Business Strategies and Research Organization in the German Chemical Industry and its Role as Exemplar for other Industries in Germany and Britain

Abstract

This paper argues that the German chemical industry itself and its accompanying science system of in-house R & D and additional extra mutual research institutions was regarded by other industries and countries an example of successful economic and scientific development. But it also argues that this perception was only partly true, as the German chemical industry was extremely specialized in those areas deemed necessary to the war effort in the First World War.

Ulrich Marsch, Max-Planck-Gesellschaft, München

ULRICH MARSCH, MAX-PLANCK-GESELLSCHAFT, MUNICH

Business Strategies and Research Organization in the German Chemical Industry and its Role as Exemplar for other Industries in Germany and Britain _*

I. Introduction

The interwar years saw unprecedented growth of research by state and by industry. But different countries could build upon different foundations. While Germany drew on experiences from an elaborated science system stemming from well before 1914, Great Britain and the US had to start from a somewhat lower institutional and experienced level. Probably the US were at some point in organizing and financing science, research and development more advanced than Britain, that counted to a larger extent than the US on state support after 1918. ₁ Similar to Germany, the system of organized and continuous industrial research in the US is closely linked to the chemical, the electrical and the steel industry since around 1900. Here, US firms established elaborated structures and strategies on their own, after having seen German firms creating large in-house R & D facilities. Because US enterprises did not regard German firms, their business strategies, their R & D structures, their way to and their aims of innovation as exemplary and did thus not attempt to transplant strategic and organizational experiences from Germany to the US, American firms and the US science system shall not be dealt with in this paper.

Rather, this paper is on the role chemical research played for the development of firms in this industry, for the establishment of industrial research in Germany, for the German military effort in World War I, and for the attempts of the British Government to establish a science system in industry, based on chemical research. In this paper it will become clear the Britain after 1917/18 saw Germany with its strong scientific, industrial and military basis in chemical research as an exemplar. Parts of its system should deliberately be brought to Britain to put Britain in the long run in a competitive position in areas that had developed differently from Germany, but proved worthwhile to have within one's own country. This area was chemical research and chemical industry.

Using the terms "models" and "imitators" does then not mean that someone deliberately created a model of, say, an organizational structure or a business development, and that consequently someone else just copied the model in all details. Rather, this paper is one the growth and importance of the chemical industry in Germany, its role in German science and economy, and how other industries and countries, especially Britain, regarded this particular case study as an example for promising development, and therefore transferred parts of this industry's structures into their own branches.

If, in the following, I speak of "models" or "exemplars" and of "copies" and "imitators", then I will not use these terms as if there were master plans for successful developments, and in simply following them, anybody else would become equally successful. Much more, the perception by competitors of what they saw as being successful led those to the conclusion that they had to analyze the reason for this and by creating similar business structures they would become equally successful. Therefore, I do not state that there is a general model for promising development or for lasting profit; but I will show how industrialists, politicians and competitors in different branches and countries perceived that there might be a model or exemplar. But this perception was incomplete and faulty, stemming from a wrongful analysis.

I try to explain the strategies and structures of the German chemical industry before 1914; its growing importance in World War One; its structural changes during the Interwar Period; its perception by German and foreign industrialists; and finally their efforts to create similar structures.

The hypotheses put forward along with this are threefold.

The first is that the German chemical industry, or better: the organic and dyestuffs industry, despite its enormous growth and success, remained a minor industry until 1914, which grew along narrow paths of closely related technologies. Because of this specialization and a resulting path dependency in choosing new fields for research and production, the organic chemical industry experienced the thread to loose its ability to innovate and to diversify in completely new areas of activity. To regain innovative forces and competitiveness, this industry supported the foundation of new research institutions. It was their task to bring about new knowledge which the firms then could turn into production technologies and products by supplementary work of their own R & D-departments. ₂ This resulted in an industry wide "innovation system", which was later copied by other industries.

The second hypothesis relates to the tendency of German foreign and economic policy to reach greater independence of imported foreign raw materials. Especially around 1900, this policy became more and more visible. It had much to do with the general political climate during the Wilhelminian era, the growing isolation of Germany, and even preliminary preparations for a great war everybody expected to take place within the next few years. ₃ It was the organic chemical industry that had great success by substituting natural products by synthetic products, based on German coal. The commercial and technological successes of the chemical industry before and during World War One with this main strategy paved the way to implement this policy of self-sufficiency into other industries after 1918. One means to achieve economic self-sufficiency was thought to be technology, based on scientific knowledge. And rewarding, the innovative system of the chemical industry was transferred to other branches. The tremendous growth of employment of scientists and engineers in German industry already before 1910 and especially after 1918 demonstrates the political priority of economic self-sufficiency as one of the main characteristics of national security policy, which turned twice, in 1914 and in 1939, into a national aggression policy. This hypothesis thus fits into Richard Nelson's analysis that countries with a strong technological basis had a footing in national security concerns. ₄ Finally, the third hypothesis concerns the continuity of these national patterns from the late 1890s to the late 1930s. This continuity resulted in an extensive growth of science intensive as well as technology intensive techniques and products, and created a societal and economic environment in Germany, in which the production of investment goods dominated over consumption goods, and consequently restrained Germany's development into a consumer society, differently from the US or Great Britain.

II. Strategy and structure in chemicals before World War One

The period of the formation of the German chemical, mostly organic, industry is a well researched topic, and it shall not be dealt with here once more. ₅ It is an often quoted fact that Germany in 1913 supplied between 80 and 90 % of world production in synthetic dyestuffs. At the Geneva World Economic Conference in 1927, Arthur James Balfour made clear that there is no disagreement on the German part of dyestuffs world production for 1913. ₆ Similar numbers covered the supply of pharmaceuticals, photographic chemicals and solvents. From these mere facts it seems that the German organic chemical industry was one of greatest importance and one the largest exporters of German goods. But by looking at the overall German exports in 1913, it can be revealed that dyes did not play such a significant role: dyes were ranked 11 of German exports in 1913, overtaken for example by leather goods, woolen textiles, and beet sugar reaching similar levels. Exports of synthetic dyes made up for 298 Million Marks (out of a total of 10,199 Million Marks, in 1913 prices), while beet sugar counted for 264 Million Marks, leather goods for 553 Million Marks, iron and iron products for 1,336 Million Marks, and textiles and fibers for 1,581 Million Marks. ₇ Despite their large works, their thousands of workers and employees, their R & D staff and their subsidiaries in all major countries, the big three dyestuff firms (BASF, Hoechst, Bayer) were in terms of their assets only about two to three times as large the largest German brewery, Schultheiss Brauerei AG in Berlin. All other chemical firms (apart from Deutsche Solvay, being dependent on the Belgian holding) had the same size or were considerably smaller than breweries. ₈

