The UK government adopted an Advanced Manufacturing Plan in November 2023. To gauge its success a factual baseline is needed. Our analysis reveals lacklustre value creation by UK manufacturing in both absolute terms and relative to G7 peers. Total economic profit (EP) generation fell 45% from 2005 to 2022. But there are pockets of excellence. The Semiconductors & Semiconductor Equipment as well as the Technology Hardware & Equipment sectors, for example, are not only highly profitable—their EPs have also grown by 359% and 196% since 2005, respectively.

As the US presidential election stirs debate on corporate taxes, an analysis on 7,560 publicly-listed US firms reveals that despite rising total economic profits total corporate income tax payments stagnated between 2005 and 2022. On average, two-third of US companies contributed positively to tax revenues, while the remainder paid either no taxes or received tax refunds. It was not until 2022 that taxes paid per firm exceeded levels observed before the Global Financial Crisis. With a pronounced upward trend in economic profits US firms could have born a higher corporate tax burden, albeit at the risk of cutting R&D and advertising. That this has not happened represents a significant public policy choice.

Economists incline to the view that economic profits (EP) rather than accounting profits (AP) are a better guide to corporate performance. Sceptics might argue, ‘If you are so smart, then the market should reward firms with unusually high EP. Is that the case?’ We checked, and a simple, rules-based investment strategy proposed here would indeed have beaten major benchmarks over the past 10 years (with an annualized return of 17.6%) while featuring very attractive risk/return metrics. Now, we do not give investment advice in the Crux of Capitalism project, but it is intriguing to see whether this particular economic logic is valued in practice in the investment world.

Whether it be the success of Tesla over the past decade or the demands of the energy transition, the rise of electric vehicles (EV) in public consciousness is unquestionable. Since 2010, the economic fundamentals of purely EV-focused firms have strengthened, with economic profits (EP) quadrupling to 120m USD per firm by 2022. When compared to 2.3bn USD per firm for mixed EV and ICE producers, pure EV producers continue to lag behind. Despite concerns around Chinese EV production, US automakers lead the way in terms of EP generation.

Firms aren’t supposed to be immortal—competition is supposed to weed out the unviable. However, counterintuitively, some firms persist in generating sustained negative economic profits (EP). Taking a cohort of firms that consistently generate EP losses from 2010 to 2014, we find that 8 years later, 18% of these firms continue to destroy value. At the sector level, utilities and communication services have the highest prevalence of such corporate vampires, while the IT sector displays the lowest persistence. State support could be playing an important role in enabling the survival of ‘vampire’ firms.

It is a fundamental law of economics that firms in a competitive market should make zero economic profit (EP) in the long-run. In reality, though, many companies generate excess positive or negative EP. However, we also document a high degree of EP mobility. Every year an average of 3.3% of listed firms transition from a state in which they earn more than 50 mn USD or less than minus 50 mn USD back to the competitive. About 4% of companies go the other way. EP mobility is particularly high in the utilities and energy sectors and in countries with many firms in these industries, such as Brazil and Russia. About 14% of firms, however, stay in a ‘non-competitive’ EP state for at least three years.

Concerns about corporate tax avoidance have become salient. Crux of Capitalism data reveals a clear positive relationship between a company's economic profitability and its net tax payments. While the percentage of firms with negative cash effective tax rates exhibit cyclical variation, there is an overarching upward trend. In the United States, the share of firms with negative cash ETR rose by 14 percentage points from 2005 to 2022. In China, 13% of listed firms received net tax refunds in 2022.

A review of contemporary measures of bankruptcy risks in 21 economies shows they vary markedly across sectors. In Q2 2023, for example, 23% of healthcare firms showed a negative Altman Z’’-Score, a commonly used metric of bankruptcy risk. Meanwhile, this was the case for only 5% of utility companies. With the notable exception of the healthcare sector, surprisingly, these percentages have barely risen in recent years. But this may still be the calm before the storm. As higher market interest rates inflate corporate interest expenses, more firms could turn into ‘zombies’ and then witness rising risks of bankruptcy (Altman Z’’-Scores below zero). Monitoring such transitions is necessary going forward.

The energy transition requires huge investment into green infrastructure to meet UN climate goals; however, when profits are properly calculated, renewable energies are currently not economically viable. Despite lower capital costs compared to oil and gas firms—2.4% less on average—renewable energy firms struggle to create economic profits. This is primarily due to the large amounts of invested capital required for renewable energy firms to build out their infrastructure. Escaping the gravity of corporate value destruction indeed requires the renewable energy sector to expand and secure benefits from scale or reinvent their business strategies.

The notion that commercially unassailable superstar firms generate excess profits has taken hold in the United States. Evidence of the concentration of economic—as opposed to accounting—profits of publicly-listed companies in 21 economies from 2018 to 2022 is marshalled here. This allows for US experience to be benchmarked against other economies. Economic profit concentration is found to be more severe in many other nations. Cross-sectoral comparisons reveal that the IT sector does not have the most concentrated economic profits.

R&D is an important engine of economic value creation. We find that North American firms accounted for 47% of the world’s corporate R&D spending in 2022, 2.5 times more than their Chinese and European counterparts. Chinese companies, however, now spend 8,000% more on R&D than they did in 2005, while American (+174%), European (+64%), and Japanese (+28%) firms show less growth. The IT, healthcare, and consumer discretionary sectors are the largest R&D spenders. The resilience of R&D spend during 2020 and 2021 varies markedly across sectors and geography.

