For example, credit ratings that banks give to companies underemphasise their real health, such as their productivity. In research for a Policy Network report launched on Monday, we found that the probability of receiving a bad credit rating is just as high for a highly productive company as it is for an unproductive one. Companies spending more on R&D, for example, will inevitably have a higher risk profile because innovation is so uncertain. Yet risk associated with innovation is about (good) speculation aimed at the production of new products, not simply (bad) speculation for its own sake. The inability of banks to distinguish these two types of risk is partly why, during the credit crunch, the most innovative UK firms are being hit the hardest.
A credit rating is a measure of risk. Those performing more R&D are riskier. But banks are bad boys for noting this?
In the last decade, Fortune 500 companies have spent $3tn in buying back their own shares; we found that such spending has damaged the willingness and ability of companies to spend on R&D and long-term training. While the usual explanation is that “buybacks” are the only thing to do when there are no investment opportunities, the biggest repurchasers are in industries like pharmaceuticals and oil, where there are plenty of opportunities, such as in new medicines and renewable energy.
Why should oil companies invest in renewables? They know how to find, drill for, pump up and refine oil. What does this have to do with their ability to make solar cells for God’s sake? are we to throw out the entire economics of comparative advantage as it pertains to implicit knowledge in the firm?
And a state owned industrial bank investing in manufacturing under a strategic plan to only invest in the real economy…….snore…