Innovation and Regulation in the Chemical Industry: The case of the European Union, 1976-2003

This thesis examines the relationship between environmental regulation, innovation, and competitiveness. Specifically, it investigates the impact of regulatory stringency on innovation in the chemical industry by analyzing the evolution of innovative activity in highly regulated technological areas in the European Union from 1976 to 2003. A direct quantitative measure of regulatory impact on innovation was constructed by transforming the economic measurement problem into a technological classification issue. The specific regulation investigated was the EU Council Directive 76/769/EEC, which contains 986 restrictions imposed on the marketing and use of 939 chemical substances. These restrictions were linked to 17 technological fields in the International Patent Classification. The data on patent applications was extracted from the ESPACE Bulletin database maintained by the European Patent Office. Given the increasing regulatory stringency, four questions were investigated: Did regulation spur patenting activity? Has there been a change in the geographical origin of patents? Has there been an increase in patenting concentration? Has there been a change in the direction of the patenting trend? These issues were examined at the aggregated level using descriptive statistics, panel data regressions, and the study of technological trend. Four case studies were conducted to illustrate strategies utilized by European and non-European firms. I found that most restrictions were imposed during the years of 1997 and 2003 and affected mainly technological areas associated with agrochemicals, polymers, and paints and dyes. In overall regulatory stringency impacted positively patenting activity. However, top players were impacted negatively. Consequently, there was a reduction in the concentration of innovative activity in highly regulated technological areas. Ma jor changes occurred in areas in which the largest number of restrictions were imposed. There was an overall increase in innovations associated with new processes and formulations, indicating increased incremental innovation and a shift from patenting in regulated to non-regulated applications. Hence, there was increasing patenting activity in areas that did not depend on novel substances or did not have an opportunity to innovate in non-regulated uses. By contrast, there was a sharp fall in the number of applications in areas in which these conditions did not exist. Two explanations for these results are proposed: “new” technologies benefit from regulatory stringency while “old” technologies are discouraged; regulation spurs the development of substitutes better adapted to the actual regulatory framework. Moreover, this thesis shows that the Porter hypothesis is supported for the chemical industry. Yet, this occurs not because firms innovate under more stringent regulation, but because it stimulates new entrants in the market of innovation.