share to GDP (2.15) (-0.75)
Square of log of Fortune 0.009** 0.001
Log of total secondary -0.152*** -0.002
schooling rate (%) (-2.66) (-0.16)
Log of government -0.021 -0.032**
expenditure (% of GDP) (-0.37) (-2.03)
Log of inflation 0.013 -0.003
(%, GDP deflator) (1.55) (-1.39)
Log of gross capital -0.011 0.025***
foramtion (% of GDP) (-0.30) (2.58)
Log of average -0.384*** -0.069***
population (-4.07) (-2.63)
Log of GDP per capita 0.090*** -0.092***
of previous period (2.60) (-9.57)
0.001 -0.012***
Population growth
(0.045) (-3.55)
11.16*** 2.062***
Constant
(6.43) (4.27)
Obeservations 118
Countries 39
R-Squared 0.989 0.891
Note3) Values in the parantheses are t statistics.
38
[Table5A] Quasi-reduced form analysis (Inequality variable: the Gini coefficient. Openness
variables included)
Model (QC3T) (QC3S)

Dependent Variable
Log of number of -0.006 0.033*** -0.011 0.036***
Fortune firms (-0.29) (5.90) (-0.52) (6.46)
Log of Fortune 0.057** -0.005 0.062** -0.008
Log of square of Fortune 0.009** 0.001 0.009** 0.001
sales share to GDP (2.06) (0.42) (2.06) (0.27)
schooling rate (% ) (-2.78) (0.04) (-2.75) (0.26)
Log of government -0.005 -0.039** -0.033 -0.022
Log of inflation 0.014* -0.004* 0.011 -0.001
(% , GDP deflator) (1.73) (-1.72) (1.23) (-0.61)
Log of gross capital -0.011 0.027*** -0.004 0.019***
foramtion (% of GDP) (-0.30) (2.82) (-0.11) (1.99)
0.036 -0.016**
(1.18) (-1.90)
Log of stock trade -0.006 0.005***
(% of GDP) (-0.91) (2.90)
Log of average -0.371*** -0.075*** -0.439*** -0.022***
population (-3.94) (-2.87) (-3.91) (-0.72)
Log of GDP per capita 0.078*** -0.086*** 0.098*** -0.099***
of previous period (2.18) (-8.79) (2.66) (-9.94)
0.003 -0.013*** 0.003 -0.014***
Population growth
(0.24) (-3.87) (0.27) (-424)
10.876*** (omitted) 12.210*** 1.166***
Constant
(6.24) (5.86) (2.08)
Countries 39 37
R-Sqauared 0.989 0.894 0.989 0.895
39
[Table 6] Fixed-effect panel analysis (Inequality variable: Labor income share ratio)
Model (D1) (D1sq) (D2) (D2sq)

Labor income Labor income GDP per capita GDP per capita
Dependent Variable
share to GDP share to GDP growth rate growth rate
GDP per captita 0.332 0.297
growth rate (1.13) (1.00)
Labor income share 0.023 0.023
to GDP (0.60) (0.61)
Log of number of -0.067*** -0.062*** 0.034*** 0.034***
Fortune firms (-3.43) (-3.03) (4.57) (4.48)
Log of Fortune 0.029** 0.002 -0.009* -0.006
sales share to GDP (2.00) (0.07) (-1.81) (-0.59)
Log of square of Fortune -0.005 0.000
sales share to GDP (-0.87) (0.27)
Log of total secondary -0.191*** -0.189*** -0.017 -0.017
schooling rate (% ) (-2.99) (-2.96) (-0.83) (-0.81)
Log of government 0.094 0.092 -0.044** -0.044**
expenditure (% of GDP) (1.39) (1.35) (-2.13) (-2.11)
Log of inflation -0.013 -0.011 -0.005 -0.005
(% , GDP deflator) (-1.32) (-1.13) (-1.56) (-1.56)
Log of gross capital 0.031 0.027 0.025** 0.026**
foramtion (% of GDP) (0.79) (0.67) (2.07) (2.07)
Value added of industry -0.004* -0.005**
(% of GDP) (-1.86) (-2.01)
-0.012*** -0.012***
Population growth
(-3.00) (-2.99)
0.174 0.168 0.938*** 0.945***
Constant
(0.49) (0.47) (6.81) (6.72)
Obeservations 116 116 120 120
Countries 37.000 37.000 40.000 40.000
R-Sqauared (within) 0.559 0.564 0.712 0.712
R-Sqauared (between) 0.016 0.016 0.284 0.283
Hausman (33.48)*** (36.71)*** (49.03)*** (47.80)***
40
[Table 7] 3SLS fixed-effect analysis on simultaneous equations (Inequality variable: Labor
income share ratio)
Model (D3)
Dependent Variable Labor income share to GDP GDP per captita growth rate
GDP per captita 0.569*

