Federal Regulation and Chemical Innovation - ACS Publications

5 The Impact of Environmental Protection Regulations on Research and Development in the Industrial Chemical Industry JOE C. IVERSTINE and JERRY L. KINARD Southeastern Louisiana University, Hammond, LA 70401 The Clean Air Amendments to the A i r Quality Act and the Federal Water Pollution Control Act Amendments were enacted to protect the environment. They have directly affected the operations of chemical firms, particularly those of research and development. In June, 1976, the National Science Foundation approved a proposal submitted by Southeastern Louisiana University to assess the impact of environmental protection regulations on research and development i n the industrial chemical industry. Phase 1 of the study began July 1, 1976, and concluded January 31, 1977. Phase 11 of the study began April 1, 1977, and concluded A p r i l 30, 1978. Objectives of the Study During the f i r s t six years of the existence of the Environmental Protection Agency, over 19,000 formal enforcement actions were taken for air, water, and pesticide pollution. Between January, 1976, and September, 1976, the EPA initiated 6,613 actions, resulting i n fines and penalties i n excess of $1.5 m i l l i o n . (1) A significant number of enforcement actions have been taken against chemical firms. Legislation passed to c u r t a i l environmental pollution has been successful i n reducing emission/effluents into the air and waterways throughout the country. More stringent regulations, such as best practical technology requirements of 1977 and best available technology requirements of 1983, will result i n further reductions in effluents/emissions. As a result of the implementation of regulation designed to control and alleviate pollution, operations of chemical firms have been directly affected. As evidenced by the findings of "The CAPI Project, (2)" however, the total effect of such regulations on the industrial chemical industry i s undetermined. In order to assess the exact impact of environmental protection regulations on research and development in the industrial chemical industry, we explored the following areas:

0-8412-0511-6/79/47-109-067$05.00/0 © 1979 American Chemical Society

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FEDERAL REGULATION AND CHEMICAL INNOVATION

1. The manner i n which environmental p r o t e c t i o n r e g u l a t i o n s have changed or i n f l u e n c e d t r a d i t i o n a l R&D a c t i v i t y . These i n f l u e n c e s i n c l u d e (a) changes, if any, i n l e v e l s of R&D expenditures (as measured by the r a t i o of R&D expenditures to s a l e s ) from p r e - r e g u l a t i o n p e r i o d s to the c u r r e n t p e r i o d ; (b) d i v e r s i o n , if any, of R&D funds from t r a d i t i o n a l R&D goals-product development and process improvement (excluding marketable p o l l u t i o n cont r o l t r e a t i n g agents and abatement equipment)-to p r o j e c t s s p e c i f i c a l l y designed to abate p o l l u t i o n ; (c) d i v e r s i o n , if any, of t e c h n i c a l manpower to R&D a c t i v i t i e s s p e c i f i c a l l y designed to abate p o l l u t i o n ; (d) changes, if any, i n product development and process improvement lead times caused by environmental p r o t e c t i o n r e g u l a t i o n s ; (e) the u t i l i z a t i o n of R&D f a c i l i t i e s ( l a b o r a t o r i e s , p i l o t p l a n t s , computer time, etc.) f o r environmental p r o t e c t i o n p r o j e c t s ; ( f ) the p r i o r i t y given R&D p r o j e c t s f o r environmental p r o t e c t i o n as compared to t r a d i t i o n a l R&D p r o j e c t s ; (g) the extent of r e l i a n c e on e x t e r n a l (outside the firm) sources of innovat i o n ( u n i v e r s i t i e s , p r i v a t e r e s e a r c h and c o n s u l t i n g f i r m s , e t c . ) to s o l v e environmental p r o t e c t i o n problems; and (h) the a l l o c a t i o n of v a r i o u s R&D e f f o r t s among the f o l l o w i n g : controlling e x i s t i n g p o l l u t i o n , developing a n a l y t i c a l methods, e l i m i n a t i n g sources of p o l l u t i o n , developing new products, and other such endeavors. 2. The e f f e c t of changes i n R&D a c t i v i t y brought about by environmental p r o t e c t i o n r e g u l a t i o n s . T h i s e f f e c t i n c l u d e d (a) the extent to which t r e a t i n g agents and/or abatement equipment and technology have been developed as marketable products or s e r v i c e s ; (b) the degree of success of R&D a c t i v i t y i n s o l v i n g environmental p r o t e c t i o n problems ( e l i m i n a t i n g sources, c o n t r o l l i n g e x i s t i n g p o l l u t i o n , developing new products to r e p l a c e harmf u l ones, e t c . ) ; (c) an assessment of the impact of r e d i r e c t e d R&D e f f o r t s on new product development and process improvements; (d) a measurement of the t a n g i b l e , but unexpected, b e n e f i t s not s p e c i f i c a l l y r e l a t e d to environmental p r o t e c t i o n which have occurred as a r e s u l t of R&D e f f o r t s d i r e c t e d toward environmental p r o t e c t i o n ; (e) an assessment of the p e r c e i v e d e f f e c t i v e n e s s of R&D a c t i v i t y i n s o l v i n g environmental p r o t e c t i o n problems if best p r a c t i c a l technology and best a v a i l a b l e technology requirements are imposed i n 1977 and 1983 r e s p e c t i v e l y ; and ( f ) an o v e r a l l assessment from the f i r m ' s viewpoint of the b e n e f i t s (marketable products or s e r v i c e s , unexpected b e n e f i t s , more e f f i c i e n t processes, and a c l e a n e r environment) versus the c o s t s ( d i r e c t expenses and o p p o r t u n i t y c o s t s ) of R&D a c t i v i t y f o r environmental protection. 3. An examination of the u n d e r l y i n g bases f o r the above changes i n R&D a c t i v i t y brought about by environmental p r o t e c t i o n r e g u l a t i o n s and an e x p l a n a t i o n of the e f f e c t of such changes. Methodology In

