NATIONAL ACADEMY PRESS
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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.
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Library of Congress Catalog Card Number 92-80242
International Standard Book Number 0-309-04647-5
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First Printing, February 1992
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COMMITTEE ON TIME HORIZONS AND TECHNOLOGY INVESTMENTS
DONALD N. FREY, Chairman, Professor of Industrial Engineering and Management Sciences,
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,
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
BRUCE R. GUILE, Director,
NAE Program Office
KATHRYN J. JACKSON, NAE Fellow
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
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
National Academy of Engineering
Cost of Capital—The Managerial Perspective