The Political Economy of Corporate Governance in Germany

Jerome Levy Institute Working Paper No. 226

49 Pages Posted: 28 Jun 1998

See all articles by Mary O'Sullivan

Mary O'Sullivan

University of Pennsylvania - Management Department


To understand the potential economic implications of challenges from the real and financial sectors for the system of corporate governance - the social process that shapes who makes investment decisions in corporations, what types of investments they make, and how the returns from successful investments are distributed - we need an economic theory if governance. In previous work, I have argued that, if it is to be relevant, a theory of corporate governance must take account of innovation, that is, of the process through which productive resources are developed and utilised to generate higher quality and/or lower cost products than had previously been available (O'Sullivan 1997; Lazonick and O'Sullivan, 1997a; 1997b; 1997c; O'Sullivan, 1996).

Innovation is central to the dynamic through which successful economies improve their performance over time as well as relative to each other. Historical research on innovation in all of the advanced industrial nations has highlighted the importance, as loci of innovation, of corporate resource allocation and its governance must therefore incorporate an understanding of the central characteristics of the innovation process.

On the basis of the extensive literature on the subject, innovation, and the learning process that is its substance, can be characterised as one that is collective and cumulative and, hence, organisational. A system of corporate governance, if it is to support innovation, must generate the social conditions that permit collective and cumulative learning to take place. Specifically, it must provide support for financial commitment -- the commitment of resources to irreversible investments with uncertain returns -- and organisational integration -- the integration of human and physical resources into an organisational process to develop and utilise technology (Lazonick and O'Sullivan, 1996).

JEL Classification: G31, G32

Suggested Citation

O'Sullivan, Mary A., The Political Economy of Corporate Governance in Germany. Jerome Levy Institute Working Paper No. 226, Available at SSRN: or

Mary A. O'Sullivan (Contact Author)

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
+1 (215) 898-6502 (Phone)
+1 (215) 898-0401 (Fax)

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