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Too little attention - The spiral of economic mittelm like LIQUID

Markus Reitzig, 2019

Every second year, on the third weekend in June, a conference of innovation and organizational researchers takes place in Vienna. Scientists discuss as yet unpublished results on how new technologies and products are created and what society and companies can contribute to them.

 

One lecture is attracting particular attention this summer. A group of researchers from New York investigated the question of how the massive growth of index funds affects the innovation behavior of companies in research-intensive industries.

 

Index funds try to generate an average market return for their investors. To do this, fund managers buy shares in all those companies with which they want to map market developments. The index fund manager is interested in the average profit development across all companies he owns. The individual company receives far less attention from him than from a so-called active investor who specifically invests in individual companies. If the proportion of index funds increases compared to traditional investors, companies in the fund receive more financial leeway while at the same time the attention of investors decreases.

 

The results of our colleagues in America show that this diminishing attention on the part of donors has subtle effects on companies. Specifically, their willingness to invest in radical and really unsafe projects is falling significantly. Because as long as they manage to pacify the average expectations of investors, they will not face any trouble.

I sit back and reflect on my own thoughts as I discuss.

 

As a society, we need companies that are willing and able to take on real risk. Technological progress cannot be achieved without companies experimenting, making mistakes and losing (sometimes a lot) money in the process. Potentially the more, the more radical your planned developments. Research and development are expensive, but indispensable if you don't want to leave the discovery of new possibilities to others or if you consider it completely unnecessary. But if we increasingly throw the money after those who do not want to take any real risk, then we will achieve the opposite in the long run.

All of this will not be changed single-handedly by individual retail investors who buy low-cost ETFs. Many cannot or do not want to actively invest, understand far too little about the companies they entrust their money to, and are satisfied with an average market return. Including me.

 

However, we should perhaps ask ourselves whether we as a society want to allow our industry to increasingly orientate itself towards such mediocrity. Whether and how far we want to counter the possibly increasing risk-free markets. What we are ready to do so that those companies who want to jump higher than the rest of the herd receive funding; or in another direction that is possibly more important for us as a society than for the company itself. How we want to help them on their feet if they fall in the process. And who we want to make legs because they already enjoy privileges so that they take risks but don't.

For example, what do we do when nobody wants to invest in new antibiotics because the “risk is too high” compared to other investments? Are we cushioning small businesses? Do we remind the big ones of their privileges and responsibilities? Or do we increase the success fee? Or do we prefer to live with the risk of resistance? Doesn't all of this deserve a little more attention?

 

Pharmaceutical companies stop developing antibiotics

... The development of a new antibiotic costs several hundred million euros. If the drug is approved, the costs for manufacturing, distribution and marketing are added. Small companies that do not have any additional income, for example from lucrative pharmaceuticals from other areas, can usually not cover these costs on their own….

... The reason for the withdrawal of the large pharmaceutical companies from this area are apparently economic considerations. You can earn significantly less money with antibiotics than, for example, with cancer drugs or remedies for chronic diseases ...

... There is simply no market for antibiotics at the moment. He [Cueni, General Manager IFPMA] doesn't know of any company that can be held accountable to its owners for investing in areas where there is a very high risk that the research will not be successful - and if it does, you won't get any money for it, says Cueni . "

Frankfurter Allgemeine Zeitung, September 12, 2019