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INSTITUTE FOR PROSPECTIVE TECHNOLOGICAL STUDIES

SEVILLE W.T.C., Isla de la Cartuja, s/n, E-41092 Sevilla

The European Commission JRC-IPTS and Enterprise DG The impact of EU Regulation on innovation of European Industry

Regulation and Innovation in the Chemical Industry

Edited by L. Delgado DG JRC- IPTS

By Manfred Fleischer, Sabine Kelm, Deborah Palm Wissenschaftszentrum Berlin für Sozialforschung (WZB) [Social Science Research Center Berlin]

Seville, October 2000

EUR 19735 EN

Contact details:

European Commission DG Joint Research Centre Institute for Prospective Technological Studies (IPTS) Technologies for a Sustainable Development Unit (TSD)

Per Sorup, Head of Unit Luis Delgado, Head of Sector W.T.C. Isla de la Cartuja E-41092 Sevilla Tel. + 33-95 44 88 405 Fax. + 33-95 44 88 339

ã ECSC-EEC-EAEC, Brussels • Luxembourg, 2000 The views expressed in this study do not necessarily reflect those of the European Commission (EC). The European Commission retains copyright, but reproduction is authorised, except for commercial purposes, provided the source is acknowledged: neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of the following information. Printed in Spain

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________

Contents CONTENTS

II

LIST OF FIGURES

VI

LIST OF TABLES

VII

PREFACE

IX

ACKNOWLEDGMENTS

XI

EXECUTIVE SUMMARY

XIII

1 INTRODUCTION

1

1.1

Overview

1

1.2

Specific Objectives

2

1.3

Definitions

2

2 THE NOTIFICATION OF NEW CHEMICAL SUBSTANCES

6

2.1

Introduction

6

2.2

Approaches to Controlling the Safety of Chemical Substances

6

2.3 Basic Notification Procedures for New Chemical Substances 2.3.1 Overview of the Systems in the EU, Japan, and the USA 2.3.2 EU 2.3.2.1 Procedure to be Followed by the Notifier 2.3.2.2 Content of the Notification Dossier 2.3.2.3 Classification 2.3.3 Japan 2.3.3.1 Procedure to be Followed by the Notifier 2.3.3.2 Content of the Notification Dossier 2.3.3.3 Classification 2.3.4 USA 2.3.4.1 Procedure to be Followed by the Notifier 2.3.4.2 Content of the Notification Dossier 2.3.4.3 Excursus: SAR and the Assessment of Chemical Hazards in the Presence of Limited Data 2.3.4.4 Classification and Regulatory Action 2.3.5 Required Laboratory Tests in Comparison 2.3.5.1 EU 2.3.5.2 Japan 2.3.5.3 USA 2.3.5.4 Summary of Required Test

10 10 11 16 16 17 17 20 20 20 20 23 23 24 30 34 34 36 36 37

2.4 Procedure for Polymers 2.4.1 OECD Definition of Polymer 2.4.2 EU 2.4.2.1 Tests 2.4.2.2 Grouping of Polymers 2.4.2.3 Grouping by Substance 2.4.2.4 Grouping by Family

39 39 39 39 39 39 40

II

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ 2.4.2.5 Reduced Test Package (RTP) Polymers 2.4.3 Japan 2.4.3.1 Tests 2.4.3.2 Grouping of Polymers 2.4.3.3 Reduced Test Package 2.4.4 USA 2.4.4.1 Polymer Exemptions 2.4.4.2 Grouping of Polymers 2.4.4.3 Reduced Test Package 2.5 Costs for Laboratory Testing and Notification Fees 2.5.1 Notification Fees 2.5.2 Costs for Laboratory Testing for Regular Chemicals

3 MECHANISMS OF INNOVATION IN THE CHEMICAL INDUSTRY

41 41 41 42 42 42 42 43 43 44 44 45

47

3.1

Incentives for Firms to Innovate

47

3.2

A Conceptual Model of Regulation and Innovation

49

3.3

Hypotheses Concerning the Regulatory Impact

52

4 INTERACTION BETWEEN REGULATORY PROCESSES AND INNOVATION (RESULTS FROM CASE STUDIES)

54

4.1

Case Study – BASF AG

61

4.2

Case Study – Henkel KGaA

63

4.3

Case Study – Hoechst Marion Roussel (HMR)

65

4.4

Case Study – PCAS Group, France

67

4.5

Case Study – DuPont Germany

69

4.6

Case Study – Hoechst AG

69

4.7

Case Study – Bayer AG

70

4.8

Case Study – Henkel KGaA

70

4.9

Case Study – Degussa

71

5 INNOVATIVE PERFORMANCE

72

5.1 Introduction 5.1.1 Overview 5.1.2 Sample and Data 5.1.3 A Short Elaboration Concerning Firm Performance

72 72 74 77

5.2 R&D 5.2.1 R&D Expenditures 5.2.2 R&D Productivity

83 83 86

5.3

92

Basic Research and Nobel Prizes in Chemistry

III

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ 5.4 Patents 5.4.1 Introduction 5.4.2 Patent Specialization 5.4.3 Patent Productivity 5.4.4 Excursus: Polymer Patents 5.4.5 Conclusion

102 102 102 105 107 108

5.5 Innovation Counts 5.5.1 Introduction 5.5.2 The Classification of Innovations 5.5.3 The Innovation Measurement Bias 5.5.4 Evidence Based on Interviews 5.5.5 The Innovation Ranking 1996/97 5.5.6 Revealed Innovation Advantage 1996/97 5.5.7 Excursus: Polymer Innovations 5.5.8 Conclusion

109 109 113 115 120 122 126 129 130

5.6 Notification Counts 5.6.1 An Overview 5.6.2 EU 5.6.3 Japan 5.6.4 USA

131 131 132 140 143

6 CONCLUSIONS

146

7 POLICY RECOMMENDATIONS

152

8 REFERENCES

159

APPENDIX

167

IV

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ List of Figures Figure 1.1: What is Chemisty? ................................................................................................ 3 Figure 2.1: Risk Contingent Testing vs. Fixed Testing Requirements ................................... 8 Figure 2.2: Main Purposes of the Legislation Concerning the Chemicals Policy of the EU ................................................................................................................. 13 Figure 2.3: Decision Tree for New Substance Notification in the EU (Directive 92/32/EEC) ........................................................................................ 15 Figure 2.4: Systematic Chart of the Law Concerning Examination and Regulation of Manufacture, etc. of Chemical Substances (Those in Parentheses Designated as of November 1995).................................. 19 Figure 2.5: The Premanufacture Notification (PMN) – 90-Day Review Process ................. 22 Figure 2.6: Example of Health Hazard Assessment.............................................................. 27 Figure 3.1: A Conceptual Model of the Factors Influencing Product Innovations in the Chemical Industry ......................................................................................... 51 Figure 5.1: Operating Margins for the Chemical Industry .................................................... 79 Figure 5.2: R&D Intensity for the General Chemicals Industry (SIC 280) (Avg. Weighted Sales) ........................................................................................ 86 Figure 5.3: R&D Intensity for the Plastics Industry (SIC 282) (Avg. Weighted by Sales) ................................................................................... 86 Figure 5.4: Nobel Prize Winners in Chemistry from Germany, the United Kingdom, the USA and France, 1901-1999........................................................ 97 Figure 5.5: Institutions with more than one Nobel Prize Winner in Chemistry, 1945-1999 ........................................................................................................... 98 Figure 5.6: Revealed US Patenting Advantage in the Chemical Industry, 1975-1997 ......................................................................................................... 103 Figure 5.7: Revealed Innovation Advantage of the Chemical Industry, 1996/97 (based on 2,230 innovations from 59 European, 27 Japanese, and 61 US firms)...................................................................................................... 128

V


List of Tables Table 2.1:

Terms and Abbreviations Used in this Chapter.................................................... 7

Table 2.2:

Comparison of the Notification Procedures for New Chemical Substances........................................................................................................... 10

Table 2.3:

Test Data Submitted with Premanufacture Notices ............................................ 25

Table 2.4:

Comparison of Tests Required before Notification ............................................ 37

Table 2.5:

Testing Costs for Notification in the EU ............................................................ 45

Table 2.6:

Testing Costs for Notification in Japan .............................................................. 45

Table 2.7:

Comparison of Testing Costs for Notification.................................................... 46

Table 4.1:

List of Interviews Conducted (including case studies provided by ETAD and VCI).................................................................................................. 55

Table 5.1:

Characteristics of 249 European, Japanese, and US Firms in the Sample (Averages for the Period 1993-1997) ................................................................. 74

Table 5.2:

The Global Top 50 Chemical Companies, 1999................................................. 75

Table 5.3:

Four Measures of the Economic Performance of European, Japanese, and US Firms (Averages for 1993-1997)............................................................ 80

Table 5.4:

Results of Regression Using Country-Dummies on the Single Performance Criteria Controlling for Size and Sub-Sector of the Chemical Industry, 249 Firms, 1993-1997 ......................................................... 81

Table 5.5:

Regression Relating the Average Economic Performance of 78 European, 81 Japanese, and 90 US Firms of the Chemical Industry to Size, Region, and Sub-Sector, 1993-1997 .......................................................... 83

Table 5.6:

R&D Intensities by Industry and Region, 1985-1997 (in %, weighted means as mean of RDINZ 85-97) ....................................................................... 85

Table 5.7:

Production Function Estimates – Robust Regression of the Operating Income (X) on Capital (K), Labor (L), and R&D Expenditures (RD), 294 Chemical and Pharmaceutical Firms, 1985-1997 (t-statistics in parentheses) ........................................................................................................ 90

Table 5.8:

Production Function Estimates (Unbalanced Panel Data) – Estimate Population-Averaged Panel-Data Model Using a GEE Approach of the Operating Income (X) on Capital (K), Labor (L), and R&D Expenditures (RD), 197 Chemical Firms, 1985-1997 (z-statistics in parentheses) ........................................................................................................ 92

Table 5.9:

The Nobel Prize in Chemistry (1901-1999)........................................................ 96

Table 5.10: Patent Regression Results (Unbalanced Panel) – Poisson Regression of US Patents Granted on R&D Expenditures (RD), 172 Chemical Firms, 1985-1997 (t-statistics in parentheses) ............................................................. 106 Table 5.11: Polymer Patent Cross Tabulation by Region .................................................... 107

VI

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ Table 5.12: Test of Regional Differences in US Patents Using a Negative Binomial Regression Model Controlling for Size and Sub-Sector of the Chemical Industry, 1993-1997 .......................................................................................... 108 Table 5.13: Major Postwar Commercial Chemical Developments...................................... 110 Table 5.14: The Top 50 Companies of the Innovation Ranking 1996/97............................ 122 Table 5.15: Innovations by Region of the Innovating Firm, 1996/97 (in %) (59 European, 27 Japanese, and 61 US Firms) ................................................. 124 Table 5.16: Innovations by Standard Industrial Classification of the Innovating Firm for 1996/97 (59 European, 27 Japanese, and 61 US Firms)..................... 125 Table 5.17: Overview of the Polymer Innovation Counts ................................................... 129 Table 5.18: Testing the Impact of the Different Polymer Regulations Using 359 Innovations from the Innovation Count ............................................................ 131 Table 5.19: Average Annual Number of New Chemicals Introduced by Chemical Firms in the Federal Republic of Germany, 1975-1979 ................................... 135 Table 5.20: Substances Notified for the First Time per Member State per Year................. 137 Table 5.21: Notifications from EU Manufacturers Against non EU Manufacturers ........... 138 Table 5.22: Actual PORD Exemptions ................................................................................ 139 Table 5.23: Example of a Notification Record of a R&D-Intensive Japanese Chemical Firm: Notifications of New Chemical Substances, 1992-1999 ......................................................................................................... 141 Table 5.24: Example of a R&D-Intensive Japanese Chemical Firm Concerning the Cancellation of Research on Notified New Chemical Substances due to Bad Biodegradability, 1986-1997 ..................................................................... 142 Table 5.25: US-Notification Statistics, 1990-1999.............................................................. 144 Table A.1: The Sample of 249 Firms Used in the Analysis ............................................... 173 Table A.2: Innovation Ranking 1996/97: Ranking of all 147 Companies.......................... 179 Table A.3: EU Notification Statistics, 1983-1999 (Substances Notified for the First Time per Member State and per Year) ....... 183 Table A.4: Japanese Notification Statistics, 1974-1998 ..................................................... 184 Table A.5: US-Notification Statistics, 1979-1996.............................................................. 186

VII


Preface The chemical industry plays a major role in our economy, affecting our daily lives in countless ways. Many modern products depend on chemicals; therefore, the international competitiveness of European industry requires a high-tech, globally competitive European chemical industry that can supply new products at reasonable prices. Europe’s ability to maintain its leading technological position is critical to the future competitiveness of the European chemical industry. To maintain the cutting edge, industry must be supported by a regulatory framework which does not hinder such efforts. This is the major issue that this report addresses. It is not a simple issue. Chemicals do not only affect the economy, they also affect human health and the natural environment. This is the main reason why the EU has developed very comprehensive chemicals legislation. It can be argued that European chemicals policy started in 1962 with the implementation of the food legislation regarding the use of colouring substances in foodstuffs, that established common standards for food by the elaboration of Community-wide positive lists for food additives. During the mid-sixties legislation covering pharmaceuticals and cosmetics was developed. More directly important to this study is Directive 67/548/EEC (the so-called Dangerous Substances Directive) concerning the classification, packaging, and labelling of dangerous substances, which was adopted under Article 94 of the EC Treaty, to allow the free circulation of these substances in the internal market. Directive 67/548/EEC and its 6th and 7th Amendments can be regarded as a cornerstone of chemicals policy in the EU. These amendments introduced specific provisions for chemical substances newly placed on the market. The extent to which the 7th Amendment has adversely affected the development of new chemical products in the EU has become a matter of considerable interest and controversy. The question is both important and complex. The European chemical industry primarily acts globally and therefore the chemical firms are confronted with a number of different national regulations. The uncertainty concerning the effects that new chemicals regulations may have on innovation has led to the present study. Its objective is to make a comparative study analysing the impact of the notification systems for new substances on innovation in the chemicals sector in the EU, Japan and the USA. To our knowledge, this study is unique, since it is the first attempt to assess the impact of chemicals notification systems on chemical innovation in an internationally comparative framework.

VIII


Acknowledgments First of all, I would like to thank my two co-authors, Sabine Kelm and Deborah Palm. Sabine has just started her first year with an international auditing company in Berlin, and Deborah is furthering her studies in chemical engineering at Berlin’s Technical University. Both have been very helpful in compiling the information needed for this study. Furthermore, we have undertaken the analyses and the writing of this report together. Although various books, government publications, and companies’ annual reports were important in developing our understanding of regulation and innovation in the chemical industry, our most valuable sources of information and insight about the subject were personal interviews. Very special thanks have to go to three people, Dr. Arno W. Lange from the German Umweltbundesamt, Dr. Hubert Mandery from BASF, and Luis Delgado Sancho from the IPTS. Dr. Lange, who is now retired from office, has provided me with a lot of insight into the functioning of the EU new chemicals regulation. I have learnt a lot from Dr. Mandery about the industry perspective, and from his detailed comments on the first draft of this report. And Luis Delgado was probably the most careful reader of the various drafts. He provided us with very helpful comments and suggestions for revision. I am also indebted to Dr. Dieter Fink from the VCI, the Association of the German Chemical Industry, for his advice and comments on our draft. The support of the industry associations CEFIC (EU), CMA (USA), ETAD (Switzerland), and JCIA (Japan) at various stages of the project is also appreciated. I am grateful to Professor Walter Garcia-Fontes from the Universitat Pompeu Fabra in Barcelona. He is coordinating the European Targeted Socio-Economic Research (TSER) Project “From Science to Products: A Green Paper on Innovation for the European Chemical Industry”. He had given me the opportunity to discuss my ideas in a workshop of the TSERProject in Madrid in November 1999. I have to thank Dr. Jens Hemmelskamp (now at GSF - National Research Center for Environment and Health and formerly at IPTS) for his comments and his ongoing effort (since December 1997) to keep my interest in the topic of regulation and innovation alive. Thanks go also to Dr. Fabio Leone, of IPTS and Gérald Petit, former member of DG Enterprise for their advice on the subject. I am very grateful to Gérard Guillamot (PCAS Group), Dr. Ulrich Klein (BASF), Dr. Markus Schwind (HMR), and Dr. Frank Wangemann (Henkel), for providing us with very insightful case studies concerning the impact of new chemicals regulation on innovation. I conducted structured interviews with executives of eleven European, seven Japanese and five US firms. I have interviewed experts of the regulatory agencies in the EU, Japan, and the USA. The interviews with companies were preceded by a comprehensive presentation by the

IX

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ company on how the regulation works and its impact on their innovative behaviour. For reasons of confidentiality reasons I could not directly use the information which was given to me, but I benefited greatly from the presentations and the interviews. I received similar support from the experts of the regulatory agencies in Europe, Japan, and the USA. They will not be named here, but I have listed them all in Chapter 4 (“List of Interviews Conducted”). I would like to express my very special thanks to them all. In compiling the information upon which this study is based we received a lot of support in the form of research assistance from student colleagues. I would like to thank Jan-Henrik Grabbert, Nina Moldenhauer, Christian Nieters and Tabea Ulbrich for their solid work and support. I know that they enjoyed the stimulating working atmosphere at WZB. Heiko Hoche helped in organizing the interviews in Japan and my former colleague, Dr. Andreas Moerke, supported the first-round of interviews in Japan. From both I have benefited from their intimate knowledge of the Japanese language and culture. I am most grateful to Nina Bonge who, with the support of her colleague Stephan Schönfeld, did the final technical work on the manuscript before it went to IPTS in Sevilla. Special thanks go to Eva Buchholz for the careful typing of parts of the manuscript, but particularly for helping me to manage the project. I am indebted to Dr. Kenn Kassman, who edited the English of the various drafts of the report. Two special debts must, however, be acknowledged. First, there is the financial support from IPTS in Sevilla for research assistance and travel. Second, this work began in 1998 in WZB’s Research Area “Market Processes and Corporate Development”. Professor Dr. Dr. h.c. mult. Horst Albach, at that time Director at WZB, gave us encouragement when it appeared that little could be done with the subject. To him and to other members of that stimulating institution we owe a great deal. While the contributions of all these people improved our study, none of them is responsible for any shortcomings.

Berlin, October 2000

Manfred Fleischer

X


Executive Summary The purpose of this report is to contribute to the analysis of three important issues. First, what are the structural differences between the notification systems for new chemical substances of the EU, Japan, and the USA? Second, the evaluation of the innovative performance of the chemical industries in these three regions. Third, to determine whether the differences observed can be attributed in part to the structural differences between the regulatory systems. The methodological framework is both quantitative and qualitative: a quantitative analysis of the large and medium-sized stock companies of the industry, and a qualitative analysis using the case study approach, focusing on polymers and dyestuffs. Econometric analysis was applied as the general methodology. For the qualitative analysis, interviews with experts from both industry and regulatory agencies were undertaken to gain further evidence. To measure performance differences between the European, Japanese and US chemical sectors we chose the firm as the unit of analysis and constructed an original firm database to analyze the economic and innovative performance of 78 European, 81 Japanese, and 90 US firms. Patent data from the US Patent and Trademark Office (USPTO) was used as a proxy for the innovative output of the firms. We applied a direct measure of innovative output; that is the number of innovations reported in the annual reports of 147 companies. This enabled us to analyse a total of 2,230 innovations in the period 1996-1997. Finally, we used the statistics on the notification of new chemical substances for the EU, Japan and the USA to draw conclusions about the efficiency of different regulatory systems. This report has five main parts. In the first part (Chapter 2) we focus on the structural differences between the regulatory systems by distinguishing the fixed testing requirement systems of the EU and the risk contingent testing requirement systems of Japan and the USA. The regulations are described in such detail that differences and possible impacts on the innovation behaviour of the firm can be easily seen and understood. In the second part (Chapter 3) we develop a conceptual model of new chemicals regulation and innovation in the chemical industry. The third part (Chapter 4) deals with the interaction between regulatory processes and innovation processes at the firm level. In-depth interviews were undertaken with eleven European, seven Japanese and five US firms; the regulatory agencies in these three regions were also interviewed. These interviews were used to gather the necessary information needed to analyse the impact of the notification procedure on chemicals innovation. Nine case studies on the impact of the new chemicals regulation on innovation are presented in this section. The fourth and major part of the study (Chapter 5) provides a comprehensive analysis of the innovative performance – including a short elaboration on the economic performance – of the European, Japanese, and US firms. Also included are observations and comments concerning the general innovative performance of the sector obtained from secondary data sources. In the final part (Chapter 7) we propose several policy

XI

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ recommendations – in particular changes of regulations and of the regulatory structure – geared to improving the innovative performance of the chemical industry in the EU. The major empirical findings of our analysis are stated directly below.

§

EU and Japanese firms exhibit a lower economic performance than US firms Using a combined index of economic performance we find that the US firms exhibit the highest economic performance, followed by the European firms. The Japanese firms are the firms with the lowest economic performance in the period from 1993 to 1997.

§

EU and Japanese firms exhibit a lower R&D productivity than US firms The estimated output elasticity of R&D for the USA is clearly higher than that of Europe and Japan in both models we have tested. Nevertheless, the R&D elasticity for Europe in the first model is not significant. The elasticity of R&D in Japan is higher than in Europe in the first model (0.11 and 0.04 respectively), but they are nearly identical in the second model, 0.09 for Europe and 0.10 for Japan.

§

US firms exhibit the highest patent productivity – Japanese firms lead in the number of patents Based on the Poisson model, the differences in the elasticities are considerable. The elasticity of patents with respect to the natural logarithm of the R&D expenditures is highest for the US firms at 0.56. For the European firms it is 0.16 and for the Japanese 0.08.

§

US firms have a lead in polymer patents The analysis of the polymer patents shows that the US firms have a more than proportionate share of all polymer patents. Polymer patents account for 7.1% of all 139,590, but polymer patents account for 7.9% of all those held by US firms. Although this difference is not extreme, we can conclude from the interviews with the industry that firms operating under the EU regime avoid the development of new polymers using more than 2% of new monomers (e.g. BASF case study).

§

The innovation counts provide mixed results regarding the innovative performance of the EU, Japanese, and US chemical industries Perhaps the greatest obstacle to understanding the role of innovation in economic processes is still the lack of meaningful measures of innovative outputs. We have applied a direct measure of innovative output; that is the number of innovations reported in the annual reports of companies. This measure leads to a significant measurement bias, but no better measure was available. The results are therefore interesting, but

XII

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ mixed. Overall we have surveyed the annual reports of 147 firms leading to 2,230 innovations in 1996/97. If we compare the 50 companies with the highest numbers of innovations 23 are from Europe (46%), 21 from the USA (42%), and 6 from Japan (12%). Europe and the USA are in absolute terms approximately on the same level, as they also are in the number of reported innovations by the top 50 for these regions, which are 555 in Europe (44.1%) and 527 in the USA (41.8%). Japan is in absolute terms at the bottom, both in innovative companies and in number of innovations, with 178 (14.1%). However, the 14.1% of innovations introduced by Japanese firms is produced by only 12% of all firms. We have tested whether there is a difference in the innovative performance between the EU, Japan and the USA using a Poisson regression model controlling for firm-size and the sub-sector of the chemical industry. The result is that there is no statistical significant difference.

§

The eu system has produced the lowest number of new chemicals notifications For the EU we have notification statistics for 15 years, for Japan 25 years, and for the USA 21 years. In the EU, the companies have notified on average 143 new chemicals per year. In Japan, firms have made 154 notifications annually. The number of new chemical substances (excluding polymers) introduced into the US market was 425.

§

The EU system provides cost disadvantages for notifiers. However, for large corporations, market entry barriers may temporarily eliminate the adverse competitive effects of the EU notification system Notification costs on average are highest in the EU. Firms coming from the US have an advantage by having much lower regulatory costs than firms in the EU. This factor becomes more important in relationship to the number of trials needed for the development of a successful chemical. But the EU system provides a quasi-patent protection for the first notifier. The protection in form of market entry barriers due to the regulation cost and to the quasi-patent status granted to the first notifier may temporarily help large corporations in the EU. Small and medium-sized companies cannot afford, in general, to develop and notify new chemical substances. However, due to the regulatory and other cost disadvantages in the EU, we would expect to see EU manufacturers setting up facilities outside the EU to produce final products based on new chemical substances. The new chemicals regulations in general do not regulate articles, that is, final products which include new chemicals. In fact, it is rational for all firms to pursue an innovation strategy which is based on the use of the

XIII

Regulation and Innovation in the Chemical Industry ___________________________________________________________________________ article provision. Thus, the market entry barriers due to EU new chemicals regulation may last not very long.

§

Priority perceptions regarding an increase in the efficiency of the EU, Japanese, and US systems For the interviewed EU companies it is most important that regulatory expenses be reduced without sacrificing the safety of chemicals. For the Japanese companies the harmonization of the notification system is of top priority, particularly harmonization with the EU system. The companies in the USA are confronted with the most efficient risk-oriented chemicals control system. That system provides exemptions that promote innovation. Is estimated that notification costs for 86% of the Pre Manufacture Notifications, PMN, are low. The US companies are disappointed with the static EU inventory for existing substances, EINECS, and with the inventory for new substances, ELINCS. They are convinced that a dynamic inventory would be the best solution for the EU.

Policy Recommendations

§

It is recommended that due consideration be given to the adoption of a risk-oriented regulatory system. A structural change of the system is also important in order to create a unified chemicals control system for new and existing chemical substances.

§

Beyond the recommendation to reorient the structure of the EU chemicals control system from a fixed testing requirement system to a risk-oriented one, some other changes regarding exemptions should be considered. In particular, the Low Volume Exemptions, the R&D Exemptions and the Polymer Exemptions should be reoriented.

XIV

Regulation and Innovation in the Chemical Industry __________________________________________________________________________

1

Introduction 1.1

Overview

Considerable concern has been expressed in recent years about the impact of regulation on innovation and the competitiveness of the European chemical industry. The impact of regulation on innovation is much discussed, yet hardly analyzed. The debate has been characterized by an inadequate level of information, as well as poor systematic empirical foundation. In order to close this knowledge gap the IPTS has conducted a major study dealing with the impact EU regulation has on Innovation of European Industry in a number of sectors. Within this project the Wissenschaftszentrum Berlin für Sozialforschung (WZB) has conducted the present study on Regulation and Innovation in the Chemical Industry. The project’s focus is on the following propositions1: The position of the European chemical industry in the world market could be threatened due to the decline in innovation followed by new European chemicals regulation (in particular the 6th and 7th amendment of Directive 67/548/EEC). This decline limits the future potential for the development of new substances, which could weaken the position of the European chemical industry as a whole. The counterproposition: These regulations have directly and indirectly induced innovations, which could lead to first-mover advantages for the European chemical industry in global competition. Obviously these propositions cannot be proved using a simple test. The complexity of the innovation process itself and its interaction with other processes have to be well understood. The chemical industry has, for example, shifted its attention towards responsible care issues, which has led to the implementation of the “product stewardship” function within a number of firms. Often, the innovation policy of firms implicitly implies a sound risk assessment, the invention and development of less riskier chemicals, and the introduction of these new chemicals to the market in order to replace chemicals with higher risks. Thus, empirical evidence for both propositions was to be expected. The objective was to make a comparative study on the impact of the notification systems for new substances on innovation in the chemicals sector in the EU, Japan, and the USA. The analysis is based on a quantitative analysis of the large and medium-sized stock companies of the industry, and on a qualitative analysis using the case study approach, focusing on polymers and dyestuffs. Regarding the methodological approach, we should mention that the traditional stimulusresponse model for the analysis of the impact of regulation on innovation is no longer 1 Note, that the way in which the following two proposition are formulated does not cover explicitly

the competitive adjustment behaviour of firms as a reaction to differences in regulatory systems. Such behaviour is analyzed in particular in chapters 3 and 4.

1

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ appropriate because innovation in the chemical industry takes place in a collective and interactive manner within a complex institutional, social, and economic network. For this reason we follow the systems approach as proposed by Kemp, Smith and Becher (1999). Innovation is seen as “a distributed process – its inputs in terms of knowledge and resources are distributed among many participants and contributors, linked to each other in networks of relationships. Moreover it is a dynamic process, one which involves learning and change within the social and economic spheres.” (Kemp, Smith, and Becher 1999, p. 3) Systems approach implies that innovations by firms cannot be understood simply in terms of the decision-making at the level of the firm. Regarding the analysis of innovations the firm has to be understood as part of a larger set of systems.2 A final introductory remark should be made to clarify the definition of the chemical industry. Although, pharmaceuticals and biotechnology were initially excluded from the study, this was not always feasible. The reason is that firms are classified into industry sectors according to their main activities, and a significant number of firms are continuously shifting their activities from chemicals to pharmaceuticals. Thus, it was decided to focus the innovation counting only on the chemical innovations. However, the analysis of patents includes also pharmaceutical patents of firms classified into the chemicals industry. 1.2

Specific Objectives

1.

Definitions for Regulation and Innovation in the Chemical Industry

2.

Interaction between Regulatory Processes and Innovation

3.

Identification of the Determinants of Innovation

4.

Indication of the Performance of the Chemical Industries in Terms of Innovation

5.

Impact Analysis of the Notification System on Innovation

6.

Policy Recommendations 1.3

Definitions

The chemical industry is composed of all companies that produce their products exclusively or primarily by the conversion of substances. The goal of chemistry, in this definition, is the substitution of natural substances and/or the creation of new substances. This is done either by the conversion of natural substances (such as modified starches) or by the syntheses of organic or inorganic base materials (i.e. the synthesis of chlorinated dissolvents). Practically the companies combine organic and inorganic materials from the earth with heat, air, and water to make chemicals to be used by other chemical producers to make other chemicals or by other industries to make a broad range of products used in everyday life (see figure 1.1). Companies 2 See for an early application of the systems approach to the analysis of innovations e.g. Sahal (1981).

2

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ whose treatment of substances is done exclusively by (or connected with) physical processes – such as mixing, emulsifying or extracting – are also often considered to be part of the chemical industry. Figure 1.1:

What is Chemisty? Inorganic Raw Materials

Mining

Heat Air Water

Organic Raw Materials

Oil & Gas Production

Chemical Processing

"Basic" or Building Block Chemicals

Heat Air Water

Chemical Processing

Chemical Intermediate and Finished Products

Other Manufacturers

Consumers

Exports

Source: Lenz and Lafrance (1996, p. 15)

Due to the empirical character of our study and the involved measurement issues we will use a narrow definition of innovation as the introduction of a new physical product into the market or of the application of a new technological production process, both based on research and development and/or invention. Finally, we will focus our empirical analysis mainly on product innovations, i.e., a new or changed chemical product introduced in the market. We nevertheless take also process innovations into account. Product innovations may be based on the development of a new chemical substance, formulations, blends, and mixtures of new and/or existing chemical substances. Product innovations that are based on new chemical substances often require new processes. Such process innovations are regarded as an essential

3

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ part of the product innovation. Generally new chemicals are developed using the conversion of natural substances or chemical synthesis. Since any new chemical requires the use of a particular conversion or synthesis, the development of new chemicals is accompanied by the development of new chemical processes. The radicalness of innovations varies according to the degree to which they embody technological change, that is, according to their technological worth. The highest technological worth is placed on radical breakthrough innovations, followed by those which represent major technological shifts, improvements, imitations, and finally those which do not require significant new technology (Feinman and Fuentevilla 1976). In the literature on innovations a further distinction is made between basic innovations and improvement innovations (Mensch 1979). Such a dual distinction is useful since it allows a better understanding of the role of innovation in the development of the chemical industry. Some authors3 see the development of the chemical industry as occurring in waves triggered by technological breakthroughs. According to Franck (1983), the following innovations constituted revolutionary basic innovations: the production of mineral fertilizer in the first half of the 19th century, the introduction of the Haber-Bosch-process, the synthesis of organic colorants, and the development of plastics (the scientific foundation of which had already been laid in the 1920s and 1930s). Amecke (1987) and the DRI Europe (European Commission 1995, p. 6-8) argue, however, that the potential for further development of basic innovations is exhausted. From a company perspective Miller (1998) supports the evolutionary approach that basic technological innovations are followed by incremental innovations. He reports that since 1927 at DuPont they have observed four innovation cycles, each lasting 15 to 20 years, with the focus switching from growth and new products to cost reduction and consolidation. The distinction of innovations according to their significance is important. For this project we use the distinction between breakthrough and incremental innovation, that is, breakthrough innovations include radical breakthrough and major technological shifts, whereas incremental innovations include improvement, imitation, and finally those which do not require significant new technology. To measure the innovative performance of the firms of the chemical industry we have developed a classification of innovations according to the product groups most commonly used in the chemical industry (see chapter 5). The concept of regulation refers to the implementation of rules by public authorities and government regarding market activity and the behaviour of private agents in the economy. The literature distinguishes three types of regulation, that is, economic regulation, social regulation, and market organizing regulation. Social regulation refers to public intervention to prevent negative externalities to the public. Among the regulatory model under discussion, regulation of chemical substances follows the 3 See Mensch (1979); Franck (1983); Ayres (1988); Miller (1998).

4

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ concept of social regulation and in particular the regulatory model of “detailed technical harmonization.” For further development of the systems approach see Kemp et al. (1999) and for the working definitions of regulation and innovation see Brousseau (1998).

5


2

The Notification of New Chemical Substances 2.1

Introduction

Regulatory requirements regarding the notification of chemical substances have been introduced to avoid the negative impact of some of those substances on human health and the environment. Despite efforts to globally harmonize these requirements, there are significant differences involved, which make it difficult for manufacturers to introduce a new substance worldwide. This chapter tries to portray the similarities and differences in the notification procedures for new chemical substances in the USA, EU and Japan. This is done by comparing the relevant legislation: in the EU the Directive 67/548/EEC amended, in Japan the Chemical Substances Control Law and in the US the Toxic Substances Control Act. The goal of this legislation is to protect mankind from harm, though the approach may be different. 2.2

Approaches to Controlling the Safety of Chemical Substances

Non-assessed risks in new and existing chemical substances can threat human health and the environment. These risks cannot be dismissed, as has been demonstrated by various chemical hazards and scandals (e.g. Asbestos, CFCs, Dioxin, or PCBs). Similar risks may still exist in substances that are already on the market. Some of the risks may be very difficult to detect without direct testing, as there are no control groups available. Others may only become visible in the far future. This is particularly true for substances interfering with the genetic code. In addition, many of the existing chemical substances not yet sold on a large scale have the potential to become marketed in the future without risk analysis. In principle, all substances used in the chemical industry should have gone through identical risk assessment, independent of whether they are new or not. It is clear that even the existing testing requirements for new substances do not completely eliminate all risk. No test can completely capture the real world, therefore a residual, nonquantifiable risk always remains. For example, potential interactions with other chemical substances may not have been taken into account, the effect on certain animal species may not have been tested, and so forth.

6

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Table 2.1: CAS CSCL EINECS ELINCS ENCS EPA FGEW

Terms and Abbreviations Used in this Chapter

GLP GMP LoREX LVE MHW MITI MPD MW NAMW NCN OECD PMN

Chemical Abstract Service Chemical Substances Control Law (Japan) European Inventory of Existing Commercial Chemical Substances European List of Notified Chemical Substances Existing Notified Chemical Substances (Japan) Environmental Protection Agency (USA) Functional Group Equivalent Weight, i.e., the weight of polymer containing one functional group weight (1 mole) of the functional group Good Laboratory Practice Good Manufacturing Practice Low Releases and Exposure Low Volume Exemption Ministry of Health and Welfare (Japan) Ministry of International Trade and Industry (Japan) Minimum Premarketing Data (OECD) Molecular Weight Number Average Molecular Weight New Chemical Notification Organisation for Economic Co-operation and Development Premanufacture Notification (USA)

SNUR TME

Significant New Uses Rule Test Marketing Exemption

TSCA

Toxic Substances Control Act (USA)

It is also evident that not everything is done to eliminate this residual risk at any cost. It is always possible to further refine the testing, carry out an additional analysis or to develop new tests to further reduce the residual risk. However, in most cases these additional testing strategies are too costly given the very small increase in knowledge that they would contribute. In other words, a no-risk strategy does not exist. The only thing that can be done is to push the risk below a quantifiable size. Therefore, any testing procedure is a trade off between reduced risk and low costs. This tradeoff can be used to classify the different notification systems. We distinguish two systems, the risk contingent testing requirements system (contingent testing, two-tier system) and the fixed volume-triggered testing requirements system (fixed testing, one-tier system). Figure 2.1 shows in a very simple way the structural differences of these systems. The Japanese and the US systems are contingent testing requirement systems whereas the EU system is a fixed “block” and mainly volume-triggered testing requirements system. It is apparent that the existing EU block testing procedures can be improved. Carrying out the same amount of tests on substances which are believed to be potentially dangerous and on

7

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ substances which have a high probability of no harmful effects is inefficient. At identical costs, intensifying the analysis of more risky substances and reducing the test effort for the innocuous chemicals could increase safety. Figure 2.1:

Risk Contingent Testing vs. Fixed Testing Requirements

EU (fixed)

Japan (risk contingent)

USA (risk contingent)

Base Set Tests

Biodegration* Test

Chemical Review Meeting

NonBiodegradable

Early Drops from Further Review

Bioaccumulation Test

Level 1 Tests Bioaccumulative

Level 2 Tests

Safe Chemical

Structure Activity Meeting NonBioaccumulative

Chronic Toxicity Test

Screening Toxicity Test Non-Toxic

Non-Toxic Toxic

Toxic

Safe Chemical Class I Specified Chemical

Focus Meeting (Risk Ass. I)

Safe Chemical Chronic Toxicity Test

Standard Review (Risk Ass. II)

- Focus Drops - Exemptions (Grant or Deny): Test Market Low Volume Low Exposure

Non-Toxic Toxic

Safe Chemical Class II Specified Chemical

Regulatory Action

* If the chemical biodegrades to unsafe chemicals or chemicals of unknown safety, the degradation products may also be subject to separate assessments.

Information generated during the testing procedure can be used to decide about further tests. This is what is done in the US TSCA system, which is called a risk contingent system since it works with a contingent testing strategy. This strategy begins very early (Day 8-10) with the review of the chemical and the development of an information search strategy. This process is very sophisticated. At a very early stage approximately 86% of premanufacture notifications,

8

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ PMNs, are dropped from further review (see below). The procedure begins with inexpensive screening test information. It requires additional test information if the initial data has not provided clear evidence. From an overall point of view this procedure is cheaper and more informative than the block-testing strategy applied by the EU regulation. However, the US system leaves a considerable degree of uncertainty for about 14% of the submitters of PMNs to the Environmental Protection Agency, EPA. That is, in 1997 10.8% of them became regulated and 3.2% are withdrawn by submitters in face of regulatory action (EPA 2000a, for details see section “2.3.4.3 Classification and Regulatory Action”). All three regulatory regimes are based on the indication of volume, particular exemptions, and an inventory that serves as the baseline to measure whether a chemical substance is a new chemical substance according to the regulation. However, the major difference is that the structure of the EU system is one with fixed testing requirements, whereas the Japanese and the US system are risk contingent testing requirement systems. The differences in the regulatory regimes lead to differences in the costs and time needed to bring the new substances to the market, two important factors in competition. The relevant differences are the following: §

The EU regulation requires fulfilling a basic set of test and data requirements. The requirements are independent of risk. However, the firms do know the requirements and the time and cost effects in advance. All companies can use modest R&D and LowVolume Exemptions (modest as compared with the Japanese and US regulations). The system foresees low sanctions for noncompliance, a high noncompliance rate was observed during several inspections among SMEs.

§

The Japanese regime is two-tiered, based on the criterion of biodegradability. If a new chemical substance is biodegradable, then standard requirements need to be fulfilled, whereas in case of non-biodegradability the test are more complex, time consuming, and expensive. The system foresees low sanctions for noncompliance and is not relaying on inspections. All companies are benefiting from extraordinary R&D and Low-Volume Exemptions.4

§

The US regulation is a two-tier system as well. The minimal information requirements for the premanufacturing notification (PMN) are low. Depending on the estimated expected health and environmental risk of the new substance further tests are required or not. Thus, there is a significant amount of uncertainty of the outcome of the request. This uncertainty is expressed in the uncertainty of costs and time-delay. In particular, the US exemption of polymers is different from the EU regulations. Polymers with a high

4 According to the law there is no limit to R&D Exemptions. 6,659 Low-Volume Exemptions used by

domestic manufacturers and 2,348 used in the case of imports are reported by MITI (1999) for 1998.

9

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ molecular weight are exempted. The system foresees high sanctions for noncompliance and relies on inspections. 2.3

Basic Notification Procedures for New Chemical Substances5 2.3.1 Overview of the Systems in the EU, Japan, and the USA

Table 2.2:

Comparison of the Notification Procedures for New Chemical Substances

Name of Procedure

Corresponding legislation and year of first publication

Purpose of legislation

Inventory (Type) Polymers listed? Approach for new substances GLP requirement Classification of Substances Legal delay before manufacture Responsible bodies

EU

Japan

USA

Notification (DSD, Dangerous Substances Directive) European Council Directive 67/548/EEC (1967) And 7th Amendment 92/32/EEC (1992) Protect man and environment

Notification (CSCL)

Premanufacture Notification (TSCA) Toxic Substances Control Act (TSCA) (1976)

Chemical Substances Control Law No. 117 (1973) and amended in 1986 Protect man from contamination through the environment ENCS (dynamic)

EINECS (static; old) ELINCS (static; new) No

Protect man and environment

Yes

TCSA Inventory (dynamic) Yes6

Premarket

Premanufacture

Premanufacture

Yes On the basis of intrinsic properties

Yes ▪ Designated ▪ Specified Class 1 ▪ Specified Class 2 Japan: 90 days Import: 120 days MITI MHW

No None

60 days (before marketing) National competent authorities and European Commission DG XI

PMN: 90 days NCMI7: 30 days US EPA

5 This section draws on Murphy and Rigat (1993), on the IPTS report by B. Neven and R. Schubert

(1998), Comparison of Regulatory Requirements for the Notification of New Chemical Substances in the European Union, the USA and Japan, IPTS: Sevilla, EUR 18119. It draws too on the Report of the OECD Workshop on Sharing Information about New Industrial Chemicals Assessment, Paris: OECD/GD(97)33, on material from the European Chemicals Bureau, from the Chemical Products Safety Division of MITI, from the Office of Pollution Prevention and Toxics (OPPT) of the US EPA, and on material provided by Dr. Derek Knight from SafePharm Laboratories. We should also refer to a publication edited by Winter (2000), Risk Assessment and Risk Management of Toxic Chemicals in the European Community, and mention in particular the papers of Krämer (2000) and Vogelgesang (2000). 6 Unless covered by 1995 US polymer exemption rule. 7 NCMI: Notice of Commencement of Manufacture or Import.

