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The Pursuit of Shareholder Value: Cisco's Transformation from Innovation to Financialization

Author

Listed:
  • Marie Carpenter

    (Institut Mines-Telecom Business School)

  • William Lazonick

    (The Academic-Industry Research Network)

Abstract

Once the global leader in telecommunication systems and the Internet, over the past two decades the United States has fallen behind global competitors, and in particular China, in mobile communication infrastructure specifically 5G and Internet of Things (IoT). This national failure, with the socioeconomic and geopolitical tensions that it creates, is not due to a lack of US government investment in the knowledge required for the mobility revolution. Nor is it because of a dearth of domestic demand for the equipment, devices, and applications that can make use of this infrastructure. Rather, the problem is the dereliction of key US-based business corporations to take the lead in making the investments in organizational learning required to generate cutting-edge communication-infrastructure products. No company in the United States exemplifies this deficiency more than Cisco Systems, the business corporation founded in Silicon Valley in 1984 that had explosive growth in the 1990s to become the foremost global enterprise-networking equipment producer in the Internet revolution. This paper provides in-depth analysis of Cisco's organizational failure, attributing it ultimately to the company's turn from innovation in the last decades of 20th century to financialization in the early decades of the 21st century. Since 2001, Cisco's top management has chosen to allocate corporate cash to open-market share repurchases aka stock buybacks for the purpose of giving manipulative boosts to the company stock price rather than make the investments in organizational learning required to become a world leader in communication-infrastructure equipment for the era of 5G and IoT. From October 2001 through October 2022, Cisco spent $152.3 billion - 95 percent of its net income over the period - on stock buybacks for the purpose of propping up its stock price. These funds wasted in pursuit of "maximizing shareholder value" were on top of the $55.5 billion that Cisco paid out to shareholders in dividends, representing an additional 35 percent of net income. In this paper, we trace how Cisco grew from a Silicon Valley startup in 1984 to become, through its innovative products, the world leader in enterprise-networking equipment over the next decade and a half. As the company entered the 21st century, building on its dominance of enterprise-networking, Cisco was positioned to upgrade its technological capabilities to become a major infrastructure-equipment vendor to service providers. We analyze how and why, when the Internet boom turned to bust in 2001, the organizational structure that enabled Cisco to dominate enterprise networking posed constraints related to manufacturing and marketing on the company's growth in the more sophisticated infrastructure-equipment segment. We then document how from 2002 Cisco turned from innovation to financialization, as it used its ample profits to do stock buybacks to prop up its stock price. Finally, we ponder the larger policy implications of Cisco's turn from innovation to financialization for the competitive position of the US information-and-communication-technology (ICT) industry in the global economy.

Suggested Citation

  • Marie Carpenter & William Lazonick, 2023. "The Pursuit of Shareholder Value: Cisco's Transformation from Innovation to Financialization," Working Papers Series inetwp202, Institute for New Economic Thinking.
  • Handle: RePEc:thk:wpaper:inetwp202
    DOI: 10.36687/inetwp202
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    References listed on IDEAS

    as
    1. Marie Carpenter & William Lazonick & Mary O’ Sullivan, 2003. "The stock market and innovative capability in the New Economy : the optical networking industry," Post-Print hal-02447314, HAL.
    2. William LAZONICK, 2008. "The Quest for Shareholder Value : Stock Repurchases in the US Economy," Discussion Papers (REL - Recherches Economiques de Louvain) 2008043, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    3. William Lazonick, 2008. "The Quest for Shareholder Value: Stock Repurchases in the US Economy," Recherches économiques de Louvain, De Boeck Université, vol. 74(4), pages 479-540.
    4. Lazonick William, 2009. "The New Economy Business Model and the Crisis of U.S. Capitalism," Capitalism and Society, De Gruyter, vol. 4(2), pages 1-70, October.
    5. William Lazonick & Mustafa Erdem Sakinç & Matt Hopkins, 2020. "Why Stock Buybacks Are Dangerous for the Economy," Post-Print hal-03987814, HAL.
    6. Dhammika Dharmapala & C. Fritz Foley & Kristin J. Forbes, 2011. "Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act," Journal of Finance, American Finance Association, vol. 66(3), pages 753-787, June.
    7. William Lazonick, 2009. "Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number spne, November.
    8. Marie Carpenter & William Lazonick & Mary O'Sullivan, 2003. "The stock market and innovative capability in the New Economy: the optical networking industry," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 12(5), pages 963-1034, October.
    9. Matt Hopkins & William Lazonick, 2016. "The Mismeasure of Mammon: Uses and Abuses of Executive Pay Data," Working Papers Series 49, Institute for New Economic Thinking.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cisco Systems; communication technology; enterprise networking; strategic control; organizational integration; financial commitment; acquisitions; stock-based compensation; share repurchasers; dividends; shareholder value; global competition; innovation; financialization.;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • N81 - Economic History - - Micro-Business History - - - U.S.; Canada: Pre-1913
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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