Market View
John D. Sanders, Ph.D.,
"R&D Budgets, Regulations, and Business Needs"
I refer you to the cover page article in the Summer 1995 Issue of Technology Transfer Business on "In Deep Water -- Oil Industry Seeks Federal R&D Help". (If you need a copy, let me know.) The summary conclusions are: 1- a major oil field lies under the Gulf of Mexico; 2- For economic and security reasons, our nation's oil reserves must be increased and U. S. companies must take the lead in pursuing that particular oil field; 3- Such deep water drilling will require new technologies and capabilities; 4- R&D capabilities of the U. S. oil industry have been substantially reduced under the relentless pressure for current earnings; 5- The federal and other U. S. laboratories have technologies that can help develop the necessary capabilities; 6- A strong program must be designed to bring together all the necessary components, including money, to move forward at all due haste.
To me, these factors present classic problems in U. S. business going into the 21st Century.
Conflicting interests and decades-old regulations make this much more than just a problem "caused by the corporate fat cats." In fact, other than a few corporate executives who are paid exorbitant salaries, our U. S. corporations have truly responded to the demands of their owners- and these owners to a great extent are the pension funds and public mutual funds representing the broad population. The fund managers demand quarterly increases in earnings combined with cash dividends, both of which can be in conflict with strong R&D expenditures. Corporate management must balance the short term interests of stockholders with long term growth necessities to keep their respective companies competitive in the future. These major ownership blocks also can move quickly and have a devastating effect on a corporation's ability to access capital markets.
Here are more reasons why this overall problem is so complex. The fund managers have a singular requirement for "performance" of their funds; in fact, there are many regulations on pension funds that dictate short term comparisons and leave the managers little leeway. There are virtually no tax incentives for long term holding, especially in the increasing pools of pension fund money. Furthermore, our banking system is still dominated by depression-era designed laws and regulations that totally separate commercial lending from equity investment. In other industrial countries the banks can view a corporation's performance with longer term outlook and needs.
So, here's the cycle. Large percentages of U. S. corporations are owned by money that responds primarily to current performance. Banking laws and regulations along with tax laws actually encourage that action. U. S. corporate management must be truly sensitive to the dictates of their ownership, and therefore lean heavily on the side of the short term profit results, with a corresponding downsizing of R&D and long-term capital commitments. The large pools of capital in commercial banks can only deal with the current assets and have little ability to respond to long term investment needs. Investment banks are caught up in the stock market frenzy for immediate results demanded by their customers who have all kinds of trading techniques to "make the market efficient."
Do I have suggestions? Of course. However, I don't have simple solutions. The oil industry is not the only group caught up in this maze of conflicts. Every company with long term considerations of using new technologies to fuel growth must confront these same considerations. Regulations must be reviewed. Banking laws should be updated for the current reality. Tax laws should encourage longer term commitments (by pension funds also). And, the American investing public should be taught about the real values in long term corporate growth.
Finally, what great opportunities for the Federal Laboratories to provide R&D leadership! Until the financial conflicts are resolved, U. S. industry can not be expected to solely meet the needs for new technologies.
If you have comments, please contact me at Technology Transfer Business magazine: phone: 703-848-2800, ext. 151; fax: 703-848-2353; internet: jsanders@technews.com.
prepared for the July, 1995 Issue of the Federal Laboratory Consortium NewsLink