The competitiveness of U.S. corporations, particularly manufacturing firms, declined during the 1980s. The decade witnessed serious inroads by foreign firms into traditional domestic markets. In capital goods, for example, the import penetration ratio rose from less than 15 percent to nearly 40 percent. Some indicators of U.S. competitiveness have stabilized or shown some improvement in the first half of the 1990s, largely as a result of exchange rate movements and a strong U.S. macroeconomy. However, the productivity of foreign manufacturers, notably those in Japan, has grown faster than that of U.S. firms for more than two decades.1 This trend suggests that foreign corporations will continue to present stiff challenges to U.S. firms in the years ahead.
Many explanations have been advanced for the decline in U.S. industrial competitiveness during the 1980s. They frequently assign a central role to differences in the willingness of U.S. and foreign firms to forgo short-term returns in favor of long-term rewards. These differences in “time horizons” can manifest themselves in differences in R&D, plant, and equipment investment; training for workers with firm-specific skills; and willingness to undertake long-term market development programs. The interest in corporate time horizons has generated a lively academic and policy debate about the cost of capital facing firms in different nations. The cost of capital is an important component of the discount rate used in evaluating long-term projects and is increasingly viewed as a source of competitive advantage or disadvantage in world markets.2
Although the time horizons of U.S. firms have been implicitly at issue throughout the debates on competitiveness policy, there is little direct evidence on corporate planning horizons or on their changes during the 1980s.3 In this study, we attempt to bridge the gap between analytical studies of corporate capital budgeting and the policy debate on corporate competitiveness.
To investigate corporate time horizons and hurdle rates, we surveyed the CEOs of all firms in the Fortune 1,000. We asked them to describe their capital budgeting practices, provide information about hurdle rates and other determinants of their firms’ time horizons, and evaluate the effects of a number of different policies on their firms’ investment planning horizons. Here we report our survey findings, which focus on hurdle rates, the capital budgeting process, and the effects of various factors on investment in R&D and physical assets.