YuvalG, great post, and I definitely share your view that economic growth and employment growth may not move in a perfectly coincident fashion – and may even become de-linked as a result of technological advancement, as you stated. I do wonder whether brand new great ideas and innovations, supported by low costs of capital generally, might find it lucrative to tap into an increase in available human capital as technology removes the need for that human capital to be focused on traditional tasks. Taxi drivers could either enjoy more free time, or they could participate in new MCIs that require them to refocus their energy toward learning new skills. As farm harvesting technology expanded, didn’t farm laborers essentially become…well, taxi drivers? I still agree with your broader point that we may need less labor in a future era, but that labor will still be available to become trained and productive, and it seems some enterprising, entrepreneurial entity might benefit from an MCI that taps into it. What do you think?
Nate, I think you are right that evaluating the evolution of the mix of revenue streams is critical to understanding whether a company is willing to invest revenue from “old ideas” into “new ideas” successfully. If an “old business” makes up a large percentage of a company’s revenue streams for a very long time, it is possibly the case that the company simply can’t find, or is unwilling to invest to try to find, new revenue streams. The risk, of course, is that old revenue streams eventually exhibit slowing growth or “stall points” to cite the book Derek Van Bever and Matthew Olson published in 2008, as these businesses become commoditized, face increasing competition, and are disrupted by others with better, faster, or cheaper products or services. So, it seems an unchanging revenue mix would, over time, signal a lack of a culture that supports long term investment, and possibly, vice versa.
Great point, Gavin…and definitely an important topic to explore further would include how government funding and government policy have impacted corporate strategy through time. Have the innovations spawned by government-sponsored programs generated enough value relative to the size of those programs/investments? Has there been a noticeable downside where governmental actions have steered capital or innovation focus away from the best opportunities? This is definitely an import issue when considering much of the innovation at Bell Labs and in the defense industry, for sure.
While there are many different considerations as to whether a management team should focus on near-term versus long-term results, one that is commonly overlooked is the impact of the cost of capital. Assumed costs of capital should be adjusted in accordance with a number of factors, but significant among these factors is the level of investment returns available across markets at any particular time, most easily described by the general level of interest rates. Furthermore, there is a plethora of analysis on company valuation methods, but simply stated, the stock price of a company is roughly equal to the value of its assets, both tangible and intangible, and the earnings those assets can generate over time. During periods of very high interest rates (high costs of capital), the net present value of near term earnings contributes proportionately less to the total net present value of the company, and conversely, during periods of low interest rates – all else equal – near term earnings are less important to overall company valuation. Therefore, a management team should invest proportionately more in long-term projects, less certain innovation, etc during low interest rate periods, as long-term earnings comprise a far greater proportion of the company’s valuation. Interestingly though, during periods of low interest rates such as the environment that exists currently, shareholders become eager for more income because of the general lack of it in this low return environment. This leads management teams to feel pressured to provide more certainty with regard to increasing dividends and/or share buybacks, as opposed to reinvesting profits into the company’s long-term projects that can generate higher net present value long-term earnings. While this is a generalized description of the current behaviors of companies, it is important for both shareholders and management teams to appreciate that their costs of capital should influence their willingness to invest in long-term projects. It is clearly in the true interests of shareholders for management to focus on creating long-term profit streams that come from near-term investments in market-creating innovations, potentially far beyond their own tenure with the company, even if these investments dampen near-term earnings.