TIME HORIZONS AND TECHNOLOGY INVESTMENTS

Committee on Time Horizons and Technology Investments

NATIONAL ACADEMY OF ENGINEERING

NATIONAL ACADEMY PRESS
Washington, D.C. 1992



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TIME HORIZONS AND TECHNOLOGY INVESTMENTS Committee on Time Horizons and Technology Investments NATIONAL ACADEMY OF ENGINEERING NATIONAL ACADEMY PRESS Washington, D.C. 1992

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NATIONAL ACADEMY PRESS 2101 Constitution Ave., NW Washington, DC 20418 NOTICE: The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourage education and research, and recognizes the superior achievement of engineers. Dr. Robert M. White is president of the National Academy of Engineering. This publication has been reviewed by a group other than the authors according to procedures approved by a National Academy of Engineering report review process. Funding for this effort was provided by the the National Academy of Engineering Fund. Library of Congress Catalog Card Number 92-80242 International Standard Book Number 0-309-04647-5 Additional copies of this publication are available from: National Academy Press 2101 Constitution Ave, N.W. Washington, D.C. 20418 S489 Printed in the United States of America First Printing, February 1992 Second Printing, July 1992

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COMMITTEE ON TIME HORIZONS AND TECHNOLOGY INVESTMENTS DONALD N. FREY, Chairman, Professor of Industrial Engineering and Management Sciences, Northwestern University ROBERT C. FORNEY, Retired Executive Vice President, E. I. du Pont de Nemours & Company MARTIN GOLAND, President, Southwest Research Institute GEORGE N. HATSOPOULOS, Chairman and President, Thermo Electron Corporation TREVOR O. JONES, Chairman of the Board, Libbey-Owens-Ford Company HENRY KRESSEL, Managing Director, Warburg, Pincus & Company JOHN R. MOORE, Retired Vice President and General Manager, Electro-Mechanical Division, Northrop Corporation JOHN W. PODUSKA, SR., President and CEO, Stardent Computers Inc. JAMES BRIAN QUINN, William and Josephine Buchanan Professor of Management, Amos Tuck School of Business, Dartmouth College SHELDON WEINIG, Chairman and CEO, Materials Research Corporation Staff BRUCE R. GUILE, Director, NAE Program Office KATHRYN J. JACKSON, NAE Fellow

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TIME HORIZONS AND TECHNOLOGY INVESTMENTS

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Preface It is often asserted that the short time horizons of U.S. firms are contributing to a decline in the technological strength and competitive performance of U.S. companies in technology-intensive industries. Although this assertion is now widely accepted among those concerned with U.S. competitive performance, relatively little attention has been focused on examining, in detail, the time horizons that organizations use or the forces that create inappropriate, short time horizons. To address these issues, the National Academy of Engineering established a Committee on Time Horizons and Technology Investments under the chairmanship of Donald Frey, formerly chairman and CEO of Bell & Howell Corporation and now professor of industrial engineering and management sciences, Northwestern University. The study committee was carefully balanced to ensure that the members of the committee, individually and collectively, had deep expertise in matters of corporate governance, investment decision making, technology commercialization, manufacturing, management of research and development, and general business management. A study was launched to gather evidence and sort out claims about the time horizons of U.S. businesses and the impact of time horizons on the willingness of companies to invest in research, development, or the deployment of new technology. The particular concern was that the time horizons of U.S. businesses were shortening and that shortened time horizons would create a reluctance to invest in technology-related activities with long-term payoff. The study had a special focus on the interaction of corporate governance and managerial decision making with the overall financial and economic environment. Although focusing on the technological aspects of

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businesses, the study nonetheless needed to engage issues such as the cost of capital, financial market structures, the impacts of mergers and acquisitions, changing company capital structures, and increasing debt levels. The committee's report makes an important contribution to a complex and often confused aspect of debates over the causes of, and solutions to, U.S. competitiveness problems. On behalf of the Academy of Engineering I would like to thank the chairman and the members of the committee (p. iii) for their insights and efforts on this project. Over the course of two years, several committee meetings and workshops, and innumerable FAXs, phone calls, and draft versions of the report, they remained actively engaged and unfailingly constructive. I would also like to thank several members of the NAE Program Office. NAE Fellow Kathryn J. Jackson served as study director from the start of the study through the spring of 1991, when she left at the end of her fellowship. Annemarie Terraciano and Margery Harris provided administrative and logistical support for the project. Bruce R. Guile, director of the NAE Program Office, added this study to his workload in mid-1991 and saw it through to completion. They all deserve special thanks. Robert M. White President National Academy of Engineering

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Contents     EXECUTIVE SUMMARY   1 1   THE ISSUE AND THE APPROACH   6     The Approach and Method of the Study,   7     Do U.S. Corporate Executives Have Short Time Horizons?,   9     Macroeconomic Evidence: Relative Rates of Investment in Fixed Capital and R&D,   10     Summary and Conclusion,   11 2   EXPLAINING TIME HORIZONS AND TECHNOLOGICAL INVESTMENTS   12     What is "Near-term Oriented" Management and Governance?,   14     The Mechanics of Capital Costs, Risk, and the Special Characteristics of Investments in Technology Developments,   17     Determinants of Company Investment Time Horizons,   23     Summary and Conclusion,   24 3   COMPANY TIME HORIZONS AND TECHNOLOGY INVESTMENTS: THE ROLES OF CORPORATE GOVERNANCE AND MANAGEMENT   26     The Importance of Governance: The Roles of Boards of Directors,   28     The Prerogatives of Management and Corporate Time Horizons,   32     Summary and Recommendations,   40

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4   TIME HORIZONS AND COST OF CAPITAL   43     Financial Markets and Time Horizons in the 1990s,   46     A Company's Control Over Its Cost of Capital,   49     The Economic Cost of Capital: National Differences as a Crucial Issue,   53     Summary and Recommendations,   57 5   THE INFLUENCES OF GOVERNMENT INVESTMENTS AND REGULATORY POLICIES ON CORPORATE TIME HORIZONS   59     Government Policies and a Stable Environment for Investment,   60     Government Investments, Complementary Assets, and Private-Sector Time Horizons for Innovation,   64     Summary and Recommendations,   69 6   SUMMARY ARGUMENT: UNDERSTANDING TIME HORIZONS AND TECHNOLOGY INVESTMENTS   71     REFERENCES   74     APPENDIXES     A   Cost of Capital—The Managerial Perspective Joseph Morone and Albert Paulson   79 B   Biographical Information on Committee Members   105

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TIME HORIZONS AND TECHNOLOGY INVESTMENTS

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