Federal Regulation and Chemical Innovation - ACS Publications

3 What Do We Really Know About the Impact of

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Regulation on Innovation? JAMES W. LEENHOUTS Dow Chemical U.S.A., 566 Building, Midland, MI 48640

Others so much more eloquent than I have extolled the value of innovation that I would do little good to join that competition. In r e a l i t y , there i s n ' t much sense, anyway, discussing what we agree on - innovation has priceless value. But before you get comfortable, be reminded that there are two substantial, and growing, philosophical cores that firmly disagree with us that innovation has value. For these thinkers, the answer to our problems is either the conservative position of stopping progress because it causes problems, or the radical position that even the progress we have witnessed i s so slow we should demolish what we have b u i l t . I am trying to find agreement on the subject of the impact of government regulation on innovation, while I'm not sure that the conservative and radical philosophies, like taxes, are not squeezing those of us progressives i n the middle more than we want. I have to admit that, the more I observe attitudes today, the less confident I become that innovation i s seen as universally desirable. Innovation i s the complex, successful combination of invention; a need; production, which i s labor and capital; marketing and management. As such, many things impact innovation, and of these many things, government regulation has been universally indicted as an important factor. Since the rate of innovation in the U.S. is declining, and this i s deemed unsatisfactory, we should be examining this important factor. (1, 2, 3) From what others have seen and reported, we might find a means to regain a more satisfactory progress rate. (4, 5, 6) Therefore, i n the construction of this paper, I dedicated myself to the perspective of a review, a classification of the substantive studies a v a i l able and a classification of the regulation types. In my quest, I concentrated primarily on studies in which the author dealt with a data base or developed a carefully constructed model. I did this to avoid a number of references where data was skimpy or the author was more inclined to offer just his theory. These authors may be absolutely correct and remarkably 0-8412-0511-6/79/47-109-029$05.00/0 © 1979 American Chemical Society

Hill; Federal Regulation and Chemical Innovation ACS Symposium Series; American Chemical Society: Washington, DC, 1979.

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eloquent, but I f e e l that some evidence i s r e q u i r e d . I was pleased t h a t , c o n t r a r y to the f e e l i n g of others who have reviewed it, the l i t e r a t u r e i s reasonably ample. Innovation and government r e g u l a t i o n are popular things to t a l k about. Such was not the case i n the 1920 s and 1930 s when Ludwig Von Mises and Joseph Schumpeter d i s c u s s e d bureaucracy, i n n o v a t i o n and the f a i l u r e of c a p i t a l i s m .


1

Types of

1

Studies

I t seems to me that there are four types of s t u d i e s a v a i l able i n the l i t e r a t u r e ; mathematical model s t u d i e s , cost added s t u d i e s , e m p i r i c a l s t u d i e s and case s t u d i e s . The d i s t i n c t i o n between each and t h e i r value to our subject i s worth n o t i n g . Model S t u d i e s . The spectrum of w r i t i n g on the subject i s broad as t y p i f i e d by Takayama, P r o f e s s o r of Economics at Purdue, who, i n h i s Behavior of the Firm Under Regulatory C o n t r o l , (7) reduced and modeled the problem to 26 equations. Model s t u d i e s , u n f o r t u n a t e l y are not c o n v i n c i n g . Those who l a b o r to produce them do so i n a l o n e l y world at the present time. As y e t , the complex question of human nature, emerging technology, economic c y c l e s and n a t i o n a l s e c u r i t y m i t i g a t e s against the modeler's credibility. Cost Added S t u d i e s . Cost added s t u d i e s are t y p i f i e d by, f o r example, those of Dr. Paul Chenea, V i c e P r e s i d e n t of Research at General Motors, who, i n h i s paper, The Costs and E f f e c t s of Regul a t i o n , (8) documents very w e l l the c o s t s of r e g u l a t i o n i n h i s company. He concludes that we need "reasonable r e g u l a t i o n " and that "research i s hobbled by excessive r e g u l a t i o n " . Dr. Chenea, as many authors do, leaves us with the problem of what i s " e x c e s s i v e " and what i s "reasonable". One has a strong f e e l i n g that " e x c e s s i v e " i s what does not make sense to General Motors. But suppose it i s not seen as excessive to the r e g u l a t o r , a senator, Ralph Nader, or car d r i v e r s ? I am reminded of one of those cute, catchy signs you see on p e o p l e s desks BE REASONABLE, DO IT MY WAY. While that may be humorous, the problem of d i s t i n g u i s h i n g between "reasonable" and " e x c e s s i v e " i s a very s e r i o u s one. The l i t e r a t u r e i s s i l e n t . Therefore, without p i c k i n g on an e x c e l l e n t piece of work and I chose it j u s t because it i s - these types of s t u d i e s , which I c a l l "added cost s t u d i e s " , provide us with a d d i t i o n a l cost i n f o r m a t i o n due to r e g u l a t i o n , but nothing we can r e a l l y get our hands on with respect to i n n o v a t i o n . Many U.S. companies will be p a r t i c i p a t i n g i n a very ambit i o u s , w e l l documented, inter-company, Arthur Anderson study of the cost of r e g u l a t i o n , to be completed i n the s p r i n g of 1979. I t will d e f i n e the cost of r e g u l a t i o n across 200 top companies. I t will not e n l i g h t e n us on the impact on i n n o v a t i o n , although it 1


