Varying Time Horizons Across the Public and Private Sector
In the private sector, the pressure to realize quarterly earnings has traditionally driven investment decisions for publicly traded firms. In 2013, McKinsey and the Canada Pension Plan Investment Board surveyed more than 1,000 board members and executives and found that seventy-nine percent of respondents felt especially pressured to demonstrate strong financial performance over a period of two years or less. Eighty-six percent of the same board members and executives however stated that using a longer time horizon to make business decisions would positively affect corporate performance, strengthen financial returns and increase innovation.
Corroborating this sentiment, a paper published in 2015 in the National Bureau of Economic Research (NBER) found that publication intensity (number of publications, weighted by citations received) fell by sixty-six percent between 1980 and 2007. The researchers were concerned however that this trend may be driven by publication behavior rather than changes in research activity. This would mean that instead of publishing their research, firms are keeping their discoveries in-house. If this is the case, we would see a sharper decline in applied research publications because these publications are closer to commercial realization. However the researchers found that the decline was evident only for basic publications but not applied publications, indicating that the effect of quarterly earnings pressure on declining basic research was not driven by a shift to keep research secret from competitors.
While the constraints that investors place on firms can diminish their ability to innovate over the long run, the federal government has historically operated in the other extreme. Basic research is differentiated here from applied research, where basic research functions on a longer time research and is “performed without thought of practical ends” while applied research seeks to answer specific questions and stands closer to commercial reward. The federal government can operate on a longer horizon because its investors (taxpayers) have a diminished ability to influence its activity. This stands in stark contrast to investors in public corporations who often run (read: sell) at the sight of a poor quarterly earnings report. While taxpayers could elect officials that act according to their preferences towards short-run activities, the multitude of other demands on politicians can leave the influence of taxpayers on specific government programs somewhere between noisy and absent. Another advantage the federal government has in basic research is its immense scale. The likelihood of immediate payoff for any specific project is low, however “the proceeds from a small portion not identifiable in advance more than pay for the total outlay” (NSF).
In the later half of the decade, earlier trends have been reversed and the time horizons of the private and public sector have started to converge. This trend in basic research investment may be driven in part by the increasing size of firms. In 2018, the Forbes Global 2000 firms collectively accounted for $3.2 trillion in profit, up twenty eight percent from 2017. And the U.S. in particular dominated the list, taking almost 30% of the total number of firms. As firms increase in size, they are able to place more bets on basic science and increase the likelihood of net profit. Increasing basic science research also could have resulted from increased tolerance for short term losses on the part of investors. Regardless of the cause, spending on basic research by U.S businesses has almost doubled in the last decade from $13.9 billion in 2008 to $24.5 billion in 2014. While the federal share of basic research may have dipped below fifty percent for the first time in 2013, increases in corporate investment have left basic research in good hands.
As corporations have started to invest more in basic science, they have effectively lengthened their time horizon. This lengthening could have resulted from increasing size of firms that have a higher likelihood of profiting from basic research or increased investor patience. The increasing investment of firms in basic science has bucked a historical truth where firms cave to the pressure of short term investors to the detriment of long run financial success. In doing so, the private sector is catching up to the federal government in basic science research and the time horizons across both sectors are converging.
SOURCES:
McKinsey: Investing for the Long Term
Science Magazine: U.S. Government Share of Basic Research Funding
National Science Foundation: What is Basic Research?