Companies might invest more in new ventures if they could see in advance how to redeploy the assets if things don’t pan out
After years of booming corporate earnings, American companies are facing political and social heat to invest in new products, jobs and facilities in the U.S. That’s a key element of President Donald Trump’s “Make America Great Again” program.
But how best to deploy shareholders’ capital in what are inherently risky new ventures? Research by UCLA Anderson’s Marvin B. Lieberman, Gwendolyn K. Lee of the University of Florida and Timothy B. Folta of the University of Connecticut proposes a blueprint, of sorts, for making the wisest possible corporate investment decisions.
For inspiration, the authors draw in part on the growth philosophy of Amazon Inc. founder Jeff Bezos. In his oft-quoted 2015 letter to shareholders, Bezos described two tiers of decision making. “Type 1” decisions are “consequential and irreversible or nearly irreversible — one-way doors — and these decisions must be made methodically, carefully, slowly,” Bezos wrote. But most business decisions are “Type 2” decisions, he said: they are changeable, reversible — two-way doors. “If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through,” Bezos said.
That two-way door concept favors investing in new projects that are related to a company’s established business lines, Lieberman, Lee and Folta write in the Strategic Management Journal. On the face of it, that advice might appear to merely endorse the old-fashioned idea of seeking “synergy” among a company’s businesses. But the authors say traditional notions of synergy don’t capture all the benefits of what they term “relatedness” venture investing by corporations.