Financing Innovation: In the United States, 1870 to the Present (review)

This edited volume makes a large and welcome contribution to our understanding of the history of entrepreneurial finance in the United States. The focus of the volume is on innovation by both corporations and entrepreneurs. It examines all the important forms of financing, including wealthy individuals (who we now call angels), venture capital, government financing and debt. Scholars of many disciplines, including economics, finance, entrepreneurship, business history, and organizational networks will find this volume to be of interest and the essays can be read either selectively or globally.

Lamoreaux and Sokoloff’s introduction is a significant chapter in itself, providing a rich historical analysis of the rise of the U.S. patenting system. The editors also provide a thorough summary of each essay and note that these authors address a number of important issues in innovation: the shifting role of inventors from self-financed entrepreneurs to employees of larger corporate labs, the importance of the institutional environment (such as patent laws) in promoting innovation, the role of the government in financing and encouraging adoption of technology, and the return to market forces in the venture capital system of innovation.

The eleven contributed essays address four topics, each from a different historical period. The first two chapters examine technology clusters at the turn of the century. Lamoreaux, Levinstein, and Sokoloff document the rise of Cleveland as an industrial center. Working from patenting and financial records, they show how start-up capital came from wealthy individuals, not banks, and entrepreneurs gained access to them through a business network surrounding the Brush Electric Company and its multiple spin-offs.

Klepper’s chapter traces early automobile industry, showing the explosion of spin-offs from Olds, Cadillac, Ford, and Buick and the subsequent consolidation of the industry to a handful of firms. In carefully tracing the origins of each firm, Klepper presents evidence that many spin-offs came from strategic disagreements between partners and that these new firms were more successful than other start-ups due to the founder’s prior experience.

The next three chapters focus on the early stock market and how it financed innovation. First, Neal and Davis look to untangle the regulatory, legal, and business decisions that characterized the development of the New York, London, and Berlin exchanges in order to understand how the New York exchange rose to prominence. Their work speaks to the current challenges of building financial markets in developing nations to support innovation. In Chapter 4, O’Sullivan looks at how the stock market evolved at the turn of the century to financing a much broader range of firms. She then looks at equity funding of three nascent industries: automobile firms, where the stock market enabled consolidation of existing firms, versus radio and aviation industries where it funded many new ventures. O’Sullivan’s work casts a critical eye on the “virtuous cycle” that suggests access to external finance leads to higher productivity and growth. In the next chapter, Nicholas examines the 1920s stock market boom and crash from a novel perspective; using patent data, he estimates the value of intangible property. He attributes the run-up of stock prices to the many important patented innovations during this historical period, an important insight into the maturation of American financial markets and its investors.

Chapters 6 through 8 look at the role of commercial and government financing of innovation after World War II. In Chapter 6, Graham examines the four financial challenges that Corning faced in bringing fiber optics to market. As developing this innovation involved the whole firm and not just R&D, Corning’s management had to set aside their regular internal financial controls in order to marshal the required funds. Graham posits that Corning’s success was due in large part to the quick decision-making by their risk-taking leadership. In Chapter 7, Fabrizio and Mowery seek to understand the influence of the federal government in funding innovation...