Are large companies efficient%3F

I often hear the talking point that large corporations are run inefficiently.

The outside view leans towards “efficient”: Clearly, corporations like Google or Microsoft are in fact efficiently converting capital into value—their ever-increasing control / power / value / stock price indicates this. On the other hand, successful startups¹ seem to have higher growth rates, some predictably so.

The inside view / anecdotal evidence leans towards “inefficient”: employees of these large companies often complain about internal bureaucracy on their particular projects and teams. Business and management professors also claim this inefficiency exists (or so I hear).

Second Best

This phenomenon seems potentially explained by the sort of reasoning that results in the theory of second best. TLDR, this theory says that constraints change the landscape (shocker, I know).

Under this view, there’s some constraint placed on the companies that the employees and professors are not taking into account, and after considering this constraint, the companies are in fact efficient.

Alternatively, the companies are optimizing for something different than what professors and

employees think they are / ought to be optimizing for. One simple explanation could be that larger companies become more risk-averse, aiming for compounding growth rather than risking a chance of complete collapse. I would be somewhat surprised if business professors didn’t account for this, but who knows, people are silly sometimes.¹

What could the constraint be?

Footnotes

1. (insert survivorship bias plane image) ↩ ↩²