Giants such as Amazon stay on top because they’re both more productive and more scalable than their competitors, according to research from Wharton and Penn.
New research co-authored by University of Pennsylvania academics challenges a core assumption in economics: that the most successful companies achieve their dominance purely through superior productivity. Instead, this study highlights the important role of scalability — how well firms can grow as they add resources — in explaining why the largest companies stay on top.
By focusing on differences in how companies scale, or “returns to scale” (RTS), Salgado, Joachim Hubmer, assistant economics professor at Penn, and the other authors of the study shed light on the more varied ways that firms produce goods and expand. In doing so, they provide insights for policymakers, investors, and business leaders.
“In the traditional view, we think of large companies like Amazon as simply more productive than others. But that doesn’t quite capture it,” said Hubmer. “Amazon is unique because it’s scalable, and that’s something that seems built into their technology.”
Scalability and Productivity Predict Greater Growth for Firms
By examining Canadian firms over nearly two decades, Hubmer, Salgado, and their co-authors found that scalability, not just “total factor productivity” (TFP), explains why some companies grow significantly larger than others.
While productivity grows with revenue, it plateaus for the largest firms, whereas scalability keeps climbing. In fact, the top 5% of firms enjoy RTS around 10 percentage points higher than their smaller peers, allowing them to expand efficiently even as they grow larger.
This insight isn’t just a minor technical detail. It helps explain why, within the same industry, some companies thrive while others struggle, even with similar resources.
Previous research has shown that uneven resource use among firms contributes to inefficiencies, affecting company size and profits and, on a larger scale, impacting economic growth. This study goes a step further, suggesting that differences in scalability are key to understanding these dynamics.
The researchers analyzed data from more than 4.3 million records of Canadian firms from 2001 to 2019 — over 90% of the country’s private sector output. This extensive dataset allowed them to measure both productivity and scalability within various industries and across company sizes.
Why Some Companies Have Higher Scalability
Interestingly, companies that achieved high scalability tended to spend more strategically on inputs (like raw materials), leading to stronger growth outcomes. Scalability, it turns out, isn’t just about pouring more money into the mix; it’s about how effectively companies use those investments to produce more output (products or services).
Even within the same industries, the study observed that companies vary widely in their scalability. “We found the largest firms are set up to expand with fewer cost increases,” said Hubmer. “Their operations are structured to scale efficiently, which isn’t always the case for smaller companies.”
On average, firms with higher RTS can generate 7% more output than others with the same input increase — which underlines the point that a stable, consistent approach to production, rather than temporary tactics, is what often drives scalability.
These findings were further validated in the study by comparing similar data from U.S. firms, which confirmed the scalability edge seen in the Canadian context.
Important Insights for Economists and Policymakers
Beyond just explaining company success, the study offers important insights for economists and policymakers. Companies with high scalability (RTS) not only grow faster and stay in business longer but also tend to offer higher wages, potentially narrowing wealth gaps.
However, the study also shows that wealthier business owners tend to invest in companies that can grow easily (high scalability) rather than just in the most efficient ones. This choice could impact wealth inequality because scalable companies usually bring in higher returns over time.
For policymakers, the study also sheds light on the often-overlooked efficiency costs of financial restrictions, or a company’s ability to access funds. These financial limits hit scalable firms much harder, meaning funding policies may need to support scalable businesses to help them succeed.
“If Amazon is only profitable at a large scale, financial constraints really matter,” said Hubmer. “A lot of companies might never get off the ground because potential entrepreneurs can’t get past that initial hurdle.”
“Our quantitative analysis shows that differences in RTS have important implications for the impact of financial frictions,” Salgado said.
The implications of this study are far-reaching. For investors, the scalability factor can guide better investment strategies by focusing on companies with growth-oriented production methods. For policymakers, it raises questions about how to structure taxes, incentives, and financing policies to support scalability, especially for companies that might struggle under traditional financial limits.
In short, the research underscores that scalability, not just productivity, is a critical driver of growth at the top. “We’re saying it’s crucial to have the right view of what makes firms large or small,” Hubmer said. “That understanding could shape everything from tax policy to financial support structures.”
