Innovation in Times of Financialization - the Limited Freedom of Innovation Activities in German Industry Sectors

Processes of global financialization and their impact on economic institutions and activities have been intensively discussed in recent years (Windolf 2005, Van der Zwan 2014). Especially employees are affected by the implemented short-term strategies which focus on increasing yield returns, satisfying shareholder interests as well as restructuring company organizations. It is questionable whether innovativeness can be kept under these changing conditions: The freedom of innovation research with its uncertainty and risks must be balanced against the interest of investors in safe short-term, high yield returns (cf. Lazonick 2003, Hirsch-Kreinsen 2011).

However, our analysis of statistical data about the German manufacturing industry shows no direct influence of financial market actors on innovation, since most companies finance innovation out of their internal cash flow (cf. Rammer 2009). The question therefore is whether financialization of innovations holds for innovation strategies at all?

Answering this research question requires a deeper insight in financing innovations on the company level where intensive open interviews with crucial actors of the German industrial innovation system were conducted. The results lead to a different picture than it could be expected with regards to the financialization debate:

• Confirmation of the statistical analysis: Both did not show a direct influence of financial investors on innovation activities.
• But there is an interesting development: Large companies have created research and innovation departments with a high degree of freedom, independently from the daily, short-termed development tasks. Since the development departments work under a strong market pressure, research departments provide the companies with scientifically upgraded innovations, independently from current market requirements and financial targets with a rather mid-/long-term perspective for future technologies.
• But this is not the whole story because these departments are not untroubled by restrictions: The newly created freedom of research is limited by financial norms and values like controlling, stage gates or an internal competition for project funding. The financial logic leads decision making when new ideas for innovation projects are generated.

Finally: It does not require further discussions that financial measures like yield returns provide an important strategical orientation for decision making in companies. Due to their main interest in high yield returns and lacking technological competencies financial actors focus primarily on meeting those targets. Companies have the power to decide independently how much financial logic they allow for their innovation strategies and how they solve the contradiction between obtaining control even in uncertain innovation processes and ensuring a certain kind of freedom of research.

References

Hirsch-Kreinsen, Hartmut (2011): Financial Market and Technological Innovation. In: Industry & Innovation, 18/4, pp. 351-368

Lazonick, William (2003): The Theory of the Market Economy and the Social Foundations of Innova­tive Enterprise. Economic and Industrial Democracy, 24/1, pp. 9-44

Rammer, Christian (2009): Innovationsverhalten der Unternehmen in Deutschland 2007. Studien zum deutschen Innovationssystem, no. 4, ZEW Mannheim

Van der Zwan, Natascha (2014): State of the art: Making sense of financialization. In: Socio-Economic Review, 12/1, pp. 99-129

Windolf, Paul (Hg.) (2005): Finanzmarkt-Kapitalismus – Analysen zum Wandel von Produktionsregimen, Kölner Zeitschrift für Soziologie und Sozialpsychologie, Sonderheft 45, Wiesbaden: VS Verlag