Corporate governance and innovation: an organizational perspective

Belloc, Filippo (2010): Corporate governance and innovation: an organizational perspective.

Abstract

Traditional economic studies of innovation, built on the contribution of Schumpeter, cannot explain why firms of the same size and market power can show largely different innovation performances. Contrastingly, the literature on corporate governance provides some useful insights for understanding corporate innovation activity, to the extent that such literature examines the economic consequences of different modes of coordination between firm participants. The process through which individuals integrate their human and physical resources within the firm is indeed central to the dynamic of corporate innovation. This paper provides the first survey of the literature on this issue. We start by discussing why a theory of the firm must be put at the base of an economic analysis of corporate innovation. We then describe three main channels – corporate ownership, corporate finance and labour – through which a system of corporate governance shapes firm innovation activity. Finally, we examine the recent literature on national structures of governance.

• Item Type: MPRA Paper
• Language: English
• Keywords: corporate governance; innovation; theory of the firm; specific investments
• Subjects: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

References

Acs, Z.J. and Audretsch, D.B. (1988) “Innovation in Large and Small Firms: An Empirical Analysis”, American Economic Review, 78(4):678-690.

Aghion, P. and Tirole, J. (1994) “The Management of Innovation”, Quarterly Journal of Economics, 109(4):1185-1209.

Aghion, P., Van Reenen, J. and Zingales, L. (2009) “Innovation and Institutional Ownership”, CEPR Discussion Paper No. 7195.

Alchian, A.A. and Demsetz, H. (1972) “Production, Information Costs, and Economic Organization”, American Economic Review, 62(5):777-795.

Aoki, M. (2001) Toward a Comparative Institutional Analysis, MIT Press, Cambridge, MA.

Balakrishnan, S. and Fox, I. (1993) “Asset Specificity, Firm Heterogeneity and Capital Structure”, Strategic Management Journal, 14(1):3-16.

Battaggion, M.R. and Tajoli L. (2001) “Ownership Structure, Innovation Process and Competitive Performance: the Case of Italy”, CESPRI Working Paper No. 120, Milano.

Baysinger, B.D., Kosnik, R.D. and Turk T.A. (1991) “Effects of Board and Ownership Structure on Corporate R&D Strategy”, Academy of Management Journal, 34(1):205-214.

Becker, G.S. (1975) Human Capital, 2nd ed., National Bureau of Economic Research, New York.

Belloc, F. (2010) “The Dark Side of Shareholder Protection: Cross-country Evidence from Innovation Performance”, Quaderni del Dipartimento di Economia Politica Working Paper No. 583/2010, University of Siena, Siena.

Bemmels, B. and Reshef, Y. (19991) “Manufacturing Employees and Technological Change”, Journal of Labor Research, 12(3):231-246.

Berger, S. and Dore, R. (1996) National Diversity and Global Capitalism, Cornel University Press, Ithaca.

Blair, M.M. (1995) Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, Brookings Institution Press, Washington.

Blair, M.M. (1999) “Firm Specific Human Capital and Theory of the Firm” in Blair M.M. and M.J. Roe (eds.) Employees and Corporate Governance, Brookings Institution Press, Washington, pp. 58-90.

Blair, M.M. and Stout L.A. (1999) “A Team Production Theory of Corporate Law”, Virginia Law Review, 85(2):248-328.

Blair, M.M. and Stout L.A. (2006) “Specific Investment and Corporate Law”, European Business Organizational Law Review, 7(2):473-500.

Bradley, M., Jarrel G. and Kim, E.H. (1984) “On the Existence of an Optimal Board Composition, and Ownership Structure: the Case of Banking”, Journal of Finance, 39:857-878.

Bruining, H. and Wright, M. (2002) “Entrepreneurial Orientation in Management Buyouts and the Contribution of Venture Capital”, Venture Capital: An International Journal of Entrepreneurial Finance, 4:147-168.

Carpenter, R.E., Lazonick, W. and O’Sullivan, M. (2003) “The Stock Market and Innovative Capability in the New Economy: The Optical Networking Industry”, Industrial and Corporate Change, 12(5):963-1034.

Carpenter, R.E. and Petersen, B.C. (2002) “Capital Market Imperfections, High-Tech Investment, and New Equity Financing”, Economic Journal, 112(477):54-72.

Casper, S. and Matraves, C. (2003) “Institutional Frameworks and Innovations in the German and UK Pharmaceutical Industry”, Research Policy, 32:1865-1879.

Chandler, A.D., Amatori, F. and Hikino, T. (1997) Big Business and the Wealth of Nations, Cambridge University Press, Cambridge.