Contemporary observers were stunned by the high annual dividends the leading dyestuffs firms paid from the 1890s to World War One: between 18 and 26%. ₉ But hidden assets, for times of economic crises like that after 1873, loans to pay back, a quick amortization of plants and equipment and piling up of reserves increased real fixed capital, so that paid dividends did not reflect the real value of these firms. Probably dividends were to half to reach a serious level of valuation. Much more, dividends were paid by oligopolistic firms that had divided the German market, protected it by sales agreements and cartels, and dominated the world's market in a relatively narrow range of production, adding to it equally narrow products by their large R & D departments. In some sense, it was the expectation of securing this position and of obtaining new products by intensive R & D, that made firms pay these high dividends to shareholders, who in turn were made to keep their shares to minimize the risk of takeovers or to avoid industrial banks' domination. R & D capacity and oligopoly was thus honored, but less the competitive position of those firms. ₁₀

If we turn to inorganics, things before 1913 looked differently. Britain produced before the First World War roughly 50 % of world production of soda, mainly by the new Solvay-process, and was not overtaken by Germany until 1939. In 1884, British firms manufactured 430,000 tons of soda (Germany 100,000 tons), in 1904 850.000 tons (Germany: 325,000 tons), and in 1935 800,000 tons (Germany: 700,000 tons). ₁₁ In sulfuric acid, Britain produced in 1913 1.1 million tons of sulfuric acid (100 per cent solution), compared to 1.7 million tons in Germany and 2.25 million tons in the United States. This accounted for roughly 13 % of world production (Britain), 20 % (Germany) or 27 % (United States). Less concentrated sulfuric acid was needed in the textiles industries and for refining of metals, the domain of British until 1914. Highly concentrated sulfuric acid was raw material for dyestuffs, pharmaceuticals, high explosives, and also for the oil refining industry. The strength of British firms in textiles and metals reflected their need of less concentrated sulfuric acid, and an overall smaller production.

The relative weakness of German firms in inorganic chemicals can be revealed by looking at import tariffs. While no tariffs protected the German market in dyes and pharmaceuticals because of the strength of home producers, there was in 1913 a 48% tariff on sulfate of aluminum, 19% on calcium carbide, and 17% on soda. Those tariffs had been established to protect German firms from more economically and more efficiently produced British chemicals. ₁₂

In concluding, we see that only in a small branch of chemicals Germany was dominating production and exports, i.e. in dyes and pharmaceuticals. In inorganic chemicals, Britain remained the largest producing country, with Brunner, Mond & Co Ltd. being the largest chemical company in the world, closely followed by Solvay of Belgium.

By their diversified production lines, the big three chemical firms (Bayer, Hoechst, BASF), and a handful of smaller producers (Agfa, Griesheim-Electron, Weiler-terMer, Degussa, Th. Goldschmidt) had been able to divide the German market among themselves, to deter German and foreign competitors from market entry by investment in large scale production facilities and R & D structures, and had gained some political influence.

In these regards, the chemical industry did not differ much from coal mines, electrical, steel, optical glass industries: oligopolistic market structures, tariff protection, cartelization and dumping on foreign markets. In chemicals, similarities went even further: to a greater extent than in other branches, the oligopolistic large firms shared very similar technologies, were tied together by cartels, sales agreements and common interests. Those similar technologies resulted in comparable firms' strategies: supplanting natural dyes and other raw materials by synthetics, and turning high fixed costs of foregoing research and large production facilities to low unit costs by economies of scale. It is therefore not surprising to see that these major German chemical firms had also strong similarities in their internal structures and organizations. Major product lines had each single departments, in which acquisition, production, sales, administration, research, development and advertising were organized more or less independently from other departments. But it must be kept in mind that in the German chemical firms organization and diversification were not as elaborated as in US firms in chemicals or other branches, and that therefore the Chandlerian model is only in parts suitable for German firms.

Despite firms in other branches like electrical goods, steel, optical glass and scientific instruments had also been dependent on scientific research and technological development, it was the chemical industry had gone the longest way in use of science and research as an input of production. In 1912, the ratio of chemists to employed workers in the large chemical firms was on average 1 to 30. ₁₃

The incorporation of science into the chemical firms has been a major topic in business history over the last years, and ony the results of this discussion shall be mentioned here briefly. ₁₄ It is important to look at this aspects of firms' activities, because later it was this integration of science that was seen by competitors as the most important step to lasting success.

On top of the hierarchy of the firms' laboratories stood the Central Research Laboratory in all major German chemical firms. It had evolved mainly between 1870 and 1883, with the Farbenfabriken Bayer the last to follow in 1883. The Central Research Laboratory substituted in some firms aging company founders or, in other firms, created new ways of producing relevant knowledge. The newly introduced all-German Patent Law of 1877 had made copying of production processes no longer possible. The task of the Central Research Laboratory was to secure the constant production of new classes of dyes and single colors, and possibly even totally new and unknown knowledge and product lines. Interestingly, the last development happened to a smaller degree. Universities played until around 1900 the more important part in chemical innovation, and after 1900 to some degree firms' laboratories grew increasingly important for innovation. Having this role, the Central Research Laboratories, with all its connections to academic research and universities, was the key factor in turning organic chemistry into products, and was the main proponent of the growing specialization of the dyestuff-firms. The Central Research Laboratory stood for the scientification of industrial research. But let's keep in mind that scientification here meant using scientific methods for producing closely related good - a mass attack of chemical analytical methods to find new dyes from existing ones, to eliminate expensive and time-consuming trial and error ways of experiment, and that no flash of genius could be found by such routine work. At least, this was the opinion of Carl Duisberg, directing manager of one of the most important chemical firms, Farbenfabriken Fried. Bayer & Co near Cologne. ₁₅ Scientific investigation became routine, and the corporation turned to be a routine innovator, no matter how specialized ist range of products may be. ₁₆

Development work was done in separated technical laboratories which were organizationally connected to the Central Laboratory and which had grown out of the former dye-testing departments. The technical laboratory was responsible for semi-large production of new dyes and applying new production processes that had been found in the Central Research Laboratory. It was dominated by chemists rather than engineers, supplied greater amounts of newly found chemicals for further testing, worked out more efficient and larger production processes and additionally, undertook investigations in suitable materials for large production plants. ₁₇ A so called "Literature Department" screened scientific journals of chemistry, physics, engineering and related disciplines as well as German and foreign patents to have latest news of scientific developments or competitors' efforts.