growth rate (1.71)
Labor income share 0.177
to GDP (0.88)
Log of number of -0.069*** 0.044***
Log of Fortune 0.029*** -0.013**
Log of total secondary -0.179*** 0.020
schooling rate (%) (-3.53) (0.44)
Log of government 0.115** -0.057*
expenditure (% of GDP) (2.04) (-1.96)
Log of inflation -0.009 -0.002
(%, GDP deflator) (-1.07) (-0.36)
Log of gross capital 0.022 0.019
foramtion (% of GDP) (0.69) (1.59)
Value added of industry -0.004**
(% of GDP) (-2.46)
Log of GDP per capita -0.085***
of previous period (-4.59)
-0.009**
Population growth
(-2.00)
0.474
Constant (omitted)
(1.55)
Obeservations 116
Countries 37
R-Sqauared 0.981 0.848
Hansen-Sargan (5.37)
41
[Table 7A] 3SLS fixed-effect analysis on simultaneous equations (Inequality variable: Labor
income share ratio. Openness variables included)
Model (D3T) (D3S)

Labor income GDP per capita Labor income GDP per capita
Dependent Variable
share to GDP growth rate share to GDP growth rate
GDP per captita 0.192 0.603*
growth rate (0.62) (1.92)
Labor income share 0.221 0.119
to GDP (1.20) (0.62)
Log of number of -0.063*** 0.045*** -0.069*** 0.043***
Fortune firms (-4.70) (3.77) (-4.57) (4.46)
Log of Fortune 0.032*** -0.014** 0.029*** -0.013**
schooling rate (%) (-3.68) (0.60) (-3.26) (0.64)
Log of government 0.043 -0.056** 0.124** -0.037
expenditure (% of GDP) (0.83) (-2.57) (2.19) (-1.21)
Log of inflation -0.019** 0.0001 -0.008 0.0001
(%, GDP deflator) (-2.39) (0.01) (-0.95) (0.02)
Log of gross capital 0.036 0.019 0.018 0.016
foramtion (% of GDP) (1.27) (1.61) (0.55) (1.51)
-0.134*** 0.017
(-5.28) (0.65)
Log of stock trade 0.003 0.005**
(% of GDP) (0.54) (2.12)
Value added of industry -0.004** -0.004**
(% of GDP) (-2.78) (-2.21)
-0.012** -0.012**
Population growth
(-3.14) (-2.98)
Constant (omitted) (omitted) (omitted) (omitted)

Countries 37 37
R-Sqauared 0.985 0.836 0.981 0.878
42
[Table 8] Quasi-reduced form analysis (Inequality variable: Labor income share ratio)
Model (QD3)
Dependent Variable Labor income share to GDP GDP per captita growth rate
Log of number of -0.036** 0.034***

Log of Fortune 0.021* -0.008**
Log of total secondary -0.174*** -0.015
schooling rate (%) (-3.64) (-1.00)
Log of government 0.105** -0.043***
expenditure (% of GDP) (2.13) (-2.79)
Log of inflation -0.013* -0.004
(%, GDP deflator) (-1.65) (-1.46)
Log of gross capital 0.018 0.028***
foramtion (% of GDP) (0.61) (3.03)
Value added of industry -0.004** -0.001*
(% of GDP) (-2.01) (-1.78)
Log of GDP per capita -0.080** -0.090***
0.014 -0.013***
Population growth
(1.40) (-4.26)
Constant (omitted) (omitted)
Obeservations 116
Countries 37
R-Sqauared 0.982 0.885
43
[Table 8A] Quasi-reduced form analysis (Inequality variable: Labor income share ratio.
Openness variables included)
Model (QD3T) (QD3S)

