Economists have proposed many possible explanations: top managers flocking to top firms, automation creating an imbalance in productivity, merger-and-acquisition mania, lack of antitrust regulation and more.
But new data suggests that the secret of the success of the Amazons, Googles and Facebook s of the world—not to mention the Walmart s, CVSes and UPSes before them—is how much they invest in their own technology.
There are different kinds of IT spending. For the first few decades of the PC revolution, most companies would buy off-the-shelf hardware and software. Then, with the advent of the cloud, they switched to services offered by the likes of Amazon, Google and Microsoft . Like the difference between a tailored suit and a bespoke one, these systems can be customized, but they aren’t custom.
IT spending that goes into hiring developers and creating software owned and used exclusively by a firm is the key competitive advantage. It’s different from our standard understanding of R&D in that this software is used solely by the company, and isn’t part of products developed for its customers.