"Who Solved the Capitalist’s Dilemma?" Capex and Market Creation ARE Correlated
From Asymco:
In The Capitalist’s Dilemma, Clayton
Christensen and Derek van Bever introduce a powerful new theory which
explains the relative paucity of growth in developed economies. They
draw a causal relationship between the mis-application of capital in
pursuit of innovation and the failure to grow.[]
In particular, they observe that capital is allocated toward the type
of innovations which increase efficiency or performance and not toward
those which create markets (and hence long term growth and jobs.) This
itself is caused by a prioritization and rewarding of performance ratios
rather than cash flows and that itself is due to a perversion of the
purpose of the firm.[]
For this statement of causality to be confirmed we need to observe
whether it predicts measurable phenomena. For instance, we need to see
whether companies which create markets apply capital toward
market-creating innovations and whether companies which create value
through efficiencies or performance improvements hoard abundant capital.
Over the entire global economy, the pattern of capital over-abundance is easy to see. The amount of cash or securities on balance sheets is extraordinary and unprecedented (estimated at $7 Trillion, doubling over a decade). However, growing cash is not a perfect indicator of inactivity. Cash is the by-product of earnings after
investment. So if operating profits are growing and investment is
growing, but not as fast, then it’s possible to grow cash while still
growing investment.
The better measure is investment in capital equipment or, more specifically, purchases of plant, property and equipment.[] Indeed, on a global scale, capital expenditure as a percent of sales is at a 22-year low.
CapEx is a good proxy for non-financial “investment”. It’s also a
measure that can be easily obtained as companies report this activity in
their Cash Flow Statements....MORE