Inside the several production departments in each firm, this structure of scientific and technical laboratories and stations was mirrored by the departmental organization, having one large departmental laboratory for each product line, a technical station, and works laboratories for testing raw materials and continuous production control.

Until 1914, all major German dyestuffs companies had developed this organizational structure to almost identical levels. Still some differences in detail between the firms remained, and pharmaceutical firms still differed more from dye-firms; but in general, companies in the organic chemical industry had strong in-house R & D capacities, elaborated managerial structures to secure flow of information, and technological knowledge to turn new findings into products and productions processes. ₁₈

Furthermore, these firms had created what I call an industrial scientific system. This system included a strong industrial basis, influence on legislation and university curricula, and finally even shaped the way scientific topics were defined and investigations were undertaken.

These firms held close ties to organic chemists in German universities and had contributed largely to specialize chemistry in Germany mainly to organic fields. An abundant reservoir of young chemists left university after having been trained in organic, mostly dyestuff chemistry. They sought industrial employment, as universities did not grew fast enough to take up a major part of graduates. Curricula and examinations at universities had been newly arranged, with close collaboration of the leading dye-firms. ₁₉

It is well known that the German Patent Law of 1877, despite having been initiated by Werner Siemens and the "Verein deutscher Ingenieure", was mainly influenced by the chemical industry, and even changes and amendments to the Patent Law in 1891 in favor of this industry had their origin in pressure politics also by this industry. ₂₀

Growing specialization in the German dyestuff industry and simultaneously being incompetent to reach similar levels of market dominance in inorganic chemicals, an increasing need for nitrates and fertilizers in Germany, and the development of new chemical products outside Germany (rayon, new explosives) had this industry's leaders realized that the ongoing specialization in organics would not solve future problems and would in the long run threat their ability to radical innovations. To make a long story short: between 1898 and 1910 a number of university chemists, industrial chemists and managers, and members of the Prussian bureaucracy formed a plan to set up new research institutions that were to build a German stronghold in inorganic chemicals and even in early biotechnology, without their staff having to follow teaching obligations. But during this long gestation period, the new institutions of the Kaiser-Wilhelm-Gesellschaft, founded in 1911, were to reshape their scientific profile. They turned to coal research, electrical chemistry, chemistry and biology. ₂₁ Instead of entirely new research in inorganics, the Kaiser Wilhelm Institutes pursued similar topics like university chemists, but on a larger scale, without teaching requirements, and partly financed by industry. This reshaping of the research agenda called Jeffrey Johnson "the prussianization" of these new institutes, because those areas of interest were formulated that were also of interest mainly to the state's administration and the military: hydrogenation of coal, more efficient use of German coal, fertilizers, artificial fibers, synthetic rubber, fermentation technology to release Germany from imports of alcohol etc. ₂₂ It was Germany's most famous chemists at that time, Emil Fischer, who set this agenda at the opening of the Kaiser-Wilhelm-Institut für Kohlenforschung in Mülheim at the Ruhr in 1913. ₂₃

Just before World War One, an industrial science system in the German chemical industry had been established: large firms with strong in-house R & D facilities, links to universities that secured transfer of knowledge and scientifically trained man-power, influence on state politics that secured the dominant role of this industry at home and abroad, and new research institutions, financed by state and industry that should work on those radical innovations which the firms were no longer able to achieve because of their specialization.

We do find such an industrial scientific system also in the iron and steel industry, in scientific instruments, optical glass, and in electrical goods; but in neither of them it was elaborated to such a degree as in chemicals. ₂₄

III. Chemicals and the First World War

Why dyes and organic chemistry gained the importance they enjoyed after 1918 had its origin in the First World War. In technical terms, the First World War was a chemical war. Chemistry was applied mainly in two ways. One way was to use toxic gases for chemical warfare. ₂₅ Although not important in the quantities being produced, it had devastating effects when brought into action. Chemical gases made from chlorine and chlorinated hydrocarbons, and could be easily mass produced by firms like Bayer and Hoechst. These had produced chlorine and other intermediates for synthetic dyes and could quickly switch to manufacture gases. ₂₆

But much more important was the supply of raw material for munitions and the "Ersatzindustrie", which was both secured by chemicals. Producing ammonia by the newly developed Haber-Bosch process (1911) and then turning it to explosives by oxidation of ammonia (Bosch, Mittasch, Beck, 1913) allowed to continue the war on the German side despite the Allied blockade. During the war, a great number of products was to be manufactured by raw materials that were synthesized and thus substituted imported resources, e.g. rubber, leather, fats like glycerin, fibers. Famous chemists took part in wartime production, in poisonous gases (Fritz Haber) as well as in synthetic fats (Emil Fischer). ₂₇ Without chemical production of "Ersatzstoffe", of fertilizers and ammunitions, the German war effort could have not been upheld beyond 1915. Research institutes such as the Kaiser-Wilhelm-Institut für Physikalische und Elektrochemie, led by Fritz Haber, were used for research and production of war related chemicals and toxic gases. A new coordinating organization was founded in 1916, the "Kaiser Wilhelm Stiftung für kriegstechnische Wissenschaft", that financed and coordinated research in chemicals and gases (Fritz Haber), metals and non-ferrous metals (Fritz Wüst) synthetic oils and lubricants (Emil Fischer), physics, ballistics, telegraph and telephone (Walther Nernst), engineering (Alois Riedler), and aircraft and aeronautics (Heinrich Müller-Breslau). The domination of chemicals is not be overseen. ₂₈ Chemical firms like BASF experienced substantial growth as they produced in newly erected large works ammonia and explosives and in turn received state guarantees for prices and sales that made large-scale production of ammonia, explosives and fertilizers profitable. But firms knew by then that they would enter peace time economy with considerable over capacities, stemming from the war related expansion of production.

