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Project Studies Financial Institutions and Business Innovation

Boom and Bust, Stock Buybacks, or Stable and Equitable Growth?

Prof. William Lazonick leads an international team of scholars considering the relationships between business finance and innovation.

By Sandra Seitz

As governments consider new regulations on the financial industry, a new study will seek insights on the relationship between finance and innovation at the business level, as well as the implications for the economy as a whole.

An international team of scholars, directed by Prof. William Lazonick of the Department of Regional Economic and Social Development (RESD), has received a $200,000, two-year grant from the Ford Foundation for the project, titled Financial Institutions for Innovation and Development.  

Lazonick’s team includes senior researchers at the University of California Berkeley, Georgia Institute of Technology, University of London, New School for Social Research, University of Oxford and the Stockholm School of Economics, plus 15 junior researchers, including five from RESD and the Center for Industrial Competitiveness, which Lazonick co-directs. 

The project will compare the experiences of the United States, Japan and China with a focus on information and communication technology, biotechnology and clean technology.

“We will analyze the governance, organization and operation of financial institutions that fund industrial innovation in these key high-tech sectors of the economy,” says Lazonick. “Business interests may have a central role in restructuring financial institutions.”

Although businesses exist to generate high-quality, low-cost products that provide the foundation for stable and equitable growth, that relationship can be disconnected. For example, the speculative promotion of startups in the boom led to instability, with venture capital and Wall Street banks playing active roles.

So, too, large banking interests used self-styled “innovative” financial products to shape the operation of American mortgage institutions, culminating in the financial meltdown of 2008.

As Lazonick detailed in his recent book, “Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States” as well as in a number of other recent publications, in the 2000’s U.S. companies have shown themselves to be more interested in doing stock buybacks, to boost their stock prices, than investing in innovation and job creation.

The Financial Times featured an article by Lazonick on the problem of stock buybacks in the midst of the financial meltdown of September 2008, while BusinessWeek published a piece of his last summer as the economy struggled to recover. Most recently, USA Today ran a story on buybacks largely based on Lazonick’s research.

The project will analyze the different sources of finance, including government spending, for innovation in the three nations: United States, Japan and China. The scholars will consider the various users of this finance such as government research institutes, universities, large corporations and small businesses and the ways in which the financial gains from innovation are distributed among the nation’s population: workers, entrepreneurs, financiers and governments.

The Ford Foundation grant complements a European Commission grant for €1.5 million for international collaborative research on finance, innovation and growth. Lazonick is involved in this grant through his affiliations with The Open University in the United Kingdom and the University of Bordeaux in France.

In a related event, Lazonick is organizing a conference on “The US Corporation in the Recovery and Beyond” in collaboration with Prof. Will Milberg of the New School for Social Research. The conference, to be held on April 22-23 at the New School, is funded by the Ford grant and by the Schwartz Center for Economic Policy Analysis.