Low Interest Rates and Business Investments – Update October 2020

Low Interest Rates and Business Investments – Update October 2020

There has been several new research on the topic of Low Interest Rates and Business Investments since my last post.

Decision Making by Firms in Low Interest rates environment

  • Invest and Grow
  • Merge / Consolidate
  • Pay Dividends
  • Buyback Shares
  • Divestures
  • Acquisitions
  • Horizontal Mergers (Market Share)
  • Vertical Mergers (Costs)
  • Innovation M&A (New Tech, New Product)

Key Terms

  • Business Investments
  • Monetary Polcy
  • Zero Lower Bound
  • Interest Rates
  • Fed Funds Rate
  • Corporate Finance
  • Hurdle Rates
  • Capital Budgeting
  • Internal Rate of Return IRR
  • CAGR Compond Annual Growth Rate
  • Cost of Capital
  • Discounted Cash Flow
  • Net Present Value
  • Mergers vs Investments
  • Organic Growth
  • Inorganic Growth
  • State of the Industry
  • State of the Economy
  • Liquidity Financial
  • Bank Lending
  • Capital Markets
  • Economic Growth
  • Corporate Planning
  • Strategic Planning
  • Strategic Management

My Related Posts

Increasing Market Concentration in USA: Update April 2019

Rising Market Concentration and Declining Business Investments in the USA – Update June 2018

Low Interest Rates and Business Investments : Update August 2017

Business Investments and Low Interest Rates

Cash and Investments: Corporate Savings Glut in USA

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Risk taking channel of Monetary Policy

Low Interest Rates and International Investment Position of USA

Low Interest Rates and Bank’s Profitability – Update May 2019

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks Profitability: Update – December 2016

Impact of Low Interest Rates on Bank’s Profitability

The Decline in Long Term Real Interest Rates

Cash and Investments: Corporate Savings Glut in USA

Why do Firms buyback their Shares? Causes and Consequences.

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Key Sources of Reserach

Lengthy era of rock-bottom interest rates leaving its mark on U.S. economy

Weak demand in U.S. and other rich nations explains historic shift

Washington Post

https://www.washingtonpost.com/business/2020/10/03/low-interest-rates/

Do Interest Rates Affect Business Investment? Evidence from Australian Company-level Data

Jonathan Hambur and Gianni La Cava

Low Interest Rates Have Benefits … and Costs

Kevin L. Kliesen

October 1, 2010

https://www.stlouisfed.org/publications/regional-economist/october-2010/low-interest-rates-have-benefits–and-costs

Low for Long?
Causes and Consequences of Persistently Low Interest Rates

Geneva Reports on the World Economy 17 Charles Bean

London School of Economics and CEPR

Christian Broda

Duquesne Capital Management

Takatoshi Ito

SIPA Columbia University and CEPR

Randall Kroszner

Booth School of Business, University of Chicago

2015

Low Interest Rates, Market Power, and Productivity Growth∗

Ernest Liu

Princeton University

Atif Mian
Princeton University and NBER

Amir Sufi
University of Chicago Booth School of Business and NBER

August 18, 2020

The Economic Effects of Low Interest Rates and Unconventional Monetary Policy

17 September 2020

Rochelle Guttmann, Dana Lawson and Peter Rickards

RBA

https://www.rba.gov.au/publications/bulletin/2020/sep/the-economic-effects-of-low-interest-rates-and-unconventional-monetary-policy.html

Firms’ Investment Decisions and Interest Rates

Kevin Lane and Tom Rosewall

RBA

Has Business Fixed Investment Really Been Unusually Low?

By François Gourio

Chicago Fed Letter, No. 418, 2019

https://www.chicagofed.org/publications/chicago-fed-letter/2019/418

Fiscal Policy with High Debt and Low Interest Rates

William Gale

July 1, 2019

The impact of negative interest rates on banks and firms 

Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti, Sarah Holton  

08 November 2019

https://voxeu.org/article/impact-negative-interest-rates-banks-and-firms

Global Trends in Interest Rates

Marco Del Negro Domenico Giannone Marc P. Giannoni Andrea Tambalotti

Staff Report No. 866 September 2018

Financial stability implications of a prolonged period of low interest rates

Report submitted by a Working Group established by the Committee on the Global Financial System

The Group was co-chaired by Ulrich Bindseil (European Central Bank) and Steven B Kamin (Board of Governors of the Federal Reserve System)

July 2018

BIS

Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311-2018.

Paul Schmelzing

https://economics.rutgers.edu/downloads-hidden-menu/news-and-events/workshops/money-history-and-finance/1823-paulschmelzing/file

Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions

Review of Financial Studies

49 Pages Posted: 14 Jul 2016 Last revised: 29 Aug 2018

Chen Lian

Massachusetts Institute of Technology (MIT)

Yueran Ma

University of Chicago – Booth School of Business

Carmen Wang

Harvard University – Department of Economics; HBS Negotiations, Organizations and Markets Unit

Date Written: August 22, 2018

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2809191

MONETARY POLICY, CORPORATE FINANCE AND INVESTMENT

James Cloyne Clodomiro Ferreira Maren Froemel Paolo Surico

Determinants of the real interest rate

Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at the National Treasury Management Agency

Dublin, 28 November 2019

https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp191128_1~de8e7283e6.en.html

Understanding Weak Capital Investment: the Role of Market Concentration and Intangibles∗

Nicolas Crouzet and Janice Eberly

Prepared for the Jackson Hole Economic Policy Symposium Federal Reserve Bank of Kansas City

August 23 – 25, 2018 This version: May 14, 2019

Monetary policy in advanced economies

Low policy rates are here to stay

https://www2.deloitte.com/us/en/insights/economy/monetary-policy-low-interest-rates-advanced-economies.html

Have low interest rates led to excessive risk taking?

https://www.aeaweb.org/forum/311/have-low-interest-rates-led-to-excessive-risk-taking

The Policy Perils of Low Interest Rates

The consequences of prolonged low interest rates in Europe

https://www.gisreportsonline.com/the-consequences-of-prolonged-low-interest-rates-in-europe,economy,2465.html

Increasing Market Concentration in USA: Update April 2019

Increasing Market Concentration in USA: Update April 2019

In this post, I have compiled recent articles and papers on the issues of:

  • Increased Market Power
  • Increased Market Concentration
  • Increased Corporate Profits
  • Increased Inequality
  • Anti Trust Laws and Competition policy
  • Interest rates and Business Investments
  • Interest rates and Mergers and Acquisitions
  • Stock Buybacks, Dividends, and Business Investments
  • Outsourcing, and Global Value Chains
  • Corporate Savings Glut
  • Slower Economic Growth
  • Reduced Dynamism

 

From Low Interest Rates, Market Power, and Productivity Growth

How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model’s key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.

Please see my related posts:

 

Competition, Concentration, and Anti-Trust Laws in the USA

Concentration, Investment, and Growth

Shareholder Capitalism: Rising Market Concentration, Slower Productivity Growth, Rising Inequality, Rising Profits, and Rising Equities Markets

Rising Market Concentration and Declining Business Investments in the USA – Update June 2018

Rising Profits, Rising Inequality, and Rising Industry Concentration in the USA

Why are Macro-economic Growth Forecasts so wrong?

Low Interest Rates and Business Investments : Update August 2017

Mergers and Acquisitions – Long Term Trends and Waves

Business Investments and Low Interest Rates

Economic Growth Theories – Orthodox and Heterodox

The Decline in Long Term Real Interest Rates

Why do Firms buyback their Shares? Causes and Consequences.

On Inequality of Wealth and Income – Causes and Consequences

Intra Industry Trade and International Production and Distribution Networks

FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

Understanding Trade in Intermediate Goods

Trends in Intra Firm Trade of USA

Cash and Investments: Corporate Savings Glut in USA

Key sources:

Markups, Consumption and Market Concentration

American Economic Association

https://www.aeaweb.org/conference/2019/preliminary/814?q=eNqrVipOLS7OzM8LqSxIVbKqhnGVrJQMlWp1lBKLi_OTgRwlHaWS1KJcXAgrJbESKpSZmwphlWWmloO0FxUUgLQagFwwSH9BYjpIBZANXDDjnB7P

AMERICA’S CONCENTRATION CRISIS

AN OPEN MARKETS INSTITUTE REPORT

https://concentrationcrisis.openmarketsinstitute.org

How Low Interest Rates Have Led To Increased Market Concentration

Seeking Alpha

March, 2019

https://seekingalpha.com/article/4245601-low-interest-rates-led-increased-market-concentration

 

Market Concentration Is Threatening the US Economy

https://www.project-syndicate.org/commentary/united-states-economy-rising-market-power-by-joseph-e-stiglitz-2019-03

Concentration increasing?

John Cochrane

2019

https://johnhcochrane.blogspot.com/2019/03/concentration-increasing.html

Industry Concentration in Europe and North America

OECD

2019

Monopolies are the ‘missing piece of the puzzle’ when it comes to analyzing US inequality, investment researchers argue

Barclays Launches New Research Study Analyzing how Market Concentration is Affecting the US Economy

March 26, 2019

DISRUPTION CONCENTRATION AND THE NEW ECONOMY

The Surprising Thing About Market Concentration

by esteban rossi-hansberg, pierre-daniel sarte and nicholas trachter

 

Increased market power: a global problem that needs solving?

January 2019

https://www.oxera.com/agenda/increased-market-power-a-global-problem-that-needs-solving/

Click to access Increased-market-power.pdf

 

 

 

70 Years of US Corporate Profits∗

Simcha Barkai

Seth G. Benzell

April 2018

 

Click to access 2270yearsofuscorporateprofits.pdf

 

 

Low Interest Rates, Market Power, and Productivity Growth

Ernest Liu, Atif Mian, Amir Sufi

January 2019

NBER

https://www.nber.org/papers/w25505

Click to access BFI-MFRI-2019-09.pdf

Chapter 2: The Rise of Corporate Market Power and Its Macroeconomic Effects

World Economic Outlook

April 2019

IMF

https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019

Outsourcing, Occupational and Industrial Concentration

Nicholas Bloom (Stanford), Audrey Guo (Stanford) and Brian Lucking (Stanford)
November 2018

 

 

 

Diverging Trends in National and Local Concentration∗

Esteban Rossi-Hansberg Pierre-Daniel Sarte

Nicholas Trachter

February 26, 2019

 

Click to access DTNLC.pdf

 

 

 

Macroeconomics and Market Power: Facts, Potential Explanations, and Open Questions

Chad Syverson

January 2019

Brookings

 

Click to access ES_20190116_Syverson-Macro-Micro-Market-Power.pdf

A Theory of Falling Growth and Rising Rents

Author(s): Philippe Aghion, Antonin Bergeaud, Timo Boppart, Peter J. Klenow, and Huiyu Li

March 2019

Fed Reserve San Francisco

https://www.frbsf.org/economic-research/publications/working-papers/2019/11/

Competition and market concentration in the United States

 

December 2018

https://www.tresor.economie.gouv.fr/Articles/bd779c20-ede1-4266-94ee-13eb70d0b882/files/c19bc114-e2ee-4f2e-99a4-6ca645b6f0d5

Concentration, Market Power and Dynamism in the Euro Area

ECB Working Paper No. 2253 (2019); ISBN 978-92-899-3515-9

 

Posted: 26 Mar 2019

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3360233&download=yes

The Rise of Market Power and the Macroeconomic Implications

Jan De Loecker
Jan Eeckhout
Gabriel Unger
November 22, 2018

 

Click to access RMP.pdf

 

Concentration, Investment, and Growth

Concentration, Investment, and Growth

 

Recent Economic Policy Symposium at Jackson Hole Wyoming (August 23-25) where economists, central bankers, policy makers gather together annually discussed issues of Rising Market Concentration, Declining Business Investments, and Declining Economic Dynamism.

2018 Economic Policy Symposium, Jackson Hole, Wyoming

https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2018

 

 

Richmond Federal Reserve Bank published an article on Market Concentration.

Are Markets Too Concentrated?

Industries are increasingly concentrated in the hands of fewer firms. But is that a bad thing?

 

Click to access cover_story.pdf

Click to access full_issue.pdf

 

 

Washington Post published a story on market concentration in US companies.

Are U.S. Companies Too Big and Powerful? The Fed Wants to Know

https://www.washingtonpost.com/business/are-us-companies-too-big-and-powerful-the-fed-wants-to-know/2018/08/23/35891356-a6b0-11e8-ad6f-080770dcddc2_story.html?noredirect=on&utm_term=.9cb83dadde89

 

 

 

OECD held a joint conference with the World Bank and the IMF on Product Market Concentration, Inclusive Growth, and Regulation at OECD HQ, Paris, France. 11 June, 2018.

http://www.oecd.org/eco/reform/joint-imf-wb-oecd-conf-structural-reform-2018/

 

 

Please see my related posts

Rising Market Concentration and Declining Business Investments in the USA – Update June 2018

Shareholder Capitalism: Rising Market Concentration, Slower Productivity Growth, Rising Inequality, Rising Profits, and Rising Equities Markets

 

Shareholder Capitalism: Rising Market Concentration, Slower Productivity Growth, Rising Inequality, Rising Profits, and Rising Equities Markets

Shareholder Capitalism: Rising Market Concentration, Slower Productivity Growth, Rising Inequality, Rising Profits, and Rising Equities Markets

 

Public traded companies are always under pressure to show earnings growth and sales revenue growth to enhance shareholder value.

 

How do they do it when markets have matured and economy has slowed?

  • Lower Costs
  • Increase Market Share
  • Find New Markets
  • Diversify
  • Create New products and servicces

 

How do then companies lower their costs?

  • Vertical Mergers and Acquisitions
  • Outsourcing (Sourcing parts and components / Intermediate Goods / Inputs from cross border)
  • Offshoring (Shifting Production cross border)
  • Vertical Integration

 

How do then companies increase their market share?

  • Horizontal Mergers and Acquisitions
  • Cross Border Markets Share (Sales in other countries)

 

In the last thirty years, this is exactly what has happened in US economy.

Macro Trends of increase in Outsourcing/Offshoring, Increase in Market Concentration, Increase in Inequality, Increase in Corporate Profits, Rising Equity Prices, Slower Productivity Growth, Lower Interest Rates, Low Labor Share, and Capital Share.