While Germany struggled for securing sufficient supply for inorganic chemicals, Britain needed organic chemicals for dyes, pharmaceuticals, photographic materials and explosives. Before 1914, all these goods were imported to Britain in large quantities. Only to a few industrialists like Ivan Levinstein, owner of a large dyestuff-firm, it appeared as risky to import around 90 % of the British demand of dyes and pharmaceuticals. ₂₉ But to all other firm owners and industrialists, this practice of importing needed raw materials and exporting refined goods, e.g. dyed textiles, belonged to normal conditions of free trade peace economy. And it had so far proved profitable to the large textile industry. The degree of dependence on German goods was only felt in summer 1914, when dyes, pharmaceuticals, magnetos, detonators, optical instruments and range finders, non-ferrous metals such as tungsten, and electrical equipment did no longer reach Britain because of the blockade. What proved worthwhile in peacetime, i.e. using comparative and competitive advantages of many suppliers, importing goods from many countries and upgrading them by home industry, turned to be a strategic disadvantage in times of war, when those goods were needed even more, but not having an adapted home industry to produce them. ₃₀ These shortages to overcome was the task of the "Ministry of Munitions", set up in 1915 and headed by David Lloyd George. This Ministry succeeded in securing sufficient supplies of war related materials, by concentrating efforts at home, by setting up new firms and even industries in Britain, by help of allies, and by importing goods from neutral countries, e.g. dyes and pharmaceuticals from Switzerland. Similar to Germany, the lack of ammunition was especially felt in Britain. Trinitrotoluol, the most effective and widely used explosive since the 1890s, is made from toluene, a coal-tar derivative, and sulfuric acid. As Britain's coal-tar dyestuffs industry was considerably smaller than Germany's, there was also a huge gap in supply of munitions. And because the textile industry needed less sulfuric acid than the dyestuff-industry, there was also a lack of sufficient amounts of sulfuric acid. These shortages were overcome by combining the few remaining British dyestuff-firms and a centrally administered production and distribution of sulfuric acid. By the end of 1915, a continuous and sufficient supply of ammunitions was secured.

To show this example in length is important, because the subsequent British policy towards industry and state was heavily influenced by the experiences of the first two years of war. The lesson politicians derived from the shortage of ammunition, dyes and pharmaceuticals resulted in the decision that Britain never again were to be dependent on other countries for war related products. The first step to secure production of war related chemicals was to combine chemical firms to "British Dyestuffs Ltd." in 1916, to have one single firm in Britain large enough to manufacture needed dyes and byproducts for ammunitions. In no other industry British government went so far in intervening than in chemicals by setting up a new large firm with substantial state guaranteed loans to secure large-scale war time production. The next step was to define "essential industries" in 1917 (chemicals, electric goods, non-ferrous metals, optical instruments and glasses), that were of importance to any war related production, but whose position at home was not yet strong enough to withstand foreign competition. ₃₁ These branches were to be supported by a number political measures: import tariffs, loans to enlarge production facilities, and improved university education to achieve relevant numbers of science graduates to recruit for industry. The most drastic steps were taken to secure dyestuff-production: importing dyes was prohibited since 1921 by the "Dyestuffs Import Regulation Act", though some exemptions could be given in special cases. In no other branch such measures were taken. Some tariffs were introduced on cars and bicycles, but a general prohibition on imports was only applied to dyes. The importance of dyes and their byproducts was simply too great to allow another shortage in future. The Dyestuffs Import Regulation Act was upheld until World War II, despite Britain having reached self-sufficiency in dyes in 1930.

But Britain did more than simply apply economic steps to diminish dependence on German goods during and after World War I. British policy went beyond temporary measures and tried to find out why Britain had in the first place become dependent on so many German goods. The British government established in 1917 a number of Parliamentary Committees on many branches of industry (electrical goods, textiles, engineering, acids, fertilizers) to find out why this happened. One important conclusion of all these committees was that German industry, supported by the State, had a strong scientific basis by large numbers of university graduates, in-house research laboratories and a number of industry or state financed research institutions, and could thus produce innovative products. ₃₂ These reports strongly advised to increase the level of industrial research and university education to root British industrial production in science and technology. All the following political steps were part of a reconstruction policy that aimed not only to rebuild a peace-time economy but also to introduce long-time planning and state assistance to industry to avoid future shortages. ₃₃

Those economic and strategic considerations were simultaneously complemented by a re-definition of British science policy. For the first time in British history, government and state decided to invest unprecedented sums in science, technology and education in state and private institutions. A science policy was formulated, and a new ministry was established.

A new department was set up in 1916, the Department for Scientific and Industrial Research., the DSIR. Its first task was to coordinate the scientific investigations that took place for the war effort by the Admiralty, the Army, the War Office, the Ministry of Munitions and other state departments, and secondly to strengthen the role of science and research in state administration and industrial enterprises, By three ways, scientific research and technical development were to be supported by the new department: by university grants for research projects at universities; by industrial grants for scientific investigations and product development in single firms; and by support for cooperative Research Associations, set up by one branch of industry to undertake long run and pre-competitive investigations for the benefit of the entire branch. ₃₄ The Department planned that for five years the Associations' budget were to paid half by the state and half by the regarding industry, and therefore Parliament voted the sum of £ 1million only to support the foundation of as many Research Associations as possible. Until 1920, 23 Research Associations were founded, and another eight until 1931.

