12 The Effect of Government Regulation on Innovation in the Chemical Industry ARTHUR GERSTENFELD Department of Management, Worcester Polytechnic Institute, Worcester, MA 01607 HOWARD K. NASON I.R.I. Research Corporation, 7800 Bonhomme Avenue, St. Louis, MO 63105
This paper addresses issues concerned with the e f f e c t s of government performance regulations on innovation, (as d i f f e r e n t i a t e d from economic regulations) with p a r t i c u l a r focus on the chemical industry. There is perhaps no other topic more timely these days than that of government regulation and its e f f e c t on what generally is conceded to be a lagging innovation p r o cess in the U.S. There are scarcely any meetings of business persons, government officials, o r academics where t h i s topic does not emerge as a c e n t r a l concern f o r today's economy. The concerns are not l i m i t e d to the borders of the United States since regulatory d i f f e r e n c e s are now being c i t e d as an important f a c t o r a f f e c t i n g i n t e r national balance of trade. It is c l e a r that if some area of the U.S. economy has imposed on it more stringent requirements than a foreign counterpart the U.S. regulations must r e s u l t in increased costs, hence an unfavorable trade p a t t e r n . However, f o r the purposes of t h i s discussion we s h a l l l i m i t our a t t e n t i o n to three aspects, namely growth of performance r e g u l a t i o n s ; unintended consequences; and p r e s c r i p t i o n s f o r improvement. I.
Growth of Regulations
P r i o r to 1960 there were few performance regulations a f f e c t i n g chemicals in industry and the environment. Some of the l e g i s l a t i o n that has since come into e f f e c t includes: (1) The Clean A i r Act The Energy Supply and Environmental Coordination Act The Clean Water Act
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The Federal Environmental P e s t i c i d e Control Act The Occupational Safety and Health Act The Federal i n s e c t i c i d e ; Fungicide, and Rodenticide Act The Mine Safety and Health Act The F i s h and W i l d l i f e Coordination Act The Coastal Zone Management Act The Hazardous Materials Transportation Act The Marine Protection Research and Sanctuaries Act The Resource Conservation and Recovery Act The S o l i d Waste Disposal Act The Toxic Substances Control Act, and The Transportation Safety Act There is little doubt in our minds that economic h i s t o r i a n s will i d e n t i f y the time from i960 to the present as "The Regulatory Period". Regulation today has not only increased in volume but has increased in breadth (2). One used to equate regulations with "Regulatory Controlled Industries" i . e . , transportation, utilities, e t c . However, there is scarcely an industry today that is not a f f e c t e d by the spectre of government regulations. The chemical industry has been p a r t i c u l a r l y a f f e c t e d . II.
Unintended Consequences
In order to examine the unintended consequences from t h i s large growth of government regulation we s h a l l first consider the major forces that have caused t h i s growth to appear. Rising incomes often r e s u l t in demands f o r s o c i a l l e g i s l a t i o n . These demands have been coupled with engineering and science s o p h i s t i c a t i o n and change is coming about r a p i d l y . New products and processes constantly appear with ever decreasing product l i f e c y c l e s , with demands f o r requirements often exceeding the o r i g i n a l i n t e n t i o n . Focusing on unintended consequences, it has been pointed out that although we desperately need b e t t e r medicines, the current state of drug regulation is standing in the way of that objective ( 3 ) . There is e s s e n t i a l l y no area of medicine that does not s u f f e r from inadequate drugs. Cancer patients receive little help from present therapies and schizophrenics would welcome treatment that does not carry with it the r i s k of i r r e v e r s i b l e neurological damage. One consequence of current regulations is that it now takes a U.S. f i r m about 8 years and $ 5 4 m i l l i o n to b r i n g one of i t s drugs to the U.S. market ( 4 ) . Recent studies show that many new drugs are a v a i l a b l e f o r the treatment of
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the a f f l i c t e d from 3 to 1 5 years sooner in other count r i e s , such as Great B r i t a i n , Canada and Germany, than in the U.S. Some attempts have been made to c a l c u l a t e the e f f e c t s in l i v e s saved vs. damage from u n a n t i c i pated side e f f e c t s , but more d e f i n i t i v e data of t h i s kind is needed. The e f f e c t is, however, s i g n i f i c a n t . A great threat to chemical innovation is incons i s t e n t government regulations, often as dysfunctional as the regulation themselves ( 5 ) . Inconsistency and i n d e c i s i o n by Federal Agencies cause companies to withdraw f i n a n c i a l support from p r o j e c t s at c r i t i c a l times. Regulatory inconsistencies leave company management unable to p r e d i c t whether a new product o r process will be acceptable. Nason has stated that regulation-driven changes can have p o s i t i v e e f f e c t s on innovation, though at great economic and s o c i a l costs. (6). Examples include the development of more s e n s i t i v e and r e l i a b l e automatic instrumentation f o r monit o r i n g chemicals, r a d i a t i o n and b i o l o g i c a l materials in the environment, of safety-or-environment-related add-on equipment f o r v e h i c l e s , of p o l l u t i o n - c o n t r o l technology and of s a f e t y - r e l a t e d equipment f o r use in industry, mining and the home. A major concern is the e f f e c t of regulation on the innovation process i t s e l f . While Hill, ( 7 ) in a 1 9 7 4 study of the chemical and a l l i e d products indust r i e s , concluded that "although much of the l i t e r a t u r e emphasizes the possible deleterious e f f e c t s of regul a t i o n on innovation, examples of regulations which stimulate innovation may also be found", the concensus today among i n d u s t r i a l research administrators is that the o v e r a l l e f f e c t is pernicious ( 8 ) . R and D aimed at innovation i n c r e a s i n g l y is being squeezed out by a growing proportion of non-discretionary work made necessary by regulation in a t o t a l environment of a f i x e d , o r in some cases decreasing, resource pool. Ill.