Please see my other posts expanding on these issues.

Please note that these forces are continuing and trends will remain on current trajectory.

 

Key Terms:

  • Stakeholder vs Shareholder Capitalism
  • Short Termism
  • Slow Productivity Growth
  • Rising Market Concentration
  • Rising Profits
  • Rising Equities Market
  • Rising Inequality
  • Dupont Ratio Analysis
  • Financial Planning (Micro – Firm Level)
  • Economic Planning (Macro- Aggregate Level)
  • Quarterly Capitalism

 

From SHAREHOLDER CAPITALISM: A SYSTEM IN CRISIS

Our current, highly financialised, form of shareholder capitalism is not just failing to provide new capital for investment, it is actively undermining the ability of listed companies to reinvest their own profits. The stock market has become a vehicle for extracting value from companies, not for injecting it.

No wonder that Andy Haldane, Chief Economist of the Bank of England, recently suggested that shareholder capitalism is ‘eating itself.’1 Corporate governance has become dominated by the need to maximise short-term shareholder returns. At the same time, financial markets have grown more complex, highly intermediated, and similarly shorttermist, with shares increasingly seen as paper assets to be traded rather than long term investments in sound businesses.

This kind of trading is a zero-sum game with no new wealth, let alone social value, created. For one person to win, another must lose – and increasingly, the only real winners appear to be the army of financial intermediaries who control and perpetuate the merry-goround. There is nothing natural or inevitable about the shareholder-owned corporation as it currently exists. Like all economic institutions, it is a product of political and economic choices which can and should be remade if they no longer serve our economy, society, or environment.

Here’s the impact this shareholder model is currently having:
• Economy: Shareholder capitalism is holding back productive investment. Even the Chief Executive of BlackRock, the world’s largest asset manager, has admitted that pressure to keep the share price high means corporate leaders are ‘underinvesting in innovation, skilled workforces or essential capital expenditures.’ 2
• Society: Shareholder capitalism is driving inequality. There is growing evidence that attempts to align executive pay with shareholder value are largely responsible for the ballooning of salaries at the top. The prioritisation of shareholder interests has also contributed to a dramatic decline in UK wages relative to profits, helping to explain the failure of ordinary people’s living standards to rise in line with economic growth.
• Environment: Shareholder capitalism helps to drive environmental destruction. It does this by driving risky shortterm behaviour, such as fossil fuel extraction, which ignores long-term environmental risks.

The idea that shareholder capitalism is the most efficient way to mobilise large amounts of capital is no longer tenable.

We need both to create new models of companies, and implement new ways of organising investment that are fit for building an inclusive, equal, and sustainable economy.

Companies should be explicitly accountable to a mission and a set of interests beyond shareholder returns. Equally, investment must provide long-term capital for socially and environmentally useful projects, and damaging forms of speculation must be restricted.

For most people, our economy simply is not working, and the damaging aspects of shareholder capitalism are at least in part responsible. Reforming shareholder capitalism must not be dismissed as too difficult – the crisis is too urgent for that. We can take the first steps towards a better economic model right now. It’s time to act.

 

 

A Crash Course in Dupont Financial Ratio Analysis

 

  • What happens when economic growth slows ?
  • What happens when profit margins decline ?
  • What happens when Sales growth is limited ?
  • What does lead to Mergers and Acquisitions ?
  • What is the impact of Cost of Capital ?
  • What is EVA (Economic Value Added) ?
  • What is impact of Outsourcing/Offshoring on Financial Ratios ?
  • What is impact of Mergers and Acquisitions on Financial Ratios ?
  • What is impact of Stock Buy Backs on Financial Ratios ?
  • What is impact of Dividends on Financial Ratios ?
  • ROS (Return on Sales)
  • ROE (Return on Equities)
  • ROA (Return on Assets)
  • ROIC (Return on Invested Capital)
  • EVA (Economic Value Added)
  • MVA (Market Value Added)

From The DuPont Equation, ROE, ROA, and Growth

The DuPont Equation

The DuPont equation is an expression which breaks return on equity down into three parts: profit margin, asset turnover, and leverage.

Learning Objectives

Explain why splitting the return on equity calculation into its component parts may be helpful to an analyst

Key Takeaways

Key Points

  • By splitting ROE into three parts, companies can more easily understand changes in their returns on equity over time.
  • As profit margin increases, every sale will bring more money to a company’s bottom line, resulting in a higher overall return on equity.
  • As asset turnover increases, a company will generate more sales per asset owned, resulting in a higher overall return on equity.
  • Increased financial leverage will also lead to an increase in return on equity, since using more debt financing brings on higher interest payments, which are tax deductible.

Key Terms

  • competitive advantage: something that places a company or a person above the competition

The DuPont Equation

image

DuPont Model: A flow chart representation of the DuPont Model.

The DuPont equation is an expression which breaks return on equity down into three parts. The name comes from the DuPont Corporation, which created and implemented this formula into their business operations in the 1920s. This formula is known by many other names, including DuPont analysis, DuPont identity, the DuPont model, the DuPont method, or the strategic profit model.

The DuPont Equation: In the DuPont equation, ROE is equal to profit margin multiplied by asset turnover multiplied by financial leverage.

Under DuPont analysis, return on equity is equal to the profit margin multiplied by asset turnover multiplied by financial leverage. By splitting ROE (return on equity) into three parts, companies can more easily understand changes in their ROE over time.

Components of the DuPont Equation: Profit Margin

Profit margin is a measure of profitability. It is an indicator of a company’s pricing strategies and how well the company controls costs. Profit margin is calculated by finding the net profit as a percentage of the total revenue. As one feature of the DuPont equation, if the profit margin of a company increases, every sale will bring more money to a company’s bottom line, resulting in a higher overall return on equity.

Components of the DuPont Equation: Asset Turnover

Asset turnover is a financial ratio that measures how efficiently a company uses its assets to generate sales revenue or sales income for the company. Companies with low profit margins tend to have high asset turnover, while those with high profit margins tend to have low asset turnover. Similar to profit margin, if asset turnover increases, a company will generate more sales per asset owned, once again resulting in a higher overall return on equity.

Components of the DuPont Equation: Financial Leverage

Financial leverage refers to the amount of debt that a company utilizes to finance its operations, as compared with the amount of equity that the company utilizes. As was the case with asset turnover and profit margin, Increased financial leverage will also lead to an increase in return on equity. This is because the increased use of debt as financing will cause a company to have higher interest payments, which are tax deductible. Because dividend payments are not tax deductible, maintaining a high proportion of debt in a company’s capital structure leads to a higher return on equity.

The DuPont Equation in Relation to Industries

The DuPont equation is less useful for some industries, that do not use certain concepts or for which the concepts are less meaningful. On the other hand, some industries may rely on a single factor of the DuPont equation more than others. Thus, the equation allows analysts to determine which of the factors is dominant in relation to a company’s return on equity. For example, certain types of high turnover industries, such as retail stores, may have very low profit margins on sales and relatively low financial leverage. In industries such as these, the measure of asset turnover is much more important.

High margin industries, on the other hand, such as fashion, may derive a substantial portion of their competitive advantage from selling at a higher margin. For high end fashion and other luxury brands, increasing sales without sacrificing margin may be critical. Finally, some industries, such as those in the financial sector, chiefly rely on high leverage to generate an acceptable return on equity. While a high level of leverage could be seen as too risky from some perspectives, DuPont analysis enables third parties to compare that leverage with other financial elements that can determine a company’s return on equity.

ROE and Potential Limitations

Return on equity measures the rate of return on the ownership interest of a business and is irrelevant if earnings are not reinvested or distributed.

Learning Objectives

Calculate a company’s return on equity

Key Takeaways

Key Points

  • Return on equity is an indication of how well a company uses investment funds to generate earnings growth.
  • Returns on equity between 15% and 20% are generally considered to be acceptable.
  • Return on equity is equal to net income (after preferred stock dividends but before common stock dividends) divided by total shareholder equity (excluding preferred shares ).
  • Stock prices are most strongly determined by earnings per share (EPS) as opposed to return on equity.

Key Terms

  • fundamental analysis: An analysis of a business with the goal of financial projections in terms of income statement, financial statements and health, management and competitive advantages, and competitors and markets.

Return On Equity

Return on equity (ROE) measures the rate of return on the ownership interest or shareholders’ equity of the common stock owners. It is a measure of a company’s efficiency at generating profits using the shareholders’ stake of equity in the business. In other words, return on equity is an indication of how well a company uses investment funds to generate earnings growth. It is also commonly used as a target for executive compensation, since ratios such as ROE tend to give management an incentive to perform better. Returns on equity between 15% and 20% are generally considered to be acceptable.

The Formula

Return on equity is equal to net income, after preferred stock dividends but before common stock dividends, divided by total shareholder equity and excluding preferred shares.

Return On Equity: ROE is equal to after-tax net income divided by total shareholder equity.

Expressed as a percentage, return on equity is best used to compare companies in the same industry. The decomposition of return on equity into its various factors presents various ratios useful to companies in fundamental analysis.

ROE Broken Down: This is an expression of return on equity decomposed into its various factors.

The practice of decomposing return on equity is sometimes referred to as the “DuPont System. ”

Potential Limitations of ROE

Just because a high return on equity is calculated does not mean that a company will see immediate benefits. Stock prices are most strongly determined by earnings per share (EPS) as opposed to return on equity. Earnings per share is the amount of earnings per each outstanding share of a company’s stock. EPS is equal to profit divided by the weighted average of common shares.

Earnings Per Share: EPS is equal to profit divided by the weighted average of common shares.

The true benefit of a high return on equity comes from a company’s earnings being reinvested into the business or distributed as a dividend. In fact, return on equity is presumably irrelevant if earnings are not reinvested or distributed.

Assessing Internal Growth and Sustainability

Sustainable– as opposed to internal– growth gives a company a better idea of its growth rate while keeping in line with financial policy.

Learning Objectives

Calculate a company’s internal growth and sustainability ratios

Key Takeaways

Key Points

  • The internal growth rate is a formula for calculating the maximum growth rate a firm can achieve without resorting to external financing.
  • Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy.
  • Another measure of growth, the optimal growth rate, assesses sustainable growth from a total shareholder return creation and profitability perspective, independent of a given financial strategy.

Key Terms

  • retention: The act of retaining; something retained
  • retention ratio: retained earnings divided by net income
  • sustainable growth rate: the optimal growth from a financial perspective assuming a given strategy with clear defined financial frame conditions/ limitations

Internal Growth and Sustainability

The true benefit of a high return on equity arises when retained earnings are reinvested into the company’s operations. Such reinvestment should, in turn, lead to a high rate of growth for the company. The internal growth rate is a formula for calculating maximum growth rate that a firm can achieve without resorting to external financing. It’s essentially the growth that a firm can supply by reinvesting its earnings. This can be described as (retained earnings)/(total assets ), or conceptually as the total amount of internal capital available compared to the current size of the organization.

We find the internal growth rate by dividing net income by the amount of total assets (or finding return on assets ) and subtracting the rate of earnings retention. However, growth is not necessarily favorable. Expansion may strain managers’ capacity to monitor and handle the company’s operations. Therefore, a more commonly used measure is the sustainable growth rate.

Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy, such as target debt to equity ratio, target dividend payout ratio, target profit margin, or target ratio of total assets to net sales.

We find the sustainable growth rate by dividing net income by shareholder equity (or finding return on equity) and subtracting the rate of earnings retention. While the internal growth rate assumes no financing, the sustainable growth rate assumes you will make some use of outside financing that will be consistent with whatever financial policy being followed. In fact, in order to achieve a higher growth rate, the company would have to invest more equity capital, increase its financial leverage, or increase the target profit margin.

Optimal Growth Rate

Another measure of growth, the optimal growth rate, assesses sustainable growth from a total shareholder return creation and profitability perspective, independent of a given financial strategy. The concept of optimal growth rate was originally studied by Martin Handschuh, Hannes Lösch, and Björn Heyden. Their study was based on assessments on the performance of more than 3,500 stock-listed companies with an initial revenue of greater than 250 million Euro globally, across industries, over a period of 12 years from 1997 to 2009.

image

Revenue Growth and Profitability: ROA, ROS and ROE tend to rise with revenue growth to a certain extent.

Due to the span of time included in the study, the authors considered their findings to be, for the most part, independent of specific economic cycles. The study found that return on assets, return on sales and return on equity do in fact rise with increasing revenue growth of between 10% to 25%, and then fall with further increasing revenue growth rates. Furthermore, the authors attributed this profitability increase to the following facts:

  1. Companies with substantial profitability have the opportunity to invest more in additional growth, and
  2. Substantial growth may be a driver for additional profitability, whether by attracting high performing young professionals, providing motivation for current employees, attracting better business partners, or simply leading to more self-confidence.

However, according to the study, growth rates beyond the “profitability maximum” rate could bring about circumstances that reduce overall profitability because of the efforts necessary to handle additional growth (i.e., integrating new staff, controlling quality, etc).

Dividend Payments and Earnings Retention

The dividend payout and retention ratios offer insight into how much of a firm’s profit is distributed to shareholders versus retained.

Learning Objectives

Calculate a company’s dividend payout and retention ratios

Key Takeaways

Key Points

  • Many corporations retain a portion of their earnings and pay the remainder as a dividend.
  • Dividends are usually paid in the form of cash, store credits, or shares in the company.
  • Cash dividends are a form of investment income and are usually taxable to the recipient in the year that they are paid.
  • Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends.
  • Retained earnings can be expressed in the retention ratio.

Key Terms

  • stock split: To issue a higher number of new shares to replace old shares. This effectively increases the number of shares outstanding without changing the market capitalization of the company.

Dividend Payments and Earnings Retention

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. On the other hand, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. Retained earnings are shown in the shareholder equity section in the company’s balance sheet –the same as its issued share capital.

Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a “special dividend” to distinguish it from the fixed schedule dividends. Dividends are usually paid in the form of cash, store credits (common among retail consumers’ cooperatives), or shares in the company (either newly created shares or existing shares bought in the market). Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder.