10

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 2.3.2 EU The roots of the EU legislation concerning chemical substances lie in the maintenance of industrial health and safety standards. Standards for work safety are included in the first EEC directive of 1967 (Directive 67/548/EEC). This directive covered the approximation of the laws, regulations, and administrative provisions relating to the classification, packaging, and labeling of dangerous substances. The concept of dangerous substances encompasses a broad range of possible human health and environmental effects. The major concern was for occupational safety and health. This was achieved by developing a classification and labeling system for chemical substances in order to ensure safety for workers and the environment. This system was also used to improve chemical trade, and the exchange of information related to chemicals and hazard risk. A better understanding of the risks that lower level exposure involves led to the belief that existing regulations were not capable of ensuring safety in the manufacturing, handling, and use of chemical substances. In the EU this has led to a significant change in Directive 67/548/EEC, the so-called 6th Amendment (formally referred to as Directive 79/831/EEC). It was adopted by the Council of Ministers in 1979, and was expected to become law in the Member States within two years. The 6th Amendment was itself a significant change since it introduced a mandatory notification system for new chemical substances. It is interesting that one can already recognize the differences between the EC regulation and the US Toxic Substances Control Act, TSCA regulation (see Biles 1983). First, under the 6th Amendment substances were considered always “new”, even in cases where another company had already placed the substance on the market. The 6th Amendment thus required person-specific notification (e.g. there were cases where one substance was registered sixty times in the EU; this has changed with the 7th Amendment). Second, the EC Directive included a follow-up reporting system, which implied progressively more extensive and expensive testing requirements than TSCA. Third, there was a one-time notification requirement for each company throughout the EEC. In 1992, the Council of Ministers agreed upon the 7th Amendment (Directive 92/32/EEC). As with the 6th Amendment, the 7th Amendment introduced several important changes (see Murphy and Rigat 1993) such as the possibility of external manufacturers nominating sole representatives and the harmonization of EU notification procedures for substances marketed in quantities below one tonne per annum across the EU. The EC chemicals legislation restricts the marketing and use of chemical substances8 with the following directives: 8 Substances: Chemical elements and their compounds in the natural state or obtained by any

production process, including any additive necessary to preserve the stability of the products and any impurity deriving from the process used, but excluding any solvent which may be separated without affecting the stability of the substance or changing its composition.

11

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ §

evaluation and control of existing substances (793/93/EEC regulation)

§

notification of new substances (67/548/EEC directive)

§

classification/labeling of substances (67/548/EEC directive)

§

classification/labeling of preparations (88/379/EEC directive, recently replaced by 1999/45/EC Directive)

§

importation/exportation of some dangerous substances and preparations (2455/92/EEC regulation)

§

restriction of the marketing and use of certain dangerous substances and preparations (76/769/EEC directive)

§

substances that deplete the ozone layer (591/91/EEC and 3952/92/EEC regulations).

This whole set of directives and regulations establishes what we may call a chemicals policy.9 A chemicals policy is the observation, monitoring, and regulation of possible toxicological and ecotoxicological consequences of the use of chemicals. Figure 2.2 illustrates the main tasks of the directives and regulations, which have constituted the chemicals policy of the EU since 1967. These main tasks are: data collection, classification and labeling, risk assessment, and risk management. (For an evaluation of the directives and regulations see European Commission 1998b). An important area of work we should mention concerns data collection, priority setting and risk assessment (Regulation 793/93/EEC). Data collection is a very fundamental task organized in the EU by the European Chemicals Bureau in Ispra. They have developed the socalled International Uniform Chemical Database (IUCLID), which enables the involved parties to handle, organize, exchange, and use the enormous amount of data collected under the mentioned directives and regulations. The IUCLID structure enables the entry of any type of data that is relevant to risk assessment, and it covers the data requirements of the Base Set used for the notification of new chemicals and the OECD SIDS elements.10 How IUCLID is used as a tool for risk assessment is described in Heidorn et al. (1996).

9 For a discussion of the concept of chemicals policy and related concepts see Jacob (1999). A very

comprehensive overview on European chemicals policy and its problems is given in Winter (2000). The publication edited by Winter is intended to stimulate the ongoing discussion about a reform of the EC chemicals policy. 10 SIDS stands for Screening Information Data Set. This is an OECD program addressed to the safety of existing chemicals. It particularly collects a standard minimum set of data for all chemicals with a high global production rate. Thus, the SIDS is not intended to be a thorough description of each chemical, but to provide enough information to assign a priority for further work. For detail of the SIDS program see the SIDS Manual (OECD 1997a).

12

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Figure 2.2:

Main Purposes of the Legislation Concerning the Chemicals Policy of the EU Data Collection

Directive 67/548/EEC 6th & 7th Amendments

Existing Chemicals Regulation

Classification and Labelling

67/548/EEC 6th & 7th Amendments on Substances

1999/45/EC on Preparations

Risk Assessment

67/548/EEC

Existing Chemicals Regulation

Worker Protection Directives

Risk Management

76/769/EEC Marketing & Use

Export Import Regulation

Worker Protection

Consumer Protection

Environment Air, Water, Soil, Waste

Product & Civil Liability

For the purpose of this report the relevant legislation in the EU is only the part concerning the notification and release of chemicals. It is the Directive 92/32/EEC known as the 7th Amendment of the Directive 67/548/EEC. It was established in 1992 to harmonize notification procedures of all European member states, to exchange information about newly registered substances and thereby to be able to assess the potential risk to human health and the environment, as well as to unify the system of classification, labeling and packaging of substances dangerous to man and the environment.

13

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Excursus: The Static Inventory of the EU System The creation of the inventory of existing chemical substances was an important step in dangerous substances policy. One of the first things the EU institutions had to do when implementing dangerous substances policy was to establish an inventory of all existing chemicals in order to create knowledge about these substances and a reference to define what new chemical substances are.11 The European Inventory of Existing Commercial Chemical Substances (EINECS) contains more than 100,000 entries of substances that were on the market before the notification procedure became effective on 18th September 1981 (Murphy and Rigat 1993). EINECS includes 82,000 well-defined substances and 18,000 substances of unknown or variable composition, complex reaction products, or biological material (UVCB-substances). EINECS, the inventory of all existing substances (except existing polymers) is a static inventory which is closed, that is new chemical substances are not added to it. The 2nd inventory is the European List of Notified Chemical Substances, ELINCS, the inventory of newly notified substances. The ELINCS test data of the 1st notifier is protected for 10 years (since the entry of most recent data into the dossier) The role the two EU inventories play is crucial. For the market introduction of a new substance that is not listed on EINECS a notification is required, even if others had earlier submitted a notification on the same substance, which is therefore listed in ELINCS. If the new substance is listed in ELINCS the 2nd notifier has to seek for cooperation with the 1st notifier to get access to the test data set. In cases where cooperation fails complete notification is required. The protection of the test data of the 1st notifier for 10 years provides a “quasipatent protection” in form of an entry cost barrier. The TSCA inventory in the USA is different from EINECS. The TSCA inventory includes chemicals that were either in commercial production or were imported between 1975 and 1977, and chemicals that subsequently began to be imported or produced commercially. However, the TSCA inventory is dynamic since the newly notified substances are also added. If a second notifier is going to manufacture a new chemical he can make a so-called bona-fide request to EPA, that is, he will be informed if his chemical is already on the actual TSCA Inventory, and whether it is regulated or whether he may freely manufacture it. It seems to be the case that a dynamic inventory is more favourable to innovation competition because of its transparency and equal treatment of all chemicals.

11 Vollmer et al. (1998) and Rasmussen et al. (1999) report on the compilation of EINECS and

provide descriptions and definitions used for substances, impurities, mixtures, etc. Rasmussen et al. (1998) clarify how polymers are dealt with under the Directive 67/548/EEC.

14


Decision Tree for New Substance Notification in the EU (Directive 92/32/EEC) Is the substance placed on the market (act of supply including import )? Yes

No Yes

Is the substance on EINECS?

Does not require notification.

No Yes

Is the substance exempt*? No Yes

Is the quantity < 10 kg per year?

May require certain information to be sent to authorities. Annex VII C, 1.2

No Yes


Reduced notification dossier required. Annex VII C

No Yes


Reduced notification dossier required. Annex VII B

No

≥ 10 tonnes: Annex VIII

Full notification required. Annex VII A

≥ 100 tonnes: Annex VIII, Level 1

≥ 1000 tonnes: Annex VIII, Level 2 * Exemptions:

Polymer containing < 2% of a new substance. Controlled under other approval system. For research and development at < 100 kg per year. Process orientated research and development exemption can be granted in certain cases.

Note:

For simplicity reasons only the tonnage per year and manufacturer is mentioned not the total quantity placed on the market. The total quantity is five times the annual quantity.

15

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ In the EU a new substance has to be notified if it is placed on the EU market either on its own or as a preparation and it is neither in EINECS nor in ELINCS and if it is not covered by one of the following exemptions. Exemptions leading to reduced or no reporting requirements: §

Substances placed on the EU market in quantities of less than 10 kg per year per manufacturer

§

Polymers

§

Substances for scientific R & D

§

Substances for process-oriented R & D

§

Manufactured for export use only

§

Intermediates manufactured and consumed on the same site

The structure of the EU system is described in figure 2.3 (see also Barker 1993). It shows the fixed testing requirements in detail. 2.3.2.1 Procedure to be Followed by the Notifier The notifier for a new substance manufactured or imported into the EU is the manufacturer himself or, in case the substance is manufactured outside the EU, the importer or a person designated by the manufacturer as his sole representative. A notification dossier has to be completed and submitted to the competent national authority in which the substance is manufactured or in case the manufacturer is located outside the EU, in the Member State where the notifier is established. This notification dossier has to be submitted at least 60 days before placing the substance on the market. 2.3.2.2 Content of the Notification Dossier Essentials A Technical Dossier This includes information about the notifier, identity of the substance, intended uses and intrinsic properties of the substance, i.e. physical-chemical properties, toxicological and ecotoxicological data. There are different possible testing packages depending on the amount of the substance intended to be placed on the European market. There is a distinction between a full (Annex VII A and VIII) and a reduced (Annex VII B or C) notification dossier. A full notification dossier, needed if the amount of the substance exceeds 1 tonne per manufacturer per year, additional tests are required if the amount reaches 10 tonnes or more. A reduced

16

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ notification dossier will suffice for low volume substances, i.e. < 1 tonne/year/manufacturer. To ensure that all tests are carried out to the same high quality standard, Good Laboratory Practice (GLP) has to be followed. A Proposal for the Classification and Labeling of the Substances A Proposal of Safety Data Sheet, if the substance is classified as dangerous A Statement from the Extra-EU Producer, in cases where the sole representative procedure is being employed Possibles, at the request/discretion of the notifier A Provisional Risk Assessment, carried out by the notifier A Request to be exempted for one year from Data Sharing Requirements 2.3.2.3 Classification The Directive recognizes 15 different categories of danger. The criteria are laid down in Article 2. Classification results from the intrinsic properties of the substance as known through the Technical Dossier. Substances considered dangerous are listed in Annex I. 2.3.3 Japan The relevant legislation in Japan is the Chemical Substances12 Control Law (CSCL) No. 117, implemented in 1973 and revised in 1986 to take the OECD Minimum Pre-marketing Data into account. The introduction of the CSCL was a direct reaction to an environmental problem in the 1960ies, when PCBs caused health problems due to their high bioaccumulation and low biodegradability. It should be mentioned that there is a second new chemical substance notification regulation in Japan, which is the Ministry of Labor (MOL) Scheme based on the Industrial Safety and Health Law. According to this law, manufacturers and importers should investigate the toxicity of new chemicals and notify the MOL. The focus of the MOL assessment is the harmfulness of new chemical substances in regard to occupational health. The system works quite independently from the MITI/MHW Scheme. The MOL Scheme also uses its own inventory, however, in general the requirement is satisfied if the results of mutagenic testing are provided by the notifier. In fact, the companies manage the MITI/MHW and the MOL notification as separate issues. This is in part because the low volume exemptions are different: the MOL requires a notification beginning with 100 kg (on a site) and the MITI/MHW with 1,000 kg (per manufacturer). Thus, the companies have to keep track more 12 Substances, as the term is used in this context: Chemical substances deriving from a chemical

reaction as elements, a compound or compounds.

17

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ intensely with the MOL requirement, but the “regular” notification scheme is the CSCL managed by MITI/MHW. Unlike the EU and US regulation, the CSCL aims at protecting human health from contamination through the environment. So its purpose is to prevent the contamination of the environment by persistent chemical substances which may be harmful to the human health. A further objective of the CSCL is to establish a system of examination to determine in advance of manufacturing or importing a substance whether it is persistent or not. And thereby classifying it in one of the following categories: Specified Class 1 Chemicals, Designated Chemicals or Specified Class 2 Chemicals. The structure of the logic of the CSCL is described in the figure 2.4. It shows how the testing requirements are triggered by risk assessment considerations. A new substance has to be notified if it is placed on the market and it is not already listed in the Existing Notified Chemical Substances, ENCS, (the Japanese inventory of existing chemicals) or whose notification has not been published by the MITI. Exemptions from this procedure: §

Substances manufactured or imported for testing and research

§

Reagents used for estimation or detection

§

Substances manufactured and consumed at the same site (this exemption does not exist in MOL requirements)

§

Some substances used in certain end use consumer applications, such as paints and films

Exemptions leading to a reduced test package: §

Small Volume Exemption, < 1 tonne/year/company or 1 tonne/year/whole Japan. In this case, a notification of tonnage has to be made every fiscal year

§

Intermediates, possible enlargement of the application for a new substance.

§

High molecular weight polymers (MW > 1,000)

18


Systematic Chart of the Law Concerning Examination and Regulation of Manufacture, etc. of Chemical Substances (Those in Parentheses Designated as of November 1995) Existing chemicals

New chemicals

Decomposability, accumulation and toxicity tests

Notice

New chemicals examined under the previous version of the Law

Examination upon decomposability, accumulation and chronic toxicity

Judgment Decomposability - difficult Accumulation - high Chronic toxicity - yes

Designated by Ordinance as Class I specified chemical substance * Prohibition against manufacture and import in principle

* Prohibition against uses in exposure system (9 chemicals including PCB, TBTO)

Decomposability - difficult Accumulation - low Chronic toxicity - suspected

Regulated as designated chemicals (Notification in National Gazette)

Others

Not controlled

* Notification of manufactured or imported annual quantities (159 chemicals including chloroform; dichlorotoluene) Required to examine chronic toxicity because of health risks through environmental pollution

Instruction of harmfulness investigation

Investigation of harmfulness

Judgement of harmfulness

Chronic toxicity - no

Not controlled

Health risks caused by chronic toxicity, and quite high accumulation in wide region (or those possibilities)

Regulated by Ordinance as Class II specified chemical substance * Notice of scheduled annual quantities and actual quantities of manufacture or import * Compliance of technical guidelines * Compliance of labelling requirement (23 chemicals including trichloroethylene, tetrachloroethylene, carbon tetrachloride, TPT, compounds, and TBT compounds)

Recognised as requirement of quantity limitation of manufacture or import for prevention of health damage through environmental pollution Order to change scheduled quantities of manufacture or import

19

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 2.3.3.1 Procedure to be Followed by the Notifier The notifier is any person who intends to manufacture or import a new substance in Japan. The notifier does not have to be the Japanese importer, it can be the manufacturer or exporter from abroad. A notification dossier has to be submitted to the Japanese authorities, in case of import, the notification shall be provided from abroad, four months prior to the beginning of import. For a notification from inside Japan, three months will suffice. 2.3.3.2 Content of the Notification Dossier The content of the dossier depends heavily on the outcome of the first tests. Essentials Physical-chemical data on the intrinsic properties of the substance, the chemical identity and ecotoxicological data. If the substance is readily biodegradable, no further tests are required. If it is poorly biodegradable, further tests are necessary, e.g. bioaccumulation, long-term toxicity etc. Examination by Analogy This is allowed, if the substance is very similar to an existing substance considered safe. New Substances Formed during Biodegradation If these are poorly biodegradable, they have to be examined and the data must be submitted in the notification. By-products and Impurities Can be neglected if they account for < 1% by weight of the main substance, exemption from this rule is, if the impurity is a Specified Class 1 chemical. 2.3.3.3 Classification There are three different categories 1.

Class 1 Specified Chemical Substances

2.

Designated Chemicals

3.

Class 2 Specified Chemical Substances

2.3.4 USA The relevant legislation in the USA concerning the notification and release of chemicals was enacted in October 1976 and took effect 1 January 1977, it is called the Toxic Substances

20

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Control Act (TSCA). The notification and assessment system for new chemicals came into operation on 1 July 1979. The Regulatory Agency is the Environmental Protection Agency (EPA) in Washington, D.C. Its activities are grounded on TSCA and it reports directly to the President. The purpose of the law is to protect human health and the environment from unreasonable risks by chemical substances13 through comprehensive legislation.14 The procedure for a Premanufacture Notice (PMN) provides the EPA with the necessary information to decide whether the risk due to the release of the new substance is reasonable or not. New substances are all, which are not listed in the TSCA inventory and have therefore to be notified, if they do not fall under an exemption rule. PMNs are not required for: §

R&D chemicals

§

Polymers (annual reporting only)

Exemption from PMN leading to limited or reduced reporting requirements: §

Low Volume Exemption, if 3, or measurement is not applicable, bioaccumulation data has to be submitted

§

Examination by analogy Only possible if the substance has a structure similar to a certain existing chemical, which has been confirmed as low bioaccumulation by test, or similar to a chemical declared safe. – Log Pow has been used for examination of bioaccumulation by analogy. Normally a Log Pow of about 3 is the criteria, but further tests have to carried out to be sure – CSCL method

§

New products formed during biodegradation reaction –

§

New products emerging by natural biodegradation shall be separately examined if bioaccumulation is high

Toxicity – • • • – •

Repeated dose toxicity tests using mammals Reversibility NOEL (no observed effect lever) Chronic toxicity tests Mutagenicity tests Depending on the results, carcinogenicity tests can follow

2.3.5.3 USA For the PMN there is no legal obligation to conduct laboratory tests, only available data has to be submitted. On a case to case basis, the EPA can require additional tests to be carried out.

36

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 2.3.5.4 Summary of Required Test Table 2.4:

Comparison of Tests Required before Notification Study

EU

Spectra Melting Point Boiling Point Relative Density Vapour Pressure Surface Tension Water Solubility Partition Coefficient Dissociation Constant Granulometry Flash Point Flammability Test Explosivity Oxidising Properties Autoflammability Acute Oral Toxicity Acute Dermal Toxicity Acute Inhalation Toxicity Skin Irritation Eye Irritation Skin Sensitisation Subacute Toxicity Ames Test In vitro Chromosome Aberration Test Mouse Lymphoma Assay Mouse Micronucleus Test Acute Fish Toxicity Acute Daphnia Toxicity Algal Growth Inhibition Fish Bioaccumulation Ready Biodegradation Activated Sludge Respiration Inhibition Abiotic Degradation By Hydrolysis Soil Adsorption/Desorption Screening Test

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓a ✓ ✓ ✓ ✓ ✓ ✓ ✓b ✓b c

✓ ✓ ✓ ✓ ✓ ✓d ✓e ✓f

Japan

USA

g g g g g

g

✓ g

✓

✓ ✓ ✓ c

✓ ✓

✓ ✓ ✓ ✓

h

✓ g

a The choice of the exposure route for the second acute toxicity study depends on the respirability of the substance evaluated from the granulometry test and the likely human exposure route b The mouse lymphoma assay is required as part of the EU Base Set instead of the in vitro chromosome aberration test if the Ames test is positive. Alternatively, a third in vitro study of the HPRT locus test can be conducted. c The mouse micronucleus test or an in vitro chromosome aberration test will normally be required immediately after notification if either of the in vitro mutagenicity tests are positive. d The activated sludge respiration inhibition test is not needed for “readily biodegradable” substances, and may sometimes be omitted on a case-by-case basis for substances which undergo significant biodegradation in the ready biodegradation test. e Required for substances which are not “ready biodegradable” and/or potentially hydrolysable, unless the study is technically impracticable because of low aqueous solubility. f The new reverse-phase high performance liquid chromatography method can be used to measure the adsorption, as an alternative to the OECD screening test. g Certain physico-chemical properties data are required for Japanese notification, depending on the results of the biodegradation, bioaccumulation potential and toxicity examination.

37

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ h A fish bioaccumulation study may be needed if the substance is not “ready biodegradable” and has a high partition coefficient.

38

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 2.4

Procedure for Polymers 2.4.1 OECD Definition of Polymer

This definition of polymer was developed in 1970 by an OECD expert group and soon after accepted by the OECD. “Polymer” means a substance consisting of molecules characterised by the sequence of one or more types of monomer units and comprising a simple weight majority of molecules containing at least three monomer units which are covalently bound to at least one other monomer unit or other reactant and consists of less than a simple weight majority of molecules of the same molecular weight. Such molecules must be distributed over a range of molecular weights wherein differences in the molecular weight are primarily attributable to differences in the number of monomer units. In the context of this definition a “monomer unit” means the reactant form of a monomer in a polymer. 2.4.2 EU The only polymers applying for the European polymer regulation are those meeting the OECD definition of a polymer. Polymers are not listed in EINECS and after the OECD definition of a polymer was implemented in 1997, there were several substances considered “no-longerpolymers” which were neither listed in EINECS nor in ELINCS. Because these substances were already on the market, albeit not listed, they would have to be notified. In order to avoid this, a list of “no-longer-polymers” was implemented. Substances not meeting the OECD definition of a polymer are considered chemical substances and must be notified as such. 2.4.2.1 Tests Basically, the same tests are required for polymers as are for other chemicals, but some can be exempt whereas others are added specifically for polymers. 2.4.2.2 Grouping of Polymers There are two different ways of grouping polymers for a notification, thus reducing some of the costs and time needed for a notification. 2.4.2.3 Grouping by Substance21

§

Homopolymers NAMW (Number Average Molecular Weight) can vary up to 3-fold

21 Substance in this context means:

A group of (co-)polymers with a similar composition and/or molecular weight, derived by the same process. The following variations are acceptable.

39


§

Copolymers – NAMW constant (test are conducted on the polymer with the lowest NAMW, i.e. varies up to 2-fold) → composition can vary by ±10% absolute – Composition constant (i.e., ± 3% absolute) → NAMW can vary 3-fold

Substances meeting these requirements will be treated as one during the notification, with the consequence that the tonnage of the different polymers combined, is regarded as one entry, too. Even if the polymers are regarded as one substance and are covered by the same notification, information on the identity and the quantities must be made available to the competent national authorities. If the variation in a group of polymers is too wide to be considered as a substance, the following family approach might be applicable. 2.4.2.4 Grouping by Family Definition of a polymer family: Polymer families require at least two New Chemical Notifications, NCNs. Polymer families are groups of polymers (or polymer substances) in which one parameter (NAMW or composition) is fixed (i.e., narrow range) while the other varies. The variations are intentional, but the process is the same. Families also include polymer groups in which the same polymer chain is connected to compositionally similar side chains (e.g., ethoxylated fatty acid polymers) or to polymers of closely related structure such as carbohydrates. This system of a family approach was implemented in order to reduce technical dossiers and tests (and thus reduce the notification costs, too) to a reasonable, albeit sufficient number. Because of their higher mobility and solubility, the low NAMW members of a family are assumed to cause more likely toxicological and/or ecotoxicological effects than those members with a high NAMW. The effects are not always linear throughout a family, but the correlation is considered to be close enough to justify the family approach. The testing system is based on testing representative members of the family. In the case of homopolymers (see under “Grouping by Substance” for an explanation), the range of variation has to be submitted by the notifier. The polymers at the ends of the range must be tested, i.e. the polymer with the Lowest and that with the highest NAMW. The low NAMW polymer is to undergo the full test package, because of said assumption, that these are more likely to be dangerous. If the low NAMW polymer results show no toxic or ecotoxicological effects, the high NAMW polymer may be exempted from testing and the whole family is covered by the one test package. If there are dangerous effects shown by the low NAMW polymer, the high

40

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ has to be tested for these effects too, in order to see if these results are characteristic throughout the whole family. If so, the whole family is covered. On the other hand, if the toxicological/ecotoxicological data differs from one end of the range to the other, additional technical dossiers or tests are required for representative members, most likely from one of the middle ranging polymers, to maintain the safety standard as well as preserving the simplified notification. If NAMW is fixed and the composition varies, or the composition is fixed and the NAMW varies, similar principles apply. With the first case two technical dossiers have to be submitted, for each end of the range of the family-to-be. Full tests are usually conducted on the polymer with the most new monomers present. Some test are specific for high NAMW polymers and may be added even if the low NAMW end of the range shows no toxic effects, e.g. inhalation toxicity for polymer dusts or ecological tests such as light-stability. Each substance of the family has to be briefly reported to the competent authority, but without the need for the submission of a technical dossier. 2.4.2.5 Reduced Test Package (RTP) Polymers This reduced test package may be used for polymers with a NAMW < 1,000-10,000 and low water extractivity, for those substances are considered to be unable to cause toxicological or ecotoxicological effects, because they are regarded as non-bioavailable. 2.4.3 Japan Japan does not use the OECD definition of polymers, instead they use the following criteria: a polymer is a substance with a NAMW > 10,000 and possessing these attributes: molecular weight distribution, difficult to separate by standard techniques such as distillation, most are insoluble in solvents, no clear solubility, no clear melting point, forming films or fibers. New polymers qualify as all substances meeting the definition, which are not listed on the current MITI list of existing chemicals. 2.4.3.1 Tests Tests on biodegradation have to be conducted. If the substance is not readily biodegradable, the following tests have to be conducted. Tests on chemical stability in a buffer solution, then solubility tests in ate toluene and other solvents. Further data has to be submitted, such as a description of the polymer structure and data on NAMW. If these tests are passed without complication, then the polymer is considered as safe and not causing any damage to human health, therefore no further tests are required.

41

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 2.4.3.2 Grouping of Polymers There seems to be no group and/or family approach in Japan. 2.4.3.3 Reduced Test Package If the substance meets the requirements of the polymer flow scheme, it is considered for the reduced test package, i.e., the NAMW is > 1,000, the substance possesses typical polymer characteristics, such as an unclear melting point, does not degrade to an unknown or unsafe chemical while exposed to several test, shows stability in a pH-range from 1-9, does not contain more than 1% of oligomers with a NAMW < 1,000 and does not contain any heavy metals or other functionalities of concern (i.e., the functionality is not defined). 2.4.4 USA The US does not have a polymer definition of its own, a new polymer is one, which is not already listed in the TSCA inventory. Unlike the EU or Japan, the USA has a special exemption for polymers applying especially to low risk polymers. Polymers are defined on the basis of the reactants used to manufacture them, not on the basis of the final polymer structure, as most other countries do it. Polymers not qualifying for the polymer exemption require a normal notification, as every other chemical substance does. 2.4.4.1 Polymer Exemptions Substances qualifying for this exemption do not require a full or even limited NCN. The only things required are internal company records and a notice to be submitted by the company of how many (not which) polymers have been manufactured in the previous year. These substances are not listed in the TSCA inventory. The following three categories of polymers (they have to also meet OECD definition of a polymer) are considered to be of low risk and therefor exempt from notification: 1.

NAMW ≥ 10,000 (type A polymers), and the polymer contains < 5% polymers with a NMAW < 1,000 and < 2% of polymer with NAMW < 500. Limitations are not on functional groups but on cationic functional groups. The functional group equivalent weight (FGEW)is to be ≥ 5,000 to qualify for the exemption.

2.

1,000 ≤ NAMW < 10,000 (type B polymers), there are three categories of functional groups in this type of polymers to determine whether they can be treated as low risk polymers or not.

42

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ (1) Non-reactive or low concern reactive functional groups, such as carboxylic acids, sulfones etc. There are no limitations on the amount on these functional groups in type B polymers. (2) Moderate-concern functional groups, such as acid halides, epoxides etc. Polymers containing these sorts of functional groups must have a FGEW ≥ 1,000 to qualify for the exemption. (3) High-concern functional groups such as cationic groups, isocyanate etc. Polymers containing these sorts of functional groups have to have a FGEW ≥ 5,000 to qualify for the exemption. 3.

Polyester polymers made only from those reactants specifically listed in the polymer exemptions regulations (type C polymers). There are no limits on functional groups other than cationic groups.

However, there are certain criteria that disqualify a substance from being treated as a low concern polymer: 1.

Polymers not meeting the OECD definition.

2.

Cationic polymers, if not otherwise exempt, s.a.

3.

Unstable/degradable polymers.

4.

More than 2% of a reactant not listed in the TSCA inventory

5.

Polymers absorbing their own weight of water.

6.

Polymers not containing at least two of the following elements: carbon, hydrogen, nitrogen, oxygen, sulphur or silicon.

7.

Polymers containing fluoride ion.

8.

Polymers containing ≥ 0.2% of lithium, boron, phosphorous, titanium, manganese, iron, nickel, copper, zinc, tin or zirconium.

9.

Polymers containing any elements, except as impurities other than (1) fluorine, iodide, chlorine or bromide covalently bound to carbon, (2) the cations: sodium, magnesium, aluminium, potassium, calcium or those elements identified in, 6 and 8 above. 2.4.4.2 Grouping of Polymers

There seems to be no special exemption for the grouping of polymers for a notification. 2.4.4.3 Reduced Test Package For a reduced test package see either polymer exemption or exemptions from a full NCN above.

43


Costs for Laboratory Testing and Notification Fees

The following costs are based on the IPTS study by Neven and Schubert (1998). There are mainly two sources for cost estimates, company estimates and prices charged by testing laboratories. The price of studies provided by external testing laboratories also depends on the total volume of tests supplied for a single customer, thus, there is further spread in costs. To gain an overview of rough cost estimates according to toxicology testing requirements for global registration we include a table provided by Cytec (1998). Neven and Schubert report that for the EU base set (< 10 tons) testing costs in the range of Euro 75,000-85,000. Cytec (1998) lists the typical base set test as costing $ 176,820. Staudt et al. (1997) report similar price discrepancies for Germany. The companies they surveyed had estimated the cost for a reduced notification to be in the range of Euro 35,800-51,120 and for a base set notification Euro 92,000-230,000. The German competent authorities assume that external testing laboratories should charge Euro 66,500-87,000 for the base set testing requirements. According to other information from testing laboratories the figure of Euro 200,000 seems to us the upper-limit for the base set requirements. This cost estimate also roughly corresponds to the cost listed in Cytec (1998). 2.5.1 Notification Fees EU:

Japan:

§ Annex VII C: Euro 500 § Annex VII B: Euro 2,125 § Annex VII A: Euro 4,000 no regular fees

USA:

§ PMN Euro 2,400 § Reduced: Euro 95

44

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 2.5.2 Costs for Laboratory Testing for Regular Chemicals EU: Table 2.5:

Testing Costs for Notification in the EU

Test requirements under Directive 2/32/EEC

Laboratory Costs (Euro)

Annex VII C (< 100 kg) Annex VII B (< 1,000 kg) Annex VII A (< 10 tonnes)

15,000 – 20,000 25,000 – 30,000 75,000 – 85,000

Annex VIII Level 1 (< 100 tonnes) Annex VIII Level 2 (< 1,000 tonnes)

175,000 – 250,000 275,000 – 325,000

Japan: Costs related to the advanced report and to the designated level are approximately as follows: Table 2.6:

Testing Costs for Notification in Japan Level

Laboratory Costs (Euro)

Advanced report Specified Class 1 Designated Specified Class 2

10,000 – 12,500 ––––––––––– 20,000 – 25,000 50,000 – 60,000

USA: The US system is a risk-based testing requirements system. There is no legal obligation for the notifier to conduct specific tests on the substance to be notified. Only data that is already available is required. However, the EPA can demand further data. This is decided on a case by case basis. Therefore, testing requirements are somewhat negotiable since the need to conduct certain tests is based upon the outcome of preliminary test results, coupled with the material’s physical/chemical properties and potential exposure to humans and the environment. Testing costs in the USA are about $ 15,000 (see Cytec 2000).

45

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Table 2.7:

Comparison of Testing Costs for Notification

Study Toxicity Acute Oral-rat Acute Dermal-rat

Acute Inhal Skin Irritation Eye Irritation Skin Sensitization 28-Day Oral Ames Test Chrom Abs SUBTOTAL

Cost (US-$)

European Uniona

2,200 2,400 15,000 560 560 4,000 50,000 2,500 20,000 107,220

X X X X X X X X X

4,200 21,400

X X X X X X X

Japanb

USAc

X X X X X X X

X

Environmental Acute Fish Tox Analytical for Aquatics Acute Daphnia Algal Growth Ready Biodeg. Hydrolysis Absorb/desorb MITI Biodeg MITI Bioacc

2,800 4,600 8,000 2,600 20,000 100,000

SUBTOTAL

66,100*

2,500

W W W W

X X

*without MITI

Physical/Chem Properties Spectra Melting Point Boiling Point Relative Density

Vapor Pressure Water Solubility Partition Coefficient Dissoc Constant Particle Size Flash Point Flammability Explosivity Autoflammability Oxidizing Probs SUBTOTAL TOTAL ($k) Notes:

2,100 750 750 750 3,600 5,700 5,700 4,700 1,350 700 700 3,500 2,200 1,000 39,200

X X X X X X X X X X X X X X 170

X X+

200

30

a

Typical Base Set (Import Up to 10 metric tonnes/year) Typical Japanese Notification c Typical US PMN Notification X indicates test is required W indicates test is required internally by Cytec for products used in Water Treating applications + indicates test may be required, depending on the application and exposure b

Source: Cytec (1998). The Totals are approximate costs. The exact numbers based on the costs provided by Cytec are: EU: $k 177; Japan: $k 198-203; USA: $k 8-41.

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3

Mechanisms of Innovation in the Chemical Industry 3.1

Incentives for Firms to Innovate

The empirical approach of this study is guided by a dynamic view. It relates to the basic structure and the basic dynamics of an industry and to the question, “What are the origins of the competitive advantage of firms?” The competitive advantage has much to do with inventive and innovative entrepreneurs, but it also has a lot to do with efficiency. The most distinctive feature of innovation competition is the optimization of the firm's payoff with respect to the product differentiation/innovation – the cost efficiency trade-off. Only recently, the complementarity of these strategies has been expressed, and process innovation regarded as the complement of product innovation. This complementarity is particularly true for innovations in the chemical industry. Thus, it is important to recognize that: “Competitive moves are generally prompted by moves of the customers along the competition front. A shift of demand from lower price products to higher price products may cause the firms with low prices and low costs to shift in the direction of products with higher target values, higher prices and correspondingly higher target costs. If a product becomes a commodity, customers shift in the direction of the lower target value, lower target cost direction, and products are varied accordingly in the competitive process. Innovation, by contrast, tries to move the competition front to the right.”22 According to Albach’s observation of the competitive process, three competitive strategies are of interest. The first one aims at offering a better product, which can be regarded as a strategy of product innovation or vertical product differentiation. The second aims at offering a cheaper product, which usually is regarded as a strategy of process innovation or cost leadership. The third aims at a better and only slightly more expensive product, which might be characterized as a strategy combining horizontal and vertical product differentiation. If such a strategy includes process innovation it might well shift the competition front to the right. Product differentiation based on new products is a key component of competition in the chemical industry. Economists have stressed the distinction between two types of product differentiation – horizontal and vertical.23 The marketing profession, however, has neglected the concept of product differentiation, and instead it has developed the concept of market 22 Albach (1996, Chapter 4). 23 “Differentiation is said to be horizontal when … between two products the level of some

characteristics is augmented while it is lowered for some others, as in the cases of different versions … of a car. [A consumer] will buy the “closest” product in terms of a certain distance…. Differentiation is called vertical when … between two products the level of all characteristics is augmented or lowered, as in the case of cars of different series … There is unanimity to rank the products according to a certain order.” (Phlips and Thisse 1982, p. 2).

47

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ segmentation. Market segmentation as a part of target marketing is understood as segmenting markets according to customer needs.24 Marketing people stress that product variations due to product differentiation are not based on an analysis of natural market segments. In markets such as those for specialty chemicals the problem has still a slightly different aspect as these goods are mainly customized products. Thus, product differentiation in these markets has much to do with product customization and the establishment of reputation. According to the normal understanding of marketing, product customization comes close to the idea of market segmentation since the products are custom-made in order to penetrate highly specific market segments. This type of competition creates a particular environment for the competitive advantage in the specialty chemicals industry. The product life cycle is very short. The companies must continuously compete for customers with new product offerings. The competitive advantage is also quite short. This is because the special chemistry of the companies may last longer, however, the single new chemical product has shorter life cycles. This leads to a situation in which a firm can sustain positive profits only by continually developing new products. This is the very particular dilemma which the companies are faced with concerning new chemicals regulation. From an economic point of view we should consider three incentive to innovate. They are best described by their effects on innovation. These are the sunk cost effect, the replacement effect, and the efficiency effect. The first incentive, the sunk cost effect is due to the asymmetry between a firm that has already introduced an innovation and has committed considerable resources to it and one that is planning such an innovation. For the firm that has already made the innovation, the cost associated with these investments are sunk and should be ignored when the firm considers making a new innovation. Sunk cost leads to sticking with the current innovation. For the other firm considering a market entry the situation is different. That firm can compare the cost of all alternative innovations under consideration. Obviously, under the constraints of the new chemicals regulation the sunk cost effect applies to established companies, which do not have to cover the regulatory cost since they produce existing chemicals, and therefore they do not have incentives to innovate. The second incentive is due to the replacement effect. Although developed by Arrow (1962) for the adoption of a process innovation, it can also be applied to product innovations. The 24 “Target marketing requires marketers to take three major steps:

1. Market segmentation: Identify and profile distinct groups of buyers who might require separate products and/or marketing mixes. 2. Market targeting: Select one or more market segments to enter. 3. Market positioning: Establish and communicate the products’ key distinctive benefits in the market”. (Kotler 1997, p. 249).

48

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ process innovation is assumed to have lower average variable cost. Arrow has compared two situations. One with a monopolist using the old technology and one with a potential entrant which might become a monopolist. Under which situation is the willingness to pay to develop the innovation greatest? If the companies have equal innovative capabilities an entrant would be willing to spend more than the monopolist to develop the innovation. The intuition behind Arrow’s conclusion is that a successful innovation for a new entrant leads to monopoly. A successful innovation by the established firm confirms the monopoly, but the gain from innovation is lower than that for the potential entrant. The entrant has a strong incentive to innovate since he can replace the monopolist. Arrow’s analysis shows that innovative entrants may overtake established firms because of a natural market dynamic. The third incentive, the efficiency effect, is also due to market structure. It has to do with the benefit a company has as a monopolist as compared with being a duopolist and with being in the industry at all (and earning no profits). A monopolist has more to lose than an entrant may gain from entry. This is due to the fact that the entrant not only takes the business from the monopolist, but also increases price competition and puts pressure on prices. The efficiency effect provides a stronger incentive to the established monopolist to innovate than a potential entrant. It is obvious that among established firms of the chemical industry and potential entrants all three effects, the sunk cost effect, the replacement effect, and the efficiency effect will operate simultaneously. Which effect dominates depends on the specific conditions of the innovation competition. It seems that in the European chemical industry the replacement effect and the sunk cost effect may dominate because the chances of small companies entering the market are low. Then, the established firms will rely on current profits and will reduce their competitive advantages. However, current restructuring in the European chemical industry indicates that the competitive environment is changing. It seems to be the case that the efficiency effect is becoming stronger, because of increasing competition due to the impact of restructuring and due to additional foreign entry. If, however, EU regulation is in favor of the established European firms, this may lead to a deterioration of innovation competition and of innovative performance in the long run. 3.2

A Conceptual Model of Regulation and Innovation

The framework for assessing the effects of the different chemicals regulations is based on the factors affecting a firm’s decision to innovate and the impact of these decisions on the firm’s performance. Innovative behaviour is considered part of a firm’s overall competitive strategy, which is in turn conditioned by its corporate goals, the organization of the firm, and the environment in which the firm operates. A major factor of the environment of the chemical

49

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ industry is regulation.25 Figure 3.1 shows these relationships. Market attractiveness drives innovation competition and shapes the strategy of firms. To this extent, a company aiming to introduce new products is defined by the R&D strategy and by the goal of a new product sales ratio to be achieved. A reasonable R&D strategy is influenced by the size and structure of public R&D. The influence of new chemicals regulation may lead to a conversion of resources in other areas and to a higher degree of uncertainty in the final outcome of R&D, and thus also lead to uncertainty concerning the commercialization of new products. The R&D strategy has to choose and define to which extent the company is going to patent its inventions or to pursue a strategy of secrecy, and whether the firm will license to others or from others. The R&D strategy defines the boundaries for the innovation strategy. In the specialty chemicals business it is important to assess the conditions under which the company should develop new substances, blends, or mixtures. The innovation strategy is directly influenced by chemicals regulation. The regulation for the notification of new chemicals increases the innovation cost due to the regulatory costs. It also increases time-to-market, however, it may provide some flexibility by offering Low-Volume-Exemptions or R&D-Exemptions. The overall impact is measured by the success/failure rate of the specific product group, i.e., the number of market test needed to develop a commercially successful new chemical. If the success rate is low the regulatory cost are significantly higher than with a higher success rate, and thus there is a strong inhibiting effect of the regulation on the outcome of the innovation process and innovation competition. This situation leads to particular strategies triggered by the regulation. The innovators have to notify the new chemical substances and to cover the regulatory cost and the disadvantage of the longer time-to-market. However, they may benefit, in the EU and in Japan, from the quasi-monopolistic situation granted by the regulatory system to the notifier. In the EU the first notifier has some leverage to delay the exchange of test data in cases where a second notifier appears. In the end the second notifier may decide to drop the market introduction of the new chemical. In a number of cases this effect was reported during the interviews with European firms, in particular if the negotiations take place between companies located in different EU countries. In Japan the effect is stronger still because the second notifier gets “no response” from the regulatory agency for about five years (this means he cannot market the new chemical), which in fact is a strong “quasi-patent protection” for the first notifier. In the US the situation is different. The new chemical of the first notifier is added to the TSCA inventory after the 90-day review period expires and the first notifier submits a Notice of Commencement to EPA within 30 days of commencing non25 Our research concentrates on the regulation of new chemical substances, however, at present

environmental regulations are still at the center of the debate. Thus, most research focuses on the impact of environmental regulation on competitiveness. See e.g. Sofres (1998) for an analysis of the impact of EU environmental regulations on the competitiveness of the EU chemical industry. This report provides also a comprehensive review of the literature. Recent work is focusing more directly on the impact of environmental regulation on innovation (see e.g. Hemmelskamp 1997, 1999).

