If - and it is a big if - UK investors are now getting more bangs per buck, this is not a reason to cut back on investment, says Robert Heller, but a reason to boost such spending to ensure future growth.
The prime sin of British managers down the post-war decades, so critics agree, is the failure to invest sufficiently. Whether the investment is in new plant, new machinery, new processes or new products, the UK has consistently lagged behind competitors even though the managers concerned knew that, in the microeconomy of the firm, as in the macroeconomy, investment is the key to growth.
Yet the Government, via the competitiveness division in Michael Heseltine's bailiwick, argues that the 9% fall in manufacturing investment in the last quarter of 1995 is not the horror it seems. True, that leaves such spending a scant 7% above the worst level of the recession. But the apologists argued that investment spending now yields more bang per buck, and anyway cheap investment in better methods, combined with more use of part-timers to boost production, has reduced the need for expensive machinery.
The apologia would be more convincing if 1995's fall-back were unique.
Many times before, though, investment spending has sagged when it should have soared. The City has often been blamed for encouraging short-termism and discouraging long-term investment in projects which have delayed pay-offs. Meanwhile successive governments have been cursed, too, for policy errors which have caused roller-coaster growth.
Fingers have also been pointed at the whole national climate, allegedly risk-averse and over-tolerant of mediocrity. How unlike the Americans, Germans and Japanese, the successive heroes of British breast-beating.
Others, too, have occasionally aroused envy: the French (national planning), the Hong Kong Chinese (low taxation) and the Swedes (high taxes, but high ambition). These heroes have mostly developed feet of clay. Hong Kong is the exception (until next year, that is); but meaningful comparison cannot be made between mature economies and high-growth entrepots.
As for Japan, accountancy and consultancy firm KPMG reports that 'Japanese companies are generally disappointed with the profitability' of their £19.4 billion of investments in Britain. According to the Financial Times, none of 70 industrial companies surveyed 'thought their profits were high, whereas 40% said they were average, and 53% said they faced low profits or losses'. The prime reason given for poor results was weak performance by the single market.
An additional factor is that greenfield projects (the typical Japanese investment) do not pay off rapidly. All the same, nearly 70% of the companies admitted competitive shortcomings: accounting, marketing focus and after-sales service all needed improvement. Organisational structures prevented local managers from taking quick decisions without the time-consuming process of referring back to Japan. That's no mean indictment - and by the Japanese themselves.
Have the Japanese caught the British disease? Is this further evidence against the local climate, pointing to some insidious miasma that carries infection into the investment process? If so, it's spread to Germany. The Wall Street Journal Europe headlines the fact that German automotive suppliers are taking aim 'at years of inefficiency': 1,000 (a third) of these one-time cynosures are now losing money. The prime cause is underinvestment in precisely those new 'software' methods whose improvement (according to Heseltine's team) helps explain UK manufacturers' low spending on hardware.
But only insatiable optimists (or ministers clutching at straws) would argue that UK manufacturers are more efficient than Japanese transplants or German automotive engineers. The poor consolation is that low Japanese profitability, German automotive stumbling and Britain's investment lag all have the same cause.
It lies in defective management processes. The Heseltine line pre-supposes instead that companies have a finite need for investment, which is determined by the demands of production. But dynamic management pursues a dynamic investment policy which uses capital aggressively to create bigger and better market opportunities and penetration. The absence of such dynamism is the true British problem.
Back in the 1960s, the US economy had a ratio of manufacturing investment lower even than Britain's. At the time its proponents explained that US plants were already so efficient that relatively small additions to capital spending generated disproportionate surges in productivity and profit. In hard truth, by skimping on capital expenditure, US manufacturers boosted current profits at the expense of future competitive ability. The eventual result was abject surrender of world leadership in steel, cars and other key industries.
As in the US, so in the UK. Barry Riley of the Financial Times draws an interesting analogy from the present mortgage market: 'It is very profitable to contract slowly, but very unprofitable to grow. Is that Britain's economic problem, summed up?'
To put the issue another way, improved productivity of capital is logically (and historically) a sound reason for spending more, not less. As ever, the race will go to the swift and the strong - the real big spenders.