Cash dividends (most common) are those paid out in currency, usually via electronic funds transfer or a printed paper check. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. This is the most common method of sharing corporate profits with the shareholders of the company. For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is $0.50 per share, the holder of the stock will be paid $50. Dividends paid are not classified as an expense but rather a deduction of retained earnings. Dividends paid do not show up on an income statement but do appear on the balance sheet.

image

Example Balance Sheet: Retained earnings can be found on the balance sheet, under the owners’ (or shareholders’) equity section.

Stock dividends are those paid out in the form of additional stock shares of the issuing corporation or another corporation (such as its subsidiary corporation). They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock dividend will yield five extra shares). If the payment involves the issue of new shares, it is similar to a stock split in that it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held.

Dividend Payout and Retention Ratios

Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:

The part of the earnings not paid to investors is left for investment to provide for future earnings growth. These retained earnings can be expressed in the retention ratio. Retention ratio can be found by subtracting the dividend payout ratio from one, or by dividing retained earnings by net income.

Dividend Payout Ratio: The dividend payout ratio is equal to dividend payments divided by net income for the same period.

Relationships between ROA, ROE, and Growth

Return on assets is a component of return on equity, both of which can be used to calculate a company’s rate of growth.

Learning Objectives

Discuss the different uses of the Return on Assets and Return on Assets ratios

Key Takeaways

Key Points

  • Return on equity measures the rate of return on the shareholders ‘ equity of common stockholders.
  • Return on assets shows how profitable a company’s assets are in generating revenue.
  • In other words, return on assets makes up two-thirds of the DuPont equation measuring return on equity.
  • Capital intensity is the term for the amount of fixed or real capital present in relation to other factors of production. Rising capital intensity pushes up the productivity of labor.

Key Terms

  • return on common stockholders’ equity: a fiscal year’s net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage
  • quantitatively: With respect to quantity rather than quality.

Return On Assets Versus Return On Equity

In review, return on equity measures the rate of return on the ownership interest (shareholders’ equity) of common stockholders. Therefore, it shows how well a company uses investment funds to generate earnings growth. Return on assets shows how profitable a company’s assets are in generating revenue. Return on assets is equal to net income divided by total assets.

Return On Assets: Return on assets is equal to net income divided by total assets.

This percentage shows what the company can do with what it has (i.e., how many dollars of earnings they derive from each dollar of assets they control). This is in contrast to return on equity, which measures a firm’s efficiency at generating profits from every unit of shareholders’ equity. Return on assets is, however, a vital component of return on equity, being an indicator of how profitable a company is before leverage is considered. In other words, return on assets makes up two-thirds of the DuPont equation measuring return on equity.

ROA, ROE, and Growth

In terms of growth rates, we use the value known as return on assets to determine a company’s internal growth rate. This is the maximum growth rate a firm can achieve without resorting to external financing. We use the value for return on equity, however, in determining a company’s sustainable growth rate, which is the maximum growth rate a firm can achieve without issuing new equity or changing its debt-to-equity ratio.

Capital Intensity and Growth

Return on assets gives us an indication of the capital intensity of the company. “Capital intensity” is the term for the amount of fixed or real capital present in relation to other factors of production, especially labor. The underlying concept here is how much output can be procured from a given input (assets!). The formula for capital intensity is below:

Capital Intensity=Total AssetsSales

The use of tools and machinery makes labor more effective, so rising capital intensity pushes up the productivity of labor. While companies that require large initial investments will generally have lower return on assets, it is possible that increased productivity will provide a higher growth rate for the company. Capital intensity can be stated quantitatively as the ratio of the total money value of capital equipment to the total potential output. However, when we adjust capital intensity for real market situations, such as the discounting of future cash flows, we find that it is not independent of the distribution of income. In other words, changes in the retention or dividend payout ratios can lead to changes in measured capital intensity.

 

 

1280px-DuPontModelEng.svg

Please see my related posts:

Rising Market Concentration and Declining Business Investments in the USA – Update June 2018

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FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

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Low Interest Rates and Business Investments : Update August 2017

Low Interest Rates and Monetary Policy Effectiveness

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Mergers and Acquisitions – Long Term Trends and Waves

Business Investments and Low Interest Rates

The Decline in Long Term Real Interest Rates

Low Interest Rates and Banks Profitability: Update – December 2016

 

 Key Sources of Research:

 

 

 

The DuPont Equation, ROE, ROA, and Growth

https://courses.lumenlearning.com/boundless-finance/chapter/the-dupont-equation-roe-roa-and-growth/

 

 

Short-Termism in business: causes, mechanisms and consequences

EY Poland Report

 

Click to access Short-termism_raport_EY.pdf

 

 

Shareholders vs Stakeholders Capitalism

Fabian Brandt

Goethe University

Konstantinos Georgiou

University of Pennsylvania

 

https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1002&context=fisch_2016

 

 

Hedrick Smith Speaks to the Community about Who Stole the American Dream.

 

http://nhlabornews.com/2013/10/hedrick-smith-speaks-to-the-community-about-who-stole-the-american-dream/

 

 

Let’s Talk About “Maximizing Shareholder Value”

https://www.pragcap.com/lets-talk-about-maximizing-shareholder-value/

 

 

SHAREHOLDER CAPITALISM: A SYSTEM IN CRISIS

 

New Economics Foundation

 

Click to access NEF_SHAREHOLDER-CAPITALISM_E_latest.pdf

 

 

 

THE HISTORICAL CONTEXT OF SHAREHOLDER VALUE CAPITALISM

 

Mark S. Mizruchi and Howard Kirneldorf

 

Click to access 191bbc2b82f351633c7379deea7b9ccad0e9.pdf

 

 

Shareholder capitalism on trial

 

By Robert J. Samuelson

 

Click to access 03-19-15_WashingtonPost.pdf

 

 

 

The real business of business

McKinsey

 

https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Corporate%20Finance/MoF/Issue%2053/MoF53_The_real_business_of_business.ashx

 

 

 

Managers and Market Capitalism

 

Rebecca Henderson Karthik Ramanna

HBR

 

Click to access Henderson_Ramanna___Managers_and_Market_Capitalism___March_2013.pdf

 

 

The Embedded Firm: Corporate Governance, Labor, and Finance Capitalism

Peer Zumbansen

Cynthia A. Williams

 

http://digitalcommons.osgoode.yorku.ca/cgi/viewcontent.cgi?article=1056&context=clpe

 

 

 

 

Andrew G Haldane: Who owns a company?

Speech by Mr Andrew G Haldane,

Executive Director and Chief Economist of the Bank of England,

at the University of Edinburgh Corporate Finance Conference, Edinburgh,

22 May 2015.

 

Click to access r150811a.pdf

 

 

 

 

Capitalism for the Long Term

MARCH 2011
HBR

The Short Long

 

Speech by
Andrew G Haldane, Executive Director, Financial Stability, and Richard Davies

29th Societé Universitaire Europeene de Recherches Financieres Colloquium: New Paradigms in Money and Finance?

Brussels

May 2011

 

https://www.bankofengland.co.uk/-/media/boe/files/speech/2011/the-short-long-speech-by-andrew-haldane

 

 

 

 

Is short-termism wrecking the economy?

Redefining capitalism

By Eric Beinhocker and Nick Hanauer

Fast finance and slow growth

 

Andy Haldane

http://progressive-policy.net/2015/09/fast-finance-and-slow-growth/

 

Beyond Shareholder Value

The reasons and choices for corporate governance reform

Click to access BSV.pdf

 

 

AN ECONOMY FOR THE 99%

It’s time to build a human economy that benefits everyone, not just the privileged few

OXFAM

 

Click to access bp-economy-for-99-percent-160117-en.pdf

 

 

Short-Termism

By Douglas K. Chia

 

Click to access 01181_millstein_10th_anniversary_essay_2_chia_v2.pdf

 

 

 

The Future of Finance

THE LSE REPORT

 

Click to access future-of-finance-chapter-3.pdf

 

 

 

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?

 

Click to access IsShortTermBehaviorJeopardizingTheFutureProsperityOfBusiness_CEOStrategicImplications.pdf

 

 

 

 

How Effective Capital Regulation can Help Reduce the Too‐Big‐To‐Fail Problem

Anat Admati

Stanford University

 

Click to access Minn-Fed-combined.pdf

 

 

 

Business School’s Worst Idea: Why the “Maximize Shareholder Value” Theory Is Bogus

Yves Smith

http://evonomics.com/maximize-shareholder-value-theory-yves-smith/

 

 

 

When Shareholder Capitalism Came to Town

The American Prospect

http://prospect.org/article/when-shareholder-capitalism-came-town

 

 

 

Competition Conference 2018

What’s the Evidence for Strengthening Competition Policy?

Boston University

July 2018

http://sites.bu.edu/tpri/competition-conference-2018/

 

 

 

Market Concentration

Issues paper by the Secretariat
6-8 June 2018

This document was prepared by the OECD Secretariat to serve as an issues paper for the hearing on market concentration taking place at the 129th meeting of the OECD Competition Committee on 6-8 June 2018

https://one.oecd.org/document/DAF/COMP/WD(2018)46/en/pdf

 

 

 

 

Monopoly’s New Era

In today’s economy, many industries can’t be analyzed through the lens of competition.

Chazen Global Insights
May 13, 2016

 

https://www8.gsb.columbia.edu/articles/chazen-global-insights/monopoly-s-new-era

 

 

 

Market power in the U.S. economy today

Washington Center for Equitable Growth

http://equitablegrowth.org/research-analysis/market-power-in-the-u-s-economy-today/

 

 

 

Don’t Panic: A Guide to Claims of Increasing Concentration

Gregory J. Werden

Luke Froeb

 

Date Written: April 5, 2018

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3156912

 

 

 

Market concentration

OECD

http://www.oecd.org/daf/competition/market-concentration.htm

 

 

 

 

A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

Jason Furman Peter Orszag1

October 16, 2015

Click to access FurmanOrszag15.pdf

 

 

 

Do the Productivity Slowdown and the Inequality Increase Have a Common Cause?

Jason Furman (joint work with Peter Orszag)

Peterson Institute for International Economics
Washington, DC
November 9, 2017

Click to access 4-1furman20171109ppt.pdf

 

 

 

Is There a Connection Between Market Concentration and the Rise in Inequality?

https://promarket.org/connection-market-concentration-rise-inequality/

 

 

 

Concentrating on the Fall of the Labor Share

David; Dorn, David; Katz, Lawrence F; Patterson, Christina; Reenen, John Van

Click to access b8d7a989cab4b76e7fe795bf4572dbcdd0bc.pdf

 

 

 

 

Business Investment Spending Slowdown

April 9, 2018

FAS Congressional Research Services

Marc Labonte

Click to access IN10882.pdf

 

 

 

 

Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents

Lina Khan and Sandeep Vaheesan

Click to access HLP110.pdf

 

 

 

Five Myths about Economic Inequality in America

By Michael D. Tanner
September 7, 2016

 

Cato Institiute

https://www.cato.org/publications/policy-analysis/five-myths-about-economic-inequality-america

 

 

 

 

Is the US Public Corporation in Trouble?

Kathleen M. Kahle and René M. Stulz

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.31.3.67

 

 

 

Declining Labor and Capital Shares

Simcha Barkai

Click to access FeijooOnBarkai17.pdf

 

 

 

Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline

Kehrig, Matthias; Vincent, Nicolas

(2017)

Click to access cesifo1_wp6454.pdf

 

 

 

 

Declining Competition and Investment in the U.S.

Germán Gutiérrez† and Thomas Philippon‡

March 2017

Click to access IK_Comp_v1.pdf

 

 

 

ACCOUNTING FOR RISING CORPORATE PROFITS: INTANGIBLES OR REGULATORY
RENTS?

James Bessen

Boston University School of Law

November 9, 2016

Click to access Accounting-for-Rising-Corporate-Profits.pdf

 

 

 

 

Kaldor and Piketty’s facts: The rise of monopoly power in the United States

Gauti Eggertsson
Jacob A. Robbins
Ella Getz Wold

Feb 2018

Click to access 02052018-WP-kaldor-piketty-monopoly-power.pdf

 

 

 

 

Is There an Investment Gap in Advanced Economies? If So, Why?

Robin Döttling

German Gutierrez Gallardo

Thomas Philippon

 

Date Written: July 2017

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3002796

 

 

 

 

Antitrust in a Time of Populism

Professor Carl Shapiro

CRESSE 2017 Heraklion – Crete, Greece

2 July 2017

Click to access 2017_Key_SHAPIRO.pdf

 

 

 

The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

Credit Suisse

March 2917

Click to access document_1072753661.pdf

 

 

 

Declining Competition and Investment in the U.S

German Gutierrez Gallardo

Thomas Philippon

 

Date Written: December 2017

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3095586

 

 

 

 

The Fall and Rise of Market Power in Europe

John P. Weche and Achim Wambach

Click to access dp18003.pdf

Click to access 1011811367.pdf

 

 

 

 

On the Formation of Capital and Wealth: IT, Monopoly Power and Rising Inequality

Mordecai Kurz,

Stanford University

2018

Click to access e50bf8be5c75f1cca2e9e3d4afa4b8b8ac84.pdf

 

 

 

 

Appendix for \Investment-less Growth: An Empirical Investigation”

 

German Gutierrez and Thomas Philippony

March 2018

Click to access gutierrezappendixfa17bpea.pdf

 

 

 

 

WP 18-4 Slower Productivity and Higher Inequality: Are They Related?

