FINANCIAL MANAGEMENT

UNIT 1

The Finance Function: Nature and Scope, Evolution of Finance Function, Its New Role in
the Contemporary Scenario, Goals of Finance Function, Profit Maximization and Wealth
Maximization, the Agency Relationship and Costs; Risk-Return Trade off; Concept of
Time Value of Money, Future Value and Present Value and the Basic Valuation Model.

Role of money and blood is similar in an organization and human body respectively. But money
and finance are not same. A currency as long as with a person is money and when he/she lends it
to others or invest somewhere it becomes finance. An individual in the capacity to manage three
activities in an organization i.e. forecasting money needs, obtaining money and investing money
in various productive assets is termed finance manager. That is why finance is called an art and
science of managing money. The goal of finance manager is to maximize owners’ wealth.

Meaning of Finance Function

A) Meaning of Finance Function
The finance function involves planning, organizing, and controlling financial resources to
ensure the success and stability of a business. It helps in making sound financial decisions that
drive business growth while managing financial risks.
Every organization, whether a startup, multinational corporation, or government entity,
needs finance management to allocate funds efficiently, control costs, and maximize
profitability.
Key Components of the Finance Function with Examples

1. Raising Funds
Definition: Raising funds refers to how a business secures financial resources to start, expand, or
maintain operations.
Sources of Raising Funds
 Debt Financing: Borrowing money through bank loans, bonds, or credit.
 Equity Financing: Selling shares in the company to investors.
 Internal Financing: Using retained earnings (profits from previous years) to reinvest in
the business.
Example 1: Tesla’s Fundraising Strategy
 Tesla issues shares (equity financing) and raises debt (loans, bonds) to fund its electric
vehicle production and expand globally.
 In 2020, Tesla raised $5 billion by selling additional shares to investors.
Example 2: Startups Raising Capital
 A startup like Airbnb initially raised funds through venture capital (VC) investments
before going public in an IPO (Initial Public Offering) in 2020.
Example 3: Government Infrastructure Projects
  Governments issue bonds to raise money for large-scale projects like highways, bridges,
and hospitals.

2. Investing Funds
Definition: Investment decisions involve determining how financial resources should be
allocated to maximize returns.
Types of Investments
 Capital Expenditures (CapEx): Buying long-term assets like machinery, buildings, and
technology.
 Research & Development (R&D): Investing in innovation for future growth.
 Stock Market & Securities: Companies may invest in stocks, mutual funds, or
government bonds.
Example 1: Amazon’s Warehouse Expansion
 Amazon invests billions in automated warehouses to improve delivery efficiency and
reduce costs.
 In 2021, Amazon invested over $50 billion in infrastructure.
Example 2: Apple’s Investment in R&D
 Apple spends billions on R&D to develop new iPhones, MacBooks, and software
innovations.
 In 2023, Apple invested over $27 billion in R&D.
Example 3: McDonald's Franchise Model
 McDonald's buys real estate worldwide and leases it to franchisees, generating steady
income.

3. Managing Financial Risks

Definition: Financial risk management involves identifying and minimizing risks related to
market fluctuations, interest rates, currency exchange rates, and credit defaults.
Types of Financial Risks
 Market Risk: Risk due to stock price, interest rate, or commodity price changes.
 Credit Risk: Risk that borrowers or customers may not pay back loans.
 Liquidity Risk: Risk of running out of cash to meet expenses.
 Operational Risk: Business disruptions due to fraud, system failures, or external factors.
Example 1: Airline Industry – Fuel Price Hedging
 Airlines like Southwest Airlines use hedging strategies to lock in fuel prices and reduce
exposure to rising oil costs.
Example 2: Foreign Exchange Risk in Global Businesses
 Companies like Nike and Coca-Cola face currency exchange rate risks and hedge their
earnings using financial instruments.

4. Ensuring Liquidity
Definition: Liquidity management ensures a company has enough cash or liquid assets to meet
short-term financial obligations like salaries, rent, and supplier payments.
Ways to Maintain Liquidity
 Managing cash reserves and bank credit lines.
 Reducing unnecessary inventory.
 Speeding up accounts receivable collections.
Example 1: Walmart’s Inventory & Cash Flow Management
 Walmart uses just-in-time (JIT) inventory systems to optimize stock levels and ensure
it doesn’t run out of cash for operations.
Example 3: Small Business Cash Flow Crisis
 Many small businesses face liquidity issues because of late customer payments. To fix
this, they offer discounts for early payments.