Cho, M.H. (1998) “Ownership Structure, Investment, and the Corporate Value: an Empirical Analysis”, Journal of Financial Economics, 47(1):103-121.

Coase, R.H. (1937) “The Nature of the Firm”, Economica, 4(16):386-405.

Cohen, W. and Levin, R. (1989) “Empirical Studies of Innovation and Market Structure”, in Schmalensee, R. and Willig, R.D. (eds) Handbook of Industrial Organisation, North Holland, London, pp. 1059-1107.

Daniel, W. (1987) “Workplace Involvement in Technical Change”, Policy Studies, 7(4):43-57.

David, P. and Hitt, M.A. and Gimeno, J. (2001) “The Influence of Activism by Institutional Investors on R&D”, Academy of Management Journal, 44(1):144-157.

Drago, R. and Wooden, M. (1994) “Unions, Innovation and Investment: Australian Evidence”, Applied Economics, 26(6):609-615.

Eng, L.L. and Shackell, M. (2001) “The Implications of Long Term Performance Plans and Institutional Ownership for Firm’s Research and Development Investments”, Journal of Accounting, Auditing and Finance, 16(2):117-39.

Francis, J. and Smith, A. (1995) “Agency Costs and Innovation: Some Empirical Evidence”, Journal of Accounting and Economics, 19:383-409.

Goyer, M. (2001) “Corporate Governance and the Innovation System in France 1985-2000”, Industry and Innovation, 8(2):135-158.

Graves, S.B. (1988) “Institutional Ownership and Corporate R&D in the Computer Industry”, Academy of Management Journal, 31:417-428.

Graves, S.B. (1990) “Institutional Ownership and Corporate R&D Investment : A Multi-Industry Study”, Technological Forecasting and Social Change, 37(1):59-76.

Grossman, S.J. and Hart O.D. (1986) “The Cost and Benefit of Ownership: A Theory of Vertical and Lateral Integration”, Journal of Political Economy, 94(4):691-719.

Gugler, K. (2001) Corporate Governance and Economic Performance, Oxford University Press, Oxford.

Hall, P. and Gingerich, D.W. (2004) “Varieties of Capitalism and Institutional Complementarities in the Macroeconomy: an Empirical Analysis”, MPIfG Discussion Paper 04/5.

Hall, P. and Soskice, D. (2001) “An Introduction to Varieties of Capitalism”, in Hall, P. and Soskice, D. (eds.) Varieties of Capitalism, Harvard University Press, Cambridge, MA, pp. 1-68.

Hansen, G.S. and Hill, C.W. (1991) “Are Institutional Investors Myopic? A Time-Series Study of Four Technology-Driven Industries”, Strategic Management Journal, 12(1):1-16.

Hart, O.D. and Moore, J. (1990) “Property Rights and the Nature of the Firm”, Journal of Political Economy, 98(6):1119-1158.

Hauschildt, J. (1999) “Opposition to Innovations – Destructive or Constructive?” in Brockhoff, K., Chakrabarti, A., Hauschildt, J. (eds.) The Dynamics of Innovation, Springer, Berlin, pp. 217-240.

Hill, C.W., Hitt, M.A. and Hoskisson, R.E. (1988) “Declining US Competitiveness: reflections on a Crisis”, Academy of Management Executive, 2(1):51-60.

Hill, C.W. and Snell, S.A. (1988) “External Control, Corporate Strategy, and Firm Performance in Research-Intensive Industries”, Strategic Management Journal, 9(6):577-590.

Hirsch, B.T. and Link, A.N. (1987) “Labor Union Effects on Innovative Activity”, Journal of Labor Research, 8(4):323-332.

Hitt, M.A., Hoskisson, R.E., Ireland, R.D. and Harrison, J.S. (1991) “Effects of Acquisitions on R&D Inputs and Outputs”, Academy of Management Journal, 34(3):693-706.

Holmstrom B. (1982) “Moral Hazard in Teams”, The Bell Journal of Economics, 13(2):324-340.

Holmstrom B. (1989) “Agency Costs and Innovation”, Journal of Economic Behavior and Organization, 12(3):305-327.

Holmstrom B. and Milgrom P. (1994) “The Firm as an Incentive System”, American Economic Review, 84(4):972-991.

Hoskisson, R.E., Hitt, M.A. and Ireland, D. (1994) “The Effects of Acquisition and Restructuring (Strategic Refocusing) Strategies on Innovation”, in Von Krogh, G., Sinatra, A. and Singh, H. (eds) The Management of Corporate Acquisitions: International Perspectives, Macmillan, New York, pp.144-169.

