"Innovation and Financialization in the Theory of the Firm"

In the study of the evolution of the U.S. corporate economy, I have employed a methodological approach that integrates history and theory: the study of history provides the knowledge that we distill as theory, while theory thus constructed provides us with an analytical framework for the further, and more pointed, study of history as well as the refinement of theory. I will outline how I have used this methodology to understand how and why the U.S. corporate economy turned from innovation to financialization since the 1980s. I will also summarize how the three business histories on Hercules, Merck, and Cisco that are papers for this panel apply and further develop this integrative methodology. As “Chandlerian firms” with their origins in the “Old Economy” business model, Hercules in chemicals and Merck in pharmaceuticals entered the 1980s as companies with decades of sustained innovation. Yet during the 1990s both companies became highly financialized, legitimized by the ideology that a company should be run to “maximize shareholder value”. Financial interests used shareholding to reap where they had not sown, as manifested at Hercules and Merck by massive stock buybacks. The rapid growth of Cisco to become the dominant company in enterprise networking in the 1990s epitomized the “New Economy” business model, with a central role of the stock market in attracting labor using shares as a compensation currency and acquiring other companies using shares as a combination currency. Over the past two decades, however, Cisco has become highly financialized, ceasing to be an innovative enterprise as it wasted all its profits on buybacks. In chemicals, the case of Hercules, now extinct, presages the recent attacks on DuPont and Dow by “predatory value extractors” (see Lazonick and Shin, Predatory Value Extraction, OUP, 2020). In pharmaceuticals, the case of Merck exemplifies a once highly innovative firm that has largely lost the capability for internal drug development. In communication technology, the case of Cisco leads us to ask the question: Why isn’t it Huawei?