order to s a t i s f y the o b j e c t i v e s of the study, a combina-

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t i o n of s t r u c t u r e d and non-structured personal interviews with R&D o f f i c e r s of firms i n the i n d u s t r i a l chemical i n d u s t r y was used as a primary research instrument. The research team sampled only " l a r g e " chemical companies ( s a l e s over $200 m i l l i o n ) because of l a r g e f i r m domination o f i n d u s t r y R&D. F i f t e e n firms were s e l e c t e d from the 36 companies whose primary business a c t i v i t y i s r e l a t e d to chemicals and which have chemical s a l e s over $200 m i l l i o n . This sample c o n s t i t u t e s 71.6 percent of 1976 i n d u s t r y R&D spending. The research sample i n c l u d e s : Rohm & Haas, Dow, A l l i e d , Dexter, Celanese, DuPont, S t a u f f e r , Vulcan, W.R. Grace, E t h y l , Cabot, American Cyanamid, Monsanto, BASF Wyandotte, and Ciba Geigy. Findings And Conclusions The f o l l o w i n g i s a summary of the major f i n d i n g s and the r e s u l t i n g conclusions from t h i s study. D e t a i l s o f the methodology, a n a l y t i c a l methods, and data a r e a v a i l a b l e i n "The Impact of Environmental P r o t e c t i o n Regulations on Research and Development i n the I n d u s t r i a l Chemical Industry" (3). O v e r a l l Assessment o f R&D f o r Environmental P r o t e c t i o n . I t i s recognized by the researchers that a t o t a l a n a l y s i s of the s o c i e t a l cost versus s o c i e t a l b e n e f i t s o f R&D f o r environmental p r o t e c t i o n research i s w e l l beyond the scope of t h i s study. For example, the b e n e f i t of a cleaner environment was not examined and, moreover, would be very d i f f i c u l t to measure. However, an o b j e c t i v e of t h i s study i s to c o n t r i b u t e to the on-going process o f e v a l u a t i o n of costs versus b e n e f i t s of governmental r e g u l a t i o n of business. Hence, the f o l l o w i n g i s a summary assessment o f the costs versus b e n e f i t s of environmental research i n the chemical i n d u s t r y . Costs. I t has been e s t a b l i s h e d that chemical firms a r e a l l o c a t i n g R&D resources to solve environmental p r o t e c t i o n problems. Even though t h i s research may be h i g h l y d e s i r a b l e from a s o c i e t a l posture, it does represent a d i v e r s i o n of R&D resources from t r a d i t i o n a l goals of product development and process improvement. This d i v e r s i o n represents "opportunity c o s t s " or the l o s s that the firms s u s t a i n by foregoing the b e n e f i t s that are provided by t r a d i t i o n a l research p r o j e c t s . One way to minimize the impact of these opportunity costs i s to supplement R&D spending to o f f - s e t the funds a l l o c a t e d to environmental p r o t e c t i o n research. Hence, it was expected that R&D spending as a per cent of s a l e s would increase from prer e g u l a t i o n periods because of the n e c e s s i t y to conduct e n v i r o n mental p r o t e c t i o n research. However, the r a t i o of R&D spending to s a l e s has a c t u a l l y d e c l i n e d from .0424 i n 1970 to .0297 i n 1976. One p o s s i b l e explanation i s that the i n f l a t i o n i n chemical p r i c e s has exceeded the i n f l a t i o n i n R&D c o s t s . Over t h i s p e r i o d ,