50

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ exempt commercial manufacture. Thus, the “second” notifier can produce it with the obligations to fulfill the decisions of the EPA (SNUR etc.). Figure 3.1:

A Conceptual Model of the Factors Influencing Product Innovations in the Chemical Industry

Market Attractiveness * Demand (volume/growth/elasticity) * Market structure * Technological opportunities * Appropriability

Corporate Strategy Chemicals Regulation

Resource Conversion

Size and Structure of Public R&D

R&D Strategy

Uncertainty

Innovation Strategy (Development of new substances, blends, mixtures etc.)

Cost Increase Time Delay Flexibility to use Exemptions

Success Rate

New & Existing Substances

New

Notification required

Existing

Notification not required

Uncertainty of 2nd Notifier

Innovative Performance

Market Conduct

51

National Innovation Systems (NIS)

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ The typical strategy of a company would be to market new and existing substances. But intensifying competition in the chemical industry increases the pressure to achieve higher sales ratios with new chemicals. The new chemicals have to be notified and the regulatory costs have to be recovered by sales. A third strategy is to use only existing chemicals for product innovations. To a large extent small- and medium-sized firms pursue this. Due to the small size of their markets they cannot recover the regulatory costs, and they have to meet their customers’ needs by developing new products using existing chemical substances and creating mixtures, blends, and particular formulations. A similar effect is seen with larger firms due to the time needed to meet the test conditions and the notification process itself. As a rule of thumb, the companies would not consider developing a new chemical in cases where the customer would need it in less than two years. These companies would then use existing chemicals to develop the new chemical products required by the customer. A final option is not included in the figure, that is the option of not complying with the regulation for the notification of new chemical substances. The NONS and SENS inspections programs have show that noncompliance is a serious problem. In particular, some of the small- and medium-sized firms do not seem to be informed about the details of the regulation. Furthermore, they may not know whether the chemicals they are developing are existing or new chemicals. Finally, the interaction of the different strategies and effects result in the innovative performance of the company and the market. This certainly influences the attractiveness of the market as well as further development of corporate strategy. 3.3

Hypotheses Concerning the Regulatory Impact

As described in the preceding chapter, there are a few significant differences between the regulation of the notification requirements of new chemical substances in the EU, in Japan, and the USA. As noted earlier, our basic premise is that chemicals regulation will affect R&D activity and the market introduction of new chemicals directly. Furthermore, chemicals regulation will affect R&D indirectly, if at all, via their effect on those firm or industry characteristics that more directly influence the level, composition, or efficiency of R&D activity. The review of the literature yields several characteristics for further study. The most important among these are firm size, market power, the degree of diversification and internationalization, profitability and/or liquidity, the appropriability conditions, and technological opportunity. By studying the effects of regulatory regimes on these variables, one may gain some insight into the ultimate effects of the chemicals regulation on R&D activity. As the literature review should make

52

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ clear, there is still considerable debate concerning the importance of each of these characteristics as a determinant of R&D. However, there seems to be consensus that market and industry conditions – including technological opportunity and appropriability – tend to dominate other factors in explaining the level of R&D activity. Thus, particular attention should be paid to the extent to which chemicals regulation alter such basic industry characteristics. Chemicals regulation will affect the market introduction of new chemicals directly via their effect on the cost and time needed to fulfill the regulatory requirements for the notification of new substances. This itself has an indirect effect on R&D. The effect is twofold. First, if the firms decide on R&D projects including cost and time effects to meet the regulatory requirements, it may well rule out certain R&D projects. Second, the firms may decide to pursue a strategy to avoid any notification of new substances at all. That is, they may exploit the available exemption and/or innovate by using only the known substances included in the inventory. Considerable research has also been devoted to the determinants of the composition of a firm’s R&D portfolio. However, there is a lack of empirical regularities regarding the effect of chemicals regulation on the mixture of long-term versus short-term, basic versus applied, low risk versus high risk chemicals, projects in the firm’s R&D portfolio. For example, the largest firms of the chemical industry have been found to conduct a disproportionately large share of the most basic research. They are also the largest notifiers of new chemical substances. Thus, by examining different firm size with respect to the involvement in notification of new substances one might gain some useful insight into changes in the composition of R&D. There is also some evidence that international diversification – including the R&D function – enhances a firm’s technological progressiveness. For the chemical industry this implies that international firms are forced to meet quite divergent regulatory requirements. There are some indications that regulatory competition takes place. It is still an open question whether a useful convergence of the regulatory regimes will take place. Thus an examination of the extent to which the R&D and innovative function are international may yield some useful insights.

53


4

Interaction between Regulatory Processes and Innovation (Results from Case Studies)

We have analyzed the interaction between the process of regulatory formation, policy implementation, and innovation by interviewing experts. We have taken into account how regulators and agencies deal with the problem of incomplete and possibly biased information, how open the policy process is, and the implementation in EU Member States, among others issues. In-depth interviews have been undertaken with the central control agencies of the EU Member States, of Japan, and the USA, and the EU Commission (DG Environment). Contacts have been established with the German authorities, the Bundesanstalt für Arbeitsschutz und Arbeitsmedizin (BAuA),26 and the Umweltbundesamt (UBA), the European Chemicals Bureau in Ispra (ECB), the US Environmental Protection Agency (EPA), and the Chemicals Department of the Ministry of International Trade and Industry (MITI). The main contacts were established during the Trans-Atlantic Business Dialog Meeting (TABD) of the chemical sector which took place in Washington, D.C. 25-26 January 2000. In-depth interviews were undertaken with 11 European, 7 Japanese and 5 US firms. These interviews were used to get the necessary information to analyze the impact of the notification procedure on chemicals innovation. The following table provides an overview of the interviews undertaken. Due to the fact that information related to the notification of chemicals is confidential, access to the competent authorities with the aim of gathering further information is quite difficult. An important report regarding the functioning of the EU notification system is the “Three Yearly Report on the Implementation of Directive 67/548/EEC as Amended by Directive 92/32/EEC” (European Commission 1998a). This first report on European Chemical Legislation includes a summary of the implementation of the European Legislation in the Member States as well as data on the notification.

26 An overview on the interaction between the German competent authorities and industry can be

found in Arndt (1993).

54


No.

List of Interviews Conducted (including case studies provided by ETAD and VCI)

Company Name/ Date/ Place of Interview Time

People Interviewed

Department/ Function/Division

EU (France)/Companies EU-1 F

Elf Atochem, Paris

24 Feb 2000 10:00-12:00

Jacqueline Bakes

Head of Ecotoxicology and Product Safety Service

EU-2 F

PCAS/Seloc, Longiumeau

23 Feb 2000 10:00-12:00

Gérard Guillamot Benoit-Joseph Pons

Director R&D Group PCAS Director Dept. Synthesis Pharma

EU (Germany)/Companies EU-3 DE

BASF, Ludwigshafen

30 Apr 1999 12:00-16:00

Dr. Mandery Dr. Klein Dr. Bieberbach Dr. Jahn

Head of Regulatory Affairs Regulatory Affairs Head of Patenting Dept. Head of R&D Planning

EU-4 DE

Henkel, Düsseldorf

29 Aug 1999 10:30-15:30

Dr. Frank Wangemann

Regulatory Affairs

EU-5 DE

Hoechst Marion Roussel (HMR), Frankfurt/Main

20 Apr 1999 10:00-12:30

Dr. Schwind Mr. Striffler

Abt. Umwelt, Sicherheit und Behördenservice, Gruppe Sicherheit

EU-6 DE

Wacker-Chemie, Burghausen

28 Apr 1999 12:00-16:00

Dr. Engel

Regulatory Affairs

1 July 1999 10:00-12:00

Dr. Mario Visca

R&D Head, Fluorinated Fluids Product Safety and Industrial Toxicology

EU (Italy)/Companies EU-7 I

Ausimont S.p.A., Bollate (MI), Italy

Dr. ssa. Graziella Chiodini EU-8 I

EU-9 I

Ciba Specialty Chemicals S.p.A., Pontecchio Marconi (Bologna), Italy

30 June 1999 14:00-17:00

Lamberti S.p.A., Albizzate (VA), Italy

2 July 1999 9:30-11:45

Dr. Giorgio Merlante Dr. ssa. Eliana Veronese

Head of Product Safety and Registration Sicurezza Prodotti/ Origgio (VA)

Dr. Maurizio Colombo

Regulatory Affairs

John H. Moore

Notification and Regulation Manager Company Research Associate/Group Leader

EU (United Kingdom)/Companies EU-10 Avecia Limited UK (ICI-ZenecaManagementBuyout), Manchester

21 Oct 1999 09:30-14:30

EU-11 Hickson UK International plc, Castleford, UK

22 Oct 1999 09:30-14:00

Prof. Peter Gregory

C.P. Smith

55

Group H.S.&E. Officer

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Europe/Governmental Agencies 29 Jun 1999 14:00-17:00

Dr. Sokull-Klüttgen Dr. Vollmer (as of 15:00)

Institute for Health and Consumer Protection, ECB Ispra

Ms. Reynier

Service Controle de Produits

10 Sept 1998 11:00-13:00

Dr. Arno W. Lange

Director Environmental Regulation

EU Gov

European Chemicals Bureau (ECB), Ispra, Italy

EU Gov

Institut National de 21 Feb 2000 14:00-16:00 Recherche et de Securite (INRS), Paris

EU Gov

Umweltbundesamt (UBA), Berlin

Europe/Test Laboratories EUNLInst

Notox, DL‘sHertogenbosch Netherlands

30 July 1999 09:30-14:00

Drs. Patrick Anthonio Ir. Jan Hellinga

Registration Manager Marketing Director

EUUKInst

SafePharm Laboratories, Derby, UK

20 Oct 1999 09:30-15:00

Dr. Derek Knight Erhard A. Vandaele

Director Marketing Manager

14 Mar 2000 10:00-12:00

Dr. Katsuei Mutou Tsuneo Baba, Ph.D. Ikui Uchikawa Naoki Kawada, D.Sc.

Env. Affairs Dept. R&D Director/Tox. & Pharmacology Div. Safety & Env. Control R&D Services

Japan/Companies JP-1

Daicel Chemical Industries, Ltd., Tokyo

JP-2a

DIC Berlin R&D Laboratory (Dainippon Ink & Chemicals, Inc.) Berlin

2 Sept 1999 09:30-11:30

Dr. Gerwald F. Grahe Dr. Rainer B. Frings Dr. Arthur Lachowicz

Director Polymer Synthesis General Manager

JP-2b

Dainippon Ink & Chemicals, Inc., Tokyo

15 Mar 2000 10:00-12:00

Kyotaro Shimazu Eiji Nakajima Yasuo Tanaka Ryosuke Kurata Dr. Taku Kitamura Kohtaro Tamura

Director Env. & Safety & QC Env. & Safety & QC R&D Env. & Safety & QC R&D

JP-3

Kansai Paint Co., Ltd., Tokyo

8 Mar 2000 14:00-16:00

Iwao Momiyama Masaharu Toyoka Sadaaki Hashimoto

Managing Director PR Dept. Product Qual. & Env.

JP-4

Kao Corporation, Tokyo

10 Mar 2000 10:00-12:00

Kazuo Kawashima, Ph.D. Kenjiro Ohba Kouichi Matsuda

All Product Safety/Intern. Technical Reg.

JP-5

Mitsui Chemicals, Inc., Tokyo

9 Mar 2000 14:00-16:00

Kimihiro Iwamoto Masa Yamada Masahiko Hanzawa Motoyoshi Kondo Hazano Hirotaka

Dir., Env. & Safety Div. PR Dept. (Co. Comm.) Env. Safety & Qual.Div. Env. Safety & Qual.Div.

56

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Japan/Companies continued JP-6

Sumitomo 7 Mar 2000 Chemical Co. Ltd., 13:00-16:00 Tokyo

Kazuya Ishii Yasuyoshi Ueda

Env. & Safety Dept. Fine Chemicals Div.

JP-7

Tokuyama Corp., Tokyo

Hikaru Tajima Akira Futakata Shigeru Moriyama Yasuhiro Hosoi

Dir., RC Admin. Div. Pharma Team Leader Ass., Strategic Planning Ass., RC Admin. Div.

16 Mar 2000 09:30-11:30

Japan/Governmental Agencies/Industry Associations JP Gov

MITI – Ministry of 7 Mar 2000 International Trade 10:00-12:00 and Industry, Tokyo

Takashi Koyari Reiko Nagata

Chemical Management Policy Division, Basic Industries Bureau

JP Gov

MHW – Ministry of Health and Welfare, Tokyo

8 Mar 2000 17:30-19:00

Jun Yoshida

Office of Environmental Chemical Safety, Environmental Health Bureau

JP Ind

JCIA – Japan Chemical Industry Association, Tokyo

8 Mar 2000 09:30-12:00

Sachio Otoshi Naoshi Sugawara Keizo Kanma Yoshitaka Noguchi

Chem. Safety Group ICCA & Foreign Aff. Chem.&Techn. Info. C. JETOC

JP Ind

JETOC – Japan Chemical Industry EcologyToxicology & Information Center, Tokyo

16 Mar 2000 14:00-16:00

Takao Sawada Yasuharu Imai

Director Planning Dept.

USA/Companies US-1

Dow Chemical 1 Feb 2000 Company, 10:00-13:30 Midland, Michigan

Linda C. Burgert Lorraine Francourt Paul A. Wright

Technical Manager Product Manager Counsel/Legal Dept.

US-2

DuPont, Wilmington, Delaware

2 Feb 2000 9:30-13:30

Sharron Laas Kavsy D. Dastur

Polymer Division Specialty Chemicals

US-3

J. M. Huber, Atlanta

24 Jan 2000 08:00-12:00

Matt Taylor

Regulatory Affairs

US-4

Lubrizol Corporation, Wickliffe, Ohio

31 Jan 2000 9:00-15:30

Joseph Kostusyk, Ph.D. Regulatory Affairs Fred Koch R&D Director John R. Blickensderfer, Ph.D. Head Product Safety Dept.

US-5

4 Feb 2000 3M (Minnesota 9:00-12:00 Mining Manufacturing Co) St. Paul, Minnesota

Greg McCarney Sharilyn K. Loushin Kenneth D. Goebel

57

Corporate Product Responsibility/Regulatory Affairs Specialists

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ USA/Governmental Agencies/Industry Associations US Gov

US EPA Washington, D.C.

US-EU TABD Meeting Washington, D.C.

27 Jan 2000 8:00-11:30

Anna Coutlakis Robert J. Lenahan, Ph.D.

Coordinator Economist

25/26 Jan 2000

Interviews by phone US-B

Crompton & Knowles (C&K)

Dr. Gerbeaux

US-DE Wittco (C&K Subsidiary) EU-DE Bayer

Dr. Wilhelm Kröck

Previous case studies available ETAD cases ETAD- Bayer 1

Dr. Raúl Moll 27-30 May Dr. Friedrich W. Kröck 1994 Interview: Steve Hollins Dr. Thomas Eizenhöfer

Head of Ecology, Dyes Div. Corporate Notification Officer R&D Assistant, Dyes Div.

ETAD- Sun Chemical 2 KVK

3-6 June 1994 Arne Vinther Interview: Ralph Juul Sørensen Steve Hollins Per Onsberg

R&D Manager Registration Manager Registration Dept.

ETAD- Yorkshire 3 Chemicals plc

John Dawson 20-23 May John Christopher 1994 Macolm Wild Interview: Steve Hollins

Group Technical Dir. Comp. Health & Safety Group Quality Assurance

VCI cases VCI-1

Bayer

April 1995

VCI-2

Degussa

April 1995

VCI-3

DuPont

April 1995

VCI-4

Henkel

April 1995

VCI-5

Hoechst

April 1995

An in-depth interview with an UBA official took place. The interview led to a very comprehensive reconstruction of the development of the legislation and implementation in Germany. We have also used the only available report on the implementation of TSCA27 as well as the most recent Premanufacturing Notification data of the EPA. We gathered information on the functioning of the Japanese notification system during the interviews in Japan.

27 Moore, John, prepared by Elaine Z. Francis, Charles M. Auer: The PMN Process: A Discussion

and Analysis of the New Chemicals Program in the Office of Toxic Substances, US Environmental Protection Agency, Office of Toxic Substances, Washington D.C.; no year, about end of 1980s.

58

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Differences in the implementation of existing regulations are observed for all countries. These may be due to incomplete and possibly biased information. The interest of the interviews was first of all to obtain information about experiences with the implementation of the new chemical substances regulation and with the EU harmonized guidance manual for new chemicals.28 The focus was on the interaction between regulators and firms. Furthermore, we explored the differences in the regulations between the EU, Japan, and the USA and the impact these differences have on the innovative performance of firms, including whether the impact is important for the performance of firms. Two issues are of special interest regarding the interaction between the notifier and the competent authority. First, what are the professional standards in dealing with the (possible) notifiers in a customer-oriented – and not in a bureaucratic fashion. One general conclusion which can be drawn from the interviews is that there are well established working relationships between the companies and the competent authorities. In only a few cases was it mentioned that some authorities asked non-professional questions and that they operated in a bureaucratic fashion. The most serious problem seems to be the turnover of personnel, that is the maintenance of the competent authorities consistent regulatory behaviour over time. The second more specific area has to do with the required data for deciding exemptions and the handling of exemptions (in particular R&D exemptions). The case study approach has shown to be very promising in gaining a better understanding of the impact of the notification procedure on innovation. German firms had gotten the impression that the issue has been over-investigated in Germany. However on an international level we feel the issue has been under-investigated. We were able to convince the VCI of the

28 Due to obvious differences in the implementation of EU Directives 92/32/EEC and 67/548/EEC in

EU Member States, a European enforcement project on the “Notification of New Substances: NONS” was carried out, starting in January 1995 and ending in June 1996. All Member States (except Luxembourg) and Norway participated in the project (Italy as an observer). A second enforcement project has been carried out, the project “Solid Enforcement of Substances in Europe (SENSE)”, which started in September 1996 and ended in December 1997. The final report of the “European Inspection Project ‘Solid Enforcement of Substances in Europe” (SENSE) of January 1998 concluded: “A comparison of the results of the SENSE project with those of the NONS project lead to the conclusion that the compliance with Directive 92/32/EEC by companies seems to have improved: − The number of companies that did not comply with Directive 92/32/EEC in SENSE (32%) is lower than in NONS (47%). − There were substantially more new substances checked in SENSE (12%) than in NONS (3%). Only 5% of the new substances checked in SENSE were not notified against 37% in NONS. − The quality of the company records checked in SENSE is better than in NONS. − Follow up actions seemed to have more effect in SENS than in NONS: 13% of the substances checked in NONS could be identified after correspondence with the company against 29% in SENSE.” (p. 22)

59

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ strength of our argument, which resulted in access to four firms (BASF, Hoechst Marion Roussel, Wacker-Chemie, and Henkel). At the European level CEFIC was very helpful and their national members participated willingly in our study. We have three case studies from German firms (BASF, Henkel, Hoechst-Marion-Roussel) and one from the French company PCAS. We have included also further case studies available. The case studies provide interesting insight into the problems of the EU notification system. The case study from BASF illustrates furthermore the structure we applied to gather the cases. We have established contacts with the Ecological and Toxicological Association of Dyes and Organic Pigments Manufacturers (ETAD) in order to get access to the case studies which were undertaken for a study jointly funded by DG Environment, ATC, and ETAD.29 ETAD has provided access to three case studies on the notification of dyestuff manufacturers. However, these three cases are still confidential. They might be used in a summarized version.

29 Hollins and Macrory (1994).

60


Case Study – BASF AG The European Chemicals Regulation: Notification of so-called “New Polymers” Source:

Case study provided by Dr. Ulrich Klein BASF Aktiengesellschaft Dept. Product Safety & Product Regulations (DUG/CB) 6 October 1999 (revised 21 August 2000)

“New polymers” in the sense of the European chemicals legislation are polymers which contain (chemically bound) 2% or more of a non-EINECS-listed monomer or reactant. Since the implementation of the 7th amendment of directive 67/548/EEC in 1994 “new polymers” are subject to notification requirements comparable to those required for new chemicals, which implies the generation of a full package of studies on physical-chemical, toxicological and ecological properties. In 1992/93, BASF developed a new hardener for epoxy-based polymer systems which could be used in a solvent-free application. It was planned to replace an existing hardener with a market volume of an estimated 3,000 tonnes per year in Europe and 4,000-4,500 tonnes per year globally. The market growth of the hardener was estimated as above-average: up to 10 % annually. Over a 12 to 15 month R&D process costing an investment of 5 million DM, BASF fully developed the new substance as ready for market entry and prepared to deliver technical support to their customers. The R&D process was to include §

the synthesis and the screening of several chemical substances (on laboratory scale) in order to identify the chemical substance with the optimal cost/performance profile,

§

the developing of the manufacturing process and scale-up of the process in m3-scale,

§

cost-intensive performance tests by 30 customers supported by BASF technical service, and

§

creation of the required studies and submission of the notification dossier to the competent authority.

Shortly before market-entry by the customers – who were large and middle-sized enterprises – the impacts of the revised chemical regulations on the customers were realized. The customers decided not to introduce the new hardener, because the costs for notification of the resulting “new polymers” were too high. This example illustrates that innovations through “new polymers” are severely impeded in Europe for the following reasons:

61


Innovations of polymers are mainly based on existing monomers or reactants.

§

The use of new substances as monomers or reactants for the manufacturing of “new polymers” leads to multiple notifications. Every prepolymer and polymer incorporating the new monomer or reactant requires a separate notification. Grouping of similar polymers to one consolidated notification is possible in principle but under very restrictive criteria

§

Polymers usually reach large production volumes. Therefore a data set according to Level 1 is likely to be required – with estimated costs of Euro 500,000-800,000.

It should be emphasized that examples like the present one – showing the failure within the R&D process – are very rare because European researchers do not take into account new monomers or reactants for innovations in the polymer area. Therefore R&D on “new polymers” is very rare. A completely different situation exists in the USA. Polymers fulfilling certain criteria for “low concern polymers” are exempt from notification. Polymers requiring notification are evaluated using Structure Activity Relationship (SAR) based on experimental data from similar substances. New studies are required if the assessment determines an unreasonable risk. Therefore, in most cases, studies are not required. In Japan the testing requirements are also risk-oriented, but follow different criteria. Usually the testing requirements are higher than in the USA. Polymer exemption provisions for “low concern polymers” are also used. In order to remove the impediments to innovations of “new polymers” in Europe consideration should be given to change the European provisions for notification. The use of a new monomer or new reactant in the manufacturing of polymers should not require notification if the monomer or reactant has already been notified. This would increase innovations through new polymers in Europe without lowering the level of protection for man and the environment.

62


Case Study – Henkel KGaA The Impact of the German Chemical Law on Innovation Source:

Case study provided by Dr. Frank Wangemann Henkel KGaA, VTS-Regulatory Affairs, Düsseldorf, Germany, 20 October 1999

Whereas the US Premanufacture Notification system (PMN) enables the notifier to submit socalled “consolidated PMNs” – covering information for up to six new substances with structural analogies – the European notification system requires testing and notification of every single substance. This is even true for different salts of fatty acid derivatives. In 1997, Henkel KGaA started a project to develop fatty acid glycol ester sulfates as potential alternatives to commercially available detergents like fatty acid isethionates, and fatty alcohol ether sulfates. The project was based on the company’s basic technologies of ethoxylation and sulfation and a newly developed catalytic system. Due to the distinct requirements for use in the planned applications (similar solubility and compatibility with other ingredients), several salts and even slight differences in chain lengths were necessary or found to be interesting. The European market potential for solid applications in the cosmetic area was about 1,000 t/a. A similar market exists for liquid applications. Thus, the new substances would have been candidates quickly triggering level 1 or 2 testing requirements. Henkel approached the German competent authorities at a very early stage of the development submitting known data on isethionates of the same chain length. Isethionates only differ in that they have a sulfonate functional group while the new substances have a sulfate group. The main question to the authorities was if physical-chemical, toxicological, or ecological data prepared on one salt would be accepted as “read across” for the other salts. The answer to this question is essential in order to define the time to market for the new products. In the targeted market areas it would be impossible to cooperate with customers or even present the new substances without a definite time schedule for market clearance. The cosmetic market changes products very quickly and often it is not even possible to introduce new developments with a long waiting period for market clearance. Furthermore, the answer is fundamental in estimating the upcoming costs of testing at the base level, level 1 and level 2 respectively. Within two months the German competent authority responded that: §

Physical-chemical data have to be prepared on each of the salts,

§

Ecological data would be accepted for a “read across”, so only one of the salts would have to be tested,

63


Toxicological data would not be accepted for a “read across” on the basis of the current information, i.e. one salt had to be fully tested first, then a decision could be made whether the results could be accepted for “read across”.

As the result of these findings uncertainty exists regarding the toxicological testing, leading to possible testing costs in the range of Euro 100,000 to 200,000 at the Base Set Level, plus an additional Euro 400,000 to 800,000 at Level 1, depending on the requirement to test one or two salts. Costs for Level 2 testing (> 1,000 t/a) could only be estimated at a range of Euro 1,500,000 to 3,000,000. What is more, the decision on the acceptance of the test results for a “read across” was decided to be postponed until one complete set of data would be available. So, there was additional uncertainty concerning time to market. If the “read across” would have been finally accepted the new products would need some 9-12 month for market clearance, if not, another 9-12 months would be necessary to complete testing on the second salt. The only alternative to this uncertainty would be to start testing on both salts simultaneously, despite to this being in clear contradiction to animal welfare concerns. At this stage European chemical companies face the major disadvantage of the European system. A consolidated PMN of those salts should be possible without additional testing requirements. It would be more likely that the US EPA would take reference to already existing data on comparable substances by using Structure Activity Relationship in their assessment. The regulatory costs for this are estimated at only Euro 10,000 and the time to market would be about 3 months. So, the inflexible EU notification system affects the European chemical and cosmetic industry twofold. It hampers innovation and competitiveness. Whereas raw materials for cosmetic products have to be notified if they and the subsequent cosmetic formulations are manufactured within the EU, the same cosmetic product containing the same raw material produced outside the EU faces no notification obligations at all. Thus there are some million Euro savings for non-European chemical and cosmetics manufacturers vs. EU based companies intending to market identical cosmetic products on the European market. The final consequence is to shift research and development as well as production facilities for innovative cosmetic ingredients outside the EU.

64


Case Study – Hoechst Marion Roussel (HMR) Problems in Developing New Pharmaceutical Substances Regarding the German Chemicals Control Law (ChemG) Source:

Case study provided by Dr. Markus Schwind, HMR, Frankfurt am Main, Germany, 24 April 1999

The following synthesis can be seen as a typical example of the multi-stage development of a pharmaceutical active substance. Because of the highly specialized molecular structure needed, the technical syntheses tend to be increasingly expensive. (The example of a “Cytostatikum” is given with a synthesis of nine stages.) Therefore, in meeting the requirements of the German Chemical Control Law (ChemG), problems which hinder quick process development arise. Rough Scheme of Drug Development and the Parallelism of Research and Development Development of the Pharmaceutical Substance

Chemical Clinical Trials Laboratory/D esign

Development of the Process

kg-Laboratory

Registration According Marketing to the German Pharmaceutical Law

Technological Setup (Technikum)

Production

Initial situation: 1.

Globalization Intermediate stages are already produced during the development phase, possibly of different locations. The reason is the differentiation of know-how owners for particular chemical stages.

2.

Quality of Synthesis-Routes In order to allow parallel validations, as well as to compensate low overall efficiency of the stages of the synthesis, large quantities have to be produced during the early development of the synthesis-route.

3.

Development Already in the development phase of the synthesis-route the active substances are examined in clinical tests. Points 2 and 3 have to be coordinated to maintain a time optimal process.

4.

Time The selection of production plants has to be flexible and adjusted to short-term decisions.

65

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Problems: The main problems affecting an innovation result from the “legal position” of the separate intermediate stages. The regulation regarding chemical intermediates distinguished between internal intermediate stages for chemicals not leaving the production plant of the legally independent unit. It also distinguishes the external intermediate stages given to a “contract manufacturer” for further development. §

The understanding of the word “development” differs among the registration authority and the industry. While the authority handles the production of substances for clinical tests as a commercial action – not as part of the development process, the industry has no marketable pharmaceutical substance yet. The synthesis may be ineffective or the substance may prove to be unsuitable. This implies that costs of notification or registry will not be balanced by the value added.

§

The large production quantities of intermediate stages – a range of tonnes is quite possible – often result in a minimal quantity of active substances (often measured even in pounds). Sometimes it is not possible to plan an exact R&D-program, i.e. an exact planning of quantities, because of the flexible adjustment of the synthesis process in relation to the results of preceding tests.

§

The limitation of the “Process-Oriented Research and Development exemption (PORD)” to one year leads to difficulties, if more substances have to be ordered than initially planned, or if the same substance has to be used in different places.

§

Short-term changes are not possible.

§

The notification of all separate intermediate stages during the productive phase following § 16 b of ChemG results in substantial costs, not arising in foreign countries.

§

The inconsistent regulation of the PORD-procedure favors some countries concerning R&D.

66


Case Study – PCAS Group, France Impact of the EU Notification Regulation on the Business Development of Fine Chemical Groups in Europe Source:

Case study provided by Gérard Guillamot, R&D Manager, PCAS Group, Longjumeau, France, 6 March 2000

Generally speaking, the global Market of Drug Development is now focusing primarily on Basic Research and Marketing and Sales. In the meantime, the synthesis of the Active is increasingly and more subcontracted to the Fine Chemical Industry where GMP facilities (facilities which are approved by the US Food and Drug Administration according to the Good Manufacturing Practice Regulations) are readily available and which can offer both the Chemical Expertise and Regulatory know-how to the major Pharmaceutical companies. This outsourcing trend is steadily increasing as the Drug Companies focus more and more on their core business. As at least 50% of the new chemical entities are discovered in the United States, there is a positive balance of outsourcing between Europe (where the major Fine Chemical companies are based) and the USA in terms of economic value. This balance can be affected by the EU regulation in the way described in the following example: In late 1998, PCAS experimented a notification problem with one of the major Pharmaceutical Companies located in the USA. PCAS was identified as a possible subcontractor for developing Drug candidates by this company and they shipped the required starting materials through Anvers and later Le Havre. But, these chemical intermediates did not have an EINECS or TSCA Number and they were blocked by the customs authorities. The American company finally asked a specialized company, SafePharm Laboratories in England to perform the preliminary tests in order to notify the substances under Council Directive 92/32/EEC as sole representative of the non-EC manufacturer. These preliminary tests took at least three months and we got the chemical starting materials too late by far to comply with the original schedule as defined by this company. Nevertheless, we did our best to deliver the required compound (which needed five tricky chemical steps) in terms of quality and chemical yield. As it generally happens when we start to work with a new company, the first project is almost always used as a test to check responsiveness, competence and many other points concerning the fine chemical company. As a consequence, they have not offered any news on the future of this product and we have not got any other project from them.

67

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Generally, the typical amount of product required in the preliminary phases of development for a drug candidate is in the range of 10-100 kg. That means that the needed amount of starting material or intermediates will be between 100-5,000 kg. In this kind of business, where the speed to market is crucial for the future of the drug candidate, the EU regulation looks like a new hurdle for the non-EU pharmaceutical company, which will then prefer any of the Swiss based fine chemical companies or in-house facilities.

68


Case Study – DuPont Germany Process-Orientated Research and Development Moved from Germany to the USA Source:

VCI-Untersuchung (1995): “Chemikaliengesetz und Innovation”

In 1985, DuPont Germany in cooperation with a renowned manufacturer of carpet fibers, developed a product that imparts carpets anti-staining properties. This product was a polymer that contained a novel monomer in the reacted form. Since that monomer was not on EINECS and more than 2% of it was in the copolymer, the copolymer had to be notified. In the trials, the notified sizing was found to be not entirely satisfactory. A change in the monomer ratio would have helped, but this would have required another notification of the slightly modified copolymer. Cost reasons meant that this development was not pursued. This experience caused DuPont basically to abandon development and marketing of such custom-made products in Europe. DuPont has registered no similar new substance in Germany since 1985.

4.6

Case Study – Hoechst AG Time Restriction for Process-Oriented Research and Development Unacceptable Source:


For the development of chemical active ingredients, Hoechst AG develops new intermediates and supplies them to the companies that produce such active ingredients. The companies generally purchase more than 100 kg per year, produce the new active ingredient, formulate it (for example to give the finished medicament), and apply for registration. The process takes a number of years, during which new consignments of the intermediate have to be constantly ordered and processed, in particular in the case of crop protection agents. However, it is only after completion of the registration process that it is possible to assess whether the substance can be marketed in larger amounts. In order to avoid the current legal requirement that notification with the prescribed testing must be completed within one year, it should be possible to extend the exceptions to several years.

69


Case Study – Bayer AG30 Notification Effort Excessive for Substances with a Low Exposure Potential Source:


A Bayer AG active substance is prepared via a sequence of novel intermediates, which are also isolated. So long as all the intermediates are produced within the company, an announcement under section 16b of the German Chemicals Act is required. The costs per intermediate are about DM 70,000-100,000. In certain steps, capacity bottlenecks occur which can only be eliminated by the planning and construction of new plants. These plants can take five to six years to construct. The interim periods are bridged by using a contract manufacturer, with the result that the two site-limited intermediates then become two substances placed on the market. The two substances must therefore be notified at a cost of up to DM 400,000 each. The amounts required can quickly rise to more than 100 tonnes per year, therefore the resultant product and also the substance to be produced in a consecutive step, possibly have to undergo additional testing. The costs per substance can then exceed DM 1.5 million. Both Bayer AG and the contract manufacturer produce the intermediates exclusively for further conversion in their own reactors. Thus the intermediates are essentially “disposed of”. There is no difference in safety terms, and the safety precautions in both companies correspond to the state of the art. The public cannot be exposed to the substances. The extra costs caused by notification required for formal legal reasons are out of proportion to the gain in safety.

4.8

Case Study – Henkel KGaA Use of Domestic Raw Materials Prevented by Polymer Regulations Source:


Soya oil epoxide is a bulk industrial product (world market 220,000 tonnes/year) and a substance listed in the EINECS inventory. Rape-oil epoxide, which is very similar from a chemical point of view and can be produced by the same process from domestic rape-oil, is a new substance. It is not listed on EINECS since it had no economic importance when the 30 An overview of the organization of regulatory affairs within the Bayer AG is provided in Lorenz

(1993).

70

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ inventory was drawn up. Partial replacement of soya oil by rape-oil in the form of the epoxide and products based on it, which is now conceivable and economically practicable, is only allowed after notification under the Chemicals Act. However, it is not only rape-oil epoxide itself but also its derivatives, polymers based on rape-oil epoxide, that would require individual notification if they contain more than 2% of (reacted) rape-oil epoxide. The relatively low price difference compared with soya oil and the high testing costs associated with notification mean that the new polymeric derivative based on rape-oil is not economically viable. This has resulted in Henkel completely abandoning research with rapeoil epoxide. The industrial utilization of domestic rape-oil in the form of rape-oil epoxide and its numerous derivatives is prevented by the Chemicals Act.

4.9

Case Study – Degussa Inflexible Application of the Testing and Notification Requirements Source:


A Degussa intermediate in the form of the calcium salt was to be converted into the sodium salt, partly to achieve an environmentally favourable production process with no residues. However, this would have required notification as a new substance and thus the expense of testing, which would be unaffordable for the product.

71


5

Innovative Performance 5.1

Introduction 5.1.1 Overview

Chemical innovations require the creative labor of invention, laboratory experimentation to synthesize new chemicals, constant testing and re-testing, and finally introduction into the market. These activities include basic research as well as applied research. The process of discovery eventually produces new chemicals that show enough potential to be identified as candidates for extensive testing. During this early developmental stage decisions regarding the safety and efficacy of the new chemicals are constantly being made. This includes, of course, the effects of new chemicals regulation and market forces, which have serious consequences for the level and nature of innovative activities and performance. The intensity with which firms from the chemical industry pursue innovative activities varies widely from sub-sector to sub-sector of the chemical industry and from country to country. The purpose of this chapter is to make a quantitative and qualitative comparison of the innovative activities and the innovative output of the firms of the chemical industry in the EU, in Japan, and in the USA. Because such a task is extremely complicated and wide-ranging we have scrutinized all the available sources of information which provide at least some relevant indication as to the innovative performance of the industry under study. This is necessary, because of the wide variation of the innovation activities in question and the complexity and uncertainty involved in the innovation processes. We begin this chapter with a description of the sample of the firms and the data we used for the analysis. We continue with a short elaboration concerning the economic performance of the firms of the chemical industry (using the described data). The analysis of the data leads to a clear-cut result, which helps focus the further analysis of the innovative performance. Surprisingly (or perhaps not), we have to recognize that the US firms outperform the EU firms and the firms from Japan when we use a combined indicator of profitability and value drivers.31 One explanation for this may lie in the possible efficiency differences of the 31 It is important to refer to similar results based on a sector-analysis of industry macro-data. These

results are presented in a final report by the National Institute of Economic and Social Research (1998) to the European Commission Directorate General III. They concluded, that “there was little difference between labour productivity growth rates in chemicals in the US and the EU over the period 1979 to 1995, although the US performed relatively better in the mid-1980s whereas the EU pulled ahead from 1989. … When we consider relative levels of labour productivity a different story emerges. Here the extent to which Europe falls behind the US and Japan is generally much higher in chemicals than in total manufacturing. In 1995 the EU chemicals industry produced about 60% less output per hour than the US industry and this gap has remained virtually unchanged since 1979. … When account is taken of differences in levels of capital intensity, total factor productivity levels in Europe are close to those in the US in chemicals. Thus

72

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ underlying governance structures, an argument which is now under debate among economists (see for an overview Myers 1999). It is assumed that the corporate governance structure of US firms is more efficient than the one in the EU countries and in Japan. The same type of argument is also being put forward concerning the governance structure of the capital market. Our suspicion is that a small portion of the difference in economic performance for the firms in the chemical industry may be due to an efficiency difference produced by the different governance structures of the systems regulating new chemicals. However, we believe that it is not appropriate to run a simple regression analysis to determine this relationship. Unfortunately, we do not have enough data to control for all relevant factors. A simple regression would leave too much noise in the error term. Therefore we focus on the more narrowly defined aspects of innovative performance. The chapter is organized roughly along the lines of an input-throughput-output model of innovation. We first analyze the R&D expenditures, that is the financial inputs into the process. Then we take a look at the R&D productivity differences between the EU, Japanese, and US firms using the operating income as an output measure. Next, a typical measure of innovative throughput is looked at, specifically the number of patents granted by the US Patent and Trademark Office. Then, a major section introduces a direct measure of innovative output which we have applied, primarily the number of innovations the firms have reported in their annual report in 1996-1997. Reservations regarding this measure can be noted, particularly with respect to the fact that the firms have a different propensity to report their innovations. We discuss this problem at length, however, no better direct measure for the innovative output was available. Finally, we analyze the data we think is most appropriate to measure the direct effect of new chemicals regulation, that is the available data on the notification of new chemicals. We draw some of our most interesting conclusions using this data, however, we have to admit that we could not obtain access to the original notification data due to the strict confidentiality of that data. Now let us describe the firms in our sample and the data we have used.

differences in capital intensities can explain much of the productivity gap. … In summary in chemicals Europe falls behind the US in levels of fixed capital intensity and in the employment of higher level skills but probably has no serious deficit in R&D activity. Differences between Europe and the US in chemicals may merely be following a general pattern of concentration on mass production of standardised in the US and greater focus on customised products in Europe. If the European markets require more customised products, then it is probably neither feasible nor desirable to replicate US production methods and hence increase levels of capital intensity in Europe. This is unlikely, however, to be the entire story. For example the much greater degree of regulation in Europe, both environmental and involving labour markets may have an impact on European firms ability to build larger scale and more capital intensive plants” (pp. 2-4).

73

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.1.2 Sample and Data The basis for the measurement of the performance of the chemical industries is a sample of 392 large European, US and Japanese firms based on Standards and Poors’ Global Vantage Database. From these 392 firms, 261 are classified into the chemical, 93 into the pharmaceutical, and 38 into the biotechnological sub-sectors. Our analysis focuses on the 261 chemical firms. Due to a number of outliers in the data, we had to exclude 12 firms from the analysis of the economic performance. The table A.1 in the appendix in this report contains the list of the 249 firms included in the analysis. Table 5.1:

Characteristics of 249 European, Japanese, and US Firms in the Sample (Averages for the Period 1993-1997)

Number of Firms Sales ($ million) Employees Assets ($ million)

Europe

Japan

USA

78

81

90

1,524.7

2,640.5

2,120

9,716

1,871.4

2,866.4

3,479.9 17,680 3,838.7

An important criteria for the evaluation of our empirical analysis is whether we have chosen a representative sample of the firms of the chemical industry. One way to evaluate this is by comparing our sample with a sample of the global players of the chemical industry. It is important that our reference sample measures the sales of the chemical activities of the firms. Such a ranking of the top 50 chemical producers is provided by Chemical & Engineering News annually (Short 2000). The top 10 global firms are the key players in the chemical industry. Their share of the chemical sales of all 50 companies is 42.8%. Among the top 10 the sales share of the 6 European firms is 59.1% and the 4 US firms have a share of 40.9%. No Japanese firms are among the top 10 global players. If we exclude firms with less than 50% of their sales coming from the chemicals business we would get a ranking of the top 10 “pure” chemicals manufacturers. Such a ranking would exclude the European and US petrochemical firms. The list then would be composed of 5 European firms (BASF, Bayer, ICI, Akzo Nobel, and Degussa-Hüls), 3 US firms (DuPont, Dow, and Huntsman), and 2 Japanese firms (Sumitomo and Mitsui). Such a newly defined “pure” chemical manufacturers ranking would show the following sales shares: EU 55.5%, USA 34.4%, and Japan 10.1%. Interestingly, this distribution corresponds nicely with the overall distributions of chemicals sales of all 50 firms. Specifically, the sales of $ 396.9 billion are distributed as follows: 25 European firms account for 54.4%, 16 US firms for 32.1%, 6 Japanese firms for 10.0%, and the other firms for 3.5%. According to the top 50 global firms of the chemical industry (as measured by sales)

74

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ the European firms have a strong position, the US position is good, and the Japanese firms are in a minority position. Table 5.2: No.