Jason Furman and Peter Orszag

June 2018

PIIE

Click to access wp18-4.pdf

 

 

 

 

THE FUTURE OF PRODUCTIVITY

OECD

2015

 

Click to access OECD-2015-The-future-of-productivity-book.pdf

 

 

 

 

OECD Study on the Future of Productivity

Video

PIIE

 

 

 

 

 

A productivity perspective on the future of growth

By James Manyika, Jaana Remes, and Jonathan Woetzel
McKinsey
2014

https://www.mckinsey.com/featured-insights/employment-and-growth/a-productivity-perspective-on-the-future-of-growth

 

 

 

 

The future of productivity in manufacturing

Anne Green, Terence Hogarth, Erika Kispeter, David Owen

Peter Glover

February 2016

Click to access ier_2016_manufacturing_sector_productivity_report.pdf

 

 

 

 

THE PRODUCTIVITY OUTLOOK: PESSIMISTS VERSUS OPTIMISTS

August 2016

Zia Qureshi
at the Brookings Institution

Click to access productivity-outlook.pdf

 

 

 

The Slowdown in Productivity Growth: A View from International Trade

Development Issues No. 11

UN

April 2017

Click to access dsp_policy_11.pdf

 

 

 

 

Five Puzzles in the Behavior of Productivity, Investment, and Innovation

Robert J. Gordon

NBER

August 2004

http://www.nber.org/papers/w10660

 

 

 

 

AN OECD AGENDA ON ISSUES IN PRODUCTIVITY MEASUREMENT

Paul Schreyer

OECD Statistics Directorate
2016 World KLEMS Conference
Madrid, May 23-24 2016

Click to access worldklems2016_Schreyer_slides.pdf

 

 

 

THE FUTURE OF PRODUCTIVITY

Chiara Criscuolo
Directorate for Science, Technology and Innovation OECD

Understanding the Great recession: from micro to macro
Bank of England
London | 24 September 2015

Click to access CCriscuolo.pdf

 

 

 

 

 

Industry 4.0

The future of Productivity and Growth in Manufacturing Industries

BCG

Click to access media.media.72e472fb-1698-4a15-8858-344351c8902f.original.pdf

 

 

 

 

The waning of productivity growth

Raymond Van der Putten

http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=29178

 

 

The Impact of Robots on Productivity, Employment and Jobs

A positioning paper by the International Federation of Robotics

April 2017

Click to access IFR_The_Impact_of_Robots_on_Employment.pdf

 

 

 

 

The fall in productivity growth: causes and implications

Speech given by Silvana Tenreyro, External MPC Member, Bank of England

Peston Lecture Theatre, Queen Mary University of London

15 January 2018

https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/the-fall-in-productivity-growth-causes-and-implications

 

 

 

Artificial Intelligence, Automation, and the Economy

Science and Technology Council

Executive Office of the President

December 2016

Click to access EMBARGOED%20AI%20Economy%20Report.pdf

 

 

 

 

Long-term growth and productivity projections in advanced countries

Gilbert Cette, Rémy Lecat & Carole Ly-Marin

Working Paper #617

December 2016

Bank of France

Click to access DT617.pdf

 

 

 

ARE WE APPROACHING AN ECONOMIC SINGULARITY?
INFORMATION TECHNOLOGY AND THE FUTURE OF ECONOMIC GROWTH

By
William D. Nordhaus

September 2015

Click to access d2021.pdf

 

 

 

Challenges for the Future of Chinese Economic Growth

Jane Haltmaier

Federal Reseve Bank USA

2013

Click to access ifdp1072.pdf

 

 

 

Innovation, research and the UK’s productivity crisis.

Richard Jones

SPERI Paper No. 28

Click to access SPERI-Paper-28-Innovation-research-and-the-UK-productivity-crisis.pdf

 

 

 

Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies

BY ROBERT D. ATKINSON

MAY 2016

Click to access 2016-think-like-an-enterprise.pdf

 

 

 

Solving the productivity puzzle

By Jaana Remes, James Manyika, Jacques Bughin, Jonathan Woetzel, Jan Mischke, and Mekala Krishnan

McKinsey

Feb 2018

https://www.mckinsey.com/featured-insights/meeting-societys-expectations/solving-the-productivity-puzzle

 

 

 

Solving the productivity puzzle: the role of demand and the promise of digitization

DR. JAN MISCHKE

McKinsey Global Institute

May 2018

Click to access 20180523-MGI_Solving-the-productivity-puzzle_Bruegel.pdf

 

 

Worried about Concentration? Then Worry about Rent-Seeking

By Brink Lindsey and Steven Teles
This article appeared on ProMarket on April 18, 2017.

 

https://www.cato.org/publications/commentary/worried-about-concentration-then-worry-about-rent-seeking

 

 

 

Online platforms, distortion of markets, social impacts and freedom of expression

Oxford Centre for Competition law and policy

22 May 2017

Tim Cowen.

Click to access Tim_Cowen_Oxford_Centre_for_Competition_Law_and_Policy_speech_22May2017—updated-21.09.2017.pdf

 

 

 

What’s Behind the Increase in Inequality?

By Eileen Appelbaum*

September 2017

Click to access whats-behind-the-increase-in-inequality-2017-09.pdf

 

 

 

A NATIONAL COMPETITION POLICY: UNPACKING THE PROBLEM OF DECLINING COMPETITION AND SETTING PRIORITIES MOVING FORWARD

American Antitrust Institute

September 28, 2016

Click to access AAINatlCompPolicy.pdf

 

 

 

AI and the Economy

Jason Furman
Harvard Kennedy School
Cambridge, MA

Robert Seamans
NYU Stern School of Business
New York, NY

29 May 2018

Click to access c14099.pdf

 

 

 

The United States and Europe: Short-Run Divergence and Long-Run Challenges

Jason Furman
Chairman, Council of Economic Advisers

Remarks at Bruegel
Brussels, Belgium
May 11, 2016

Click to access The-United-States-and-Europe-Short-Run-Divergence-and-Long-Run-Challenges-Jason-Furman.pdf

 

 

 

 

Business Investment Spending Slowdown

April 9, 2018

Marc Labonte

CRS Insights

Click to access IN10882.pdf

 

 

 

 

ECONOMIC REPORT OF THE PRESIDENT

Together With
THE ANNUAL REPORT
of the
COUNCIL OF ECONOMIC ADVISERS

Feb 2016

Click to access ERP-2016.pdf

 

 

Keynote Remarks of Commissioner Terrell McSweeny

Washington Center for Equitable Growth

Making Antitrust Work for the 21st Century

Washington, DC

October 6, 2016

Click to access mcsweeny_-_keynote_remarks_at_equitable_growth_10-6-16.pdf

 

 

Wal-Mart: A Progressive Success Story

Jason Furman

November 28, 2005

Click to access walmart.pdf

 

 

“America Without Entrepreneurs: The Consequences of Dwindling Startup Activity”

Testimony before
The Committee on Small Business and Entrepreneurship
United States Senate
June 29, 2016

John W. Lettieri
Cofounder
& Senior Director for Policy and Strategy
Economic Innovation Group

Click to access 7F75741C1A2E6182E1A5D21B61D278F3.lettieri-testimony.pdf

 

 

 

 

A reading list on market power, superstar firms, and inequality

BLOG

http://www.beyondthetimes.com/2017/08/16/a-partial-reading-list-on-market-power-superstar-firms-and-inequality/

 

 

 

 

 

Productivity Growth in the Advanced Economies:The Past, the Present, and Lessons for the Futures

Jason Furman

Chairman, Council of Economic Advisers

July 2015

Click to access 20150709_productivity_advanced_economies_piie_slides.pdf

 

 

 

 

 

Forms and sources of inequality in the United States

Jason Furman

17 March 2016

VOXEU

 

https://voxeu.org/article/forms-and-sources-inequality-united-states

 

 

 

 

Business Investment in the United States: Facts, Explanations, Puzzles, and Policies

Jason Furman
Chairman, Council of Economic Advisers
Progressive Policy Ins9tute

September 30, 2015

Click to access 2015.09.30-Jason-Furman_Business-Investment-in-US-Facts-Explanations-Puzzles-Policies.pdf

 

 

 

 

Can Tax Reform Get Us to 3 Percent Growth?

Jason Furman
Harvard Kennedy School & Peterson Institute for International Economics

New York, NY
November 3, 2017

Click to access furman20171103ppt.pdf

 

 

 

 

Structural Challenges and Opportunities in the U.S. Economy

Jason Furman
Chairman, Council of Economic Advisers

London School of Economics
November 5, 2014

Click to access 20141105_1830_structuralOpportunitiesUSEconomy_tr.pdf

 

 

Is This Time Different? The Opportunities and Challenges of Artificial Intelligence

Jason Furman
Chairman, Council of Economic Advisers

Remarks at AI Now: The Social and Economic Implications of Artificial Intelligence Technologies in the Near Term
New York University
New York, NY

July 7, 2016

Click to access 20160707_cea_ai_furman.pdf

 

 

 

 

Rebalancing the U.S. Economy

Jason Furman

Click to access TIE_Sp15_Furman.pdf

 

 

 

 

Should Policymakers Care Whether Inequality Is Helpful or Harmful For Growth?

Jason Furman

Harvard Kennedy School & Peterson Institute for International Economics
Rethinking Macroeconomic Conference, October 11-12 2017

Preliminary Draft: October 5, 2017

Click to access furman20171012paper.pdf

 

 

 

 

 

A Political Economy of Oligarchy: Winner-take-all ideology, superstar norms, and the rise of the 1%

Yochai Benkler

September, 2017

Click to access Political%20economy%20of%20oligarchy%2001.pdf

 

 

 

 

Can Trump Overcome Secular Stagnation?
Part One: The Demand Side *

James K. Galbraith

Click to access can_trump_overcome_secular_stagnation.pdf

 

 

 

 

The macroeconomic effects of the 2017 tax reform

Robert J. Barro, Harvard University
Jason Furman, Harvard University

March 2018

Click to access 4_barrofurman.pdf

 

 

 

 

A FUTURE THAT WORKS: AUTOMATION, EMPLOYMENT, AND PRODUCTIVITY

McKinsey Global Institute

January 2017

https://www.mckinsey.com/~/media/mckinsey/featured%20insights/Digital%20Disruption/Harnessing%20automation%20for%20a%20future%20that%20works/A-future-that-works-Executive-summary-MGI-January-2017.ashx

 

 

 

A MISSING LINK: THE ROLE OF ANTITRUST LAW IN RECTIFYING EMPLOYER POWER IN OUR HIGH-PROFIT, LOW-WAGE ECONOMY

ISSUE BRIEF BY MARSHALL STEINBAUM

APRIL 2018

Click to access Monopsony-issue-brief.pdf

 

 

 

Inclusive Growth

For once, some good news

by jason furman

Click to access 16-29-MR64.pdf

 

 

 

 

The Outlook for the U.S. Economy and the Policies of the New President

Jason Furman
Senior Fellow, PIIE
Peterson Institute for International Economics |

SNS/SHOF Finance Panel

Stockholm

June 12, 2017

Click to access furman20170612ppt.pdf

 

 

 

 

The Role of Economists in Economic Policymaking

Jason Furman
Senior Fellow, Peterson Institute for International Economics

Arnold C. Harberger Distinguished Lecture on Economic Development
UCLA Burkle Center for International Relations
Los Angeles, CA

April 27, 2017

Click to access furman20170427.pdf

 

 

 

 

Market Concentration – Note by the United States

Hearing on Market Concentration
7 June 2018

OECD

Click to access market_concentration_united_states.pdf

http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/WD(2018)59&docLanguage=En

 

 

 

 

The fringe economic theory that might get traction in the 2016 campaign

 

https://www.washingtonpost.com/news/wonk/wp/2015/03/02/the-fringe-economic-theory-that-might-get-traction-in-the-2016-campaign/?noredirect=on&utm_term=.77c5e3479485

 

 

 

ACHIEVING INCLUSIVE GROWTH IN THE FACE OF DIGITAL TRANSFORMATION AND THE FUTURE OF WORK

OECD

Click to access achieving_inclusive_growth_in_the_face_of_digital_transformation_and_the_future_of_work_oecd_0.pdf

Cash and Investments: Corporate Savings Glut in USA

Cash and Investments: Corporate Savings Glut in USA

 

Profits/Retained Earnings of a firm can be used in number of ways:

  • Capital Investments
  • Debt Repayment
  • Dividends
  • Cash and Short Term Investments
  • Long Term Investments
  • Share Buybacks
  • M&A Investments

Please see three quarterly reports from FACTSET on trends in

  • Dividents
  • Buybacks
  • Cash and Investments

Share buybacks are very common for several years.

Please see my related posts

Why do Firms buyback their Shares? Causes and Consequences.

Low Interest Rates and Business Investments : Update August 2017

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Mergers and Acquisitions – Long Term Trends and Waves

Business Investments and Low Interest Rates

 

From The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

cash

From Why Are Corporations Holding So Much Cash?

cash 2cash3

 

From FACTSET Cash and Investment Quarterly

cash4

Companies are holding on to the large sum of cash.  Rather than capital investments (CAPEX), cash is being used for share buybacks, dividend payouts, mergers and acquisitions, and cash investments (short and long term).

 

From FACTSET Cash and Investment Quarterly

cash5

Key Sources of Research:

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

Joseph W. Gruber
Steven B. Kamin

This Draft: June 2015

Click to access Gruber.pdf

 

The global corporate saving glut: Long-term evidence

Peter Chen, Loukas Karabarbounis, Brent Neiman

05 April 2017

http://voxeu.org/article/global-corporate-saving-glut

 

 

 

Declining Labor Shares and the Global Rise of Corporate Saving

Loukas Karabarbounis

Brent Neiman

October 2012

Click to access labshare.pdf

 

The Global Rise of Corporate Saving

Peter Chen

Loukas Karabarbounis

Brent Neiman

March 2017

Click to access CKN.pdf

Click to access w23133.pdf

 

FACTSET Dividend Quarterly

https://www.factset.com/websitefiles/PDFs/dividend

 

FACTSET Buyback Quarterly

https://www.factset.com/websitefiles/PDFs/buyback

FACTSET Cash and Investment Quarterly

https://www.factset.com/websitefiles/PDFs/cashinvestment

Click to access Cash%20and%20Investment%20Quarterly%20Q3%202016_12.21.16_v2.pdf

 

 

 

Why Are Corporations Holding So Much Cash?

By Juan M. Sanchez and Emircan Yurdagul

2013

 

Click to access RE_Jan_2013.pdf

 

 

Why Do Companies Hold Cash?

Gianni La Cava and Callan Windsor

RDP 2016-03

 

Click to access rdp2016-03.pdf

 

 

MULTINATIONALS AND THE HIGH CASH HOLDINGS PUZZLE

Lee Pinkowitz

René M. Stulz Rohan Williamson

June 2012

 

http://www.nber.org/papers/w18120.pdf?new_window=1

 

 

 

The Determinants and Implications of Corporate Cash Holdings

Tim Opler, Lee Pinkowitz, Rene Stulz, Rohan Williamson

Issued in October 1997

Click to access w6234.pdf

 

 

WHY DO U.S. FIRMS HOLD SO MUCH MORE CASH THAN THEY USED TO?

