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Innovative Business Models and Varieties of Capitalism: Financialization of the U.S. Corporation

Part of: Henrietta Larson Award Winner

Published online by Cambridge University Press:  14 April 2011

William Lazonick
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Abstract

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How does economic organization affect economic performance? This analysis of the historical transformation of the U.S. economy from the business model of the “old economy” to that of the “new economy” demonstrates that the Japanese challenge of the 1980s was an important catalyst for the shift. Anchored by the “Chandlerian” corporation, the old model delivered economic growth that was much more equitable and stable than the new one. Furthermore, the business model that underpinned the Japanese challenge represented a superior version of the old U.S. prototype. The fi nancialization of corporate decision-making under the new paradigm has been the prime source of inequity and instability in U.S. economic performance over the past three decades. As manifested in outsized executive pay and massive stock buybacks, the fi nancialization of the U.S. corporation threatens long-term economic growth.

Type
Articles
Information
Business History Review , Volume 84 , Issue 4: Business History and Varieties of Capitalism , Winter 2010 , pp. 675 - 702
Copyright
Copyright © The President and Fellows of Harvard College 2010

References

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13 The stock market can perform fi ve functions in the operation of the company that can be summarized as creation, control, combination, compensation, and cash. See Lazonick, “The New Economy Business Model.”

14 Under the new-economy business model, most companies list on NASDAQ, which has less stringent listing requirements than the New York Stock Exchange, thus tending to shorten the duration of time from company formation to initial public offering (IPO), which in turn tends to increase the prevalence of owner-entrepreneurs who still exercise a degree of control over the allocation of resources of the company after the IPO. Nevertheless, the participation of venture capital and the use of broad-based stock option plans in the new-economy model contribute to the separation of ownership from control at the IPO, and the tendency remains for the complete separation of ownership from control over time under the new model.

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18 These institutions are conventionally labeled “cross-shareholding,” “lifetime employment,” and “the main bank system,” respectively. For reasons elaborated in Lazonick, “The Institutional Triad and Japanese Development,” these conventional terms are misleading.

19 When in fi nancial distress, a company might raise cash by selling some of its stable shareholdings to other companies at the going market price, but with an understanding that the shares would be repurchased, also at the going market price, if and when its fi nancial condition improved.

20 The value of shares held by foreigners increased from 6 percent in 1992 to over 13 percent in 1998 to almost 28 percent in 2008. Tokyo Stock Exchange, Fact Book 2009 (2009), 61, available at http://www.tse.or.jp/english/market/data/factbook/index.html.Google Scholar

21 Hence, my use of the more modest term “main bank lending,” rather than the grandiose term “main bank system,” to describe this institution.

22 This section draws upon Lazonick, Sustainable Prosperity in the New Economy? and references contained therein.

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25 Lazonick, “The New Economy Business Model.”

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33 U.S. Could Lose Race for Nanotech Leadership.”

34 William Lazonick and Öner Tulum, “U.S. Biopharmaceutical Finance and the Sustainability of the Biotech Business Model,” Research Policy (forthcoming).

35 AFL-CIO, Executive Paywatch (2009). See the Web site http://www.afl cio.org/corporate watch/paywatch/pay/index.cfm.Google Scholar

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37 Ibid.

38 Lazonick, Sustainable Prosperity in the New Economy? ch. 2.

39 Ibid., ch. 5.

40 Ibid.; Lazonick, “The New Economy Business Model and the Crisis of U.S. Capitalism.”