So why, given the abundance of cheap capital asked a participant, aren’t businesses earmarking money to find and develop those game-changing innovations?
“Because of business professors like me,” he responded. “We teach students about internal rates of return which encourages quick payback investments.”
Without attempting to explain the arcane world of accounting, Christensen said the fact that the cost of capital is virtually zero the net present value of a future stream of growth in five years is identical to one that yields a return in one week.
Until accounting attitudes changed after the 1980s, the United States and Japan invested in disruptive innovations in technology and products and their economies grew like crazy. “Since we measure profitability the way I’ve described, their economies have flat-lined,” he said.
Empowering innovation takes time, five to eight years he estimated, and uses capital, and does not generate it. “What we taught them caused them not to invest in anything other than efficiency innovations. They are awash in capital and not innovating because we taught them to measure profitability that way.”
The prescription, said the professor, is to change the accounting metrics measuring business investments and to provide tax incentives to keep capital working for at least five years. There must be “soft” accounting too.
“We also need new measurements such as measuring the return on investments in people in order to get out of the situation we’re in,” he said.
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