But before the new policy to support scientific and industrial research via grants and Research Associations was formulated, British politicians and bureaucrats had closely analyzed the scope and direction of science in university and industry in the US and in Germany. While in 1911 the foundation of the Kaiser-Wilhelm-Gesellschaft did not find great recognition in Britain, this changed after it had become known in Britain to what extent its institutes contributed to the German war effort. Now, in 1916, external research institutions such as the Physikalisch-Technische Reichsanstalt and the institutes of the Kaiser-Wilhelm-Gesellschaft were regarded as most important means to increase scientific knowledge that then was used by the dominating large firms to turn it to innovative products. British officials drew the conclusion that as long as Britain did not posses similar institutes and additionally in-house R & D, the threat of becoming once more dependent on German technology intensive goods was not banned. As chemical research institutes within the Kaiser-Wilhelm-Gesellschaft played the major part of research there, as the large chemical firms had the most elaborate internal structure for R & D, and as the combination of both had helped the German side to lead war despite serious shortages, it was this system of producing and using new knowledge within the German chemical industry that was perceived as exemplary, attempted to copy and in parts transferred to Britain via the Research Association movement. ₃₅

For two reasons, the way via the Research Association Movement was deliberately chosen by British government. First, in 1917, setting up a number of large state run research institutes, additionally to the few existing ones, was still regarded as to interventionist and far reaching - in the long run, it would have found no majority in Parliament. And secondly, government wanted to increase industrial research, in-house R & D, and to create a new labor market for university graduates. But as British firms in their majority were perceived to be too small to create large in-house R & D facilities on their own, external cooperative institutions were to show those firms the value and importance of industrial research and finally make them pay exclusively for industrial research. Those were the hopes British government connected to the establishment of Research Associations.

The importance British government and industry attributed to the German chemical industry can be revealed by an analysis that German chemical firms experienced after the Armistice. Between May and June 1919, British Governmental Organized an inspection tour to the chemical works in occupied Germany. The commission consisted of representatives of British chemical firms, of the Board of Overseas Trade and of the Board of Trade. Similar missions were sent to leather works and iron and steel firms between 1919 and 1926. But no other mission had so many delegates, visited so many firms, inspected so closely production processes and laboratories and gave such a detailed final report. ₃₆ The scope of the Mission was simply put forward: to find out how German chemical firms had become successful and to bring home information that would make British branches, especially chemicals, equally successful. Establishing a new large company "British Dyestuffs Ltd." by state support and planning a British program for producing nitrogen by fixation of ammonia by the Haber-Bosch process, which was seen as key-technology in these days, partly resulted from this inspection tour and can demonstrate the priority government put to chemicals and the importance of the chemical industry as an essential and strategic branch.

IV. The Interwar Years

The years between the two world wars saw spectacular growth of industrial research in all major industrialized countries. Besides enlarging in-house facilities for R & D, cooperative research institutions outside the firms was one of the most widely spread ways to organize and use scientific research and technical development.

In Britain this took place via the newly created Department of Scientific and Industrial Research, leading to the foundation of about 30 Research Associations until 1930. In Germany, industrial branches set up their own cooperative research institutions, for example for research in concrete, in energy efficiency, in textiles, in glass, in ceramics and many other. ₃₇ Additionally, excessive war profits had enabled large firms like Hoesch and Thyssen (steel), coal mines, leather firms, and diary and food industry to create or enlarge in-house R & D facilities. Even firms like AEG, that had not yet invested big sums in internal R & D, started to strengthen their scientific and technological basis.

Interestingly in those branches that had seen severe shortages of raw materials during the war or that had to cope with serious loss of natural resources due to the territory losses after 1918/19 (iron, non-ferrous metals, coal, textiles, leather), initiatives to make this off by increased internal and external R & D are more than obvious. Creating external cooperative institutes was left to the Kaiser-Wilhelm-Gesellschaft and its industrial sponsors, who trusted in the organizational capabilities and experiences this association had acquired since 1911, and especially during the war. Looking at new Kaiser-Wilhelm-Institutes, such as for research on iron and steel, on non-ferrous metals, on textiles, on leather, on coal, we do find three ways of argumentation in favor of such new research institutes, that had made industrialists and bureaucrats establish and finance these new institutions. One line of argumentation was that Germany had lost important resources for iron ores, non-ferrous metals, and for coal and thus had to use the remaining deposits more efficiently and economically. Second, the war had shown to what degree independence from foreign raw materials could be achieved by scientific research and technological development. Industrialists and bureaucrats attempted to transfer this economic and technological policy into peace time. It was hoped to diminish the need for foreign currency to acquire imports, to keep up employment at home after the demobilization, and to reach a permanent level of self-sufficiency or autarky to become independent from former enemies. And third, extramural research institutions, such as the Kaiser-Wilhelm-Institutes could help to lay the scientific basis for such an economic and technological policy.

During the foundation period of these new institutes between 1917 and 1922, industrialists, scientists and bureaucrats regarded earlier Kaiser Wilhelm Institutes (for chemistry, physical chemistry, coal research) clearly as exemplars and hoped to achieve similar success by additional institutes. It was perceived that the German chemical firms had been successful because they had internally elaborated R & D structures and additionally research institutions within the Kaiser-Wilhelm-Gesellschaft. Moreover, the close connection of science and industry in chemicals during the war had made the German war effort possible, and this fact was in the eyes of bureaucrats and industrialists of other branches the key to success. ₃₈ But it was not realized that success in the chemical industry stemmed from a narrow production line with very special conditions in dyestuffs chemistry and the peculiar situation during the First World War. It was not considered if such a business strategy might be profitable for other branches in peace time.

It is then not all too surprising to see the direction scientific research and technological development in the newly set up German institutes was guided to. It had been not attempted to find new products or new production processes. Rather, it was mainly tried to solve chemical structures of pig iron, of steel, of different fibers, of different leathers and of different coals (Westfalia or Silesia), and then to imitate or improve products derived from these originals. It was chemical structural research that dominated investigation in those institutes.

In the British Research Associations, it was looking for new products, for new production processes and new materials that was the main effort there, Chemical structural research did not play such a significant role as it did in Germany.

