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Rich US high-tech firms may be blunting innovation, says OECD

WASHINGTON — It is practically an article of faith in Silicon Valley: High-tech companies are an unalloyed good for the United States economy, generating the innovation that is critical to its long-term success. That is not always the case, according to the Organisation for Economic Cooperation and Development (OECD).

WASHINGTON — It is practically an article of faith in Silicon Valley: High-tech companies are an unalloyed good for the United States economy, generating the innovation that is critical to its long-term success. That is not always the case, according to the Organisation for Economic Cooperation and Development (OECD).

The Paris-based group argues that rich, entrenched technology companies may be blunting innovation by buying up fledgling firms.

“Merger-and-acquisition activity is showing signs of blunting market forces in some industries,” said the 34-nation OECD in a report late last week on the US economy.

“This is particularly apparent in the high-tech industry, where deep-pocketed incumbents have acquired promising young firms.”

It singled out Facebook’s 2014 purchase of mobile-messaging start-up WhatsApp as an example of the buyout trend.

The organisation said such moves “tend to sideline the strong-performing young firms that play a key role in pushing market innovation and challenging incumbents”.

High-tech is not the only industry where the OECD saw potential for problems. It also cited retailing and pharmaceuticals as sectors “where consolidation is especially evident”.

The group, which serves as forum for democracies with market economies to swap policy ideas, suggested that the US consider broadening the scope of its existing antitrust laws in response.

Financial Rules

Another possible reason for the country’s recent sluggish productivity performance, according to the OECD: Tougher financial regulations imposed in the wake of the 2007 to 2009 economic crisis.

While making the financial system safer, they also could be limiting the amount of credit provided to businesses and entrepreneurs.

“Time will tell whether policy makers need to recalibrate these measures as the trade-offs between financial stability and funding availability become more apparent,” it said.

The report was mostly upbeat on the state of the US economy seven years after the end of the worst financial crisis since the Great Depression.

“The United States is making a comeback,” said the group. “The US economic recovery, while modest by historical standards, has been one of the strongest in the OECD.”

Gross domestic product has expanded at an annual average rate of about 2 per cent since the middle of 2009, and the OECD sees more of the same this year and next. It sees “stubbornly low” inflation edging higher towards the Federal Reserve’s 2 per cent goal.

“Further increases in interest rates would be warranted in line with inflation becoming more consistent with the Fed’s inflation target, though at a pace so as not to jeopardise the recovery,” said the OECD. “As the target is symmetric, inflation could run temporarily higher than 2 per cent.” BLOOMBERG

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