Making Innovative Chemical Giants: A Firm-Level Analysis of IG Farben and DuPont Dogan, Muhsin Science and Technology Policy Studies, Middle East Technical University, Turkey “Without coal and IG Farben, I can have no foreign policy.” Gustav Stresemann1 “The German nation is forced to live within a much too restricted space. Barred from owning the world's sources of raw materials, it is forced to produce the raw materials it needs for its national security out of its own deposits- from coal, salts, lime and other substances, as well as from air and water through chemical means.” Carl Krauch2 “DuPont people have transformed their company successfully for two centuries, making DuPont one of the most successful and sustained industrial enterprises in the world. Their story makes for exciting history, and this timeline tells how they did it.” DuPont3 “… most business histories the responses of individuals, in their corporate setting, to the larger economy and particularly to the needs and opportunities created by rapidly changing markets and increasingly complex technologies. Nevertheless, few men in American industry [Pierre Samuel du Pont] have had a strong enough influence within a major business enterprise to provide such a focus.” Alfred D. Chandler, Jr. and Stephen Salsbury4 Introduction Recently, innovation and learning have gained importance in explaining technological divergence among economic institutions. Examining the complex nature of the learning processes in innovation can bring interesting insights that neo-classical economics is unable to provide. In this paper, the role of learning and innovation in setting up the development path in the chemistry industry between 1925 and 1945 in Germany and USA has been examined in terms of evolution of innovation process. The principal purpose of the paper is to analyse the complicated relations with respect to learning and innovation process in two giant chemical firms – IG Farben in Germany and DuPont in the USA – over the period 1925 and 1945. These two firms are selected on the basis of similarities and differences in their approach to learning and 1 Foreign Minister of Weimar Republic in Germany between 1923-1929. 2 He was the former executive in BASF until establishment of IG Farben. Also, he was a member of NSDAP (National Socialist German Workers Party), and responsible for Reich Office of Economic Development (Reichsamt für Wirtschaftsausbau) in 1936 (Hentschel, 1996, p. 162; Macrakis, 1993, p. 102). 3 DuPont’s anonomous motto. It is quoted from the website: https://goo.gl/4KC6g1 (accessed date: 2016-11-22). 4 (Chandler & Salsbury, 1971, p. 10) 1 innovation activities. They both have successful innovation paths in the selected period. Success of two firms enables us making comparison through case studies. At this point, World War II has a greater role in stimulating innovation in both Germany and the USA. Therefore, the paper predominantly focuses on pre-war and war period to understand the reasons behind the divergence among the firms as well as countries. Innovation and learning activities of firms will be examined in detail with the assistance of archival data. Researchers have long been interested in understanding the nature of innovation and role of learning in the innovation process. Joseph Schumpeter provided the first contribution on innovation process. Schumpeter is the first to define innovation and its process systematically5. The main tendency in the literature is to define innovation in order to measure it. There have been many studies that are interested in analysing innovation and its effects on economy. Classical economic theory, someway, ignored the evolutionary. The First important attempt to clarify innovative activity came from mainstream economics. In this respect, primarily, Solow’s work6 emphasizes technical change and source of economic growth. In addition to Solow’s contribution, technical change has been analysed as a source of economic growth by studies of Romer’s7 contribution. It is known as Endogenous Growth Model. According to the model, investment in human capital, innovation, and knowledge are significant contributors to economic growth8. The Second important attempt has come from evolutionary economists. For the first time, Evolutionary economists have interpreted innovation as dynamic and non-linear process9. This advancement expands our knowledge about innovation and learning process. With those contributions, the innovation framework has been drawn by collaboration of many scientists from different fields. Institutional and cultural effects have been discussed endlessly. The Third contribution has arisen from interdisciplinary areas due to the fact that complex nature of innovation and learning cannot be explained by classical theories. The paper will develop a detailed perspective that affects our knowledge regarding innovation and learning process in two cases. Learning in innovation activities has become a popular term in the literature. Some explanations on learning process were first made by philosophical debates which are related to learning and knowledge transfer. Polanyi’s contribution, in that sense, is valuable. Tacit and subjective definition of knowledge is the first effort to comprehend the effect of knowledge on economics10. Furthermore, learning process causes to create new knowledge in firms by sharing11. This analysis supports the identifying importance of firms’ actions in gaining knowledge. In addition, collective learning helps to understand 5 (Schumpeter, 1934) 6 (Solow, 1956) 7 (Romer, 1994) 8 (Solow, 1956) 9 (Fagerberg, Mowery, & Nelson, 2005) 10 (Polanyi, 1983) 11 (Nonaka & Takeuchi, 1995) 2 why firms must communicate with each other. Collective learning also occurs in socialization process of communities. “Communities of practice” is important to create new knowledge12. Contrary to this view, learning was defined as an individual and essential activity13. Individual carries knowledge to others within institutions like firms and corporate. Collective learning shows that firms and individuals have to learn to meet their needs. Much of this paper is concerned about understanding how new knowledge could be created. Finally, empirical studies and several case studies show that innovation is a process of organizational learning and knowledge creation14. In this paper, chemical sector was chosen due to the fact that it is general-purpose technology that spread its knowledge and inventions over all industrial sectors in the market15. According to Delorme, innovative activities are intense in chemistry corporations16. Moreover, chemistry can be seen as the main promoter in industrial production due to its side effects and externalities on economy. Conclusively, the period is intentionally chosen to eliminate divergent conditions and to standardize circumstances for two countries. As known, the two countries, Germany and the US, entered the War as great powers. Hence, two giant chemical companies were selected to pursuit what the differences and similarities in innovation and learning activities are. There are three important points in this paper in terms of innovation studies literature. The first is size of the firms affected its market strategies. They needed to join international competition for gaining advantage. Nowadays, this situation has been called as Global Value Chain. In this case, IG Farben and DuPont had benefited from those “value” chains deceptively. The second point is evolutionary sides of the cases. For those companies, evolutionary factors such as variety, dynamism etc. can be observed as Schumpeterian concept. The last point is type of conducting research activities in both company. This means that for both company and country had highly had innovation environment in terms of “system approach” to innovation. Activities were examined accordance with Nelson and Rosenberg (1993) and also Freeman and Soete’s (1997) ideas. Under the facts of the literature, the paper study will try to analyse and answer several questions what about the differences/similarities regarding the foundations of innovation between IG Farben and DuPont are? Were there differences in terms of the role of learning? How did external factors such as war, political conditions and structure, economic system, economic policies interact with the learning process and innovation process? The main target of the paper is to clarify mentioned points. The first aim is understanding and analysing innovation and learning process in IG Farben and DuPont between 1925 and 1945. The second aim is to find a pattern that explains and perceives 12 (Wenger, 1999) 13 (Simon, 1991) 14 (Fagerberg et al., 2005, pp. 115–147) 15 Christopher Freeman and Luc Soete, The Economics of Industrial Innovation, 3rd ed (Cambridge, Ma: MIT Press, 1997). 16 (Delorme, 1962) 3 innovation and learning for general theory with the help of comparative case study. To achieve my objectives, I will use historical and theoretical analyses with the help of related the literature. In addition to this approach, making a historical innovation analysis can provide a picture about the mechanism, and this framework helps us to understand today’s innovation policies and its mechanism. Novelty of the paper is to analyse innovation and learning in historically by using network tools and other comparison methods. Methodological Approach Certainly, it is not easy to set a framework for research in economic history. Data and sources could be rare and scarce. In this thesis, there