The finance/innovation nexus in Schumpeterian analysis: theory and application to the case of U.S. trustified capitalism

Joseph Schumpeter built his theory of economic development around the interaction between the entrepreneur and the banker, representations of the underlying finance/innovation nexus. The neo-Schumpeterian revival has marginalized this theoretical element, in favor of an interpretation focused primarily on technological aspects of innovation. Recent attempts by innovation scholars to re-integrate the missing financial elements have been hindered by this theoretical gap. The purpose of this paper is to contribute to the recovery of the finance/innovation nexus in the context of Schumpeter’s theory by proposing an original institutional interpretation of the relationship between finance and the entrepreneurial function. The new approach identifies the economic role of innovation as dependent on the contextual form taken by the related funding process. Application of these concepts to the U.S. trustified capitalism experience allows for an alternative interpretation linking corporate internalization of innovation and financial repression. A Schumpeterian trilemma involving monetary capitalism, financial autonomy of the corporate sector and financial stability is revealed. The proposed framework provides a flexible theoretical background for the development of our understanding of the current capitalist regime, open to further integration with other schools of economic thought.     

On novelty and economics: Schumpeter’s paradox

Is novelty as such an intra or extra-economic phenomenon? Must we, necessarily, treat novelty uniquely as something that, from outside of an economic system, has an influence on it and on its evolution? Is it not a paradox to say that something that has no economic meaning is able to explain economic change? If so, is this paradox present in the Schumpeterian view on development? In this paper, we present what will be called the Schumpeter paradox: denoting nominally ‘novelty’ and ‘creator personality’ as its source, and ‘norm change’ as an analytical tool, is insufficient to separate different fields such as development and growth, if previously (and as a necessary condition) one does not develop a theoretical framework that has a natural place for the elements of ‘novelty’ and ‘creator personality’ that can support such a difference. Nobody should pretend that the study of economic development processes is straightforward. There are good grounds for believing that the innovation ‘black box’ will remain partially closed to economic analysis. However, this does not mean that nothing substantial may be said about novelty and economic development. How to tackle with this topic (and so, with the above-mentioned paradox) will require a change of perspective: a heuristic task should be undertaken. The ‘action plan approach’ here proposed would provide a coherent analytical framework to tackle with this kind of paradox.     

The co‐development of economies and institutions

In this study, we model the Schumpeterian growth theory in a simple discrete‐time framework in which both economies and institutions need to be developed. Individuals need to borrow from an imperfect financial market to develop an economy. A government can adopt two potential strategies for improving the borrowing capacity of individuals and, as a result, enhancing economic performance: ‘the rule of law’ and ‘industrial policies’. We interpret market‐oriented reform in transition economies as a shift from ‘industrial policies’, exemplified at the extreme by the traditional planned economy, to ‘the rule of law’. The presented model shows that both strategies could be the best choice at different stages of development.     

Weaker jobs,weaker innovation. Exploring the effects of temporary employment on new products

This work explores the relationship between temporary employment and product innovation focusing on five major European economies (France, Germany, Italy, Spain and the Netherlands) observed between 1998 and 2012. The analysis distinguishes sectors according to their technological characteristics and regimes finding that industries using temporary employment tend to have a weaker product innovation propensity. The negative correlation between temporary employment and innovation turns out to be stronger in those sectors where tacit firm’s specific knowledge is crucial to the development of innovations. These sectors are identified using both the ‘Cumulativeness’ proxy stemming from Peneder’s classification as well as distinguishing between different Schumpeterian regimes – Schumpeter Mark I vs. II – of knowledge accumulation.     