Labor income GDP per capita Labor income GDP per capita
Dependent Variable
share to GDP growth rate share to GDP growth rate
Log of number of -0.049*** 0.032*** -0.035* 0.036***
Fortune firms (-3.04) (5.81) (-1.96) (6.72)
Log of Fortune 0.028*** -0.007** 0.019* -0.010***
Log of total secondary -0.160*** -0.014 -0.157*** -0.003
schooling rate (%) (-3.71) (-0.91) (-3.10) (0.23)
Log of government 0.046 -0.049*** 0.121** -0.026*
expenditure (% of GDP) (1.00) (-3.14) (2.34) (-1.66)
Log of inflation -0.020*** -0.004* -0.010 -0.001
(%, GDP deflator) (-2.82) (-1.77) (-1.26) (-0.31)
Log of gross capital 0.030 0.029*** 0.012 0.021***
foramtion (% of GDP) (1.14) (3.19) (0.40) (2.36)
-0.128*** -0.014
(-5.22) (-1.63)
Log of stock trade 0.005 0.005***
(% of GDP) (0.98) (3.63)
Value added of industry -0.004** -0.001* -0.003** -0.001
(% of GDP) (-2.37) (-1.84) (-1.80) (-1.18)
Log of GDP per capita -0.035 -0.085*** -0.088*** -0.099***
of previous period (-1.20) (-8.40) (-2.73) (-10.28)
0.008 -0.014*** 0.012 -0.015***
Population growth
(0.93) (-4.47) (1.16) (-5.18)
Constant (omitted) (omitted) (omitted) (omitted)

Countries 37 37
R-Sqauared 0.986 0.887 0.982 0.897
44
[Appendix 1] Definitions of Variables and Sources of Data
(1) lgini: Log of Gini index (Source: Standardized World Income Inequality Database Ver. 4.0)
(2) llabsh: Log of share of labour compensation in GDP at current national prices (Source: Penn
World Table 8.0)
(3) gdpgr: Real per-capita PPP conditioned GDP growth rate, calculated by real per-capita PPP
conditioned GDP. (2005 constant international dollar) (Source: World Development Indicator and
IMF Statistics)
(4) lnumber: Log of number of Fortune Global 500 firms, calculated by adding 1 and taking log
values. (Source: The Fortune)
(5) lshare: Log of sales of Fortune Global 500 firms share to GDP, calculated by adding 0.0001 and
taking log values. (Source: The Fortune, World Development Indicator, IMF Statistics)
(6) lsharesq: Square of log of sales of Fortune Global 500 firms share to GDP, calculated by adding
0.0001 and taking log values. (Source: The Fortune, World Development Indicator, IMF Statistics)
(7) ledu: Log of total secondary schooling rate. (% of age 15+) (Source: Barro-Lee 2012)
(8) lgovw: Log of gross government consumption expenditure (% of GDP) (Source: World
Development Indicator and Penn World Table Ver. 8.0)
(9) linf: Log of inflation rate (%, GDP deflator) (Source: World Development Indicator and IMF
Statistics)
(10) linv: Log of gross capital formation (% of GDP) (Source: World Development Indicator and IMF
Statistics)
(11) ltrade: Log of imports and exports of goods and services (% of GDP) (Source: World
Development Indicator and Stats APEC)
(12) lstock: Log of stock traded, total value (% of GDP)) (Source: World Development Indicator)
(13) lpop: Log of total population (Source: World Development Indicator and IMF Statistics)
(14) ind: Value added of industry (Mining, manufacturing, construction, electricity, water, and gas) (%
of GDP) (Source: World Development Indicator)
(15) popgr: Population growth rate, calculated by total population (source: World Development
Indicator and IMF Statistics)
(16) linigdp: Real per-capita PPP conditioned GDP growth rate of previous period, calculated by real
per-capita PPP conditioned GDP. (2005 constant international dollar) (Source: World Development
Indicator and IMF Statistics)
45
[Appendix 2] Regression on the Fortune Companies Sales as a Share of GDP By Their Number
Model (5yr Average Panel)

Dependent Variable Log of share of Fortune sales to GDP
Log of number of Fortune firms 0.974 (10.52)***
Year/Period Dummies (included)
Constant -3.586 (-22.55)***

Obsevations 128
Countries 41
R-squared (within) 0.745
R-squared (between) 0.481
Hausman (-sq (2)) (12.92)**
[Appendix 3] Summary of Statistical Information on Variables
Variable Obs Mean Std. Dev. Min Max

