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The chemical industry is among the largest manufacturing industries; its products range from acids to intermediate chemicals such as synthetic fibres and plastics, and to final products such as soaps, cosmetics, paints and fertilizers. Perhaps as a result, the chemical industry is under-studied by economists, though not by economic and business historians (e.g., Hounshell and Smith 1988).

The modern chemical industry has its origins in the discovery of synthetic dyes in Britain in the 1850s. German chemical firms such as BASF, Bayer and Hoechst soon dominated the production of synthetic dyestuffs and related organic compounds. The American chemical industry grew by exploiting the rich American natural resource endowments, initially using European technology.

After the First World War, American firms, especially Du Pont, invested in R&D. The inter-war period saw rapid product innovation in synthetic fibres, plastics, resins, adhesives, paints, and coatings, based on polymer science. To succeed commercially, these products had to be produced cheaply, which meant large-scale production and, in turn, the development of chemical engineering. The Second World War marked a watershed. The chemical industry became closely linked with the oil industry, as many chemicals used petroleum-based inputs instead of coal byproducts. The United States was the first country to develop a petrochemicals industry, mainly due to its abundant oil reserves, as well as wartime government programmes for aviation fuel and synthetic rubber.

The early advantage of the US chemical industry in petrochemicals was eroded as technologies diffused widely, first to Europe and Japan; and in the 1970s China, Taiwan and S. Korea emerged as leading producers. Increased competition, the oil shocks of the 1970s, and waning possibilities for product innovation together resulted in exit: larger, multi-product firms exited earlier, but larger plants closed later (Lieberman 1990). In addition, firms reshuffled product portfolios so as to focus on fewer products but in more geographical markets (Arora and Gambardella 1998). The restructuring took a heavy toll of incumbents; and many familiar names such as Hoechst, Union Carbide, Ciba-Geigy, Sandoz, and American Cynamid have vanished.

A number of interesting themes emerge, some of which have been studied by economists. Others remain as potentially rich veins to be mined.

FormalPara International competition

Why did British firms fail to exploit the rich potential of organic chemistry despite a head start, access to cheap inputs (coal tar) and to the British textile industry, and a well-functioning capital market? Many explanations, none entirely persuasive, have been offered, including the alleged bias of the British financial system towards low risk-projects (Da Rin 1998), the weak links between English universities and industry (Murmann and Landau 1998), and inferior management (Chandler 2005).

FormalPara Patents

Overenthusiastic patent protection in the 1870s nearly killed the French dyestuff industry, while German firms strategically used patent protection (Arora 1997). The confiscation of German patents and industrial property in Britain, France and the United States after both world wars was a setback to German firms but proved insufficient for the Americans and British to catch up. Systematic analysis of this natural experiment can shed light on the role of patents in shaping oligopolistic competition.

FormalPara Markets for technology

Arrow (1962) observed that Du Pont appeared to have profited as much from innovations it had licensed from others as from its own products, perhaps reflecting imperfections in the market for technology. Yet technology licensing has been extensive in chemicals (Arora et al. 2001). The market for technology dramatically changed industry structure, with accumulated production experience of incumbents insufficient to deter successful entry (Lieberman 1989).

FormalPara Complementarities and industrial convergence

After the Second World War, oil refining and the production of synthetic fibres and plastics came to share a common technical base. The convergence led to vertical integration by oil firms into chemicals and chemical firms into petrochemicals (Lieberman 1991). Thanks to a market for petrochemical technology, the European chemical industry was able to switch to petrochemicals very rapidly, despite very substantial investments in coal-based technologies.

FormalPara Division of labour and vertical industry structure

Specialized engineering firms, which arose to provide plant construction and design services to chemical firms, led the way in diffusing petrochemical technologies worldwide (Freeman 1968). This competition prodded even large chemical firms such as Union Carbide to give licences to others, further diffusing technology and promoting entry (Arora et al. 2001). The chemical industry thus provides a clear example of the benefits of vertically disintegrated industry structures in promoting entry and competition.

The enduring lesson of the history of the chemical industry for economists is the important role of firms – their history and their capabilities – which largely explains why some countries dominated the industry for such long periods. But that history is also a strong reminder to that, in the end, even the mightiest firms must eventually bow to market forces.

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