Fiscal Policy,Monetary Policy and the Mechanics of Modern Clearing and Settlement Systems

Thomas Palley, Eric Tymoigne and Randall Wray recently debated neo-Chartalism in this journal. This article argues that the mechanics of modern clearing and settlement systems is important to understanding this debate. In the neo-Chartalist framework taxes and bond issuance function as part of monetary policy; it is an alternative method for draining reserves to obtain the overnight target rate. Abba Lerner’s Chartalist framework is much clearer on public finance, noting that the federal government can use alternative financing methods to pay for expenditures. Palley’s concerns with central bank ‘money financing’ and inflation are unpersuasive. The Old Keynesian ‘budget restraint– high-powered money relation’ offers limited insight into modern clearing and settlement systems. The article concludes that policymakers should embrace Lerner’s advice and view ‘money printing’ as a normal policy instrument to support functional finance.     

R&D and Absorptive Capacity: Theory and Empirical Evidence*

This paper presents a single unified framework that integrates the theoretical literature on Schumpeterian endogenous growth and major strands of the empirical literature on R&D, productivity growth and productivity convergence. Starting from a structural model of endogenous growth following Aghion and Howitt (1992, 1998) , we provide microeconomic foundations for the reduced‐form equations for total factor productivity (TFP) growth frequently estimated empirically using industry‐level data. R&D affects both innovation and the assimilation of others’ discoveries (“absorptive capacity”). Long‐run cross‐country differences in productivity emerge endogenously, and the analysis implies that many existing studies underestimate R&D's social rate of return by neglecting absorptive capacity.     

Performative global finance: bridging micro and macro approaches with a stratified perspective

Theories of performativity can enhance the study of global finance. Taking everyday financial practices seriously, they emphasise the potentially structuring effects and disciplinary nature of finance, and foreground the performative role of economics, financial models, and formulas. It has remained largely overlooked to date that the literature on the performativity of finance can be divided into two distinct approaches. ‘Microperformativity’ is the more actor-oriented approach, beginning its analysis with the exploration of agencements and their practices, or the examination of the social history of mathematical formulas in finance. ‘Macroperformativity’, in contrast, takes its point of departure from the social structure of finance itself, often in relation to national, international, or global power structures. Neither approach provides for an intermediary concept that more explicitly links the micro and macro level. Nor does either approach give adequate analytical consideration to social conflicts and power struggles. To fill these gaps, the paper applies poststructural hegemony theory to reconceptualise performativity as an articulatory logic which accounts for the transition of a particularity towards a universality within a framework of stratified hegemony. Framed accordingly, the concept of performativity accounts more strongly for the social and political processes, ruptures, contestations and contradictions in global finance.     

International restructuring,health and the advanced industrial state

For the better part of the last century, the debate between ‘liberalisers’ and ‘interventionists’ marked thinking about the relationship between finance and development. It has by now been superseded by the emergence of the discourse of financial system development, which links economic growth to the development of the financial sector. As the risks entailed by wholesale financial reform came to the fore in the financial crises of the 1990s and early 2000s, emphasis shifted from liberalising financial markets to building institutional frameworks to accommodate investment. Arguably, the emergence of the financial-system-development discourse occurred within a wider shift in the neoliberal paradigm towards institution building. These changes are particularly pronounced in East and Southeast Asia. This paper argues that a convergence of opinions has occurred between Asian financial policy elites, previously strong supporters of the bank-based developmental state model, and the liberalisers, represented through international financial institutions such as the IMF. This consensus is geared towards the expansion of capital markets and a generally more neoliberal, market-oriented mode of economic governance. To illustrate this claim, this paper traces institutional changes in Asian financial systems since the 1997-98 financial crisis. Although local characteristics remain, a common feature is the more salient role of bond markets in the financial system. This is the result of the conscious and deliberate development of local currency debt markets by policymakers. However, the new consensus narrows down the space in which economic policymaking takes place. Yet, by re-politicising financial system development, this space could be broadened again.     

