The myth of Japan's low-cost capital

The low rate at which U.S. companies are investing in manufacturing and the resulting decline in America's competitive position has been a topic of grave concern for more than a decade. During that time, critics have offered many excuses for this shortsighted investment behavior. Yet one excuse has steadily gained adherents and is becoming something of an article of faith--that is, that capital in the United States is more expensive than in other countries, particularly Japan. It is both a popular and appealing argument. Yet authors W. Carl Kester and Timothy A. Luehrman, professors at the Harvard Business School, warn that this argument is not only false but also dangerous. They assert that the empirical evidence does not support the claim that the U.S. manufacturing sector has persistently faced significantly higher average capital costs than the Japanese manufacturing sector. The authors argue that differences in capital costs have been isolated and temporary, not broad and persistent. To prove their point, Kester and Luehrman critically dissect both the common wisdom and the academic studies on the topic. They conclude that in the new global economy, all companies--Japanese, American, European, and others--must compete for the same capital. Some will succeed in obtaining it on temporarily favorable terms, not because they are Japanese but because they are efficiently organized and governed. But as long as an alleged international cost-of-capital gap is their excuse, U.S. managers run the risk of retaliating counterproductively against U.S. trading partners or doing nothing at all inside corporations. In short, managers should stop complaining about how much capital costs and worry more about how to manage it after it's been raised.