Chemistry and Economic Growth in the Long Term: Two Lessons
American Chemical Society
and American Institute Chemical Engineers
January 20, 2000
I begin with a thumbnail depiction of the past, present, and future role of chemistry and chemical engineering in American economic growth. This experience indicates that two factors have been especially important in the long-term growth of the industry. The first was the importance of adaptability among chemical firms; the second was the critical contribution of American research universities to advances in the industry.
The chemical business is best seen as the first major science-based industry to arise in the United States, an excellent example of sustained, successful commercialization of science. But only a very few chemists, and hardly any economists at all, have appreciated the roles chemistry has played in United States economic growth. This role is difficult to exaggerate, inasmuch as the fortunes of the chemical industry have long been closely intertwined with textiles, pulp and paper, the oil business, pharmaceuticals, automobiles, food processing, photography, and building materials.
Once, many decades ago, the German chemical industry surpassed all others. A knowledge of German was de rigueur for academic chemists. The chemical industry in Britain and Japan has long been large, but has not threatened the U.S. chemical industry for leadership in technological innovation.
By mid-century, the U.S. chemical industry had supplanted that of Germany as the largest and most innovative in the world. Three years ago, total sales of the U.S. industry reached nearly $400 billion, compared to only $220 billion in Japan and $500 billion for all nations of Western Europe put together. Moreover, U.S. firms commercialized half of the top forty-one major chemical process innovations of the past forty years. The role of the chemical industry in overall U.S. economic growth over the past century has been nothing less than pivotal. The tight linkages between chemistry and other industries has not only meant that prosperity and recession in the chemical industry has mirrored the U.S. business cycle; it has almost meant that the industry itself, through feedbacks from suppliers and customers, has energized other important sectors of the economy. Moreover, the competitive strength of the U.S. chemical industry has grown steadily over time, while the performances of the industry in Germany and Britain have been much less consistent. And, in Japan chemical companies are reducing capacity at fifteen plants this year.
Why? Adaptability seems to be one of the principal reasons, according to a recent series of fourteen studies of the industry. It is clear from this body of research that the source of U.S. competitive strength in the chemical industry in the year 2000 differs greatly from that of 1900, 1925, 1950, or even 1975. As I interpret these studies and other evidence, the industry has passed through five stages in the past century.
From about 1900-1935, the principal sources of strength in the American chemical industry were gifts of nature: our abundant and accessible endowment of raw materials.
From 1936-1965, it was primarily the immense size of the American market (relative to those of Europe and Japan) that lay behind the strength of the industry.
From perhaps 1965-1985, technological innovations based on advances in science became even more crucial to the industry’s prospects than in the past.
Then, over the next decade and a half, the skills most central for the commercial
success of the industry gravitated from chemical science to chemical engineering, as the fortunes of the industry came to depend more and more on process, ingenuity, and relatively less on product innovation.
Finally, we appear to be in the early years of a new period wherein once again findings of basic science may be the principal fuel for transformation of the industry. Especially significant will be nanoscale science and nanotechnology, wherein researchers will move around individual atoms to create the products we need. No less important will be the incorporation of advances in computation and modeling in industrial processes.
The past century’s experience suggests that the U.S. chemical industry has proven very adept at adapting. Elsewhere the pattern has been rather more mixed. True enough, portions of the chemical industry in Germany (c.f. the experiences of Hoechst, BASF, and Bayer) have enjoyed a long run of success, while Japan has fared quite well in petrochemicals, and Britain has made ICI work (more or less). However, no other nation’s chemical sector has kept pace with their American rivals across the industry spectrum. In particular, the chemical industries in Germany, Britain, and Japan have proven rather less nimble in capitalizing upon discoveries in science and technology.
A second reason for the long-term competitive strength of the U.S. chemical industry is related to government: not the presence of direct government intervention, but the relative absence of same. To a much greater extent than in the U.S., governments in Germany, Britain, and Japan pursued conscious, often intrusive, policies to promote and protect their domestic chemical industries. As is often the case, these interventionist policies did sometimes have positive short-term effects, but more often protectionism, by insulating chemical firms from competition, thereby reduced the adaptability of firms in the industry, creating weaknesses that became apparent when the industry became exposed to world markets.
One type of much more general government policy, however, was clearly supportive of innovation, and therefore adaptability in the industry: government support of research universities. This tool was most heavily used in the United States, but very lightly employed in Germany, Britain, and Japan. This has probably been the only government program anywhere for strengthening the industry that encountered any long-term success. More generally, this support enabled universities in the U.S. to be responsive to the needs of the chemical and other industries while preserving the independence of the former throughout the last half of the century. By 1998, U.S. research universities were responsible for about half of the nation’s basic research, and about 12 percent of its applied research.
What of the prospects for the chemical industry in America? It is best to be careful about making predictions¾especially about the future. But it seems clear that as long as the industry maintains its adaptability as long as the government avoids past intrusive policies of other nations intended to protect the industry. While bolstering support to basic research in chemistry the U.S. may retain its present advantage in chemical science and chemical engineering. Fortunately for the industry, industrial and university labs in the U.S. are still pushing out the technological envelope faster than elsewhere. Evidence of the continued superiority of basic and applied research in the U.S. is abundant, especially in nanoscale science and technology, potentially the most disruptive¾and beneficial¾technological development in recent history, as well as in advances in biology and computational science.
I close by reminding you that between 1900 and 2000 the American chemical industry passed through at least five major stages. Between now and the year 2100, it — and many other American industries —will be transformed over and over again.
We must prepare Houston, the state of Texas and our citizens not just for the next thing, or even the “next, next thing.” Through education, university research, a digital economy, technologically oriented collaborations and venture capital, we must prepare ourselves and our successors to adapt to all the changes to come.
 Ashish Arora and Nathan Rosenberg, “Chemicals, A U.S. Success Story,” p.p. 71-78. In Ashish Arora, Ralph Landau and Nathan Rosenberg, Chemicals and Long-Term Economic Growth. (New York, John Wiley and Sons), 1998
 Chemicals and Long-Term Economic Growth
 Ashish Arora, Ralph Landau, and Nathan Rosenberg, “Conclusions,” in Chemical and Long Run Growth, p.p. 515-517.
 Barry Eichemgreen, “Monetary, Fiscal, and Trade Policies in the Development of the Chemical Industry,” p.p. 265-307.
 Nathan Rosenberg, “Technological Change in Chemicals: The Role of University Industry Relations” in Chemicals and Long-Run Growth, p.p. 193-230.
 Association of American Universities, “America’s Research Universities: Institutions in Service to the Nation,” AAA Draft, Washington, December 20, 1999.