An empirical study of capital budgeting practices for strategic investments in CIM technologies

Abstract

In recent years, an increasing number of companies have been struggling to justify strategic technology investments using traditional capital budgeting systems. The existing accounting-based decision models (such as discounted cashflow) are said to be no longer adequate to help evaluate investments in technological innovation, mainly because of the strategic, intangible nature of the benefits involved. As a result, traditional capital budgeting methods have been heavily criticized of discouraging the adoption of advanced manufacturing technologies and thus undermining the competitiveness of western firms. Some authors would argue that the only alternative is to exempt these strategic investments from the control of accounting systems. Others have developed sophisticated methods for performing an integrated strategic and financial investment analysis. At this point, however, it is still unclear which approach is prevalent in practice and which factors contribute to effective investment decisions. This empirical study attempts to shed some light on the problem by examining the capital budgeting practices of firms with regard to strategic investments in Computer-Integrated Manufacturing (CIM) technologies. Questionnaire data are used to provide a better insight into the ways in which manufacturing firms go about controlling major investments in new process technologies. In addition, tentative findings are presented about hypothesized relationships between characteristics of the investment decision making process and the perceived ex post financial performance of CIM investments.