Hoskisson, R.E., Hitt, M.A., Johnson, R.A. and Grossman, W. (2002) “Conflicting Voices: The Effects of Institutional Ownership Heterogeneity and Internal Governance on Corporate Innovation Strategies”, Academy of Management Journal, 45(4):697-716.

Jensen, M.C. and Meckling, W.H. (1976) “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, Journal of Financial Economics, 3(4):305-360.

Johnson, M.S. and Rao, R.P. (1997) “The Impact of Antitakeover Amendments on Corporate Financial Performance”, Financial Review, 32(3):659-690.

Kamien, M.I. and Schwartz, N.L. (1975) “Market Structure and Innovation: A Survey”, Journal of Economic Literature, 3(1):1-37.

Kochhar, R. and David, P. (1996) “Institutional Investors and Firm Innovation: A Test of Competing Hypothesis”, Strategic Management Journal, 17(1):73-84.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R.W. (1998) “Law and Finance”, Journal of Political Economy, 106(6):1113-1155.

Lacetera, N. (2001) “Corporate Governance and the Governance of Innovation: the Case of Pharmaceutical Industry”, Journal of Management and Governance, 5:29-59.

Laursen, K. and Foss, N.J. (2003) “New Human Resource Management Practices, Complementarities and the Impact on Innovation Performance”, Cambridge Journal of Economics, 27(2):243-263.

Lazonick, W. (2003) “The Theory of the Market Economy and the Social Foundations of the Innovative Enterprise”, Economic and Industrial Democracy, 24(1):9-44.

Lazonick, W. (2007) “The US Stock Market and the Governance of Innovative Enterprise”, Industrial and Corporate Change, 16(6):983-1035.

Lazonick, W. and O’Sullivan M. (1996) “Organization, Finance and International Competition”, Industrial and Corporate Change, 5(1):1-49.

Lazonick, W. and Prencipe A. (2005) “Dynamic Capabilities and Sustained Innovation: Strategic Control and financial Commitment at Rolls-Royce plc”, Industrial and Corporate Change, 14(3):501-542.

Lerner, J., Sørensen, M. and Strömberg, P. (2008) “Private Equity and Long-run Investment: The Case of Innovation”, NBER Working Paper No. 14623.

Long, M. and Malitz, I. (1985) “The Investment-Financing Nexus: Some Empirical Evidence”, Midland Corporate Finance Journal, 3(1):53-59.

Long, W.F. and Ravenscraft, D.J. (1993) “LBOs, Debt and R&D Intensity”, Strategic Management Journal, 14:119-135.

Machin, S. and Wadhwani, S. (1991) “The Effects of Unions on Investment and Innovation: Evidence from WIRS”, Economic Journal, 101(2):324-330.

Maher, M. and Andersson, T. (2002) “Corporate Governance: Effects on Firm Performance and Economic Growth”, in J.

McCahery, L. Renneboog, P. Moerland and T. Raaijmakers (eds.) Corporate Governance Regimes: Convergence and Diversity, Oxford University Press, Oxford.

Markman, G.D., Balkin, D.B. and Schjoedt, L. (2001) “Governing the Innovation Process in Entrepreneurial Firms”, Journal of High Technology Management Research, 12:273-293.

Mayer, C. (1997) “Corporate Governance, Competition and Performance”, Journal of Law and Society, 24(1):152-176.

McCain, R.A. (1980) “A Theory of Codetermination”, Journal of Economics, 40(1-2):65-90.

Menezes-Filho, N., Ulph, D. and Van Reenen, J. (1998) “R&D and Unionism: Comparative Evidence fro British Companies and Establishments”, Industrial and Labor Relations Review, 52(1):45-63.

Michie, J. and Oughton, C. (2003) “HRM, Employee Share Ownership and Corporate Performance”, Research and Practices in Human Resource Management, 11(1):15-36.

Michie, J. and Sheehan, M. (1999a) “No Innovation without Representation? An Analysis of Participation, Representation, R&D and Innovation”, Economic Analysis, 2:85-98.

Michie, J. and Sheehan, M. (1999b) “HRM Practices, R&D Expenditure and Innovative Investment: Evidence from the UK’s 1990 Workplace Industrial Relations Survey (WIRS)”, Industrial and Corporate Change, 8(2):211-234.

Michie, J. and Sheehan, M. (2003) “Labour Market Deregulation, “Flexibility” and Innovation”, Cambridge Journal of Economics, 27(1):123-43.

Milgrom, P. and Roberts, J. (1992) Economics, Organization and Management, Prentice Hall, Eaglewood Cliffs.