The Global Top 50 Chemical Companies, 1999

Company

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

BASF AG Du Pont (E I) De Nemours Bayer AG Dow Chemical ExxonMobil ICI plc Shell Akzo Nobel Ny Degussa-Hüls BP Amoco Total Elf Aquitaine Sumitomo Chemical Co Ltd Huntsman Mitsui Chemicals Henkel KGaA Aventis General Electric Solvay SA Dainippon Ink & Chemicals Inc Air Liquide (L) SA DSM Nv Mitsubishi Chemical Clariant Toray Industries Ciba Speciality Chemicals Rhodia Union Carbide Corp PPG Industries Inc Equistar Rohm & Haas Co SABIC Monsanto Co Boc Group plc Norsk Hydro A/S Novartis Reliance Industries Air Products & Chemicals Inc Praxair Inc Celanese Eastman Chemical Co Asahi Organic Chem Ind ENI Borealis Honeywell/AlliedSignal Roche Formosa Plastics Lyondell Petrochemical SKW Chevron Total Sales

Country

DEU USA DEU USA USA GBR GBR NLD DEU GBR FRA FRA JPN USA JPN DEU FRA USA BEL JPN FRA NLD JPN CHE JPN CHE FRA USA USA USA USA S. Arabia USA GBR NOR CHE India USA USA DEU USA JPN ITA DNK USA CHE Taiwan USA DEU USA

Chem. Sales

Chem. Sales

1999 ($ mill.)

as % of Total Top 50 (%) Sales 90.1 7.9 93.1 7.0 69.4 5.1 98.3 4.7 7.4 3.5 100.0 3.4 8.6 3.2 80.1 3.1 76.7 2.5 9.3 2.4 22.2 2.4 24.5 2.3 97.5 2.1 100.0 2.0 100.0 2.0 60.5 1.8 32.5 1.8 6.2 1.7 85.6 1.7 81.2 1.7 95.0 1.7 98.0 1.7 44.2 1.6 100.0 1.6 70.5 1.5 100.0 1.5 100.0 1.5 100.0 1.5 70.9 1.4 100.0 1.4 100.0 1.3 100.0 1.3 55.8 1.3 92.3 1.2 36.0 1.2 21.7 1.2 100.0 1.2 92.7 1.2 100.0 1.2 100.0 1.2 100.0 1.2 43.4 1.1 13.1 1.1 100.0 1.1 16.9 1.0 21.0 1.0 65.7 0.9 100.0 0.9 100.0 0.9 10.0 0.9

31250.3 27688.0 20192.5 18600.0 13777.0 13671.5 12886.0 12323.5 10085.8 9392.0 9343.6 9272.2 8136.5 8000.0 7762.7 7324.6 7090.2 6941.0 6791.9 6696.9 6617.3 6609.7 6472.7 6161.6 6133.8 5972.6 5887.4 5870.0 5502.0 5436.0 5339.0 5330.0 5102.0 4947.6 4726.5 4697.1 4654.0 4653.8 4639.0 4600.4 4590.0 4555.0 4363.9 4334.0 4007.0 3859.7 3728.9 3693.0 3609.3 3544.0 396863.5

Source: Short (2000), Chemical & Engineering News

75

Share of

100.0

Accumul. Included in Share (%)

our Analysis

7.9 14.9 20.0 24.7 28.1 31.6 34.8 37.9 40.5 42.8 45.2 47.5 49.6 51.6 53.5 55.4 57.2 58.9 60.6 62.3 64.0 65.7 67.3 68.8 70.4 71.9 73.4 74.9 76.2 77.6 79.0 80.3 81.6 82.8 84.0 85.2 86.4 87.5 88.7 89.9 91.0 92.2 93.3 94.4 95.4 96.4 97.3 98.2 99.1 100.0

yes yes yes yes no yes no yes no no no no yes no yes yes no no yes yes yes yes yes no no no no yes yes no yes no yes yes yes no no yes yes no yes yes no yes no no no yes no no

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Let us now take a look at the restructuring which took place in the chemical industry from 1989 to 1999 when the first ranking of the top 50 was issued by the Chemical & Engineering News (Short 2000). In the first listing Hoechst and Rhône-Poulenc were among the top 10. The two firms merged in 1999 to form Aventis, now a French life science company. The Italian Enimont disappeared in 1990 when EniChem and Montedison withdrew their chemical assets and dissolved the Enimont. Ciba-Geigy merged with Sandoz to form Novartis. The chemical businesses finally went into Ciba Specialty Chemicals. Hüls merged with Degussa to form Degussa-Hüls. The operations of France’s Orkem were distributed by the French government to other French chemical companies. American Cyanamid spun off most of its chemical operations as Cytec Industries. Finally, two important Japanese mergers should be mentioned. The first is took place in 1994 between Mitsubishi Petrochemical and Mitsubishi Kasei to form Mitsubishi Chemical (number 23 in the 1999 list). The second is Mitsui Chemical which was born in 1997 as a result of a merger between Mitsui Petrochemicals and Mitsui Toatsu Chemicals, now number 15 among the world players. We have used this ranking for the purpose of evaluating the representativeness of our sample. Since we wanted to focus on the chemical manufacturers we have included only those firms which have more than 50% of their activities in the chemical business. This is why petrochemical firms are not included in our sample, or General Electric with its chemical activities. Furthermore, the chemical firms created by recent restructuring activities are not in our sample (Celanese, Ciba Specialty Chemicals, Clariant, Equistar, Rhodia, and SKW). No data was available for Toray Industries. In the end, we could include 26 of the top 50 companies as ranked by Chemical & Engineering News. These 26 companies comprise the most important segment of the top 50 ranking. Furthermore, we have included in our analysis 223 additional firms which operate as stock companies. Now let us turn to the methodology we applied to study the competitiveness of the chemical industry. The first step on our way was to create a set of variables containing all the relevant values of the companies engaged in the European, Japanese or American chemical industry markets. Afterwards, we decided which variables we would need for the later analysis. We drew these from the database for all companies. In order to study as long a period of time as possible, we combined data from databases of different years. The period of time researched thus lasts from 1985 to 1997. The analysis of the economic performance focuses on the period lasting from 1993 to 1997. The Global Vantage Database contained most of the variables we were looking for. We computed the missing variables out of the given data. Return on sales, for example, was derived from income and sales. The variables used for the analysis of the economic performance are described in the next section.

76

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.1.3 A Short Elaboration Concerning Firm Performance There are several problems that must be addressed when choosing criteria of economic performance.32 With respect to the unit of analysis, a decision must be made as to whether performance should be measured on the level of the business unit, the firm, or the industry. Because we are studying the impact of the chemicals regulation on the innovative behaviour of the firm, we decided to use the firm as the unit of analysis. It would have been even more appropriate to use the business unit as the unit of analysis, since it is more closely related to the market where innovation competition takes place. However, it was impossible to get such data for a large sample of firms. The next step in the research process is to decide which type of performance criteria to accept. Are measures based on accounting data appropriate? Or is information concerning capacity utilization and productivity more appropriate? Finally, one has to fix the reference point and the time period for the measurement. The explanatory power of a single one-dimensional performance criterion is limited. Accounting criteria might be biased. One has a certain amount of leverage in drawing up a balance sheet. For instance, there are possibilities to choose among various rules for the valuation and depreciation of assets. We have used the following variables to construct a measure of economic performance: Operating Margin after Depreciation (“Profitability”) This profitability measure is the operating income divided by total sales multiplied by 100. The operating income represents the total income from normal business operations. This variable is a component of the pretax income. The variable is the sum of: 1.

Other Operating Revenues

2.

Net Sales less:

3.

Total Depreciation and Amortization

4.

Operating Expense

Cash Flow per Sales (“Financial Resources”) The cash flow shows which financial means were available for investment, expunction and for distribution during the financial period. It is a steady criterion for the true profitability of the firm. Taxes and interest have been subtracted from the income while depreciation has not been considerate yet. The cash flow is often calculated per sales, thus expressing the available 32 For a discussion of these problems see also Richards (1998). According to Richards the right

performance measure is the internal rate of return. However, he admits that there are notinsignificant difficulties in calculating this measure from the published accounting statements which we are using.

77

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ capital as a percentage. This way the differences in the sizes of the firms being compared can be negotiated. Sales Growth For a long time Japanese companies have focused their main attention on the growth of their market share. The literature also underlines the importance of growth measurement (see e.g. Brealey and Myers 2000). Sales growth is not directly influenced by the capital market and therefore shows how successfully the company has defended or extended its market share by sales. Plant, Property, and Equipment Growth (“Investment Activity”) Investment generates dynamic markets and makes way for success. A company in the manufacturing industry that doesn’t continuously modernize and renew its machinery and equipment will not be able to survive in the long-term. Process-innovation and the resulting investment in property, plant and equipment secure a more cost-effective manufacturing of new products. The variable expresses whether a company invests in new technologies to secure its existing value. Knowledge-management has become very important recently. Nevertheless, modern and innovative production is a prerequisite to producing marketable goods. This variable indicates future strength in market competition. Standardization There is a need for standardization as there are severe differences in the sizes of the companies. For this reason, the highest values of a year where rated one and the lowest zero, all others lie in-between. The standardized performance psi (i = 1,…,4) is psi = (pi – pi min)/(pi max – pi min) The combined performance indicator ps is the simple arithmetic mean of the four single standardized performance psi measures. For our empirical analysis we have used the data for the period 1993 to 1997 for two reasons. First, we were interested in gaining insight into the most recent developments concerning the competitiveness of the companies of the chemical industry. Second, since 1993 we have been able to observe the beginning of a new business cycle in the chemical industry. The table A.1 in the appendix gives an overview of the firms and their characteristics as well as their average values for the period 1993 to 1997 concerning the four single performance measures and the rank they achieve based on the combined economic performance criteria. As is the case with every aggregate measure the single measures get mixed-up. The four single measures have the property that they are independent, that is, they measure independent dimensions of the competitiveness of the firms. The overall measure then combines the single characteristics by averaging the standardized values, and thus it might well be that some

78

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ measure dominates the overall value due to a very high or low single value. The correlation between the profitability measure (operating margin after depreciation) and the financial resource criteria (cash flow per sales) is 0.68. The sales growth (growth of sales) shows a correlation of 0.56 with the investment activity (plant, property, and equipment growth). The overall measure of economic performance correlates with the single measures as follow: 0.78 with profitability, 0.67 with financial resources, 0.67 with investment activity, and 0.57 with sales growth. The operating margin (operating income after depreciation to sales) provides a measure of the profitability of a firm’s basic operation. As Blaine (1994) has shown this is one of the most meaningful measures, in particular for international comparative studies on the accounting profitability. Figure 5.1 shows the operating margin for the European, Japanese, and US firms over the period 1986 to 1997. For this graph we have used those companies for which we could obtain data over the whole period, a total number of 249 firms. However, the regional structure of the sample is slightly different from our main sample, since we used data for one variable only, but for a longer period. Figure 5.1:

Operating Margins for the Chemical Industry

20

Mean Operating Margin (%)

16

12

8

EUROPE (82 Firms) 4 JAPAN (81 Firms) USA (86 Firms)

0 1986

1988 1987

1990 1989

1992 1991

1994 1993

1996 1995

1997

Year

At this point we can observe that US firms have a higher operation margin over the entire 12-year period than either European or Japanese chemicals manufacturers. The structure of the underlying business cycle seems to be comparable for the European and US firms, peaking in 1988 and having its low in 1993. The entire cycle with an up- and downswing covers 12 years.

79


Four Measures of the Economic Performance of European, Japanese, and US Firms (Averages for 1993-1997)

Standard Industrial Classification

Europe

Japan

28 7.1 9.5 3.2 5.8

33 4.0 5.6 8.6 3.2

5 11.0 11.3 5.1 2.0

66 5.8 7.7 6.1 4.2

8 7.5 13.5 -0.1 -0.6

9 2.8 7.1 8.3 3.0

12 12.0 11.8 8.9 15.0

29 7.9 10.8 6.3 7.0

15 5.3 10.2 4.3 2.7

14 5.0 8.6 9.6 3.9

13 11.0 12.2 5.2 5.5

42 6.9 10.3 6.4 4.0

13 8.1 8.3 6.2 3.6

5 3.4 5.3 5.9 -0.1

23 7.9 6.1 6.7 7.8

41 7.4 6.7 6.4 5.5

2 8.4 10.0 9.1 3.7

4 3.5 4.1 11.4 2.5

6 11.5 9.0 12.3 11.7

12 8.3 7.5 11.5 7.3

1 11.6 12.5 19.9 11.9

5 3.3 5.7 5.8 2.7

13 12.3 10.7 4.9 10.5

19 9.9 9.5 5.9 8.5

5 8.7 10.2 5.2 1.2

3 3.7 5.2 2.1 6.9

6 15.8 12.9 10.3 9.3

14 10.7 10.3 6.7 5.9

6 9.4 7.6 7.4 7.6

8 3.8 6.5 7.5 4.6

12 13.4 11.9 7.4 7.9

26 9.5 9.2 7.4 6.8

78 7.3 9.8 4.4 4.0

81 3.9 6.3 8.2 3.3

90 11.2 10.1 7.1 8.9

249 7.5 8.7 6.6 5.4

Chemicals General [208] Number of Firms [No] Operating Margin after Depr. (%) [OMAD] Cash Flow per Sales (%) [CF/S] Growth of Sales (%) [GrS] Growth of Fixed Assets (%) [GrFA] Industrial Inorganics [281] No OMAD (%) CF/S (%) GrS (%) GrFA (%) Plastics [282] No OMAD (%) CF/S (%) GrS (%) GrFA (%) Soap and Detergents [284] No OMAD (%) CF/S (%) GrS (%) GrFA (%) Paints and Varnishes [285] No OMAD (%) CF/S (%) GrS (%) GrFA (%) Industrial Organics [286] No OMAD (%) CF/S (%) GrS (%) GrFA (%) Agrochemicals [287] No OMAD (%) CF/S (%) GrS (%) GrFA (%) Misc. Chemicals [289] No OMAD (%) CF/S (%) GrS (%) GrFA (%) All Industries No OMAD (%) CF/S (%) GrS (%) GrFA (%)

80

USA Total Average

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Table 5.3 show the single performance criteria according to the three regions and eight subsectors of the chemical industry. For all sub-sectors, except soap and detergents (SIC 284), the same pattern emerges, the US firms have on average the highest operating margin, followed by the European and Japanese firms. In the case of soap and detergents the average of 8.1% is slightly higher than the 7.9% for the US firms. The US agrochemical firms exhibit the highest operating margin with 15.8%. The lowest margin is 2.8%, observed for the Japanese industrial inorganics manufacturers. For the averages in the table 5.3 we have undertaken a test showing whether the means for the regions according to the sub-sectors are statistically different or not. This is because we are interested in whether the regions show significant differences. For that purpose we have to control for the size of the firms and for the sub-sector because it is expected that they influence the performance criteria. Conceivably there are other factors which might influence the operating margin. For the test we have run dummy regression analysis. A test of the single criteria according to the region shows the following results. Table 5.4:

Results of Regression Using Country-Dummies on the Single Performance Criteria Controlling for Size and Sub-Sector of the Chemical Industry, 249 Firms, 1993-1997 Europe

Japan

USA

Profitability

O

–

+

Financial Resources

O

–

(+)

Sales growth

–

+

O

Investment Activity

O

(–)

+

Notes:

+ O – ()

indicates that the firms of the region have the highest performance. indicates that the firms of the region have an average performance. indicates that the firms of the region have the lowest performance. indicates the result is statistically not significant at the 10%-level or lower.

For the criteria profitability, financial resources, and investment activity the pattern is identical. The US firms have the highest values, followed by the European and Japanese firms. However, for the US firms financial resources is statistically not significant, and for the Japanese firms the investment activity result is not significant. A different and statistically significant result is observed for the sales growth criteria. Here, the Japanese firms have over the five year period on average grown faster than the US and European firms. Our overall measure of the economic performance of firms is composed of the previously mentioned four measures. It is the simple average of all the four measures, since the single

81

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ measures are standardized to have values between 0 and 1. The same range of values is possible for the overall performance measure. One has obviously to compromise when constructing a combined measure. Our goal was to construct one measure for economic performance which sought to also capture the competitiveness of the firms. Therefore, we have included the sales growth (sales growth) and investment activity (growth of fixed assets). Because we use only statistical averages (arithmetic means) over a quite short period of time (5 years) a structural effect might occur when restructuring activities take place. Since such restructuring is an essential part of the competitive process and the process of gaining competitive advantage we cannot exclude data which reflect restructuring. The acquisition or sales of quite large assets (e.g. companies, business units or subsidiaries) has an impact, particularly on the sales growth and the investment activity criterion. For example, if a company acquires another company then both the sales and the assets of the acquiring company increase. If the acquired asset is only a business unit or subsidiary of the company selling that asset, then its sales and assets growth both decrease. This reservation should be kept in mind when looking at the performance ranking (last column in the table A.1 of the appendix). Significant merger activity drives up the overall performance of the acquiring company and vice-versa for the acquired company (if some part of it remains independent). However, the profitability criterion has a decisive impact on the combined criterion of the economic performance. To test for the significance of differences between the European, the Japanese and US firms we again have run a dummy regression analysis controlling for the size of the firms and for the sub-sector. The table 5.5 summarizes the results of the regression analysis. The estimation results of the whole equation are highly significant (the F-statistic is 6.43). 18% of the variance is explained (adjusted R2 = 0.18). This is considerable for such a complex pattern of influences using a de facto cross-section analysis. The result is highly significant, at the 1%-level. The US firms exhibit the highest economic performance, followed by the European firms. The Japanese firms are the firms with the lowest economic performance in the period 1993 to 1997.

82


Regression Relating the Average Economic Performance of 78 European, 81 Japanese, and 90 US Firms of the Chemical Industry to Size, Region, and Sub-Sector, 1993-1997

Variable

Size Dummy if region=Japan Dummy if region=USA Dummy if SIC=281 Dummy if SIC=282 Dummy if SIC=284 Dummy if SIC=285 Dummy if SIC=286 Dummy if SIC=287 Dummy if SIC=289 Constant Number of obs F(10, 238) Prob > F R-squared Adj R-squared

Coefficient

t-value

Significance P>t

-7

0.627 -2.969 3.907 1.028 0.332 -1.672 0.595 0.590 1.205 1.136 34.256

0.531 0.003 0.000 0.305 0.740 0.096 0.552 0.556 0.230 0.257 0.000

5.51*10 -0.0334 0.0448 0.0164 0.0046 -0.0246 0.0132 0.0113 0.0251 0.0189 0.3827 249 6.43 0.0000 0.2127 0.1792

Note: The base line category for region is Europe and for SIC, if SIC=280. That is, the intercept term for US firms is significantly higher (+3.9) than for the EU firms, whereas for the Japanese firms it is significantly lower (-3.1). The sub-sectors are compared with "Chemical Industry, general".

5.2

R&D 5.2.1 R&D Expenditures

A company which innovates regularly needs an R&D function for continued innovative activities, in particular in a science-based industry like the chemical industry. The obvious question then is, what will be the optimum level of R&D expenditures required to achieve the company’s objectives? As we have learned from our interviews, there is no simple answer to this question. It depends on the businesses of the company, its strategy and objectives, the position of the company amongst its competitors, its profitability, and many other factors. Thus, the answer to the question ranges between as much as possible and as little as necessary, however, money does not guarantee results but to little money may guarantee no results at all. There are a number of definitions of R&D, amongst others those of the OECD (Frascati Manual; Oslo Manual) and various national and international accounting standards. For our

83

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ approach using balance sheet data the national accounting standards are relevant for the definition of R&D. The main R&D expenditures are due to the type of R&D, that is, defensive, offensive, and basic R&D. Defensive R&D is to maintain the existing businesses and support minor extensions. It is related to the number and maturity of existing product lines and their rate of obsolescence. Firms can use historical company data to make predictions about the cost-benefit relationship of defensive R&D projects, and thus determine the level of defensive R&D. Offensive R&D is intended for major improvements in the existing business, for extensions into related fields, or for completely unrelated R&D. It is related to the profitability and the growth strategy of the firm. Basic and exploratory research serves to maintain the scientific knowledge-base of the firm, that is, to maintain the technical skill and knowledge of the firms researchers but would not generally exceed a proportion of about 20% of the total R&D effort. All this adds up to the total amount of R&D expenditures. It is obviously a compromise between the desired profit goals and the ambitions for growth. We are going to use an overall figure for R&D expenditures as reported in balance sheets and profit and loss accounts. As an aggregated figure it may tell not too much for a single large and diversified firm, however, comparing a larger number of those firms shows nevertheless interesting patterns (see table 5.6).

84


R&D Intensities by Industry and Region, 1985-1997 (in %, weighted means as mean of RDINZ 85-97)

Chemical Industries [SIC3]

Region

N = 331 R&D Intensity (%)

Chemicals General [280]

EU Japan USA Total

20 33 5 58

4.80 2.06 5.82 4.37

2.4 3.0 5.2 4.0

Industrial Inorganics [281]

EU Japan USA Total

4 9 10 23

1.34 1.79 1.53 1.51

0.7 2.5 1.1 1.3

Plastics [282]

EU Japan USA Total

7 13 11 31

2.21 3.45 4.18 3.69

3.5 2.4 1.0 2.3

Pharmaceuticals [283]

EU Japan USA Total

24 34 66 124

11.49 8.57 10.59 10.42

29.7 10.9 91.8 57.7

Soap and Detergents [284]

EU Japan USA Total

8 4 20 32

2.26 1.36 2.53 2.27

1.9 1.1 1.2 1.5

Paints and Varnishes [285]

EU Japan USA Total

1 4 6 11

4.51 2.84 2.61 2.96

0.0 0.8 2.0 1.9

Industrial Organics [286]

EU Japan USA Total

3 5 11 19

3.46 2.27 2.42 2.50

0.0 3.2 2.6 2.6

Agrochemicals [287]

EU Japan USA Total

2 3 5 10

0.84 1.21 1.48 0.94

0.0 0.3 19.6 2.2

Misc. Chemicals [289]

EU Japan USA Total

4 7 12 23

7.56 1.55 2.65 4.15

25.3 0.5 0.3 15.3

All Industries

EU Japan USA Total

73 112 146 331

5.43 4.05 5.49 5.19

18.5 13.3 41.3 27.2

85

Variance


R&D Intensity for the General Chemicals Industry (SIC 280) (Avg. Weighted Sales)

9 8

Avg. R&D Intensity in %

7

Europe (32 Firms)

6 5

Japan (34 Firms)

4 3

USA (5 Firms)

2 1 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year

Figure 5.3:

R&D Intensity for the Plastics Industry (SIC 282) (Avg. Weighted by Sales) 9 8

Avg. R&D Intensity in %

7

Europe (16 Firms)

6 5 4

Japan (14 Firms)

3 2

USA (13 Firms)

1 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year

5.2.2 R&D Productivity R&D productivity has been greatly discussed in the context of international competitiveness. It would be interesting to know whether there is a relationship between the national system of innovation and the R&D productivity and whether that might have something to do with the regulatory regime and the chemical industry. Thus, this section tries to assess the contribution of R&D spending of firms to their own productivity performance assuming that it might be

86

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ influenced by the national system of innovation. For that purpose a model of a knowledge production function is applied. A number of studies have been done concerning the R&D productivity issue at the country and industry level. Many use aggregated data, like the recent one by Eaton, Gutierrez, and Kortum (1998) at the country level. The other type of study is the panel study. They use timeseries data for a cross section of individual firms. Early work in this area was done by Zvi Griliches and his colleagues. Griliches and Mairesse (1984) have analyzed the relationship between output, employment, and physical and R&D capital for large US firms. In the crosssectional dimension they found a strong relationship between firm productivity and the level of its R&D investments. In the time dimension this relationship nearly vanished. According to Griliches and Mairesse this may be due, in part to the increase in collinearity between the trend, physical capital, and R&D capital. We will pursue this line of research in order to establish a base from which it will be possible to gain a better understanding of the R&D productivity of EU, Japan, and the USA. The most recent work, by Eaton et al. (1998), draws several broad conclusions. First, they found research productivity in Europe as high as or higher than in the USA or Japan. However, European countries suffer from a smaller market size for innovative products. Second, their analysis indicates that policies that stimulate research activities within one European country will also raise productivity growth elsewhere. This is the free-rider effect resulting from cross-country knowledge spillovers may reduce research effort in those countries. Third, there is a large variance in research intensities across Europe. This variance is mostly explained by differences in research productivity, which reflect differences in the amounts devoted to public research in the various European countries. The differences between the EU, Japan and the USA might also be due to factors such as a higher proportion of defense spending in the USA and differences in R&D subsidies and the tax system. Since our focus is on the impact of the chemicals regulation we have to apply an analysis of individual firm data, in particular when measuring the productivity of R&D in the chemical industry. The extension of the classical production function is a useful tool to measure the productivity of R&D. The extension of the classical production function which is of interest is the one that includes R&D capital as a third factor of production beyond capital and labor. Shell (1966) has developed an aggregate model in which it is useful to think of technical knowledge as a public good of production, while the level of inventive activity is dependent upon the amount of economic resources devoted to that activity. This approach was further developed and applied by Minasian (1969), Mansfield (1980), Griliches and Mairesse (1984), and Romer (1990) among others. Based on the typical research, development, and production technology in the chemical industry an application of the Cobb-Douglas production function is

87

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ appropriate (see e.g. Fleischer 1997 for the empirically relevant properties of the CobbDouglas production function concerning industrial goods industries). The production function of a firm may be expressed by the following equation: Xit = f (Kit , Lit , Tit ) where Xit, Kit, Lit, and Tit represent, respectively, value added, capital, labor, and technology. Since the firm’s technology in time, t, is a positive function of the existing stock of knowledge, we assume, that the stock of knowledge is related to the R&D expenditures made over time. These models of the so-called knowledge production function are quite sophisticated regarding the measurement of the R&D capital stock. For a comprehensive review and analysis see Görtzen (2000). One major constraint of the quantitative analysis is the availability of comparable data. For the European companies, particularly, there is a lack of data on R&D. That is the reason why we had to choose various estimation techniques. Regarding the whole sample, a lack of data covering value added had to be taken into account, that there was not enough information on the cost of inputs in order to calculate the value added. That is why we used operating income to proxy for value added. Capital was proxied by fixed assets. Due to the lack of appropriate data on wages, salaries, and social benefits, the labor input variable was proxied by the number of employees. For the R&D capital stock we used the annual R&D expenditures. That is an especially appropriate strategy to proxy for the stock of R&D capital in case of quite unbalanced panels. Due limited availability of data on R&D expenditures we have not used an alternative specification of R&D capital, which would be to use a polynomial distributed lagged function. For that very we have chosen R&D expenditures for the R&D capital input. The natural logarithms of the variables were used in order to apply linear estimation techniques. Finally, we have specified the following production function ln Xi = ln a0 + a1 ln Ki + a2 ln Li + a3 ln RDi + a4 DJP + a5 DUS + ε where i:

Subscript for Firms, i = 1,…,N

Xi :

Operating Income

Ki :

Fixed Assets

Li :

Employees

RDi :

R&D Expenses

DJP :

Dummy Variable, 1 if Japan otherwise 0

DUS :

Dummy Variable, 1 if USA otherwise 0

88

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ It should be noted that due to the data constraint we used robust regression analysis instead of ordinary least square (OLS) regression. Robust regression allows the handling of the outlier problem systematically. Apart from selecting the outliers on a case by case basis there is no other reasonable way to handle the outlier problem. Due to the quite large size of the samples of EU, Japanese, and US firms we have chosen the systematic procedure of robust regression analysis. OLS fits outliers usually at the expense of the rest of the sample. This leads to greater sampleto-sample variation or inefficiency when samples often contains outliers (Judge et al. 1988). Robust regression is more insensitive to model misspecification. Thus, it aims to achieve almost the efficiency of OLS with ideal data and substantially better-than-OLS efficiency in nonideal situations, e.g. when errors are not normally, independently, and identically distributed. The robust regression procedure used is “rreg” from STATA. It performs an initial screening based on Cook’s distance greater than one to eliminate gross outliers prior to calculating starting values and then performs Huber iterations followed by biweight iterations. To test for differences in the R&D productivity of chemical firms from the EU, Japan, and the USA two equations were estimated. First, dummy variables were incorporated as predictors in the equation. Second, the production function model was estimated separately for each of the three samples. The regression results are presented in table 5.7. In equation (1) we have used all firms, that is manufacturers of chemicals and pharmaceuticals, whereas equation (2) is limited to the manufacturers of chemicals. The estimation of equation (1) and (2) with country dummies shows a highly significant F-value (As a reference: the OLS estimation provides an adjusted R2 of 0.85.) The time dummies controlling for the time effect show no particular pattern. The coefficients and t-values are omitted in the table. Again, estimation (1) is based on the entire sample of firms which have reported R&D expenditures. The coefficients are all highly significant including those of the country dummies, except the constant term for the chemical industry. The estimations for the single regions, (3), (4), and (5) are as well significant, except of the R&D and the labor input variable for the EU.

89


Production Function Estimates – Robust Regression of the Operating Income (X) on Capital (K), Labor (L), and R&D Expenditures (RD), 294 Chemical and Pharmaceutical Firms, 1985-1997 (t-statistics in parentheses) All 296 Firms (1) Country Fixed Effectsa

197 Chemical Firms (2) Country Fixed Effectsa

Pooled Model (3) EU Firmsa

(4) Japanese Firmsa

(5) US Firmsa

A1 (ln K)

0.557*** (30.21)

0.537*** (26.69)

0.832*** (19.65)

0.454*** (12.72)

0.566*** (20.87)

A2 (ln L)

0.344*** (19.55)

0.327*** (16.48)

0.043 (1.07)

0.492*** (10.47)

0.219*** (9.09)

A3 (ln RD)

0.149*** (13.78)

0.118*** (9.27)

0.043 (1.54)

0.107*** (5.16)

0.213*** (11.48)

-0.236*** A4 (Dummy for Japan) (-6.14)

-0.345*** (-7.45)

0.220*** A5 (Dummy for USA) (6.87)

0.214*** (5.96) -0.655** (-2.06)

0.180 (1.04)

-0.187 (-1.46)

-0.276*** (-3.24)

A0 Constant

0.004 (0.04)

Observations

2,700

1,786

305

F-value

1,724.41***

1,149.13*** 248.14***

739 197.41***

742 828.78***

Significance levels: *** = 1%; ** = 5%; * = 10%. Note:

a

Coefficients for time dummies are omitted.

The output elasticity of capital of the chemical firms is 0.54. In the case of the estimations of the pooled regression for the three regions it varies between 0.45 for Japan and 0.83 for the EU. The output elasticity of capital for the chemical firms in Europe is very high. This indicates that the European firms made rather significant investment in machinery and equipment for each unit of output than their counterparts in Japan and the USA. The output elasticity for labor is considerable lower. For all chemical firms it is 0.32, ranging between 0.04 for the EU and 0.49 for Japan. To check for alternatives in measuring output we used also sales figures. Alternative estimations using sales as an output variable led to similar results, not reported here for the sake of conciseness.

90

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ The output elasticity of R&D expenditures is 0.12 for the chemical firms. For the entire sample of firms, including the pharmaceutical companies, the R&D elasticity increases to 0.15. This is as expected and is due to the high R&D intensity of the pharmaceutical industry. Significant differences are observed between the regions. Europe has the lowest R&D elasticity, that is one unit of R&D input creates 0.04 unit of operating income. The elasticities are 0.11 for Japan, and 0.21 for the USA. The USA has the highest R&D productivity, which we attribute among other to the efficiency of the US regulation of new chemicals. However, there is a number of other factors which may influence the R&D productivity as well, such as, for example, R&D tax subsidies. We would like to add two points. First, the constant term in the dummy regression can be interpreted as a measure of innovation. The production of goods is assumed to be efficient, as they are produced with the minimum value of inputs. Shifting the production function upwards, that is, increasing the intercept (constant) implies that more output can be produced with a certain amount of inputs. This might have two reasons: (1) the processes are more efficient due to process innovation and/or (2) the produced products are of a higher value due to product innovation. According to the coefficients of the dummy variables the USA has the highest innovative efficiency measure, followed by Europe, and Japan with the lowest efficiency. Since that result is somewhat mixed regarding Japan we applied a more sophisticated estimation technique based on the generalized linear model. It is possible to estimate cross-sectional time-series linear models and allowing to specify the within-group correlation structure for the panels. The estimations are based on the following model: ln Xit = ln a0 + a1 ln Kit + a2 ln Lit + a3 ln RDit + ε where t is the time period ranging from t = 1,…,13. The variables are the same as above, however, no country dummies are applied, (see table 5.8). The panel is unbalanced and the range of available time series data is from 1 to 13. We have used a generalized estimating equation approach (GEE, that is the “xtgee” regression procedure from STATA). Overall the estimations are significant. The coefficients for the labor input are not significant for the EU and the US firms. The constant is not significant for the Japanese firms. However, all R&D coefficients are significant. A qualitatively similar picture emerges from this comparison. The European R&D elasticity of 0.09 is lowest, the Japanese with 0.10 only a little higher, but the US R&D elasticity is 0.30, thus considerably higher. To sum up, we can say that the elasticity of R&D for the USA is clearly higher than that of Europe and Japan in both models. Nevertheless, the R&D elasticity for Europe in the first model is not significant. The elasticity of R&D in Japan is higher than in Europe in the first model (0.11 and 0.04 respectively), but they are nearly identical in the second model, 0.09 for

91

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Europe and 0.10 for Japan. The differences between Japan and Europe can not be considered similar to those between Europe and the USA. Regarding the USA, in both models the elasticity of R&D is higher than in the EU, 5 times more in the first model and 3 times more in the second. Again, the difference might be attributed among others to the US notification regulation, although we would be very cautious to do so. A statistical test of the relationship would have required access to the notification behaviour at the company level. Due to confidentiality reasons we could not get such data. Table 5.8:

Production Function Estimates (Unbalanced Panel Data) – Estimate Population-Averaged Panel-Data Model Using a GEE Approach of the Operating Income (X) on Capital (K), Labor (L), and R&D Expenditures (RD), 197 Chemical Firms, 1985-1997 (z-statistics in parentheses) (1) EU Firms

(2) Japanese Firms

(2) US Firms

A1 (ln K)

0.813*** (13.21)

0.449*** (8.88)

0.639*** (11.48)

A2 (ln L)

0.015 (0.31)

0.448*** (6.97)

0.065 (1.34)

A3 (ln RD)

0.093** (2.03)

0.104*** (3.05)

0.305*** (7.31)

A0 Constant exp(ln a0)

-1.01*** (-3.57)

0.193 (0.77)

-0.538** (-2.09)

Observations

305

739

742

No. of Firms

46

77

74

Wald chi2

1,046.67***

638.51***

1,734.79***

Significance levels: *** = 1%; ** = 5%; * = 10%.

5.3

Basic Research and Nobel Prizes in Chemistry

The Nobel Prize, like patents, may be regarded as a lagging indicator of successful basic research and its discoveries. It is certainly an indicator of excellent academic research. However, the results of fundamental academic research are so widely disseminated and their effect is so basic and widespread, that it is difficult to identify and measure the links between academic research and technological innovation.33 Nevertheless, we feel it is important to

33 Related to this issues is the question whether public R&D is a complement or substitute for private

R&D. A comprehensive review of the econometric evidence is provided by David, Hall, and Toole (2000). They conclude that the findings overall are ambivalent and the existing literature as

92

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ study the impact the research of Nobel Laureates has on the creation of breakthrough innovations as well as on significant improvement innovations, so we will consider the Nobel Prizes in Chemistry. Since the prize is usually awarded for work done during the preceding year, but can also be awarded for older work provided its significance has only recently been demonstrated, the time lag has a broad range, ranging from a few years to more than three decades. The average lag for academic-research-based innovations is about 7 years (Mansfield 1991). As said, it is difficult to identify the links between high quality basic research for which the Nobel Prize is awarded and innovations in the chemical industry. But high quality basic research has a complementary effect on chemical innovation since it is an important source of new chemical knowledge. Although the relationship between fundamental chemistry and process and product innovation is weaker than in the case of patents there are some interesting examples to study. It is also important to explore the question of whether new chemicals regulation have any impact on the successful commercialization of the output of basic research. So far no systematic analysis of the impact of the research of Nobel Laureates in chemistry on technological innovation is available. The only related publications of which we know (with the exception of case histories like the collection included in Jewkes et al. 1969) are the ones by Faust et al. (1999) and by Malmström (1999). Both provide a survey of the Nobel Prizes in Chemistry during the past century. Malmstöm further provides an analysis of important trends in the development of chemistry.34 Our interest is different. We will first illustrate the relationship between fundamental chemical research and breakthrough innovations in the chemical industry. For this purpose we use selected Nobel Prize Laureates as examples. These examples illustrate the importance of systematic, science-related process development. Next, we present a quantitative overview of the Nobel Prizes awarded according to the home countries of the laureates. Furthermore, we show the concentration of laureates by institution. Finally, we argue that fundamental research may be related in a very loose fashion to the system of new chemicals regulation and the innovative output of firms by using the case of Japan. a whole is subject to the criticism that the nature of the research setting(s) is not adequately specified. 34 Another in-depth study concerning the trends in basic chemical research with high innovation potential was undertaken by DECHEMA, the German Association for Chemical Engineering and Biotechnology (see Baselt et al. 1988, including references to a few other important studies). DECHEMA have explored the innovation potential of basic research in twenty-five areas, in conjunction with a large number of experts in Germany. The study could be described as a very comprehensive type of Delphi study, incorporating the knowledge of chemists in academia, various research institutes, and industry. A comparable study more closely related to industry needs was conducted by the Chemical Industries Association (1995). The goal of this study was to assess the priorities for research funding in the light of the strengths and weaknesses of the UK science and engineering base, with the scope of UK exploitation of commercial opportunities.

93

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Dyes and Fertilizers An important consideration in understanding the relationship between basic research and the development of new chemicals is that the chemical firms recruit highly qualified staff skilled in doing product and process innovation from the universities. This practice was established as early as the turn of the 19th century by BASF, Bayer, and Hoechst. Although by the 1870s Bayer had a lead in indigo synthesis they were not successful in a dyestuff product innovation. It was Adolf von Baeyer who first produced synthetic indigo on a laboratory scale as well as a whole series of indigo dyes. In recognition of this work for the advancement of organic chemistry and the chemical industry von Baeyer was awarded the Nobel Prize in 1905. BASF and Hoechst jointly took out patents on von Baeyer’s work. At this time, however, the cost of producing the synthetic indigo was much higher than the price of the natural dye. Thus, the discovery was not commercially successful. The second laureate working in the field of organic chemistry was Otto Wallach from Göttingen. He, like von Baeyer, contributed to alicyclic chemistry, studying components of ethereal oils. The importance of his discovery for the chemical industry was emphasized during the award ceremony in 1910. Freeman and Soete (1997) have summarized how the story of synthetic indigo led to an economically feasible chemical, which determined the industry structure at that time. “After years of further effort, success was finally achieved at BASF, partly as a result of an accident during experiments on the oxidation of naphtalene, which at that time was extremely expensive. A thermometer accidentally broke and mercury flowed into the reactor vessel. It proved to be an ideal catalyst. […] By the end of the century, the German and Swiss chemical firms had established their supremacy as technical and market leaders, accounting for over 80% of total world production. The Swiss firm CIBA maintained close research links with BASF […] The Swiss firms concentrated on research-based high quality dyes and drugs” (pp. 90-91). Polymers Another example of a successful complementarity of fundamental chemistry and chemical process engineering capacity was the development of the Haber-Bosch process for synthetic nitrogenous fertilizers. It started with the prize for the work of Fritz Haber in 1918 for the synthesis of ammonia from nitrogen and hydrogen. This synthesis was crucial for the development of the Haber-Bosch method. This method was developed by Carl Bosch as an improvement of Haber’s original procedure (made possible due to an agreement between Haber and BASF). Carl Bosch succeeded in designing and constructing the necessary high pressure vessels to start commercial production in 1913. In 1931 Bosch received the Nobel Prize for the manufacture of ammonia on a large scale. A final example of the successful marriage between fundamental chemistry and the development of successful new chemicals is the field of polymers (for details see Landau

94

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 1998). In the 1920s, Hermann Staudinger developed the concept of macromolecules. He synthesized many polymers, and showed that they are long chain molecules. The plastic industry is largely based on Staudinger’s work. He received the Nobel Prize for Chemistry in 1953 for his discoveries in the field of macromolecular chemistry. Landau (1998) reports, that “(T)he German chemists disputed the exact nature of these products, however, and thus Carothers and his group at DuPont became the inventors of the first truly important polymer. The German Paul Schlack, an I.G. Farben chemist, independently had hit on a loophole in the Carothers patents and was able to develop a similar compound from caprolactam, which yielded a nylon called nylon 6 (as distinguished from DuPont’s nylon 66, reflecting the fact, […], that two 6-carbon chain-molecules were hooked together, whereas nylon 6 had only one 6-carbon chain-molecule, with an amine group on one end and an acid group on the other)” (pp. 163-164). Research in the 1950s was toward further methods of making polymers. In late 1953, Karl Ziegler of the Max Planck Institute for Coal Research made the discovery that ethylene gas will polymerize rapidly with certain organometallic catalysts to form polyethylene. After having established a close cooperation with Ziegler, the Italian chemist Guilio Natta from Milan Politecnico and Montecatini showed in 1954 that Ziegler catalysts can produce polymers with a highly regular three-dimensional structure. Natta obtained a crystalline polypropylene with a high melting point and promising commercial applications. In 1963, both Ziegler and Natta were awarded the Nobel Price for their discoveries in polymer chemistry. We should also mention the latest Nobel Prize for contributions in the field of polymer chemistry, which was given to Paul J. Flory of Stanford University in 1974. Flory was awarded for his fundamental and experimental investigations of the physical chemistry of macromolecules. Malmström (1999) reports, that Flory’s “work also led to such important polymers as nylon and synthetic rubber” (p. 15). After having illustrated the importance of fundamental research in chemistry for the achievement of breakthrough innovations in the chemical industry and the role of the Nobel Prize, let us now turn to the prize itself, its origin, and whether it might be related to the systems of new chemicals regulation. The Nobel Prize has its origin in Swedish chemist Alfred Nobel (1833-1896), who invented dynamite, a form of nitroglycerine. Dynamite was produced on an industrial scale, so that economic success was not long in coming. From the estate of Alfred Nobel a foundation was established, which manages the prize money. At first, five prizes were awarded according to his will. These are the Nobel Prize for Chemistry, the Nobel Prize for Physics, the Nobel Prize for Physiology or Medicine, the Nobel Prize for Literature and the Nobel Prize for Peace. These Prizes have been awarded

95

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ annually since the 10th of December, 1901. An additional award for Economics was set up in 1968 and given in 1969 for the first time. The selection of the laureates for Chemistry is done by a commission of experts from the Royal Swedish Academy of Sciences. According to Nobel’s will the Prize for Chemistry can be given for the most important discovery or improvement in Chemistry. Table 5.9:

The Nobel Prize in Chemistry (1901-1999) No. of Prizes (absolute)

Proportion of all Nobel Prizes

USA

39

29.3

Germany

27

20.3

UK

25

18.8

France

6

4.5

Austria

5

3.8

Hungary

3

2.3

Canada

3

2.3

Netherlands

3

2.3

Norway

3

2.3

Sweden

3

2.3

USSR

3

2.3

Switzerland

2

1.5

Other

11

8.3

Total

133

Countries

The table shows the number of Nobel Prizes of those countries with more than one Prize. There are 11 countries with one Nobel Prize, among which Japan is found. Please note that there are 133 laureates in 99 years, that is, in a number of cases the prize was shared among two or more laureates. We do not consider this explicitly in our analysis. The countries with the most winners of the Nobel Prize in Chemistry are the United States (39), Germany (27), the United Kingdom (25), and France (6). These four countries are represented in figure 5.4. In that diagram the number of Nobel Prizes for each country are shown over the passage of time (per decade). At the beginning of the century (1901-1939) the awards were dominated by Germany. At that time no other country had as many Nobel Prizes as Germany. Between 1940 and 1979 most winners of the Nobel Prize came from the United States and the United Kingdom. After this period the awards have been dominated clearly by the United States, which has got 39 Nobel Prizes altogether. In the Eighties, the United States got 10 Prizes and in the Nineties the USA got 9 Prizes.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ The United Kingdom had its maximum in the Fifties and Sixties. After that period the awards were dominated by the USA. But in the Nineties, the United Kingdom again was awarded 4 Nobel Prizes. France with its 6 Prizes altogether, got 5 of the Prizes in the first 4 decades of the century. Figure 5.4:

Nobel Prize Winners in Chemistry from Germany, the United Kingdom, the USA and France, 1901-1999

No. of Nobel Prizes per Decade

12

Germany UK USA France

10

8

6

4

2

0 19011909

19101919

19201929

19301939

19401949

19501959

19601969

19701979

19801989

19901999

In figure 5.5 the institutions to which the laureates belonged at the time of the Nobel Prize are represented. The institutions are sorted by nations. Only those institutions that had more than one laureate between 1945 and 1999 are represented. 9 out of 15 institutions that appear in this diagram are in the USA. The other institutions are one German (Max-Planck-Institute with 5 laureates), four English (the MRC, Laboratory of Molecular Biology, Cambridge, Oxford University, Cambridge University and University of Brighton) and one of Swiss (Eidgenössische Technische Hochschule, Zürich). The University of California with its different locations is the institution with the most laureates (10), followed by the Harvard University, Cambridge, MA (5).