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Impact of Regulation on Innovation

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will

address i t s e l f to added research c o s t s . Without any question, r e g u l a t i o n adds burdensome c o s t s . Americans have been b a t t l i n g c o s t s with a passion that would suggest, i n a Darwinian sense, that r e g u l a t i o n i s a n a t u r a l enemy of cost e f f i c i e n c y , and v i c e v e r s a . We might wander o f f the subj e c t by wondering why we have a plague of r e g u l a t i o n , but that might be c a r r y i n g Darwin too f a r . Cost added s t u d i e s may be of inestimable a i d i n b a t t l i n g i n f l a t i o n , but the case has not been made that there i s a p a r t i c u l a r connection with i n n o v a t i o n .

E m p i r i c a l Studies. The greatest v a l u e i n understanding the impact of r e g u l a t i o n on innovation should come with e m p i r i c a l studies. Furthermore, one s p e c i f i c s e r i e s of e m p i r i c a l s t u d i e s which i n v o l v e s drug innovations i s p a r t i c u l a r l y i n t e r e s t i n g . There have been s e v e r a l s t u d i e s i n t h i s area and, while I s p e c i f i c a l l y r e f e r to the Henry Grabowski work, Drug Regulation and Innovation, (9) there are others, a l s o . This i s a d e t a i l e d p i e c e of work that deserves to be a major part of our t h i n k i n g on the subject. With drugs, authors i n t h i s area have had an unusual s i t u a t i o n that has allowed them a unique opportunity to study the impact of r e g u l a t i o n s on an i n n o v a t i v e i n d u s t r y with p l e n t y of h i s t o r i c a l information and comparative data. Because drugs have been regulated f o r many years and have been s y s t e m a t i c a l l y r e g i s tered f o r s a f e t y purposes, and because drugs were s p e c i f i c a l l y impacted by the 1962 Drug Amendments, Grabowski was able to document the d i s a s t e r o u s consequences on i n n o v a t i o n . In a d d i t i o n , because other c o u n t r i e s a l s o r e q u i r e r e g i s t r a t i o n but d i d not i n s t a l l new r e g u l a t i o n s at the time the U.S. Congress d i d , comp a r a t i v e n a t i o n a l information i s a l s o a v a i l a b l e . There are not many e m p i r i c a l s t u d i e s . In f a c t , I can f i n d only a few. Obviously, such s t u d i e s are not easy to come by and they are expensive to research. Furthermore, very few have the s i t u a t i o n so w e l l set up f o r research as drugs. The r e a l question i s the a p p l i c a b i l i t y of drug innovation s t u d i e s to other areas of technological innovation. Since I understand the Grabowski work has encountered t h i s problem, e m p i r i c a l s t u d i e s with any l e s s e r foundation may be next to u s e l e s s . Case Studies. The l a s t area of our spectrum i s the case s t u d i e s which, although numerous i n the l i t e r a t u r e , are, l i k e a developing mosaic, each too s p e c i f i c to present a broad p i c t u r e of innovation and r e g u l a t i o n . However, the mosaic i s taking some form and the i n c r e a s i n g weight of the case study l i t e r a t u r e i s of r e a l value w h i l e a l s o h e l p i n g us understand how a s p e c i f i c regul a t i o n d i d impact on a s p e c i f i c i n n o v a t i o n . Case s t u d i e s are numerous enough that a s i n g l e month will b r i n g p l e n t y of examples. The r e a l value of case study l i t e r a t u r e i s to f i r m l y f i x the f a c t that r e g u l a t i o n s and innovation are r e l a t e d . A good example of a case study i s the Paul O r e f f i c e , L e t ' s