Former success in chemicals turned this industry into serious troubles. Over capacities in nitrogen and ammonia production caused losses, dyes sales dropped as foreign markets closed their borders, and new competitors such as British Dyestuffs or American firms had arisen and sold now products to their home market. This ongoing crises and the strategy to diversify into synthetic gasoline brought a merger of the leading German chemical companies to form IG Farben in 1925. ₃₉ Other branches in Germany faced similar problems. In steel, the cartel agreement of 1904 was on the brink of collapse, over capacities and falling prices drove profitability down. Two ways out of this structural crises seemed to be rationalization in production and scientification. The establishment of Vereinigte Stahlwerke and its elaborate R & D structure, including close contact to the Kaiser-Wilhelm-Institut für Eisenforschung, can be regarded as copy of IG Farben and thus an attempt to solve post-war problems by industrial concentration and by industrial research. ₄₀ Similar movements were to be found in the textiles and in the coal industry of Silesia. By 1930, Germany had a number of very large firms like IG Farben, Vereinigte Stahlwerke, Siemens & Halske and AEG, that all had developed strong in-house R & D department, close contact to universities and ties to extramural research institutions such as the Kaiser-Wilhelm-Institutes or the Physikalisch-Technische Reichsanstalt.

But it seemed tht by the mid-1930s, the German chemical industry had gone into of dead end streets. Synthetic fuel and synthetic rubber were scientifically and technologically feasible, but economically unsound. Still, enterprises stuck to both; partly for political reasons, partly being tied to pre-1914 experiences of what is technically possible will turn out commerically successful. Gasoline and rubber for the first time proved that differently. In fibers, competitors like DuPont, ICI and Courtalds developed new fibers that IG Farben could not match. In pharmaceuticals, it is Gerhard Domagk's research and success in chemotherapy that had IG fixed to this path and neglected newer trends, such as the potentials of Penicillin. Overall, we observe that IG went into a number of dead ends and did not depart from former technologies to a similar extent as DuPont or ICI did. ₄₁

Despite the importance of chemicals, Britain did not establish purely chemical research institution outside the major firms. Britain rather followed a policy of support and incentives to create large firms in chemicals that were first to emancipate Britain from German imports, then second to build up large ammonia and synthetic fuels programs, and thirdly to compete with IG Farben by establishing Imperial Chemical Industries. ₄₂ Support and incentives were given in the creation by British Dyestuffs Ltd in 1916 and its enlargement to British Dyestuffs Corporation in 1918, then in 1921 by the protection via the Dyestuffs Import Regulation Act, and finally in 1925 when ICI was founded as deliberate counter-move to Germany's IG Farben. And similar to Germany, Britain sustained the erection of large ammonia works after 1918 to enable Britain to produce sufficient amounts of explosives if war should brake out. Britain even subsidized a large and lengthy program for synthetic fuels (even if it did not reach scales of investment comparable to Germany). Therefore, it can be said that Britain changed her policy towards science and industry drastically after the events of the First World War. By 1930, we find large chemical firms and subsidized R & D for hydrogenation, we find import protection and we find strongly increased expenditures for in-house R & D by large firms and for cooperative extramural research via the Research Associations.

The Research Association Movement turned out not to be as successful as it was hoped in 1917/18. Lacking industrial contribution, some of them had to close down only after a few years, some remained too small to have a decisive impact on the overall situation of the regarding branch. Only a few of them, like the Cotton Industry Research Association in Manchester (today's Shirley Institute) attracted sums large enough to finance large-scale research on product and process innovation. Further, it implemented strategies to bring results to member firms by evening classes and inhouse training of workers and engineers in the Association. This was not achieved by chemical research but by technological investigations in spinning, weaving, bleaching and sizing. For pure chemical research, needed for synthetic fibers, the Cotton Research Association for example was the wrong place. Research of such nature was done by ICI and Courtalds, and proved profitable there. This casts doubts on the effectiveness and usefulness of such extramural cooperative research.

4. Conclusion

Before 1914, structure and strategy of British and German industry in general, and in chemicals especially, differed widely. It was World War I with its shortages and particular ways to react in each country that made both countries comparable by reshaping their policies and economies. By 1930, we find that both countries had much more in common regarding large firms, cartels, expenditure for science and technology, and research institutions. In terms of economic policy, both countries tried to implement a strategy of self-sufficiency: while Britain attempted this mainly for chemicals, electrical and optical goods by creating large firms and supporting research, Germany brought this policy forward to many more branches, and had thus even higher expenditures for R & D and even more in-house and extramural research institutions. Systems of creating new knowledge and turning it to new product and processes had been copied from the organic dyestuffs industry, were this strategy had been successful since the 1870s and had paved way to number of synthesized products.

Notes

Note *: I am grateful to the Volkswagen Foundation that had financed research on this project. Back.

Note 1: For the US see David A. Hounshell, "The Evolution of Industrial Research in the United States." Engines of innovation: U.S. industrial research at the end of an era. Edited by Richard S. Rosenbloom and William J. Spencer. Boston, Mass.: Harvard Business School Press 1996, pp. 13-85; David C.Mowery and Nathan Rosenberg, "The US research system before 1945." Technology and the Pursuit of Economic Growth. Cambridge: Cambridge University Press 1989, pp. 59-97; for Britain see David Edgerton, Sally Horrocks, "British Industrial Research and Development before 1945." Economic History Review 47 (1994), pp. 213-238; for Germany see Ulrich Marsch, Industrieforschung in Deutschland und Groβbritannien. Betriebsinterne und Gemeinschaftsforschungen bis 1936. Phil.Diss. Munich 1996. Back.

Note 2: Jonathan Harwood, "Institutional Innovation in fin de siècle Germany". British Journal for the History of Science (1994) 27, pp. 197-211. Back.

Note 3: Lothar Burchardt, Friedenswirtschaft und Kriegsvorsorge. Deutschlands wirtschaftliche Rüstungsbestrebungen vor 1914. Schriften des Militärgeschichtlichen Forschungsamtes, Boppard 1968. Back.

Note 4: National Innovation Systems. A Comparative Analysis. Ed. by Richard Nelson. Oxford: Oxford University Press 1993, p. 508. Back.

Note 5: See John Joseph Beer, The Emergence of the German Dye Industry. Urbana: University of Illinois Press 1959; Paul M. Hohenberg, Chemicals in Western Europe. An economic study of technological change. Chicago: Rand McNally 1967; Ludwig F. Haber, The Chemical Industry during the Nineteenth Century. A Study of the Economic Aspects of Applied Chemistry in Europe and North America. Oxford: Clarendon Press 1958; Ludwig F. Haber, The Chemical Industry 1900-1930. International Growth and Technological Change. Oxford: Calrendon Press 1971; Alfred D. Chandler Jr., Scale and Scope. The Dynamics of Industrial Capitalism. Cambridge, Mass.: Harvard University Press 1990, pp. 474-486; Gottfried Plumpe, Die I.G. Farbenindustrie AG. Wirtschaft, Technik und Politik 1904-1945. Berlin: Duncker & Humblot 1990, pp. 40-57. Back.

