A person stops to look at an electronic stock board showing Japan's Nikkei index at a securities firm, July 12, in Tokyo.Eugene Hoshiko/The Associated Press
Tax Big Tech from Toronto to Timbuktu? Break it to bits? Pandering politicians worldwide claim tech’s behemoths are too dominant – and that requires regulatory crackdowns.
You hear Canadian regulators touting international tech taxes They aren’t alone. European politicians yapped endlessly about “fixes” during the run-up to recent European Union elections. America’s looming November vote fans similar break-up-the-biggies talk.
The Fine them! Tax them! Break them up! mentality is exemplified by Uncle Sam’s lawsuit alleging Apple Inc.’s smartphone is a “monopoly.” That’s just one example. Canada’s years-long antitrust probe into Google’s online advertising practices is another. Pundits mindlessly nod, seeing government as surely right to step in.
No! It is all dangerously wrong nonsense.
Whatever you think of Big Tech (or other behemoths), political fixes aren’t the answer.
Government intervention isn’t needed. Capitalism’s secret lifeblood – plus patience – renders such plans counterproductive. Here is how.
Creative destruction – the non-stop churn of new startups outthinking, outflanking and replacing slowly aging giants – solves the dilemma naturally. It always has. It is a near-perfect self-regulatory feature.
It is Adam Smith’s legendary “invisible hand” of 1776, which guides open markets.
Hugeness creates unbelievably vast profits. As firms grow into societal Goliaths, entrepreneurial Davids see opportunities. The old, now-fattened hunters become the hunted. A tiny minority of entrepreneurial innovators successfully emerge, rise and overthrow old titans who can’t change, adapt or innovate fast enough.
It takes 10 or 20 years – rarely more. I have watched this perpetual marketplace saga for 50-plus years and always known it. Dominance isn’t permanence, ever.
To see it, consider the largest 20 global companies by market capitalization in 1970, 1990, 2010 and now. From 1970′s tally, just seven made 1990′s list – with several from then-booming Japan skyrocketing to the top tier.
By 2010, those hot Japanese companies faded. Just four from 1970′s list made the 2010 cut. Just four! None do now. What happened? Innovation!
Many formerly dominant Goliaths from 1970′s list got decimated – think of Kodak KODK-N, Sears and Xerox XRX-Q. Poof! Others, such as DuPont, General Motors Co. GM-N, IBM IBM-N and U.S. Steel X-N shrank to second- or third-tier status. New entrepreneurial entrants ate their lunches – no government fixes required.
Minicomputer firms toppled IBM. Personal computer makers toppled minicomputer companies. Smartphones decimated Kodak. Amazon and Walmart toppled Sears. Everyone toppled Xerox. Globally, former tech kings such as Japan’s calcified.
It never ends. Consider today’s top 20 global companies: Only five adorned 2010′s list. In just 14 years, 15 newbies reached the top 20! Only two of today’s top 20 were on 1990′s list. Creative destruction reigns!
Yes, the process causes business failures, threatening jobs and spurring angst. But long term, failures benefit us all by freeing capital. Creative destruction allows dynamic upstarts to provide world-bettering offerings, create better jobs and more. Failures provide vital information – showing what works versus what needs improvement. Governments barring or inducing creative destruction muddles those key messages.
Consider Japan and its infamous zombie companies, which can no longer lead, yet they still siphon capital from challengers, effectively subsidized by regulation, banks and cross-shareholders. Many zombie companies would be long dead without such support and artificially low interest rates.
Some people cheer Japan’s stable employment. But think bigger: Japan’s dearth of creative destruction created a decades-long malaise. The country’s gross domestic product grew just 0.8 per cent annualized from 1994 to 2023, versus 2.4 per cent for the United States and 2.3 per cent for Canada.
It also underpinned the puny 152 per cent return for Japanese stocks in yen over that stretch. The 924 per cent in Canadian dollars for the Toronto Stock Exchange, tilted to financials and energy, beats that. The S&P 500 Index′s 1,694 per cent boom in U.S. dollars crushes Japan! Notably, government protections didn’t prevent Japan’s strong presence in 1990′s top 20 list from fading.
Governmental interference also often creates unintended consequences. Consider the EU’s many and varied new regulations, lawsuits, fines and attempts to hobble Big Tech for alleged excesses. The latest – EU regulators fining Apple APPL-Q up to 10 per cent of its global revenue for its App Store’s supposed non-compliance with Europe’s Digital Markets Act – is just one among countless examples over recent decades.
The effects? Europe’s tech sector is tiny. Only three of the world’s 50 largest tech or tech-like firms are eurozone-based, and just three are Japanese. People should decry the lost competitiveness as old-line European and Japanese sectors lag. Meanwhile, America has 35 of tech’s Big 50.
Some proponents now laud Canada’s digital services tax on foreign Big Tech firms – mostly impacting U.S. behemoths such as Alphabet Inc. GOOGL-Q and Meta Platforms Inc. META-Q Maybe you do, too! Finance Minister Chrystia Freeland positively compares it to similar moves in Europe.
But I have shown you the unforeseen consequences of European regulations. Do you really want that here? Today, Canada’s biggest tech company, Shopify Inc., SHOP-T floats near the bottom of the tech Big 50 list. More regulation won’t help.
No, I don’t urge some no-regulation Wild West. Governments should enforce property rights, truth in advertising and safety rules, which are crucial to investor confidence and risk-taking. But in regulating market dominance, creative destruction works best. Embrace it and thrive.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.