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it i s p o s s i b l e that the l e v e l of R&D a c t i v i t y has been maintained or has not decreased p r o p o r t i o n a l l y to the d e c l i n e i n R&D to sales r a t i o . Another p o s s i b l e e x p l a n a t i o n f o r the d e c l i n e i n the R&D/sales r a t i o was o f f e r e d by Dr. Theodore C a i r n s , D i r e c t o r of DuPont's massive c e n t r a l R&D o r g a n i z a t i o n . Dr. C a i r n s c i t e d the f a c t that duPont's c u r r e n t r a t i o of R&D to s a l e s i s approximately four per cent compared to 6.5 per cent i n 1970. He suggests that DuPont adopted the p o l i c y of d i v e r s i f i c a t i o n and aggressive p u r s u i t of new products i n the 1960*s. Dr. C a i r n s notes that DuPont s p o l i c y has r e c e n t l y changed to development of e x i s t i n g product lines. He f u r t h e r suggests that a good i n d u s t r y r e s e a r c h program will have a d e c l i n i n g budget r e l a t i v e to s a l e s , as at some p o i n t , the i n d u s t r y must develop what has been researched. Both of the above explanations have some m e r i t . In response, however, to the f i r s t e x p l a n a t i o n , R&D c o s t s are "managed." The growth of these c o s t s i s dependent upon management d e c i s i o n s with regard to number of s c i e n t i s t s employed, purchase of equipment and f a c i l i t i e s , e t c . I t i s l i k e l y that i n c r e a s e s i n R&D c o s t s were below i n c r e a s e s i n chemical p r i c e s because of manager i a l d e c i s i o n s i n the chemical i n d u s t r y to r e s t r i c t the growth of R&D spending r e l a t i v e to s a l e s . T h i s c o n t e n t i o n i s supported by the f a c t that the number of chemical R&D s c i e n t i s t s and engineers dropped from 22,000 i n 1970 to l e s s than 20,000 i n 1973. In 1976, the number of chemical R&D s c i e n t i s t s and engineers returned to the 1970 l e v e l of 22,000. Hence, t h i s d e c l i n e i n the R&D to s a l e s r a t i o during the 1970 to 1976 p e r i o d i s p a r t i a l l y due to fewer R&D personnel employed. Moreover, R&D spending i n 1976 by the i n d u s t r y i n terms of constant d o l l a r s i s at the 1968 l e v e l of $800 m i l l i o n , whereas, s a l e s have i n c r e a s e d 28.6 per cent i n terms of constant d o l l a r s during t h i s p e r i o d . So, the growth of R&D i n the chemical i n dustry has d e f i n i t e l y not matched the growth of the i n d u s t r y i n terms of s a l e s . In response to the second e x p l a n a t i o n f o r t h i s d e c l i n e , the researchers were not able to v e r i f y the c o n t e n t i o n that c u r r e n t R&D e f f o r t s are c a p i t a l i z i n g on important d i s c o v e r i e s made during the l a s t decade. I t may be that the i n d u s t r y experiences a c y c l e of d i s c o v e r y and then development with corresponding i n creases i n the s a l e s to R&D r a t i o followed by decreases i n t h i s ratio. However, the r e s e a r c h e r s found that the i n d u s t r y i s c u r r e n t l y spending approximately 44.6 per cent of i t s R&D on "new" product/process development and approximately 37.5 per cent of i t s R&D on " e x i s t i n g " product/process improvement. I t appears that the R&D e f f o r t i s balanced between new developments and improvement of e x i s t i n g products/processes. From the evidence c o l l e c t e d i n t h i s r e s e a r c h study, it i s noted that approximately 13.5 per cent of chemical R&D i s a l l o c a ted to environmental p r o t e c t i o n p r o j e c t s (see Table I ) . T h i s represents an o u t l a y of approximately $198.7 m i l l i o n by the indus1