5. Maximizing Shareholder Value

Definition: Financial decisions should focus on increasing the company’s market value and
delivering high returns to shareholders.
Ways to Maximize Shareholder Wealth
 Increasing company earnings and stock prices.
 Paying regular dividends to shareholders.
 Expanding business operations for long-term growth.
Example 1: Apple’s Stock Buybacks
 Apple repurchases its own stock to increase share value and reward investors.
 Apple has spent over $90 billion in stock buybacks.
Example 2: Dividend Payments by Coca-Cola
 Coca-Cola consistently pays dividends to shareholders, making it a reliable stock for
income investors.
Example 3: Amazon’s Focus on Growth Instead of Dividends
 Amazon doesn’t pay dividends but reinvests profits into growth, increasing its stock
price over time.

Conclusion
The finance function is crucial for business success. It includes:
1. Raising funds (through loans, shares, or retained earnings).
2. Investing wisely (in growth opportunities, R&D, and assets).
3. Managing risks (hedging, credit risk management, and operational risk reduction).
4. Ensuring liquidity (cash flow management and working capital control).
5. Maximizing shareholder value (through profitability and market value growth).

B) Scope of Finance Function

The scope of the finance function covers four major areas, which are interrelated and crucial
for business success.

1. Investment Decisions
Where should a company invest its money to maximize returns?
Investment decisions, also known as capital budgeting, involve selecting the best opportunities
to invest company funds for growth and long-term sustainability.
Types of Investment Decisions
 Long-term Investments (Capital Budgeting):
o Involves large expenditures with long-term benefits.
o Examples:
 Purchasing new machinery for production.
 Expanding a factory or opening new business locations.
 Investing in new technology or innovation.
o Evaluation Techniques:
 Net Present Value (NPV) – Measures the profitability of an investment.
 Internal Rate of Return (IRR) – Calculates the expected rate of return.
 Payback Period – Determines how long it will take to recover the
investment.
 Short-term Investments (Working Capital Management):
o Focuses on managing current assets (cash, inventory, accounts receivable).
o Ensures the company can meet short-term financial obligations.
o Example: Managing inventory efficiently to avoid overstocking or stockouts.
🔹 Real-world Example:
 Tesla invests heavily in electric vehicle (EV) technology and battery research,
ensuring future profitability and sustainability.

Graph 1: Risk vs. Return Tradeoff

 This graph illustrates the relationship between risk and return.
 Observation:
o Low-risk investments (e.g., bonds, savings accounts) yield lower returns.
 o High-risk investments (e.g., stocks, cryptocurrencies) offer higher potential
returns.
 Application:
o Investors must balance risk appetite and return expectations.
o Example: A conservative investor may prefer bonds, while an aggressive investor
may choose high-growth stocks.

2. Financing Decisions
How should a company raise funds for its investments?
Financing decisions focus on determining the best mix of debt and equity to finance business
activities.
Sources of Finance
 Debt Financing (Borrowed Funds):
o Includes bank loans, corporate bonds, and issuing debentures.
o Advantages:
 Interest is tax-deductible.
 Retains company ownership.
o Disadvantages:
 Increases financial risk due to repayment obligations.
 Interest payments can reduce net profits.
 Equity Financing (Owner’s Funds):
o Includes issuing shares to investors.
o Advantages:
 No repayment obligation.
 Reduces financial risk.
o Disadvantages:
 Dilutes ownership and control.
 Shareholders expect dividends and business growth.
 Retained Earnings (Internal Financing):
o Using company profits for reinvestment.
o Example: Google reinvests most of its earnings into research and expansion
instead of paying large dividends.
🔹 Real-world Example:
 Amazon raised funds by issuing corporate bonds to finance its warehouses and cloud
services expansion.
 Startups like SpaceX raise equity funds from investors instead of taking loans.
Graph 2: Capital Structure (Debt vs. Equity Financing)
 This pie chart represents the financing decision of a company.
 Observation:
o The company finances its activities with 60% debt and 40% equity.
o Debt financing is emphasized as it often provides tax advantages but increases
financial risk.
 Application:
o Example: Tesla has used a mix of equity (stock issuance) and debt (bonds,
loans) to fund its expansion.
o Companies must decide on optimal capital structure to balance risk and return.