As central bankers have lifted interest rates to restore their inflation-fighting credentials, the capital costs of firms have risen as well. We find that funding costs are currently much higher for Western firms than for their Chinese and Japanese counterparts. Firms in the energy and IT sectors face particularly changing circumstances. The increase in capital costs between Q2 2022 and Q2 2023 were largest in Russia and South Africa. Capital costs for Italian industrial and energy firms spiked, too.

High quality data that is available fast and for a broad set of countries is hard to come by. Yet, it can be essential for improving economic forecasts and for assessing economic health at time of acute stress. This analysis shows that, for most countries in our sample, the data needed to meaningfully track economy-wide economic profit and corporate distress metrics is available just 45 days after a quarter ends. This is true for all European and North American economies plus Indonesia, Brazil, Singapore, and India. For the United States and Sweden enough data is available after just 30 days.

By now, the 'Magnificent Seven' “tech” stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – together amount to around 30% of the S&P 500's market cap. Crux of Capitalism data reveals their heft extends beyond that. In 2022, these 7 giants alone accounted for 32% of the economic profit of all firms listed in the US stock market. Plus, with the M7 responsible for 38% of total R&D spending, these companies are central to US innovation ecosystems.

In his recent remarks at the ECB Forum Alfred Kammer from the IMF admitted that “forecasting is a humbling process” and that more granular bottom-up data may be needed. Our Crux of Capitalism database can contribute here. In the Swiss context, we show that our firm-level metrics on economic profits and corporate distress may be valuable leading indicators for macroeconomic variables, which can improve key economic forecasts. The mean absolute predication error (out-of-sample) in our preferred forecast model for real Swiss GDP growth, for example, drops by 45%.

After nearly two decades, claims that Germany is the “sick man of Europe” are making a comeback. Germany is the only major advanced economy expected to see its GDP shrink, the IMF contend. Our firm-based performance data reveals a 50% drop in economic profit for Germany’s publicly-listed firms in the first-half of 2023. The resulting crimp on investments by corporate giants like BASF and Siemens ought to be a major economic policy concern. While other EU countries are also experiencing economic profit declines in 2023, falls in Germany are more pronounced — heightening the imperative of reform.

Measuring economic profits rather than accounting profits is a far more reliable indicator of a company’s performance, argue Simon Evenett and Felix Reitz. And value-creating firms are well-equipped to help fund sustainability as well as making healthy returns for shareholders.

We examine whether China’s tremendous economic growth this century has a counterpart in significant economic profitmaking by its firms. We find that Chinese companies only started to generate significant economic profits after 2019. The largest firms in the consumer discretionary, IT, and industrial sectors have driven this recent upturn. Yet, these developments appear vulnerable. Furthermore, even with the recent increases, Chinese firms only create 34% of the economic profits of their US counterparts.

As interest rates rose in many economies, fears of a “hard landing” grew. But has tighter monetary policy translated into more firms going into corporate distress? The Crux of Capitalism project tracks three indicators of corporate performance and is well placed to assess how many firms are close to the edge. In 2021 and 2022 already 25% of firms struggled to make their interest payments, 8% showed elevated risk of bankruptcy, and 28% were destroying economic value. Australian and Canadian firms appear to be especially vulnerable, while fewer Japanese and Swiss counterparts are in danger.

A firm is in distress if its current operations cannot generate the means to meet its interest payments and/or bankruptcy risk is too high. The Crux of Capitalism project generates interest coverage ratios and Altman’s Z’’-scores that, when combined, indicate whether a firm is likely to be in corporate distress. Sorting between viable zombie companies and more destined for failure is possible. This approach could support the development of accurate early warning indicators and, during an era of interest rate normalisation, reduce false alarms about unviable zombie firms.

The economic profit measure developed in the Crux of Capitalism initiative is based solely on reported firm performance. As such it departs from established metrics of the national business environment, parts of which are based on perceptions of national policies and institutional effectiveness. Here we compare across countries and over time to assess where our outcome measure confirms or departures from high-profile, established metrics of the national business environment.

Fair cross-country comparisons of the value created by capitalist economies require accounting for differences in the propensity of firms to list on stockmarkets. We compute the shares of companies listed by country, year, and asset size category and find significant cross-country variation. Adjusting for these differences changes rankings of nations based on total economic profit generated in plausible ways. Adding the contribution of non-listed firms raised the total economic profit generated in the 21 economies studied in the Crux of Capitalism project by 35% on average for the 2014-2022 period. This correction does not alter the US primacy in global economic value creation.

Our societies confront a number of critical challenges such as the transitions to a low-carbon economy and to a digital and aging society. Many expect a lot from business, begging the question of how much economic profits are available for any use, including investing in the future of the business. We find that in 2022 publicly-listed firms in 21 capitalist economies generated significant surpluses. Based on our economic profit measures, these companies have at most 2.8 trillion USD to deploy, with notable concentrations in the IT, health care, consumer discretionary, and industrial sectors.

The track record of Swiss publicly-listed companies in creating economic value is assessed, along with their propensity to experience corporate distress. This assessment is conducted both in absolute terms and relative to foreign peers for the years 2005 to 2022. Established measures of corporate distress were augmented by a specially-constructed economic profits measure assembled from quarterly financial reports. While on average Swiss firms perform better in economic profit terms than rivals from neighbouring countries, there are doubts as to whether Swiss firms can generate higher levels of economic profit in the future, especially as the cost of capital is rising.

The Crux of Capitalism project calls into question the efficacy of accounting profit measures when assessing a firm’s ability to create value through its current operations. An economic profits measure is advanced instead and is executed at the firm level and then aggregated across firms into sectoral and national totals. Three examples where accounting profits measures obscure the underlying health of firms and capitalist economies are provided here.