Ekonomski Vjesnik (Dec 2010)
Innovation Cycles through the Impact on Market Capitalization of Companies and the Dominant Portfolio Construction Model
Abstract
Innovation cycles have a direct influence on the level of economic activity and the phase of economic cycle. Furthermore, they influence the development of new branches of economy, industries, technologies, business models and products. The concept of innovation cycles can be seen as non-monetary concept of economic cycles and consequently as an alternative model to interpret the intensity and the direction of eqity issues on capital markets. The theory of long waves, the theory of secular market cycles and other contributions to the problem of economic cycles are partly explained within the theory of innovation cycles. The contemporary business environment was hard to predict only ten years ago, so that the innovation phenomenon deserves a special place in theoretical considerations. Based on the research conducted by Business Week-Boston Consulting Group 2007 of twenty-five largest, most innovative companies in the world today (measured by market capitalization), this paper tests the relative performance of their shares, i.e. the evolution of market capitalization of listed companies with respect to the reference market index in the longer time span. The objective is to prove or disprove the hypothesis that innovative companies generate stronger growth than the economy as a whole, although their size is such that their aggregate growth could be conventionally observed as the growth of the economy, i.e. the sector they are in. Thus the results of the research gain their pragmatic implementation aspect and prove that the innovation component present in the decision-making processes in business decisions, investment analysis and business strategy, and in investment decisions generally merits careful consideration.