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Stop Dumping U.S. Jobs, (10) i n which he p o i n t s out how The Dow Chemical Company employed an i n n o v a t i v e s u l f u r d i o x i d e c o n t r o l system i n Michigan i n which a complex, computer based weather a n a l y s i s program i s fed m e t e o r o l o g i c a l data c o n s t a n t l y to d e t e r mine the balance of c o a l and o i l to be burned i n the v a r i o u s p l a n t b o i l e r s each day. In the many years t h i s has operated, Dow has been able to burn a maximum of U.S. produced c o a l , a minimum of o i l , thus reducing imports, all without a s i n g l e excursion from the EPA g u i d e l i n e s . The EPA does not intend to extend the Dow permit an a d d i t i o n a l two years while a new power p l a n t , now under c o n s t r u c t i o n , can be completed. The new power p l a n t has been p a r t l y delayed, i n t e r e s t i n g l y enough, by r e g u l a t i o n . A f a i l u r e to permit would f o r c e Dow to use some $44 m i l l i o n more o i l f o r no purpose whatsoever. Cost Versus Innovation

Accounting

Both cost added and case s t u d i e s represent the bulk of the l i t e r a t u r e a v a i l a b l e . T h i s i s no s u r p r i s e s i n c e it i s a t e s t i mony to the American business system, which i s much more accurate i n keeping t r a c k of what something costs to make r a t h e r than the need it s o l v e s . In f a c t , probably only due to the slowly awakeni n g American c o r p o r a t i o n ' s s e n s i t i v i t y to defend the s o c i a l value of i t s products, i s the American c o r p o r a t i o n now d e d i c a t i n g a l a r g e r and l a r g e r p o r t i o n of i t s time to evaluate the good things it has done as w e l l as what it cost to do it. I s u r e l y t h i n k t h i s i s a s o l i d step i n the r i g h t d i r e c t i o n , because I r e a l l y don't t h i n k we would be having t h i s symposium if the American chemical business, or all business, had had an i n n o v a t i o n accounting system that approximates our cost accounting system. Is Regulation

A Spur To

Innovation?

What has been s a i d about r e g u l a t i o n being a spur to innovat i o n has been p a r t i c u l a r l y i n t r i g u i n g to me, and I hoped t h i s review would shed some l i g h t . My problem i s p h i l o s o p h i c a l i n that government r e g u l a t i o n - or any r e g u l a t i o n , even i n s i d e a business f o r that matter, i s designed to make events and behavior " r e g u l a r " or " c o n t r o l l e d " . Innovation, which i s s u c c e s s f u l l y doing somet h i n g f o r the f i r s t time, i s change. Change and c o n t r o l are as opposite as they can be, i n my mind. Thus, i n t h i s review, I was p a r t i c u l a r l y s e n s i t i v e to any documentation of r e g u l a t i o n being a spur to i n n o v a t i o n . G e r s t e n f e l d ' s e m p i r i c a l s t u d i e s of 107 s u c c e s s f u l and uns u c c e s s f u l companies i n Government Regulation E f f e c t s on the D i r e c t i o n of Innovation: A Focus on Performance Standards, (11) could only f i n d that performance standards r e g u l a t i o n s have a secondary, but p o s i t i v e , impact on the d i r e c t i o n of s u c c e s s f u l innovations. L e s s i n g comes to the c o n c l u s i o n i n Why the U.S. Lags i n Technology. (12) that government programs r e l a t e d to