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try. I t i s a l s o noted that there has not been an increase i n the growth of R&D to o f f - s e t the n e c e s s i t y of having to conduct environmental p r o t e c t i o n research. In f a c t , t o t a l chemical R&D has remained unchanged from p r e - r e g u l a t i o n periods to the present i n terms of constant d o l l a r s a l e s . Hence, it can be concluded that the n e c e s s i t y of having to conduct environmental p r o t e c t i o n research does represent a d i v e r s i o n from t r a d i t i o n a l innovative a c t i v i t i e s of product/process development and product/process improvement. Moreover, the i n c l u s i o n of environmental p r o t e c t i o n r e g u l a t i o n s i n r i s k models may f u r t h e r r e s t r i c t R&D a c t i v i t i e s i n the chemical i n d u s t r y due to the d e c i s i o n to forego numerous product development p r o j e c t s . These a c t i o n s represent opportunity costs f o r the i n d u s t r y . Table I Summary of R&D

Spending By The

Chemical

Category Percentage of R&D Environmental P r o t e c t i o n 13.521 Process Improvement 18.784 New Process Development 22.786 Product Improvement 18.867 New Product Development 21.978 Other (not included i n above) 4.064 100.000

Industry Spending

Benefits Success i n S o l v i n g Environmental P r o t e c t i o n Problems. The EPA reported that 1303 chemical p l a n t s out of 1371 were i n comp l i a n c e with the 1970 Clean A i r Act. T h i s represents a 95 per cent compliance r a t e . A l s o , 89 per cent of the chemical p l a n t s were i n compliance with the 1977 deadline of "best p r a c t i c a b l e c o n t r o l " s p e c i f i e d i n the 1972 F e d e r a l Water Q u a l i t y Act Amendments. (4) Hence, the chemical i n d u s t r y has been somewhat succ e s s f u l i n u t i l i z i n g i t s technology to meet environmental prot e c t i o n standards. O f f i c e r s from twelve of the f i f t e e n responding firms i n d i c a t e d that R&D e f f o r t to meet these deadlines r e p r e sented e f f i c i e n t and e f f e c t i v e s o l u t i o n s to p o l l u t i o n c o n t r o l problems. Screening of P o t e n t i a l l y Harmful Products. An EPA research d i r e c t o r suggested that the i n c l u s i o n of environmental p r o t e c t i o n r e g u l a t i o n s i n r i s k models has screened out numerous products that may have been environmentally harmful. R&D o f f i c e r s r e a d i l y agree that numerous product ventures have been dropped due to u n c e r t a i n t y i n meeting environmental p r o t e c t i o n r e g u l a t i o n s . While these d e c i s i o n s may p a r t i a l l y e x p l a i n the f a i l u r e of chemi c a l R&D to match the growth of the i n d u s t r y , it i s l i k e l y that they have succeeded i n preventing environmental p r o t e c t i o n prob-

