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The stock market and innovative capability in the New Economy: the optical networking industry

Author

Listed:
  • Marie Carpenter
  • William Lazonick
  • Mary O'Sullivan

Abstract

The purpose of this paper is to analyze the impact of the stock market on the innovative capabilities of high-technology companies that have been central to what in the last half of the 1990s came to be called the 'New Economy'. The empirical focus is on equipment suppliers in optical networking--an industry that integrates the bandwidth potential of fiber optics with the data communications potential of the internet. The study covers the period from 1996 to 2003, during which the optical networking industry was, first, central to the New Economy boom, and, then from 2001, ensnared by the bursting of the New Economy bubble. This paper shows how, responding to the New Economy business model brought into the industry by Cisco Systems, three Old Economy companies--Nortel Networks, Lucent Technologies, and Alcatel--sought to use their corporate stock as a currency to acquire technology companies and compensate talented people, and thus accumulate innovative capability. To understand the relation between the stock market and innovative capability in the Cisco 'growth-through-acquisition-and-integration' model and in the 'creative responses' of the Old Economy companies to the Cisco challenge, we apply an analytical framework that links four functions of the stock market--control, combination, compensation and cash--with three social conditions of innovative enterprise: strategic control--the abilities and incentives of strategic decision makers to allocate resources to uncertain investments in innovative capabilities; organizational integration--the structure of incentives that motivates employees to apply their skills and efforts to collective learning processes; and financial commitment--the availability to the enterprise of resources to sustain cumulative learning processes until, by accessing markets, they can generate financial returns. Using this framework, we show that the ways in which the Old Economy companies used their stock to accumulate innovative capability in the New Economy boom of 1998--2000 made them more vulnerable to the stock market collapse and the slowdown in the optical networking industry in 2001--2003. Copyright 2003, Oxford University Press.

Suggested Citation

  • Marie Carpenter & William Lazonick & Mary O'Sullivan, 2003. "The stock market and innovative capability in the New Economy: the optical networking industry," Industrial and Corporate Change, Oxford University Press, vol. 12(5), pages 963-1034, October.
  • Handle: RePEc:oup:indcch:v:12:y:2003:i:5:p:963-1034
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    Citations

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    Cited by:

    1. William Lazonick & Andrea Prencipe, 2004. "Sustained Innovation: Career Engineers, Stock Markets, and the Theory of the Innovative Enterprise," SPRU Working Paper Series 121, SPRU - Science Policy Research Unit, University of Sussex Business School.
    2. Lazonick William, 2008. "Comment on "Technological Revolutions and the Evolution of Industrial Structures" (by Giovanni Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsenigo)," Capitalism and Society, De Gruyter, vol. 3(1), pages 1-22, June.
    3. Jackie Krafft & Yiping Qu & Francesco Quatraro & Jacques-Laurent Ravix, 2014. "Corporate governance, value and performance of firms: new empirical results on convergence from a large international database," Industrial and Corporate Change, Oxford University Press, vol. 23(2), pages 361-397.
    4. Suk Choi & Christopher Williams, 2014. "The impact of innovation intensity, scope, and spillovers on sales growth in Chinese firms," Asia Pacific Journal of Management, Springer, vol. 31(1), pages 25-46, March.
    5. Roberto Fontana & Lorenzo Zirulia, 2015. "“…then came Cisco, and the rest is history”: a ‘history friendly’ model of the Local Area Networking industry," Journal of Evolutionary Economics, Springer, vol. 25(5), pages 875-899, November.
    6. J. Krafft & J.-L. Ravix, 2008. "Corporate Governance And The Governance Of Knowledge: Rethinking The Relationship In Terms Of Corporate Coherence," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 17(1-2), pages 79-95.
    7. Filippo Belloc, 2010. "The Dark Side of Shareholder Protection: Cross-country Evidence from Innovation Performance," Department of Economics University of Siena 583, Department of Economics, University of Siena.
    8. repec:zbw:hbsedi:204 is not listed on IDEAS
    9. Giovanni Dosi & Valérie Revest & Alessandro Sapio, 2016. "Financial regimes, financialization patterns and industrial performances : preliminary remarks," Post-Print halshs-01418040, HAL.
    10. William Milberg & Nina Shapiro, 2013. "Implications of the Recent Financial Crisis for Innovation," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2013-2, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    11. Jackie Krafft, 2010. "Profiting in the info-communications in the age of broadband: lessons and new considerations," Post-Print hal-00203801, HAL.
    12. Lazonick, William, 2006. "Corporate Governance, Innovative Enterprise, and Economic Development," WIDER Working Paper Series 071, World Institute for Development Economic Research (UNU-WIDER).
    13. repec:hal:wpaper:hal-00786664 is not listed on IDEAS
    14. William Lazonick, 2010. "Entrepreneurial Ventures and the Developmental State: Lessons from the Advanced Economies," Working Papers id:3167, eSocialSciences.
    15. Lazonick, William & March, Edward, 2010. "The rise and demise of Lucent Technologies," MPRA Paper 22012, University Library of Munich, Germany.
    16. William Lazonick, 2010. "The Chandlerian corporation and the theory of innovative enterprise," Industrial and Corporate Change, Oxford University Press, vol. 19(2), pages 317-349, April.
    17. Belloc, Filippo, 2010. "Corporate governance and innovation: an organizational perspective," MPRA Paper 21495, University Library of Munich, Germany.
    18. Alessandro Giovannini & Maurizio Iacopetta & Raoul Minetti, 2013. "Financial Markets, Banks, and Growth : Disentangling the links," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 105-147.
    19. Honoré, Florence & Munari, Federico & van Pottelsberghe de La Potterie, Bruno, 2015. "Corporate governance practices and companies’ R&D intensity: Evidence from European countries," Research Policy, Elsevier, vol. 44(2), pages 533-543.
    20. Ulrich Lichtenthaler & Eckhard Lichtenthaler, 2009. "A Capability-Based Framework for Open Innovation: Complementing Absorptive Capacity," Journal of Management Studies, Wiley Blackwell, vol. 46(8), pages 1315-1338, December.
    21. Jackie Krafft & Jacques-Laurent Ravix, 2005. "The governance of innovative firms: an evolutionary approach," Post-Print hal-00203620, HAL.
    22. repec:eee:crpeac:v:21:y:2010:i:7:p:631-641 is not listed on IDEAS
    23. Lazonick, William, 2008. "Entrepreneurial Ventures and the Developmental State: Lessons from the Advanced Economies," WIDER Working Paper Series DP2008/01, World Institute for Development Economic Research (UNU-WIDER).
    24. Munari, Federico & Oriani, Raffaele & Sobrero, Maurizio, 2010. "The effects of owner identity and external governance systems on R&D investments: A study of Western European firms," Research Policy, Elsevier, vol. 39(8), pages 1093-1104, October.
    25. Marie CARPENTER & Nabyla DAIDJ & Christina MORENO, 2014. "Game Console Manufacturers: the End of Sustainable Competitive Advantage?," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(94), pages 39-60, 2nd quart.

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