Schumpeterian dynamics : Some methodological notes

The main purpose of this paper is to define ‘Schumpeterian dynamics’ and to indicate how it can serve as a basis and starting point for studies in development economics irrespective of how Schumpeter used his general approach and what kind of hypotheses he launched. Schumpeterian dynamics is characterized by its focus on economic transformation. This implies that the main interest is in causal chains outside the scope of macroeconomic growth analyses, namely in disequilibria and chain effects created inter alia by entrepreneurial activities, market processes and competition as a dynamic force. The micro underpinnings of such analyses therefore differ from those of growth models which deal with aggregates, such as investments and saving, productivity, income distribution, wage shares in value added, and capital/output ratios. Seen through Schumpeterian glasses, the micro units have no well-defined generalizable ‘propensities’, and they are not fully informed calculators reacting in a mechanical way to prices that they cannot influence. Instead, firms continuously seek new information and often search for projects which, if carried out, exert transformation pressure on the markets. Consumers can also actively influence firms and markets and do not only passively react to supply prices. Transformation analyses should not replace macroeconomic growth models, but a change of roles is called for. Such analyses have too long and too often been regarded as empirical complements to growth analyses and therefore as belonging mainly to the domain of economic historians. The stress on ‘complement’ instead of ‘alternative’ implies that some sort of a synthesis should be sought in theoretical as well as in empirical research.     

The reverse tragedy of the commons: an exploratory account of incentives for under-exploitation in an open innovation environment*

This paper presents an empirical account of a phenomenon that we refer to as the ‘reverse tragedy of the commons’ in open innovation. The name signifies the ‘under-exploitation’ of intellectual property (IP) under weak appropriability. The name is this graphic because the tragedy is costly, and can also render IP effectively worthless and block innovation in the short to medium term. We propose that the tragedy is borne out of the interaction between enterprise characteristics, a competitive setting and the framework that is set by the policy intervention. This finding is pertinent to policy-makers with regard to the design of research, development and innovation instruments, as well as managers who must determine how to implement open practices in innovation.     

Technology innovation and entrepreneurial state: the development of China's high-speed rail industry

China proactively promotes indigenous technology innovation towards developing an innovation-based economy. This contradicts the developmental state literature that puts emphasis on technology imitation. Drawn from the strategic entrepreneurship perspective, this article explores the role of the government in China's technology innovation process. Carrying out a case study in the high-speed rail (HSR) industry, it suggests that it is best to understand the Chinese government as an entrepreneur in moving China's HSR industry towards technology innovation-driven development, through three dimensions of state-led strategic entrepreneurship: alertness to opportunities, resource exploration and consolidation, and strategic learning. This article highlights the importance of strategic entrepreneurship to the government in an emerging economy context and contributes to the literature by building a conceptual framework of ‘entrepreneurial state’.     

Conditional factors Pushing catch-up across developed and emerging countries in the nanotechnology sector, 2000–2010

ABSTRACT

The aim of this article is to test national and sectorial technological and innovation capability factors, as well as social capability indicators, which could explain a possible conditional convergence across countries in nanotechnology within the context of a model of innovative technological knowledge β convergence. Based on growth convergence models, our proposal also takes into account the Schumpeterian theory, the National System Innovation –NSI– approach, and particularly the sectorial system of innovation and the technological catch-up hypothesis, as well as theoretical and empirical literature on conditional convergence. The findings allow us to confirm that new nanotechnology knowledge convergence is conditioned by a higher growth rate of technological capabilities in nanotechnology: growth from the initial level of patents granted, cumulative knowledge, and links to technological and scientific activities. Finally, as regards social capabilities, only the institutional weakness variable (corruption index) associates negatively with β convergence. As an emergent paradigm, we realize that convergence and catch-up are starting processes, which could allow less technologically developed countries to benefit from higher growth of some of the factors identified.     