Prescription
In a new book to be published in l a t e 1 9 7 8 , Gert e n f e l d ( 9 ) presents a seven point p r e s c r i p t i o n f o r lessening some of the deleterious e f f e c t s from government regulations. In t h i s paper some of those ideas will be l i s t e d and some new ideas added with the obj e c t i v e of ameliorating the e f f e c t s of government regul a t i o n on innovation. 1 . E f f o r t s to evaluate the e n t i r e economic impacts of regulations before enactment is e s s e n t i a l and could y i e l d s u b s t a n t i a l p o s i t i v e r e s u l t s ( 1 0 ) .
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2. Improved consistency within government could provide industry with the guidelines so necessary to encourage the needed R and D e f f o r t s . 3. The concept of accepting some i n e v i t a b l e r i s k (inherent in all products and processes) must become a part of the decision-making process, since our current path toward a "no-risk" society creates a climate that is the very a n t i t h e s i s f o r innovation and is, in any event, unattainable at any cost in the r e a l world. 4. Information t r a n s f e r must take place between industry and government on a continual basis and must s t a r t at the very beginning of a regulatory movement. 5. Government regulators must become more f a m i l i a r with industry problems and perhaps it is time to consider a one year sabbatical to be spent in industry f o r each government regulator assigned to a s p e c i f i c industry. 6. S i m i l a r to zero base budgeting, there should be zero base regulations so that a regulation cannot be allowed to b u i l d on a previous regulation but rather each should be considered from a zero baseline. A p p l i c a t i o n of the "Sunset P r i n c i p l e " to regulation has been advocated widely and is under study by the Congress. 7. C a r e f u l , rigorous s o c i e t a l impact analyses of both primary and secondary e f f e c t s should be evaluated p r i o r to the enactment of each and every r e g u l a t i o n . 8. Periodic assessment of regulations and t h e i r impact on innovations should be a standard and regular procedure. It has become f a r too easy to allow f o r an accumulation of regulations which has resulted from a reward system within government which encourages increasing l e g i s l a t i o n with no rewards f o r l e s s e r cont r o l s . A process to correct f o r experience is badly needed. 9. C o n f l i c t i n g agencies often issue c o n f l i c t i n g regulations r e s u l t i n g in lessened innovations. A clearinghouse system must be devised so that compati b i l i t y can be obtained. 10. Small business, which has been p a r t i c u l a r l y hurt by performance regulation requirements, should have s p e c i a l systems a v a i l a b l e so that reporting requirements and other administrative costs connected with regulations can be decreased. 11. Research programs and experiments should be u t i l i z e d so that more of the. uncertainty in connection with the e f f e c t s of regulation can be reduced. In conclusion, an example of a form of economic deregulation will be used to chart a course f o r s i m i l a r actions on performance regulations. While the
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Senate has passed a major b i l l g i v i n g a i r l i n e s more authority to cut fares and add new routes, the C i v i l Aeronautics Board has relaxed i t s rules so much that a form of a i r l i n e deregulation now e x i s t s . This has r e sulted in an abundance of new low f a r e s , and the entry into new markets of competing a i r l i n e s . The o v e r a l l r e s u l t of t h i s decreased regulation has been more air t r a v e l e r s and higher p r o f i t s f o r the c a r r i e r s . While we recognize that notallcases are to c l e a r cut, we do believe that s i m i l a r p o s i t i v e r e s u l t s could be ob tained by s e r i o u s l y considering the points raised within t h i s paper and by taking a c a r e f u l reappraisal of the unintended as well as the intended consequences from government regulations. Literature
Cited
1. Corn, Morton, Impact of Federal Regulations on Engineers", CEP, J u l y , 1978, pp. 24-27 2. Leone, Robert Α . , "The Real Costs of Regulation", Harvard Business Review, November - December, 1977, pp. 57-66 3. Lasagna, Louis, "The Development and Regulation of New Medications", Science, Volume 200, May, 1978, pp. 871-873 4. Ibid. 5. Throdahl. Monte C., Chemical and Engineering News, September 19, 1977, pg. 14 6. Nason, Howard K., "The Environment f o r I n d u s t r i a l Innovation in the U.S.,", Technological Innovations: Government - Industry Cooperation, Gerstenfeld, E d i t . , New York: Wiley Interscience, (in press) 7. Hill, Christopher T . , et al, "A State of the Art Review of the E f f e c t s of Regulation on Technolgoical Innovation in the Chemical and A l l i e d Products Indus tries", National R & D Assessment Program, NSF RDA 74-20086 A01, February, 1975 8. Manners, George E . , Jr., and Nason, Howard K., "Trends in I n d u s t r i a l Research", National Science Board Planning Environment Review, 1978, Volume I., pp. 45-49, NSB-78-191, June, 1978 9. Gerstenfeld, Arthur, "Government Regulations and Innovation", Technological Innovation: Government Industry Cooperation, Gerstenfeld, E d i t . , New York: Wiley Interscience (in press) 10. Kramm, Robert F . , Nagy, Stephen F., and Nemec, Joseph, "Complying with Proposed Regulations: Esti mating Industry's Costs", Business Horizons, August, 1977, pp. 86-91 The opinions expressed are those of the authors and do not n e c e s s a r i l y represent the views of the i n s t i t u t i o n s with which they are affiliated. RECEIVED
March 8, 1979.
