Thursday, December 06, 2007
Creative Destruction
In his biography, 'The Age of Turbulence', Alan Greenspan gives an example of capital shifting as a result of creative destruction:0 Comments:
In November 2005, GM announced plans to terminate upto 30,000 employees and close 12 plants by 2008. If you looked at the company's cash flows, you could see GM was directing billions of dollars it historically might have used to create products or build factories into funds to cover future pensions and health benefits for workers and retirees. These funds, in turn, were investing the capital where returns were most promising - in areas like high tech. At the same time Google was growing at a tremendous rate. The company's capital expenditure increased nearly threefold in 2005 to more than $800 million. And in the expectation that the growth would continue, investors bid up the total market value of Google stock to eleven times that of GM's. In fact, the GM pension fund owned Google shares - a textbook example of capital shifting as a result of creative destruction.
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