Trade liberalization,wilful credit defaults and bank bribery in a credit-constrained economy

The rising incidence of credit defaults may cause credit crunch. This affects the ability of firms to finance working capital and also fixed capital formation. Naturally, this is a major macroeconomic shock. This paper is an attempt to address the microeconomic foundation of such macroeconomic shock. We provide a theoretical framework to explain the economic rationale behind ‘wilful corporate defaults’ and ‘financial corruption’ in the specific context of trade liberalization. First, we model the behavioural aspects of wilful corporate defaulters and bank officials to determine the bank bribe rate as an outcome of the Nash bargaining process in a two-stage sequential move game. Based on the results of the partial equilibrium framework, we examine aspects of trade liberalization in an otherwise 2 × 2 general equilibrium framework. We also compare the efficacy of punishment strategies to economic incentives to deter credit defaults and banking sector corruption. Methodologically, our analytical model integrates finance capital distinctly from physical capital in Jonesian general equilibrium framework. Interestingly, our findings indicate that there exists a trade-off at equilibrium between curbing credit defaults and bribery. We also find that not all punishment strategies are equally effective at deterring credit defaults if general equilibrium interlinkage effects are carefully dealt with.     

Innovation and finance: a stock flow consistent analysis of great surges of development

The present work aims at contributing to the recent stream of literature which attempts to link the Neo-Schumpeterian/Evolutionary and the Post-Keynesian theory. The paper adopts the Post-Keynesian Stock Flow Consistent modeling approach to analyze the process of development triggered by the emergence of a new-innovative productive sector into the economic system. The model depicts a multi-sectorial economy composed of consumption and capital goods industries, a banking sector and two households sectors: capitalists and wage earners. Furthermore, it provides an explicit representation of the stock market. In line with the Schumpeterian tradition, our work highlights the cyclical nature of the development process and stresses the relevance of the finance-innovation nexus, analyzing the feed-back effects between the real and financial sides of the economic system. In this way we aim at setting the basis of a comprehensive and coherent framework to study the relationship between technological change, demand and finance along the structural change process triggered by technological innovation.     

Technology progress in the Chinese construction industry under the iron-fist of government

Government policies and actions in transitional economies have far-reaching consequences for technology progress. Many studies suggest the important role of governments in providing policies and finance to facilitate technology innovations. The Chinese government has often been seen to exemplify this. This article probes government actions in practice, the way it is conducted and the negative consequences for innovation. We focus on one of China's most important and successful sectors – construction. An analytical framework based on ‘complex systems industry’ is used and a causal map developed to examine the role of the Chinese government acting as client, regulator and administrator of industrial and professional bodies and their impact on innovation in the construction sector. This paper confirms that innovation is industry specific and social and economic context dependent. While recognising the powerful role of the Chinese government, it argues that in reality the ‘Chinese government’ is not a uniform entity, but rather consists of various entities acting in accordance with their varied vested interests at a specific time and under particular circumstances.     

Innovation as a nonlinear process,the scientometric perspective,and the specification of an ‘innovation opportunities explorer’

The process of innovation follows nonlinear patterns across the domains of science, technology, and the economy. Novel bibliometric mapping techniques can be used to investigate and represent distinctive, but complementary perspectives on the innovation process (e.g. ‘demand’ and ‘supply’) as well as the interactions among these perspectives using animations. In a map, the different perspectives can be represented as ‘continents’ of data related to varying extents over time. For example, the different branches of Medical Subject Headings (MeSH) in the Medline database provide sources of such perspectives (e.g. ‘Diseases’ vs ‘Drugs and Chemicals’). The multiple-perspective approach enables us to reconstruct facets of the dynamics of innovation, in terms of selection mechanisms shaping localisable trajectories and/or resulting in more globalised regimes. By expanding the data with patents and scholarly publications, we demonstrate the use of this multi-perspective approach in the case of RNA Interference (RNAi). The possibility to develop an ‘Innovation Opportunities Explorer’ is specified.     

Industrial Policy and Islamic Finance

Debates on industrial policy have typically focused on interventions in the ‘real’ sector to facilitate the transformation of a resources-based economy to one that is based on manufacturing. Although the financial sector has always figured strongly in these discussions, its development, or rather repression, is almost always considered in the context of serving the ‘real’ sector. In contrast, this paper contributes to the emerging literature on government policies to develop financial sectors into independent and internationally competitive sources of economic growth on their own right through an analysis of the development of Islamic finance in Malaysia. The paper argues that the emergence of Islamic finance in Malaysia, and the country's evolution into a key player of the sector in the global market, can be attributed to developmental efforts or industrial policies adopted by the government. The case of Islamic finance in Malaysia suggests the continuing relevance of industrial policy for developmental purposes. More importantly, it demonstrates that developing countries can chart a path towards services-led growth, the next frontier in economic development.     

