Markets are worse for resource misallocation - excess profits go to share buybacks, not R&D

One of the greatest problems, which we return to in Chapter 9, has been the way in which such reductions in spending on R&D have coincided with an increasing 'financialization' of the private sector. While causality may be hard to prove, it cannot be denied that at the same time that private pharma companies have been reducing the R of R&D, they have been increasing the amount of funds used to repurchase their own shares—a strategy used to boost their stock price, which affects the price of stock options and executive pay linked to such options. For example, in 2011, along with $6.2 billion paid in dividends, Pfizer repurchased $9 billion in stock, equivalent to 90 per cent of its net income and 99 per cent of its R&D expenditures. Indeed, from 2003 to 2012, Pfizer spent amounts equivalent to 71 per cent and 75 per cent of its profits, respectively, on share buybacks and dividends (Lazonick 2014, 55). Amgen, the largest dedicated biopharma company, has re- purchased stock in every year since 1992, for a total of $42.2 billion through 2011, including $8.3 billion in 2011. Since 2002, the cost of Amgen's stock repurchases has surpassed the company's R&D expenditures in every year except 2004, and for the period 1992-2011 was equal to fully 115 per cent of R&D outlays and 113 per cent of net income (Lazonick and Tulum 201 1). The fact that top pharma companies are spending a decreasing amount of funds on R&D at the same time that the State is spending more—all while increasing the amount they spend on share buybacks—makes this particular innovation ecosystem much more parasitic than symbiotic. This is not the 'crowding out' effect: this is free-riding. Share buyback schemes boost stock prices, benefitting senior executives, managers and investors that hold the majority of company stock. Boosting share prices does not create value (the point of innovation), but facilitates its extraction. Shareholders and executives are thus 'rewarded' for riding the innovation wave the State created. In Chapter 9, 1 look more closely at the problem of value extraction and ask whether and how some of the 'returns' from innovation should be returned to the employees and State that are also key contributors and stakeholders in the innovation process.

Unfortunately the same problem seems to be appearing in the emerging clean technology sector. In 2010, the US American Energy Innovation Council (AEIC), an industry association, asked the US government to increase its spending on clean technology by three times to $10 billion annually, with an additional $ 1 billion given to the Advanced Research Projects Agency-Energy (Lazonick 201 lc). On the other hand, companies in the council have together spent $237 billion on stock repurchases between 2001 and 2010. The major directors of the AEIC come from companies with collective 2011 net incomes of $37 billion and R&D expenditures of approximately $10 billion. That they believe their own companies' enormous resources are inadequate to foster greater clean technology innovation is indicative of the State's role as the first driver of innovation or of their own aversion to taking on risks—or both.

The problem of share buybacks is not isolated but rampant: in the last decade, Standard & Poor's (S&P) 500 companies have spent $3 trillion on share buybacks (Lazonick 2012). The largest repurchasers (especially in oil and pharmaceuticals) claim that this is due to the lack of new opportunities. In fact, in many cases the most expensive (e.g. capital-intensive) investments in new opportunities such as medicine and renewable energy (investments with high market and technological risk) are being made by the public sector (GWEC 2012). This raises the question of whether the 'open innovation' model is becoming a dysfunctional model. As large companies are increasingly relying on alliances with small companies and the public sector, the indication is that large players invest more in short-run profit gains (through market gimmicks) than long-run investments. 1 return to this question in Chapters 9 and 10.