Redesigning the capital budgeting process to support large firm growth: a case for the entrepreneurial mindset

Abstract

Purpose – This paper aims to argue that important elements in the capital budgeting process are either undervalued or not considered and are a significant reason for both low and slow growth in large firms. Adopting an entrepreneurial mindset in conjunction with a portfolio approach based on different types of innovation to allow for growth projects to enter the process and be evaluated for possible selection are outlined as an alternative to strengthen the capital budgeting process. Design/methodology/approach – Concepts and processes drawn from the finance, economics and entrepreneurship literature are used to form a proposed new approach to the capital budgeting process. Findings – Only a handful of large firms even achieve returns more than their cost of capital. This manuscript argues that the reason for the lack of growth is a function of a capital budgeting process that does not allow the full spectrum of risk projects because of behavioral factors. This manuscript further proposes a portfolio approach that would allow for all projects to be fairly considered and aligned with stakeholder interests. Originality/value – The current literature tends to focus on the financial evaluative aspect of the capital budgeting process. The void in the literature is with other aspects of the capital budgeting process both in terms of currency and in pursuing alternative explanations for the reasons the full risk spectrum of projects is not considered.

Keywords

• Capital budgeting
• Large firm growth
• Entrepreneurial mindset in firm growth