The Capital in Capitalism Is Intellectual
It takes money to make money. Money makes the world go ‘round. One thing’s sure and nothing’s surer: The rich get richer and the poor get . . .
Life in the global marketplace is filled with such enduring truisms. That’s why American industry gets the jitters when economists warn of an impending “capital crunch” as Eastern Europe seeks mega-billions to rebuild itself. And U.S. business gets the heebie-jeebies when it looks at Japan’s tsunami of capital spending.
Although Japan’s economy is but 60% the size of the U.S. economy, estimates are that its capital spending last year exceeded $750 billion--almost a quarter of its gross national product. By contrast, the United States spent roughly 10% of GNP on capital investments--over $500 billion. Until 1988, the United States exceeded Japan in capital spending. Today, on a per-capita basis, Japan outspends the United States 2 to 1.
What’s more, about a quarter of Japan’s capital investment is going into new product development and product enhancement research--up from 14% in 1980. Another 20% of that more than $750 billion is going into productivity improvements (such as robotics) to ease Japan’s incipient labor shortage.
That’s an impressive investment in the future. No matter which way the United States turns to compete--research, development, plant improvement, etc.--it is being outspent by Japan. While it’s true that, throughout the 1980s, Japanese industry enjoyed a cost-of-capital advantage over most of American industry, that begs the question rather than answers it. Is Japan’s competitive advantage that it’s investing more? Or that it knows how to get more out of its investments?
The United States had its biggest post-war capital spending boom in the early 1980s, gorging itself on computer and telecommunications networks. It’s not clear that industry got quite the returns it was expecting. General Motors spent many billions on capital investments; the returns haven’t yet materialized. Capital spending is an input measure, not an index of productivity. I can invest a billion dollars in the stock market and have nothing to show for it but brokerage fees.
People who focus on capital spending are worrying too much about the wrong side of the equation. The problem isn’t capital--it’s return on capital. That’s the underlying dynamic of capitalism. If you can make a case that you can get a decent return on capital, you can get the capital. Right now, few people would argue that Japanese managers don’t get a decent return on their capital investments. By contrast, more than a few investors get queasy at the idea of certain American management teams spending a billion dollars. They’re no longer confident that management knows how to wring a return from the investment.
That’s why a comment from Alcoa President C. Fred Fetterolf is so provocative. Aluminum Co. of America is an old-line U.S. concern in a highly capital-intensive business: metals and materials. In a recent interview, Fetterolf basically said that as far as Alcoa is concerned, capital is no longer king.
“What we are really interested in now is an engineering community who can solve problems without capital,” he says. “The engineers in the plants have generally been capital managers and equipment managers, as opposed to technical innovators. The non-capital problem solvers are the heroes of tomorrow. We have a transitional problem where there’s still a perception that the way to success is to manage large capital projects. We’re working hard to recognize the heroes that solved a problem and didn’t spend a dime.”
In other words, realizing value from the enterprise depends less on the quantity of financial capital and more on the quality of the people. That’s what intellectual capital means. If it’s true that it takes money to make money, it’s also true that it takes intellectual capital to create intellectual capital. Measuring financial capital investment without considering the human capital endowment is like using a thermometer to tell time. It just doesn’t work very well.
If you want to buy RJR Nabisco, there’s no question that you need humongous amounts of financial capital. To steer a new drug through global regulation to the marketplace takes capital. Yes, it takes capital to build a wafer fabrication facility for semiconductors.
But how much capital does it take to design a new object-oriented computer language? How much capital does it take to craft a new industrial enzyme? If you’ve got a labyrinth of manufacturing and processing facilities like Alcoa--or Minnesota Mining & Manufacturing or International Business Machines or General Motors--does innovation come from the constant injection of financial capital? Or does it come from a judicious injection of intellectual capital?
There’s no question that capital dominated global markets in the 1980s. Junk bonds reshaped corporate America; foreign exchange traders and global investment funds radically altered capital flows; everything that wasn’t nailed down was securitized by Salomon Bros. or Nomura and sold everywhere from Dubuque to Dakar. And yet, what was really being sold here was a potential return on capital. These instruments were all clever ideas--intellectual capital--packaged into readily tradeable financial formats.
The 1990s will build on this--but the capital will be increasingly intellectual in nature, not financial. Capitalism is being redefined. Increasingly, it takes intellectual capital to animate financial capital; it takes ingenuity and innovation to get financial capital to yield up its returns.
Certainly, capital spending isn’t irrelevant or incidental to global competitiveness. But it’s no longer the make or break factor. What really concerns me about Japan’s tremendous capital investment thrust is that it bespeaks a confidence in managing for the future that much of U.S. industry conspicuously lacks.
In a way, Fetterolf’s observation is the best blend of pragmatism and optimism I’ve come across: It recognizes that while you can buy innovations, you can’t buy innovation. You have to build them. We are now at the time when American business finally acknowledges that the raw material for innovation isn’t the kind of capital you can get from the bank.