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lems. Marketable Products or S e r v i c e s Related to Environmental Protection, As i n d i c a t e d e a r l i e r , R&D o f f i c e r s from two-thirds of the responding f i r m s r e p o r t e d marketable products or s e r v i c e s created by environmental p r o t e c t i o n r e g u l a t i o n s . R&D o f f i c e r s from these responding f i r m s q u i c k l y observe that revenues from these products o r s e r v i c e s do not come c l o s e to o f f - s e t t i n g c o s t s a s s o c i a t e d with meeting environmental p r o t e c t i o n r e g u l a t i o n s . Nevertheless, these chemical f i r m s are r e q u i r e d to comply w i t h these r e g u l a t i o n s , and any recovery of c o s t s from these newly created revenue centers represent a b e n e f i t f o r these f i r m s . Unexpected B e n e f i t s . Of the f i f t e e n responding f i r m s , R&D o f f i c e r s from only f i v e f i r m s report t a n g i b l e b e n e f i t s that are not d i r e c t l y r e l a t e d to environmental p r o t e c t i o n . These b e n e f i t s i n c l u d e : b e t t e r a n a l y t i c a l chemists; closed system philosophy of p l a n t o p e r a t i o n ; improved knowledge of molecular s t r u c t u r e of products; and b e t t e r process i n s t r u m e n t a t i o n . Other F a c t o r s U n i f o r m i t y of Impact. I t was expected that environmental p r o t e c t i o n r e g u l a t i o n s would a f f e c t chemical R&D u n i f o r m l y throughout the i n d u s t r y . Even though there i s v a r i a t i o n i n the s i z e and product l i n e s of chemical producers, it was b e l i e v e d that the impact of these r e g u l a t i o n s on R&D would be somewhat uniform. The impact was assessed by per cent of R&D spent on environmental p r o t e c t i o n . The r e s e a r c h e r s conclude that the d i s p e r s i o n of R&D spending f o r environmental p r o t e c t i o n i s no greater than the d i s p e r s i o n of R&D spending f o r other c a t e g o r i e s . Hence, the impact does appear to be uniform throughout the industry. S i z e of the Firm. Related to the above f a c t o r , the r e s e a r c h ers suspected that small chemical producers may experience a g r e a t e r impact on t h e i r R&D f u n c t i o n than l a r g e r chemical producers. Even though the r e s e a r c h design e l i m i n a t e d f i r m s having s a l e s l e s s than $200 m i l l i o n , the sample d i d i n c l u d e a range of s a l e s from approximately $200 m i l l i o n to $8.4 b i l l i o n . Within t h i s range, the r e s e a r c h e r s note that there i s no c o r r e l a t i o n between s a l e s and per cent of R&D spent on environmental p r o t e c t i o n . A negative c o r r e l a t i o n of s a l e s to per cent of R&D spent on environmental p r o t e c t i o n was expected if these r e g u l a t i o n s more s e v e r e l y a f f e c t e d s m a l l e r f i r m s . T h i s was not the case. R e l a t i o n s h i p w i t h the EPA. When the r e s e a r c h e r s asked R&D o f f i c e r s about t h e i r r e l a t i o n s h i p with the EPA w i t h regard to environmental p r o t e c t i o n r e s e a r c h , f i f t e e n d i f f e r e n t r e a c t i o n s were r e c e i v e d from the f i f t e e n responding f i r m s . In d e s c r i b i n g