Thomas W. Bates Kathleen M. Kahle Rene M. Stulz

September 2006

 

Click to access w12534.pdf

 

 

Why do firms hold so much cash? A tax-based explanation

C. Fritz Foley, Jay C. Hartzell, Sheridan Titman, and Garry Twite

October 2006

 

Click to access w12649.pdf

 

 

It’s Alive! Corporate Cash and Business Investment

Finn Poschmann

 

Click to access e-brief_181.pdf

 

 

Dead money

There are good reasons for hoarding cash.

John Lorinc

 

http://www.canadianbusiness.com/economy/dead-money/

 

 

IS “DEAD” MONEY ALIVE? A FIRM-LEVEL ANALYSIS OF CANADIAN NON-FINANCIAL LISTED CORPORATIONS CASH HOLDING AND CAPITAL EXPENDITURE BEHAVIOR

2014

IMF

 

Click to access cr1428.pdf

Understanding Trade in Intermediate Goods

Understanding Trade in Intermediate Goods

 

One of the key source of International Trade statistics is a document published by the UNCTAD since 2013:

Key Statistics and Trends in International Trade

Please see references below to access reports for 2015 and 2016.

 

In 2014, out of USD 18.5 trillion in global trade, about USD 8 trillion was in intermediate goods.

 

From TRADE IN INTERMEDIATE GOODS AND SERVICES

Introduction: the international dimension of the exchange of intermediate inputs

1. Trade in intermediate inputs has been steadily growing over the last decade. However, despite the internationalisation of production and the increasing importance of outsourcing and foreign investment, some studies have found little rise in intermediate goods trade as a share of total trade1. More than half of goods trade is however made up of intermediate inputs and trade in services is even more of an intermediate type with about three quarters of trade flows being comprised of intermediate services. Trade in intermediate goods and services thus deserves special attention from trade policymakers and so far few studies have investigated how it differs from trade in consumption goods or services.

2. An intermediate good can be defined as an input to the production process that has itself been produced and, unlike capital, is used up in production3. The difference between intermediate and capital goods lies in the latter entering as a fixed asset in the production process. Like any primary factor (such as labour, land, or natural resources) capital is used but not used up in the production process4. On the contrary, an intermediate good is used, often transformed, and incorporated in the final output. As an input, an intermediate good has itself been produced and is hence defined in contrast to a primary input. As an output, an intermediate good is used to produce other goods (or services) contrary to a final good which is consumed and can be referred to as a “consumption good”.

3. Intermediate inputs are not restricted to material goods; they can also consist of services. Thelatter can be potentially used as an input to any sector of the economy; that is for the production of the same, or other services, as well as manufacturing goods. Symmetrically, manufacturing goods can be potentially used to produce the same, or other manufacturing goods, as well as services.

4. An important question we can ask is how to identify inputs among all goods and services produced in an economy. Many types of goods can be easily distinguished as inputs, when their use excludes them from final consumption. Notable examples include chemical substances, construction materials, or business services. The exact same type of good used as an input to some production process can however be destined to consumption. For instance, oranges can be sold to households as a final good, as well as to a factory as an input for food preparation. Telecommunication services can be sold to individuals or to business services firms as an intermediate input for their output. The United Nations distinguish commodities in each basic heading on the basis of the main end-use (United Nations, 2007). It is however recognized that many commodities that are traded internationally may be put to a variety of uses. Other methodologies involve the use of input-output (I-O) tables to distinguish between intermediate and consumption goods.

5. The importance of intermediate goods and services in the economy and trade is associated with a number of developments in the last decades. Growth and increased sophistication of production has given birth to strategies involving fragmentation and reorganisation of firm’s activities, both in terms of ownership boundaries, as in terms of the location for production. In what follows, the international dimension of the exchange of intermediate goods and services is explored by clarifying terms and concepts as well as the links between trade in intermediate inputs and FDI.

From Key Statistics and Trends in International Trade 2015

inter8

 

From Key Statistics and Trends in International Trade 2015

inter2

 From Key Statistics and Trends in International Trade 2015

inter3

From Key Statistics and Trends in International Trade 2015

inter4

From Key Statistics and Trends in International Trade 2015

inter

From Key Statistics and Trends in International Trade 2015

inter5

From Key Statistics and Trends in International Trade 2015

inter6

From Key Statistics and Trends in International Trade 2015

inter7

From Key Statistics and Trends in International Trade 2015

Trade networks relating to global value chains have evolved during the last 10 years. In 2004, the East Asian production network was still in its infancy. Most trade flows of parts and components concerned the USA and the European Union, with a number of other countries loosely connected with these two main hubs. As of 2014 trade of parts and components was much more developed. The current state is characterized not only by the prominent role of China, but also by a much more tightly integrated network with a much larger number of countries many of which have multiple connections to different hubs.

From Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy

inter10inter11inter12

Key sources of Research:

 

TRADE IN INTERMEDIATE GOODS AND SERVICES

OECD Trade Policy Working Paper No. 93
by Sébastien Miroudot, Rainer Lanz and Alexandros Ragoussis

2009

Click to access 44056524.pdf

 

 

An Essay on Intra-Industry Trade in Intermediate Goods

Rosanna Pittiglio

2014

Click to access ME_2014051916452646.pdf

 

 

The Rise of International Supply Chains: Implications for Global Trade

Click to access GETR_Chapter1.2.pdf

 

 

 

Growing Trade in Intermediate Goods: Outsourcing, Global Sourcing or Increasing
Importance of MNE Networks?

by
Jörn Kleinert
October 2000

Click to access kap1006.pdf

 

 

 

Imported Inputs and the Gains from Trade

Ananth Ramanarayanan
University of Western Ontario
September, 2014

https://www.economics.utoronto.ca/index.php/index/research/downloadSeminarPaper/49816

 

 

 

Key Statistics and Trends in International Trade 2015

Division on International Trade in Goods and Services, and Commodities
United Nations Conference on Trade and Development

Click to access ditctab2015d1_en.pdf

 

 

 

Key Statistics and Trends in International Trade 2016

Division on International Trade in Goods and Services, and Commodities
United Nations Conference on Trade and Development

Click to access ditctab2016d3_en.pdf

 

 

Integration of Trade and Disintegration of Production in the Global Economy

Robert C. Feenstra
Revised, April 1998

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.39.7178&rep=rep1&type=pdf

 

 

 

GLOBAL VALUE CHAINS: CHALLENGES, OPPORTUNITIES, AND IMPLICATIONS FOR POLICY

OECD, WTO and World Bank Group
Report prepared for submission to the G20 Trade Ministers Meeting Sydney, Australia, 19 July 2014

Click to access gvc_report_g20_july_2014.pdf

 

 

Trade in Value Added: Concepts, Estimation and Analysis

Marko Javorsek* and Ignacio Camacho

20015

Click to access AWP150Trade%20in%20Value%20Added.pdf

 

 

The Similarities and Differences among Three Major Inter-Country Input-Output Databases and their Implications for Trade in Value-Added Estimates

Lin Jones and Zhi Wang, United States International Trade Commission Li Xin, Beijing Normal University and Peking University Christophe Degain, World Trade Organization

December, 2014

Click to access ec201412b.pdf

 

 

Advanced Topics in Trade
Lecture 9 – Multinational Firms and Foreign Direct Investment

Heiwai Tang – SAIS
April 8, 2015

Click to access lecture_8_new.pdf

 

 

Efforts to Measure Trade in Value-Added and Map Global Value Chains: A Guide

Andrew Reamer

May 29, 2014

Click to access Reamer_ISA_Trade_in_Value_Added_05-29-2014.pdf

 

 

 

Global Value Chains for Value Added and Intermediate Goods in Asia

N Shrestha

20015

Click to access CESSA%20WP%202015-07.pdf

 

 

 

Global Value Chains: The New Reality of International Trade

Sherry Stephenson
December 2013

Click to access E15-GVCs-Stephenson-Final.pdf

 

 

Asia and Global Production Networks Implications for Trade, Incomes and Economic Vulnerability

Benno Ferrarini

David Hummels

20014

Click to access asia-and-global-production-networks.pdf

 

 

Participation of Developing Countries in Global Value Chains:
Implications for Trade and Trade-Related Policies

by
Przemyslaw Kowalski, Javier Lopez Gonzalez, Alexandros Ragoussis
and Cristian Ugarte

Click to access OECD_Trade_Policy_Papers_179.pdf

 

 

GLOBAL VALUE CHAINS: SURVEYING DRIVERS, MEASURES AND IMPACTS

João Amador
Sónia Cabral

2014

Click to access wp20143.pdf

 

World Intermediate goods Exports By Country and Region

2014

WITS World International Trade Statistics

http://wits.worldbank.org/CountryProfile/en/Country/WLD/Year/2014/TradeFlow/Export/Partner/all/Product/UNCTAD-SoP2

 

 

Trade in global value chains

2013

WTO

Click to access its13_highlights4_e.pdf

 

 

The Rise of Trade in Intermediates: Policy Implications

  • February 10, 2011

http://carnegieendowment.org/2011/02/10/rise-of-trade-in-intermediates-policy-implications-pub-42578

 

 

International trade with intermediate and final goods under economic crisis

Elżbieta Czarny, Warsaw School of Economics
Paweł Folfas, Warsaw School of Economics
Katarzyna Śledziewska, Warsaw University

Click to access 375.pdf

 

 

 

Trade in Intermediate Goods: Implications for Productivity and Welfare in Korea

Young Gui Kim

Hak K. PYO

Date Written: December 30, 2016

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929118

 

 

Growing Together: Economic Ties between the United States and Mexico

BY CHRISTOPHER WILSON

Click to access growing_together_economic_ties_between_the_united_states_and_mexico.pdf

 

 

Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy

Timothy J. Sturgeon
Olga Memedovic

Click to access WP%2005%20Mapping%20Glocal%20Value%20Chains.pdf

 

India’s Intermediate Goods Trade in the Inter Regional Value Chain:
An examination based on Trade data and Input Output Analysis

Simi Thambi

Click to access 10_2%20fp.pdf

 

Global Supply Chains

Click to access pub4253_2.pdf

 

 

Global value chains in a changing world

Edited by Deborah K. Elms and Patrick Low

Click to access aid4tradeglobalvalue13_e.pdf

 

Slowdown in Global Investment (FDI) Flows

Slowdown in Global Investment (FDI) Flows

 

 

From Determinants of Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is a major component of globalization, together with international trade. Its operation is made possible by movements of factors across countries, in particular, capital. By definition, FDI involves long-term cross-country commitments. According to International Monetary Fund (IMF), FDI entails the establishment of a “lasting interest” by a resident entity of one economy in an enterprise located in another economy (International Monetary Fund, 1993). Lasting interest implies a long-term relationship between the foreign investor and the overseas enterprise where the said investor holds significant influence over management. The IMF defines a direct investment enterprise as one in which a foreign investor holds at least 10% of the ordinary shares or voting power (International Monetary Fund, 1993). The Organization for Economic Cooperation and Development (OECD, 1996, p. 10) classifies enterprises of direct foreign investors into three groups: subsidiaries, in which a nonresident investor holds more than 50% of the ownership; associates, in which a nonresident investor’s shares range between 10 and 50%; and branches, which are unincorporated enterprises owned by a nonresident investor, wholly or jointly. Obviously, such definitions and the resultant measurements leave ambiguities and imprecisions. However, they do help maintain relative consistency in cross-country comparisons.

From 1995 to 2015, the world saw a dramatic increase in FDI. The FDI inflows in 2015 were 8.6 times those in 1995, an increase from about 0.2 trillion USD in 1995 to about 1.8 trillion USD in 2015. While FDI inflows to developed countries increased 8.6-fold, those to developing countries and transitional economies increased 23 times. In 1995, FDI inflows to developing and transitional economies were 17% of the world total, and in 2015 they accounted for 45%. FDI flows to OECD countries peaked in 2007, at about 1.3 trillion USD. Between 2013 and 2014, for the first time, developing countries received more FDI than developed countries (UNCTAD, 2016), though the developed world recaptured the position as the largest FDI recipient in 2015 (see Figure 1).

There is an ever-growing body of literature on FDI. As Markusen (2008) demonstrated, three strands of relevant literature exist:

  • the international business approach that is oriented toward the rationale of individual firms,
  • the macroeconomic approach that focuses on aggregate flows of FDI without making a distinction between direct and portfolio investments,
  • and the international trade theory approach, which increasingly moves closer to the international business approach, combining firm-level FDI analysis with aggregate analysis of capital flows.

 

 

From UNCTAD World Investment Report 2017

FDI2

 

 

Key Sources of Research:

 

2017 AT Kearney FDI Confidence Index

http://www.iberglobal.com/files/2017/fdi_index_atkearney.pdf

 

UNCTAD World Investment Report 2017

http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf

 

 

Recent Developments in Trade and Investment

Pierre Sauvé
Trade and Competitiveness Global Practice
World Bank Group
MIKTA Workshop on Trade and Investment
Session 2
Geneva, 20 March 2017

https://www.wto.org/english/forums_e/business_e/pierre_sauve_world_bank.pdf

 

 

OECD FDI Data

https://data.oecd.org/fdi/fdi-flows.htm

 

 

UNCTAD FDI Data

http://unctad.org/en/Pages/DIAE/FDI%20Statistics/Interactive-database.aspx

 

 

GLOBAL FDI FLOWS SLIP IN 2016, MODEST RECOVERY EXPECTED IN 2017

http://unctad.org/en/PublicationsLibrary/webdiaeia2017d1_en.pdf

 

 

Cross border mergers make India favoured FDI route: UNCTAD

June 2017

 

http://www.deccanchronicle.com/business/economy/080617/cross-border-mergers-make-india-favoured-fdi-route-unctad.html

 

 

Cross-border M&As push global FDI flows to $1.76 trillion

June 2016

http://economictimes.indiatimes.com/news/international/business/cross-border-mas-push-global-fdi-flows-to-1-76-trillion/articleshow/52860326.cms

 

 

OECD Bilateral FDI Data

http://stats.oecd.org/index.aspx?DataSetCode=FDI_FLOW_PARTNER

 

 

UNCTAD Bilateral FDI Data

http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx

 

 

World Bank FDI Database

https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD

 

 

FDI Markets

https://www.fdimarkets.com

 

 

FDI Reports

http://www.fdireports.com/home/index.cfm?CFID=16605395&CFTOKEN=534deb8f9bfff240-CA8D9CBD-9042-6C79-7D3F0DD68E9B6616&jsessionid=2030aa76f30310567d2372163935674e554c

 

 

Determinants of Foreign Direct Investment (FDI)

Yi Feng

Online Publication Date: Jun 2017

http://politics.oxfordre.com/view/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-559?print=pdf

Why are Macro-economic Growth Forecasts so wrong?

