Accelerating energy innovation: Lessons from the chemical industry Ashish Arora, Duke & NBER Alfonso Gambardella, Bocconi ?
<ul><li>The Chemical Industry </li></ul><ul><li>High R&D intensity, declines with time </li></ul><ul><li>High basic R&D sh...
Govt. Role in Chemical Innovation:  The Synthetic Rubber Research Program  (1/2) <ul><li>Started 1942 – US feared cutoff f...
The Synthetic Rubber Research Program  (2/2) <ul><li>Production problems solved  </li></ul><ul><ul><li>Synthetic rubber ou...
A major challenge for energy innovation: Rapid diffusion <ul><li>New producer goods technologies do not completely displac...
An exception: Switch from coal to oil <ul><li>Conversion without much government intervention  </li></ul><ul><li>Driven by...
A major challenge of energy innovation: wide spread technology deployment <ul><li>Oil refining and chemical complex, Jamna...
The Global Market for Engineering and Licensing in Chemicals, 1980-1990   43.9% 34.6% 21.5% 15.6% 71.6% 12.7% Total   29.2...
Share of SEFs in chemical technology licensing by type of buyer Source: Arora and Fosfuri, 2000   <ul><li>Require “broad” ...
Licensing by Chemical Firms by Share of SEF in total Licensing Source: Arora and Fosfuri,1999 <ul><li>Require “broad” mark...
<ul><li>Require “broad” markets    tough anti-trust stance on market power in product market </li></ul><ul><li>Push incum...
Summary & Conclusions <ul><li>The history of chemical innovation </li></ul><ul><li>Chemical innovation – science based and...
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Accelerating Energy Innovation: Lessons From the Chemical Industry

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October 23, 2009 Washington DC

Accelerating Energy Innovation: Lessons from Multiple Sectors

Rebecca Henderson and Richard Newell

Published in: Education, Business, Technology
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  • Role of government in chemical innovation, past and present: Two case studies Coal to oil Synthetic rubber The importance of diffusion Specialized Engineering Firms (SEFs) and the division of labor Implications for anti-trust and IP policy
  • The tremendous increase in the production of synthetic rubber did not require radical technological advance. Although a variety of alternative monomers (building blocks) were tried out, it turned out that butadiene and styrene, used in the Buna-S rubber patented in Germany in 1921, were the most suitable. Neither was the basic process fundamentally new. Even so, a variety of logistical and technological problems had to be solved, such as expanding the supply of butadiene, for which advances in chemical engineering and petroleum refining were critical. Butadiene could be produced from the byproducts of oil refining or natural gas. It could also be produced from other sources, such as industrial alcohol (ethanol). Many different sources of ethanol were considered, included alcohol from grain or molasses. In Europe, Chemische Werke Huls (a German specialty chemicals company) nearly built a tire plant with French red wine as an ethylene source; the United States actually imported beet ethanol for butadiene for the synthetic rubber program shortly after WWII. During the tenure of the synthetic rubber program, Congress passed laws mandating use of grain ethanol for butadiene production. Plus ca change, plus c&apos;est la meme chose ! The vast bulk of butadiene, however, was ultimately produced from oil-refining byproducts.
  • Program succeeded in accomplishing rapid increases in production of inputs and outputs, by creating a “standard” synthetic rubber, defining input requirements, investing in production capability, allocating output, and information sharing. Program succeeded in increasing scale and cost reduction with existing techniques, and many improvements in the process. Program did not succeed in significant innovations in polymer science, catalysis, or process technology
  • Co-invention, investment and inter-dependencies. When first introduced, rayon fiber was believed to be weaker than cotton fiber, and because rayon fibers were further weakened when wet, the material was assumed to be unsuitable for tire cord. However, it was discovered that hot rayon is 50 percent stronger than cotton. Rayon tire cord, however, did not take off until World War II, when circumstances forced the use of synthetic rubber for tires; synthetic rubber tires run hotter than natural rubber tires, and therefore rayon was a better cord material under those hotter conditions. This also illustrates the systemic interdependencies in chemical innovation.
  • Coal tar provided a source for synthetic dyes; coal coking furnaces provided the nitrogen for fertilizers and explosives such as TNT, and coal provided the toluene for those explosives. Heating coal to make coke—a raw material in the manufacture of high-carbon steel—also produces a number of chemically useful gases and byproducts: coal tar, ammonia, and benzene.
  • Accelerating Energy Innovation: Lessons From the Chemical Industry

