KNOWLEDGE AND COMPETITIVE ADVANTAGE: The Coevolution of Firms, Technology, and National Institutions, by Johann Peter Murmann, Cambridge University Press, 2004, 294 pages, $60 (ISBN 0-521-81329-8)
In 1856, 18-year-old William Henry Perkin was trying to make quinine, the antimalarial drug critical to British colonial interests. But instead, he invented aniline purple (mauve), the first synthetic dye. Against the advice of his professor, he left the British Royal College of Chemistry and quickly commercialized aniline purple, launching the synthetic dye industry.
The book started as a dissertation project at Columbia University, and Murmann carried the idea with him to his current position as an assistant professor in the Kellogg School of Management at Northwestern University. The academic origin seen in the first chapter is a well-referenced look at past ideas of economic development and evolutionary theories. As Murmann advises, the language and background are "a bit much for the general reader," whom he directs to Chapter 2. But in moving ahead, Murmann does have a good story to tell.
In 1863, German expatriate August Wilhelm von Hofmann, at that time one of the leading organic chemists in the world, made a prescient observation: "At no distant date England will be the greatest color-producing country in the world, nay, by the strangest revolutions, she may erelong, send her coal-derived blues to indigo-growing India, her tar-distilled crimson to cochineal-producing Mexico, and her fossil substitutes for quercitron and safflower to China and Japan, and to the other countries where these articles are now derived."
This is indeed what happened, but Germany, not England, dominated the industry.
Murmann examines the dye industry at three levels: governmental policies, company winners and losers in each country, and the coevolution of national industries and institutions. William Perkin & Son with other entrepreneurs in Britain led the synthetic dye industry for most of its first decade. British firms introduced many other synthetic dyes to the market and held the largest market share.
The British had many advantages over their rival German firms. The British production of coal to make coal tar--the key raw material--was six times that of Germany's. For many years, Germany imported coal tar from England. Britain also had the largest textile industry in the world. British dye companies continued to innovate, developing a number of important dyes. For example, Perkin found the best process for synthesis of anthraquinone used to make the red dye alizarin.
These advantages and continued entrepreneurial leadership were not enough to ensure continued success. By 1870, German dye producers had captured about 50% of the global synthetic dye market, with Britain in second place. By 1900, Germany's share climbed to 85%, where it remained until World War I.
This dramatic gain was in part the result of patent laws. Laws in Great Britain shielded British dye producers from fierce competition; thus the companies did not feel a strong pressure to improve processes. By contrast, before 1870 there was little patent protection in the separate German states.
Many German firms, realizing the large market potential, entered the dye business. This led to intense price competition, and the companies with the strongest manufacturing and marketing capabilities survived.
The German industry benefited by copying English products and getting strong government support through subsidies, favorable tariffs, support of public education and worker welfare, and a research-oriented university system. In Great Britain, recognition of the importance of organic chemical research came later, and the dye industry did not generate the level of government support achieved in Germany.
U.S. efforts to support industry matched those of Germany at the time, but the U.S. focused on agriculture and the growing steel industry, which offered better opportunities than dyes.
Murmann points out that the evolutionary process in Germany was facilitated by industry, government, and the academic community as they acted on and shaped one another. German universities educated a surplus of chemists, and the dye companies began to employ chemists in production jobs. The chemists experimented with plant processes to improve yields, giving the German companies cost advantages. The German companies worked together and lobbied the government to support work on basic dye chemistry at the new universities.
August Kekulé had recently published his theory on the structure of benzene. Recognizing the significance of this fundamental advance, lead German company Bayer expanded its research activities. As the German industry started to invent new dyes, it sought and obtained government approval of a new patent law, which in turn influenced patent legislation in other countries. The German dye companies filed patents in all major countries and created a structure that led to their worldwide monopoly position.
While these developments did seem to take on a life of their own, Murmann's case for "evolution" leading to the success of individual companies within each country is not as persuasive to me. Bayer started with a marketing business in natural colors. The firm jumped on the opportunity to copy synthetic dyes and sell them in Germany and other markets where there were no patent barriers.
Bayer certainly helped to shape the German environment, but the company had no inherent competitive advantage compared with other German producers. Bayer's worldwide marketing strength and its use of customer-oriented technical service could have been matched by its competitors.
I view the competition among German producers to be a result of talent, organization, and strategy rather than any evolutionary process. For example, in football better talent and coaching leads one team to beat another. Is developing football strategy an evolutionary process? Would it be helpful to study the game in this way? I'm not sure.
It is evident that utilization of new ideas depends on the environment. New technology, like the construction of railroads in the U.S. in the late 1800s, changes the business environment. So Murmann's book explains much of what we already know. For example, the recent growth of high-tech industries in the U.S. is centered near major research universities and is supported by government spending.
Murmann argues that many start-up firms and many failures are an essential part of the evolutionary process. He shows that this happened in the dye industry. Even William Perkin & Son sold out in 1908 after more than 50 years in business. The idea that many failures are an essential part of economic change is new to me.
Murmann's ideas about evolutionary processes do help explain the recent economic development in Japan, China, and India. Japan picked business targets, supported and controlled plant investment, protected the domestic market, and subsidized exports. China, like Japan, has copied existing products with a major effort to gain outside technology, established a strong educational and science base, protected domestic markets, carefully controlled outside investment, and subsidized exports. Indian patent policies followed those of the early German states.
In all three countries, a strong interrelationship of commercial organizations, government, and universities is present and has shaped the course of economic development. Do we call this central planning or an evolutionary process? Maybe it is both.
The book also raised questions for me about the impact of globalization and efforts to improve the economies of poor nations. Can developing nations make out without educational facilities or tariff protection? Is there a way to improve poor economies by creating a favorable environment using only local resources and talent?
Of additional note in the book is a short, valuable technological history of dyes, as well as a collection of databases on firms and plants. There's also a comprehensive bibliography and a good index.
Murmann's book will interest and stimulate the thinking of anyone involved in management in a technology-based operation. I also recommend it to policymakers in government and the host of nongovernmental organizations that seek to influence international policy. As Murmann hopes, it should also encourage additional research.