lgini 153 -1.061694 0.2678202 -1.528946 -0.3766747
gdpgr 161 0.0214747 0.024415 -0.0940346 0.1010544
lnumber 128 1.815847 1.272019 0.1823216 5.239628
lshare 128 -1.578167 1.059172 -4.290412 0.6275894
lsharesq 128 3.603691 4.126921 0.000101 18.40764
ledu 161 4.138466 0.3409113 3.115735 4.595726
lgov 160 2.814725 0.3246019 1.886357 3.348098
linf 154 1.422699 1.092343 -0.7871661 6.013428
linv 160 3.109565 0.2067917 2.651727 3.861116
lpop 161 17.15511 1.590118 12.92035 21.01421
lavegdp 161 9.850074 0.801094 7.253761 11.13531
linigdp 161 9.745262 0.8463203 7.047424 11.13531
popgr 161 1.159507 1.442447 -0.4017382 13.46351
46
[Appendix 4] Correlation Between Variables
lgini gdpgr lnumber lshare lsharesq ledu lgov linf linv lavepop lavegdp linigdp popgr
lgini 1
gdpgr 0.1735* 1
lnumber -0.1866* 0.0346 1
lshare -0.3974** -0.0402 0.6714** 1
lsharesq 0.3067** -0.0021 -0.6228** -0.9423** 1
ledu -0.5800** -0.0814 0.4274** 0.3940** -0.3949** 1
lgov -0.5969** -0.1695* 0.1681 0.1217 -0.1168 0.4670** 1
linf 0.5421** -0.0898 -0.3776** -0.4091** 0.3344** -0.4389** -0.2686** 1
linv 0.2391** 0.5679** -0.0408 -0.1199 0.0869 -0.1589* -0.4519** 0.0622 1
lavepop 0.5664** 0.2427** 0.4238** -0.1157 0.0599 -0.2115** -0.2234** 0.2996** 0.2647** 1
lavegdp -0.7483** -0.3206** 0.2576** 0.4618** -0.3943** 0.6183** 0.3500** -0.5653** -0.3318** -0.6880** 1
linigdp -0.7360** -0.4451** 0.2352** 0.4363** -0.3670** 0.5967** 0.3545** -0.5217** -0.3933** -0.6847** 0.9909** 1
popgr 0.5270** -0.3163** -0.2870** -0.2399** 0.2187* -0.1843* -0.4427** 0.1710* 0.0894 -0.1539 0.0367 0.0814 1
Note) ** : 1% significance level, * : 5% significance level
47

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Role of the Big Business in the Growth-Inequality Nexus

Revised: February, 2015

Department of Economics, Seoul National University,

* M.A. Student in Economics, Department of Economics, Seoul National University,

This work was supported by the BK21Plus Program

2.1 Literature on Big Business

suggest that sociopolitical instability caused by inequality discourages investment an hinders

2.3 Direction of Research

3. Theoretical Review of the Role of Big Business in the Growth-Inequality Nexus

3.1 The Model

3.1.2.1 Technology Process

3.1.2.2 Capital and Labor

3.1.2.3 Firms Problem

Wage for unskilled workers is

3.2 General Equilibrium

3.3 Economic Growth and Inequality

3.4.1 Change in the Number of Large Firms

3.4.1.1 Wage Difference

3.4.1.2 Aggregate Output

3.4.1.3 Labor Share

3.4.2 Change in the Exploitation

3.4.1.2 Aggregate Output

The impact of change in on aggregate supply is as follow.

3.4.2.3 Labor Share

The effect of the change in on labor share is

The above result can be summarized as

Output Labor Share Wage Difference

4. Review of Empirical Analysis

4.1 Analytical Method

4.2 Variable selection and Data Collection

4.2.1 Big Business Variable

4.2.2 General Description of the Fortune Variable

4.2.3 Income Distribution Variable

4.2.4Other Variables Related to Inequality

4.2.5Other Variables Related to Economic Growth

5.1.1 Fixed-effect Panel Analysis

5.1.2. Estimation of Quasi-Reduced Form

5.2.1 Fixed-effect Panel Analysis

5.2.2. Estimation of Quasi-Reduced Form

6. Implications on Policies with Regard to Big Business

Brazil 5.3 1.3 19.6 5.9

China 7.4 1.4 39 10.3

Germany 41.7 14.7 56.5 17.2

France 54.4 21.5 78.7 26.3

England 42.8 16.3 71.6 26.9

India 2.5 0.3 18.1 3.1

Ireland 0 0 20.8 6.4

Italia 21.6 7.4 30.6 11.9

Japan 79.6 27.7 58 17.8

Mexico 8.7 1.8 12.6 4.1

Malaysia 0 0 32.4 3.4

Russia 0 0 22.1 5.3

Turkey 6.3 1.5 4.7 1.1

Taiwan 6.5 2 55.3 13.3

United States 41.8 15.7 49.4 14.2

Korea 31.6 7.6 57.5 13.9

Average 21.9 7.5 39.2 11.3

Country 1994 1997 2000 2003 2006 2009 2012

Model (C1) (C1sq) (C2) (C2sq)

Model (C3a : C1sq & C2sq) (C3b : C1sq & C2)

Model (C3bT) (C3bS)

Log of number of -0.009 0.035***

Model (QC3T) (QC3S)

Log of number of -0.036 0.034*