This article begins with an overview of the changing context of U.S. industrial enterprise from the Second Industrial Revolution of the late nineteenth century to the end of the Second World War. It then examines the changes in the nature of competition, in the financial markets, and in corporate management that transformed the industrial environment in the postwar decades. Against that historical background, the essay describes in detail the results of an empirical study aimed at discovering how U.S. companies maintained, increased, or dissipated their organizational capabilities and how the market for corporate control affected that behavior.

The authors of this article argue that companies' high cost of capital or short investment horizons do not explain the decline in global competitiveness of many U.S. industries in the 1970s and 1980s. Instead, they find the source of malaise in the capital-budgeting and financial-planning systems that arose after the Second World War. Although they allowed managers in large companies to evaluate some aspects of their business efficiently and comprehensively, these systems also obscured the value of investment in organizational capabilities, because such investments were hard to quantify—indeed, even to describe—within the financial models in widespread use. As a result, companies often invested vigorously—but in the wrong things. The authors define a set of desirable capabilities and, using case studies, describe both the problems of the recent past and the requirements for successful investment in the future.

Many observers of the corporate restructurings that reached major proportions in the United States in the 1980s have believed that the market for corporate control had a serious negative impact on companies' long-term investment, which in turn contributed to the United States's decline in global competitiveness. In the following study, the author looks carefully at the effects of financial restructurings on investment, especially at expenditures on R&D, in a large set of companies categorized according to their level of technology and the length of their investment horizon. She then compares the U.S. situation with that in the United Kingdom, Germany, and Japan. She concludes that, though many such events occasioned no change at all in investment strategies, restructuring pressures and declines in investment tended to concentrate in certain industries. She also finds that investment decisions were usually rational, given high interest rates and a tax environment that favored debt over equity.