TIME HORIZONS, VALUE CREATION, AND INNOVATION

During the 1980s and early 1990s, a common criticism of America's industrial leaders was that they had “short time horizons” (see Jacobs 1991; Porter 1992). Managers who value present over future returns to their companies tend to avoid investment strategies that require considerable developmental periods before a flow of earnings can be realized. Yet these developmental – or innovative – investments are what enterprises need to sustain their competitive positions on global markets and what a national economy needs to maintain and enhance the standards of living of its people.

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?