August 10, 2016 - A report from the MAPI Foundation outlines new decision criteria for businesses undertaking cost–benefit analysis on the purchase and implementation of new technologies. The study suggests that, unlike with capital investments, the purchase and implementation of new technologies involves a larger and more complex set of decision factors beyond traditional return on investment (ROI) metrics. It is the third and final paper in a series of studies on productivity that the MAPI Foundation produced this year, underwritten by Rockwell Automation, a global leader in industrial automation.
Written by Cliff Waldman, director of economic studies at the MAPI Foundation, the analysis points out that traditional capital investment analysis and related ROI metrics fall short when evaluating investments in rapidly advancing new technologies. The study asserts that an alternative decision framework is needed to capture the expanded benefits, costs, and likely productivity gains associated with new technology investments. “With investments in new technology, the cost side of the ROI equation contains a broader set of factors than is the case with a fixed technology frontier, where all technologies are considered previously employed capital,” says Waldman.
“At the same time, the benefits of investing in a new technology are potentially as broad as the costs—including the opportunity to establish differentiation and/or remain cost competitive as the new technology spreads.” In the report, Waldman provides new technology decision criteria that includes the broad and far reaching benefits of new technology in addition to traditional ROI metrics. And, given the need to remain competitive, asserts that the strategic decision to invest is rapidly becoming one about when, not if, to invest. “This is potentially a new way of thinking about what drives new and innovative technology investment versus capital investment,” said Stephen Gold, president and CEO of the MAPI Foundation. The findings of this report complement Waldman’s two prior studies.
In the first study, Productivity Dynamics in U.S. Manufacturing: An Industry-Based Analysis , Waldman analyzed productivity growth in a range of manufacturing subsectors over the past 25 years and provided compelling statistical evidence on the importance of capital investment and educated labor as drivers of productivity performance. The paper also revealed strong cross-industry correlations for productivity growth. The interconnectedness of productivity performance across industries, says Waldman, suggests that, where investments in any one industry lead to faster productivity growth, such expenditures can have impacts that extend to other subsectors as well.
The second study, Automation Investment in U.S. Manufacturing: An Empirical Picture , indicated that despite the economic slowdown in the industrial sector over the past year, the incidence of actual and planned automation investment is very high in American manufacturing.
The report was based on a national survey of U.S. manufacturers and non-U.S. manufacturers with a presence in the United States.
The findings showed that increased automation investment spans company sizes and industries. New technology investment is unlikely to be a reaction to short-term market changes. Manufacturers should examine a large set of complex factors beyond the traditional capital investments assessed with a fixed technology investment to determine the value of emerging technologies for their industries.
