significantly exceed the cost of capital. These high hurdle rates are reflected in the significantly higher current reported profitability of U.S. companies compared to those in Japan and Germany. The board concurs that there is a tendency to overemphasize the short-run return on investment in the U.S. capital allocation system, primarily in publicly held companies.

The structural differences among industrial countries in their systems for allocating capital both among and within enterprises to different kinds of investment projects are one of the keys to understanding the pressures affecting time horizons. These capital allocation systems can be thought of as including the macroeconomic environment, the external capital market environment, and the internal capital market environment. Michael Porter’s research, which focused on the United States, Japan, and Germany (which have directly competing industries), indicates that the capital allocation systems in these advanced industrial economies are strikingly different. Each system has its strengths and weaknesses, and it is important to identify the principal features of each before reaching conclusions about changes that might be beneficial for investment and growth in the United States.

All three countries have public markets for investments. The U.S. system is significantly more advanced than that of Germany or Japan in creating public markets that are accessible, liquid, and fair in that no class of investors is either advantaged or disadvantaged. Japanese and German public markets are more volatile and less efficient and provide investors with less information than their counterparts receive in the United States. Although the average holding period for all stocks in the United States declined substantially in the past decade as holdings by institutional investors and other investment managers increased, participants in the Japanese and German public markets hold their stocks for even shorter periods. If the only force at work on the matter of time horizons for investments were public trading, the investor pressure on management in all three countries to produce for the short term would not be substantially different.

In contrast to the situation of U.S. companies, however, short-time horizons characteristic of public markets do not have a great deal of influence on the management decisions of most major Japanese and German companies. That is because the owners of controlling shares and debt have a vested interest in these companies’ long-term success, seek to sustain their relationships with the companies, and see their success as their own. Their perceptions and dominant postures lead them to



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