Value Creation and the Pursuit of Multi Factor Productivity Improvement

This paper links Value Management to macro-economics to explore transformational innovation. It borrows from economics and the relationship between technological progress and rising living standards for citizens. Central to this is seeing 'technology' in a wider sense than devices. What makes this paper different is it attempts to link Government spending on capital projects directly to economic growth in an economy. Whilst macroeconomists use historic data, this paper applies those theories to the conceptual stages of capital-projects to become part of a Government's investment appraisal process. As such, this paper outlines a 'how to' approach that will help Governments prefer Foreign Investments that lead to long-term economic growth. The hope is that this paper will stimulate other researchers to replicate the methodology and in so doing open a new direction for innovation methodologies such as Value Engineering and Value Management that link capital projects to growth in GDP.

Capital projects; Economic growth; Government; Innovation; Productivity; Value management

The field of Value Management (Woodhead and Male, 2000; Woodhead, 2001;  Kaufman and Woodhead, 2006; Male et al., 2007; Berawi et al., 2014; Teschl, 2018; Visser, 2019) has confined itself to micro-economics. In this paper we extend it to macro-economics to explain how economists understand the role of technological progress as a key determinant of economic growth at the national level (Wiratmadja et al., 2016). This stands on ideas linked to productivity and production functions. However, economists use historic data and given low and even negative productivity statistics in many countries, we argue there needs to be a proactive way to influence economic growth. We start by reviewing  established ideas from economists before exploring how we could adopt a more proactive approach that would help Governments not only deliver capital projects that their citizens need, but also in ways that stimulate productivity and a consequential rise in prosperity. We do so by sharing a method that could be used in the conceptual stages of a capital project, alongside established investment appraisal techniques. The hope of this paper is to start new lines of research in the field of Value Management. 

This paper offers a way to solve the Productivity Puzzle by considering capital projects in the conceptual stages and learning how MFP calculations vary during project execution. This could be valuable to Governments as it would help them assess which investments are likely to have more spill over benefits that lift the living standards of its citizens. This approach is in contrast to methods typically used by economists where historic data is investigated with mathematical techniques such as multiple regression.

A positive MFP suggests the new approach is better than the base case in terms of its benefit to economic growth. Understanding approximate contributions a major capital project could have on economic growth enables a Government to make more informed choices about the way their capital projects unlock technological progress and spill over benefits that raise living standards beyond the project itself.

Most capital investment methods (e.g. NPV, IRR, PI etc.) need to demonstrate positive results before investors give an approval to proceed and funds are sanctioned. This is well established. Yet evidence from around the world shows negative productivity exists which means what counts as success from investment appraisal techniques may not actually be successful for the economy and GDP growth.

We accept a need to maintain proven investment appraisal techniques to satisfy the needs of financiers. What we call for is to also make the MFP calculation part of a Government's investment appraisal criteria.

In this paper we made a number of assumptions and omissions (e.g. taxation was omitted) to keep our explanation simple and to show how MFP enables valuable a priori insights. Those insights could be used in capital projects to unlock new levels of prosperity for a nation's citizens as well as meeting the requirements of the usual stakeholders in capital projects.

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