of U.S. executives. One well-known example is the semiconductor memories industry. Major U.S. companies chose to invest less in new products and new plant and equipment than foreign competitors during the time of slack demand. When demand increased, usually for the next generation of product, U.S. companies fell behind in their ability to respond while their competitors gained market share. As a result, the fate of some U.S. semiconductor firms was to lose market share coming out of every period of slack demand and eventually to leave the business. The short-term goals that executives choose to pursue—in particular the desire to earn "predicted" profits—seem to have hurt the companies in the long run. Use of a different goal—long-term profitable market share, for example—might have yielded different results.

A second type of evidence that U.S. companies suffer from time horizons that are too short is the low relative levels of investment in long-lived assets by U.S. corporations. Between 1973 and 1985, manufacturing gross fixed capital formation as a share of manufacturing gross domestic product averaged 12.4 percent in the United States and 19.1 percent in Japan, a ratio of 1.5 in Japan's favor. From 1976 to 1988, investment in machinery and equipment in Japan varied from 14.9 percent to 20.6 percent of gross national product (GNP). In the United States it ranged from 7.5 to 9.0 percent. Rates of capital formation as a percentage of gross domestic product in other competitor nations—West Germany (before unification), France, the United Kingdom and Canada—were lower than in Japan but almost universally higher than in the United States. The last years of the 1980s were the most dramatic as Japanese investment in manufacturing increased by more than 25 percent between 1988 and 1989 while U.S. investment went up by only 9 percent.¹

A third type of evidence that indicates short-term behavior on the part of U.S. companies is the low relative levels of investment in research and development—usually relatively risky investments not expected to pay off quickly. The United States actually leads the world's industrialized nations in terms of absolute expenditures on research and development, spending almost 2.5 times more than Japan. As a percentage of GNP, however, U.S.