Why are Macro-economic Growth Forecasts so wrong?

 

There are several institutions which publish economic forecasts annually/quarterly.

  • IMF
  • OECD
  • EC

Central Banks of Nations also publish economic Forecasts.  For Example:

  • Federal Reserve Bank of USA
  • Bank of England
  • Bank of Canada
  • Riksbank of Sweden
  • European Central Bank

 

There are several surveys of professional forecasters which create consensus forecasts to improve the accuracy of forecasts.

  • US Fed Reserve Survey of Professional Forecasters
  • ECB Survey of Professional Forecasters
  • Consensus Forecasts by Consensus Forecasts
  • Federal Reserve Blue Book
  • Federal Reserve Livingston Survey
  • Blue Chip Economic Forecasts by Wolters Kluwers

 

International Forecasting organizations (Private and Government)

  • IMF, “World Economic Outlook”;
  • EC, “European Economic Forecast”;
  • OECD, “OECD Economic Outlook”;
  • Consensus Economics, “Consensus Forecasts”;
  • The Economist, “The Economist pool of forecasters”.

 

USA Private and Government Economic Forecasters

  • Fed Reserve Survey of Professional Forecasters
  • Blue Chip Economic Indicators ( Wolters Kluwer)
  • Green Book
  • Livingston Survey
  • CBO
  • FOMC
  • Office of Management and Budget (OMB)
  • Western Blue Chip Economic Forecast

 

From Swiss Re Report May 2017

imfforecast

From Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach

RMSE GDP

 

Surveys of Economic Forecasters:

list

 

USA Private Economic Forecasters

There are many private forecasters who also publish forecasts.  For Example:

  • The Conference Board
  • Wells Fargo Bank
  • Goldman Sachs
  • Citi Group
  • Haver Analytics
  • RSQE Forecasts at University of Michigan

 

See the lists below for almost all of professional forecasters.

private forecasters USA

 

From Blue Chip Economic Forecast:

bluechip2bluechip

From Social Learning, Strategic Incentives and Collective Wisdom: An Analysis of the Blue Chip Forecasting Group

forecastersforecasters2

 

There is also in UK:

  • NIESR ( National Institute of Economic and Social Research)

 

From time to time many of these organizations review quality of their forecasts.  Results of these studies are published in papers many of which are listed in references below.

After the global financial Crisis of 2008-2009, many institutions have taken another look at their models used for forecasting economic variables.

See recent papers by

  • Bank of Canada
  • IMF
  • OECD
  • Fed Reserve
  • Bank of England
  • Riksbank of Sweden
  • US CBO
  • Bank of Portugal
  • European Commission

 

From Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach

Since late 2007, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve has regularly published assessments of the uncertainty associated with the projections of key macroeconomic variables made by individual Committee participants.1 These assessments, which are reported in the Summary of Economic Projections (SEP) that accompanies the FOMC minutes once a quarter, provide two types of information about forecast uncertainty. The first is qualitative in nature and summarizes the answers of participants to two questions: Is the uncertainty associated with his or her own projections of real activity and inflation higher, lower or about the same as the historical average? And are the risks to his or her own projections weighted to the upside, broadly balanced, or weighted to the downside? The second type of information is quantitative and provides the historical basis for answering the first qualitative question. Specifically, the SEP reports the root mean squared errors (RMSEs) of real-time forecasts over the past 20 years made by a group of leading private and public sector forecasters.

 

Some have blamed the entire economics profession.  Several attempts are being made to improve economic analysis.  Examples include work being done at

  • INET ( Institute for New Economic Thinking)
  • NAEC  at OECD

Heterodox schools of economics are making claims to accuracy of their approach after failure of main stream orthodox New Classical economics in predicting the Global Financial Crisis.

I will create another post later for some of these issues.

  • GDP forecasts errors have been attributed to errors in GDP components of business investments and exports.
  • Variability of GDP forecasts from short term to long term
  • Variability of GDP forecasts between forecasters – private and governments

 

Key Sources of Research:

 

The Case of Serial Disappointment

Justin‐Damien Guénette, Nicholas Labelle St‐Pierre, Martin Leduc and
Lori Rennison

Bank of Canada Staff Analytical Note 2016-10
July 2016

The Case of Serial Disappointment

 

ToTEM: The Bank of Canada’s New Quarterly Projection Model

Stephen Murchison and Andrew Rennison

Research Department
Bank of Canada

2006

ToTEM: The Bank of Canada’s New Quarterly Projection Model

 

 

ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model

José Dorich, Michael Johnston, Rhys Mendes, Stephen Murchison and Yang Zhang

Canadian Economic Analysis Department
Bank of Canada

2013

ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model

 

 

Introducing the Bank of Canada’s Projection Model for the Global Economy

Jeannine Bailliu, Patrick Blagrave, and James Rossiter

International Economic Analysis Department
Bank of Canada

2010

Introducing the Bank of Canada’s Projection Model for the Global Economy

Introducing the Bank of Canada’s Projection Model for the Global Economy

 

 

BoC-GEM: Modelling the World Economy

René Lalonde, International Economic Analysis Department

Dirk Muir, International Monetary Fund

BANK OF CANADA REVIEW SUMMER 2009

BoC-GEM: Modelling the World Economy

 

 

MUSE: The Bank of Canada’s New Projection Model of the U.S. Economy

Marc-André Gosselin and René Lalonde
International Department
Bank of Canada

2005

MUSE: The Bank of Canada’s New Projection Model of the U.S. Economy

 

 

OECD FORECASTS DURING AND AFTER THE FINANCIAL CRISIS: A POST MORTEM

OECD Economics Department
Policy Note no. 23
February 2014

OECD FORECASTS DURING AND AFTER THE FINANCIAL CRISIS: A POST MORTEM

 

 

THE USE OF MODELS IN PRODUCING OECD MACROECONOMIC FORECASTS

OECD ECONOMICS DEPARTMENT WORKING PAPERS NO. 1336
By David Turner

2016

THE USE OF MODELS IN PRODUCING OECD MACROECONOMIC FORECASTS

 

 

Lessons from OECD forecasts during and after the financial crisis

Christine Lewis and Nigel Pain

OECD Journal: Economic Studies
Volume 2014

Lessons from OECD forecasts during and after the financial crisis

 

 

How accurate are OECD forecasts?

12 February 2014
by Brian Keeley

 

Home Glossary About Contact Disclaimer How accurate are OECD forecasts?

 

 

Debate the Issues: Complexity and Policy making

OECD

Edited By:Patrick Love, Julia Stockdale-Otárola

06 June 2017

Debate the Issues: Complexity and Policy making

 

 

We need an empowering narrative

OECD Insights
23 June 2017
Gabriela Ramos

 

 

Final NAEC Synthesis : New Approaches to Economic Challenges

OECD

2015

Final NAEC Synthesis New Approaches to Economic Challenges

 

Debate the Issues: New Approaches to Economic Challenges

OECD

2016

Debate the Issues: New Approaches to Economic Challenges

 

OECD Forecasts During and After the Financial Crisis

A Post Mortem

Nigel Pain, Christine Lewis, Thai-Thanh Dang, Yosuke Jin, Pete Richardson

17 Mar 2014

OECD Forecasts During and After the Financial Crisis A Post Mortem

 

 Outlook for the Budget and the Economy

CBO USA

Outlook for the Budget and the Economy

 

CBO’s Economic Forecasting Record: 2015 Update

US CBO

CBO’s Economic Forecasting Record: 2015 Update

 

“Gauging the Uncertainty of the Economic
Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach,”

Finance and Economics Discussion Series 2017-020.

Washington: Board of Governors of the Federal Reserve System

“Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach

 

 The FRB/US Model: A Tool for Macroeconomic Policy Analysis

lint Brayton, Thomas Laubach, and David Reifschneider

2014

The FRB/US Model: A Tool for Macroeconomic Policy Analysis

 

 

 Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors

David Reifschneider and Peter Tulip

federal Reserve

2007-60

Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors

 

The IMF/WEO Forecast Process

Hans Genberg, Andrew Martinez, and Michael Salemi

IMF

2014

The IMF/WEO Forecast Process

 

 

On the Accuracy and Efficiency of IMF Forecasts: A Survey and Some Extensions

Hans Genberg and Andrew Martinez

IMF

2014

On the Accuracy and Efficiency of IMF Forecasts: A Survey and Some Extensions

 

 

An Evaluation of Commissioned Studies : Assessing the Accuracy of IMF Forecasts

Prepared by Charles Freedman
February 12, 2014

IMF

An Evaluation of Commissioned Studies : Assessing the Accuracy of IMF Forecasts

 

 

An Assessment of IMF Medium-Term Forecasts of GDP Growth

Carlos de Resende

2014

IMF

An Assessment of IMF Medium-Term Forecasts of GDP Growth

 

 

THE POLITICS OF IMF FORECASTS

AXEL DREHER
SILVIA MARCHESI
JAMES RAYMOND VREELAND

CESIFO WORKING PAPER NO. 2129

OCTOBER 2007

THE POLITICS OF IMF FORECASTS

 

 

Macroeconomic Forecasting: A Survey

K Wallis

1989

Macroeconomic Forecasting: A Survey

 

 

INTERNATIONAL ORGANISATIONS’ VS. PRIVATE ANALYSTS’ FORECASTS:

AN EVALUATION

Ildeberta Abreu

Banco de Portugal
July 2011

International organisations’ vs. private analysts’ forecasts: an evaluation

Click to access ab201105_e.pdf

 

 

On Macroeconomic Forecasting

Simon Wren-Lewis

2014

On Macroeconomic Forecasting

 

Why central banks use models to forecast

Simon Wren-Lewis

2014

Why central banks use models to forecast

USA Survey of Economic Professional Forecasters

ECB Survey of Economic Professional Forecasters

 

Trading Economics

 

Oxford Economics

 

Consensus Economics

IHS Markit

 

Evaluating forecast performance

Bank of England

Independent Evaluation Office | November 2015

Evaluating forecast performance

 

 

 Does the FederaL Reserve Staff Still beat Private Forecasters?

Makram El-Shagi, Sebastian Giesen and Alexander Jung

2014

 

DoeS THe FeDeraL reSerVe STaFF STiLL beaT PriVaTe ForeCaSTerS?

 

 

Modern Forecasting Models in Action: Improving Macroeconomic Analyses at
Central Banks

Malin Adolfson, Michael K. Andersson, Jesper Lind´e,
Mattias Villani, and Anders Vredina

Sveriges Riksbank
CEPR
Stockholm University

Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks

 

 

Updated Historical Forecast Errors (4/9/2014)

Federal Reserve

Updated Historical Forecast Errors (4/9/2014)

 

 

How good is the forecasting performance of major institutions?

Riksbank of Sweden

Monetary Policy Department.

How good is the forecasting performance of major institutions?

 

 

Best Economic Forecaster Awards

Focus Economics

Best Economic Forecaster Awards

 

Has Output Become More Predictable? Changes in Greenbook Forecast Accuracy

Federal Reserve

Has Output Become More Predictable? Changes in Greenbook Forecast Accuracy

 

Green Book

Federal Reserve Bank of Philadelphia

Green Book

 

US Federal Reserve Livingston Survey

Federal Reserve Bank of Philadelphia

Livingston Survey

 

 

The IMF and OECD versus Consensus Forecasts

by
Roy Batchelor
City University Business School, London
August 2000

The IMF and OECD versus Consensus Forecasts

 

 

CBO’s January 2017 Budget and Economic Outlook

CRFB

CBO’s January 2017 Budget and Economic Outlook

 

 

Growth Forecast Errors and Fiscal Multipliers

Prepared by Olivier Blanchard and Daniel Leigh

January 2013

IMF

http://www.nber.org/papers/w18779

Central Bank Macroeconomic Forecasting during the global Financial Crisis: the European Central Bank and Federal Reserve Bank of New York experiences

no 1688 / july 2014

 

 

Economic Forecasting and its Role in Making Monetary Policy

RB Australia

1999

 

https://www.rba.gov.au/publications/bulletin/1999/sep/pdf/bu-0999-1.pdf

 

Are Forecasting Models Usable for Policy Analysis?

1986

Chris Sims

Minneapolis Federal Reserve

 

https://www.minneapolisfed.org/research/QR/QR1011.pdf

 

Persistent Overoptimism about Economic Growth

BY KEVIN J. LANSING AND BENJAMIN PYLE

2015

 

http://www.frbsf.org/economic-research/files/el2015-03.pdf

 

 

Federal Reserve economic projections: What are they good for?

Ben S. Bernanke

Monday, November 28, 2016

https://www.brookings.edu/blog/ben-bernanke/2016/11/28/federal-reserve-economic-projections/

 

Reassessing Longer-Run U.S. Growth: How Low?

John G. Fernald
Federal Reserve Bank of San Francisco

August 2016

 

http://www.frbsf.org/economic-research/files/wp2016-18.pdf

 

 

Recent declines in the Fed’s longer-run economic projections

by Jonas D. M. Fisher,

Christopher Russo,

2017

https://www.chicagofed.org/publications/chicago-fed-letter/2017/375

 

 

“How Accurate Are Private Sector Forecasts? Cross-Country Evidence from Consensus Forecasts of Output Growth.”