Cooperation in R&D through a network,an ‘organizational gamble’? an empirical analysis of rhône poulenc rorer-gencell

This paper is based on the empirical analysis of innovation challenges to Rhône Poulenc Rorer-Gencell (RPR-Gencell) resulting from development of biotechnology in the pharmaceutical industy. These we identify as an organizational innovation involving the development of a network of partners following and/or inducing a technological innovation. RPR-Gencell represents a ‘style of innovation’ since it is based on various factors specific to the firm and corresponds to a new organizational form, the ‘tight network’ of partners. We argue that this organizational from, in the context of the development of biotechnology in the pharmaceutical industry, can be likened to an ‘organizational gamble’ associated with a ‘technological gamble’ Altogether, this ‘gamble’ dimension means that the network of partners in R&D is still a marginal organizational form. After an introduction we show that the specficities of the pharmaceutical industry especialy since the emergence of biotechnohgy have led to the emergence of a multiplicity of institutional arrangements governing cooperation in R&D. We take as a specific example that of gene therapy. Later on, we present some stylized facts to emphasize the diversity among the network organizational forms. The network of partners is an alternative to the other complex but ‘clarsical’ forms of cooperation (R&D agreements, cross-licensing, joint-ventures, mergers/acquisilions). We propose a new definition of the network based on the case of RPR-Gencell: the ‘tight network’. We distinguish between the ‘tight network’ and all the other approaches, focusing in particular on the ‘loose network’ of cooperative relationship (mostly multifirm alliances implemented with several bilateral contracts). Only two pharmaceutical companies have adopted the ‘tight network’ to govern their cooperation in R&D. We present the network ofpartners as an organizational innovation governing a technological innovation. We argue that this organizational innovation could be likened to an ‘organizational gamble’ in the case of the pharmaceutical industry. Finally, we show that the network raises several organizational issues since it short-circuits traditional strategic operations in the pharamaceutical industry. We argue that among many different reasons, RPR's technological choices (especially the priorig given to gene therapy) have influenced the creation of its network of partners. As a conclusion, we discuss the link between the organizational innovation and the technological innovation focusing on the ‘gamble’ dimension of such an innovation.     

Innovative initiatives supporting inclusive innovation in India: Social business incubation and micro venture capital

In India inclusive innovation through social entrepreneurs is currently booming. However, these entrepreneurs suffer from a lack of finance since the bank system as well as the microfinance sector are unwilling or unable to finance them. However, pioneering finance initiatives have been emerging recently to bridge this gap. This paper discusses these emerging alternative financing initiatives which are forming an innovation eco-system of support for inclusive innovation and social entrepreneurship. It highlights two instruments in particular that are used in conventional innovation support: business incubation and venture capital. Two case studies are undertaken in order to provide evidence on how such instruments can operate with a ‘dual bottom line’ in supporting inclusive innovation and social entrepreneurship.     

R&D financing and growth

ABSTRACT

R&D investment are an important engine of growth and development. Yet economists have often claimed underinvestment, based on the consideration that these projects are more costly to finance, especially, due to the asymmetric information between inside and outside investors. Coherently, a recent empirical evidence has shown that firms intensively active in R&D are less leveraged and rely more heavily on internal finance. Motivated by this evidence, we study the effects of asymmetric information and financial frictions within a GE economy of Schumpeterian tradition. The model and equilibrium concept are rich enough to represent investment and innovation decisions, technology adoption/diffusion through patent licensing and, most importantly, firms' financial decisions. In this representation, R&D-intensive firms might effectively rely more on internal sources and equity than on debt financing, relative to what would happen in frictionless markets. Further, financial decisions affect aggregate investment and income dynamics.