    1. 1. Accelerating energy innovation: Lessons from the chemical industry Ashish Arora, Duke & NBER Alfonso Gambardella, Bocconi ?
    2. 2. <ul><li>The Chemical Industry </li></ul><ul><li>High R&D intensity, declines with time </li></ul><ul><li>High basic R&D share, declines with time </li></ul><ul><li>Low government support for R&D, declines with time. </li></ul><ul><li> R&D is mostly privately funded, driven by market and technical opportunities . </li></ul><ul><li>Chemicals and energy innovation </li></ul><ul><li>Key similarity  process innovation to use new feedstock </li></ul><ul><li>Key differences  innovation golden age 1920-55, different historical era. </li></ul>
    3. 3. Govt. Role in Chemical Innovation: The Synthetic Rubber Research Program (1/2) <ul><li>Started 1942 – US feared cutoff from rubber suppliers </li></ul><ul><li>Objectives </li></ul><ul><ul><li>Expand output of synthetic rubber </li></ul></ul><ul><ul><li>Improve quality and produce specialty rubbers </li></ul></ul><ul><ul><li>Contribute to polymer science </li></ul></ul><ul><li>Involve leading rubber firms, petro-chem firms and university research groups </li></ul><ul><li>Free information exchange </li></ul><ul><li>Extended after WW II </li></ul><ul><li>$56 million invested in R&D, 1942-56 </li></ul>Synthetic rubber fed to an automatic weighing machine, operated by United States Rubber Company at Institute, West Virginia, ca. 1945
    4. 4. The Synthetic Rubber Research Program (2/2) <ul><li>Production problems solved </li></ul><ul><ul><li>Synthetic rubber output 850,000 tons in 1945 </li></ul></ul><ul><ul><ul><li>Seven times peak German output </li></ul></ul></ul><ul><ul><ul><li>Eighty Five times output in 1941 </li></ul></ul></ul><ul><ul><li>New variants of GR-S rubber developed </li></ul></ul><ul><ul><ul><li>Cold rubber; oil extended rubber </li></ul></ul></ul><ul><li>But major innovations from outside the program </li></ul><ul><li>Limited impact on polymer science </li></ul><ul><li>Bottom Line: Program did what it was intended for - Increase production. </li></ul><ul><li> Programs for energy innovation and programs for large scale production of energy from alternative sources are not the same . </li></ul><ul><li>Synthetic rubber Innovations </li></ul><ul><li>Nitrile rubbers ( Goodrich, Goodyear ) </li></ul><ul><li>Carbon black ( Philips Petroleum ) </li></ul><ul><li>Oil extended rubber (Goodyear; General Tire ) </li></ul><ul><li>Fully synthetic rubber ( cis- polyisoprene) – (Karl Ziegler) </li></ul>
    5. 5. A major challenge for energy innovation: Rapid diffusion <ul><li>New producer goods technologies do not completely displace existing technologies (at least not quickly) </li></ul><ul><ul><li>Old technologies improve in response </li></ul></ul><ul><ul><li>Complementary investments, infrastructure </li></ul></ul><ul><ul><li>Co-Invention </li></ul></ul>
    6. 6. An exception: Switch from coal to oil <ul><li>Conversion without much government intervention </li></ul><ul><li>Driven by growth in Automobile; coal driven by Steel </li></ul><ul><li>Massive investment and major advances in technology (catalysts, plants ..) </li></ul><ul><li>Market for technology and market for oil were important in facilitating switch </li></ul><ul><li>Specialized Engineering Firms (SEFs) diffused technology </li></ul><ul><li>In 1950, 50% of US organic chemical output was based on natural gas and oil; by 1966, it was 88%. </li></ul><ul><li>In 949, only 9% of UK organic chemical output was based on natural gas and oil; by 1962, it was 63%. </li></ul><ul><li>The first petrochemical plant in Germany in 1950s; by 1973, 90% of organic chemical output was oil based </li></ul>
    7. 7. A major challenge of energy innovation: wide spread technology deployment <ul><li>Oil refining and chemical complex, Jamnagar, India, 1997 </li></ul><ul><li>Total cost - $6 Billion. </li></ul><ul><li>World’s largest grassroots petrochemical complex. </li></ul><ul><li>Expanded 2008 – Capacity doubled. = 1.2 million bpd </li></ul><ul><li>Key Technology Suppliers </li></ul><ul><li>Bechtel (project management); UOP - technology </li></ul><ul><li>Stone and Webster; DPG </li></ul><ul><li>Black & Veatch - sulphur recovery and gas treatment units; </li></ul><ul><li>Dow Global Technologies , licensing and services polypropylene </li></ul><ul><li>Foster Wheeler : fired heaters for the refinery's coker; </li></ul><ul><li>UOP catalytic converter reactor section and PSA (pressure swing absorption) packages </li></ul><ul><li>Criterion Catalysts & Technologies (Shell): catalysts </li></ul><ul><li>In chemicals, process technology is a marketable commodity </li></ul><ul><li>Both manufacturing and non manufacturing firms (SEFs) provide technology licenses </li></ul><ul><li>Vital for diffusion to “small” firms – Developing countries and small firms in rich countries. </li></ul><ul><li>SEFs play an important role </li></ul><ul><ul><li>Some major innovations (e.g., Scientific Design, UOP) </li></ul></ul><ul><ul><li>More likely package technology (incl. licensed in from others) with engineering and design services </li></ul></ul>