3. Dividend Decisions
How should profits be distributed among shareholders or reinvested?
Dividend decisions determine how a company allocates its earnings:
 Whether to distribute profits as dividends to shareholders.
 Whether to reinvest profits for business expansion.
Types of Dividend Policies
 Stable Dividend Policy:
o The company pays consistent dividends, even if profits fluctuate.
o Example: Coca-Cola pays stable dividends yearly to maintain investor trust.
 Constant Payout Ratio:
o A fixed percentage of earnings is distributed as dividends.
o Example: If a company decides to distribute 40% of profits, dividends
fluctuate based on earnings.
 Residual Dividend Policy:
o Dividends are paid only after funding business needs.
o Used by high-growth companies that prefer reinvesting profits.
🔹 Real-world Example:
  Apple Inc. has a balanced approach, paying dividends but also reinvesting in
technology and product development.
 Amazon does not pay dividends and reinvests all profits into business expansion.

Graph 3: Dividend vs. Retained Earnings Allocation

 This pie chart illustrates how a company distributes its profits.
 Observation:
o 30% of profits are paid as dividends to shareholders.
o 70% of profits are retained for business reinvestment.
 Application:
o Example: Companies like Amazon and Tesla reinvest most of their profits to
expand operations, while firms like Coca-Cola distribute higher dividends to
shareholders.
o High-growth companies tend to retain more earnings, whereas mature
companies distribute higher dividends.

4. Risk Management
How can a company protect itself from financial uncertainties?
Risk management involves identifying potential financial risks and implementing strategies to
reduce them.
Types of Financial Risks
1. Market Risk – Fluctuations in stock prices, interest rates, and currency exchange rates.
2. Credit Risk – The risk of customers or borrowers defaulting on payments.
3. Liquidity Risk – Difficulty in converting assets into cash when needed.
4. Operational Risk – Losses due to fraud, system failures, or mismanagement.
Risk Mitigation Strategies
 Hedging: Using derivatives (futures, options) to protect against market fluctuations.
 Diversification: Investing in multiple assets to reduce dependency on one sector.
 Insurance: Protecting against unexpected financial losses.
🔹 Real-world Example:
 Airlines like Southwest Airlines hedge fuel prices using futures contracts to protect
against oil price spikes.
  Banks use credit risk models to evaluate the repayment ability of borrowers.

Graph 4: Time Value of Money (Future Value Growth)

 This graph demonstrates how money grows over time at different interest rates.
 Observation:
o An initial investment of $1,000 grows significantly over 10 years.
o At a 5% interest rate, the investment grows moderately.
o At 10% and 15% interest rates, the future value increases rapidly.
 Application:
o Example: If you invest $1,000 today at 10% interest, it will grow to $2,593 in
10 years.
o This concept helps in retirement planning, investments, and financial
forecasting.

Financial Planning & Forecasting

 Estimating future financial needs and preparing budgets.
 Types:
o Short-term (operational budgeting, cash flow management).
o Long-term (capital investment planning, debt financing strategies).
g) International Financial Management
 Managing financial activities in a global environment.
 Focus areas:
o Foreign exchange risk management.
o Cross-border investment decisions.
o Compliance with international financial regulations.

Objectives of Financial Management

  Profit Maximization: Ensuring earnings growth and efficiency.
 Wealth Maximization: Increasing the value of shareholders' investments.
 Efficient Resource Allocation: Properly utilizing financial resources.
 Financial Stability: Maintaining liquidity and avoiding insolvency.
 Growth & Expansion: Supporting long-term business development.
 Risk Management: Identifying and mitigating financial risks.

Conclusion
The finance function is the backbone of any business, ensuring the efficient use of financial
resources. The scope of finance is broad, covering:
 Investment decisions (Where to invest?)
 Financing decisions (How to raise money?)
 Dividend decisions (How to allocate profits?)
 Risk management (How to protect assets?)
By balancing these four areas, businesses can achieve financial stability, maximize
shareholder wealth, and ensure long-term success.

Evolution of the Finance Function

The finance function has evolved significantly over time. Initially, it focused only on raising and
managing funds, but today, it plays a strategic role in business growth, risk management, and
value creation. The evolution of finance can be divided into three major phases:

1. Traditional Phase (Before 1950s) – Transaction-Oriented Finance

Key Characteristics

 The primary focus was on fund-raising (how to acquire money).