Prakash Loungani

2000

IMF

https://www.imf.org/external/pubs/ft/wp/2000/wp0077.pdf

 

The Failure to Forecast the Great Recession

Simon Potter

 

Liberty Street Economics / New York Federal Reserve Bank

http://libertystreeteconomics.newyorkfed.org/2011/11/the-failure-to-forecast-the-great-recession.html

 

 

Social Learning, Strategic Incentives and Collective Wisdom: An Analysis of the Blue Chip Forecasting Group

J. Peter Ferderer Department of Economics Macalester College
St. Paul, MN 55105 ferderer@macalester.edu

Adam Freedman Chicago, IL 60601 freedman.adamj@gmail.com

July 22, 2015

 

http://muse.union.edu/lamacroworkshop2015/files/2015/01/34-Ferderer-Blue-Chip-Collective-Wisdom.pdf

 

 

CBO’s Economic Forecasting Record 2013 Update

 

https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/43846-ForecastingRecord.pdf

 

CBO’s Economic Forecasting Record 2015 Update

https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/49891-Forecasting_Record_2015.pdf

 

CBO Recurring reports

https://www.cbo.gov/about/products/major-recurring-reports#7

 

European Commission’s Forecasts Accuracy Revisited: Statistical Properties and Possible Causes of Forecast Errors

Marco Fioramanti, Laura González Cabanillas, Bjorn Roelstraete and Salvador Adrian Ferrandis Vallterra

2016

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2753854

 

 

Western Blue Chip Economic Forecast

Arizona State University

JPMorgan Chase Economic Outlook Center

https://research.wpcarey.asu.edu/economic-outlook/western-blue-chip/state-forecasts-archive-download?type=pdf&year=2017&month=08&state=Summary

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Monetary Policy Effectiveness

 

World economy is stuck in low interest rates environment.   Euro area, japan have even negative interest rates.  US Fed Reserve since December 2016 has started raising interest rates.

Attempts by Central Banks have not been effective in increasing economic growth.  Many Economists now are presenting counter intuitive reasons for low growth.

 

Please see my earlier related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

Since 2016, there are several new studies published exploring effectiveness of monetary policy in low interest rates environment.

 

Is monetary policy less effective when interest rates are persistently low?

by Claudio Borio and Boris Hofmann

April 2017

Is Monetary Policy Less Effective When Interest Rates are Persistently Low?

 

In March 2017, Brookings Institution published the following study by the economists of the US Federal Reserve.

Monetary policy in a low interest rate world

 

Fed Reserve of Chicago published speech given by Charles Evans in 2016.

Monetary Policy in a Lower Interest Rate Environment

 

Lecture by Vítor Constâncio, Vice-President of the ECB, Macroeconomics Symposium at Utrecht School of Economics, 15 June 2016

The challenge of low real interest rates for monetary policy

 

Journal of Policy Modeling published a paper by Ken Rogoff.  Paper was presented at American Economic Association, 2017.

Monetary policy in a low interest rate world

 

Eight BIS CCA Research Conference on “Low interest rates, monetary policy and international spillovers”, hosted by the Board of Governors of the Federal Reserve System, Washington DC, 25-26 May 2017

Low interest rates, monetary policy and international spillovers

 

Economist Magazine published an article on views of Bill Gross and others.

November 2015

Do ultra-low interest rates really damage growth?

 

Bloomberg Business Week published an article describing views of Charles Calomiris and others.

June 2017

Is the World Overdoing Low Interest Rates?

 

Claudio Borio and Boris Hofmann

The Paper was prepared for the Reserve Bank of Australia conference
“Monetary Policy and Financial Stability in a World of Low Interest Rates”,

16-17 March 2017, Sydney

Is monetary policy less effective when interest rates are persistently low?

 

Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

Claudio Borio and Leonardo Gambacorta

February 2017

Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

 

Negative Interest Rate Policy (NIRP):
Implications for Monetary Transmission and Bank Profitability in the Euro Area

Prepared by Andreas (Andy) Jobst and Huidan Lin

IMF

August 2016

Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area

 

James Bullard, President and CEO of Federal Reserve Bank of St. Louis

March 24, 2009

The Henry Thornton Lecture, Cass Business School, London

Effective Monetary Policy in a Low Interest Rate Environment

 

Federal Reserve Bank of New York

Monetary Policy, Financial Conditions, and Financial Stability

Tobias Adrian
Nellie Liang

Monetary Policy, Financial Conditions, and Financial Stability

 

Monetary policy, the financial cycle and ultra-low interest rates

Mikael Juselius of Bank of Finland

DNB Workshop on “Estimating and Interpreting Financial Cycles”

Amsterdam, 2 September 2016

Monetary policy, the financial cycle and ultra-low interest rates

BIS Paper

Monetary policy, the financial cycle and ultra-low interest rates

 

The dynamics of real interest rates, monetary policy and its limits

Philippe d’Arvisenet

May 2016

The dynamics of real interest rates, monetary policy and its limits

 

Output Gaps and Monetary Policy at Low Interest Rates

By Roberto M. Billi

Output Gaps and Monetary Policy at Low Interest Rates

 

The insensitivity of investment to interest rates: Evidence from a survey of CFOs

Steve A. Sharpe and Gustavo A. Suarez

2014-02

The insensitivity of investment to interest rates: Evidence from a survey of CFOs

 

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Prepared by Stephen Cecchetti, Tommaso Mancini-Griffoli, and Machiko Narita

February 2017

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

 

The Microeconomic Perils of Monetary Policy Experiments

Charles W. Calomiris

Cato Institute

The Microeconomic Perils of Monetary Policy Experiments

 

Why Have the Fed’s Policies Failed to Stimulate the Economy?

Mickey D. Levy

Cato Institute

Why Have the Fed’s Policies Failed to Stimulate the Economy?

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Short term Thinking in Investment Decisions of Businesses and Financial Markets

 

When companies buyback shares and pay dividends rather than investing in new capacity, it leads to low economic growth and low aggregate demand.

Central Banks respond by cutting interest rates.  Yet Businesses do not invest in new capacity.

Many studies attribute this to short term thinking dominant in corporate investment decisions.  Pressures from shareholders push corporate managers to be short term oriented.

Many economists and thinkers have criticized this recently as advanced economies are suffering from anemic growth.

Larry Summers has invoked Secular Stagnation.  He says one of the reason for Secular Stagnation is short term thinking.

Andy Haldane of Bank of England has criticized short term thinking as it prevents investments and causes low economic growth.

Key Terms:

  • Quarterly Capitalism
  • Secular Stagnation
  • Short Term Thinking
  • Low Economic Growth
  • Business Investments
  • Real Interest Rates
  • Monetary Policy
  • Income and Wealth Inequality
  • Aggregate Demand
  • Productive Capacity
  • Productivity growth
  • Long Term Investments
  • Share Buybacks
  • Dividends
  • Corporate Cash Pools

 

Capitalism for the Long Term

The near meltdown of the financial system and the ensuing Great Recession have been, and will remain, the defining issue for the current generation of executives. Now that the worst seems to be behind us, it’s tempting to feel deep relief—and a strong desire to return to the comfort of business as usual. But that is simply not an option. In the past three years we’ve already seen a dramatic acceleration in the shifting balance of power between the developed West and the emerging East, a rise in populist politics and social stresses in a number of countries, and significant strains on global governance systems. As the fallout from the crisis continues, we’re likely to see increased geopolitical rivalries, new international security challenges, and rising tensions from trade, migration, and resource competition. For business leaders, however, the most consequential outcome of the crisis is the challenge to capitalism itself.

That challenge did not just arise in the wake of the Great Recession. Recall that trust in business hit historically low levels more than a decade ago. But the crisis and the surge in public antagonism it unleashed have exacerbated the friction between business and society. On top of anxiety about persistent problems such as rising income inequality, we now confront understandable anger over high unemployment, spiraling budget deficits, and a host of other issues. Governments feel pressure to reach ever deeper inside businesses to exert control and prevent another system-shattering event.

My goal here is not to offer yet another assessment of the actions policymakers have taken or will take as they try to help restart global growth. The audience I want to engage is my fellow business leaders. After all, much of what went awry before and after the crisis stemmed from failures of governance, decision making, and leadership within companies. These are failures we can and should address ourselves.

In an ongoing effort that started 18 months ago, I’ve met with more than 400 business and government leaders across the globe. Those conversations have reinforced my strong sense that, despite a certain amount of frustration on each side, the two groups share the belief that capitalism has been and can continue to be the greatest engine of prosperity ever devised—and that we will need it to be at the top of its job-creating, wealth-generating game in the years to come. At the same time, there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results.

Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of “long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at least five to seven years.) This shift is not just about persistently thinking and acting with a next-generation view—although that’s a key part of it. It’s about rewiring the fundamental ways we govern, manage, and lead corporations. It’s also about changing how we view business’s value and its role in society.

There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.

When making major decisions, Asians typically think in terms of at least 10 to 15 years. In the U.S. and Europe, nearsightedness is the norm.

None of these ideas, or the specific proposals that follow, are new. What is new is the urgency of the challenge. Business leaders today face a choice: We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public. The good news is that the reforms will not only increase trust in the system; they will also strengthen the system itself. They will unleash the innovation needed to tackle the world’s grand challenges, pave the way for a new era of shared prosperity, and restore public faith in business.

1. Fight the Tyranny of Short-Termism

As a Canadian who for 25 years has counseled business, public sector, and nonprofit leaders across the globe (I’ve lived in Toronto, Sydney, Seoul, Shanghai, and now London), I’ve had a privileged glimpse into different societies’ values and how leaders in various cultures think. In my view, the most striking difference between East and West is the time frame leaders consider when making major decisions. Asians typically think in terms of at least 10 to 15 years. For example, in my discussions with the South Korean president Lee Myung-bak shortly after his election in 2008, he asked us to help come up with a 60-year view of his country’s future (though we settled for producing a study called National Vision 2020.) In the U.S. and Europe, nearsightedness is the norm. I believe that having a long-term perspective is the competitive advantage of many Asian economies and businesses today.

Myopia plagues Western institutions in every sector. In business, the mania over quarterly earnings consumes extraordinary amounts of senior time and attention. Average CEO tenure has dropped from 10 to six years since 1995, even as the complexity and scale of firms have grown. In politics, democracies lurch from election to election, with candidates proffering dubious short-term panaceas while letting long-term woes in areas such as economic competitiveness, health, and education fester. Even philanthropy often exhibits a fetish for the short term and the new, with grantees expected to become self-sustaining in just a few years.

Lost in the frenzy is the notion that long-term thinking is essential for long-term success. Consider Toyota, whose journey to world-class manufacturing excellence was years in the making. Throughout the 1950s and 1960s it endured low to nonexistent sales in the U.S.—and it even stopped exporting altogether for one bleak four-year period—before finally emerging in the following decades as a global leader. Think of Hyundai, which experienced quality problems in the late 1990s but made a comeback by reengineering its cars for long-term value—a strategy exemplified by its unprecedented introduction, in 1999, of a 10-year car warranty. That radical move, viewed by some observers as a formula for disaster, helped Hyundai quadruple U.S. sales in three years and paved the way for its surprising entry into the luxury market.

To be sure, long-term perspectives can be found in the West as well. For example, in 1985, in the face of fierce Japanese competition, Intel famously decided to abandon its core business, memory chips, and focus on the then-emerging business of microprocessors. This “wrenching” decision was “nearly inconceivable” at the time, says Andy Grove, who was then the company’s president. Yet by making it, Intel emerged in a few years on top of a new multi-billion-dollar industry. Apple represents another case in point. The iPod, released in 2001, sold just 400,000 units in its first year, during which Apple’s share price fell by roughly 25%. But the board took the long view. By late 2009 the company had sold 220 million iPods—and revolutionized the music business.

It’s fair to say, however, that such stories are countercultural. In the 1970s the average holding period for U.S. equities was about seven years; now it’s more like seven months. According to a recent paper by Andrew Haldane, of the Bank of England, such churning has made markets far more volatile and produced yawning gaps between corporations’ market price and their actual value. Then there are the “hyperspeed” traders (some of whom hold stocks for only a few seconds), who now account for 70% of all U.S. equities trading, by one estimate. In response to these trends, executives must do a better job of filtering input, and should give more weight to the views of investors with a longer-term, buy-and-hold orientation.

If they don’t, short-term capital will beget short-term management through a natural chain of incentives and influence. If CEOs miss their quarterly earnings targets, some big investors agitate for their removal. As a result, CEOs and their top teams work overtime to meet those targets. The unintended upshot is that they manage for only a small portion of their firm’s value. When McKinsey’s finance experts deconstruct the value expectations embedded in share prices, we typically find that 70% to 90% of a company’s value is related to cash flows expected three or more years out. If the vast majority of most firms’ value depends on results more than three years from now, but management is preoccupied with what’s reportable three months from now, then capitalism has a problem.

Roughly 70% of all U.S. equities trading is now done by “hyperspeed” traders—some of whom hold stocks for only a few seconds.

Some rightly resist playing this game. Unilever, Coca-Cola, and Ford, to name just a few, have stopped issuing earnings guidance altogether. Google never did. IBM has created five-year road maps to encourage investors to focus more on whether it will reach its long-term earnings targets than on whether it exceeds or misses this quarter’s target by a few pennies. “I can easily make my numbers by cutting SG&A or R&D, but then we wouldn’t get the innovations we need,” IBM’s CEO, Sam Palmisano, told us recently. Mark Wiseman, executive vice president at the Canada Pension Plan Investment Board, advocates investing “for the next quarter century,” not the next quarter. And Warren Buffett has quipped that his ideal holding period is “forever.” Still, these remain admirable exceptions.

To break free of the tyranny of short-termism, we must start with those who provide capital. Taken together, pension funds, insurance companies, mutual funds, and sovereign wealth funds hold $65 trillion, or roughly 35% of the world’s financial assets. If these players focus too much attention on the short term, capitalism as a whole will, too.

In theory they shouldn’t, because the beneficiaries of these funds have an obvious interest in long-term value creation. But although today’s standard practices arose from the desire to have a defensible, measurable approach to portfolio management, they have ended up encouraging shortsightedness. Fund trustees, often advised by investment consultants, assess their money managers’ performance relative to benchmark indices and offer only short-term contracts. Those managers’ compensation is linked to the amount of assets they manage, which typically rises when short-term performance is strong. Not surprisingly, then, money managers focus on such performance—and pass this emphasis along to the companies in which they invest. And so it goes, on down the line.

