(This passage is excerpted from material published in a1997.)

    Whereas United States economic productivity grew at an annual rate of 3 percent from 1945 to 1965,it has grown at an annual rate of only about 1 percent since the early 1970's. What might be preventing higher productivity growth? Clearly, the manufacturing sector of the economy cannot be blamed. Since1980, productivity improvements in manufacturing have moved the United States from a position of acute decline in manufacturing to one of world prominence. Manufacturing, however, constitutes a relatively small proportion of the economy. In 1992, goods-producing businesses employed only 19.1 percent of American workers, whereas service-producing businesses employed 70 percent. Although the service sector has grown since the late 1970's, its productivity growth has declined.

    Several explanations have been offered for this decline and for the discrepancy in productivity growth between the manufacturing and service sectors. One is that traditional measures fail to reflect service-sector productivity growth because it has been concentrated in improved quality of services. Yet traditional measures of manufacturing productivity have shown significant increases despite the under measurement of quality, where as service productivity has continued to stagnate. Others argue that since the 1970's, manufacturing workers, faced with strong foreign competition, have learned to work more efficiently in order to keep their jobs in the United States, but service workers, who are typically under less global competitive pressure, have not. However, the pressure on manufacturing workers in the United States to work more efficiently has generally been overstated, often for political reasons. In fact, while some manufacturing jobs have been lost due to foreign competition, many more have been lost simply because of slow growth in demand for manufactured goods.

    Yet another explanation blames the federal budget deficit: if it were lower, interest rates would be lower too, thereby increasing investment in the development of new technologies, which would spur productivity growth in the service sector. There is, however, no dearth of technological resources; rather, managers in the service sector fail to take advantage of widely available skills and machines. High productivity growth levels attained by leading-edge service companies indicate that service-sector managers who wisely implement available technology and choose skillful workers can significantly improve their companies' productivity. The culprits for service-sector productivity stagnation are the forces-such as corporate takeovers and unnecessary governmental regulation-that distract managers from the task of making optimal use of available resources.

Kenyan IPO pricing

    Researchers recently examined the initial public offering (IPO)—a private firm's first sale of stock shares to the public—of firms listed on Kenya's Nairobi Stock Exchange (NSE) between 1994 and 2008. During this time, the number of IPOs listed per year varied from zero to four The researchers wanted to exam­ine the extent to which four different variables—investor sentiment, firm size, board prestige, and firm age—affected the IPO stock share price, which is set by the firm. They hypothesized that all four variables would show a strong positive correlation with this IPO asking price. However, after examining the firms listed, they were surprised to find that none of the variables showed a strong positive correlation with IPO pricing, and in fact investor sentiment and board prestige both showed a strong negative correlation.

    The researchers also discovered that nearly all of these IPOs were underpriced by an aver­age of 50 percent, which is to say the IPO share prices were about half of what the share prices were at the close of that first day of trading. Such underpricing constitutes a loss to the listed firm because the firm could have immediately raised more money with a higher price. The researchers noted that firms should take care to set an IPO price low enough to capture investor interest but high enough to generate sufficient capital for the firm.

Kenyan IPOs, 1994-2008

    The table lists companies, examined by the researchers, that had their IPO on the NSE between 1994 and 2008, together with the IPO share price, first day closing price, and percent underpricing. Prices are in Kenyan shillings.