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t h i s r e l a t i o n s h i p , the a d j e c t i v e s ranged from: "good, productive, on-going, some, guarded, l i t t l e , arm's length, none, poor, and lousy." Perhaps the same r e a c t i o n s may be r e c e i v e d from the EPA if asked about t h e i r r e l a t i o n s h i p with the r e s p e c t i v e chemical f i r m s . While these a t t i t u d e s d e f i n i t e l y do not represent "hard data," they, nonetheless, are important i n p o l i c y formation f o r future environmental p r o t e c t i o n research. I f r e l a t i o n s h i p s on the whole were " b e t t e r " , the r e s u l t would be c l e a r e r communicat i o n s , b e t t e r standards through more input, b e t t e r defined goals, and more e f f i c i e n t research. However, the researchers recognize the necessary d i s t a n c e that must be maintained between r e g u l a t o r and " r e g u l a t e e . " Offensive Versus Defensive Posture. Almost all of the R&D o f f i c e r s noted a change i n recent years from a defensive to an o f f e n s i v e posture with respect to the r e g u l a t i o n s . A number of these firms a g g r e s s i v e l y challenge the EPA if they b e l i e v e that the r e g u l a t o r y agencies are m i s i n t e r p r e t i n g the law, s e t t i n g unreasonable standards, or over-stepping t h e i r a u t h o r i t y as pres c r i b e d by the r e g u l a t i o n s . Several of these firms have spent m i l l i o n s of d o l l a r s i n defense of products under attack because of environmental c o n s i d e r a t i o n s . This " o f f e n s i v e " philosophy represents a s h i f t from a more "defensive" posture when the r e g u l a t i o n s were f i r s t promulgated. D i r e c t i o n of Future Regulations. A l l R&D o f f i c e r s unanimousl y agreed that the r e g u l a t i o n s will become more r e s t r i c t i v e . They portrayed e f f o r t s to meet the standards as t r y i n g to h i t a "moving t a r g e t . " The R&D o f f i c e r s expressed the hope that f u t u r e r e g u l a t i o n s will not obviate R&D e f f o r t s i n developing e x i s t i n g e n v i r o n mental p r o t e c t i o n technology. One reason c i t e d f o r more r e s t r i c t ive r e g u l a t i o n s i s the advances i n a n a l y t i c a l chemistry. In a number of cases, standards were based on the l e v e l of d e t e c t i o n demonstrated by a n a l y t i c a l methods. However, some methods have advanced from p a r t s per m i l l i o n concentrations to p a r t s per b i l lion. Several R&D o f f i c e r s b e l i e v e that the standards will become more r e s t r i c t i v e as d e t e c t i o n becomes more s o p h i s t i c a t e d . R&D o f f i c e r s from one f i r m e x h i b i t e d an exponential increase i n costs as the standard became more r e s t r i c t i v e f o r one product. Methodology Problems In the course of the above research p r o j e c t , s e v e r a l methodo l o g i c a l problems were encountered. The f o l l o w i n g i s a d i s c u s s i o n of these problems and the manner i n which they a f f e c t e d the study. V a r i a t i o n s i n Accounting. Although p u b l i c accounting procedures and p r a c t i c e s are b a s i c a l l y standardized, the s p e c i f i c techniques employed by i n d i v i d u a l firms vary. Consequently, these d i f f e r e n c e s present some problems i n both e x t e r n a l and i n t e r n a l

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analysis. E x t e r n a l a n a l y s i s i s the comparison of one company to other companies i n the i n d u s t r y and i n t e r n a l a n a l y s i s i s the h i s t o r i c a l comparison of d i f f e r e n t p e r i o d s w i t h i n a s i n g l e company. In a n a l y z i n g the R&D a c t i v i t i e s of those f i r m s i n c l u d e d i n t h i s study, a determination of R&D expenditures as a percent of Sales and R&D as a percent of Sales minus P r o f i t was made. D i f ferences i n d e p r e c i a t i o n methods, i n v e n t o r y methods, e t c . will a f f e c t the Sales and P r o f i t f i g u r e s f o r a f i r m , thus making comp a r i s o n s between f i r m s u s i n g d i f f e r e n t methods d i f f i c u l t . Furt h e r , a change i n technique by a s i n g l e company n e c e s s i t a t e s adjustments i n p r i o r years to get comparable f i g u r e s . E x t r a - o r d i n ary items or experiences i n a given year ( i . e . , a l a r g e w r i t e o f f ) are r e f l e c t e d i n the Sales and/or P r o f i t f i g u r e s f o r the f i r m , thereby p o s s i b l y g i v i n g a d i s t o r t e d i n d i c a t i o n of the normal a c t i v i t y f o r the company. However, d e s p i t e these v a r i a t i o n s i n accounting, the f i n a n cial data presented i n the annual r e p o r t s of the sample f i r m s provided a b a s i s f o r e s t a b l i s h i n g R&D expenditure p a t t e r n s . No attempt was made to compare one f i r m to another. Instead, the data were used to access the p a t t e r n of R&D expenditures f o r each i n d i v i d u a l f i r m f o r the years 1970-1976 and f o r the sample f i r m s as a whole. D e f i n i t i o n of Research and Development. The major purpose of t h i s r e s e a r c h p r o j e c t was to access the impact of environmental p r o t e c t i o n r e g u l a t i o n s on R&D i n the i n d u s t r i a l chemical i n d u s t r y . Therefore, it was necessary to i d e n t i f y the i n d u s t r i a l chemical i n d u s t r y and to determine what c o n s t i t u t e s a "chemical f i r m . " To r e s o l v e t h i s problem, the r e s e a r c h e r s used those firms c l a s s i f i e d i n SIC Codes 2800 to 2899. F u r t h e r , the i n d u s t r i a l chemical i n dustry i s o l i g o p o l i s t i c i n nature; consequently, a s e l e c t group of l a r g e companies c o n s t i t u t e the bulk of all i n d u s t r y a c t i v i t y . A recent survey by Chemical and Engineering News noted that 19 companies account f o r about 80% of the chemical i n d u s t r y ' s s a l e s and more than 90% of the e n t i r e i n d u s t r y ' s R&D d o l l a r s . Theref o r e , f i f t e e n f i r m s were taken from a u n i v e r s e of 36 l a r g e i n d u s t r i a l chemical f i r m s . (See s e c t i o n on methodology.) In 1976, these f i f t e e n f i r m s accounted f o r 71.6% of R&D expenditures. F i n a l l y , it should be noted that many of these companies are d i v e r s i f i e d and are engaged i n v a r i o u s a c t i v i t i e s other than chemicals. F i n a n c i a l data presented i n annual r e p o r t s are o f t e n aggregate data and, consequently, it i s d i f f i c u l t to determine the impact on R&D r e l a t e d only to chemical a c t i v i t i e s . Although many companies have chemicals as one of t h e i r products, the companies s e l e c t e d f o r t h i s p r o j e c t are predominantly i n v o l v e d i n the manuf a c t u r e and s a l e of i n d u s t r i a l chemicals. P r o c e s s i n g of S u b j e c t i v e Data. The r e s e a r c h instrument used i n t h i s study combined both s t r u c t u r e d and u n s t r u c t u r e d q u e s t i o n s . A n a l y s i s of the o b j e c t i v e data from the s t r u c t u r e d p o r t i o n of the