 Businesses relied mainly on bank loans and retained earnings.
 Investment decisions were limited to buying assets like land, buildings, and
machinery.
 No structured approach to risk management.

Sources of Finance

 Business owners depended on personal savings, loans, and reinvested profits.

 Bank loans and government funding were the primary sources for large firms.
  Financial management was not highly specialized.

Example:

 A small textile mill in the 1920s would borrow money from banks or family savings
to expand operations.
 Companies like Ford Motors (founded in 1903) used profits from car sales to reinvest
in production.

2. Modern Phase (1950s–1980s) – Decision-Oriented Finance

Key Characteristics

 The role of finance expanded beyond fund-raising to include:

o Investment decisions (Where should we invest money?).
o Capital structure decisions (Should we use debt or equity?).
o Dividend decisions (How much profit should be paid to shareholders?).
 Financial managers started using capital budgeting techniques (NPV, IRR, Payback
Period) to evaluate investments.
 Financial planning and forecasting became essential for business expansion.

Emergence of Financial Markets

 The stock market and bond market grew rapidly.

 Companies began raising capital by issuing shares to the public (IPOs).
 Credit ratings became important for evaluating company risk.

Example:

 IBM and Coca-Cola expanded globally during this phase, using capital budgeting to
decide on investments in new markets.
 Warren Buffett’s Berkshire Hathaway used financial analysis to invest in
undervalued companies.
Graph: Growth in Stock Market Financing vs. Traditional Bank Financing

 This bar chart compares the shift from traditional bank financing to stock market
financing over different decades.
 Observations:
o In the 1950s, businesses relied 90% on bank loans and only 10% on stock
markets.
o By the 2000s and beyond, stock market financing overtook bank loans as the
primary source of capital.
o 2020s trend: Companies now prefer IPOs, bond markets, and venture capital
investments over traditional bank financing.
 Application:
o Firms like Apple, Tesla, and Google raise billions through stock markets instead
of bank loans.
o The rise of venture capital (VC) and private equity also contributed to this
shift.

3. Contemporary Phase (1980s–Present) – Strategic & Digital Finance

Key Characteristics

 Finance now plays a strategic role in business decisions.

 Advanced financial models help in investment planning and risk management.
 Companies focus on maximizing shareholder wealth rather than just short-term profits.
 The rise of financial technology (FinTech) has changed how businesses manage
finances.

Major Developments in the Contemporary Phase

a) Financial Risk Management

 Businesses use hedging strategies, derivatives, and credit risk modeling to manage
financial risks.
 Example: Airlines hedge against fuel price fluctuations using futures contracts.

b) Digital Transformation in Finance

 Artificial Intelligence (AI) and Big Data help in financial decision-making.

 Robo-advisors and algorithmic trading manage investments automatically.
 Companies use blockchain technology for secure financial transactions.

c) Globalization and Corporate Finance

 Companies operate internationally, requiring currency risk management.

 Mergers and acquisitions (M&A) have become a key strategy for growth.
 Example: Amazon’s expansion into India and China required careful financial planning.

d) Sustainable Finance and ESG Investing

 Companies now focus on environmental, social, and governance (ESG) factors.

 Green bonds and impact investing are becoming popular.
 Example: Tesla’s focus on electric vehicles and renewable energy attracts ESG
investors.

Comparison Table: Evolution of Finance Function

Phase Focus Area Key Developments Example Companies

Traditional (Before Bank loans, retained earnings,

Fund-raising Ford, General Electric
1950s) limited investment analysis

Modern (1950s– Investment & Capital budgeting, stock IBM, Coca-Cola,

1980s) Decision-Making markets, credit ratings Berkshire Hathaway

Contemporary Strategic & Digital AI, blockchain, FinTech, risk Tesla, Amazon, JP
(1980s–Present) Finance management, ESG investing Morgan

Final Thoughts
  Finance has evolved from a passive function to a proactive, strategic function.
 Companies now use advanced financial models, technology, and risk management
techniques.
 The role of finance is no longer just about raising money—it helps drive business
growth, sustainability, and global expansion.

