RC Passage: Capital Investments and Competitiveness

  
Time 0 0 : 0 0 : 0 0

To compete effectively in international markets, a nation’s businesses must sustain investment in intangible as well as physical assets.  Although an enormous pool of investment capital exists in the United States, the country’s capital investment practices put United States companies at a competitive disadvantage.


United States capital investment practices, shaped by sporadic and unpredictable changes in tax policy and high federal budget deficits, encourage both underinvestment and overinvestment.  For example, United States companies invest at a low rate in internal development projects, such as improving supplier relations, that do not offer immediate profit, and systematically invest at a high rate in external projects, such as corporate takeovers, that yield immediate profit.  Also, United States companies make too few linkages among different forms of investments.  Such linkages are important because physical assets, such as factories, may not reach their potential level of productivity unless companies make parallel investments in intangible assets such as employee training and product redesign.  In general, unlike Japanese and German investment practices, which focus on companies’ long-term interests, United States investment practices favor those forms of investment for which financial returns are most readily available. By making minimal investments in intangible assets, United States companies reduce their chances for future competitiveness.

According to the passage, which of the following characterizes the capital allocation strategy of United States companies?

(A)

They tend to underinvest in intangible assets.

(B)

They tend to invest heavily in product redesign.

(C)

They tend to underinvest in physical assets.

(D)

They make parallel investments in internal and external projects.

(E)

They seek to allocate capital in ways that reduce their tax burden.

GMATTM is a registered trademark of the Graduate Management Admission CouncilTM. The Graduate Management Admission CouncilTM does not endorse, nor is it affiliated in any way with the owner or any content of this web site.