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technology continue to be dominated by short-term c o n s i d e r a t i o n s i n s t e a d of b a s i c technologies. Both of these s t u d i e s , at best, show a rather weak r e l a t i o n s h i p . The Washington U n i v e r s i t y "CAPI P r o j e c t " , A State of the A r t Review of the E f f e c t s of Regulation on T e c h n o l o g i c a l Innovation i n the Chemical and A l l i e d Products I n d u s t r i e s , (13) s t a t e s that "other r e g u l a t i o n s s t i m u l a t e innovations by s e t t i n g performance standards which current technology i s unable to meet". I b e l i e v e that the authors would agree that t h i s statement i s more speculat i o n than documentation as the "CAPI Report" c o n c l u s i o n does not r e f e r again to such an important c o n c l u s i o n . In f a c t , the "CAPI Report" conclusions are not at all d e f i n i t i v e , c a u t i o n i n g that the l i t e r a t u r e only suggests that some r e l a t i o n s h i p e x i s t s but that the p o s i t i v e or negative and primary or secondary impacts of r e g u l a t i o n on innovation are not known. I t i s p o s s i b l e that an i n n o v a t i o n may come from or be spurred by r e g u l a t i o n , but it i s e q u a l l y probable that the i n n o v a t i o n and the r e g u l a t i o n come independently from the same cause. Since l o g i c t e l l s us that both innovation and r e g u l a t i o n are expected responses to a problem, it's i n t e r e s t i n g why we p e r s i s t i n d e v e l oping the l o g i c sequence that it i s the problem that begets r e g u l a t i o n that begets i n n o v a t i o n . With a few exceptions, which are t u r n i n g sour, we all know that by the time a r e g u l a t i o n i s w r i t t e n , the technology f o r compliance e x i s t s . The r e s u l t can e a s i l y be the famous regulated cowboy. Now many of you have seen t h i s horse w i t h the r o l l bars, turn s i g n a l s and so f o r t h . The humorous aspect of t h i s i s that it i s all too t r u e . This i s e x a c t l y what a horse would look l i k e simply because a horse i s i n h e r e n t l y i n e f f i c i e n t , dangerous and i s a notorious p o l l u t o r . The horse could be improved by such " i n n o v a t i o n s " . However, the automobile, which represents a vast improvement i n all those areas, would not have come i n t o being because of such r e g u l a t i o n . As with t u r n s i g n a l s on a horse, to order, by law, that a c e r t a i n new c o n d i t i o n must be met and then count the i n s t a l l a t i o n of that technology as an i n n o v a t i o n , r e g a r d l e s s of the economic impact, d e s i r a b i l i t y , or even the need, i s to a l s o g r o s s l y misunderstand i n n o v a t i o n . Do we spur innovation by the p o l i t i c a l d e c i s i o n to o r d a i n that a c e r t a i n mix of automobiles manufactured by a company should average 25 miles per gallon? I'm not conversant with the problems of g e t t i n g 25 miles per g a l l o n , but I don't see how that r e g u l a t i o n will b r i n g on the b a t t e r y powered car - or g a s o l i n e from c o a l or corn s t a l k s , or convenient urban t r a n s p o r t a t i o n , or a host of other innovations that might have come to solve our f u e l problems. The premise that a problem begets both r e g u l a t i o n and innov a t i o n i s a s i g n i f i c a n t new thought that e x p l a i n s much of the confusion i n the e x i s t i n g l i t e r a t u r e about what c o n s t i t u t e s a spur to i n n o v a t i o n . Based on my review, we have a long way to go bef o r e r e g u l a t i o n , no matter what other good it does, can be p o s s i b l y j u s t i f i e d as a spur to i n n o v a t i o n .



