Government // Mobile & Wireless
Commentary
10/22/2013
06:12 PM
Robert Atkinson
Robert Atkinson
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America's Investment Crisis

Why cutting back on IT and other capital spending is disastrous for U.S. business and the country.

Investment in new-capital machinery, equipment and software is the primary means through which innovation spreads throughout the economy.

As these innovations -- whether they are new PCs with touch screens and solid-state drives or new cotton harvesters with microwave sensors and wireless data communication capabilities -- diffuse through industries, they raise productivity, lower costs of production and improve the competitiveness of the American economy as a whole.

However, as the Information Technology and Innovation Foundation details in a new report, business investment in the U.S. has fallen significantly in the last decade. In the 1980s, businesses increased their fixed-capital investments in the U.S. by 2.7% per year on average, and in the 1990s by 5.2%. But since 2000, the rate has fallen to just 0.5% per year. In fact, as a share of gross domestic product, annual private capital investment has declined by more than three percentage points since the early 1980s. In addition, the capital stock of equipment and software used by business establishments has fallen 5%, relative to GDP, since 2000.

This decline isn't just in "old economy" machines. From 2000 to 2011, investment in IT assets as a share of GDP fell by 37%. That decline has particularly negative consequences because there's considerable evidence that IT capital investments have even larger benefits for companies and the economy than other kinds of capital investments.

Between 2006 and 2010, companies that invested heavily in IT assets increased productivity three times as fast as companies that didn't. In addition, from 2000 to 2009, service-sector companies that used IT intensively grew jobs at a rate of 5.1%, while non-IT-intensive service companies expanded jobs by only 1.5%. And a study by MIT’s Erik Brynjolfsson found that for every dollar a company invests in IT capital, it raises its market valuation by more than $10.

Unfortunately, the reverse is also true. Companies that fail to invest in new-capital equipment ultimately see productivity growth and competitiveness stagnate, while also lowering innovation diffusion throughout the economy. It isn't a coincidence that the decline in capital investment over the last decade has coincided with the decline in productivity growth rates and U.S. global competitiveness.

One reason for the decline in private-capital investment is the growing dominance of "short-termism." In recent decades, Wall Street pressure on public companies to hit short-term profit goals has all too often come at the expense of long-term investment. A 2013 study by three academics found that public companies made substantially lower capital investments than privately held companies for that reason.

Restoring robust capital investment rates is critical to our economic future. To encourage additional investment in machinery, equipment and software, Congress should restore the investment tax credit, which was abolished in 1986.

In addition, it's time to tackle the curse of corporate short-termism. It's not clear what the answer is, but the Obama administration can start addressing this issue by establishing a task force to recommend policies to ameliorate the problem.

Given the evidence of the paramount importance of investment to the growth and competitiveness of businesses, it's essential for governments and executives to take the long view and support policies that will spur increased capital investment. The long-term health of business -- and the country as a whole --depends on it.

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MyW0r1d
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MyW0r1d,
User Rank: Strategist
10/24/2013 | 8:46:49 PM
re: America's Investment Crisis
I understand what you're saying Doug, but I have also seen and lived through CXOs that take comments like this to justify not investing in OS upgrades to dedicate almost the entire IT budget to BI. Specifically, a company that in 2010 was still running a Win2003 domain and servers refusing to upgrade to 2008 and only purchasing the necessary member server licenses for the BI project (leveraging SQL 2005 because "we can't invest in keeping the lights on upgrades"). Comment space is limited so a thorough discussion isn't possible and today any OS upgrade should justifiably have a virtualization/consolidation review, but some "keeping the lights on" comments should be issued with instructions.
Lorna Garey
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Lorna Garey,
User Rank: Author
10/24/2013 | 6:53:28 PM
re: America's Investment Crisis
If this is the case when borrowing costs are so low, what's going to happen when the Fed finally tightens up the flow?
RobPreston
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RobPreston,
User Rank: Author
10/24/2013 | 4:07:50 PM
re: America's Investment Crisis
I think this gets to Doug's point above: Companies need to move their capital investments from commodity areas to areas where those investments can make a true competitive difference.
Petar Zivovic
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Petar Zivovic,
User Rank: Strategist
10/23/2013 | 7:55:45 PM
re: America's Investment Crisis
There is one thing not covered here: outsourced cloud computing. Instead of purchasing a $10k server, or spinning up a new local VM server that requires adding drives to a SAN, more companies are simply outsouring their servers to cloud providers as a service investment and saving on the hardware costs up front. This I'm sure will skew the investment numbers downwards to some extent - perhaps not enough to account for what's written here, but should be factored in nonetheless to provide a true investment picture.
aflaidar980
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aflaidar980,
User Rank: Apprentice
10/23/2013 | 5:56:35 PM
re: America's Investment Crisis
Short-term-ism plagues various other industries. A particularly painful spot is the investments fall in antibiotics manufacture, where not even state funded research cannot spur growth, on the basis that healthy :) returns require at least a 10 years cycle. Wall Street has become short sighted.
D. Henschen
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D. Henschen,
User Rank: Author
10/23/2013 | 5:02:32 PM
re: America's Investment Crisis
There's investment in IT innovation and then there's keep-the-lights-on IT budgets and same-old, same-old ways of doing things. In the applications arena businesses are trying to get away from building and maintaining customizations that don't add much value. In BI and data-warehousing the push is to spread access and capabilities to business users. The reality, however, is that there's still lots of wasted spending keeping the lights on, maintaining creaky old code, and building queries and reports for users rather than giving them tools so they can do it on their own.

I'm fine with the idea of spending on innovation, but cost pressure on IT budgets is not a bad thing. It forces IT to crack down on wasteful spending and approaches, and that in itself often leads to innovation. In summary, avoid blank-check IT "investment" and instead target places to invest where new technology is promising and places to crack down where costs are out of line if not out of control.
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