Note 6: The Chemical Industry. Documentation of International Economic Conference, Geneva, May 1927. Publication of the League of Nations, II, Economic and Financial Section, 1927.II.4, pp. 28 and 84. Back.

Note 7: Otto Keck, "The National System for Technical Innovation in Germany". National Innovation Systems. A Comparative Analysis. Ed. by Richard Nelson. Oxford: Oxford University Press 1993, pp. 115-157, here p. 128. Back.

Note 8: See Chandler, Scale and Scope, Appendix C.1. Back.

Note 9: See Carl Duisberg, "Denkschrift über die Vereinigung der deutschen Farbenfabriken", 1904. Carl Duisberg, Abhandlungen, Vorträge und Reden aus den Jahren 1882-1921. Berlin: Verlag Chemie, 1923, pp. 343-369, here p. 347; and Carl Duisberg, "Die Vereinigung der deutschen Farbenfabriken" (1915). Introduced by Wilhelm Treue. Tradition 8 (1963), pp. 193-227. Back.

Note 10: See Fritz Redlich, Die volkswirtschaftliche Bedeutung der deutschen Teerfarbenindustrie. München, Leipzig 1914, p. 36; Carsten Reinhardt, Forschung in der chemischen Industrie. Die Entwicklung synthetischer Farbstoffe bei BASF und Hoechst, 1863-1914. Phil. Diss. Technische Universität Berlin 1995, p. 50. Back.

Note 11: Claus Ungewitter, Chemie in Deutschland. Rückblick und Ausblick. Berlin: Junker & Dünnhaupt 1938, p. 19. Back.

Note 12: The Chemical Industry. Documentation of International Economic Conference, Geneva, May 1927. Publication of the League of Nations, II, Economic and Financial Section, 1927.II.4, pp. 54 and 81. Back.

Note 13: Marsch, Industrieforschung in Deutschland und Groβbritannien, p. 76. Back.

Note 14: John J. Beer, "Coal Tar Dye Manufacture and the Origins of the Modern Industrial Research Laboratory". Isis 49 (1958), pp. 123-131; Hans Georg Grimm, "Organisation der Forschung in der chemischen Industrie". Stahl und Eisen, 55 (1935), pp. 349-352; Ernst Homburg, "The Emergence of Research Laboratories in the Dyestuffs Industry, 1870-1900". British Journal for the History of Science, 25 (1992), pp. 91-111; Georg Meyer-Thurow, "The Industrialization of Invention: A Case Study from the German Chemical Industry". Isis, 73 (1982), pp. 363-381; Ulrich Marsch, "Strategies for Success: Research Organization in German chemical companies and IG Farben until 1936". History and Technology 12 (1994), pp. 25-77. Back.

Note 15: Henk van den Belt, Arie Rip, "The Nelson-Winter-Dosi Model and the Synthetic Dye Chemistry." The Social Construction of Technological Systems. Ed. by Wiebe E. Bijker, Thomas P. Hughes, Trevor Pinch. Cambrigde, Mass.: MIT-Press 1994, pp. 135-158, here p. 155. Back.

Note 16: See also David F. Noble, America by Design: Science, Technology, and the Rise of Corporate Capitalism. New York: Knopf 1977. Back.

Note 17: Ralph Landau, Nathan Rosenberg, "Successful Commercialization in the Chemical Process Industries." Technology and the Wealth of Nations. Ed. by Nathan Rosenberg, Ralph Landau, David C. Mowery. Stanford: Standford University Press 1992, pp. 73-120. Back.

Note 18: For the case of pharmaceutical firms and dyestuffs producers, which had diversified into pharmaceuticals see Wolfgang Wimmer, `Wie haben fast immer was Neues.' Gesundheitswesen und Innovation in der Pharma-Industrie in Deutschland, 1880-1935. Berlin: Duncker & Humblot 1994. Back.

Note 19: Hartmut Scholz, "August Wilhelm Hofmann und die Reform der Chemikerausbildung an deutschen Hochschulen". Die Allianz von Wissenschaft und Industrie. August Wilhelm Hofmann (1818-1892). Ed by Christoph Meinel and Hartmut Scholz. Weinheim: VCH 1992, pp 221-234; see also Duisberg's statements to the planned reform of university education "Zum Chemiker-Examen", "Zum Staatsexamen für Chemiker", "Staatsprüfung für Chemiker". Duisberg, Abhandlungen, Reden und Vorträge 1882-1921, p. 171-200 Back.

Note 20: Arndt Fleischer, Patentgesetzgebung und chemisch-pharmazeutische Industrie im deutschen Kaiserreich 1871-1918. Stuttgart 1984, pp. 53-77 and 368-372; Eberhard Schmauderer, "Leitmodelle im Ringen der Chemiker um eine optimale Ausformung des Patentwesens auf die besonderen Bedürfnisse der Chemie während der Gründerzeit." Chemie-Ingenieur-Technik (1971) 43, pp. 531-540; Eberhard Schmauderer, "Der Einfluβ der Chemie auf die Entwicklung des Patentwesens in der zweiten Hälfte des 19. Jahrhunderts." Tradition (1971) 16, pp. 144-176; Henk van den Belt, Arie Rip, "The Nelson-Winter-Dosi Model and the Synthetic Dye Industry"; see also Petition of the Farbenfabriken Bayer "Zur Revision des deutschen Patentgesetzes" at the German Reichstag 1891, Duisberg, Abhandlungen, Reden und Vorträge 1882-1921, pp. 625-629. Back.

Note 21: Alan Beyerchen, "On the Stimulation of Excellence in Wilhelminian Science." Another Germany: A Reconsideration of the Imperial Era. Ed. by Jack R. Dukes and Joachim Remak. Boulder 1988, pp. 139-168. Back.

Note 22: Jeffrey Allen Johnson, The Kaiser's Chemists. Science and Modernization in Imperial Germany. Chapel Hill: University of North Carolina Press 1990, chapters 2 and 7. Back.