97


Institutions with more than one Nobel Prize Winner in Chemistry, 1945-1999 10

University of California (USA) 5

Harvard University, Cambridge, MA (USA) California Institute of Technology, Pasadena (USA)

3

Cornell University, Ithaca, NY (USA)

3

Rockefeller University, New York (USA)

3

Stanford University, CA (USA)

3

Rice University, Houston (USA)

2

Rockefeller Institute for Med Research, Princeton, NJ (USA)

2

University of Texas (USA)

2 5

Max-Planck-Institute (GER) MRC Laboratory of Molecular Biology, Cambridge (UK)

3

Oxford University (UK)

3

University of Cambridge (UK)

2

University of Sussex, Brighton (UK)

2

Eidgenössische Technische Hochschule, Zürich (CH)

2 0

2

4

6

8

10

12

Number of Nobel Prizes

By quoting Malmström (1999) let us now turn to the fields of chemistry to which the contributions of the Nobel Laureates in Chemistry belong to well as to a trend extrapolation for the 21th century. This is because Malmström offers us a clear view of how successful fundamental research in chemistry has developed and also extrapolates the direction in which the innovative effort in academia and the chemical industry might lead to in the future. “From a quantitative point of view, organic chemistry dominates with no less than 25 awards. This is not surprising, since the special valence properties of carbon results in an almost infinite variation in the structure of organic compounds. Also, a large number of prizes in organic chemistry were given for investigations of the chemistry of natural products of increasing complexity and thus are on the border to biochemistry. As many as 11 prizes have been awarded for biochemical discoveries. Even if the first biochemical prize was given in 1907 (Buchner), only three awards in this area came in the first half of the century, illustrating the explosive growth of biochemistry in recent decades (8 prizes in 1970-1997). At the other end of the chemical spectrum, physical chemistry, including chemical thermodynamics and kinetics, dominates with 13 prizes, but there have

98

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ also been 6 prizes in theoretical chemistry. Chemical structure is another large area with 8 prizes, including awards for methodological developments as well for the determination of the structure of large biological molecules or molecular complexes. Industrial chemistry was first recognized in 1931 (Gergius, Bosch), but many more recent prizes for basic contributions lie close to industrial applications, for example, those in polymer chemistry. […] Extrapolating the trend of the 20th century Nobel Prizes for Chemistry, it is expected that in the 21st century theoretical and computational chemistry will flourish with the aid of the expansion of computer technology. The study of biological systems may become more dominant and move from individual macromolecules to large interactive systems, for example, in chemical signaling and in neural function, including the brain. And it is to be hoped that the next century will witness a wider national distribution of Laureates.” (p. 17) Of course, a wider national distribution may be desirable, but we have to focus on the observed narrow national distribution of the recent laureates, which is the period after World War II. The US lead after World War II is obvious (see above). However, in our analysis of patent and innovation counts we could find only a statistically weak lead for US firms (except in the case of polymer patents where the lead is significant). This may be partially due to the measurement error in case of the innovation counts and to methodological weaknesses in the case of the analysis of patents. The main weakness in innovation counts is the over- and respectively under-reporting bias concerning innovations in annual reports. In the patent analysis we have used only simple patent counts and have not evaluated the value of the patents or patent families. We could neither take into account the fact, that firms might have a preference to patent minor discoveries, which would lead in the end to a higher number of patents per firm. Although the Nobel Prizes for chemistry from the US range over the entire spectrum of basic chemical science – from theoretical chemistry to biochemistry and applied chemistry – there seems to be a concentration in the field of biochemistry. For a number of reasons this concentration may have had no strong impact on the innovative output of the US chemical industry. A stronger impact on the biotechnological and pharmaceutical industry is conceivable, but this speculation lies beyond the scope of the present analysis. Once again, the public good relationship of the results of fundamental research, if not patented, allows for a wide and fast dissemination of the new basic chemical knowledge. It is obviously difficult to identify and measure the link between progress in basic research and innovation in the chemical industry. We have discussed a few examples, but we could not describe in enough detail the complexity of the innovation process. From the two types of innovation typical for the chemical industry, the radical or breakthrough innovation and the incremental innovation, in this section we focused on the breakthrough innovations. In the

99

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ section on innovation counts we analyze the incremental innovations of the years 1996 and 1997, which we have collected from the annual reports of European, Japanese, and US companies. Landau (1998) states for the US, that outsiders – individuals or firms – have much to do with radical innovations. In the cases described there was quite a strong commitment of the firms involved towards basic research. Incremental innovation is typical for capital-intensive industries and large firms, which is typical for the chemical industry. Hollander’s (1965) detailed study of DuPont rayon plants show that incremental innovations were typical for the productivity increases at DuPont. Mueller (1962) has analyzed 25 of DuPont’s most important product and process innovations made between 1920 and 1950. He found that only 5 of the 18 new products could be credited to DuPont, and 5 out of 7 process innovations. Mueller (1962) concluded, that DuPont has been more successful in making product and process improvements than discovering and developing radical innovations, except for nylon. We should mention a reservation made by Hounshell (1995) which shed some light on the difficulty of grasping the complexity of the innovation process in the chemical industry. He concluded that the above mentioned studies were strongly colored by the context of that time as they argued for the massive funding of basic research. He believes this because Mueller (1962) agreed with Nelson’s 1959 thesis that “though private profit motives may stimulate the firms of private industry to spend an amount on applied reasonable research close to the figure that is socially desirable, it is clear […] that the social benefits of basic research are not adequately reflected in opportunities for private profit, given our present economic structure” (Mueller 1962, p. 346). A recent report by Lenz and Lafrance (1996) states that the US government has made important historical investments in basic chemical research at universities. With respect to the R&D performance of the US system of innovation we can draw a conclusion, based on the statistics of the Nobel Prizes and the anecdotal evidence from the breakthrough innovations we know of. The US system shows a strong R&D performance. However, this only provides a brief advantage for the chemical industry, excluding pharmaceuticals. This advantage is supported by an efficient chemicals regulation which allows for the inexpensive experimentation and market testing of new chemicals in the large US market. Now let us turn to the case of Japan. The only Nobel Prize Laureate from Japan is Kenichi Fukui, who was awarded in 1981. In 1952, he was engaged in experimental research on synthetic fuel chemistry in the Army Fuel Laboratory and published his finding of a correlation between the frontier electron density and the chemical reactivity in aromatic hydrocarbons. If we observe that over a period of nearly a century only one Nobel prize was awarded to a chemist from Japan, we may think that Japan has a lack of high quality basic research.

100

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ On the other hand, Japanese chemical firms have been forced recently to diversify into many new product areas. This was mainly due to the fact that they often do not possess the core competencies of a particular product (Hikino et al. 1998). Historically Japanese companies have relied on the capability of finding innovations in the United States and Europe. The result was that the Japanese companies have over time developed a quite extensive product portfolio. This can also be seen from the Japanese R&D spending in the United States. R&D expenditures by foreign-owned companies in the USA tripled from $ 6.5 billion in 1987 to $ 19.7 billion in 1997, and accounted for nearly 15% of total company-funded R&D in the US (Dalton et al. 1999). With 251 Japanese R&D facilities in the USA, the Japanese companies lead, followed by Germany (107), the United Kingdom (103), and France (44). In the chemical and pharmaceutical industries the picture is different. Germany leads in the chemical industry’s R&D facilities in the USA (chemical industry: 27; pharmaceutical industry: 26), followed by Japan (25; 26), the United Kingdom (19; 15), France (14; 7), Switzerland (7; 15), and the Netherlands (6; 5) (Dalton et al. 1999, p. 23). These 192 foreign R&D facilities of the chemical and pharmaceutical industries represent 27.4% of all 701 foreign R&D facilities in the USA. Japanese firms of the chemical industry possess of 25 R&D facilities in the USA, whereas European companies have 73. Thus European companies have nearly triple the number of the Japanese firms. However, these figures do not tell us much about the R&D resources employed in these facilities. Based on our innovation counting and the analysis of US patents, we can conclude that the Japanese firms have developed a good position in the area of incremental innovation of specialty chemicals. The questions is how Japanese firms may have substituted for a conceivable lack of high quality basic research as indicated by the number of Nobel prizes received? One explanation may be that due to the public good character of basic research the Japanese firms have gotten easy access to the results of high quality basic research and they use it in a very productive way to develop new chemicals. We are convinced that the good record of Japanese companies in incremental innovations as reported in annual reports has something to do with the Japanese new chemicals regulation and its functioning, in particular with the small volume exemptions. In 1998, the Japanese statistics reported 9,007 small volume exemptions for new chemicals. Of these, 6,659 or 73.9% are due to chemicals manufactured in Japan and 2,348 or 26.1% are due to imports (MITI 2000). Thus, due to the public good character of basic research results and its widespread dissemination the Japanese firms are able to substitute for a lack of self-originated fundamental research in chemistry as indicated by the Nobel Prize statistics. The flexibility of the provisions for the development of new chemicals, which is provided mainly by the exception rules of the Japanese regulation, is very supportive for developing incremental innovations. Thus, the Japanese chemical industry benefits from so-called hyper-competition

101

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ (a form of competition mainly based on incremental innovation used for the purpose of product differentiation) due to their home-country new chemicals regulations, specifically from the small volume exemption in their home market. 5.4

Patents 5.4.1 Introduction

For testing the technological position of 261 stock companies of the European, Japanese, and US chemical industries we use US patents issued from the Micro Patent “US Patent Search” database.35 We use the indicators: patents per employee, R&D dollars per patent, a concentration measure, and a patent citation measure to weight the total number of patents received and may be the waiting time. The US patent data does not allow us to compute patents per application and the examination rate since only data on patents issued is available. The crucial question for the firms in the chemical industry is whether patents offer much protection against the disparate ways of doing the same thing that are characteristic of their technology. Clearly, they have to evaluate whether they can put a heavy premium on getting into the market first, establishing brand preference, and perfecting the product and technology. It seems to be reasonable to assume that patents are a good indicator of innovative activity in the chemical industry. This is because the chemical industry is an industry with a high propensity to patent. It is estimated that about 80% of the inventions in the chemical industry are patented. However, to which extent patents are included in single innovations depends very much on the type of the product. Usually patent statistics are used to examine trends in the evolution of technology, and the relationship between these trends and various other economic variables. We focus on the structural dimension, as opposed to the time series form of analysis. Patent statistics are ideally designed to provide a picture of the knowledge base of the firms. The best choice for an international comparison can be made by using US patent data since it has the largest market and the most patents granted to foreigners. For our purpose we chose to apply the “US Patent Search Database (USPS)” from Micro Patent. We could not use the available Internet patent data sources because we had to retrieve large amounts of patent information. 5.4.2 Patent Specialization A deeper analysis of the patenting activities provides insight into the innovative performance of the firms and whether the regulatory regime might have an impact on the performance. 35 For a discussion of the various patent data sources and an analysis of the impact of European,

German, Japanese, and US patents on the performance of firms see Fleischer (1999).

102

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Note that a significant amount of patents are never used, thus there is no simple relationship between patents and innovation. Nevertheless, patents are a very important indicator of innovative performance. Historical studies of the chemical industry have shown that a relationship exists (see e.g. Walsh 1984; Achilladelis and Schwarzkopf 1990). Figure 5.6 illustrates the revealed patent advantage of the EU, Japanese, and US firms. Figure 5.6:

Revealed US Patenting Advantage in the Chemical Industry, 1975-1997

29.7% Organic Macromolecular Components (C08)

EU USA

28.5% Organic Chemistry (C07)

Japan 8.9% Health (A61)

6.4% Agriculture (A01)

6.3% Processes (B01)

5.2% Dyes; Paints; Polishes; Natur. Resins; Adhesives (C09) 4.8% Printing (B32)

4.3% Instruments (G03)

3.1% Inorganic Chemistry (C01)

2.8% Electricity (H01)

-100

Note:

-80

-60

-40

-20

0

20

40

60

80

100

N = 72,404 US Patents out of a total of 104,061 US Patents.

The revealed patent advantage is often used to measure the technological position of an economy (see e.g. NIW et al. 1999). The revealed patent advantage (RPA) is calculated by following means: RPA = 100 * tanh [ln ( pcs/pcg )]

103

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Where pcs is calculated by percentage of patents of a country in a certain patent class and pcg is accordingly calculated by the percentage of patents of a country of all patents counted. Taking the logarithm of that ratio leads to symmetry around the “neutral” value 0. tanh gives the hyperbolic tangent. It is used in order to keep the values of RPA within the range of -100 and +100. The purpose of the revealed patent advantage analysis is to show how a region is represented in a certain sector according to all patents made in this sector and region. Therefore it shows in which categories a region is strong (or weak for this matter). We use the RPAs for the European firms to illustrate how the figure should be interpreted. EU: A revealed patent advantage is observed in the following patent classes:

§

Organic Chemistry (C07)

§

Health (A61)

§

Agriculture (A01)

§

Dyes etc. (C09)

Weak areas are (RPA < -50%):

§

Printing (B32)

§

Electricity (H01)

Relatively weak areas are:

§

Organic Macromolecular Components (C08)

§

Processes (B01)

§

Instruments (G03)

§

Inorganic Chemistry (C01)

Out of a sample of 72,404 US PTO patents the patent class Organic Macromolecular Components (C08) counts for 29.7% of the patents of the sample. The European firms are relatively weak in this patent class, whereas Japanese and US firms have an advantage. The situation is the opposite for the second largest class Organic Chemistry (C07), which count for 28.5% of the sample. The same is true for the smaller classes, the third largest class of Healthrelated patents, and the fourth of Agriculture-related patents.

104

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.4.3 Patent Productivity Patenting plays a key role in the chemical industry. The questions are, what is the relationship between R&D investment and patents? And, is there an observable difference in the patenting productivity between Europe, Japan, and the USA? If we do observe a productivity difference, might that difference be due to differences in the regulation of new chemicals? A significant amount of empirical research focuses on this relationship because comparable patent data is available which can be used as an indicator for the innovative output. Griliches (1990) summarizes the main research results and concludes that there is a quite strong relationship between R&D and the number of patents granted at the cross-sectional level across firms. The relationship is weaker in the within-firms time-series dimension. The estimated total elasticity of patents with respect to R&D expenditures is in time-series analysis between 0.3 and 0.6. This is also the case when allowing for different lag-specifications. A number of different specifications have been used to test the relationship between R&D and patenting. Bound et al. (1984) have estimated these various model to check whether there are diminishing returns to R&D. They found that the Poisson estimation and the nonlinear least squares indicate diminishing returns, whereas ordinary least square and the negative binomial specification have indicated increasing returns to scale. Since the Poisson model allows us to model the outcomes of the patenting process properly as counts we use that specification. It normally takes between three to five years time from the patent application until the patent is granted by the USPTO, therefore, a lag-structure in the model specification would be obvious. Since our overall time period of 13 years is too short, no attempt is made to model a lagstructure.

105


Patent Regression Results (Unbalanced Panel) – Poisson Regression of US Patents Granted on R&D Expenditures (RD), 172 Chemical Firms, 1985-1997 (t-statistics in parentheses) (1) EU Firms 0.155*** (5.54)

ln RD

(2) Japanese Firms 0.077*** (2.75)

(3) US Firms 0.558*** (21.09)

1986

-0.057 (-0.68)

-0.164** (-2.21)

-0.050 (-1.54)

1987

-0.074 (1.05)

-0.079 (-1.03)

-0.049 (-1.52)

1988

0.133* (1.88)

0.007 (0.09)

-0.133*** (-4.08)

1989

0.284*** (4.07)

0.243*** (3.35)

-0.034 (-1.06)

1990

0.381*** (5.36)

0.257*** (3.44)

-0.161*** (-4.67)

1991

0.402*** (5.65)

0.389*** (5.15)

-0.007 (-0.22)

1992

0.381*** (5.40)

0.437*** (6.13)

-0.062* (-1.92)

1993

0.306*** (4.28)

0.698*** (9.26)

-0.057* (-1.80)

1994

0.196*** (2.71)

0.676*** (8.98)

-0.098*** (-3.77)

1995

0.204*** (2.77)

0.538*** (6.87)

-0.137*** (-4.29)

1996

0.287*** (3.88)

0.442*** (5.79)

-0.235*** (-7.17)

1997

0.296*** (4.09)

0.367*** (4.37)

-0.436*** (-12.43)

2.647*** (8.46)

2.030*** (12.39)

-0.538** (-2.09)

Observations

198

593

550

No. of Firms

33

73

66

***

***

663.60***

Constant

Wald chi

2

326.59

665.37

Significance levels: *** = 1%; ** = 5%; * = 10%.

We have estimated a Random Effect Poisson model using time dummies for each of the three regions. In all of the regression we find a significant and positive relationship between the number of patents and the natural logarithm of the R&D expenditures. The time dummies are quite stable over time.

106

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Based on the Poisson model the differences in the elasticities are considerable. The elasticity of patents with respect to the natural logarithm of the R&D expenditures is highest for the US firms with 0.56. For the European firms it is 0.16 and for the Japanese 0.08. Hausman, Hall, and Griliches (1984) pointed out that the Poisson model is restrictive, since it imposes a distribution on data whose mean is equal to its variance. This property arises from the assumed independence of the “arrival” of the patents granted. However, the Poisson model has shown its merits for the analysis of patents in science-based industries (see e.g. Griliches 1990). 5.4.4 Excursus: Polymer Patents The Analysis of the polymer patents is best illustrated with table 5.11. It shows that the US firms have a more than proportionate share of all polymer patents. The proportion of the polymer patent of all 139,590 patents is 7.1% and the proportion of the polymer patents held by US firms is 7.9%. To transform this proportion into the revealed patent advantage we get a RPA of 11.1. We think it is conceivable that the favourable US polymer regulation might work as an innovation incentive. This incentive leads to more research on polymers and to more patents on polymer inventions, because it pays-off in the market (as compared to the EU and Japanese polymer regulation). However, the patenting advantage is not particularly high when compared with other patent classes, as it emerges from figure 5.6. Table 5.11:

Polymer Patent Cross Tabulation by Region Polymer Patent Other Polymer

Region

Total

EU

Count Expected Count % within Region

43974 43650 93.6

2996 3320 6.4

46970 46970 100.0

Japan


27149 26944 93.6

1844 2049 6.4

28993 28993 100.0

USA


58600 59129 92.1

5027 4498 7.9

63627 63627 100.0

Total


129723 129723 92.9

9867 9867 7.1

139590 139590 100.0

Note:

The Chi-Square Tests is significant at the 1% level.

107

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.4.5 Conclusion There are two results found in this chapter which may be considered a bit puzzling. The first is the high US patent productivity with respect to R&D. The second is the higher average number of patents for the Japanese firms. Based on the Poisson model the differences in the elasticities are considerable. The elasticity of patents with respect to the natural logarithm of the R&D expenditures is highest for the US firms with 0.56. For the European firms it is 0.16 and for the Japanese 0.08. This model leads to a sample selection bias because not all firms report R&D expenditures. Since we had access to the number of patents granted by the US PTO for all firms which patented, we used a negative binomial regression model to test for the difference in the number of patents, controlling for firm-size and sub-sector. The result was highly significant with Japan having the highest average number of US patents followed by the US and EU firms (see table 5.12). Thus, we conclude, that the US firms exhibit the highest patent productivity despite the Japanese firms’ lead in the number of patents obtained. Table 5.12:

Test of Regional Differences in US Patents Using a Negative Binomial Regression Model Controlling for Size and Sub-Sector of the Chemical Industry, 1993-1997

Variable

Size Dummy if region=Japan Dummy if region=USA Dummy if SIC=281 Dummy if SIC=282 Dummy if SIC=284 Dummy if SIC=285 Dummy if SIC=286 Dummy if SIC=287 Dummy if SIC=289 Constant Number of obs LR chi2(10) Prob > chi-squared Pseudo R-squared

Coefficient

z-value

Significance P>z

0.8266 0.6971 0.4412 0.0115 0.7676 -0.1349 0.0070 -0.2160 -1.3809 0.2210 -3.5885

13.014 2.754 1.820 0.038 2.993 -0.475 0.016 -0.666 -2.734 0.732 -6.037

0.000 0.006 0.069 0.969 0.003 0.635 0.987 0.506 0.006 0.464 0.000

188 175.6 0.0000 0.1127

Note: The base line category for region is Europe and for SIC, if SIC=280. That is, the intercept term for Japanese firms is significantly higher (+0.70) than for the EU. The intercept term for the US firms is also significantly higher (+0.44) than the EU firms. The sub-sectors compared with "Chemical Industry, general".

108


Innovation Counts 5.5.1 Introduction

Perhaps the greatest obstacle to understanding the role of innovation in economic processes is still the lack of meaningful measures of innovative inputs and outputs36. There exists no measure of innovation that permits readily interpretable cross-industry comparisons. And, the value of an innovation is difficult to assess. Measurements of innovation have typically involved one of two aspects of the innovation process: (1) a direct measure of innovative output; or (2) an intermediate output, such as the number of inventions which have been patented. To our knowledge there are only a very few surveys covering major innovations in the chemical industry. An overview of the recent studies is given in Freeman and Soete (1997). Mensch (1979), while developing his seminal approach towards a theory of innovation, undertook a comprehensive analysis of the chemical inventions and innovations that occurred in the 19th century. An interesting overview is given by Landau (1990 and 1998). We will use Landau’s (1990) list of major postwar commercial chemical developments to illustrate the relationship between the very few breakthrough innovations and the numerous incremental innovations of the European, Japanese, and US chemical industries we report later. Table 5.13 presents a listing of the important chemical innovations of the postwar period. The major innovations up to the mid-1960s are in plastics (polyurethane, high-density polyethylene, polypropylene) and in fibers (polyester, nylons, acrylics). These product innovations are closely tied to process innovations, that is, they required the building of large new olefin and aromatic plants. Significant process improvements for precursors of plastics were made (maleic anhydride, terephthalic acid, cyclohexanol-cyclohexanone mixtures for nylon, vinyl cloride, acrylonitrate and hexamethylene diamine for nylon). After 1966, fibers and plastics became more and more differentiated such as Kevlar. Further process developments for precursors of polymers were introduced (ethylene oxide, glycol, and p-xylene). In the 1970s the innovations led to further product differentiation and the introduction of lower cost processes. Landau (1990) notes that the last plastic to be introduced (polypropylene) is now (in 2000) 40 years old. What the following analysis of the innovation counts will show is that there are enough basic polymers available and that companies are developing an infinite variety of incremental product innovations to meet market demands.

36 An overview on problems and approaches regarding the measurement of innovation is available in

Kleinknecht and Bain (1993).

109


Major Postwar Commercial Chemical Developments

Approximate Date

Product

Development

Company

Postwar

Low-Pressure Polyethylene

Ziegler Chemistry

Karl Ziegler

Postwar

Phenol Acetone, Cumene

Air Oxidation

Distellers Co., British Petroleum UK, Hercules

1953

Dimethyl terephthalate

Four-Step Air Oxidation

Imhausen, Hercules

1953+

Ammonia

High-Pressure Synthesis Gas Pullman/Kellogg (large single train)

1955

Maleic Anhydride

High-Yield Benzene Oxidation

Halcon

1957

Irradiated Polyethylene

Memory Plastics

Raychem

Through 1957 Isocyanates-Urethanes

Urethanes and Foams Bayer, Houdry, Wyandotte (Polyether Polyols, One-Shot Foam, etc.)

1958

High-Density Polyethylene; Polypropylene

New Catalysts

Montecatini-Natta, Phillips, Avisun, Amoco

1958

α-Olefins and Linear Alcohols

New Catalysts

Gulf, Ethyl, Conoco

1958+

Terephthalic Acid

Air Oxidation of ρ-Xylene Pure Product

Halcon, Amoco

1959

Acetaldehyde

Vapor-Phase Ethylene Oxidation

Hoechst/Wacker

1960-70

Oxo Alcohols

Improved Catalysts

Exxon, ICI, Shell, Union Carbide

1960-70

Acetic Acid, etc.

Oxidation of Paraffins

Celanese

1960-70

Polycarbonates

Engineered Plastics

GE, Bayer

1964

KA (Cyclohexanol-cyclohexanone) Cyclohexane Oxidation, Oil (for Nylon) Boric System

Halcon

1965

Acrylonitrile

Sohio

1965

Hexamethylene Diamine (HMDA) Acrylonitrile (for Nylon) Electrohydrodimerization

1965+

Vinyl Chloride

Oxychlorination of Ethylene Goodrich, Monsanto, PPG, Stauffer

1967+

Vinyl Acetate

Ethylene + acetic + 02, Vapor Bayer, Celanese, Hoechst, Phase USI

1968

Acetic Acid

High-Pressure Methanol + CO

BASF, Du Pont

1969

Phthalic Anhydride

High-Yield ο-Xylene Oxidation

BASF

1969

Acrylates

Propylene Oxidation

BP, Celanese, Rohm & Haas, Sohio, Union Carbide

1969

Polyethylene Terephthalate

Plastic Bottles

Du Pont

1969

Qiana (Now Abandoned Fiber)

From Cyclododecane KA Oil

Du Pont, Halcon

1969+

Propylene Oxide, Glycol, TBA

Epoxidation with Hydroperoxide

Arco/Halcon

Propylene Ammoxidation

110

Monsanto

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Table 5.13 continued: Major Postwar Commercial Chemical Developments Approximate Date

Product

Development

Company

1970

ρ-Xylene

Recovery by Adsorption

UOP

1970

Methanol

Low-Pressure CO + H2

ICI

1970

Aniline

Phenol + NH3

Halcon, Mitsui

~ 1970

Ethylene Oxide

Catalyst Improvements

Halcon, Shell, Union Carbide

~ 1970

Polyphenylene Oxide and Noryl Polymers

Engineered Plastics

GE

1972

Hexamethylene diamine (HMDA) (for Nylon)

Butadiene + HCN

Du Pont

1972

Styrene and Propylene Oxide

Epoxidation with Hydroperoxide

Arco/Halcon

1973

Acetic Acid

Low-Pressure Methanol + CO

Monsanto

1974

Kevlar

High-Tensile Fiber

Du Pont, Akzo

1974

Polypropylene

Vapor Phase

BASF

1974+

Maleic Anhydride

From Butane

Amoco, Halcon, Monsanto, Denka

1977

Linear Low-Density Polyethylene

Lower Pressure

Union Carbide, Others Later

1978

Ethylene Glycol (and Vinyl Acetate) Via Acetoxylation (Now Abandoned)

1980

Acetic Anhydride

Coal-based CO + Methanol Halcon, Tennessee Eastman

1981+

Methacrylates

Isobutane or Isobutylene Based

Mitsubishi, Other Japanese Companies, Halcon/Arco (Development)

1985

Polypropylene

Improved Catalysts and Processing Techniques (e.g. Catalloy)

Montedison/Himont, Shell, Others

Halcon/Arco

Source: Landau (1990, pp. 26-27).

If we take a look at the most innovative companies we can observe that they include oil and process engineering firms. In fact, these firms were involved in major innovations. These include numerous US companies, several firms from Europe, but also companies from Japan. Landau (1990) observes that the international technological competition among chemical and oil companies is vigorous. Virtually all of the major innovations are products with a very large tonnage. As we have shown in section 5.3 on basic research, there were also many new chemicals included. We discuss the approach we have applied to measure the numerous incremental innovations that took place in the years 1996 and 1997 in our next section. We followed a suggestion made during the IPTS project meeting at MERIT in Maastricht on January 29/30, 1999, by Keith Smith. He suggested counting the recent innovations made in

111

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ the chemical industry. Smith, together with René Kemp,37 has stressed the importance of looking at the entire chain of recent innovations in order to capture the overall effect of regulation on innovation. Although the point is well taken, it is nevertheless very important to measure the innovative performance of the chemical industry in terms of the innovative output. The way this can be done is by collecting information about the new products introduced in the market. This information can be gathered from experts or from written sources. Due to the difficulties in setting up a panel of experts for the collection and evaluation of new chemical products we decided to use annual reports of the companies of the chemical industry. Annual reports are useful because they are required by law to represent the true economic situation of their companies. This also applies to expected corporate developments. Since the prospective developments of research-intensive companies, such as chemical companies, depend on R&D, German law also requires these firms to issue periodic R&D reports. For example, the German Chemical Manufacturers Association (VCI) therefore recommends the declaration of data concerning each of the following: (1) R&D areas and R&D facilities, (2) R&D personnel and R&D expenditures, (3) the relevant results of R&D activities, and (4) the main R&D objectives. Germany's major chemical companies comply with these recommendations. Usually, the amount of money expended on R&D can be derived from the annual reports, along with data concerning gross sales, balance-sheet totals, annual net earnings, and the respective operating results. The most important source of information for this study, however, is the status report – which is the main supplier of qualitative data concerning corporate and innovative strategies, including data on the major results and goals of R&D activities. This makes the status report the primary source of information for our method of innovation counting. We have developed a database for counting the innovations. We divided this database into two parts:

37 “Innovation counts are not a good way of capturing innovation effects of regulation. One should

look at the characteristics of innovation output and the determinants of innovation, how these are affected in different ways by regulation. Regulation may have ‘ripple’ effects across an entire chain; important effects may be occuring at places outside the subject sector.” (Kemp et. al, May 1999, pp. 5-6).

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ The chart with the company's data includes the following data: name of the company Global Vantage Key of the company country of origin currency used in the business reports staff size sales of the company export share of sales expenses for R&D ratio of R&D to sales ratio of R&D to sales for all divisions of the company

The chart for counting the innovations includes the following data: name of the company Global Vantage Key of the company division, in which the innovation was made name of the innovative product description of the product category number of the product type of innovation (product or process innovation) source of this information in the evaluated business report (page and year of the annual report) remarks, concerning the innovation incentive for the innovation (motivated by environment, legislation or customers) type of co-operation (license, co-operation or joint venture) partner of co-operation country of origin of co-operation partner

These two charts were filled with data from 1997 and 1996 for those companies, whose business reports had arrived. 5.5.2 The Classification of Innovations The classification of individual innovations is done according to the product groups most commonly used in the chemical industry. However, a categorization as per Standard International Trade Classification (SITC, 3rd revision) or NACE system was not possible. The information concerning process and product innovations in the annual reports was simply not detailed enough. The classification system was developed in connection with a pilot study (Albach 1996). Our new classification system follows the 1996 system with a few minor revisions (in italics). It contains ten key groups, some of which are divided into sub-groups.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ The Classification System (additions in italics): 0

Environmental Technologies: This category primarily includes recycling technologies and wastewater treatment. These constitute a relatively new sphere of operation within the chemical industry, where repeated innovations are recorded, but do not fit into the traditional classification for chemical processes and products. This group also includes recycling technologies that are used for the recovery of precious raw materials (such as platinum from catalyzers).

10

Basic Organic Materials: Category No. 1 contains chemical elements and intermediate products which are produced in large quantities and/or manufactured from crude oil, natural gas or coal. They include methanol, ethane, benzole, butadiene, chloroethylene, unvulcanized rubber and high-value organic materials.

21

Basic Inorganic Materials: Category No. 2 includes inorganic elements manufactured in large quantities and needed as source materials for various syntheses, such as ammonia, soda and sulfuric acid.

22

Industrial Gases

3

Plastics: Because of the complexity and heterogeneity of this subject, a further subdivision was attempted. However, the partiality and insufficiency of detailed information in the annual reports was a problem. Finally, we chose to create the following subgroups: 30

Plastics: Plastics that do not fit into either 31 or 32.

31

Traditional Mass-produced Plastics: Such as polyvinyl chloride, polyethylene, polystyrene, polypropylene, including any new developments related to massproduced plastics.

32

Special Plastics: Plastics that are not based on traditional synthetic substances, such as polyetherketones, polyester resins, polysulfones, polyurethane, polyacetals, polycarbonates, and copolymers.

40

Synthetic Fibers: This category contains all synthetic fibers including fibers based on natural substances, such as cellulose (viscose, acetates, etc.). Its major component, however, consists of polyamide and polyester fibers.

50

Paints and Varnishes: Category No. 5 consists of both organic and inorganic colorants. Besides paints and varnishes, various coatings which are used as architectural coatings, electrical insulation, or by the automobile industry were also assigned to this group.

60

Agrochemicals: Category No. 6 includes fertilizers, plant protectives and veterinary preparations. Plant protectives include insecticides, herbicides, fungicides, pesticides, and plant growth regulators.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 71

Detergents, Cleaning Materials and Preservatives: This category includes detergents, cleaning materials, preservatives, disinfectants and anti-corrosives for domestic and industrial use.

72

Hygiene and Cosmetics

73

Food

8

Specialty Chemicals: As a result of its heterogeneity and its importance concerning current innovative trends this category was split into the following sub-groups:

90

81

Glues and Adhesives

82

Petrochemical Additives: Additives for the production of crude oil, fuel additives, lubricants etc.

83

Finishing Agents for Textiles and Leather

84

Paper Chemicals, Specialties for the Printing Industry (incl. Inks)

85

Specialties for Photographic Purposes

86

Specialties for Information and Entertainment Technology

87

Products for the Construction Industry

88

Plastic Additives: Softening agents, antioxidant agents, etc.

89

Miscellaneous: Examples are: explosive substances.

New Materials: The definition of this category is particularly problematic, since numerous special plastics would have to be included. In order not to confuse the different product groups, we include here only those products that do not fit into any of the categories already described above. Accordingly, this category contains high-tech ceramics and special purpose glasses, but no modern polymers. 5.5.3 The Innovation Measurement Bias

There is still a considerable bias in measuring the innovative output by using annual reports. This has to do with differences in the companies propensity to report their innovative output in their annual reports. The three main factors which influence the propensity to report innovations are the complexity of internally evaluating the innovative output, the strategy of secrecy, and the effect of the innovation reporting on the market value of the company. The task of measuring the innovative output in a given period is particularly difficult for large companies. The measurement requires evaluation within a special R&D controlling system. In large companies the R&D controlling information is an input to the regular R&D planning process. In large divisionalized companies a similar structure of R&D planning and coordination is observed. Top-management only decides the size of the budget and on particular strategies like entering or exiting a market, etc. The top-management decisions are

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ usually made within committees (e.g. Research-Management-Board, Novartis AG) or headquarter units (Corporate R&D Planning, BASF AG). To illustrate the structure of the innovative task and how the R&D committees interact reference is made to the R&D planning groups at Schering AG, a German pharmaceutical company with strong international activities. Schering operates with four main committees. The Portfolio Board is responsible for the development of a pharma strategy. The International Development Team coordinates the international R&D activities at the operative level and prepares decision making of the Portfolio Board. The International Project Management group focuses on synergies among the divisions and the Project Teams concentrate on the implementation of R&D decisions within the frame of the R&D budgets (Brockhoff 1998; see also Albach 1994). The case of the pharmaceutical industry is used because it illustrates how a R&D intense and innovative industry copes with the problem of evaluating innovative output. Differences to the chemicals business are obvious and due to two factors, the regulation of pharmaceutical products and the role of patents for development of new pharmaceutical products. Because of the risk in using and handling pharmaceutical and chemical products governmental regulation is in both cases concerned with the safety of products. The difference is grounded in the effectiveness of patent protection versus secrecy in these industries. In the pharmaceutical industry new pharmaceuticals are based on new chemical entities (NCE) which are patented. In the chemical industry the situation is different. New chemical products are generally formulations, blends, and mixtures, based on new chemical substances that may be patented, however, the possibilities of others to imitate one’s are considerable and thus secrecy plays a crucial role. The result is that we observe nearly complete transparency of corporate R&D in the pharmaceutical industry whereas the reporting on new products is less transparent in the chemical industry. The lack of transparency in the case of chemicals generates the measurement bias. In the pharmaceutical industry annual reports, web-sites, R&D brochures, and information service companies provide a wealth of information on corporate R&D. The new products are generally listed in annual reports, they are specified, including the information on the phase of the clinical trial process (phase I to III).38 Complete lists with ongoing R&D projects are provided by specialized information service companies. Since secrecy plays an important role in the competition for new chemicals, transparency increases only slowly. The reason for the increase in transparency is due to the fact that reputation of being an innovator may increase the market value of a company. The sources of that reputation are based on investment in intangible capital, and this is particularly created by 38 Phase I: Clinical trials with healthy volunteers. Phase II: Clinical trials in patients with the disease.

Phase III: Large scale clinical trials to determine definitive safety and efficacy in patients.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ R&D and marketing investment, but also by the effectiveness of corporate communication. However, the innovative performance must be transformed into economic performance, that is, innovation must lead to profits. And, that is the reason why the balance between transparency and secrecy is still very difficult for chemical companies to manage, and why the firms are somewhat reluctant to report more precisely on their innovative output.39 To illustrate how this affects our measurement bias we will use examples from Ciba Specialty Chemicals and Cytec. Both companies are positioned in the main area of our study. Ciba Specialty Chemicals ranked number1 on our “Innovation Ranking 1996/97” whereas Cytec ranked 50th. In its 1996 annual report Cytec reported on their innovative output in the following way: “Water Treating Chemicals […] Our superior liquid-soils separation chemistry improves treatment productivity, reduces sludge volume, and produces cost savings in both treatment and disposal” (p. 16). “Paper Chemicals […] Our alkaline and surface sizing agents produce papers with advanced performance qualities, such as […]” (p. 16). “Mining Chemicals Cytec is the technology leader in mineral processing reagents that improve the […] We are also a leader in making chemicals for oil drilling and enhanced oil recovery” (p. 16). “Coating and Resin Products […] In addressing more stringent regulations around the world, we have formulated more environmentally friendly products that also meet customer needs for greater durability, strength, and other performance qualities. We are also the leader in producing adhesion promoters used in the manufacture of steel-belted radial tires” (p. 17). “Polymer Additives […] We produce formulations to meet the specific needs of our customers and provide technical support to ensure our customers achieve performance advantages with the products they make using our polymer additives. Typical end-use applications for Cytec’s polymer additives include toys, lawn furniture, carpet fibers, spandex apparel, automotive components and coatings, and engineered plastics” (p. 17). Obviously it is impossible to use this type of information for a quantification of the innovative output. Information as “our superior […]”, “[…] with advanced performance qualities”, “[…] is the technology leader”, “[…] more environmentally friendly products that also meet customer needs”, and “[…] formulations to meet the specific needs of our customers” could not be used for the purpose of classifying and counting new chemical products. Due to the lack of quantitative information on innovations we could not count the underlying 39 The importance of confidentiality can also be seen in the discussion of confidential business

information in the frame of the notification of new chemicals.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ unobservable innovations which are obviously there. But for the purpose of the innovation ranking we could use only quantitative information. Now, the reporting in Cytec’s 1997 annual report has changed such that we can use the information to count and classify their innovations. For 1997 we counted seven innovations of the following type: “We have launched a new line of light stabilizers used in plastics and coating applications” (p. 18). “In 1997, we introduced the first-ever surfactant that is low foaming and low in volatile organic compounds” (p. 19). In the case of Ciba Specialty Chemicals the reporting was similar but also different in that we counted a total of 80 innovations from their Business Review 1998. As can be seen from the following quotations we had to count single innovations but also “aggregated” numbers of innovations. The reporting of aggregated innovations was unusual, and it was observed only in the case of Ciba Specialty Chemicals. To be consistent, however, we had to use the aggregate numbers. This has created obviously a positive innovation bias in favor of Ciba Specialty Chemicals. For Ciba, we counted an annual average of 114 innovations followed by Henkel with 31.5 innovations. The following examples are from the Ciba Specialty Chemicals Business Review 1998: “A multifunctional additive with friction modifying and antioxidant properties was successfully launched for engine oil applications. This new additive […] offers environmental benefits that include improved fuel economy” (p. 10; counted as one innovation). The Colors Division “[…] introduced 60 new dyes in 1998, including three new ranges: metal-free […] reactives dyes for wool, […] bright disperse dyes for printing on high quality polyester, and […] dyes for polyester dyeing.” (p. 11; counted as 60 innovations). Based on this information we could make no adjustment regarding the total number of innovations. We counted 80 innovations for 1998 including the above 60. A possible adjustment would be to count the 20 “non aggregated” innovations plus taking the 60 dye innovations, as three innovations, which would add-up to 23 innovations altogether. For 1997, the situation was similar, that is, an adjusted number of innovation counts would place Ciba Specialty Chemicals still among the top 5 innovating firms in our sample. Obviously, Ciba Specialty Chemicals would keep its position as the company leading the field in product innovations in specialty chemicals even with an adjusted innovation output measure. That is important because new dyes play a major role for the notification of new chemical substances and Ciba Specialty Chemicals would then be the company most significantly affected by the regulation of new chemicals.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Two final examples should be used to illustrate the measurement of innovation output. First, the Crompton & Knowles Corporation, which has reported an average of 29.5 innovations. This is the 3rd rank on our listing. Second, we take a look at rank number 6, which is Dainippon Ink and Chemicals Inc. The Crompton & Knowles colors division reports for 1997: “[…] the Colors business expanded its market presence for many of its product lines and continued to introduce technological innovations […] these include […] trichromy – a trio of the primary colors yellow, red and blue fiber reactive dyes which are especially wellsuited for dyeing difficult shades on cotton and viscose fibers […]” (p. 10; counted as one innovation). “Another new reactive dye line […] was introduced to meet increased requirements for higher levels of wetfastness and bleedfastness on wool” (p. 10; counted as one innovation). “As part of its strategy, the business has continued its plan to expand in more specialty type businesses with above average growth and profitability. C&K Colors participated in a joint development project with Technicolor, a leading film manufacturer, for the purpose of producing highly specialized, and high-purity dyes for use in new film print technology. Moreover, with its expertise in technical innovation for the printing industry, the business has developed […], a dye for printing inks” (pp. 10-11, counted as one innovation). Again, we observe the same situation that the dyes manufacturing companies are introducing families of new dyes, which are treated in general (except for parts of the innovation reported by Ciba Specialty Chemicals) as one family of dyes and thus we count one family as one dye innovation. For offset printing inks we use two examples from the 1997 annual report of Dainippon Ink Chemicals, which show that the new inks are obviously single innovations. “Sheet-fed offset inks recorded favourable sales owing largely to the introduction of […], a high-quality, environmentally friendly ink” (p. 12). “We also introduced […], a toluene-free ink for reverse printing that offers excellent printability and good lamination strength, and which contributed significantly to sales in fiscal 1997” (p. 12). In summarizing our considerations on the innovation measurement bias a final point should be mentioned. We are concerned with the nearly impossible task of measuring both, the quantity and quality of chemical innovations. For measuring the quality of innovations we asked specific questions during the interviews undertaken. Since the interviews were directed towards the experience of notification of new chemical substances and the interaction with the notification agencies, the main interview person was one in charge of Product Safety, Product Stewardship, Environmental Affairs, or (International) Regulatory Affairs. We also often had

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ gotten the opportunity, to talk to people from the R&D function, however, that was not possible in every case. 5.5.4 Evidence Based on Interviews We did the interviews regarding the measurement of the quality of innovation in the following way. We prepared two lists for each interview. The first list contained the innovations of the company we had counted, including the description of the innovation and our classification. The second list included patents granted by the US PTO to the company. The question regarding the list of innovations was whether it would be possible to separate a group of important innovations (e.g. measured by the sales volume or markets share) and to find out whether the innovations were based on newly notified chemicals. Generally the people did not know the whole range of innovations made by the company.40 In larger companies that was obviously due to the broad range of the product innovations. To rank the innovations counted by the importance of the innovation was nearly impossible because it requires a breakdown of sales by product. This was nearly impossible because the data was not available and would require considerable resources to be collected. The companies rejected doing this for our project. A number of companies do however keep a record of their major innovation. These are the really important innovations. Both big companies and smaller ones they usually do list not more than one or two key innovations per year. Another interesting source for the evaluation of innovation is innovation prizes for company inventors. Such a system was reported during an interview with Henkel KGaA. They organize an annual innovation competition in which they evaluate the proposals according to the degree of novelty, the impact on Henkel’s profitability, and societal demands. Again, that list with the previous prize winners could be taken as a source for looking at major innovations. One important issue during the interviews was the question to which extent the innovations are affected by the new chemicals regulation. We therefore asked the company representatives whether they could identify the innovations for which a notification of new chemicals was necessary. Again it was impossible to get an answer that would have allowed us to estimate that proportion of counted innovations which were affected by the new chemicals regulation. In other words, it was not possible to tell us which innovations required no, one, or more notifications.

