Creating and extracting value: Corporate investment behaviour and economic performance

William Lazonick
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William Lazonick: The STEP Group, Studies in technology, innovation and economic policy, http://www.step.no/

No 199420, STEP Report series from The STEP Group, Studies in technology, innovation and economic policy

Abstract: Pressured by the financial community, it is alleged that industrial managers favor investment strategies that make use of productive resources that have already been developed, and hence can generate earnings immediately without incurring large capital outlays. Meanwhile, America's competitors, and particularly the Japanese, are investing in innovation. By adopting short time horizons, according to this line of argument, American industry has been managing its way to economic decline [Hayes and Abernathy 1980]. Is this charge of short-termism against American industry warranted? If it is true that those who control America's major business corporations have short time horizons and hence avoid innovative investment strategies, then how did the United States become such a powerful industrial nation in the past? Have the time horizons of America's top managers always been short, or is their truncated vision a relatively new phenomenon? Has the financial community -- Wall Street -- always exerted equivalent pressure to generate short-term earnings, or has that pressure increased over time? And, is Wall Street really to blame, or does its proclivity for the short term reflect more fundamental problems in the organization of the American economy? If those who control American industry do indeed have short time horizons, what can policy-makers in business and government do to elongate them? Specifically, what can be done to give strategic decision-makers in the major American corporations the incentives and abilities to invest in innovation?

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