Only 45% of those surveyed in the U.S. and the UK expressed trust in business. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil.

As the stewardship advocate Simon Wong points out, under the current system pension funds deem an asset manager who returns 10% to have underperformed if the relevant benchmark index rises by 12%. Would it be unthinkable for institutional investors instead to live with absolute gains on the (perfectly healthy) order of 10%—especially if they like the approach that delivered those gains—and review performance every three or five years, instead of dropping the 10-percenter? Might these big funds set targets for the number of holdings and rates of turnover, at least within the “fundamental investing” portion of their portfolios, and more aggressively monitor those targets? More radically, might they end the practice of holding thousands of stocks and achieve the benefits of diversification with fewer than a hundred—thereby increasing their capacity to effectively engage with the businesses they own and improve long-term performance? Finally, could institutional investors beef up their internal skills and staff to better execute such an agenda? These are the kinds of questions we need to address if we want to align capital’s interests more closely with capitalism’s.

2. Serve Stakeholders, Enrich Shareholders

The second imperative for renewing capitalism is disseminating the idea that serving stakeholders is essential to maximizing corporate value. Too often these aims are presented as being in tension: You’re either a champion of shareholder value or you’re a fan of the stakeholders. This is a false choice.

The inspiration for shareholder-value maximization, an idea that took hold in the 1970s and 1980s, was reasonable: Without some overarching financial goal with which to guide and gauge a firm’s performance, critics feared, managers could divert corporate resources to serve their own interests rather than the owners’. In fact, in the absence of concrete targets, management might become an exercise in politics and stakeholder engagement an excuse for inefficiency. Although this thinking was quickly caricatured in popular culture as the doctrine of “greed is good,” and was further tarnished by some companies’ destructive practices in its name, in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of value maximization have always insisted that it is long-term value that has to be maximized.

Capitalism’s founding philosopher voiced an even bolder aspiration. “All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries,” Adam Smith wrote in his 1759 work, The Theory of Moral Sentiments. “The wise and virtuous man,” he added, “is at all times willing that his own private interest should be sacrificed to the public interest,” should circumstances so demand.

Smith’s insight into the profound interdependence between business and society, and how that interdependence relates to long-term value creation, still reverberates. In 2008 and again in 2010, McKinsey surveyed nearly 2,000 executives and investors; more than 75% said that environmental, social, and governance (ESG) initiatives create corporate value in the long term. Companies that bring a real stakeholder perspective into corporate strategy can generate tangible value even sooner. (See the sidebar “Who’s Getting It Right?”)

Creating direct business value, however, is not the only or even the strongest argument for taking a societal perspective. Capitalism depends on public trust for its legitimacy and its very survival. According to the Edelman public relations agency’s just-released 2011 Trust Barometer, trust in business in the U.S. and the UK (although up from mid-crisis record lows) is only in the vicinity of 45%. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil. The picture is equally bleak for individual corporations in the Anglo-American world, “which saw their trust rankings drop again last year to near-crisis lows,” says Richard Edelman.

How can business leaders restore the public’s trust? Many Western executives find that nothing in their careers has prepared them for this new challenge. Lee Scott, Walmart’s former CEO, has been refreshingly candid about arriving in the top job with a serious blind spot. He was plenty busy minding the store, he says, and had little feel for the need to engage as a statesman with groups that expected something more from the world’s largest company. Fortunately, Scott was a fast learner, and Walmart has become a leader in environmental and health care issues.

Tomorrow’s CEOs will have to be, in Joseph Nye’s apt phrase, “tri-sector athletes”: able and experienced in business, government, and the social sector. But the pervading mind-set gets in the way of building those leadership and management muscles. “Analysts and investors are focused on the short term,” one executive told me recently. “They believe social initiatives don’t create value in the near term.” In other words, although a large majority of executives believe that social initiatives create value in the long term, they don’t act on this belief, out of fear that financial markets might frown. Getting capital more aligned with capitalism should help businesses enrich shareholders by better serving stakeholders.

3. Act Like You Own the Place

As the financial sector’s troubles vividly exposed, when ownership is broadly fragmented, no one acts like he’s in charge. Boards, as they currently operate, don’t begin to serve as a sufficient proxy. All the Devils Are Here, by Bethany McLean and Joe Nocera, describes how little awareness Merrill Lynch’s board had of the firm’s soaring exposure to subprime mortgage instruments until it was too late. “I actually don’t think risk management failed,” Larry Fink, the CEO of the investment firm BlackRock, said during a 2009 debate about the future of capitalism, sponsored by the Financial Times. “I think corporate governance failed, because…the boards didn’t ask the right questions.”

What McKinsey has learned from studying successful family-owned companies suggests a way forward: The most effective ownership structure tends to combine some exposure in the public markets (for the discipline and capital access that exposure helps provide) with a significant, committed, long-term owner. Most large public companies, however, have extremely dispersed ownership, and boards rarely perform the single-owner-proxy role. As a result, CEOs too often listen to the investors (and members of the media) who make the most noise. Unfortunately, those parties tend to be the most nearsighted ones. And so the tyranny of the short term is reinforced.

The answer is to renew corporate governance by rooting it in committed owners and by giving those owners effective mechanisms with which to influence management. We call this ownership-based governance, and it requires three things:

Just 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles.

More-effective boards.

In the absence of a dominant shareholder (and many times when there is one), the board must represent a firm’s owners and serve as the agent of long-term value creation. Even among family firms, the executives of the top-performing companies wield their influence through the board. But only 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles. A government-commissioned review of the governance of British banks last year recommended an enormous increase in the time required of nonexecutive directors of banks—from the current average, between 12 and 20 days annually, to between 30 and 36 days annually. What’s especially needed is an increase in the informal time board members spend with investors and executives. The nonexecutive board directors of companies owned by private equity firms spend 54 days a year, on average, attending to the company’s business, and 70% of that time consists of informal meetings and conversations. Four to five days a month obviously give a board member much greater understanding and impact than the three days a quarter (of which two may be spent in transit) devoted by the typical board member of a public company.

Boards also need much more relevant experience. Industry knowledge—which four of five nonexecutive directors of big companies lack—helps boards identify immediate opportunities and reduce risk. Contextual knowledge about the development path of an industry—for example, whether the industry is facing consolidation, disruption from new technologies, or increased regulation—is highly valuable, too. Such insight is often obtained from experience with other industries that have undergone a similar evolution.

In addition, boards need more-effective committee structures—obtainable through, for example, the establishment of a strategy committee or of dedicated committees for large business units. Directors also need the resources to allow them to form independent views on strategy, risk, and performance (perhaps by having a small analytical staff that reports only to them). This agenda implies a certain professionalization of nonexecutive directorships and a more meaningful strategic partnership between boards and top management. It may not please some executive teams accustomed to boards they can easily “manage.” But given the failures of governance to date, it is a necessary change.

More-sensible CEO pay.

An important task of governance is setting executive compensation. Although 70% of board directors say that pay should be tied more closely to performance, CEO pay is too often structured to reward a leader simply for having made it to the top, not for what he or she does once there. Meanwhile, polls show that the disconnect between pay and performance is contributing to the decline in public esteem for business.

Companies should create real risk for executives.Some experts privately suggest mandating that new executives invest a year’s salary in the company.

CEOs and other executives should be paid to act like owners. Once upon a time we thought that stock options would achieve this result, but stock-option- based compensation schemes have largely incentivized the wrong behavior. When short-dated, options lead to a focus on meeting quarterly earnings estimates; even when long-dated (those that vest after three years or more), they can reward managers for simply surfing industry- or economy-wide trends (although reviewing performance against an appropriate peer index can help minimize free rides). Moreover, few compensation schemes carry consequences for failure—something that became clear during the financial crisis, when many of the leaders of failed institutions retired as wealthy people.

There will never be a one-size-fits-all solution to this complex issue, but companies should push for change in three key areas:

• They should link compensation to the fundamental drivers of long-term value, such as innovation and efficiency, not just to share price.

• They should extend the time frame for executive evaluations—for example, using rolling three-year performance evaluations, or requiring five-year plans and tracking performance relative to plan. This would, of course, require an effective board that is engaged in strategy formation.

• They should create real downside risk for executives, perhaps by requiring them to put some skin in the game. Some experts we’ve surveyed have privately suggested mandating that new executives invest a year’s salary in the company.

Redefined shareholder “democracy.”

The huge increase in equity churn in recent decades has spawned an anomaly of governance: At any annual meeting, a large number of those voting may soon no longer be shareholders. The advent of high-frequency trading will only worsen this trend. High churn rates, short holding periods, and vote-buying practices may mean the demise of the “one share, one vote” principle of governance, at least in some circumstances. Indeed, many large, top-performing companies, such as Google, have never adhered to it. Maybe it’s time for new rules that would give greater weight to long-term owners, like the rule in some French companies that gives two votes to shares held longer than a year. Or maybe it would make sense to assign voting rights based on the average turnover of an investor’s portfolio. If we want capitalism to focus on the long term, updating our notions of shareholder democracy in such ways will soon seem less like heresy and more like common sense.

While I remain convinced that capitalism is the economic system best suited to advancing the human condition, I’m equally persuaded that it must be renewed, both to deal with the stresses and volatility ahead and to restore business’s standing as a force for good, worthy of the public’s trust. The deficiencies of the quarterly capitalism of the past few decades were not deficiencies in capitalism itself—just in that particular variant. By rebuilding capitalism for the long term, we can make it stronger, more resilient, more equitable, and better able to deliver the sustainable growth the world needs. The three imperatives outlined above can be a start along this path and, I hope, a way to launch the conversation; others will have their own ideas to add.

The kind of deep-seated, systemic changes I’m calling for can be achieved only if boards, business executives, and investors around the world take responsibility for bettering the system they lead. Such changes will not be easy; they are bound to encounter resistance, and business leaders today have more than enough to do just to keep their companies running well. We must make the effort regardless. If capitalism emerges from the crisis vibrant and renewed, future generations will thank us. But if we merely paper over the cracks and return to our precrisis views, we will not want to read what the historians of the future will write. The time to reflect—and to act—is now.

 

Please see my other related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

 

Key sources of Research:

Secular stagnation and low investment: Breaking the vicious cycle—a discussion paper

McKinsey

http://www.mckinsey.com/global-themes/europe/secular-stagnation-and-low-investment-breaking-the-vicious-cycle

Case Still Out on Whether Corporate Short-Termism Is a Problem

Larry Summers

http://larrysummers.com/2017/02/09/case-still-out-on-whether-corporate-short-termism-is-a-problem/

Where companies with a long-term view outperform their peers

McKinsey

http://www.mckinsey.com/global-themes/long-term-capitalism/where-companies-with-a-long-term-view-outperform-their-peers

How short-term thinking hampers long-term economic growth

FT

https://www.ft.com/content/8c868a98-b821-11e4-b6a5-00144feab7de

Anthony Hilton: Short-term thinking hits nations as a whole, not just big business

http://www.standard.co.uk/comment/comment/anthony-hilton-short-term-thinking-hits-nations-as-a-whole-not-just-big-business-10427294.html

Short-termism in business: causes, mechanisms and consequences

EY Poland Report

Click to access Short-termism_raport_EY.pdf

Overcoming the Barriers to Long-term Thinking in Financial Markets

Ruth Curran and Alice Chapple
Forum for the Future

Click to access long-term-thinking-fpf-report-july-11.pdf

Understanding Short-Termism: Questions and Consequences

Click to access Understanding-Short-Termism.pdf

Ending Short-Termism : An Investment Agenda for Growth

Click to access Ending-Short-Termism.pdf

The Short Long

Speech by
Andrew G Haldane, Executive Director, Financial Stability, and Richard Davies

Brussels May 2011

Click to access speech495.pdf

Capitalism for the Long Term

Dominic Barton

From the March 2011 Issue

https://hbr.org/2011/03/capitalism-for-the-long-term

Quarterly capitalism: The pervasive effects of short-termism and austerity

https://currentlyunderdevelopment.wordpress.com/2016/05/10/quarterly-capitalism-the-pervasive-effects-of-short-termism-and-austerity/

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?

Click to access IsShortTermBehaviorJeopardizingTheFutureProsperityOfBusiness_CEOStrategicimplications.pdf

Andrew G Haldane: The short long

Speech by Mr Andrew Haldane, Executive Director, Financial Stability, and Mr Richard
Davies, Economist, Financial Institutions Division, Bank of England,
at the 29th Société
Universitaire Européene de Recherches Financières Colloquium,
Brussels, 11 May 2011

Click to access r110511e.pdf

THE UNEASY CASE FOR FAVORING LONG-TERM SHAREHOLDERS

Jesse M. Fried

https://dash.harvard.edu/bitstream/handle/1/17985223/Fried_795.pdf?sequence=1

The fringe economic theory that might get traction in the 2016 campaign

https://www.washingtonpost.com/news/wonk/wp/2015/03/02/the-fringe-economic-theory-that-might-get-traction-in-the-2016-campaign/?utm_term=.932bc0b97758

FCLT Global:  Focusing Capital on the Long Term

Publications

http://www.fcltglobal.org/insights/publications

Finally, Evidence That Managing for the Long Term Pays Off

Dominic Barton

James Manyika

Sarah Keohane Williamson

February 07, 2017 UPDATED February 09, 2017

https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off

Focusing Capital on the Long Term

Dominic Barton

Mark Wiseman

From the January–February 2014 Issue

Is Corporate Short-Termism Really a Problem? The Jury’s Still Out

Lawrence H. Summers

February 16, 2017

Yes, Short-Termism Really Is a Problem

Roger L. Martin

October 09, 2015

Long-Termism or Lemons

The Role of Public Policy in Promoting Long-Term Investments

By Marc Jarsulic, Brendan V. Duke, and Michael Madowitz October 2015

Center for American Progress

Click to access LongTermism-reportB.pdf

 

Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management

https://corpgov.law.harvard.edu/2009/09/11/overcoming-short-termism-a-call-for-a-more-responsible-approach-to-investment-and-business-management/

 

 

Focusing capital on the Long Term

Jean-Hugues Monier – Senior Parter – McKinsey & Company

Princeton University – November 2016

Click to access jean-hugues_j._monier_slides_final.pdf