40 We have to mention one exception. It was an interview with a medium-sized Japanese company.

There we had the opportunity to talk to a managing director for R&D and board member. He was able to explain and evaluate roughly the dozen innovations the company has mentioned in its annual report.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ This disappointing result for our study has mainly one reason, the strategy of secrecy pursued by the companies. Formulations are really the core of their business and as such have to be well protected. The strategy of secrecy is the reason why we got no answer to our main question. The companies obviously do not want to make public which new chemicals they have notified, and thus do not want to tell us which innovations have a “notification impact”. There is certainly the possibility of speculating on these issues. If a company is making new dyes and complies with the law then it is obvious that these dye innovations are affected by the new chemicals regulation. They are affected because the regulation leads to an increase of innovation cost and of the time-to-market. Since health, safety and environmental considerations aim at safer and less harmful dyes it may also lead to safer and less harmful chemicals. In the case of the polymer-based product innovations counted the situation is more complicated because a new polymer must not be a new one according to the regulation. E.g. in the EU the regulation says that if a new polymer contains a new monomer with less than 2% of the molecular weight no notification is required. That is why we cannot draw direct conclusions from our innovation counting. However, we know from the interviews in general, that in the EU the companies pursue a strategy of avoiding the notification of new polymers. We will discuss this issue further when analyzing the counts of polymer innovations. Patenting was the third area we focused on in our interviews. This was because the company experts would know best how to read patent statistics since we use patent information to measure the innovative performance of the companies. Again we found only a very loose relationship in our interviews between patenting, innovation, and the notification of new chemicals, that is, patent statistics are a source for a measurement bias regarding the innovative performance of companies. We got the impression that patenting depends very much on the patent policy regarding certain areas of R&D. It seems that the companies have a great deal of flexibility on what to patent how and where. A crucial and interrelated question is how many patents to apply for and in which countries to apply. Companies have flexibility in applying for a number of narrow patents instead of one broader patent. That depends on the extent they want to push a certain field of research by patenting. But they may reach this goal also by publishing since in the USA publishing is also used to determine whether something is already invented (e.g. published) unless the patent application is really to protect the first invention (the so-called novelty requirement of the patent application). If something new is already published then the publication is regarded as the fist invention and a second inventor cannot patent it. However, the strategy may not work elsewhere and publication strategy is only a way in the US, where nobody else can patent the invention, but the invention can be used everywhere. Which in fact would lead to a higher propensity to patent. Further measurement biases are company incentive systems to increase patenting. Companies may set-up incentive systems to increase patenting. Such incentives may lead to an increase of patenting activity and tell us little about the innovativeness of a company.

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.5.5 The Innovation Ranking 1996/97 The top 50 contains companies with the highest number of innovations, according to the evaluation of the innovation counts. These are as followed: Table 5.14:

The Top 50 Companies of the Innovation Ranking 1996/97 Average Annual Number of Innovations in 1996/97

Rank 1. 2. 3. 4. 5. 6. 7. 8. 9(a). 9(b). 10. 11(a). 11(b). 11(c). 12. 13(a). 13(b). 14. 15(a). 15(b). 16(a). 16(b). 17(a). 17(b). 17(c). 17(d). 17(e). 17(f). 18(a). 18(b). 18(c). 18(d). 19(a). 19(b). 20(a). 20(b). 20(c). 20(d).

Ciba Specialty Chemicals Henkel KgaA Crompton & Knowles Corp Colgate-Palmolive Co Goldschmidt (Th) AG Dainippon Ink and Chemicals Inc Bayer AG Clariant International AG Akzo Nobel NV BASF AG Teijin Ltd Du Pont de Nemours Ecolab Inc ICI Imperial Chemical Indus plc Borealis A/S Great Lakes Chemical Corp Sybron Chemicals Inc Kansai Paint Co Ltd. Beiersdorf AG PPG Industries Inc Avon Products Kao Corp AGA AB Caffaro SpA Clorox Co FMC Corp Morton International Inc Sued-Chemie AG Carter-Wallace Inc Reckitt & Colman plc Sherwin Williams Co Solvay Group Gibbon Group plc Sumitomo Chemical Co Ltd Elf Atochem Lubrizol Corp Rohm & Haas Co RPM Inc Ohio

114.0 31.5 29.5 26.5 26.0 25.5 21.0 20.5 18.5 18.5 16.0 15.5 15.5 15.5 15.0 13.0 13.0 12.0 11.5 11.5 11.0 11.0 10.5 10.5 10.5 10.5 10.5 10.5 10.0 10.0 10.0 10.0 9.5 9.5 9.0 9.0 9.0 9.0

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Average Annual Number of Innovations in 1996/97

Rank 21(a). 21(b). 22(a). 22(b). 22(c). 23(a). 23(b). 23(c). 23(d). 23(e). 23(f). 24.

Grupo Uralita SA Novartis Alberto-Culver Co Intern. Specialty Products Inc Showa Denko K K BOC Group plc DSM NV Intern. Flavors & Fragrances Lauder Estee Cosmetics Inc Perstorp AB Sika Finanz AG Cytec Industries Inc

8.5 8.5 8.0 8.0 8.0 7.5 7.5 7.5 7.5 7.5 7.5 7.0

Out of these 50 companies 23 are from Europe (46%), 21 from the USA (42%), and 6 from Japan (12%). Europe and USA are in absolute terms approximately on the same level, showing too in the number of reported innovations by the top 50 in these regions itself, which are 555 in Europe (44.1%) and 527 in the USA (41.8%). Japan is in absolute terms at the bottom, both in innovative companies and in numbers of innovations, which amount to 178 (14.1%). However, the 14.1% of innovations introduced by Japanese firms are produced by only 12% of all firms. Europe is very diversified, there is no real main focus, i.e. there is no area where the chemical industry is not represented, but there are no accumulations either. Whereas the USA has no top company in basic chemicals or polymers, but are well represented in all other categories. Japan has only six companies within the top 50, and it is just represented in three chemical categories: Paints, Hygiene and Cosmetics and Paper Chemicals. This distribution pattern under the top 50 is found as well in the pattern of the regions themselves, which is quite naturally. Because the top 50 forms the biggest part of the innovations in general, they give as well a hint as to where the main focus of the research in the different regions lays. The following two tables are showing the distribution of all 2,230 for the entire sample of 147 firms. The first shows the areas of concentration in innovation categories and the second illustrates the relationship between innovation categories and the categories of the Standard Industrial Classification.

123


Innovations by Region of the Innovating Firm, 1996/97 (in %) (59 European, 27 Japanese, and 61 US Firms)

Innovation Category

EU

Japan

USA

Total

Total

(percent)

(absolute)

Environmental Technologies [0] Basic Organic Materials [10] Basic Inorganic Materials [20] Industrial Gases [21] Plastics (excluding 31,32) [30] Trad. Mass-plastics [31] Special Plastics [32] Synthetic Fibers [40] Paints and Varnishes [50] Agrochemicals [60] Detergents etc. [71] Hygiene and Cosmetics [72] Food Additives etc. [73] Glues and Adhesives [81] Petrochemical Additives [82] Finishing Agents for Textile/Leather [83] Chemicals for Paper/Printing [84] Chemicals for Photographics [85] Chemicals for Information Technology [86] Chemicals for Construction [87] Plastic Additives [88] Miscellaneous Chemicals [89] New Materials [90]

59.0 59.1 56.8 47.6 41.4 68.5 35.7 38.2 61.2 61.2 61.2 28.4 29.4 64.1 30.2 88.9 57.1 50.0 14.1 64.3 64.3 64.3 36.8

7.7 18.2 8.1 33.3 27.9 20.5 25.7 25.0 13.2 10.0 5.5 6.7 2.4 17.9 1.9 2.2 19.8 50.0 54.7 28.6 4.0 11.3 10.5

33.3 22.7 35.1 19.0 30.7 11.0 38.6 36.8 25.6 35.0 45.3 64.9 68.2 17.9 67.9 8.9 23.1 31.3 7.1 44.0 40.5 52.6

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total Number of Innovations (percent)

48.9

14.0

37.1

100.0

Total Number of Innovations (absolute)

1091

312

827

124

78 44 37 42 140 73 70 76 356 120 181 285 85 39 53 90 91 2 64 42 75 168 19

2230


3 2 2 8

10 11 4 1 12

19 5 11 21 3 291

Total Number of Innovations

554

162

Total Number of Innovations (percent)

24.8

7.3 13.0

Note:

Industrial Organics [286]

Agrochemicals [287]

Misc. Chemicals [289]

2 2 11 1 9 4 9 1 1

Paints and Varnishes [285]

4 11 4 1 53 40 22 43 16 22 5 3

31 4 11 36 2

Soap and Detergents [284]

25 25 18 5 51 26 37 18 71 42 21 8 9 12 8 4 31 2 29 23 16 64 9

Pharmaceuticals [283]

Environmental Technologies [0] Basic Organic Materials [10] Basic Inorganic Materials [20] Industrial Gases [21] Plastics (excluding 31,32) [30] Trad. Mass-plastics [31] Special Plastics [32] Synthetic Fibers [40] Paints and Varnishes [50] Agrochemicals [60] Detergents etc. [71] Hygiene and Cosmetics [72] Food Additives etc. [73] Glues and Adhesives [81] Petrochemical Additives [82] Finishing Agents for Textile/Leather [83] Chemicals for Paper/Printing [84] Chemicals for Photographics [85] Chemicals for Information Technology [86] Chemicals for Construction [87] Plastic Additives [88] Miscellaneous Chemicals [89] New Materials [90]

Plastics [282]

Innovation Category

Industrial Inorganics [281]

Innovations by Standard Industrial Classification of the Innovating Firm for 1996/97 (59 European, 27 Japanese, and 61 US Firms)

Chemicals General [280]

Table 5.16:

2

6

1

5 3 1 20 3 3 2 19 20 6 13 42

2

5 1 1 5 1 1 8 3

1 2 2 1 210

133 249 5 13 15 2 8

4 3 1 1 2 63 2

12

25 13 10 2

1

22 16 1

78 44 37 42 140 73 70 76 356 120 181 285 85 39 53 90 91 2 64 42 75 168 19

3.5 2.0 1.7 1.9 6.3 3.3 3.1 3.4 16.0 5.4 8.1 12.8 3.8 1.7 2.4 4.0 4.1 0.1 2.9 1.9 3.4 7.5 0.9

2230

100.0

1

11 1 5 1 4

6 1 3 2 26 12 2 5 3 13 30

2 8 2 4

1

1 18 11 3

5 8 3

326

203

42 150

0.8 21.4 14.6

9.1

1.9

32

17 478

Total Percent

6.7 100.0

The Chi-Square Test is significant at the 0.1% level. The pharmaceutical companies are not included in the innovation counts.

The US-companies in general seem to stick with goods for the consumption markets, not basic chemicals or industrial goods. A possible reason for this is, that it is much easier to alter consumption goods using new substances, than to develop a new substance for industrial goods or in the basic chemicals area, which is much more expensive and takes normally a longer time too. This phenomenon, if a bit feebler, can be observed in the EU as well. Here too, consumption goods dominate the market, but are more broadly spread. On the Japanese

125

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ market, the main focus lays on consumption goods too, but with different variety of substances. In the area of newly developed materials the Americans are leading. This category contains 19 innovations, which represents 0.9% of total innovations, out of which ten are made by the Americans, seven by the Europeans and two by the Japanese. 5.5.6 Revealed Innovation Advantage 1996/97 Another expression for Revealed Innovation Advantage (RIA) is “Shift-Share-Analysis” which is calculated by following means: RIA = 100 * tanh [ln ( pcs/pcg )] Where pcs is calculated by percentage of innovations of a country in a certain category and pcg is accordingly calculated by the percentage of innovations of a country of all innovations counted. The purpose of this revealed advantage analysis is to show how a region is represented in a certain sector according to all innovations made in this sector and region. Therefore it shows in which categories a region is strong (or weak for this matter). EU: Strong areas (RIA > 50%):

§

Finishing Agents for Textile/Leather

Relatively strong areas (RIA > 25 and < 50%):

§

Environmental Technologies

§

Basic Organic Materials

§

Traditional Mass-produced Plastics

§

Detergents

§

Paints and Varnishes

§

Chemicals for Paper/Printing

§

Chemicals for Construction

Weak areas (RIA < -50%):

§

Chemicals for Information Technology

126

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Japan: Strong areas (RIA > 50%):

§

Industrial Gases

§

Plastics (special and other)

§

Synthetic Fibres

§


§

Photochemicals

§

Chemicals for the Information Technology

§


Relatively strong areas (RIA > 25 and < 50%):

§


§


§

Glues and Adhesives

§

Chemicals for Paper and Printing

Weak areas (RIA < -50%):

§

Detergents etc.

§


§

Food Additives etc.

§

Petrochemical Additives

§


§

Plastic Additives

USA: Strong areas (RIA > 50%): No Relatively strong areas (RIA > 25 and < 50%):

§


§

Food Additives

§

Petrochemical Additives

127

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Weak areas (RIA < -50%):

§


§

Industrial Gases

§


§

Glues and Adhesives

§


§

Chemicals for Paper/Printing

§


Figure 5.7:

Revealed Innovation Advantage of the Chemical Industry, 1996/97 (based on 2,230 innovations from 59 European, 27 Japanese, and 61 US firms) Europe

Japan

USA

Enviro nmental Techno lo gies [0] B asic Organic M aterials [10] B asic Ino rganic M aterials [20] Industrial Gases [21] P lastics (excluding 31 o r 32) [30] Trad. M ass-plastics [31] Special P lastics [32] Synthetic Fibers [40] P aints and Varnishes [50] Agro chemicals [60] Detergents etc. [71] Hygiene and Co smetics [72] Fo o d A dditives etc. [73] Glues and A dhesives [81] P etro chemical A dditives [82] Finishing A gents f. Textile/Leather [82] Chemicals fo r P aper/P rinting [84] Chemicals fo r P ho to graphics [85] Chemicals fo r Info rmatio n Techn. [86] Chemicals fo r Co nstructio n [87] P lastic A dditives [87] M iscellaneo us Chem. [89] New M aterials [90]

-100.0

-80.0

-60.0

-40.0

128

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.5.7 Excursus: Polymer Innovations The problem in registering all polymers of the innovation count database is that it is not always apparent which innovations contain polymers. There are some categories which surely contain polymers, such as plastics and synthetic fibers, but they may also be embodied in the following categories:

§


§

Explosives

§

Glues and Adhesives

§

Food (e.g. packing material)

If one concentrates on the categories of which one can be sure, the following data is apparent: Table 5.17:

Overview of the Polymer Innovation Counts

Category

Europe

Japan

USA

30

Plastics

58

39

43

31

Mass-produced plastics

50

15

8

32

Special plastics

25

18

27

40

Synthetic fibers

29

19

28

162

91

106

14.8%

19.6%

11.5%

Sum Polymers in % of all innovation of the region

Europe leads in regards to the number of innovations, followed by the USA and Japan. If these figures are regarded in relation to the total of counted innovations during the years 1996/97, then the leading region is Japan, ahead of Europe, and last the USA. However, when we take a look at the single innovation categories and compare Europe with the USA then we find that Europe has a much higher number than expected in traditional mass-plastic, a not very innovative field. The opposite is true for special plastics and synthetic fibers. The USA has, in relative terms, a more than proportionate share in the field of innovative polymers, due probably to the US polymer exemption. Despite this more favourable situation in the US, the number of innovations in the US and in the EU for the period considered is roughly the same, 55 and 54 respectively.

129

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ From interviews with the companies we also know, that the EU companies are avoiding the development of new polymers using more than 2% of a new monomer. We know this from interviews with European as well as with US firms. One innovative US firm had problems in introducing a new polymer into the European market because the customers were reluctant to switch to the US product due to the EU regulation. This problem is illustrated in some detail in the BASF case study. A further analysis would have to check whether innovation in Japan in this field is not hampered by a regulation comparable to that of the EU and far more restrictive than that of the USA. The share of Japanese innovative polymers is 25.3%, as expected within this innovation category and far above of the share of Japan in the total number of the innovations considered in this study, which it is 14%. The leading Japanese company in this category is Dainippon Ink and Chemicals Inc. who form nearly 30% of all polymers counted for Japanese companies. This result is consistent with the assumption that a regulation favoring a company's side would automatically lead to a higher degree of innovating activity. The US polymer regulation favors the development of new polymers whereas the EU regulation favors the use of old polymers. Regulation in Japan seem to affect innovation in a different way because the criteria of biodegradation and bioaccumulation and the extraordinary flexibility of low volume and R&D exemptions. The analysis of the polymer patents granted by the US Patent and Trademark Office goes in the same direction. The US firms have a more than proportionate share of the polymer patents. Global competition balances the situation, and the entry barriers caused by the EU regulation have to be overcome by US and other non-EU firms as well as by the EU firms, but the EU firms have adjusted themselves by not investing too much in new polymers. 5.5.8 Conclusion To sum up, the innovation counts based on the companies’ annual reports are a highly biased measure of the innovative output.41 This because of differences in the companies propensity to report their innovative output in their annual reports. The propensity is mainly influenced by the complexity of internally evaluating the innovative output, the strategy of secrecy, and the effect of the innovation reporting on the market value of the company. However, innovation counts based on annual reports remain an important source for the analysis of the innovation behaviour of firms. Thus, we have finally used all our innovation count data in a Poisson regression to statistically test for differences in the innovative performance between 41 An alternative measure would be to use the sales share of the innovative products introduced in the

past three years, as we have done in Albach et al. (1996). However, this indicator of the innovative performance of firms has also shown a considerable measurement bias. Because of the lack of appropriate data we could not apply this indicator in this comparative analysis.

130

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ the European, Japanese, and US firms. For this regression analysis we could use the observations of 134 firms. In the analysis we have controlled for the influence of firm size and the sub-sectors. The results of the regression show no statistically significant difference in the innovative performance between the three regions. Table 5.18:

Testing the Impact of the Different Polymer Regulations Using 359 Innovations from the Innovation Count Region

Innovation Category

EU

Japan

Total USA

Plastics (excluding 31,32) [30] Count Expected Count % within Innovation Cat.

58 63.2 41.40%

39 35.5 27.90%

140 43 140 41.3 30.70% 100.00%

Trad. Mass-plastics [31]

Count Expected Count % within Innovation Cat.

50 32.9 68.50%

15 18.5 20.50%

73 8 73 21.6 11.00% 100.00%

Special Plastics [32]


25 31.6 35.70%

18 17.7 25.70%

70 27 70 20.7 38.60% 100.00%

Synthetic Fibers [40]


29 34.3 38.20%

19 19.3 25.00%

76 28 76 22.4 36.80% 100.00%

Total


162 162 45.10%

91 91 25.30%

106 359 106 359 29.50% 100.00%

Note:

The Chi-Square Test is significant at the 0.1% level.

5.6

Notification Counts 5.6.1 An Overview

The analysis of notification data is a useful tool to develop insight into the complex issue regarding the impact of the new chemicals regulation on innovation. However, two factors inhibit a profound analysis of notification data. First, the confidentiality of the notification data, since the notifiers are unknown to the public. The new chemical substances included into the inventories are to a large extent confidential, too. There is only a dummy trade name available, which tells one nothing about the chemical substance. Second, not all the chemical substances are introduced into the market. In the USA, however, there is the requirement to submit a Notice of Commencement of Manufacture to the EPA. Such a notice indicates that a

131

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ new chemical substance is produced. On average only about 50 of the premanufacture notifications, PMNs, are manufactured, and a Notices of Commencement of Manufacture are submitted to the EPA. Although one might raise reservations against the use of notification data, it is the only source of data to compare the different regulatory systems of the EU, Japan, and the USA. The discussion will begin with an excursus on a very comprehensive study on the German Chemicals Control Law. 5.6.2 EU Excursus:

“Before-Study” by Schulze and Weiser (1982)

A pioneering study on the issue of regulation and innovation in the chemical industry is the one by Schulze and Weiser (1982). Their study focuses on the development of new substances in the West German chemical industry from 1975 to 1979, the five-year period before the introduction of the new chemical control law. The study was a major effort supported by the Association of the German Chemical Industry (VCI) and the German Environmental Protection Agency (UBA) in order to better understand the impact to be expected by the new Chemicals Law42 on innovation in the German chemical industry. Most of the new substances developed in the second half of the 1970s, i.e. 155 per year, originated in the branches of industrial organics, dyestuffs, surface-active agents and plastics. 6 branches had 5 new substances, 23 chemical preparations manufacturing branches had none at all and 4 are not subject to the new Chemicals Law. 20% of the 160 new substances were shared by middle size companies. These numbers are summarized in table 5.19. They include no imported substances. Again the main distinction is made between the innovative Group A (with four segments) and the non-innovative Group B (with six segments). Group A has introduced on average 140.5 new substances annually and Group B only 3.2 substances. That is, Group A provides 97.8% of all new chemical substances in the industry. The overall annual average for the five-year period is 143.7 newly introduced substances. Based on their sample, Schulze and Weiser estimated the annual average of new substances for the whole chemical industry at 160. The interesting distinction of newly introduced substances ranked according to large firms and SMEs was made at a sales volume of DM 150 million. Within the group A, the large firms have introduced (on average) 120.8 substances per annum – that is, 84.1% of all introductions; The SMEs introduced 19.7 substances or 13.7% of all substances.

42 That is the so-called “Chemikaliengesetz” (Chemicals Control Act), the “Gesetz zum Schutz vor

gefährlichen Stoffen” of 16 September 1980 which came into force 1 January 1982.

132

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Information on the expected reduction in the number of new substances was derived in the Schulze and Weiser study from firm response to a questionnaire.43 They have estimated an expected reduction from an average of 160 to only 98 new substances per annum due to the enforcement of the German Chemicals Control Law, which is a reduction of 39%. The distribution of the expected annual reduction according to the four product segments is as follows:

§

Organic industrial chemicals: a reduction from 63 down to 38 (that is 40%),

§

Organic dyes-stuff: a reduction from 37.4 down to 27 (that is 28%),

§

Materials for textiles, leather, and detergents: a reduction from 33 down to 14 (that is 58%), and

§

Plastics: a reduction from 22 to 16 (that is 39%).

The most significant reduction of 58% is expected for materials for textiles, leather, and detergents. This is an industry segment dominated by medium-sized firms. We should make a few qualifications regarding the study and its results to better understand the importance of the analysis and its predictions. These qualifications are as follows: First, the study was already directed towards the 6th Amendment with its exemptions and the volume trigger of 1 tonne per year, thus, it refers only to those new chemical substances which require a full notification. Nothing is said in the Schulze and Weiser study about the impact of the regulation on chemicals with a volume lower than 1 tonne per year. In the area studied, however, the impact is most considerable (see e.g. Hollins and Macrory 1994). Second, only West German firms were included in the study and no imported new chemical substances were considered. Schulze and Weiser estimated that about 50 new chemicals could be expected, with about 25% attributable to imports. The estimated reduction of new chemicals due to the regulation of 39%, however, holds for West German firms only.

43 The question reads as follows: “In case the actual budgets for research and development cannot be

increased the additional costs due to the Chemicals Law would have to be borne by innovation, that is, one would produce on average only … new substances per year.” Schulze and Weiser (1982), Questionnaire, p. 8 (translated by M.F.)

133


Average Annual Number of New Chemicals Introduced by Chemical Firms in the Federal Republic of Germany, 1975-1979 Firms

Industry code

2 12 22

8

Industry segment

Organic industrial chemicals Organic dyes-stuff Surface-active agents for textiles, leather etc. Plastics

Group A 4 Segments 9 10 28 23 29 32

Synthetic rubber Synthetic fibers Rubber chemicals Mineral oil additives Other additives Photographic materials

Group B 6 Segments Group A+B

10 Segments

Large firms

Medium-sized firms

Number of Firms

Number of new substances

Percentage of all new substances

Number of Firms



Number of Firms



14

58.4

40.6

11

55.4

38.6

3

3

2.1

3 9

37.4 24.2

26.0 16.9

3 3

37.4 9.5

26.0 6.6

6

14.7

10.2

6

20.5

14.3

5

18.5

12.9

1

2

1.4

32

140.5

97.8

22

120.8

84.1

10

19.7

13.7

2 1 1 1 -

0 0.2 2 1 -

0 0.1 1.4 0.7 -

2 1 1 1 -

0 0.2 2 1 -

0 0.1 1.4 0.7 -

-

-

-

5

3.2

2.2

5

3.2

2.2

-

-

-

37

143.7

100.0

27

124.0

86.3

10

19.7

13.7

Source: Schulze und Weiser (1982, p. 207)

135

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Third, the most recent picture of the EU and Germany is provided by the “Three Yearly Report” (European Commission 1998a). The EU notifications found there are discussed in the next section. For Germany, however, we will make already a few extrapolations regarding the impact of the regulation on the development of new chemical substances. In the period ranging from 1994 to 1996, 148 new chemical substances were notified in Germany (European Commission 1998a, table 4.2, p. 36). These figures include notifications below 1 tonne per year. Out of the 148 notifications, roughly 80 of the substances passed the 1 tonne volume trigger. We assume that the share of import notification for Germany is considerably lower than for the UK. Taking this into account we estimate that for the period of 1994 to 1996 about 50-60 new chemical substances with a volume of more than 1 tonne were notified for the first time by German firms. This is approximately 20 new substances per year for German firms. Compared with the reduction predicted by Schulze and Weiser of 39%, this is an actual reduction of 87.5%. This is a very considerable reduction due to the new chemicals regulations in Germany. Due to the fact that there is no similar study available for other EU Member States we will next discuss the overall picture of notifications in the EU. EU Notification Data44 Notifications per Member State The following notifications reported for the Member States of the European Commission (1998a) are extracted from the New Chemicals Database of the Joint Research Center, European Chemical Bureau (ECB) in Ispra (Italy). The time period is 1 November 1993 to 31 December 1996 (see tables 5.20).

§

The total number of notifications in the time period is 1,050, of which 682 are full notifications and 468 are reduced notifications.

§

These notifications refer to 755 new substances notified for the first time of which 383 are full notifications and 372 reduced notifications (see tables 5.20). Thus, for all 1,050 notifications only 36.5% are full notifications.

§

Most notifications took place in France, Germany, the Netherlands, Sweden, and the United Kingdom (UK). The UK led with 294 first time notifications and Germany came in a poor second with 151.

§

The number of notifications during the ten year period ranging from 1983 to 1993 in both the UK and Germany were more or less equal. From 1993 to 1996, however, the total number of notifications in the UK was substantially higher than that in Germany. This difference might be caused by the sole representative system, enabling notifiers to choose

44 This section draws heavily on the main source for this data, the “Three Yearly Report on the

Implementation of Directive 67/548/EEC on the Classification, Packaging and Labeling of Dangerous Substances, as Amended by Directive 92/32/EEC” (European Commission 1998a).

136

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ any country within the EU to notify. The preference for the UK is probably caused by the fact that German notification dossiers must be filled-in in German. Table 5.20:

Substances Notified for the First Time per Member State per Year 1993

1994

1995

1996

Total

Austria

-

-

4

6

10

Belgium

2

8

10

20

40

Denmark

-

-

0

1

1

Finland

-

3

0

2

5

France

3

37

28

34

102

Germany

3

35

67

46

151

Greece

0

0

0

0

0

Ireland

0

4

11

21

36

Italy

5

11

5

13

34

Luxembourg

0

0

0

0

0

Netherlands

0

12

21

30

63

Portugal

0

0

0

0

0

Spain

1

1

3

6

11

Sweden

0

0

5

3

8

United Kingdom

26

70

102

96

294

Total

40

181

256

278

755

Note:

- = country was not a Member State at that time and therefore no ECB data available

Source: European Commission (1998a, p. 36)

Notifications EU/non-EU Manufacturers To gain a clear picture of the position of the European manufacturer one should look to the relationship between EU and non-EU manufacturers.

§

There are more notifications done by non-EU manufacturers than by EU manufacturers (see table 5.21). The ratio is approximately 60% non-European manufacturers (617 notifications) to 40% European manufacturers (423 notifications) over the entire period.

§

The 617 notifications of non-EU manufacturers refer to 423 new substances (68.6%) against 423 notifications referring to 323 new substances for EU manufacturers (76.4%). Thus, it seems that the sole representative system is not always used, resulting in multiple notifications (one per country of export) instead of only one notification.

137


§

The non-EU manufacturers are mainly from Switzerland (with 205 notifications referring to 103 substances – 50.2%), from Japan (200 notifications referring to 132 substances – 66%), and from the USA (176 notifications referring to 157 substances – 89.2%). These three countries account for 581 or 94.2% of all of the 617 notifications from non-EU manufacturers (totaling 392 or 90.7% of the 423 new substances).

Table 5.21:

Notifications from EU Manufacturers Against non EU Manufacturers 1993

1994

1995

1996

Total

EU manufacturer

33

94

156

140

423

Non EU manufacturer

40

164

217

196

617

EU manufacturer (%)

46%

36%

42%

42%

41%

Non EU manufacturer (%)

54%

64%

58%

58%

59%

73

258

373

336

1,040

Total Notes:

ECB is waiting to know the manufacturer’s identity for 7 notifications, that is why the total of this table is 1,040 instead 1,050. Finish, Austrian and Swedish manufacturers have been considered as EU manufacturers for the complete time period.


If we compare the structure of notifications of 1993 with the one of 1996 , we find that there is an underlying trend showing that the share of EU manufacturers regarding notifications as compared with the non-EU manufacturers is decreasing. The most likely reason for this reversal is that Japanese and US manufacturers benefit from cheaper regulation cost in their home countries. This is crucial for those sub-sectors which exhibit a high success rate (the number of trials which is needed to produce a successful chemical, e.g. 30:1. Success rate is the term used in industry, but it is somewhat misleading since the higher the rate, the lower the success). If a company cannot use R&D exemptions in the EU due to longer R&D periods, then, the success rates drive up the regulation costs for trials done in the EU. In such a situation it is an advantage to develop new chemicals in Japan or the USA. R&D Exemptions Exemptions for process-oriented research and development (PORD) can be applied for 1 + 1 years. It requires a quite detailed request from the company, including information on the R&D strategy as well as where the amounts are used. The EU regulation in the area of new chemicals for R&D, including market testing and small volumes, is extremely unfavourable. This is a further reason why the Japanese and US manufacturers can increasingly introduce proven successful products in the EU market. The situation in the EU is as follows:

138


§

Under the 7th Amendment there were 526 substances for which PORD was actually carried out by companies (and the EU Commission was informed about it). There was a significant increase from 82 substances in 1994 to 246 in 1996.

§

A distinction should be made between PORD carried out (information communicated to the European Commission) and actual PORD exemptions. Table 5.22 shows the figures for both. In 477 of the 526 cases (91%), the PORD carried out by companies led to an actual PORD exemption approved by a competent authority.

§

Only 98 of the 477 actual PORD exemptions (20.5%, which corresponds to a success rate on average of 5:1) result in a notification. Especially in Germany, the percentage of notifications related to granted requests is low (which could be due to riskier R&D projects).

Table 5.22:

Actual PORD Exemptions Total 6th 1993 am.

1994

1995

1996 Total 7th PORD Actual am. carried PORD out exemp.

Austria

-

-

-

3

2

5

6

83%

Belgium

-

5

4

14

11

34

34

100%

Denmark

un.

0

0

2

0

2

4

50%

-

-

1

0

4

5

5

100%

France

33

0

12

22

49

83

83

100%

Germany

39

0

8

49

45

102

102

100%

Greece

0

0

0

0

0

0

1

0%

Ireland

20

1

7

14

21

43

45

96%

Italy

un.

0

8

5

9

22

22

100%

Netherlands

-

0

10

9

7

26

26

100%

Portugal

0

0

0

0

0

0

1

0%

Spain

1

0

0

4

5

9

9

100%

Sweden

0

-

-

6

3

9

9

100%

100

3

27

51

56

137

179

77%

0

0

0

0

0

0

0

-

193

9

77

179

212

477

526

91%

Finland

United Kingdom Norway Total Note:

- = not reported; un. = unknown


139

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.6.3 Japan Japanese Notification Data The Japanese system can be best understood as having two complementary sides (for an overview of the system see Moore 1998). The first side relates to the risk-orientations of the system, that is, the test for biodegration and bioaccumulation represents the essential underlying risk concept. The second side has to do with flexibility for R&D and small marketing volumes. R&D is completely exempt and only a simple notification is required for small volumes. We will discuss this later in more detail and use an illustrative example of a typical Japanese chemicals manufacturer. The table A.2 (see appendix) is broken down according to the different categories of the system. It should be mentioned that the regulation was amended at the beginning of the first quarter of 1987. The result was such that the number of notifications in the first three month was 313 and for the following nine months only 57. For the entire period of 1987-1998 the total number of notifications (including manufacturing in Japan and imports) was 3,012, an annual average of 251 notifications (without the 1987 data the number is 269). There were 417 biodegradable substances in the 12-year period, a 13.9% share of the notified new chemicals were thus biodegradable. Most interesting are the low volume exemptions. They are considerable. In 1998, a total number of 9,007 applications for low volume were made; and in the same year 8,967 application were confirmed. Of the 9,007 applications 2,348 or 26.1% made were related to imports. A remark should be made regarding the low volume exemptions. There are two different thresholds in Japan, 1 tonne according to the MITI/MHW law and 100 kg per plant according to the MOL regulation. If the volume per plant exceeds 100 kg then a full MOL notification is required.45 This full notification requires an Ames test, with a cost of about Yen 300,000 (approximately $ 2,800). Thus, a successful low volume application in Japan is quite inexpensive. We would like to illustrate the flexibility and risk-orientation of the Japanese regulation by illustrating it with data from a typical Japanese chemicals manufacturer. The notifications of this company over the period ranging from 1992-1999 are include in table 5.23. In 1998, this 45 Moore (1998) summarizes the situation as follows: “Zeneca experience to date, involving many

low volume notifications, suggest the following information is appropriate: chemical name, structure, physical form, appearance, melting point, water solubility, stability, and use profile. This data is submitted under the two separate regulations. The additional data needed to complete the full MOL notification and extend the low volume allowance to 1 ton per annum is described in Section 2b, but essentially the submission of an Ames study immediately provides the 1 ton maximum allowance. It may also be worthwhile noting that if the new substance is part of a formulation which contains other existing substances, the allowance for the formulated product can be increased in accordance with the 1 ton supply limit imposed on the substance” (p. 99).

140

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ company made 73 small volume applications (“small amounts”) according to the MITI/MHW-Law, this is 1.1% of a total of 6,659 small volume applications in 1998. In same year the company made 5 normal notifications, for 1.8% of all 274 Japanese notifications. The annual average of the two small volume exemptions is about 85% of the new chemicals the company brings to the market. These 85% are brought to the market at very low regulatory cost. However, the regulatory agency is informed about the chemicals that are brought to the market. Table 5.23:

Example of a Notification Record of a R&D-Intensive Japanese Chemical Firm: Notifications of New Chemical Substances, 1992-1999

Fiscal year 1.

Annual Annual 1992 1993 1994 1995 1996 1997 1998 1999 Averages Averages 1992-1999 in %

Law Exa. Reg. of Man. of Chem. Sub.

1.1 Notification Biodegradability alone

4

1

3

2

1

4

1

2

2.2

4.1

Safety Evaluation of Polymer alone

1

0

4

2

1

1

5

2

2.0

3.8

Biodegradability, Bioaccumulation and Screening Toxicity

0

1

0

4

1

2

0

3

1.4

2.6

1.2 Small amounts

31

32

33

34

40

51

73

75

46.1

87.0

1.3 As an Intermediate of Medical Supply

1

1

1

1

1

2

1

2

1.3

2.5

Total

37

35

41

43

44

60

80

84

53.0

100.0

2.1 Notification

1

15

1

12

7

10

14

10

8.8

16.6

2.2 Small amounts

37

37

31

34

49

43

65

57

44.1

83.4

Total

38

52

32

46

56

53

79

67

52.9

100.0

2.

Regul. N. Chem. Sub. Cont. In Safety and Health Law

Notes:

“Law. Exa. Reg. of Man. of Chem. Sub.” is Law concerning the Examination and Regulation of Manufacture, etc. of Chemical Substances. (MITI/MHW-Law) “Regul. N. Chem. Sub. Cont. in Safety and Health Law” is Regulation concerning the new chemical substances control in the industrial safety and healthy law. (MOL-Law)

141


Example of a R&D-Intensive Japanese Chemical Firm Concerning the Cancellation of Research on Notified New Chemical Substances due to Bad Biodegradability, 1986-1997

No.

Calendar Year

Decided Action

Type of Chemical (Use etc.)

1

1986

Research canceled (bad Biodegradability)

Unknown

2

1986


Agricultural chemicals 50t/y

3

1986



4

1987


Drug

5

1987


Unknown

6

1988


Drug

7

1988


Unknown

8

1988


Unknown

9

1989


Synthetic resins

10

1990


Unknown

11

1990



12

1991


Paint

13

1992


Fiber improvement agent

14

1992


Unknown

15

1993


Unknown

16

1996

Pending (difficult Biodegradability for extinction of microorganisms in activatedsludge)

Drug

17

1996

Pending (bad Biodegradability); (not detectable because the component overlaps with the peak of fish at Gas Chromatograph analysis)

Unknown

18

1997

Pending (unknown of the component decomposing by Biodegradability)

Unknown

19

1997

Pending (bad Biodegradability for hydrolyzing)

Drug 50t/y

Table 5.24 is interesting because is shows how the control of new chemicals and the relationship to risk works. We should mention that chemical manufacturers have to explore the whole range of chemicals, not only the harmless ones. Regulations and training for Good Laboratory Practice and Good Manufacturing Practice protect the workers in laboratories and plants. However, if a new chemical poses risks for man and environment the chemicals ought to be regulated or not brought to the market. This is exactly what happened in the case of our Japanese manufacturer. As table 5.24 shows, almost every year in our study they have given 142

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ up the development of a new chemical substance due to bad biodegradability. That is 20% of their full regular notifications. We should mention that the situation is similar in all Japanese companies interviewed, except for one which was focusing on “green chemistry.” The companies’ behaviour is very much directed towards the achievement of the goals as specified in the chemicals regulation. That seems to be a very important feature of a risk-oriented testing requirement system. The situation in the USA is similar. We can see this if we take the number of PMNs withdrawn as a percentage of the total number of notices of commencement, which is 11.4% over the period from 1979-1996. And again, it is this structural property riskorientation of the Japanese and US system that makes them efficient in chemicals control. More about the US notifications is discussed in the next section. 5.6.4 USA “Before” and Early Studies A number of studies have been undertaken to study the impact of the chemicals regulation on innovation in the USA. The first study was undertaken by Arthur D. Little (ADL) in 1978 for the EPA.46 This study estimated the annual number of new chemical substances introduced into the US market. The US number was estimated at 1,000 new substances per annum with a range of plus/minus 30%. From these substances 300 reach a sales volume of 0.5 tonnes per annum; the sales of the remaining 700 are below that volume. Interestingly, it was also estimated that there were 2,000 new substances annually reviewed for R&D purposes. To gain further enlightenment it is helpful to quote Umland (1983): “An earlier study by Foster D. Snell, based on expert industry opinion, found that 2,220 successful new substances were introduced each year between 1969 and 1974 (out of over 5,000 offered for customer evaluation). National Economic Research Associates, Inc. (NERA) estimated that about 1,700 new chemical substances were sold commercially each year (based on a small sample and accurate only within a broad range but consistent in order of magnitude). Nevertheless, the introduction of new commercial chemical substances as measured by PMNs [Premanufacturer Notification] submitted apparently has fallen from between 1,000 and 2,200 annually to somewhere around 600-700 in the latest 12 months. Without trying to be precise, it can be seen that there has been an apparent drop in new substances introduced in the order of 35-70 percent. […] However, for the purpose of this discussion, one can observe that of the more than 1,000 PMNs submitted, over 90% are from large companies” (Umland 1983, p. 29). Again, the estimate of the first US study by ADL was quite precise compared with the notification data available today. The following table 5.25 show a breakdown of the annual number of notifications in the USA for the period of 1990-1999 (a table covering the entire period 1979-1996 is included in the appendix). The annual average for PMNs over the 21-year 46 Arthur D. Little (1978); quoted according to Schulze and Weiser (1982).