5.



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interviews was performed by the a p p l i c a t i o n of the appropriate s t a t i s t i c a l t e s t s . However, processing the s u b j e c t i v e data presented an a n a l y t i c a l problem as such data were not r e a d i l y q u a n t i f i a b l e and, t h e r e f o r e , could not be evaluated by the use o f emp i r i c a l t e s t i n g techniques. But d e s p i t e t h i s l i m i t a t i o n , the s u b j e c t i v e data gathered provided meaningful and necessary i n f o r mation about the s i g n i f i c a n c e of environmental p r o t e c t i o n r e g u l a t i o n s on the R&D a c t i v i t i e s and plans of those companies v i s i t e d . The responses by those persons interviewed provided data on (1) environmental p r o t e c t i o n philosophy (approach to p o l l u t i o n cont r o l ; i . e . , " c o n t a i n " vs. " e l i m i n a t e source"; o f f e n s i v e v s . defensive posture, e t c . ) , (2) opportunity cost o f environmental p r o t e c t i o n p r o j e c t s , , (3) r e l a t i o n s h i p with r e g u l a t o r y agencies, (4) i n f l u e n c e o f energy conservation on environmental p r o t e c t i o n p r o j e c t s , (5) the extent to which p o l l u t i o n c o n t r o l innovation i s f r e e l y shared among firms w i t h i n the i n d u s t r y , (6) i n f l u e n c e of p o t e n t i a l land use r e g u l a t i o n on R&D p r o j e c t s a s s o c i a t e d with new p l a n t c o n s t r u c t i o n and p l a n t expansions, (7) q u a l i f i c a t i o n s of R&D personnel assigned to environmental p r o t e c t i o n p r o j e c t s , and (8) f u t u r e d i r e c t i o n of r e g u l a t i o n (as viewed by R&D o f ficers.) In a n a l y z i n g the s u b j e c t i v e data, the researchers compared the responses by the o f f i c i a l s of the d i f f e r e n t companies i n the sample to detect c o n s i s t e n c i e s and/or d i f f e r e n c e s . T h i s comparison was made to d i f f e r e n t i a t e between responses that were unique and those that appeared r e p r e s e n t a t i v e of the sample as a whole. The a t t i t u d e s , p h i l o s o p h i e s , and p r e d i c t i o n s of the u p p e r - l e v e l R&D o f f i c i a l s interviewed i n t h i s study will, i n l a r g e p a r t , determine the f u t u r e R&D p o l i c i e s and plans of these companies and, t h e r e f o r e , are h i g h l y s i g n i f i c a n t i n accessing the impact of environmental p r o t e c t i o n r e g u l a t i o n and i t s f u t u r e r a m i f i c a t i o n s . Problem of V e r i f i c a t i o n . Much o f the data used i n t h i s study were gathered by interviews with R&D personnel from the sample f i r m s . These i n d i v i d u a l s provided both s u b j e c t i v e and o b j e c t i v e information about t h e i r companies and the manner i n which environmental p r o t e c t i o n r e g u l a t i o n s impact t h e i r R&D a c t i v i t i e s . Given the s i z e and complexity of these sample f i r m s , t h i s data were d i f f i c u l t to v e r i f y . However, to help s u b s t a n t i a t e the v a l i d i t y of the data provided, the researchers analyzed the responses f o r c o n s i s t e n c i e s or p o s s i b l e c o n t r a d i c t i o n s . Comparisons were made between i n d i v i d u a l responses and data gathered from trade j o u r n a l s , annual r e p o r t s , and other secondary data sources. Further, i n s e l e c t e d i n s t a n c e s , the researchers made p l a n t tours to pers o n a l l y observe the manner i n which the companies had been a f fected. F i n a n c i a l A n a l y s i s . One o b j e c t i v e of t h i s research p r o j e c t was to determine if, i n the l a s t s e v e r a l years, there have been any changes i n the R&D expenditure patterns by the firms i n the