The New Role of Finance in the Contemporary Scenario

Introduction

The finance function has evolved significantly from merely managing funds to becoming a
strategic pillar in organizations. In today’s world, finance plays a proactive role in decision-
making, risk management, technology adoption, and sustainability.

Key Drivers of Change in Finance

1. Technological Advancements – AI, blockchain, and automation.

2. Globalization – Expansion into international markets.
3. Regulatory Changes – Stricter compliance laws.
4. Economic Shifts – Market volatility and inflation concerns.
5. Sustainability & ESG Investing – Environmental and social considerations in finance.

1. Strategic Decision-Making Role

Finance is no longer just about managing money—it drives business strategy.

Companies now use financial data to:

 Predict market trends 📈 using data analytics.

 Optimize pricing models to improve profits.
 Allocate resources efficiently to maximize returns.

Example: Amazon’s Expansion Strategy

 Amazon uses financial analytics to decide which new markets to enter.

 They analyze cost structures, tax policies, and customer demand before launching in
a new country.

Example: Tesla’s R&D Investment

  Tesla reinvests its earnings into innovation (EV technology, battery production).
 Financial forecasting helps determine long-term profitability of investments.

2. Digital Transformation in Finance

With the rise of AI, blockchain, and digital payments, finance is becoming faster, more
secure, and data-driven.

a) Artificial Intelligence (AI) in Finance

 AI predicts market trends and automates financial decision-making.

 Chatbots and Robo-Advisors provide instant financial advice.

Example: JP Morgan uses AI-powered financial models to detect fraud and improve
investment decisions.

b) Blockchain and Cryptocurrency

 Blockchain technology ensures secure transactions and fraud prevention.

 Decentralized finance (DeFi) is changing the traditional banking system.

Example: Bitcoin and Ethereum allow borderless transactions without banks.

c) FinTech & Digital Payments

 The rise of mobile banking, peer-to-peer payments, and digital wallets.

 Contactless transactions and QR code payments are increasing financial accessibility.

Example: PayPal, Stripe, and Apple Pay dominate the digital payments space.

Graphical Representation Idea: A line chart showing growth in AI and blockchain-based

financial transactions over the past decade.

3. Financial Risk Management

Modern finance focuses heavily on identifying and mitigating risks.

Companies now use sophisticated risk models to predict and prepare for financial crises.

Types of Financial Risks

 1. Market Risk – Unpredictable fluctuations in stock prices, interest rates.
2. Credit Risk – Risk of customers defaulting on loans.
3. Operational Risk – Business disruptions due to fraud or technical failures.

Example: Banks like Citibank and HSBC use AI to detect fraudulent transactions in real
time.

Example: Airlines hedge fuel prices to avoid losses from oil price fluctuations.

Graphical Representation Idea: A bar chart comparing risk management techniques used by
financial institutions today vs. 20 years ago.

4. Globalization and Cross-Border Finance

 Companies now operate in multiple countries and require complex financial strategies.
 Foreign exchange risks, international tax laws, and global investments play a crucial
role.

Example: Coca-Cola generates more than 70% of its revenue from international markets
and uses financial strategies to hedge against currency fluctuations.

Example: Apple carefully manages international supply chain financing to optimize costs in
different countries.

5. Sustainability and ESG (Environmental, Social, Governance) Finance

Sustainable finance is a key focus in the modern world. Companies are evaluated based on
their ESG performance, and investors prefer businesses with strong environmental and
social commitments.

Green Bonds and Sustainable Investments

 Green bonds are issued to fund environmentally friendly projects.

 Investors are focusing on companies with low carbon footprints and ethical business
practices.

Example: Tesla raised billions through green bonds to develop electric vehicles.

Example: Unilever has committed to 100% sustainable sourcing for its products.
 Graphical Representation Idea: A bar chart showing the increase in ESG-focused
investments over time.

6. The Role of Financial Regulations & Compliance

Governments are imposing stricter financial regulations to prevent fraud and ensure financial
stability.

Key Regulatory Areas

 Anti-Money Laundering (AML) Laws prevent illegal money transactions.

 Data Protection Laws ensure the security of financial transactions.
 Corporate Governance Rules improve financial transparency.

Example: After the 2008 financial crisis, governments introduced stricter banking
regulations (Basel III, Dodd-Frank Act).

Example: Facebook's Libra cryptocurrency faced legal challenges due to concerns about
global financial stability.

