The Innovative Enterprise and the Developmental State: Toward an Economics of “Organizational Successâ€‌ William Lazonick University of Massachusetts Lowell

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  • The Innovative Enterprise and the Developmental State: Toward an Economics of Organizational Success William Lazonick University of Massachusetts Lowell and The Academic-Industry Research Network Ford Foundation Conference on Finance, Business Models, and Sustainable Prosperity Ford Foundation, New York City December 6, 2012 William Lazonick
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  • What We Want: Sustainable Prosperity Economic performance goals: Equitable & stable economic growth = sustainable prosperity Growth: real per capita productivity gains that can raise standards of living Equity: gains from growth shared fairly among those who contribute to it Stability: employment and income that is not subject to boom and bust The vast majority of economists would agree with these performance objectives but disagree about how to achieve them William Lazonick
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  • Organizations, not markets, create value As all economists recognize, the key actors in the economy are: HOUSEHOLDS BUSINESSES GOVERNMENTS NONE of these entities are INDIVIDUALS they are ORGANIZATIONS AND IT IS ONLY WHEN THESE ORGANIZATIONS INVEST IN PRODUCTIVE CAPABILITIES THAT AN ECONOMY CAN CREATE VALUE AND GROW William Lazonick
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  • Organizations and markets The failure of an economy to generate equitable and stable economic growth is an organizational failure, not a market failure And what most economists view as market imperfections that impede the flow of capital and labor to alternative uses are often the results of the existence of organizations that can enhance the value-creating capabilities of capital and labor Developed markets in capital, labor, and products are outcomes, not causes, of economic development
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  • The gains of innovative enterprise By creating new sources of value (embodied in higher quality, lower cost products), the innovative enterprise makes it possible (but by no means inevitable) that, simultaneously, all participants in the enterprise can gain: Employees: Higher pay, better work conditions/careers Creditors: More secure paper Shareholders: Higher dividends or share prices Government: More tax revenues The Firm: Stronger balance sheet AND Consumers: Higher quality, lower cost products It is institutions and organizations, not markets, that invest in innovation and determine how the sharing of the gains occurs
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  • Our obsession with markets As individuals we benefit from well-developed markets Labor markets: we can choose where we want to work (if there are jobs available) Capital markets: we can borrow money and choose to become self-employed (if we can get access to credit) Product markets: we can be the arbiters of quality and cost (if we have money, for which we need employment) Well-developed markets provide real economic and social benefits to us an individuals but they do not create the employment opportunities, the availability of credit, or the products that we can buy William Lazonick
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  • Innovation: development and utilization of productive capabilities Innovation requires the development and the utilization of productive capabilities Development of productive capabilities: organizational learning that creates new knowledge embodied in productive capabilities, with the potential to create value Utilization of productive capabilities realizes that value- creating potential Governments, businesses, and households interact in this value-creating process
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  • Development of productive capabil ities Organizations invest in productive capabilities Governments invest in physical infrastructure and the knowledge base (education, science & technology): the developmental state based on taxation Businesses invest in productive capabilities that can generate higher quality, lower cost products: the innovative enterprise based on equity capital for a new venture and retained earnings for a going concern Households invest in the development of the labor force: the supportive family based on employment income
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  • Utilization of productive capa bilities The centrality of business enterprise Business enterprise contributes to the development of productive capabilities, leveraging investments of developmental governments and supportive households training of the labor force research and development organizational learning But business enterprise also needs to ensure the utilization of the capabilities that have been developed: providing employment to the labor force achieving high levels of throughput accessing markets to achieve economies of scale and scope
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  • Characteristics of the innovation process Innovation is uncertain, collective, and cumulativ e Uncertain: if we knew how to innovate at the outset when investments are made, then it would not be innovation technological uncertainty: Can we produce it? market uncertainty: Can we sell it? competitive uncertainty: Will others do it faster, better, and cheaper? Collective: integrating the efforts of large numbers of people with different functional capabilities and hierarchical responsibilities to develop and utilize productive resources Cumulative: sustaining the innovation process from the time that investments are made until, by generating higher quality, lower cost products, it can generate financial returns
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  • From the innovation process to the innovative enterpr ise Innovation is Uncertain: creates the need for strategy Collective: creates the need for organization Cumulative: creates the need for finance Behavioral conditions of innovative enterprise: Strategic Control: enables executives to make allocation decisions, which are dependent on not only their abilities but also their incentives Organizational Integration: induces employees to engage in collective and cumulative learning, the essence of innovation Financial Commitment: mobilizes financial capital to sustain the development and utilization of resources until higher quality, lower cost products can generate financial returns
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  • Social conditions of innovative enterprise: An analytical framework William Lazonick
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  • Institutions, enterprises, and sectors in the innovation process Governance institutions and strategic control: What are the rights and responsibilities that govern the allocation of productive resources (labor and capital) in the economy? Where in the economy is control over allocation decisions located? What are the social processes that monitor, sanction, and reform such control? Employment institutions and organizational integration: To whom does society provide education, training, and access to research? Through what organizations? For what purposes? How do people get jobs? Is a job at a point in time part of a process of building a career over time? Are careers within or across firms? Investment institutions and financial commitment: How are financial resources mobilized in the economy for investments in productive resources? From what sources? On what terms? With what expected returns?
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  • Some implications of the theory of innovative enterprise for job-creating gro wth Strategic control: paying top executives too much money can undermine their incentives to engage in innovation and put people who lack the ability to invest in innovation in charge of corporate resource allocation Organizational integration: If a company wants to accumulate innovative capabilities, it has to train employees, retain them, and motivate them to engage in the collective and cumulative learning processes that are the essence of innovative enterprise Financial commitment: innovative enterprise needs patient capital profits are needed to sustain the enterprise and reward those economic actors who have invested their labor and capital in the innovation process
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  • Some implications of the the theory of innovative enterprise for governance institutions Who bears the risks?: Taxpayers and workers provide much of the productive inputs that result in organizational success, and must be rewarded when the risks that they have taken generate returns Who gets the rewards?: Reward equity holders for creating value, not extracting value: the most destructive economic ideology of the past quarter century is the notion that companies should be run to maximize shareholder value -- it rewards value extractors Risk-reward nexus in the innovation process: economics of organizational success, instead of market failure, demands a radical rethinking of the governance of business enterprise (Lazonick & Mazzucato 2012)Lazonick & Mazzucato 2012
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  • Some implications of the the theory of innovative enterprise for employment institutions Education: nations that invest deeply and broadly in the education of their labor forces have dominated and will continue to dominate the global economy Employment: In a world of global competition, the norm of a career with one company is often no longer viable. But flexible labor markets can undermine innovation and even lead to a deterioration of human capital. National policies must help to sustain the careers path of productive employees. S&T infrastructure: the creation, absorption, and dissemination of technologies is the basis for indigenous innovation which is essential for global leadership and sustainable prosperity
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  • Some implications of the the theory of innovative enterprise for investment institutions Finance i