The INET project analyzes the ways in which an important financial institution – the stock market – affects the real economic performance of the industrial corporations that are listed on it. The analysis is constructed upon the basic tenet that, at the level of the firm, improvements in real economic performance depend on innovation, defined as the process that generates products that, at prevailing factor prices, are higher quality and/or lower cost than those previously available. From this viewpoint, the project investigates the role of financial markets in the innovation process and the causal relationship between a company’s economic performance and how a company actually makes use of the stock market through five fundamental functions of company stock.

Innovation is the product of a process that is uncertain, collective, and cumulative. Based on the given characteristics of this process, the theory of innovative enterprise is constructed around the concepts of “strategic control”, “organizational integration”, and “financial commitment”. In this project, the theory of innovative enterprise is utilized as the tool for challenging the prevailing ideology that, through the “maximization of shareholder value”, corporate resource allocation contributes to the superior performance of the economy as a whole. The study of US innovation and development shows that this fundamental assumption of agency theory is wrong. In any high-tech sector in which the United States has achieved a position of global leadership, the US government has made massive investments in the human and physical infrastructure that make innovation possible at the enterprise level. Employees also contribute to the innovation process with an expectation of receiving returns from it if and when it is successful.

Through empirical studies of the innovation process in two high-tech sectors – information and communication technologies (ICT)  and biopharmaceuticals – this project will increase our knowledge of the actual role of the stock market in the innovation process in both advanced and developing economies. In addition, this research will further our understanding of the interaction of corporate resource allocation decisions and stock-price movements, and thereby shed light on economic perspectives on the stock market such as the efficient market hypothesis, behavioral finance, information asymmetries, and financial instability. This research aspires to contribute to the efforts of developing public policies that promotes more equitable and stable economic growth by constructing a more sophisticated theory of innovative enterprise that will be useful for carrying out empirical studies of the determinants of success and failure of innovation process.

William Lazonick and Öner Tulum, “US Biopharmaceutical Finance and the Sustainability of the Biotech Business Model“, theAIRnet working paper, January 2011.

Conference: Crisis and Renewal: International Political Economy at the Crossroads, Mount Washington Hotel , Bretton Woods, New Hampshire, April 8-11, 2011: http://ineteconomics.org/initiatives/conferences/bretton-woods