Conclusion: The Future of Finance

Finance is no longer just an administrative function—it’s a business enabler!

Key trends shaping the future of finance:

1. AI and automation will make financial decision-making faster.

2. Digital banking and cryptocurrencies will reduce reliance on traditional banks.
3. Risk management and compliance will become more sophisticated.
4. ESG finance will dominate global investments.

Goals of Finance Function: Profit Maximization vs. Wealth Maximization

1. Introduction
The finance function is essential in ensuring an organization's financial stability, growth, and
long-term success. The primary goals of financial management are:

1. Profit Maximization – Focuses on increasing earnings.

2. Wealth Maximization – Focuses on increasing the overall value of the business for
shareholders.
A company must balance these goals to ensure short-term profitability while securing long-
term financial health.

2. Goals of Finance Function

🔹 The Primary Goals of Financial Management

Goal Focus Purpose

Profit Maximization Short-term Increasing earnings and reducing costs
Wealth Maximization Long-term Increasing shareholder value through financial growth

Key Objectives of Financial Management

1. Ensuring Profitability – Optimizing revenues and minimizing costs.

2. Maintaining Liquidity – Ensuring cash flow for operational stability.
3. Financial Risk Management – Reducing risks associated with market changes.
4. Efficient Resource Allocation – Investing in projects that offer the highest returns.
5. Sustainable Growth – Ensuring long-term business expansion.

📌 Example: A company like Apple balances short-term profitability with long-term growth by
reinvesting profits into R&D for new products.

3. Profit Maximization
🔹 Definition

Profit Maximization means increasing earnings while reducing costs. It is the traditional goal
of financial management and focuses on short-term performance.

🔹 How to Achieve Profit Maximization?

 Increasing sales revenue.

 Reducing operational and production costs.
 Improving efficiency and productivity.
 Raising prices strategically.
🔹 Advantages of Profit Maximization

Quick Performance Indicator – Easy to measure success through profits.

Encourages Cost Reduction – Helps businesses control expenses.
Ensures Business Survival – Profitable businesses can reinvest and grow.

🔹 Disadvantages of Profit Maximization

Short-Term Focus – Ignores long-term sustainability.

Ignores Risk – Doesn't consider financial risk exposure.

Neglects Stakeholder Interest – Focuses only on profits, not customer or employee welfare.

📌 Example: A company like McDonald's may focus on profit maximization by reducing

costs through automation in its kitchens.

📈 Graphical Representation Idea: A bar chart comparing a company's profit growth over
different years to show how profit maximization works.

3. Wealth Maximization

Definition

Wealth Maximization is the modern and preferred goal of financial management. It focuses
on increasing the long-term value of the business by maximizing shareholder wealth.

How to Achieve Wealth Maximization?

 Investing in projects with high return potential.

 Maintaining a healthy financial structure (debt vs. equity).
 Making strategic long-term investments (R&D, acquisitions).
 Ensuring stable and growing dividends for investors.

Advantages of Wealth Maximization

✅ Long-Term Growth – Focuses on financial sustainability.

✅ Considers Risk & Return – Balances investment risks and profits.
✅ Protects Shareholders’ Interests – Ensures the company’s stock price and dividends grow.

🔹 Disadvantages of Wealth Maximization

Delayed Returns – Benefits are realized in the long run, not immediately.
Complex Decision-Making – Requires careful analysis of investments.
May Ignore Short-Term Profits – Companies might sacrifice immediate profits for long-term
value.

Example: Amazon focuses on wealth maximization by reinvesting its profits into new
technologies, warehouses, and cloud computing services instead of paying high dividends.

Graphical Representation Idea: A line graph showing stock price growth over time to
illustrate wealth maximization.

5. Profit Maximization vs. Wealth Maximization

Criteria Profit Maximization Wealth Maximization
Time Frame Short-term Long-term
Focus Increasing earnings Increasing shareholder value
Risk Consideration Ignores risk Considers risk & return balance
Sustainability Not sustainable Ensures long-term financial stability
Benefits investors, employees, and
Stakeholder Impact Only benefits business owners
customers

📌 Example:

 Profit Maximization Approach: A company cuts employee salaries to increase short-

term profits.
 Wealth Maximization Approach: A company invests in employee training to improve
long-term productivity and innovation.