Download Superstar
Angelo Dearring
We find superstars exist not only among firms but among sectors and cities as well, although the trend is most evident among cities and firms. Relative to peers, superstars share several common characteristics. In addition to capturing a greater share of income and pulling away from peers, superstars exhibit relatively higher levels of digitization; greater labor skill and innovation intensity; more connections to global flows of trade, finance, and services; and more intangible assets than do their peers. Yet there are some variations. We find a higher churn rate among superstar firms compared to cities, indicating higher levels of persistence among superstar cities.
Although a variety of definitions exist, we define superstar to mean a firm, sector, or city that has a substantially greater share of income than peers and is pulling away from those peers over time.
For cities, our metric includes GDP and personal income per capita. These measures allow us to discover which economic activities are becoming more valuable over time, where the benefits flow, and what linkages exist, if any, among sector activities and superstar firms and cities.
While the superstar effect is not as strong for sectors as it is for firms, the superstar sectors over the past 20 years we have identified include financial services, professional services, real estate, and two smaller (in gross value added and gross operating surplus terms) but rapidly gaining sectors: the pharmaceuticals and medical-products sector and the internet, media, and software sector.
In addition, superstar sectors tend to have relatively higher R&D intensity and lower capital and labor intensity than other sectors do. The higher returns in superstar sectors accrue more to corporate surplus rather than labor surplus, flowing to intangible capital, such as software, patents, and brands. Although some superstar sectors have stronger multiplier effects on economic growth than declining sectors do, their gains are more geographically concentrated compared to sectors in relative decline. For instance, gains to internet and media activities are captured by just 10 percent of US counties, which account for 90 percent of GDP in that sector.
Emerging-market superstar cities have increased their contribution to global GDP by 30 to 40 percent in the past decade, while advanced-economy superstar cities have increased their share of global GDP by 20 to 30 percent. Over the past decade, we find a 25 percent churn rate among superstar cities as some advanced-economy cities, such as Rome, San Diego, and Vienna, have been displaced by emerging-market cities, such as Jakarta, Kuala Lumpur, and New Delhi, with stronger income and population growth relative to peers in the same region and income group. The growth of superstar cities is fueled by gains in labor income and wealth from real-estate and investor income, yet many show higher rates of income inequality within the cities than peers do.
At the same time, a notable number of superstar cities (and not just the city-states) have a disproportionate share of their national income given their share of the population. In addition to the 50 global superstars, we identify more than 75 regional superstar cities that are smaller but share many of these characteristics and could become global economic hubs in the future.
Our analysis so far raises questions for further research. For instance, we find that many suggested explanations of the superstar effect, such as productivity growth, technological or regulatory advantage, and intangible investments, do not fully or individually account for the phenomenon. What combination of factors leads to the emergence of superstar firms, sectors, and cities? How much of the superstar effect among firms is due to changes in the macroeconomy, including changes in value associated with different types of inputs and outputs, or to the wider accessibility of large global markets and low interest rates? How much is due to firm-specific investments in R&D and intangibles? What is the economic impact, both positive and negative, of superstars on innovation and competition, jobs and wages, investment and productivity, growth of smaller firms, consumer surplus, and overall prosperity and inclusive growth?
But counter observations also raise questions. For example, why do some superstar sectors but not others produce superstar firms? What explains superstar firms in declining sectors? Why do some superstar sectors and firms thrive despite their low digital intensity, low R&D intensity, or low levels of cross-border trade and investment activity?
The growth of superstar firms, sectors, and cities also creates policy questions beyond the causes of superstars and their effects on competition and market structure. These considerations include implications for inclusive economic growth that can support and sustain broad-based employment and wage growth.
The findings in this paper are by no means the last word on the topic of superstars. Indeed, we have highlighted questions that require further research to inform smart policies by policy leaders and winning strategies by business leaders, all with the goal of not only value creation but also more inclusive growth and shared prosperity.
In his memoir, Born Standing Up, the comedy superstar Steve Martin provides insight into his rise to prominence. I've written in-depth about his method, but perhaps the most important concept is Martin's redefinition of "diligence." He notes that diligence was crucial in his rise to comedic fame, but he's quick to redefine the term away from it's standard definition of "hard work applied consistently over time." To Martin, the key to diligence isn't the work applied to your pursuit, but instead the work you don't apply to other pursuits. He succeeded in reinventing comedy because he kept his focus on comedy, even when other, more shiny and interesting side projects presented themselves.
I have this little real estate venture going on offering housing to people in large West African cities who are at an income level above slums but below the middle class. There are millions such people and their housing needs seem to be somehwhat ignored. So far I havent heard of any company or entrepreneur in the developed world doing the same thing in the same way. Hopefully this is unique enough for a bit of superstar effect!
Thank you for a brilliant post Cal (and by extension, Tim). It reminded me of some of the themes that Malcolm Gladwell touches upon in Outliers, but what was poignant for me, was that we can reasonably engineer our success in fulfilling the superstar corollary. As I am about to embark upon my own muse project, it has justified the reason why I should be focusing solely on this particular project and not get distracted by anything else, which, currently is a problem of mine.
There are reasons, however, to worry that in agglomeration cities, the social context that these researchers describe is fading. Because Chetty's research focuses on cohorts born in 1980, it represents, inevitably, a view of the recent past rather than the present. And conditions in these agglomeration economies are changing rapidly. Those at the bottom are pushed toward increasingly precarious conditions, or out of these locations entirely. Perhaps even more important, it is becoming increasingly difficult for those not already economically advantaged to move to these escalator regions. A crucial factor in both of these developments is the transformation of housing and exploding housing prices in superstar cities, in particular.
Yet the wealth impact of the housing boom is not just, or even primarily, a question of oligarchs parking (or laundering) their assets. Rising property values in high-income cities are driving large shifts in wealth inheritance. In a precursor of the argument we develop more extensively in the next section, policy choices of national governments figure prominently in this development. In all three of the countries where our superstar cities are located, governments have relaxed inheritance tax laws to make it easier for the wealthy to pass these increasingly valuable assets on to their heirs. In the United Kingdom, the Cameron government's 2015 budget included a new exemption for the main family home from inheritance tax, potentially allowing a couple to leave their children up to 1 million tax-free. In France, the Sarkozy government increased the ceiling for tax-free transfers of inheritance to children. In the United States, conservatives have repeatedly and successfully pushed to cut inheritance taxes, which now apply only to the superrich. The tax bill passed in late 2017 will allow a couple to transfer up to $22.4 million to their heirs free of tax.
Two dynamics of exclusion are at work here: exclusion within and exclusion from. The radically new conditions in superstar cities operate not just as an escalator, but as a filter. Filtering doesn't just work by blocking in-migration by those with fewer resources; it operates within cities as well, as rising prices push individuals away from the escalator and into situations of insecure housing or homelessness. In many European cities, there are strong logics of differentiation and segregation at the extremes: geographer Sako Musterd and his colleagues have provided evidence of increased segregation in European cities. Sociologists Douglas Massey and Jacob Rugh have found similar trends in the United States, with the affluent in American cities increasingly segregated, both racially and economically, from everyone else.68
The striking changes in superstar cities thus reveal shared patterns, highlighting the importance of global forces and technological shifts. Yet the contrast between Paris, on the one hand, and New York, San Francisco, and London, on the other, demonstrates the continuing significance of national institutions, political coalitions, and policies in shaping the new contours of inequality.
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