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ period is 1,300. About 42.6% of these PMNs are introduced into the market, for a total number of new chemicals in the USA of about 567 per annum (including the low number of PMNs in the early period). This is below the range estimated by ADL. Their estimation was 700 to 1,300 PMNs per annum. If we take into account that 25% of the PMNs are polymers than we get about 425 new chemical substances (except polymers) introduced into the US market. This figure we can compare with the EU notification data. In the EU 2,150 new chemical substances where notified over the period 1983-1997, that is an annual average of 143 substances. Table 5.25:

US-Notification Statistics, 1990-1999

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Total since 1979

Section 5 Notices – Total

2,738 1,867 1,889 2,138 2,645 2,321 1,892 1,483 1,553 1,717

35,786

– PMNs

1,930 1,385 1,451 1,628 2,185 1,910 1,472

27,942

998 1,105 1,290

– Low Volume Exemptions

553

279

259

307

299

310

412

471

445

418

4,862

– Test Market Exemptions

18

25

16

23

17

11

8

14

3

4

643

5

11

– Lorexes*

6

– Polymer Exemptions**

237

178

163

180

144

90

210

269

217

Section 5(e) Orders

86

87

46

76

35

47

29

50

36

Receipt of Test Data

77

173

290

119

50

73

62

36

SNURS-Total

167

114

101

96

33

64

0

45

236

0

634

– 5(e)

167

104

72

53

11

19

0

19

37

0

455

0

10

29

43

22

45

0

26

199

0

179

988

714

804

833

904

841

640

551

468

252

11,909

– non 5(e) Notices of Commencement*** Notes:

* ** ***

2,820 38

858

172

Low release and exposure (LoREX) exemption. EPA has only to be informed by the end of the years on the numbers of polymers exempted. These reflect PMNs commenced for a specific FY.

Source: OPPT New Chemicals Program Annual Report, Washington, D.C.: US EPA (2000a)

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ The fluctuations in the number of notifications are observed in all three regions. Usually the changes in the numbers are due to amendments in the legislation, e.g. changing the threshold for exemptions, etc. In the case of the USA, two reasons exist for the increase in the number of 2,418 PMNs submitted in 1988 and the sharp drop in 1989 by 55.2% down to 1,037 PMNs. First, until 1987/88 there was no fee which the submitters of PMNs had to pay. In 1987/88 a user fee of $ 2,500 was introduced. Second, a bundling effect may have occurred because now the grouping of single PMNs into one PMN is (under certain circumstances) possible.

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6

Conclusions

The framework for assessing the effects of the different chemicals regulations is based on the factors affecting a firm’s decision to innovate and the impact of these decisions on the firm’s performance. Innovative behaviour is considered part of a firm’s overall competitive strategy, which is in turn conditioned by its corporate goals, the organization of the firm and the environment in which the firm operates. Regulations are a major factor in the environment of firms in the chemical industry. Chemicals regulations shape the innovative behaviour of firms. One important regulation regarding the innovative behaviour of chemical firms is the legislation that regulates the notification requirements for new chemical substances. As described in Chapter 2, there are several significant differences between this regulation in the EU, in Japan and in the USA. All three regulatory regimes are based on the indication of volume, particular exemptions and an inventory that serves as the baseline to measure whether a chemical substance is a new chemical substance according to the regulation. However, the major difference is that the structure of the EU system is one with fixed testing requirements, whereas the Japanese and the US systems require risk-contingent testing. The differences in the regulatory regimes lead to differences in the costs and time needed to bring the new substances to the market, two important factors affecting competitiveness. The major empirical findings of our analysis follow. The findings are based on our own statistical analyses as well as on interviews we have conducted with industry experts and on the reported empirical evidence in the literature. 1.

EU and Japanese firms exhibit a lower economic performance than US firms

Using a combined index of economic performance we find that the US firms exhibit the highest economic performance, followed by the European firms. The Japanese firms are the firms with the lowest economic performance in the period from 1993 to 1997. Looking at the individual criteria we find identical patterns for profitability, financial resources (cash flow), and investment activity. The US firms have the highest values, followed by the European and Japanese firms. However, for the US firms financial resources result is statistically not significant, and for the Japanese firms the investment activity result is not significant. A different and statistically significant result is observed for the sales growth criterion. Here, the Japanese firms have grown faster on average over the five year period than the US and European firms. The difference in the economic performance is due to a number of factors, including a more efficient governance structure within the companies and the capital market. However, the difference may also be partly attributed to an inefficient system of new chemicals regulation. The additional costs of laboratory tests under the notification scheme, particularly under the EU regulation, had either to be coped with by enlarging the R&D budget to be able to do the same amount of research as before or by reducing new substances research. Under the 146

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ reasonable assumption that it is often impossible to increase the R&D budget, additional testing costs inevitably lead to a shortfall in innovation. If chemical innovations are generally based on formerly new substances, there will be even fewer new substances. 2.

EU and Japanese firms exhibit a lower R&D productivity than US firms

The estimated elasticity of R&D for the USA is clearly higher than that of Europe and Japan in both models we have tested. Nevertheless, the R&D elasticity for Europe in the first model is not significant. The elasticity of R&D in Japan is higher than in Europe in the first model (0.11 and 0.04 respectively), but they are nearly identical in the second model, 0.09 for Europe and 0.10 for Japan. The differences between Japan and Europe cannot be considered similar to those between Europe and the USA. Regarding the USA, in both models the elasticity of R&D is higher than in the EU, 5 times more in the first model and 3 times more in the second. Again, the difference might be partially attributed to the US notification regulation, although we would be very cautious about making such attribution. A statistical test of the relationship would have required access to the notification behaviour at company level. For confidentiality reasons we could not obtain this data. 3.

US firms exhibit the highest patent productivity – Japanese firms lead in the number of patents

Based on the Poisson model the differences in the elasticities are considerable. The elasticity of patents with respect to the natural logarithm of the R&D expenditures is highest for the US firms, at 0.56. For the European firms it is 0.16 and for the Japanese 0.08. This model leads to a sample selection bias because not all firms report R&D expenditures. Since we had access to the number of patents granted by the USPTO for all firms which patented, we used a Poisson regression to test for the difference in the number of patents, controlling for firm-size and subsector. The result was highly significant, with Japan having the highest average number of US patents followed by the US and EU firms. 4.

US Firms Have a Lead in Polymer Patents

The analysis of the polymer patents shows that the US firms have a more than proportionate share of all polymer patents. Polymer patents account for 7.1% of all 139,590 patents, but polymer patents account for7.9% of all those held by US firms. This proportion represents a revealed patent advantage (RPA) of 11.1. We think it is conceivable that the favourable US polymer regulation might work as an innovation incentive. This incentive leads to more research on polymers and to more patents on polymer inventions, because it pays off in the market (as compared to the EU and Japanese polymer regulation).

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ 5.

The innovation counts provide mixed results regarding the innovative performance of the EU, Japanese, and US chemical industries

Perhaps the greatest obstacle to understanding the role of innovation in economic processes is still the lack of meaningful measures of innovative outputs. There exists no measure of innovation that permits readily interpretable international comparisons. And the value of an innovation is difficult to assess. We have applied a direct measure of innovative output; that is the number of innovations reported in the annual reports of companies. This measure leads to a significant measurement bias, but no better measure was available. The results are therefore interesting, but mixed. Furthermore, we could use only the annual reports that we could get, and we used only the English versions of annual reports. Overall we surveyed the annual reports of 147 firms leading to 2,230 innovations in 1996/97. If we compare the 50 companies with the highest numbers of innovations, 23 are from Europe (46%), 21 from the USA (42%), and 6 from Japan (12%). Europe and the USA are in absolute terms approximately on the same level, as they also are in the number of reported innovations by the top 50 for these regions, which are 555 in Europe (44.1%) and 527 in the USA (41.8%). Japan is in absolute terms at the bottom, both in innovative companies and in number of innovations, with 178 (14.1%). However, the 14.1% of innovations introduced by Japanese firms are produced by only 12% of all firms. Europe is very diversified. There is no area where the European chemical industry is not represented. Whilst the USA has no top company in basic chemicals or polymers, it is well represented in all other categories. Japan has only six companies within the top 50, and it is represented in just three chemical categories: Paints, Hygiene & Cosmetics and Paper Chemicals. We have tested whether there is a difference in the innovative performance between the EU, Japan and the USA using a Poisson regression model controlling for firm-size and the subsector of the chemical industry. The result is that there is no statistically significant difference.47 6.

The EU system has produced the lowest number of new chemicals notifications

It is certainly fraught with difficulties to compare notification numbers. However, since we have data for such long periods – 15 years for the EU, 25 years for Japan, and 21 years for the USA - it is reasonable to compare the averages. For the USA, we also eliminated the polymers counted, in order to focus better on new chemicals innovation. The results are: in the 47 We should mention that for this statistical test a few firms from the innovation counting sample are

not included because we used the sample of the 249 firms for the statistical test. Particularly, Ciba SC was not included in the statistical test for two reasons. First, we included only those firms from our main sample of 249 firms for which we had data on firm size over the entire 1993 to 1997 period. Ciba SC did not exist during this period. Second, the Ciba SC innovation count rank is biased, although it is one of the most innovative companies in the field of specialty chemicals.

148

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ ever-expanding EU, the companies notified on average 143 new chemicals per year; in Japan, firms made 154 notifications annually and, in the US, 425 new chemical substances (excluding polymers) were introduced into the market. We could adjust these figures according to various structural differences. The adjustment for the changing size of EU membership would affect the results (in particular the membership of the UK), but not substantially. We could also adjust our measurements to the size of the chemical industries in order to derive a relative measure. A size adjustment would lead to an increase for the Japanese figures. Thus, the relative notification performance of the EU would not change for the better. 7. The EU system provides cost disadvantages for notifiers. However, for large corporations, market entry barriers may temporarily eliminate the adverse competitive effects of the EU notification system. Companies operating on a global scale have to notify their new chemical substances, at least in the three largest markets of the world: the EU, the USA, and Japan. The notification costs for these three regions are approximately $ 297,000, of which roughly 60% ($ 177,000) are for the notification in the EU (see Cytec 2000). These companies are equally confronted with the “global notification requirement”. However, firms coming from the US have an advantage by having much lower regulatory costs than firms in the EU. This factor becomes more important in relationship to the number of trials needed for the development of a successful chemical. The more trials needed, the more the cost of each trial is weighed. Schulze and Weiser (1982) have shown that this effect is considerable. A lack of data prevented us from quantifying the effect in our analysis. If we look at the list of the world leaders in the chemical industry, we see that EU companies are still in a good position, but there is a lack in economic performance. The most serious problems are high regulatory cost and entry barriers for small and medium-sized firms. These companies cannot afford to notify new chemical substances because of the high regulatory costs involved, but we have only anecdotal evidence of this problem. We believe that the observation made by Hollins and Macrory (1994) is correct, that small and medium-sized enterprises do not innovate using new chemical substances. That is, there seems to be a complete lack of new chemicals innovation in this size-class, which is mainly due to the high regulation costs in Europe. The EU system, as well as the Japanese system, provides a quasi-patent protection for the first notifier due to the information asymmetry of the 2nd notifier. The US system has no bias towards the 2nd notifier. This protection may temporarily help large corporations in the EU, but, because of the regulatory and other cost disadvantages in the EU, we would expect to see EU manufacturers setting up facilities outside the EU to produce final products based on new chemical substances. The new chemicals regulations in general do not regulate articles, that is, final products which include new chemicals. In fact, it is rational for all firms to pursue an

149

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ innovation strategy which is based on the use of the article provision. Thus, the market entry barriers due to EU new chemicals regulation may not last very long. 8.

Priority perceptions regarding an increase in the efficiency of the EU, Japanese, and US systems

For the interviewed EU companies it is most important that regulatory expenses be reduced without sacrificing the safety of chemicals. A lot of experimentation is necessary to develop new chemicals and applications. If each experiment – including the numerous unsuccessful ones – has to carry the burden of the cost for the EU base set requirement, then innovation will continue to be stifled. Experimentation can be promoted by the introduction of appropriate exemptions in the EU. The bureaucratic approach of EU competent authorities regarding the application of EU exemptions was sometimes mentioned during the interviews. However, it was generally felt that the competent authorities are cooperative. For the Japanese companies, harmonization of the notification system is of top priority, in particular harmonization with the EU system. Japanese companies have to pay to a large extent for the specific biodegradation and bioaccumulation test requirements of the Japanese system. However, their system requires fewer data points (with respect to the Material Safety Data Sheet). They would prefer a simplification of the biodegradation and bioaccumulation testing requirements and an increase in the number of data points for the Material Safety Data Sheet. Companies in the USA are confronted with the most efficient risk-oriented chemicals control system. That system provides exemptions that promote innovation. It is estimated that notification costs for 86% of the PMNs are low. There is, however, a high degree of uncertainty for about 14% of the PMNs, which either become regulated or are withdrawn in the face of regulation. Since the US system intensifies innovation competition, the system needs to protect the confidential business information of the notifiers. The importance of protecting confidential business information in intensely competitive industries is a high priority for US companies. They are concerned that in the course of the harmonization of the notification systems, control over confidential business information might be softened and perhaps even abolished due to the public interest regulations in other countries. Furthermore, the US companies are disappointed with the static EU inventory for existing substances, EINECS, and with the inventory for new substances, ELINCS. They are convinced that a dynamic inventory would be the best solution for the EU. Detailed comments on the Japanese system were not given. 9.

Some speculative but considered reflection concerning the overall performance of the EU system

The Hidden Threat of Global Competition

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Due to the regulatory and other cost disadvantages in the EU we would expect to see EU manufacturers setting up facilities outside the EU to produce final products based on new chemical substances. The new chemicals regulations in general do not regulate articles, that is, final products which include new chemicals. Thus, a manufacturer in the EU who seeks new chemicals substances would try to get these substances from outside of the EU, and would then set up the manufacturing of the final products. Thus he would be able to ensure costefficient access to the new chemicals. We assume, in case of a successful introduction of an article based on new chemical substances in Japan or the USA, that a time lag exists before the article or the final product is exported to the EU. Because of the specialized and customized character of these products, it does not make economic sense to manufacture these articles in the EU. And, of course, an EU notification is not then required. An Over-Simplified Calculation of the Costs? To date, approximately 2,700 new chemical substances have been notified in the EU. If we take the cost for the base set of $ 177,000 for these 2,700 notifications we end up with a $ 477.9 million overall cost. This figure includes reduced notifications as well as Level 1 and Level 2 notifications, so it is reasonable to approximate the notifications cost in the range between $ 500 and 750 million, without the expenses of industry for the cancellation of R&D projects (which is according to Schulze and Weiser (1982) in the range of a factor 2.5-4). We would estimate administrative cost within the competent authorities and industry for the whole period of 18 years at a further $ 250 million. Of the 2,700 new chemical substances only approximately 300 have exceeded the 10 tonnes p.a. threshold, 100 the 100 tonnes p.a. threshold and 20 the 1,000 tonnes p.a. threshold. Thus, the impact of new chemical substances on the market is low. The market volume of these chemicals is about 0.01% of all chemicals on the market. Therefore, we believe that it is very important to increase the efficiency of the EU regulation of new chemical substances.

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7

Policy Recommendations

The current EU chemicals legislation has established a complex framework for the control of chemicals in the EU that has evolved over many years into a burdensome process. During the stakeholder workshop on the development of a future chemicals strategy for the European Union in February 1999 (European Commission 1999a) a number of arguments to modify the EU regulation were put forward. Rehbinder (2000) and Mahlmann (2000) have developed interesting ideas on how to streamline the EU chemicals regulation.48 The SLIM group has also made valuable technical suggestions to improve the EU regime49 and work is ongoing at the OECD.50 Based on these arguments and suggestions and the results of our study, we propose several policy recommendations – in particular changes of regulations and of the regulatory structure – geared to improving the innovative performance of the chemical industry in the EU. 1.

Risk-oriented structural change

It is recommended that due consideration be given to the adoption of a risk-oriented regulatory system. So far the system requires a fixed amount of laboratory testing, which is considerable.51 Such a structural change of the system is also important for the creation of a unified chemicals control system for new and existing chemical substances. The focus should 48 Rehbinder (2000) discusses the possibility of establishing a comprehensive regulation for the entire

body of European environmental and chemical laws. Furthermore, he asks whether the relatively high variation in strategies should be reduced in order to reach a simpler system and whether the codification of European chemical law would make sense. He believes that the benefits of a codification would outweigh its possible risks. Mahlmann (2000) concludes that the chemicals legislation was achieved as a compromise in difficult negotiations between health and environmental concerns on the one hand and the interests of industry on the other. Mahlmann argues, that ”even if the experts were to recommend a consolidation of the classification and labelling legislation, this does not necessarily mean that such a task could be undertaken, because two different Directorates-General within the Commission are responsible for the Directives. Consequently, the Commission would have to reach an agreement on the internal competency issues associated with a consolidation of chemicals legislation, and this could prove to be more complex than the technical issues at stake” (Mahlmann 2000, p. 225). 49 The SLIM Group has conducted an evaluation of the Dangerous Substances Directive. This Group comprises expertise from all parties involved. Overall they have made 48 recommendations. We have summarized the 21 recommendations that refer to the notification procedure for new chemical substances. 50 The OECD has set up a task force on new industrial chemicals notification and assessment, of which the most important task is improving the sharing of information about new industrial chemicals assessment. An OECD workshop was held in 1996 to discuss ways of making it easier to share information about new industrial chemicals, given that differences exist. The workshop confirmed that there was scope for further information sharing. The following report, OECD (1997b), discussed several major notification schemes and provided survey results identifying possibilities for sharing information about new chemicals notification and assessment. 51 The maximum amount is approximately EUR 200,000 for the base set tests (see section “2.5.2 Cost for Laboratory Testing” and Cytec 1998).

152

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ be on the risk assessment of the new chemical substances. This should not require extensive and expensive laboratory testing for all new chemical substances. A standardized data set, generally available to the notifier and his customers, should be sufficient.52 The most important issue is to create, at the level of the national competent authorities and at the level of the EU Commission, a knowledge base to handle in a very professional way the evaluation of chemicals and the design of adequate information search strategies in order to meet the EU conditions as laid down in OECD (1994). To make progress towards such an approach it is conceivable that, for example, the Member States processing 10 or more notifications a year could start with such an approach for a pilot phase of two years. In the end such a reform should lead to a more flexible and more responsive system for the regulation of new chemicals. In a great number of cases the base set testing requirements would be reduced, in a few other cases not. This would also require the EU to adopt a pragmatic approach to the application of the (Quantitative) Structure-Activity Relationship ((Q)SAR).53 (Q)SAR is a method of estimating the toxic properties of a compound using the physical and structural make-up of a compound. The evaluation of QSAR and SAR methodology is highly controversial. However, it has its merits (see the discussion under section “2.3.4.3 Assessment of Chemical Hazards in the Presence of Limited Data” of this report). When it is combined with a system of structural analogues it can help to design efficient information search strategies. The focus of the whole notification process is based on the risk assessment of the chemicals, not the creation of a fixed data set. Therefore, and because the EU conditions as laid down in OECD (1994)54 are met, it seems advisable to review the base set test data 52 Such a standard data set should include information on the following items: chemical identity,

description of uses, production/importation volume, description of by-products, description of human exposure, description of disposal practices, available health/environmental effect test data (this is usually available from the companies since they know how harmful and toxic their new chemical substance is). 53 It should be mentioned that in the early 1990s there was an initiative to evaluate the methodology in a joint effort of the US EPA and the EU. The results of that promising approach are published in a final OECD (1994) report: US EPA/EC Joint Project on the Evaluation of (Quantitative) Structure Activity Relationships. 54 Conclusions and conditions regarding the EU perspective are laid down as follows: “... this project has identified a number of possibilities for making greater use of SAR as part of the ‘base set’ testing package [...] These possibilities will be explored in the preparation of any future revision to the legislation. However, [...], there are a number of factors which should also be taken into account: (1) The EC system is operated in a decentralized manner [...] This means that any approach to notification has to be transparent and objective. Thus, while some SAR methods may be used successfully by a group of highly skilled experts working together over many years in one agency, such an approach could not work in the decentralized system applied in the EC. This means that the EC scheme could only be considered where the predictive models could be applied objectively by all agencies working within the decentralized system. (2) [...] this would mean that SARs could only be admitted: – if they were objective and reliable, and

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Regulation and Innovation in the Chemical Industry __________________________________________________________________________ requirements for quantities in excess of one tonne up to 10 tonnes a year. Since the EPA is continuously improving the efficiency of the (Q)SAR (see EPA 1998), the EU Commission should seek cooperation with them in order to implement SAR in the base set testing requirements in order to reduce unnecessary testing effort. We should keep in mind that the US approach is able to separate approximately 86% of the annual PMNs as chemicals of no concern. Such a risk-oriented approach is able to focus in an efficient manner on those chemicals that might be of concern. In addition, the new system should set up efficient inspection procedures as well as penalties similar to the US system.55 2.

Appropriate exemptions are required

Beyond the recommendation to reorient the structure of the EU chemicals control system from a fixed testing requirement system to a risk-oriented one, some other complementary changes regarding exemptions should be considered. Again, the handling of exemptions has to be responsive to the risks involved, and the competent authorities need to be given the responsibility to manage that.56 The “Manual of Decisions” is a first step in that direction to develop further a more responsive policy.57 The three obvious areas susceptible to change are: low volume exemptions; R&D exemptions and polymer exemptions. The exemptions should be adjusted for reasons of the competitiveness of the European chemical industry and balanced with the risks involved for man and environment. There are three main arguments for this. First, there is a lack of economic performance of the chemical industry of the EU as compared with the USA. Second, the innovative performance of the EU chemical industry has deteriorated, as measured in terms of notifications. The percentage of notifications of non-EU manufacturers as a share of all notifications is increasing. That is mainly due to lower regulation cost in –

if they were able to generate precise quantitative estimations/predictions of test results which could be incorporated into classification schemes, or – if notifiers accepted the principle that classification on the basis of SARs would be admitted but escape from classification, i.e. non-allocation to a danger category would not be allowed. (3) [...] While it is clear that the SARs used in this study have in many cases performed very well, such predictive models are, in the most part, based upon pure substances. For SARs to be used in a systematic way in the EC notification scheme would require this important issue of impurities to be addressed.” (OECD 1994, pp. 66-67) 55 The penalties in the US are up to $ 25,000 per day of violation of the regulation, however, the

penalties are in effect negotiable. In Japan the system is entirely based on trust.

56 To illustrate what is meant we like to use the EPA’s low release and exposure (LoREX)

exemption. This exemption the EPA has established for certain chemical substances with low environmental releases and human exposure. So far it has been applied in only a few cases (see table 5.23). 57 The “Manual of Decisions” can be found with the other EU documents on the DG Environment’s site regarding the “Directive on Dangerous Substances” (see: ).

154

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Japan and USA and the regulatory environment in Switzerland. Third, there is no risk increase due to the relaxation of the exemptions. Low volume exemptions (LVEs) Taking the regulatory cost for quantities below 1,000 kg there are significant differences between the regions. If we take the cost estimated by Neven and Schubert (1998) (which is at the lower end of the range) we get Euro 25,000-30,000. This is nearly ten times the cost for a LVE in Japan or the US. That is why the volume trigger should be at least 1,000 kg a year in the EU. However, the full Base Set test data should be required as of 10,000 kg a year. This is necessary also in comparison to the US situation, where the low volume trigger is 10,000 kg. Furthermore, EPA’s experience has shown that efficient early risk screening is feasible with much less data than required by the EU Base Set. The occupational safety concern can be dealt with through the Ames test requirement beginning with a threshold of e.g. 100 kg a year. The full Base Set testing requirements as of 10,000 kg should especially encourage small and medium-sized enterprises to further innovate, since in this size-class there seems to be a complete lack of new chemicals innovation (see Hollins and Macrory 1994), which is mainly due to the high regulation costs in Europe.58 R&D Exemptions New chemicals for R&D should be exempted in reasonable amounts. Taking the examples of Japan, where R&D is completely exempt, and the USA, where small quantities59 are exempt, an annual amount of 1,000 kg a year. seems to be reasonable for the EU. A necessary condition would be that appropriate procedural and record keeping requirements are met. The field of R&D exemptions is a very crucial area for distortions in innovation competition since the EU threshold is insufficient. These distortions are due to the EU exemptions. First, substances for scientific research and development (R&D), if they are placed on the market in quantities not exceeding 100 kg per manufacturer per year, are exempted. Second, substances for process-oriented R&D (PORD) can be placed on the market for a period of one year for a limited number of registered customers in quantities limited to the purpose. The period can be extended under exceptional circumstances for a further year. 58 Japan can be regarded as a good example of an efficient chemical controls system and an

innovation-favourable LVE threshold, which does not require using only existing chemicals for the purpose of developing new products. To mention only the LVEs in 1998: Japan 9,007 (< 1,000 kg) and in the USA 445 (< 10,000 kg). 59 There is no specific threshold defined. According to TSCA the substances are exempted “only in small quantities solely for the purpose of scientific experimentation or analysis, or chemical research on, or analysis of such substances, or another substance, including such research or analysis for the development of a product.” No application is required for the exemption of R&D, but there are appropriate procedural and record keeping requirements to be fulfilled. The burden of providing eligibility for the R&D exemption is entirely with the person claiming it. EPA advises those claiming the exemption to be prepared to justify the claim to EPA in adequate detail (see EPA 1986).

155

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ The pro and cons regarding the exemptions for substances for scientific R&D are developed by Staudt et al. (1997) in detail. Staudt et al. have evaluated the arguments from both sides, industry and the competent authorities. According to industry the 100 kg p.a. threshold provides no further safety threat since laboratory personnel are trained for worst case scenarios and they are used to working with such material. Consumers and the environment are not exposed to these substances. Competent authorities believe that a 100 kg p.a. limit does not hinder innovation. Only a comparative study of the experiences of the EU and US R&D exemptions would help to better evaluate and clarify the thresholds (100 kg versus “small amounts”). Such a study should be directed towards typical innovation processes and exposure patterns. The impression gained from anecdotal interview evidence is that 100 kg p.a. is not enough. However, relaxing the volume threshold for scientific R&D would require three things. First, the companies would have to keep records on the chemicals and would have to report annually to the competent authorities. Second, inspections would be needed to control the scientific R&D chemicals. Third, serious sanctions should be required for noncompliance with the regulation of R&D exemption. During our interviews we got the impression that such a system could work in the EU. As we have seen from the EU notification statistics, the PORD exemptions are used to an increasing extent. PORD should be changed so that it becomes possible to obtain a prolongation of the exemption period beyond the 2-year period if there are good reasons. Polymer Exemptions The polymer regulation exempts from the required notification only those polymers that in combined form contain 2% or less of any substance not in EINECS.60 Empirical evidence suggests that the polymer regulation should be revised. We should mention three points. First, the EU regulation creates a high degree of uncertainty for polymer innovations that leads to the abandonment of polymer innovations (see the BASF case study). Second, if a company tried to introduce a new prepolymer from which a new polymer could be manufactured every customer would have to submit a notification for the new polymer. This is a not risk-oriented regulation that has changed the behaviour of the market. In addition to the BASF example one US company has found it extremely difficult to introduce new prepolymers in the EU because of this regulation. Third, in the USA companies notify new polymers even if it is not necessary. This is because the EPA checks their polymers at a low regulatory cost to determine whether they might be a risky chemical or a chemical of no concern. It is estimated that about 30% of the 86% in early drops in the EPA review process is due to polymer PMNs. Thus, the companies go through a very long process with risk-oriented testing requirements, although exemptions are available. The EU should direct its regulation towards a situation where the application of new monomers or reactants for the manufacturing of polymers should 60 We should mention that the polymer issue is a very technical one. A comprehensive overview and

comparison of the polymer regulations in the EU, Japan and the USA is provided in Keener (1998).

156

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ not generate an obligation to notify the polymers made from those monomers or reactants, where they have been notified. Finally, we are convinced that many of the challenges faced by the chemical industry, namely those regarding the protection of man and of the environment, have stimulated innovation in recent decades. However, much more fundamental scientific research and a wide interdisciplinary approach are still needed to ensure the social, economic and environmental sustainability of the sector. The EU new chemicals regulation should be re-oriented to accompany and facilitate this process.

157

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Recommendations of the SLIM Phase IV Team on Dangerous Substances (Directive 67/548/EEC) Regarding the Notification of New Substances (Recommendations 23.-43.) Topic Notification Scheme

Special Requirements

Working Procedures, Duties, and Responsibilities

Testing Methods

Risk Assessment of New Substances

Confidentiality of Data

Source:

Recom. No.

Recommendation (wording usually as “review”, “consider”, “explore” etc.)

23.

Decrease the number of notifications by e.g. using groups of similar substances etc.

24.

Simplify notification of substances already notified elsewhere

25.

Increase threshold and time period limit for process-oriented R&D (PORD) exemptions

26.

Revise definition of new polymers and testing requirements

27.

Revise notification requirements for intermediates

28.

For the case of site limited, isolated intermediates not covered by the Directive assure adequate information for worker protection

29.

Revise reduced notification requirements for quantities of less than 1 tonne per annum and manufacturer

30.

Improve working procedures and centralize information management where necessary

31.

Balance process for independent review and higher efficiency

32.

The competent authority should get more flexibility to handle renotifications

33.

Inform the notifier of the outcome

34.

Revise Sole Representative facility to avoid unnecessary multiple notifications

35.

Provide more effective mechanisms to promote the sharing of data to avoid repetition of animal testing

36.

Install notification requirement for new substances solely exported to third countries

37.

Speed up use of OECD Test Guidelines

38.

Develop testing methods for particular areas, e.g. for enzyme evaluation

39.

The notifier should be responsible for initial risk assessment

40.

Establish appropriate triggers

41.

Provide risk assessment information to public

42.

Harmonize decision criteria for additional testing of level 1 and 2

43.

Balance interest of public information with confidentiality interest

European Commission (1999b)

158


8

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Appendix Document A.1:

Extract from an EPA Consent Order (Pending Development of Information)*

United States Environmental Protection Agency Office of Pollution Prevention and Toxics Regulation of a New Chemical Substance Pending Development of Information Consent Order and Determinations Supporting Consent Order Table of Contents Preamble I.

Introduction

II.

Summary of Terms of the Order

III.

Contents of PMN

IV.

EPA’s Assessment of Environmental Release

V.

EPA’s Conclusions of Law

VI.

Information Required to Evaluate Environmental Effects

Consent Order I.

Terms of Manufacture, Import, Processing, Distribution in Commerce, Use, and Disposal Pending Submission and Evaluation of Information

II.

Recordkeeping

III.

Successor Liability Upon Transfer of Consent Order

IV.

Modification and Revocation of Consent Order

V.

Effect of Consent Order

Attachment A – Definitions Attachment B – Notice of Transfer of Consent Order

* This extract is based on an original consent order which a US company has signed. Since specific

concerns are often very similar to concerns which have engendered prior orders the EPA has developed a set of typical consent orders. These so-called standard “boilerplate” orders can be found under .

167


PREAMBLE I.

Introduction

[…] II.

Summary of Terms of the Order

The Consent Order for this PMN substance requires the Company to maintain certain records and submit to EPA certain toxicity testing at least 14 weeks before manufacturing or importing a total of 400,000 kilograms of the PMN substance. III. Contents of PMN Confidential Business Information Claims (Bracketed in the Preamble and Order): Chemical Identity: CAS Registry Number: Use: Specific: Generic: Maximum 12-Month Production Volume: 500,000 kg/yr. Test Data Submitted with PMN: None. IV.

EPA’s Assessment of Environmental Release Manufacture/Process 1*

Process 2

Use

# Sites

[ ]

[ ]

[ ]

# Days/Year

[ ]

[ ]

[ ]

Water Releases (kg/year)

60

140

5,000

Not expected

1,200

500

60

1,340

5,500

Landfill Releases (kg/year) Total Releases (kg/year)

V.

EPA’s Conclusions of Law

The following findings constitute the basis of the Consent Order: A.

*

EPA is unable to determine the potential for adverse environmental effects resulting from exposure to the PMN substance. EPA therefore concludes, pursuant to section 5(e)(1)(A)(i) of TSCA, that the information available to the Agency is insufficient to permit a reasoned evaluation of the environmental effects of the PMN substance. [ ]

168

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ B.

In light of the estimated production volume and environmental release of the PMN substance, EPA has further concluded, pursuant to section 5(e)(1)(A)(ii)(II) of TSCA, that the PMN substance will be produced in substantial quantities and may reasonably be anticipated to enter the environment in substantial quantities.

VI.

Information Required to Evaluate Environmental Effects

The information required to evaluate the environmental effects of the PMN substance is described in the Testing Section of the Order and also may include longer term tests if necessitated by the results of the described tests.

CONSENT ORDER I.

Terms of Manufacture, Import, Processing Distribution in Commerce, Use, and Disposal Pending Submission and Evaluation of Information

“The Company” is prohibited from manufacturing, importing, processing, distributing in commerce, using, and disposing of the chemical substance “the PMN substance” in the United States, for any nonexempt commercial purpose, pending the development of information necessary for a reasoned evaluation of the environmental effects of the substance, and the completion of EPA’s review of that information, except under the following conditions: Manufacturing […] Testing a.

Any information on the PMN substance which reasonably supports the conclusion that the PMN substance presents a substantial risk of injury to health or the environment required to be reported under EPA’s section […]

b.

The Company shall notify, in writing, the EPA Laboratory Data Integrity Branch (2225A), […]

c.

[…]

d.

The Company is prohibited from manufacturing or importing the PMN substance beyond an aggregate manufacture and import volume of 400,000 kilograms (“the production limit”), unless the Company conducts the following studies on the PMN substance and submits all final reports and underlying data in accordance with the conditions specified in this Testing section:

169

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Study Ready biodegradation of the submitter’s choice Semicontinuous activated sludge Acute algal Acute daphnia Acute fish e.

[…]

f.

[…]

g.

If EPA finds that the data generated by a study are scientifically equivocal61, the Company may continue to manufacture and import the PMN substance beyond the applicable production limit.

h.

[…], if, within 6 weeks of EPA’s receipt of a test report and data, the Company receives written notice that EPA finds that the data generated by a study are scientifically invalid,62 the Company is prohibited from further manufacture and import of the PMN substance beyond the applicable production limit.

i.

[…]

j.

(1) EPA may notify the Company in writing that EPA finds that the data generated by a study are scientifically valid and unequivocal and indicate that, despite the terms of this Order, the PMN substance will or may present an unreasonable risk of injury to human health or the environment. EPA’s notice may specify that the Company undertake certain actions concerning further testing, manufacture, import, processing, distribution, use and/or disposal of the PMN substance to mitigate exposures to or to better characterize the risks presented by the PMN substance. Within 2 weeks from receipt of such a notice, the Company must cease all manufacture, import, processing, distribution, use and disposal of the PMN substance, unless either: […]

Risk Notification a.

If as a result of the test data required under the terms of this Order, the Company becomes aware that the PMN substance may present a risk of injury to the environment (or is so notified by EPA), the Company must incorporate this new information, and any information on methods for protecting against such risk, into a Material Safety Data

61 “Scientifically equivocal data” means data which, although developed in apparent conformity with

the Good Laboratory Practice Standards and EPA-approved protocols, are inconclusive, internally inconsistent, or otherwise insufficient to permit a reasoned evaluation of the potential risk of injury to human health or the environment of the PMN substance. 62 “Scientifically invalid” means any significant departure from the EPA-approved protocol or the Good Laboratory Practice Standards at 40 CFR Part 792 without prior or subsequent Agency approval that prevents a reasoned evaluation of the health or environmental effects of the PMN substance.

170

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Sheet (“MSDS”),63 as described in 40 CFR section 721.72 (c), within 90 days from the time the Company becomes aware of the new information. If the PMN substance is not being manufactured, imported, processed, or used in the Company’s workplace, the Company must add the new information to an MSDS before the PMN substance is reintroduced into the workplace. b.

The Company must ensure that persons who will receive the PMN substance from the Company, or who have received the PMN substance from the Company within 5 years from the data the Company becomes aware of the new information described in paragraph (a) of this section, are provided an MSDS containing the information required under paragraph (a) within 90 days from the time the Company becomes aware of the new information.

II.

Recordkeeping

a.

The Company shall maintain the following records until 5 years after the date they are created and shall make them available for inspection and copying by EPA in accordance with section 11 of TSCA:

A.

Records

1.

Records documenting the aggregate manufacture and importation volume of the PMN substance and the corresponding dates of manufacture and import;

2.

Records documenting the names and addresses (including shipment destination address, if different) of all persons outside the site of manufacture or import to whom the Company directly sells or transfers the PMN substance, the date of each sale or transfer, and the quantity of the substance sold or transferred on such date;

3.

Copies of material safety data sheets required by the Risk Notification section of this Order;

4.

Copies of any Transfer Documents and notices required by the Successor Liability section of this Order, if applicable; and

5.

The Company shall keep a copy of this Order at each of its sites where the PMN substance is manufactured, imported, processed, or used.

B.

Applicability

The provisions of this Recordkeeping Section are applicable only to activities of the Company and not to activities of the Company’s customers. III. Successor Liability upon Transfer of Consent Order […]

63 The Material Safety Data Sheet is the written listing of safety data for the chemical substance.

171

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ IV.

Modification and Revocation of Consent Order

The Company may petition EPA at any time, based upon new information on the environmental effects or environmental releases of the PMN substance, to modify or revoke substantive provisions of this Order. The exposures and risks identified by EPA during its review of the PMN substance and the information EPA determined to be necessary to evaluate those exposures and risks are described in the preamble to this Order, EPA will consider all relevant information available at the time the Agency makes that determination, including, where appropriate, any reassessment of the test data or other information that supports the findings in this Order, an examination of new test data or other information or analysis, and any other relevant information. EPA will issue a modification or revocation if EPA determines that the activities proposed therein will not present an unreasonable risk of injury to health or the environment and will not result in significant or substantial human exposure or substantial environmental release in the absence of data sufficient to permit a reasoned evaluation of the health or environmental effects of the PMN substance. In addition, the Company may petition EPA at any time to make other modifications to the language of the Order. EPA will issue such a modification if EPA determines that the modification is useful, appropriate, and consistent with the structure and intent of this Order as issued. V.

Effect of Consent Order

[…] Attachment A […] Attachment B […]

172

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Table A.1:

The Sample of 249 Firms Used in the Analysis

Company AGA AB Air Liquide (L) SA Air Products & Chemicals Inc Akzo Nobel Ny Albemarle Corp Alberto-Culver Co Albright & Wilson Ltd Alfin Inc Anglo United plc Armour Trust plc Asahi Organic Chem Ind Ausimont Avon Products Bairnco Corp Balchem Corp BASF AG Bayer AG Beauticontrol Cosmetics Inc Beiersdorf AG Block Drug Boc Group plc Body Shop International plc Borden Chem&Plast Borden Inc Borealis Brent International plc British Vita Group plc BTP plc Burelle SA Burmah Castrol plc Bush Boake Allen Inc Cabot Corp Caffaro Calgon Carbon Corp Cambrex Corp Carson Inc Carter-Wallace Inc CEA Industrie SA Cheminova Holding A/S Chemring Group plc Chr Hansen Group Christian Dior SA Chugoku Marine Paints Ltd Church & Dwight Inc Clarins SA Clorox Co/De Colgate-Palmolive Co Co-Op Chemical Co Ltd Courtaulds plc Creighton Naturally plc Company

SIC Coun- Sales 1996 Employees OMAD CF/S GrS GrFA (%) (%) (%) (%) try in Mill. 1996 in 1993-97 1993-97 1993-97 1993-97 US-$ 1,000 281 SWE 1,917.8 10.521 11.8 22.6 -0.9 5.8 281 FRA 6,723.4 27.800 12.9 16.5 3.2 6.3 281 USA 4,008.0 15.200 14.2 18.7 7.7 10.3 280 NLD 13,315.7 70.700 8.6 11.0 6.4 10.0 282 USA 854.5 2.800 10.0 16.8 2.2 -2.4 284 USA 1,590.4 10.700 6.7 5.5 10.3 9.6 280 GBR 1,098.7 4.035 6.3 8.4 2.6 18.6 284 USA 34.7 0.109 -3.1 -1.8 -8.2 -31.3 281 GBR 118.7 0.819 6.2 -11.0 -37.9 -11.5 280 GBR . . 6.7 1.1 -4.8 3.6 282 JPN 394.7 1.028 2.9 6.1 1.7 13.9 281 ITA 425.1 1.662 1.5 24.8 0.0 -10.7 284 USA 4,814.2 33.700 11.3 7.8 5.9 4.9 282 USA 150.2 0.820 9.8 8.8 -0.3 -1.1 280 USA 26.4 0.116 11.1 10.4 18.1 11.3 280 DEU 32,431.4 103.406 6.7 12.4 3.1 1.1 280 DEU 32,319.7 142.200 7.2 10.5 4.0 5.4 284 USA 80.1 0.286 8.6 7.8 3.3 3.3 284 DEU 3,841.9 17.385 7.4 7.8 4.8 -2.0 284 USA 862.5 3.703 6.9 8.7 7.0 6.0 281 GBR 5,788.0 40.913 12.1 13.9 4.1 6.2 284 GBR 427.9 3.899 13.8 12.8 10.9 7.1 282 USA 709.2 . 13.6 16.1 14.4 -2.0 286 USA 3,681.3 11.500 4.2 0.5 -22.6 -20.0 282 DNK 2,744.1 6.397 9.4 12.7 5.6 -3.7 280 GBR 218.9 1.223 6.0 7.4 1.1 -0.5 282 GBR 1,399.2 13.215 5.3 7.4 -0.3 2.8 280 GBR 641.9 2.981 12.0 10.2 15.5 29.7 282 FRA 1,592.8 9.664 3.2 6.9 14.4 12.4 289 GBR 4,778.9 21.180 8.5 6.9 2.8 -2.5 286 USA 449.4 2.103 10.9 9.8 9.9 13.6 289 USA 1,856.3 4.700 12.1 11.7 1.2 6.2 282 ITA 663.1 2.534 5.1 7.3 6.7 2.1 281 USA 290.2 1.297 11.5 11.6 2.2 -1.5 286 USA 359.4 1.292 11.2 11.3 17.0 27.0 284 USA 59.9 0.402 11.1 2.9 35.3 36.5 284 USA 652.0 3.460 7.9 4.8 0.3 0.3 281 FRA 10,362.8 43.587 4.1 19.9 9.5 -0.2 280 DNK 315.4 1.252 11.3 15.1 13.9 19.1 289 GBR 124.0 1.395 8.1 0.7 2.0 5.7 286 DNK 386.1 2.274 11.6 12.5 20.0 11.9 284 FRA 6,326.6 21.338 22.2 11.7 15.4 5.3 285 JPN 385.6 0.507 4.3 3.5 22.5 13.2 284 USA 527.8 0.937 4.5 5.8 2.3 3.5 284 FRA 579.9 3.179 13.5 10.3 11.4 8.3 284 USA 2,225.5 5.300 17.0 14.6 8.4 -0.3 284 USA 8,749.0 37.900 13.1 9.9 5.3 9.0 287 JPN 240.4 0.571 2.2 3.9 -4.1 -0.3 280 GBR 3,331.9 17.000 7.3 8.1 -1.3 9.2 284 GBR 16.0 0.171 -5.6 3.3 2.2 -4.3 SIC Coun- Sales 1996 Employees OMAD CF/S GrS GrFA (%) (%) (%) (%)

173

Econ. Innov Perf. Perf. Rank Rank 33 41 19 75 79 109 90 248 249 231 167 154 87 155 39 123 106 137 160 115 60 36 34 247 98 188 177 14 119 159 55 78 166 101 17 8 192 85 23 196 25 12 95 194 46 32 59 239 125 244 Econ.