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Types of Regulation

Affecting

Innovation

A review of the l i t e r a t u r e a l s o y i e l d s r e l a t i v e l y l i t t l e agreement or suggestions that there are v a r i o u s c a t e g o r i z a t i o n s of r e g u l a t i o n and i n n o v a t i o n . This i s unfortunate f o r one who would wish to study the s u b j e c t . As a r e s u l t , we read, repeate d l y , that "reasonable r e g u l a t i o n i s good", "some r e g u l a t i o n i s a spur to i n n o v a t i o n " , " r e g u l a t i o n i s e s s e n t i a l to p r o t e c t the publ i c " , o r , "excessive r e g u l a t i o n i s bad". The same t h i n g i s true for i n n o v a t i o n . There are innovations that are claimed to come from r e g u l a t i o n , there are innovations that come from the a c t i o n of the f r e e marketplace, and there are innovations that come from government purchasing f o r defense, l a r g e s c a l e p r o j e c t s and so forth. No attempt has been made to i d e n t i f y these. As a r e s u l t , everybody who wants to t a l k about government and r e g u l a t i o n i s right. He simply s e l e c t s the innovations or r e g u l a t o r y a c t i o n s that s u i t him, and away we go. While r e g u l a t o r y c a t e g o r i z a t i o n has not been attempted, there i s enough i n the l i t e r a t u r e to suggest that agreement can be found f o r the f o l l o w i n g l i s t i n g , which I submit, not as my i d e a , but as a d i s t i l l a t i o n of b e t t e r students of t h i s s u b j e c t . I have three c a t e g o r i e s of r e g u l a t i o n , A n t i - t r u s t , Economic, and Product or Process Standards. The l a t t e r category r e q u i r e s a f u r t h e r s u b - d i v i s i o n i n t o s p e c i f i c a t i o n s and judgmental standards. T h i s , of course, i s not meant to be a complete l i s t of all the types of r e g u l a t i o n s we have. This c a t e g o r i z a t i o n i s simply those major r e g u l a t i o n types that have been reported to have an impact on i n n o v a t i o n . A n t i - T r u s t Regulations. S u r p r i s i n g l y , I found so l i t t l e l i t e r a t u r e on t h i s important subject that I think it's my f a u l t , and I am tempted to go back w i t h a f i n e r net. The Kamien and Schwartz work, Market S t r u c t u r e and Innovation, (14) d i s c u s s e s the a n t i - t r u s t monopoly question. Another paper by F o s t e r and Gluck, Impact of A n t i - T r u s t and Regulatory A c t i o n s on Progress of Technology, (15) i s e x c e l l e n t . The paper deals with the i n c r e a s i n g involvement of the government i n t e c h n o l o g y - i n t e n s i v e i n d u s t r i e s . I t does not address i t s e l f , unfortunately, to innovations, l i m i t i n g i t s e l f only to the t h e s i s that the technology based i n d u s t r i e s are r e c e i v i n g more than t h e i r share of r e g u l a t o r y a n t i - t r u s t a c t i v i t y . Since these are the i n n o v a t i v e growth companies, whose market share i s r a p i d l y changing, such r e g u l a t o r y a c t i v i t y i s not a surprise. In view of the energy c r i s i s , the need f o r energy i n n o v a t i o n and the moves to l i m i t the o i l companies, it i s too bad we do not understand t h i s area very w e l l . A n t i - t r u s t a c t i o n s do have profound e f f e c t s on i n n o v a t i o n . F o s t e r and Gluck r e f e r to government moves to break up IBM and B e l l without any thought of the impact on these one b i l l i o n d o l l a r research o r g a n i z a t i o n s . It i s intere s t i n g that the authors r e f e r to a Senate B i l l authored by the



