Fortune: Dow-DuPont Raises Even More Concerns America Is Abandoning Corporate Research

Shareholders are arguing that research takes too long, costs too much, and carries too many risks.

America’s vaunted research prowess is under attack. Not from China, Japan, or Germany, but from within, led by impatient investors eager to gain immediate boosts in stock prices.

Spurred on by activist investors, these shareholders are arguing that research takes too long, costs too much, and carries too many risks.

Unfortunately, that’s the very nature of research: despite efforts to accelerate innovation, basic research takes as long as ever because of the thoroughness, rigorous testing, and extended time required for commercialization. Consider the human genome. It was first sequenced during Bill Clinton’s presidency. Fifteen years later, biopharma companies are still working on early applications.

America’s corporate research labs, which have been working with academic research institutions supported by federal funding, have long been the envy of the world. Bell Labs, which produced many of the scientific breakthroughs of the 20th Century, has virtually disappeared as the result of mergers that left it owned by Nokia. I worked in research-based organizations for 35 years and witnessed first-hand the stunning breakthroughs that not only improved our lives but handsomely enriched long-term shareholders.

Now, DuPont’s research labs, which produced discoveries such as nylon, rayon, Teflon, and solar cells, is the target of persistent activist attacks. This week’s announcement of the merger of America’s two leading chemical companies, DuPont DD -5.07% and Dow DOW -4.68% , could spell doom for DuPont’s central research labs and presages further research cuts at Dow as well. To preserve DuPont, former CEO Ellen Kullman won a hard-fought proxy contest with activist investor Nelson Peltz. Six months later, new board member Ed Breen convinced her to retire and took over as CEO.

Only a month after taking the reins, Breen merged the company with Dow and will become CEO of the combined companies. Breen and Dow CEO Andrew Liveris have vowed to cut R&D and break the combined company into three smaller firms, leaving it a weakened player in a competition against global chemical giants like Germany’s BASF and Bayer, and China’s Sinopec and Sinochem. Breen and Liveris were apparently reacting to pressure from activist investors including Peltz and Third Point’s Dan Loeb to resort to financial engineering to create immediate shareholder value. In doing so, they are pleasing short-term shareholders at the potential expense of business fundamentals.

These days, Wall Street cheers every time companies combine or break up and cut their R&D. Buoyed by an unquenchable thirst for short-term stock gains, traders and activist investors are mounting pressure on a wide array of companies to cut research and capital expenditures in order to increase stock buybacks and thus boost stock prices. Activist investors love the “synergies” that result from dismantling R&D. These actions cause short-term profits to rise, but what about a company’s future? Unfortunately, these investors don’t care. They cash in their profits long before a company’s prospects turn sour.

In pharmaceuticals, Pfizer has led the parade of R&D cuts. It acquired Warner-Lambert, Pharmacia & Upjohn, and Wyeth, and then slashed their research budgets by consolidating them. When Pfizer CEO Ian Read began his tenure in 2010, he vowed to make even more R&D cuts and focus on purchasing drugs from others. As this strategy fizzled and British authorities declined Pfizer’s hostile takeover of Astra-Zeneca, Read turned not to drug development but to financial engineering. He recently announced a tax inversion deal to acquire Ireland-based Allergen. Inevitably, R&D will be the big loser here as well.

Meanwhile, aggressive smaller pharmaceutical companies like Valeant openly brag about how they spend less than 3% on R&D and 3% on taxes. Their goal is to acquire larger pharma companies like Allergan and Shire by paying top dollar, and then raising prices on older drugs by 200% to 500% to generate the appearance of revenue growth.

Slashing R&D isn’t limited to pharmaceutical companies. Food giant Kraft was dismantled by Peltz in 2012, leaving a weakened company to seek shelter in the arms of Brazil’s 3G and combine with venerable HJ Heinz. The outcome? 3G is slashing all budgets including R&D, contributing to further revenue declines.

In the struggle between research to fuel growth and cutbacks for short-term gains, financial engineers have the upper hand today. While these financial machinations are pleasing short-term traders, the loser will be America’s superior research machine. As a consequence, the U.S. could lose its global edge in research and badly damage its innovative spirit.

The entrepreneurs of Silicon Valley, whose forte is not basic research but disruptive innovation, are the only ones left standing. Apple, Google, Amazon, and Facebook have all but thumbed their nose at short-term shareholders and continue to invest in research at very high rates. How? Often by keeping control with two classes of stock: voting shares for founders and original investors, and non-voting for everyone else. In the past, this was considered poor corporate governance. Today, it is a pragmatic way for companies like Apple and Google to invest billions in “moonshot” projects such as self-driving cars.

It does not look like the U.S. government is prepared to step in and fund research in Corporate America’s absence. Despite its success, the National Institutes of Health has faced decreasing budgets since 2003, as its purchasing power decreased 30%. Nor has the government invested significantly in developing new forms of renewable energy.

Meanwhile, China is funding research at an unprecedented rate. Its universities churn out 150% more scientists and engineers than America produces. As great as America’s technological universities are, the U.S. is educating far more foreign students than immigration policies permit to stay and work here. Meanwhile, China is building, not dismantling, global champions in every industry to compete for world dominance of their respective fields.

Germany isn’t backing off, either. By concentrating on select industries – automobiles, machine tools, chemicals, and construction – German industry has become the envy of the world in its exporting ability despite its high labor costs.

Where does this leave the U.S.? Barring a change in direction, our industrial base will be gutted as we lose competitive capability on the global scale. Then we will become a nation dominated by financial services, information technology, and service industries. Because of this, we will continue to lose well-paying jobs, further hollowing out the middle class, and creating even greater income inequality.

America can do a lot better, but first we have to overcome our need for instant financial gratification and focus on the long-term.

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Bill George is the author of Discover Your True North, senior fellow at Harvard Business School, and former chair & CEO of Medtronic