    8. 8. The Global Market for Engineering and Licensing in Chemicals, 1980-1990   43.9% 34.6% 21.5% 15.6% 71.6% 12.7% Total   29.2 52.9 17.9 20.3 72.2 7.4 Textile & Fibers   35.6 2.9 61.5 16.9 52.1 31.0 Misc. Specialties   50.0 46.2 3.8 17.0 79.0 4.0 Pulp & Paper   52.8 6.1 41.2 13.2 63.1 23.8 Plastics & Rubber   41.9 3.2 54.8 17.6 63.0 19.4 Pharmaceuticals   49.1 32.4 18.5 10.8 75.9 13.3 Petrochemicals   42.1 48.6 9.3 10.0 83.7 6.4 Oil Refining   36.4 19.4 44.2 21.9 53.8 24.3 Organic Chemicals   48.5 34.6 16.8 14.4 78.9 6.6 Miscellaneous   51.7 24.4 23.9 20.9 71.3 7.8 Minerals & Metals   51.1 36.1 12.9 17.8 60.3 21.9 Industrial Gases   46.4 29.2 24.4 18.9 66.9 14.1 Inorganic Chemicals   32.8 62.3 4.9 17.1 78.0 5.0 Gas Handling   40.8 38.8 20.4 20.3 74.8 5.0 Food Processing   33.7 61.5 4.8 15.6 79.6 4.8 Fertilizers   39.0 33.7 27.2% 33.5 34.1 32.4% Air Separation   By other firms (*) By SEF Own Technology by other firms (*) by SEF In‑House SECTORS % of Licenses % Of Plants Engineered
    9. 9. Share of SEFs in chemical technology licensing by type of buyer Source: Arora and Fosfuri, 2000 <ul><li>Require “broad” markets  tough anti-trust stance on market power in product market </li></ul><ul><li>Push incumbents to license & increase competition in market for technology </li></ul><ul><li>anti-trust in “market for technology” is also helpful! </li></ul><ul><li>SEFs flourish with patent protection </li></ul>SEFs differentially benefit small firms and vice versa What policies promoted technology specialists and technology diffusion? (1/3)
    10. 10. Licensing by Chemical Firms by Share of SEF in total Licensing Source: Arora and Fosfuri,1999 <ul><li>Require “broad” markets  tough anti-trust stance on market power in product market </li></ul><ul><li>Push incumbents to license & increase competition in market for technology </li></ul><ul><li>anti-trust in “market for technology” is also helpful ! </li></ul><ul><li>SEFs flourish with patent protection </li></ul>SEFs create competition in market for technology What policies promoted technology specialists and technology diffusion? (2/3)
    11. 11. <ul><li>Require “broad” markets  tough anti-trust stance on market power in product market </li></ul><ul><li>Push incumbents to license & increase competition in market for technology </li></ul><ul><li>anti-trust in “market for technology” is also helpful! </li></ul><ul><li>SEFs flourish with patent protection </li></ul>Average number of SEFs by market (1980-90) Source: Arora, Fosfuri & Gambardella, “The division of inventive labor”, 2003 SEFs flourish with patent protection What policies promoted technology specialists and technology diffusion? (3/3)
    12. 12. Summary & Conclusions <ul><li>The history of chemical innovation </li></ul><ul><li>Chemical innovation – science based and rely on private R&D </li></ul><ul><ul><li>Large, integrated in-house R&D, (e.g, Du Pont) </li></ul></ul><ul><ul><li>Research intensive specialists – UOP, SD, Criterion </li></ul></ul><ul><ul><li>Market based diffusion (SEFs) </li></ul></ul><ul><li>Universities: Train talent and institutionalize disciplines. </li></ul><ul><li>Limited govt. in golden age of chemical innovation? </li></ul><ul><ul><li>Science to product route much clearer. </li></ul></ul><ul><ul><li>Booming demand </li></ul></ul><ul><li>Implication for Energy Innovation </li></ul><ul><li>Govt programs better at coordinating large scale production than radical new technology </li></ul><ul><li>Supporting demand for innovative technologies is important, not simply subsidizing the production of new knowledge. </li></ul><ul><li>Diffusion is as important as creation of new tech. </li></ul><ul><ul><li>Diffuse through market for technology </li></ul></ul><ul><ul><li>Technology specialists . </li></ul></ul><ul><ul><li>Anti-trust: Prevent sustained concentration of market power, in both product and in technology markets. </li></ul></ul><ul><ul><li>IP policy: Patents for diffusion, not just for innovation. </li></ul></ul>
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