The stock market and innovative capability in the New Economy: the optical networking industry

Abstract

The purpose of this paper is to analyze the impact of the stock market on the innovative capabilities of high‐technology companies that have been central to what in the last half of the 1990s came to be called the ‘New Economy’. The empirical focus is on equipment suppliers in optical networking—an industry that integrates the bandwidth potential of fiber optics with the data communications potential of the internet. The study covers the period from 1996 to 2003, during which the optical networking industry was, first, central to the New Economy boom, and, then from 2001, ensnared by the bursting of the New Economy bubble. This paper shows how, responding to the New Economy business model brought into the industry by Cisco Systems, three Old Economy companies—Nortel Networks, Lucent Technologies, and Alcatel—sought to use their corporate stock as a currency to acquire technology companies and compensate talented people, and thus accumulate innovative capability. To understand the relation between the stock market and innovative capability in the Cisco ‘growth‐through‐acquisition‐and‐integration’ model and in the ‘creative responses’ of the Old Economy companies to the Cisco challenge, we apply an analytical framework that links four functions of the stock market—control, combination, compensation and cash—with three social conditions of innovative enterprise: strategic control—the abilities and incentives of strategic decision makers to allocate resources to uncertain investments in innovative capabilities; organizational integration—the structure of incentives that motivates employees to apply their skills and efforts to collective learning processes; and financial commitment—the availability to the enterprise of resources to sustain cumulative learning processes until, by accessing markets, they can generate financial returns. Using this framework, we show that the ways in which the Old Economy companies used their stock to accumulate innovative capability in the New Economy boom of 1998–2000 made them more vulnerable to the stock market collapse and the slowdown in the optical networking industry in 2001–2003.

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