Note 23: Emil Fischer, "Die Aufgaben des Kaiser-Wilhelm-Institutes für Kohlenforschung", Stahl und Eisen (1912) 32, pp. 1898-1903. Back.

Note 24: For early R & D in the iron and steel industry see Manfred Rasch, "Erfahrung, Forschung und Entwicklung in der deutschen Eisen- und Stahlerzeugung. Versuch einer Begriffserklärung und Periodisierung der letzten 200 Jahre". Ferrum (1996) 68, pp. 4-29. Back.

Note 25: See Ulrich Trumpener, "The Road to Ypers. The beginnings of gas-warfare in World War One". Journal of Modern History (1975) 47, pp. 460-480; Ludwig F Haber, The Poisonous Cloud: chemical warfare in the First World War. Oxford: Clarendon Press 1986. Back.

Note 26: Ministry of Munitions, Confidential Report of the British Mission appointed to visit enemy chemical factories in the occupied zone engaged in production of munitions of war, 1919, Cmd. 1137, Parliamentary Papers 1921, XX, p. 11-12. Back.

Note 27: Plumpe, IG Farben, pp. 63-95; Joachim Radkau, Technik in Deutschland. Vom 18. Jahrhundert bis zur Gegenwart. Frankfurt am Main: Suhrkamp 1989, pp. 254-269; Arthur von Weinberg, "Emil Fischers Tätigkeit während des Krieges." Die Naturwissenschaften 1919, pp. 868-873. Back.

Note 28: Manfred Rasch, "Wissenschaft und Militär: Die Kaiser Wilhelm Stiftung für kriegstechnische Wissenschaft." Militärgeschichtliche Mitteilungen (1991), pp. 73-120. Back.

Note 29: Ivan Levinstein, "Observations and suggestions on the present position of the British chemical industry, with special reference to coal-tar derivatives." The Journal of the Society of Chemical Industry 5 (1886), pp. 351-359. Back.

Note 30: See The Development of British Industry and Foreign Competition, 1875-1914. Ed. by Derek Aldcroft. Glasgow: George Allen & Unwin 1968; Clive Trebilcock, "War and the failure of industrial mobilization: 1899 and 1914." War and economic development. Essays in memory of David Joslin. Ed. by J.M. Winter. Cambridge: Cambridge University Press 1975, pp. 139-164. Back.

Note 31: See for example Committee on Commercial and Industrial Policy, Interim Report on Certain Essential Industries. Cd. 9032, London 1917. Parliamentary Papers 1918, XIII. Back.

Note 32: See Final Report of the Committee on Commercial and Industrial Policy after the War. Cd. 9035. London 1918, Parliamentary Papers 1918, XIII. Back.

Note 33: Paul B. Johnson, Land fit for Heroes. The Planing of British Reconstruction, 1916-1919. Chicago 1968. Back.

Note 34: Roy MacLeod, Kay Andrews, "The Origins of the DSIR: Reflections on Ideas and Men, 1915-1916." Public Administration (1970) 48, pp. 23-48; Harry Melville, The Department for Scientific and Industrial Research. London 1962; Ian Varcoe, "Scientists, Government and Organized Research in Great Britiain 1914-16: The Early History of the DSIR." Minerva (1970) 8, pp. 192-216; Ian Varcoe, "Co-operative Research Associations in British Industry, 1918-1934." Minerva (1981) 19, pp. 433-463. Back.

Note 35: Report of the Committee of the Privy Council for Scientific and Industrial Research for the Year 1915-16, Cd. 8336, Parliamentary Papers 1916, VIII, 469. Varcoe, "Co-operative Research Associations in British Industry", p. 443. Back.

Note 36: Report of the British Chemical Mission on the Chemical Factories in the Occupied Area of Germany. By the Association of British Chemical Manufacturers. London, June 1919. Confidential Report on the Leather Mission to the occupied areas in Germany, July 1919. Public Record Office London, DSIR 36/1898; J.E. Fletcher, J.G. Pearce, Continental Foundry Developments. Research Institutions and works laboratories for pure and applied research. January 1926, Public Record Office London, DSIR 36/4238. Back.

Note 37: Boeck, Ed., Die technisch-wissenschaftlichen Forschungsanstalten. Berlin 1931. Back.

Note 38: Ulrich Marsch, "Industrielle Gemeinschaftsforschung in Deutschland und Grossbritannien - Kaiser-Wilhelm-Institute und Research Associations 1916-1936." Die Kaiser-Wilhelm-/Max-Planck-Gesellschaft und ihre Institute, Studien zu ihrer Geschichte: Das Harnack-Prinzip. Ed. by Bernhard vom Brocke and Hubert Laitko. Berlin: de Gruyter 1996, pp. 561-573. Back.

Note 39: This story is well known, it need not be repeated here once more, see Peter Hayes, Industry and Ideology. IG Farben in the Nazi-Era. Cambridge: Cambridge University Press 1987; Plumpe, IG Farben, pp. 131-197. Back.

Note 40: Christian Kleinschmidt, Rationalisierung als Unternehmenstrategie. Die Eisen- und Stahlindustrie des Ruhrgebietes zwischen Jahrhundertwende und Weltwirtschaftskrise. Essen: Klartext 1993; Andreas Zilt, "Industrieforschung bei der August-Thyssen-Hütte in den Jahren 1936 bis 1960". Technikgeschichte (1993) 60, pp. 129-159. Back.

Note 41: Ingrid Pieroth, Penicilinherstellung. Von den Anfängen bis zur Grossproduktion. Stuttgart: Wissenschaftliche Verlagsgesellschaft 1992; Pilar Barrera, "The Evolution of Corporate Technological Capabilities: DuPont and IG Farben in Comparative Perspective." Zeitschrift für Unternehmensgeschichte (1994) 39, pp. 31-45. Back.

Note 42: Wiliam J. Reader, Imperial Chemical Industries: A History. 2 vols. Oxford: Oxford University Press 1970, 1975; Anthony N. Stranges, "From Birmingham to Billingham: High-Pressure Coal Hydrogenation in Great Britain." Technology and Culture 26 (1985) pp. 726-757. Back.