Accelerating Energy Innovation: Lessons From the Chemical Industry

Accelerating energy innovation: Lessons from the chemical industry

Ashish Arora, Duke & NBERAlfonso Gambardella, Bocconi

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04/14/23 Arora & Gambardella, NBER, Press Club, Washington DC.

Basic research and the share of federal funds, by industry, 1971

Aircraft and missiles

Electrical equipment and communication


Chemicals and allied products



0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Federal share in basic reseach share of basic research in total R&D

%




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.

Chemicals and energy innovation

• Key similarity process innovation to use new feedstock• Key differences innovation golden age 1920-55, different historical era.


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

http://hdl.loc.gov/loc.pnp/fsa.8e01273




The Synthetic Rubber Research Program (2/2)

• 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

1. Nitrile rubbers (Goodrich, Goodyear)

2. Carbon black (Philips Petroleum)

3. Oil extended rubber (Goodyear; General Tire)

4. Fully synthetic rubber (cis-polyisoprene) – (Karl Ziegler)


World production of man-made fibers in 1000 tons (log Scale)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

1900 1910 1920 1930 1940 1950 1960 1970 1980 2000

raw Cotton

Synthetic TOTAL

Cellulosic TOTAL

TOTAL Man-Made

A major challenge for energy innovation: Rapid diffusion

1. New producer goods technologies do not completely displace existing technologies (at least not quickly) Old technologies improve

in response Complementary

investments, infrastructure

Co-Invention


An exception: Switch from coal to oil

• 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

•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


A major challenge of energy innovation: wide spread technology

deployment

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


The Global Market for Engineering and Licensing in Chemicals, 1980-1990

% Of Plants Engineered % of Licenses

SECTORS In‑House by SEF by other firms (*)

Own Technology

By SEF By other firms (*)

Air Separation 32.4% 34.1 33.5 27.2% 33.7 39.0

Fertilizers 4.8 79.6 15.6 4.8 61.5 33.7

Food Processing 5.0 74.8 20.3 20.4 38.8 40.8

Gas Handling 5.0 78.0 17.1 4.9 62.3 32.8

Inorganic Chemicals

14.1 66.9 18.9 24.4 29.2 46.4

Industrial Gases 21.9 60.3 17.8 12.9 36.1 51.1

Minerals & Metals 7.8 71.3 20.9 23.9 24.4 51.7

Miscellaneous 6.6 78.9 14.4 16.8 34.6 48.5

Organic Chemicals 24.3 53.8 21.9 44.2 19.4 36.4

Oil Refining 6.4 83.7 10.0 9.3 48.6 42.1

Petrochemicals 13.3 75.9 10.8 18.5 32.4 49.1

Pharmaceuticals 19.4 63.0 17.6 54.8 3.2 41.9

Plastics & Rubber 23.8 63.1 13.2 41.2 6.1 52.8

Pulp & Paper 4.0 79.0 17.0 3.8 46.2 50.0

Misc. Specialties 31.0 52.1 16.9 61.5 2.9 35.6

Textile & Fibers 7.4 72.2 20.3 17.9 52.9 29.2

Total 12.7% 71.6% 15.6% 21.5% 34.6% 43.9%


51

16

22

37

45

27

47

53

2

0% 20% 40% 60% 80% 100%

Large FW firms(>$1b in 1988)

Small FirstWorld firms

(<$1b in 1988)

Third WorldFirms

in-house

SEFs

chemicalproducers

Share of SEFs in chemical technology licensing by type of buyerSource: Arora and Fosfuri, 2000

• 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

SEFs differentially benefit small firms and vice versa

What policies promoted technology specialists and technology diffusion?

(1/3)


Licensing by Chemical Firms by Share of SEF in total

Licensing

1.32

2.8

0

1

2

3

less than 18% 18 to 42 % more than 42%

Share of SEFs in Total Licenses

Avg l

icens

es pe

r pro

duce

r

Source: Arora and Fosfuri,1999




SEFs flourish with patent protectionSEFs create competition in

market for technology


(2/3)


Average number of SEFs by market (1980-90)Source: Arora, Fosfuri & Gambardella, “The division of inventive labor”, 2003







(3/3)


Summary & Conclusions

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 Innovation1. Govt programs better at

coordinating large scale production than radical new technology

2. Supporting demand for innovative technologies is important, not simply subsidizing the production of new knowledge.

3. 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.

Education

Accelerating Energy Innovation: Lessons From the Chemical Industry