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Summary Argument: Understanding Time Horizons and Technology Investments

It is clear that a large and diverse set of factors affects the time horizons exhibited by U.S. companies, and different factors clearly impinge more or less forcefully, depending on the industry segment and the size and structure of the individual company under consideration. The findings of this study can to be regarded as dividing the sources of short-term behavior into three types: those affecting the economic ability of companies to invest, those affecting the willingness of boards of directors and managements to use the resources in that manner, and those affecting the company's operational performance in effectively investing in technological development and deployment. In other words, some factors prohibit companies from taking a long-term view, others affect the relative attractiveness of long-term investments, and still others—many internal to a company—affect the ability of a company to succeed at long-term programs and projects.

With regard to economic ability, there is a valid concern that the nation will underinvest in industries or technologies that take a long time to develop or have long production lead times. Particularly troublesome is the degree to which the relatively higher cost of equity capital results in invisible losses to the nation—investments in long-horizon projects that are not seriously considered. National differences in the cost of debt, which received much attention from those concerned about international competitiveness during the early 1980s, seem to have narrowed. However, differences in the cost of equity across national boundaries are likely to persist, creating a durable but hopefully not crippling disadvantage for those U.S. companies competing with companies that draw their equity capital from other markets.

Government has several important roles affecting the economic ability of companies to invest in long-horizon technology developments. Most



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6 Summary Argument: Understanding Time Horizons and Technology Investments It is clear that a large and diverse set of factors affects the time horizons exhibited by U.S. companies, and different factors clearly impinge more or less forcefully, depending on the industry segment and the size and structure of the individual company under consideration. The findings of this study can to be regarded as dividing the sources of short-term behavior into three types: those affecting the economic ability of companies to invest, those affecting the willingness of boards of directors and managements to use the resources in that manner, and those affecting the company's operational performance in effectively investing in technological development and deployment. In other words, some factors prohibit companies from taking a long-term view, others affect the relative attractiveness of long-term investments, and still others—many internal to a company—affect the ability of a company to succeed at long-term programs and projects. With regard to economic ability, there is a valid concern that the nation will underinvest in industries or technologies that take a long time to develop or have long production lead times. Particularly troublesome is the degree to which the relatively higher cost of equity capital results in invisible losses to the nation—investments in long-horizon projects that are not seriously considered. National differences in the cost of debt, which received much attention from those concerned about international competitiveness during the early 1980s, seem to have narrowed. However, differences in the cost of equity across national boundaries are likely to persist, creating a durable but hopefully not crippling disadvantage for those U.S. companies competing with companies that draw their equity capital from other markets. Government has several important roles affecting the economic ability of companies to invest in long-horizon technology developments. Most

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obvious, of course, are tax and fiscal policies that can either improve or erode the ability of companies to invest in technological development and deployment. In addition, however, it is important to recognize that government regulatory processes, legal processes, and investments in assets complementary to privately held assets can either improve or erode the willingness and ability of companies to invest in long-horizon projects. In many easily identifiable cases, the government—by creating a market, providing risk capital, or supporting the development of new technologies or large, complex systems—has demonstrated its important role in reducing the risk of long-term development of new technologies and industries. Despite government actions to improve the economic ability of companies, however, a substantial challenge will remain for most companies. A company's financial structure and financial practices affect its economic ability to invest for the long term, and corporations that are highly sensitive to capital costs need to work to minimize either the existence of equity cost differentials or the impact of such differentials on corporate competitive abilities. Also, the international competitive success of many U.S. companies in long-horizon businesses implies that a cost of capital that is high relative to competitors will not necessarily be an overwhelming disadvantage in company competitiveness. This implies that there is considerable slack to be taken up by better business and technology management practices and increased company productivity; while capital cost disadvantages can have a serious impact on a company's time horizons, it is not clear that the disadvantage is so great that, in many cases, it could not be overcome (or its influence reduced) by better governance and management. With regard to willingness to invest and operational performance, the record of U.S. company performance shows that among companies operating in the same capital environment, some are successful at maintaining adequate investments with long time horizons. In other words, while external influences like the cost of capital are important influences on company time horizons, most of the responsibility for success or failure in managing long-horizon investments must fall on the company itself; ultimately, if a company is performing poorly in competition because of near-term orientation in its investments, it is probably because of failures of governance or management or both. The same diagnosis applies if a company is performing poorly in competition because it consistently bungles technological investments—it is a failure of corporate management or corporate governance or both. Indeed, the two types of failures are intimately related; a company that is ineffectual at developing and applying technology will have short time horizons for technology-related investments. Finally, the willingness and ability of public companies to invest in projects with long-term payoff is being affected by sweeping changes a foot in the financial economy of the United States. In particular, the "commoditization"

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of company ownership appears to have driven or allowed a pattern of corporate financial restructuring—widespread mergers and acquisitions, hostile takeovers, management leveraged buy-outs, and the defenses against such—that may be inimical to building a corporation with the ability to invest successfully in technological projects or programs with returns accruing several years out. It is important to mention explicitly two issues that this report does not address. An important question, not addressed in this analysis, is whether different types of industries—for example, batch production industries; industries in which there is extremely cyclic demand; capital goods industries; commodity industries; service industries; or contracting industries—are subject to different influences affecting the time horizons of decisions. Further, this report deals primarily with larger, public companies. A different set of conditions and influences may impinge on small private companies, whether they are high-tech start-ups or manufacturers in mature industries. Also, although the committee is in agreement about the important directions for government action, the specifics of regulatory reform to improve efficiency or of budgetary analysis to promote investment in long-lived assets clearly need considerably more analysis than is possible in this report.