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APPRAISING INVESTMENTS IN NEW TELECOM TECHNOLOGIES: THE CASE OF SWEDISH TELECOM
Abstract
Investment management and investment appraisals of new technologies in Swedish Telecom's network have been investigated in an exploratory manner. Investments in new telecom technologies are difficult to appraise because of, among other things, systems interdependence, technical change and competition. It is argued that investment appraisals need to be more closely integrated with strategy and that it is essential for management to carefully match investment management with different types of investments in order to alleviate measurement problems and to provide the right organizational incentives for investments in new technologies.
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NOTES AND REFERENCES
Crandall R. W. and Flamm K.. 1989. . Changing the Rules: Technological Change, International Competition and Regulation in Communications . , Washington , DC : : The Brookings Institution. .
A substantial body of empirical evidence supports the Schumpeterian propositions on the impact of technological competition (see for instance, A. Cooper and D. Schendel, ‘Strategic responses to technological threats’, Business Horizons, 19, 1976; and M.I. Kamien and N.I. Schwartz, Market Structure and Innovation, Cambridge University Press, 1982.
Narayanan M. P.. 1985. . ‘Managerial incentives for short-term results’. . Journal of Finance . , Vol. 40((5)): 1469––84. . Cost Management for Today's Advanced Manufacturing: The CAM-I Conceptual Design
J. S. Metcalfe, ‘On diffusion, investment and the process of technological change’, in E. Deiaco, E. Hornell, and G. Vickers (eds), Technology and Investment, Pinter Publishers, 1991; W.B. Arthur, ‘Competing technologies increasing returns and lock-in by historical events’, Economic Journal, 99, March 1989, pp. 116–31; PA. David, and S. Greenstein, The Economics of Compatibility Standards: An Introduction to Recent Research, CEPR Publications No. 207, Center for Economic Policy Research, Stanford University, 1990; C. Antonelli, ‘Investment and adoption in the international diffusion of advanced telecommunications’, paper presented at the 17th Conference of the European Association of Research on Industrial Economics, 1990, Lisboa; and O. Granstrand, ‘Temporal diffusion and population dynamics: a systems model’, in A. Grübler and N. Nakicenovic (eds), Rat Race Dynamics and Crazy Companies: The Diffusion of Technologies and Social Behavior, Springer-Verlag, Berlin, 1990.
See A. Dixit, ‘The role of investment in entry deterrence’, Economic Journal, 90, 1981, pp. 95–106; R. J. Gilbert, ‘Mobility barriers and the value of incumbency’, in R. Schmalensee and R.D. Willig (eds), Handbook of Industrial Organization, 1, Elsevier, 1989.
See R.A. Skoog, ‘The design and cost characteristics of telecommunications networks’, Bell Telephone Laboratories, 1980.
Bohlin E. and Granstrand O.. 1991. . ‘Strategic options for national monopolies in transition: the case of Swedish Telecom’. . Telecommunications Policy . , Vol. 15((5)) October;: 453––76. .
See for instance H.T. Johnson and R.S. Kaplan, Relevance Lost — The Rise and Fall of Management Accounting, Harvard Business School Press, 1987; H.R. Parsaei, T.L. Ward and W. Karwowski (eds), Justification Methods for Computer Integrated Manufacturing Systems, Elsevier, 1990.
The use of case studies to generate theory has increasingly become an accepted research approach, especially since Glaser and Strauss in 1967 pointed out the need in research for theory generation rather than solely theory verification. The generality of a case study then lies in its ability to generate theory and hypotheses with wider applicability than the case at hand. The methods used in case studies have also been expanded from being ethnographically based, as initially in Glaser and Strauss, to constituting a general approach for qualitative research in the social sciences. See B.G. Glaser and A.L. Strauss, The Discovery of Grounded Theory: Strategies for Qualitative Research, Aldine de Gruyter, 1967; K.R. Yin, Case Study Research-Design and Methods, Sage Publications, Beverly Hills, 1984; and K. M. Eisenhardt, ‘Building theories from case study research’, Academy of Management Review, 14, 4, 1989, pp. 532–50.
In December 1990, the Board of Swedish Telecom proposed to the government that it be organized as a corporation. This change will take place in January 1993 but Swedish Telecom will not yet be privatized at this stage.
The rest of the units are of secondary importance for our purposes. They are first three national divisions — cable TV services, directory services and electronic data processing services. Second, TELEINVEST is a fully owned subsidiary that in turn owns companies that are engaged in international telecom consulting, value-added services, software and industrial production. Finally, ELLEMTEL is a joint venture with Ericsson for the development of the AXE switching system.
For a detailed treatment, see E. Bohlin, ‘Techno-economic management of investments: offensive investments’, (Licentiate Dissertation, Chalmers University of Technology, 1990).
For a detailed description of competitive threats and opportunities facing Swedish Telecom, see E. Bohlin and O. Granstrand, op. cit.
For a general theory of lock-in effects, see Arthur, op. cit.
Of late there have appeared several theoretical papers that attempt to value real as opposed to financial options, building on the option pricing model, see, for instance, P. Bjerksund and S. Ekern, Managing Investment Opportunities Under Price Uncertainty: From “Last Chance” to “Wait and See” Strategies, Norwegian School of Economics and Business Administration, 1989. However, most of these models are not suitable for practical applications.
The telecom regions are not legally separated as companies but debts and equity have been allocated to the different regions.
In fact, it can be shown that the higher the growth, the lower the book ROI (Return on Investment) compared to the true economic return. This is due to linear depreciation which is not based on changes in the market value of assets from one period to another. See R. Brealey and S. Myers, Principles of Corporate Finance, 3rd ed., Prentice-Hall, 1989, ch. 12.
O. E. Williamson, The Economic Organizations of Capitalism, Free Press, 1985.
See E. Bohlin and O. Granstrand, op. cit.
For the ensuing arguments I have benefited much from discussions with Alain de Fontenay, Bellcore. However, any errors remain mine. Important references for the argument are O. Hart and B. Holmström, ‘The theory of contracts’, in T.F. Bewley (ed.), Advances in Economic Theory, Cambridge University Press, 1987; and B. Holmström, Agency costs and innovation’, Journal of Economic Behavior and Organization, 12, 1989, pp. 305–27.
Levinthal D.. 1988. . A survey of agency models of organizations’. . Journal of Economic Behavior and Organization . , Vol. 9:: 153––85. .
For in-depth discussions, see Williamson, op. cit.;and B. Holmström and J. Tirole, ‘The theory of the firm’, in R. Schmalensee and R.D. Willig (eds), Handbook of Industrial Organization, Elsevier, 1989.
P. Masse, Optimal Investment Decisions, Prentice-Hall, 1962, p. 1.