Equity markets and firm innovation in interaction : a study of a telecommunications firm in radical industry transformation

Abstract

The aim of this doctoral thesis is to advance understanding of the interrelationships between equity markets and firm innovation in their institutional context. The principal theoretical issue addressed in this thesis is reflected by the main research question, “How and why do equity markets and firm innovation interact?” Herein, the aim is to identify generative mechanisms that underlie social processes in the complex interaction between equity markets and firm innovation. In this respect, the study aims to enhance the understanding of distinct social actors’ behavior. In particular, it aims to elucidate how this behavior guides the expectations and actions of the social actors, and how these expectations and actions impact the firm innovation process and subsequent institutional change. Prior research has examined the interplay between institutional investors and firm innovation from the management perspective (Carpenter et al. 2003; Lazonick & Prencipe 2005; Tainio 2001a; Tainio 2002; Tainio 2003a,b; Tainio et al 2003). This research examines the relationship between equity markets and firm innovation from the perspective of diverse stakeholders. The research underscores the regulative, normative, and cognitive embeddedness of the organization within its transforming institutional context. Herein, the research takes into consideration the properties of the organization’s history and internal dynamics, coined as ‘interests, values, power dependencies, and capacity for action’ by Greenwood & Hinings (1996), and their interplay with external dynamics.

The research objective is achieved by employing an in-depth single case study as a research strategy, capturing micro-level social dynamics of the relationship between equity markets and firm innovation in its particular institutional context. The aim of the research is further achieved by drawing on rich primary data complemented by secondary data sources. Through the processual approach, the research specifies how firm innovation changes over time through a sequence of events. The empirical analysis presented in this research points to a need for a broader conceptual landscape within which to enhance understanding of the interaction between firm innovation and institutional investors embedded in global equity markets. This thesis contributes to new insights on the role of investors and management coupled with the interrelated role of other central stakeholders, in producing firm innovation outcomes. The thesis firstly contributes to the development of a theory of innovative enterprise by analyzing the role of changing firm ownership, and its relation to firm innovation, complementing the conceptualizations proposed by Carpenter et al (2003) and Lazonick & Prencipe (2005) by discussing how and why strategic control may influence the outcomes of firm innovation. The thesis gauges the influence of changes in state ownership of a firm and the influence of equity markets governance on enabling or constraining firm innovation. The thesis argues that the configuration of firm ownership and the identity of institutional investors as a dimension of ownership influence its set of strategic decisions on firm innovation. Secondly, the thesis underscores the role and interpretations of innovations by distinct stakeholders of the firm. The research suggests that the interplay between equity markets and firm innovation is determined by market expectations projected on the firm by its stakeholders, and their reciprocal action in the social construction of reality. The thesis argues that the diverging views on innovation held by a firm’s stakeholders derive from differing cognitive and normative perspectives on time horizons and incentive mechanisms required for firm innovation to emerge. Moreover, the thesis maintains that the diverging views on innovation held by a firm’s stakeholders are owed to differences in stakeholders’ social position inside the firm, which implies the salient role of power as a determinant of firm innovation outcomes. The thesis thus extends the conceptualization proposed by Tainio (2003a) and Tainio et al (2003) on the multifaceted relationship between investors, managers and corporate restructuring by illuminating the distinct and potentially conflicting stakeholders’ views which reverberate on managerial latitude of action and subsequently firm innovation. In essence, the thesis suggests that firm innovation cannot be accounted for by the actions of any single actor, but that innovation is an outcome of a multidimensional process. This complex process is framed by the institutional order in which it is embedded. The thesis also suggests that a distinction should not be drawn between theorizing on external and internal forces influencing firm innovation outcomes because institutional change and social processes of firm innovation are interrelated, reflecting and constituting one another.