Miozzo, M. and Dewick, P. (2002) “Building Competitive Advantage: Innovation and Corporate Governance in European Construction”, Research Policy, 31:989-1008.

Modigliani, F. and Miller, M. H. (1958) “The Cost of Capital, Corporate Finance and the Theory of Investment”, American Economic Review, 48: 261-97.

Nelson, R. and Winter S. (1982) An Evolutionary Theory of Economic Change, The Belknap Press of Harvard University Press, Cambridge (MA).

O'Sullivan, M. (2000) “The Innovative Enterprise and Corporate Governance”, Cambridge Journal of Economics, 24:393-416.

Pagano, U. and Rossi, M.A. (2004) “Incomplete Contracts, Intellectual Property and Institutional Complementarities”, European Journal of Law and Economics, 18:55-76.

Pagano, M. and Volpin, P.F. (2005) “Shareholder Protection, Stock Market Development, and Politics”, Journal of the European Economic Association, 4(2-3):315-341.

Pugh, W.N., Jahera, J.S. and Oswald, S. (1999) “ESOPs, Takeover Protection, and Corporate Decision Making”, Journal of Economics and Finance, 48(5):1985-99.

Rajan R.G. and Zingales L. (1998) “Power in the Theory of the Firm”, Quarterly Journal of Economics, 113:387-432.

Sapra, H., Subramanian, A. and Subramanian, K. (2009) “Corporate Governance and Innovation Theory and Evidence”, Chicago Booth Working Paper No. 08-05, University of Chicago Booth School of Business, Chicago.

Scharfstein, D. (1988) “The Disciplinary Role of Takeovers”, Review of Economic Studies, 55(2):165-199. Schumpeter, J.A. (1942) Capitalism, Socialism and Democracy, Harper and Row, New York.

Sherman, H., Beldona S. and Joshi, M.P. (1998) “Institutional Investor Heterogeneity: Implications for Strategic Decisions”, Corporate Governance, 6(3):166-173.

Shleifer, A. and Summers L. (1998) “Breach of Trust in Hostile Takeovers” in Auerbach A. (ed.) Corporate Takeovers: Causes and Consequences, University of Chicago Press, Chicago, pp.33-55.

Smith, A.J. (1990) “Corporate Ownership Structure and Performance: The Case of Management Buyouts”, Journal of Financial Economics, 27(1):143-164.

Smith, G. (1998) “The Shareholder Primacy Norm”, Journal of Corporation Law, 23(2):277-323.

Smith, S.C. (1991) “On the Economic Rationale for Co-determination Law”, Journal of Economic Behaviour and Organization, 16(3):61-81.

Soskice, D. (1997) “German Technology Policy, Innovation and National Institutional Framework”, Industry and Innovation, 4(1):75-96.

Stein, J.C. (1988) “Takeover Threats and Managerial Myopia”, Journal of Political Economy, 96(1):61-80.

Szewczyk, S.H., Tsetsekos, G.P. and Zantout, Z. (1996) “The Valuation of Corporate R&D Expenditures: Evidence from Investment Opportunities and Free Cash Flow”, Financial Management, 25:105-110.

Tylecote, A. and Conesa, E. (1999) “Corporate Governance, Innovation Systems and Industrial Performance”, Industry and Innovation, 6(1):25-50.

Ughetto, E. (2010) “Assessing the Contribution to Innovation of Private Equity Investors: A Study on European Buyouts”, Research Policy, 39:126-140.

Ulph, A. and Ulph, D. (1988) “Bargaining Structures and Delay in Innovation”, Scandinavian Journal of Economics, 90(4):475-491.

Van Cayseele, P.J.G. (1998) “Market Structure and Innovation: A Survey of the Last Twenty Years”, De Economist, 146(3):391-417.

Whitley, R. (1999) Divergent Capitalisms: The Social Structuring and Change of Business Systems, Oxford University Press, Oxford.

Williamson, O.E. (1985) The Economic Institutions of Capitalism: Firms, Markets, Relational Contracts, Free Press, New York.

Williamson, O.E. (1988) “Corporate Finance and Corporate Governance”, Journal of Finance, 43(3):567-591.

Wright, M., Hoskisson, R.E. and Busenitz, L.W. (2001) “Firm Rebirth: Buyouts as Facilitators of Strategic Growth and Entrepreneurship”, Academy of Management Executive, 15(1):111-125.

Zahra, S.A. (1995) “Corporate Entrepreneurship and Financial Performance: The Case of Management Leveraged Buyouts”, Journal of Business Venturing, 10(3):225-247.

Zwick, T. (2002) “Employee Resistance against Innovations”, International Journal of Manpower, 23(6):542-552.