23 119 126 9 99 41 120

21 58 10 7 19 44 90

15 82 100 57 91 70 24 83 101 29 92 84 64 59 25 4 127 Innov

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ try Croda International plc Crompton & Knowles Corp Cytec Industries Inc Dai Nippon Toryo Co Ltd Daicel Chemical Ind Daido Hoxan Dai-Ichi Kogyo Seiyaku Co Lt Dainichiseika Col & Chem Mfg Dainippon Ink & Chemicals Inc Daiso Co Ltd Del Laboratories Inc Denki Kagaku Kogyo Kk Dial Corporation Dow Chemical DSM Nv Du Pont (E I) De Nemours Dyno Industrier A/S Eastman Chemical Co Ecolab Inc Ehlebracht AG EMS-Chemie Holding AG Engrais Rosier SA EPC Groupe Ethyl Corp European Colour plc Ferro Corp First Mississippi Corp Fisipe Flugger A/S FMC Corp Freeport Mcmoran Res Fuller (H. B.) Co General Chemical Grp Inc Geon Company Georgia Gulf Corp Gibbon Group plc Gifrer Barbezat SA Goldschmidt (Th) AG Grace (W R) & Co Grande Paroisse Great Lakes Chemical Corp Grupo Uralita SA Guest Supply Inc Gun-Ei Chemical Industry Co Harima Chemicals Inc Henkel KGaA Hercules Inc Hodogaya Chemical Co Ltd Hoechst AG Hokko Chemical Industry Co Ltd Hygaea ICI plc Company

280 286 289 285 282 280 284 286 280 280 284 282 284 282 282 282 289 282 284 282 282 287 280 286 280 285 287 282 285 280 287 289 281 282 281 289 284 280 289 287 289 280 284 282 280 284 289 280 280 280 285 280 SIC

GBR USA USA JPN JPN JPN JPN JPN JPN JPN USA JPN USA USA NLD USA NOR USA USA DEU CHE BEL FRA USA GBR USA USA PRT DNK USA USA USA USA USA USA GBR FRA DEU USA FRA USA ESP USA JPN JPN DEU USA JPN DEU JPN DNK GBR Country

In Mill. 1996 in 1993-97 1993-97 1993-97 1993-97 Perf. Perf. Rank Rank US-$ 1,000 699.2 3.251 9.7 9.9 2.0 8.8 92 136 1,804.0 5.665 13.0 8.2 40.0 61.6 2 3 1,259.6 4.700 4.4 9.9 6.5 2.1 151 50 717.9 1.079 3.5 3.2 5.2 3.2 203 2,321.3 3.106 3.7 13.2 18.1 3.1 93 121 1,466.0 1.573 3.4 4.0 18.4 37.1 45 376.0 0.984 2.3 2.8 3.0 11.8 195 1,286.6 1.714 3.3 2.9 2.9 1.2 215 8,417.2 6.988 4.1 5.8 25.9 0.6 121 6 464.4 0.663 1.6 4.9 4.4 2.8 219 233.0 1.329 8.2 6.0 12.9 11.9 80 60 2,203.1 3.426 5.0 5.9 7.1 0.5 176 1,406.4 2.812 10.2 4.3 -0.1 13.9 113 85 20,079.0 40.289 13.5 14.3 1.3 -1.7 74 71 6,090.5 18.428 7.2 14.0 5.5 -2.2 107 45 38,504.0 97.000 12.6 14.7 1.7 1.6 65 12 1,504.8 7.706 6.3 8.4 7.2 5.6 138 102 4,782.0 17.505 14.4 15.2 4.5 5.2 43 61 1,490.0 9.573 12.3 12.4 10.4 15.3 27 13 147.9 1.087 6.4 9.0 12.0 26.8 48 765.6 2.795 14.9 30.2 -5.5 -10.2 35 137 79.5 0.121 6.0 6.3 7.3 5.0 156 122 163.3 1.045 3.2 8.7 -0.7 -3.7 223 1,149.7 1.800 13.7 12.7 -16.1 -8.4 163 93 37.1 0.181 13.0 10.1 15.9 27.0 18 1,355.7 6.912 8.0 6.0 4.9 2.0 149 594.9 1.170 9.8 11.0 -1.1 -2.1 134 110 72.8 0.330 2.3 8.8 7.0 -6.0 209 167.5 1.017 8.8 10.0 15.2 10.0 64 4,969.4 22.048 7.2 8.1 1.9 3.0 142 26 957.0 . 12.3 1.4 1.0 -13.5 217 1,275.7 5.900 6.2 5.9 7.1 12.7 114 86 623.7 2.256 21.0 11.5 9.0 19.1 10 123 1,144.4 1.683 5.9 7.0 5.7 -3.1 178 896.2 1.030 19.8 13.9 5.3 14.5 13 138 51.3 0.324 8.0 6.9 10.4 10.0 94 33 51.2 0.259 2.6 6.2 5.0 0.3 210 939.5 6.029 2.4 7.0 2.3 7.9 180 5 3,454.1 17.400 8.8 7.4 -19.1 -10.5 240 1,052.1 2.822 8.4 10.8 5.7 -4.8 140 2,211.7 7.000 20.1 16.7 0.5 10.7 15 16 1,067.6 5.786 6.0 6.8 -13.4 -5.4 238 39 179.0 0.980 4.6 4.4 18.8 22.0 70 177.9 0.398 6.4 12.6 4.6 5.0 105 254.5 0.474 3.9 6.2 6.7 2.4 187 10,838.6 46.377 5.1 9.1 5.3 2.9 141 2 2,060.0 7.114 16.9 18.0 -8.0 -12.4 88 111 799.2 0.748 -0.4 -0.5 37.3 -0.2 164 33,861.6 147.862 5.0 20.0 1.1 0.0 96 87 428.7 0.799 2.5 3.0 3.4 -1.5 230 31.2 0.140 7.9 9.9 2.9 -2.6 157 139 16,432.2 64.000 5.3 7.0 -2.0 -3.6 212 14 Sales 1996 Employees OMAD CF/S GrS GrFA Econ. Innov (%) (%) (%) (%) Perf. Perf. in Mill. 1996 in 1993-97 1993-97 1993-97 1993-97 Rank Rank

174

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ IMC Global Inc Intl Flavors & Fragrances Intl Specialty Prods Inc Ishihara Sangyo Kaisha Ltd Jacob Holm Jacques Bogart Japan Carlit Co Ltd Japan Synthetic Rubber Co Ltd Jeyes Group plc Kanebo Ltd Kaneka Corporation Kansai Paint Co Ltd Kanto Denka Kogyo Co Ltd Kao Corporation Kemira Oy Kerr-Mcgee Corp Koatsu Gas Kogyo Co Ltd Kuraray Co Ltd Kureha Chemical Industry Co Laporte plc Lauder Estee Cos Inc Lawter International Inc Learonal Inc Lee Pharmaceuticals Lenzing AG Lilly Inds Inc Lintec Corporation Lion Corporation L'Oreal SA LSB Industries Inc Lubrizol Corp Lyondell Petrochemical Macdermid Inc Manufacture Landaise De Prod Mcwhorter Technologies Inc Minerals Technologies Inc Minnesota Mining & Mfg Co Mississippi Chemical Corp Mitsubishi Gas Chemical Co I Mitsui Petrochemical Industr Monsanto Co Morton International Inc Nalco Chemical Co NCH Corp Nichias Corp Nichiban Co Ltd Nihon Nohyaku Nihon Parkerizing Co Ltd Nihon Tokushu Toryo Co Ltd Nippon Carbide Industries Co Nippon Chemical Industrial Co Nippon Kasei Chemical Co Ltd Company

287 286 286 281 282 284 280 282 284 284 282 285 280 284 280 281 281 282 282 280 284 282 289 284 282 285 289 284 284 281 286 286 289 280 282 281 280 287 280 280 280 289 289 284 289 280 287 289 280 280 281 281 SIC

US-$ 1,000 USA 2,981.0 9.200 14.3 6.8 26.8 15.9 20 USA 1,436.1 4.629 25.2 19.1 5.0 9.8 6 46 USA 716.5 2.700 17.5 16.7 5.8 2.6 28 42 JPN 947.7 1.536 -0.8 0.0 15.4 -3.1 236 DNK 128.9 0.583 7.1 15.6 8.5 4.4 71 FRA 115.4 0.545 8.3 6.7 -6.2 -7.5 224 JPN 234.2 0.422 1.2 8.6 28.3 12.7 69 JPN 2,033.5 3.021 3.7 8.2 8.4 2.1 172 94 GBR 176.4 1.123 2.8 4.0 0.6 2.6 222 62 JPN 5,412.6 6.713 -0.8 0.5 10.7 -7.6 242 JPN 2,736.8 3.447 4.1 9.5 5.7 5.8 144 JPN 1,665.8 3.005 3.3 5.1 5.8 -5.6 227 18 JPN 275.9 0.605 6.8 7.1 3.3 14.2 117 JPN 8,020.7 7.106 7.5 11.7 7.1 0.0 120 22 FIN 2,934.6 10.631 8.8 11.0 3.0 -3.2 126 72 USA 1,931.0 3.851 10.1 19.5 -10.3 -3.5 110 JPN 412.2 0.573 3.8 4.3 3.9 3.4 206 JPN 3,026.3 5.121 6.5 7.8 5.8 2.4 143 112 JPN 1,011.9 1.835 -0.1 6.1 8.4 -0.5 226 GBR 1,661.0 6.979 11.8 8.8 9.9 4.7 66 73 USA 3,194.5 13.500 9.5 6.7 8.0 15.4 76 47 USA 193.8 0.502 15.2 14.0 4.4 20.2 24 USA 212.2 0.800 10.1 9.4 11.9 20.7 38 USA 6.9 0.022 -3.6 2.8 -6.7 -13.4 246 51 AUT 735.9 4.936 1.0 7.4 -3.3 3.7 218 133 USA 509.0 2.140 11.4 7.5 21.8 24.7 22 JPN 1,220.1 2.968 4.8 6.0 8.6 8.5 152 JPN 3,178.6 3.738 2.0 5.1 4.5 -1.7 213 FRA 11,800.7 43.158 12.4 9.4 11.2 9.2 49 63 USA 307.2 1.553 1.4 2.7 5.4 15.3 186 USA 1,597.6 4.358 12.3 13.5 1.6 13.6 52 36 USA 5,052.0 2.835 9.6 7.2 -6.5 14.6 108 113 USA 293.7 1.086 13.1 10.4 15.7 11.0 37 FRA 56.0 0.302 3.1 6.9 4.0 -5.2 225 USA 315.9 0.590 7.6 6.8 11.6 16.4 68 74 USA 556.0 2.250 11.7 15.5 8.9 8.1 47 104 USA 14,236.0 74.289 16.3 16.4 4.7 1.1 30 79 USA 428.8 1.008 14.2 13.3 10.5 46.7 4 JPN 2,938.3 3.619 4.0 7.6 2.1 -0.4 190 128 JPN 3,555.2 3.440 5.3 7.2 11.8 -4.3 173 105 USA 9,262.0 28.000 12.8 12.4 -0.1 -3.9 97 66 USA 3,647.1 14.100 14.0 12.8 5.4 2.0 62 27 USA 1,303.5 6.502 17.5 17.2 1.1 -1.5 44 115 USA 766.8 10.458 7.4 6.4 2.9 -0.8 181 JPN 1,108.1 2.248 3.3 3.8 2.9 7.7 191 JPN 418.2 1.014 4.7 4.2 1.5 1.2 208 JPN 476.7 0.798 0.7 3.6 1.9 6.1 229 JPN 578.2 1.032 3.0 5.0 10.4 2.6 183 JPN 301.7 0.676 0.8 4.3 0.0 0.8 234 JPN 740.6 0.707 2.6 2.7 17.9 -0.2 182 JPN 344.6 0.707 1.6 22.3 5.8 17.3 56 JPN 344.3 0.426 1.6 3.5 4.1 4.6 220 Coun- Sales 1996 Employees OMAD CF/S GrS GrFA Econ. Innov (%) (%) (%) (%) Perf. Perf. try In Mill. 1996 in 1993-97 1993-97 1993-97 1993-97 Rank Rank US-$ 1,000

175

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Nippon Kayaku Co Ltd Nippon Paint Co Ltd Nippon Sanso K K Nippon Shokubai Co Ltd Nippon Soda Co Ltd Nippon Steel Chemical Co Ltd Nippon Synthetic Chemical Inc Nippon Zeon Co Ltd Nissan Chemical Industries Ltd Nl Industries Nof Corporation Norit NV Norsk Hydro A/S Okura Industrial Co Ltd Olin Corp OM Group Inc Osaka Sanso Kogyo Ltd Paterson Zochonis plc Perstorp AB Plastic Omnium SA PPG Industries Inc Praxair Inc Procter & Gamble Co Rasa Industries Ltd Reckitt & Colman plc Recticel Revlon Inc Rhone-Poulenc SA Rogers Corp Rohm & Haas Co RPM Inc-Ohio Rutgers AG Sakai Chemical Industry Co Lt Sakata Inx Corporation Sanyo Chemical Industries Ltd Schulman (A.) Inc Schweizerhall Holding AG Scotts Company Scott's Liquid Gold Sherwin-Williams Co Shikoku Chemicals Corp Shin-Etsu Chemical Co Ltd Shin-Etsu Polymer Co Ltd Shiseido Co Ltd Showa Denko K K Showa Highpolymer Co Ltd Sika Finanz AG Simona AG Sinclair (William) Holding plc Smith International Inc Snia Bpd SpA Solvay SA

280 285 281 286 281 286 286 282 280 281 289 281 287 280 280 281 281 284 280 282 285 281 284 287 284 282 284 280 282 282 285 280 280 280 282 282 280 287 284 285 280 282 282 284 280 280 287 280 287 289 282 282 SIC

JPN JPN JPN JPN JPN JPN JPN JPN JPN USA JPN NLD NOR JPN USA USA JPN GBR SWE FRA USA USA USA JPN GBR BEL USA FRA USA USA USA DEU JPN JPN JPN USA CHE USA USA USA JPN JPN JPN JPN JPN JPN CHE DEU GBR USA ITA BEL Country

284 280

USA JPN

Company Specialty Chem Res St Chemical Co Ltd

1,065.1 2.790 7.5 8.5 4.2 6.6 122 75 1,931.5 2.810 2.9 4.8 12.3 -0.7 199 76 2,377.5 1.977 3.4 6.5 5.3 -9.8 232 52 1,471.6 2.275 6.1 10.0 10.5 -0.5 139 1,558.4 1.619 2.7 5.6 22.3 5.9 111 3,063.7 2.375 0.5 1.9 6.0 -2.8 237 559.8 0.950 2.0 6.2 6.2 1.9 204 1,592.8 2.835 4.3 6.3 15.8 -2.6 171 116 1,223.7 1.561 6.6 6.4 9.9 1.9 153 88 986.1 3.100 6.5 2.9 -0.7 -7.8 233 140 1,339.0 2.415 3.4 5.4 3.6 2.0 201 218.0 1.342 5.1 13.4 14.1 -4.3 118 67 13,142.7 35.400 11.4 13.4 8.3 4.7 58 129 869.1 2.599 3.8 6.0 2.0 1.5 202 2,638.0 9.300 7.5 9.4 1.1 -1.5 161 106 388.0 0.442 13.3 11.7 16.5 29.2 11 514.8 0.704 2.5 8.1 3.9 -1.1 205 562.7 . 5.3 8.6 10.3 17.0 86 1,881.3 10.236 5.8 8.3 5.9 0.9 148 48 1,412.7 8.697 3.8 7.4 11.9 10.2 112 7,218.1 31.300 16.5 13.8 5.0 -0.7 50 20 4,449.0 25.271 16.1 17.0 13.7 16.4 9 53 35,284.0 103.000 12.7 10.5 4.1 3.3 73 68 231.6 0.615 8.1 8.0 8.6 15.0 83 3,627.3 17.425 13.1 11.6 2.3 1.9 84 30 1,132.7 7.463 1.5 4.4 6.7 0.3 216 80 2,167.0 14.300 8.5 2.3 11.2 1.6 146 16,781.6 75.250 6.5 10.4 0.3 0.2 158 141.5 0.854 8.8 12.5 4.0 9.3 81 89 3,982.0 11.633 13.5 14.3 5.5 2.6 51 38 1,350.5 6.651 12.4 9.5 21.1 18.2 21 37 3,239.1 15.348 1.2 5.5 2.7 -2.2 228 77 678.5 0.875 6.2 6.6 18.5 1.4 116 1,462.7 1.119 3.4 3.0 29.0 10.1 89 629.9 1.140 9.7 11.1 3.6 3.2 103 141 976.7 2.018 8.2 7.1 7.4 10.2 100 130 570.2 0.709 3.2 3.3 2.9 10.7 198 44.1 0.172 12.3 8.3 17.3 11.5 67 752.8 3.168 9.3 5.8 13.0 25.5 26 4,132.9 20.768 10.0 8.2 12.5 12.7 61 31 371.0 0.662 4.2 4.5 5.2 5.4 184 5,556.0 3.473 10.1 13.7 11.3 8.6 57 637.6 3.473 4.2 5.8 10.0 4.6 165 5,237.1 4.204 6.1 6.4 4.3 -2.9 197 134 5,246.9 4.332 3.8 2.1 7.8 2.5 211 43 287.6 0.628 5.1 6.1 1.4 9.0 168 143 1,141.0 6.913 7.1 8.8 -2.9 -0.5 179 49 189.0 0.922 7.9 11.0 1.6 -0.6 136 144 70.4 0.529 10.6 11.8 7.6 1.6 82 1,156.7 5.975 10.6 7.3 60.4 45.7 3 81 1,921.4 8.962 5.7 8.1 -6.4 -4.8 214 9,109.5 35.400 4.2 9.7 2.4 0.8 174 32 Sales 1996 Employees OMAD CF/S GrS GrFA Econ. Innov (%) (%) (%) (%) Perf. Perf. In Mill. 1996 in 1993-97 1993-97 1993-97 1993-97 Rank Rank US-$ 1,000 38.9 0.187 -1.8 -8.1 -3.3 32.9 235 361.8 0.631 6.7 5.1 4.3 0.5 185

176

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Stepan Co Sterling Chemicals Hldgs Inc Sud-Chemie AG Sumitomo Bakelite Co Ltd Sumitomo Chemical Co Ltd Sumitomo Osaka Cement Co Lt Sumitomo Seika Chemicals Co Sybron Chemicals Inc Takasago International Corp Takiron Co Ltd Tayca Corporation Teijin Ltd Teisan K K Terra Nitrogen Co Tessenderlo Chemie Tetra Technologies Inc Titan Kogyo Kk Toagosei Toda Kogyo Corporation Tohpe Corporation Tokai Carbon Co Ltd Tokuyama Corporation Tokyo Ohka Kogyo Co Ltd Tosoh Corporation Toyo Chemical Co Ltd Toyo Ink Manufacturing Co Lt Treatt plc Tsutsunaka Plastic Industry UCB SA-NV Union Carbide Corp Universal Foods Corp Valhi Inc Valspar Corp VGT AG WD-40 Co Wella AG Wellman Inc Witco Corp Wolstenholme Rink plc Yule Catto & Co. plc Zeneca Group plc

Abbreviations:

284 286 281 282 280 289 286 284 280 280 280 282 281 287 280 281 280 280 289 280 289 281 280 280 280 289 280 280 280 286 286 281 285 282 289 284 282 286 289 280 289

USA USA DEU JPN JPN JPN JPN USA JPN JPN JPN JPN JPN USA BEL USA JPN JPN JPN JPN JPN JPN JPN JPN JPN JPN GBR JPN BEL USA USA USA USA DEU USA DEU USA USA GBR GBR GBR

536.6 790.5 734.1 1,694.7 9,001.2 2,282.8 328.5 174.3 863.0 673.4 230.5 5,687.7 773.2 363.1 1,661.0 160.8 93.0 1,450.5 189.2 222.6 582.2 1,927.9 726.9 3,446.6 239.2 2,200.5 45.4 451.1 1,642.0 6,106.0 806.4 1,190.8 859.8 263.1 130.9 2,548.0 1,098.8 2,263.3 139.7 599.6 8,377.0

1.270 1.200 4.822 2.322 6.659 1.861 0.836 0.722 0.973 1.452 0.561 6.704 1.093 . 5.309 0.989 0.333 1.782 0.451 0.523 0.935 2.543 1.492 4.021 0.601 3.028 0.139 0.847 7.622 11.745 4.035 7.620 2.855 1.752 0.149 16.000 3.200 6.724 0.676 3.164 31.100

6.7 9.7 6.7 4.9 5.1 1.3 4.4 9.9 5.4 3.6 -2.0 4.0 5.4 34.6 7.7 9.9 -1.8 4.9 4.8 -0.4 6.3 5.2 13.8 4.6 6.1 3.5 8.9 4.3 8.3 11.9 12.8 8.8 10.5 2.3 27.2 4.3 9.8 7.6 9.1 8.9 16.7

9.2 9.0 7.9 6.6 8.3 6.9 7.4 8.2 4.7 6.8 3.2 7.9 9.5 39.1 12.1 12.0 6.6 7.9 9.1 0.9 10.3 3.8 13.5 6.5 5.8 5.4 7.5 5.7 18.3 14.9 10.4 4.7 8.6 4.6 16.5 6.8 11.1 5.9 7.8 7.8 14.7

6.2 18.9 7.4 15.0 1.1 14.7 3.4 6.1 9.5 6.3 -2.6 19.0 9.1 7.3 7.2 31.4 -3.5 10.8 3.8 -2.1 9.7 5.1 10.0 4.9 2.8 6.5 -4.2 5.0 2.4 6.3 -1.1 18.2 8.5 0.0 6.7 7.3 5.8 5.5 17.9 7.9 4.1

4.3 8.6 3.7 10.7 2.8 12.0 13.6 6.0 8.7 0.7 -7.6 -1.8 0.7 -2.7 0.3 36.3 -0.1 0.8 3.4 -15.8 -2.9 8.8 12.0 -1.8 5.8 3.7 27.8 -3.7 1.1 8.6 3.1 44.2 13.3 3.2 7.6 6.8 16.4 1.9 20.3 -0.2 6.4

132 54 129 104 175 127 135 102 128 193 243 124 130 1 99 5 241 150 170 245 133 162 29 200 169 189 72 207 77 42 91 16 63 221 7 145 53 147 40 131 31

54 145 28 34

17

11 117 95 96 97

69 135 146

132 107 118

147 78 125 98 55

OMAD = Operating Margin after Depreciation (%); CF/S = Cash Flow as a Percentage of Sales (%); GrS = Growth of Sales (%); GrFA = Growth of Fixed Assets (%); SIC = Standard Industrial Classification: 280 = Chemicals General, 281 = Industrial Inorganics, 282 = Plastics, 283 = Pharmaceuticals, 284 = Soap and Detergents, 285 = Paints, Varnishes, 286 = Industrial Organics, 287 = Agrochemicals, 289 = Misc. Chemicals.

177

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Note: The following 21 firms were excluded from the ananlysis of the economic performance since severe outliers occurred for these companies at some point or there were not enough data points available. 1 Alcide Corp 11 Meristem plc 2 Alfin Inc 12 Minnesota Mining & Mfg Co 3 Anglo United plc 13 Mitsubishi Chemical Corp 4 Asahi Chemical Ind Co Ltd 14 Pioneer Cos Inc 5 Clariant (Switzerland) AG 15 Pyrocap International Corp 6 Ecogen Inc 16 Scotts Company 7 Elf Atochem 17 Semperit AG 8 Kali-Chemie AG 18 Smith International Inc 9 Krems Chemie AG 19 Thermolase Corp 10 Lyondell Petrochemical 20 Wasag-Chemie AG 21 Wilshire Technologies Inc

178

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Table A.2: Rank

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Innovation Ranking 1996/97: Ranking of all 147 Companies Company

Ciba Specialty Chemicals Henkel KgaA Crompton & Knowles Corp Colgate-Palmolive Co Goldschmidt (Th) AG Dainippon Ink & Chemicals Inc Bayer AG (Group) Clariant (Switzerland) AG Akzo Nobel Ny BASF AG Teijin Ltd Du Pont (E I) De Nemours Ecolab Inc ICI plc Borealis Great Lakes Chemical Corp Sybron Chemicals Inc Kansai Paint Co Ltd Beiersdorf AG PPG Industries Inc Avon Products Kao Corporation AGA AB Caffaro Clorox Co/De FMC Corp Morton International Inc Sud-Chemie AG Carter-Wallace Inc Reckitt & Colman plc Sherwin-Williams Co Solvay SA Gibbon Group plc Sumitomo Chemical Co Ltd Elf Atochem Lubrizol Corp RPM Inc-Ohio Rohm & Haas Co Grupo Uralita SA Novartis Alberto-Culver Co Intl Specialty Prods Inc Showa Denko K K Boc Group plc DSM Nv Intl Flavors & Fragrances Lauder Estee Cos Inc

Country Ann. Avg. No. No. of Innovations of Innovations in Year CHE DEU USA USA DEU USA DEU CHE NLD USA JPN USA FRA GBR GBR USA USA JPN GBR SWE USA JPN SWE ITA USA USA USA DEU USA BEL USA BEL GBR JPN CHE USA GBR USA ESP CHE USA USA JPN GBR JPN USA USA

179

114 31.5 29.5 26.5 26 25.5 21 20.5 18.5 18.5 16 15.5 15.5 15.5 15 13 13 12 11.5 11.5 11 11 10.5 10.5 10.5 10.5 10.5 10.5 10 10 10 10 9.5 9.5 9 9 9 9 8.5 8.5 8 8 8 7.5 7.5 7.5 7.5

1996 148 29 25 33 31 35 23 10 25 20 16 21 16 16 18 9 13 12 16 12 11 12 12 10 10 10 4 11 6 13 4 9 12 5 9 9 5 11 6 10 13 10 6 7 9 9 10

1997 80 34 34 20 21 16 19 31 12 17 16 10 15 15 12 17 13 12 7 11 11 10 9 11 11 11 17 10 14 7 16 11 7 14 9 9 13 7 11 7 3 6 10 8 6 6 5

Total Note

228 63 59 53 52 51 42 41 37 37 32 31 31 31 30 26 26 24 23 23 22 22 21 21 21 21 21 21 20 20 20 20 19 19 18 18 18 18 17 17 16 16 16 15 15 15 15

*

*

* **

*

*

*

Regulation and Innovation in the Chemical Industry __________________________________________________________________________ Rank

48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

Company

Perstorp AB Sika Finanz AG Cytec Industries Inc Lee Pharmaceuticals Nippon Sanso K K Praxair Inc Stepan Co Zeneca Group plc Asahi Chemical Ind Co Ltd BTP plc Bairnco Corp Church & Dwight Inc Del Laboratories Inc Eastman Chemical Co Jeyes Group plc L'Oreal SA Christian Dior SA Mitsubishi Chemical Corp Monsanto Co Norit NV Procter & Gamble Co Tokuyama Corporation Bush Boake Allen Inc Dow Chemical Kemira Oy Laporte plc Mcwhorter Technologies Inc Nippon Kayaku Co Ltd Nippon Paint Co Ltd Rutgers AG Wella AG Minnesota Mining & Mfg Co Recticel Smith International Inc Brent International plc Calgon Carbon Corp Chr Hansen Group Dial Corporation Fuller (H. B.) Co Hoechst AG Nissan Chemical Industries Ltd Rogers Corp Body Shop International plc Burmah Castrol plc Cheminova Holding A/S Ethyl Corp Japan Synthetic Rubber Co Lt Tessenderlo Chemie Tetra Technologies Inc

Country Ann. Avg. No. No. of Innovations of Innovations in Year USA CHE USA USA JPN USA USA GBR JPN DEU DEU USA USA USA GBR FRA FRA JPN USA NLD USA JPN USA NLD FIN GBR USA JPN JPN DEU DEU USA USA USA GBR USA DNK USA USA DEU JPN USA DNK GBR DNK USA JPN BEL USA

180

7.5 7.5 7 7 7 7 7 7 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6 6 6 6 6 6 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5 5 5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4 4 4 4 4 4 4

1996 6 12 7 6 8 6 1 7 8 4 4 7 8 7 7 6 6 3 6 5 7 6 5 5 4 3 4 6 8 7 4 4 4 3 3 1 2 6 3 4 8 6 4 4 3 2 4 4 4

1997 9 3 7 8 6 8 13 7 5 9 9 6 5 6 6 7 6 9 6 7 5 6 6 6 7 8 7 5 3 4 7 6 6 7 6 8 7 3 6 5 1 3 4 4 5 6 4 4 4

Total Note

15 15 14 14 14 14 14 14 13 13 13 13 13 13 13 13 12 12 12 12 12 12 11 11 11 11 11 11 11 11 11 10 10 10 9 9 9 9 9 9 9 9 8 8 8 8 8 8 8

*

*

*

*

*

* *

* *


97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145

Company

Toagosei Wolstenholme Rink plc Albemarle Corp British Vita Group plc Carson Inc Dyno Industrier A/S Krems Chemie AG Minerals Technologies Inc Mitsui Petrochemical Industr Olin Corp UCB SA-NV Alcide Corp Ecogen Inc First Mississippi Corp Hercules Inc Kuraray Co Ltd Lyondell Petrochemical Meristem plc Nalco Chemical Co Nippon Zeon Co Ltd Teisan K K Union Carbide Corp Air Liquide (L) SA Albright & Wilson Ltd Daicel Chemical Ind Engrais Rosier SA General Chemical Grp Inc Kali-Chemie AG Wellman Inc Air Products & Chemicals Inc Courtaulds plc Mitsubishi Gas Chemical Co I Norsk Hydro A/S Schulman (A.) Inc Thermolase Corp Tsutsunaka Plastic Industry Lenzing AG Shiseido Co Ltd Tokyo Ohka Kogyo Co Ltd Croda International plc EMS-Chemie Holding AG Georgia Gulf Corp Hygaea Nl Industries Sanyo Chemical Industries Lt Semperit AG Showa Highpolymer Co Ltd Simona AG Sterling Chemicals Hldgs Inc

Country Ann. Avg. No. No. of Innovations of Innovations in Year JPN GBR USA GBR USA NOR AUT USA JPN USA BEL USA USA USA USA JPN USA GBR USA JPN JPN USA FRA GBR JPN BEL USA DEU USA USA GBR JPN NOR USA USA JPN AUT JPN JPN GBR USA USA DNK USA JPN AUT JPN DEU USA

181

4 4 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3 3 3 3 3 3 3 3 3 3 3 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2 2 2 2 2 2 2 1.5 1.5 1.5 1 1 1 1 1 1 1 1 1 1

1996 5 4 5 6 5 6 3 5 4 5 3 2 4 5 3 3 4 3 2 3 3 2 4 4 3 2 3 2 1 2 2 3 2 1 3 1 2 2 1 1 1 1 1 1 1 1 1 1

1997 3 4 2 1 2 1 4 2 7 3 2 3 4 2 1 3 3 2 3 4 3 3 3 1 1 2 3 2 3 3 2 2 1 2 3 1 2 1 1 1 1 1 1 1 1 1 1 1 1

Total Note

8 8 7 7 7 7 7 7 7 7 7 6 6 6 6 6 6 6 6 6 6 6 5 5 5 5 5 5 5 4 4 4 4 4 4 4 3 3 3 2 2 2 2 2 2 2 2 2 2

*

*

* * *

*


146 147

Note:

Company

Tosoh Corporation WD-40 Co

* **

Country Ann. Avg. No. No. of Innovations of Innovations in Year JPN USA

1 1

1996 1 1 1,157

1997 1 1 1,073

Total Note

2 2 2,230

*

The missing innovation counts for one year were substituted by the available data of the other year. In case of Ciba Specialty Chemicals the 1997 and 1998 data was used for the years 1996 and 1997.

182

Table A.3:

EU Notification Statistics, 1983-1999 (Substances Notified for the First Time per Member State and per Year) Notifications 1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Austria Belgium

1

Denmark

1

1

4

1

1

1

9

7

3

5

5

7

1995

1996

1997

1998

1999

3

6

4

3

6

22

11

19

15

10

18

116

1

3

8

1

Finland

3

1

1

Sum

5

France

4

4

10

10

13

12

16

13

8

29

27

23

33

35

34

38

42

351

Germany

2

4

10

14

30

34

32

62

47

55

92

38

70

82

83

79

81

815

1

1

3

7

6

7

5

10

18

16

18

24

116

Greece Ireland Italy

1

5

2

7

10

4

17

14

9

13

10

13

22

19

146

2

4

11

13

18

25

21

12

13

16

45

26

27

19

263

1

3

3

4

2

6

10

6

4

39

1

4

2

Luxembourg Netherlands

1

8

2

Norway Portugal Spain Sweden United Kingdom

Total

3

5

10

9

19

20

16

36

45

47

49

107

80

91

95

15

39

72

82

134

189

231

327

360

426

422

362

297

461

376

Source: Bundesanstalt für Arbeitsschutz und Arbeitsmedizin (2000)

183

7 98

103

833 2,721

Table A.4:

Japanese Notification Statistics, 1974-1998

Year

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

Notifications, total no.

210

82

95

140

180

253

253

228

331

377

364

376

662

313

3,864

Notifications, from Japan

114

45

70

76

140

158

160

150

242

291

275

286

568

269

2,844

Notifications, due to imports

96

37

25

64

40

95

93

78

89

86

89

90

94

44

1,020

Certified for safety total no. (old law)

29

28

57

111

144

230

199

213

305

345

322

327

553

269

3,132

Certified for safety from Japan (old law)

15

15

42

61

113

141

135

142

227

268

243

247

476

229

2,354

Certified for safety due to imports (old law)

14

13

15

50

31

89

64

71

78

77

79

80

77

40

778

Biodegrad. subst., total no.

12

15

24

26

38

46

28

42

78

47

53

61

55

11

536

Biodegrad. subst., from Japan

6

10

20

17

35

41

26

38

62

36

44

56

44

9

444

Biodegrad. subst., due to imports

6

5

4

9

3

5

2

4

16

11

9

5

11

2

92

16

13

33

85

106

184

171

171

226

298

266

264

497

258

2,588

Decision based on concentration, from Japan

8

5

22

44

78

100

109

104

164

232

199

189

431

220

1,905

Decision based on concentration, due to imports

8

8

11

41

28

84

62

67

62

66

67

75

66

38

683

No long-term toxicity, total no.

1

0

0

0

0

0

0

0

1

0

3

2

1

0

8

No long-term toxicity, from Japan

1

0

0

0

0

0

0

0

1

0

0

2

1

0

5

0

0

0

0

0

0

0

3

0

0

0

949 1,170 1,722 1,833 2,216 2,484 2,699 3,278 3,893 4,399

4,660

Decision based on concentration, total no.

No long-term toxicity, due to imports Small volume exemptions, total no.

0

0

0

714

773

931

1987 (1Q)

Sum 1974-1987

3 -

(= 1987)

Small volume applications, total no.

415

469

576

545

617

915

937 1,084 1,273 1,557 1,834 2,177 2,548

3,123

-

(= 1987)

Small volume applications, due to imports

299

304

355

404

553

807

896 1,132 1,211 1,142 1,444 1,716 1,851

1,537 (= 1987)

184

-

Table A.4 continued:

Japanese Notification Statistics, 1974-1998

Year

1987 (2-4Q)

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Sum 1987-1998

Notifications, total no.

57

147

242

272

269

276

229

227

296

320

325

352

3,012

Notifications, from Japan

51

121

198

218

209

213

170

157

223

215

245

274

2,294

Notifications, due to imports

6

26

44

54

60

63

59

70

73

105

80

78

718

Certified for safety, total no.

48

125

197

215

196

210

173

165

220

249

224

226

2,248

Certified for safety, from Japan

42

105

168

171

162

171

131

121

168

160

166

188

1,753

6

20

29

44

34

39

42

44

52

89

58

38

495

Biodegrad. subst., total no.

23

37

32

27

49

43

25

31

37

48

37

28

417

Biodegrad. subst., from Japan

19

31

28

18

39

37

20

25

31

46

31

22

347

4

6

4

9

10

6

5

6

6

2

6

5

69

No suspicion of long-term toxicity, total no.

25

84

163

188

147

167

148

134

183

201

187

198

1,825

No suspicion of long-term toxicity, from Japan

23

71

140

153

123

134

111

96

137

114

135

165

1,402

No suspicion of long-term toxicity, due to imports

2

13

23

35

24

33

37

38

46

87

52

33

423

No long-term toxicity, total no.

0

4

2

0

0

0

0

0

0

0

0

0

6

No long-term toxicity, Japan

0

3

0

0

0

0

0

0

0

0

0

0

3

No long-term toxicity, imports

0

1

2

0

0

0

0

0

0

0

0

0

3

Designed Chemical Substances, total no.

3

14

30

26

41

38

41

39

63

52

62

99

508

Designed Chemical Substances, from Japan

3

11

20

23

28

23

31

21

48

42

46

67

363

Designed Chemical Substances, due to imports

0

3

10

3

13

15

10

18

15

10

16

32

145

Small volume exemptions, total no.

-

5,562 6,262 6,848 7,305 7,236 7,473 7,567 8,050 8,333 8,468 9,007

-

Small volume applications, total no.

-

3,749 4,218 4,799 5,138 5,220 5,405 5,555 5,951 6,113 6,261 6,659

-

Small volume applications, due to imports

-

1,813 2,044 2,049 2,167 2,016 2,068 2,012 2,099 2,220 2,207 2,348

-

Certified for safety, due to imports

Biodegrad. subst., due to imports

Source: MITI (1999)

185

Table A.5:

US-Notification Statistics, 1979-1996 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Total

A. §5 Notices – Total - Premanufacture Notices - Low Volume Exemptions - Test Market Exemptions - Polymer Exemptions B. §5(e) Orders – Total - Unilateral 5(e) Orders - 5(e) w/Testing Trigger - 5(e) Other C. §5(f) Actions D. Receipt of Test Data - Ban Pending Upfront Test - 5(e) Consent Order E. Notices of Commencement* F. Suspended PMNs G. Withdrawals of PMNs – Total - In face of 5(e) - In face of 5(f) - Other H. SNURs – Total - §5(e) SNURs - non-§5(e) SNURs

* ** *** Source:

8 8 0 0 0 0 0 0 0 0 0 0 NA 6 0 0 0 0 0 0 0 0

323 620 909 281 580 839 0 0 0 42 40 70 0 0 0 7 0 4 7 0 2 0 0 0 0 0 2 0 0 0 1 10 5 1 10 5 NA NA NA 172 391 527 0 0 0 9 2 5 1 1 1 0 0 1 8 1 3 0 0 0 0 0 0 0 0 0

1,379 1,272 1,771 2,223 2,334 2,991 1,504 2,738 1,867 1,889 2,138 2,645 2,321 1,892 30,824 1,301 1,192 1,462 1,691 1,780 2,418 1,037 1,930 1,385 1,451 1,628 2,185 1,911 1,471 24,550 0 0 94 237 276 237 265 553 279 259 307 299 309 413 3,528 78 80 61 57 30 18 28 18 25 16 23 17 11 8 622 0 0 154 238 248 318 174 237 178 163 180 144 90 0 2,124 16 41 47 67 61 34 54 86 87 46 76 35 47 30 738 4 1 1 1 0 0 0 0 0 0 0 0 0 0 16 2*** 5 9 21 18 11 34 45 45 29 58 24 44 14 359 10 35 37 45 43 23 20 41 42 17 18 11 3 16 363 0 4 0 0 0 0 0 0 0 0 0 0 0 0 4 42 20 19 32 22 51 63 77 173 290 119 50 73 62 1,109 42 20 19 32 22 45 55 65 154 270 87 37 41 39 944 NA** NA NA NA NA** 6 8 12 19 20 32 13 32 23 165 824 676 799 822 847 1,026 579 988 625 674 645 684 320 33 10,638 0 0 0 0 0 4 0 4 0 2 4 13 121 79 227 30 64 80 90 101 131 125 73 84 86 117 88 50 79 1,214 20 34 33 40 48 79 95 36 50 53 62 21 23 14 611 2 2 2 4 3 0 0 0 0 0 0 0 0 0 14 8 28 45 46 50 52 30 37 34 33 55 67 27 65 589 0 0 12 1 0 0 1 167 114 101 96 33 64 0 589 0 0 9 0 0 0 1 167 104 72 53 11 19 0 436 0 0 3 1 0 0 0 0 10 29 43 22 45 0 153

These reflect PMNs for a specific FY Not Available Historically, one §5(e) order covered 106 synfuel chemicals OPPT New Chemicals Program Annual Report, Washington, D.C.: US EPA (2000a)

186