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i n d u s t r i a l chemical i n d u s t r y . To provide some i n s i g h t i n t o t h i s matter, r e s e a r c h was conducted to determine changes i n the amount o f d o l l a r s being spent on R&D a c t i v i t i e s by i n d i v i d u a l firms and by the sample f i r m s as a whole. A change i n t o t a l d o l l a r s spent on R&D from one p e r i o d t o another does not, i n i t s e l f , have much s i g n i f i c a n c e as v a r i a t i o n s can be caused by p r i c e changes, i n f l a t i o n , and other v a r i a b l e s . However, the o b j e c t i v e of t h i s study was not t o determine t o t a l d o l l a r s spent, but t o measure r e l a t i v e changes i n the R&D expenditures of the f i r m s s t u d i e d . To measure these changes, R&D as a percent o f Sales and R&D as a percent of S a l e s - P r o f i t s were determined f o r i n d i v i d u a l f i r m s f o r the years 1970-1976. C a l c u l a t i o n o f these percentages g i v e s an i n d i c a t o r of the p r o p o r t i o n ate R&D expenditure l e v e l f o r a f i r m i n a given year and permits a comparison of these p r o p o r t i o n s over time to access r e l a t i v e changes. Acknowledgement s T h i s m a t e r i a l i s based upon r e s e a r c h supported by the N a t i o n a l Science Foundation under Grant No. PRA 76-21321. Any o p i n i o n s , f i n d i n g s , and c o n c l u s i o n s or recommendations expressed i n t h i s p u b l i c a t i o n are those of the authors and do not n e c e s s a r i l y r e f l e c t the views o f the N a t i o n a l Science Foundation. Literature

Cited

1. EPA Enforcement - A Progress Report for 1976: A i r , Noise, Water, Pesticides; Environmental Protection Agency, Washington, D.C.; (January, 1977), p. 1. 2. Hill, Christopher T., et al., A State of the Art Review of the Effects of Regulation on Technological Innovation i n the Chemi c a l and A l l i e d Products Industries (CAPI Project), Volume I, Executive Summary, (February, 1975), p. 5. 3. The and

Iverstine, Joe C., Jerry L. Kinard, and William S. Slaughter, Impact of Environmental Protection Regulations on Research Development i n the Industrial Chemical Industry, (May, 1978).

4. Compliance Status of Major Air Pollution F a c i l i t i e s , U.S. Environmental Protection Agency, Office of General Enforcement, Washington, D.C. (November, 1977). RECEIVED March 8, 1979.

Federal Regulation and Chemical Innovation - ACS Publications

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