THE LONGER Pfizer’s attempt to take over Astrazeneca remains in the political spotlight, the more intense and worrying the pressure on the government is becoming to extract guarantees about what the combined company would and wouldn’t do in Britain. Attention has focused particularly on the R&D cuts that Pfizer has confirmed will happen if it succeeds in its bid. Yesterday, at Prime Minister’s questions, Ed Miliband asked for “further assurances” that “these R&D cuts will not take place in the UK”.
It would be unfair to argue that such economic nationalism only has a home in the Labour party, however. David Cameron replied with mixed messages for a politician who says he favours an open, market economy. He rightly argued that “175,000 are employed in life sciences in our country because we are an open economy that encourages investment”, before adding “that the right thing to do is to get stuck in to seek the best possible guarantees on British jobs, British investment and British science”.
The problem is that, in the long run, the right thing to do is nothing. Businesses don’t create jobs and invest because politicians “seek the best possible guarantees”. People are hired and capital is invested because it makes commercial sense. Attempts by politicians to pervert these decisions almost always end up leaving everyone worse off – preoccupied, as politicians are, with downside risks like job cuts, unlike shareholders’ desire for real growth and wealth creation in return for their risk capital. And this is true even when politics is dressed up in the grandiose language of “national interest”.
This is not some abstract economic theory that can be ignored when it comes to actual decisions. Politicians are right to worry about jobs, science and investment. But any guarantees they squeeze from Pfizer are likely to be meaningless at best. One of the reasons why the US giant wants to take over Astrazeneca is precisely because it thinks it can strip out duplicated spending. Eliminating waste, in other words, is one of the key features of corporate M&A.
While it’s good that Miliband hasn’t objected to cutting out the waste itself (he wants people in other countries to lose their jobs instead), Britain will be better off if managers make decisions about where the axe should fall based on real commercial reasons, rather than trying to appease politicians. And this debate distracts from deeper questions about the UK economy. If it makes more sense for a company to shrink its UK activity to remove duplication, that would be because our output-to-cost ratio compares unfavourably for the tasks in question. That might be because the British workers involved aren’t productive enough or because they are too highly skilled relative to the tasks, and therefore too expensive. But whichever it is, politicians trying to force firms to make bad commercial decisions isn’t sustainable.
Finally, with the pharmaceutical industry moving away from the Big Pharma model (Pfizer and Astrazeneca have both shed jobs recently), with R&D increasingly centring on smaller companies and universities, why are politicians so sure that this process should be resisted in the UK? Cameron said his role was to “get stuck in, negotiate hard and fight for Britain”. In fact, we’d be better off if he left that to the directors and shareholders.
Rory Meakin is research director at the TaxPayers’ Alliance.