Accelerating energy innovation: Lessons from the chemical industry

1. ? Accelerating energy innovation: Lessons from the chemical industry Ashish Arora, Duke & NBER Alfonso Gambardella, Bocconi

2. Chemicals and energy innovation • Key similarity  process innovation to use new feedstock • Key differences  innovation golden age 1920-55, different historical era. • The Chemical Industry • High R&D intensity, declines with time • High basic R&D share, declines with time • Low government support for R&D, declines with time. •  R&D is mostly privately funded, driven by market and technical opportunities. Arora & Gambardella, NBER, Press Club, Washington DC.

3. Govt. Role in Chemical Innovation: The Synthetic Rubber Research Program (1/2) • Started 1942 – US feared cutoff from rubber suppliers • Objectives • Expand output of synthetic rubber • Improve quality and produce specialty rubbers • Contribute to polymer science • Involve leading rubber firms, petro-chem firms and university research groups • Free information exchange • Extended after WW II • $56 million invested in R&D, 1942-56 Synthetic rubber fed to an automatic weighing machine, operated by United States Rubber Company at Institute, West Virginia, ca. 1945 Arora & Gambardella, NBER, Press Club, Washington DC.

4. Production problems solved Synthetic rubber output 850,000 tons in 1945 Seven times peak German output Eighty Five times output in 1941 New variants of GR-S rubber developed Cold rubber; oil extended rubber But major innovations from outside the program Limited impact on polymer science Bottom Line: Program did what it was intended for - Increase production. Programs for energy innovation and programs for large scale production of energy from alternative sources are not the same. Synthetic rubber Innovations Nitrile rubbers (Goodrich, Goodyear) Carbon black (Philips Petroleum) Oil extended rubber (Goodyear; General Tire) Fully synthetic rubber (cis-polyisoprene) – (Karl Ziegler) The Synthetic Rubber Research Program (2/2) Arora & Gambardella, NBER, Press Club, Washington DC.

5. A major challenge for energy innovation: Rapid diffusion • New producer goods technologies do not completely displace existing technologies (at least not quickly) • Old technologies improve in response • Complementary investments, infrastructure • Co-Invention Arora & Gambardella, NBER, Press Club, Washington DC.

6. An exception: Switch from coal to oil • In 1950, 50% of US organic chemical output was based on natural gas and oil; by 1966, it was 88%. • In 949, only 9% of UK organic chemical output was based on natural gas and oil; by 1962, it was 63%. • The first petrochemical plant in Germany in 1950s; by 1973, 90% of organic chemical output was oil based • Conversion without much government intervention • Driven by growth in Automobile; coal driven by Steel • Massive investment and major advances in technology (catalysts, plants ..) • Market for technology and market for oil were important in facilitating switch • Specialized Engineering Firms (SEFs) diffused technology Arora & Gambardella, NBER, Press Club, Washington DC.

7. Oil refining and chemical complex, Jamnagar, India, 1997 Total cost - $6 Billion. World’s largest grassroots petrochemical complex. Expanded 2008 – Capacity doubled. = 1.2 million bpd Key Technology Suppliers Bechtel (project management); UOP- technology Stone and Webster; DPG Black & Veatch - sulphur recovery and gas treatment units; Dow Global Technologies, licensing and services polypropylene Foster Wheeler : fired heaters for the refinery's coker; UOP catalytic converter reactor section and PSA (pressure swing absorption) packages Criterion Catalysts & Technologies (Shell): catalysts In chemicals, process technology is a marketable commodity Both manufacturing and non manufacturing firms (SEFs) provide technology licenses Vital for diffusion to “small” firms – Developing countries and small firms in rich countries. SEFs play an important role Some major innovations (e.g., Scientific Design, UOP) More likely package technology (incl. licensed in from others) with engineering and design services A major challenge of energy innovation: wide spread technology deployment Arora & Gambardella, NBER, Press Club, Washington DC.

8. The Global Market for Engineering and Licensing in Chemicals, 1980-1990 Arora & Gambardella, NBER, Press Club, Washington DC.

9. What policies promoted technology specialists and technology diffusion? (1/3) • Require “broad” markets  tough anti-trust stance on market power in product market • Push incumbents to license & increase competition in market for technology • anti-trust in “market for technology” is also helpful! • SEFs flourish with patent protection Share of SEFs in chemical technology licensing by type of buyer Source: Arora and Fosfuri, 2000 SEFs differentially benefit small firms and vice versa Arora & Gambardella, NBER, Press Club, Washington DC.

10. What policies promoted technology specialists and technology diffusion? (2/3) Licensing by Chemical Firms by Share of SEF in total Licensing • Require “broad” markets  tough anti-trust stance on market power in product market • Push incumbents to license & increase competition in market for technology • anti-trust in “market for technology” is also helpful! • SEFs flourish with patent protection Source: Arora and Fosfuri,1999 SEFs create competition in market for technology Arora & Gambardella, NBER, Press Club, Washington DC.

11. What policies promoted technology specialists and technology diffusion? (3/3) • Require “broad” markets  tough anti-trust stance on market power in product market • Push incumbents to license & increase competition in market for technology • anti-trust in “market for technology” is also helpful! • SEFs flourish with patent protection Average number of SEFs by market (1980-90) Source: Arora, Fosfuri & Gambardella, “The division of inventive labor”, 2003 SEFs flourish with patent protection Arora & Gambardella, NBER, Press Club, Washington DC.

12. The history of chemical innovation Chemical innovation – science based and rely on private R&D Large, integrated in-house R&D, (e.g, Du Pont) Research intensive specialists – UOP, SD, Criterion Market based diffusion (SEFs) Universities: Train talent and institutionalize disciplines. Limited govt. in golden age of chemical innovation? Science to product route much clearer. Booming demand Implication for Energy Innovation Govt programs better at coordinating large scale production than radical new technology Supporting demand for innovative technologies is important, not simply subsidizing the production of new knowledge. Diffusion is as important as creation of new tech. Diffuse through market for technology Technology specialists. Anti-trust: Prevent sustained concentration of market power, in both product and in technology markets. IP policy: Patents for diffusion, not just for innovation. Summary & Conclusions Arora & Gambardella, NBER, Press Club, Washington DC.