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l a t e Michigan Senator P h i l i p Hart, e n t i t l e d , The I n d u s t r i a l Reorganization A c t . The opening sentences of the proposed Act make i n t e r e s t i n g reading as Senator Hart wanted Congress to f i n d that..."The p r e s e r v a t i o n of a p r i v a t e e n t e r p r i s e system, a f r e e market economy and a democratic s o c i e t y i n the United States ( l i e s i n the b e l i e f that competition spurs i n n o v a t i o n and product i v i t y and) r e q u i r e s l e g i s l a t i o n to supplement the p o l i c y of the a n t i - t r u s t laws through new enforcement mechanism designed to r e s p o n s i b l y r e s t r u c t u r e i n d u s t r i e s dominated by o l i g o p o l y o r monopoly power". Obviously, other than there i s a profound impact of a n t i t r u s t l e g i s l a t i o n on r e g u l a t i o n , there i s l i t t l e agreement. I o f f e r j u s t the thought that competition among r a i l r o a d s was not s e t t l e d by breaking them up. As any student of Schumpeter knows, Messrs. Henry Ford, Wilbur and O r v i l l e Wright, were more e f f e c t i v e than any government a t r e s t r u c t u r i n g the r a i l r o a d s . I give you that r e f e r e n c e f r e e - it was i n most of your h i s t o r y textbooks. We might leave the subject of a n t i - t r u s t r e g u l a t i o n with the thoughts of Joseph Schumpeter, who pointed out that our m o t i v a t i o n to prevent t r u s t s from g e t t i n g out of hand can be accomplished by e i t h e r r e g u l a t i o n o r by i n n o v a t i o n , which goes back to my o r i g i n a l point that a need may beget both r e g u l a t i o n and i n n o v a t i o n . Economic Regulation. In t h i s area, I f i n d the g r e a t e s t agreement. Once again, the c o s t and e f f i c i e n c y conscious American business can e a s i l y see t h i s problem. There i s abundant informat i o n that government r e g u l a t i o n of the economy adversely a f f e c t s innovation. Such r e g u l a t i o n does much more than j u s t the "added cost" s i t u a t i o n discussed e a r l i e r . The primary impact on innovat i o n l i e s i n the formation of r i s k c a p i t a l and taxes on growth or c a p i t a l gains. Both of these p e n a l t i e s are most h e a v i l y borne by the innovator who would seek to a c q u i r e c a p i t a l . Paul K e l l y i n Governmental Over-Regulation and the C a p i t a l C r i s i s (16) looks a t the problem from the money standpoint; and while he i s not concerned s p e c i f i c a l l y with i n n o v a t i o n , h i s message and cases a r e c l e a r to anyone who understands that an i n n o v a t i o n r e q u i r e s , almost by d e f i n i t i o n , r i s k c a p i t a l . Elmer S t a a t s , former c o m p t r o l l e r g e n e r a l , i n h i s paper, Improving the Climate f o r Innovation, What Government and Industry Can Do (17) t r e a t s the economic problems and f u r t h e r p o i n t s out that the U.S. Government i s s u b s t a n t i a l l y behind other governments i n understanding and supporting i n n o v a t i o n and i t s i n n o v a t i v e businesses. Schweitzer, i n Regulations, T e c h n o l o g i c a l Progress and S o c i e t a l I n t e r e s t s , (18) concludes that with some added i n t e r v i e w s supplementing the Gellman Research A s s o c i a t e s , Inc. r e p o r t that "a c l e a r r e l a t i o n s h i p e x i s t s between economic r e g u l a t i o n and t e c h n o l o g i c a l i n n o v a t i o n " with "profound i m p l i c a t i o n s f o r entrepeneurs i n r e g u l a t e d i n d u s t r i e s " . Perhaps the most d i s t u r b i n g statement on venture c a p i t a l



36


comes from Howard Nason's Perceptions of B a r r i e r s to Innovation, (19) when he r e p o r t s , from a Commerce T e c h n i c a l Advisory Board r e p o r t , that "Small new p u b l i c i s s u e s i n the U.S....declined from $1.1 b i l l i o n i n 1969 to only $16 m i l l i o n i n 1974, with an even greater p r o p o r t i o n a l d e c l i n e of investment i n t e c h n i c a l l y o r i e n t e d companies. F u r t h e r , between March of 1974 and August of 1975 there were no p u b l i c f i n a n c i n g s of s m a l l t e c h n i c a l companies, a f t e r a steady d e c l i n e from some 200 i n 1969". To calmly accept t h i s s t a t i s t i c without p h y s i c a l p a i n i s downright alarming. As Joseph Schumpeter s t a t e d , "The r e p o r t that a given ship i s s i n k i n g i s not d e f e a t i s t , only the s p i r i t i n which t h i s r e p o r t i s r e c e i v e d can be d e f e a t i s t . The crew can s i t down and d r i n k . But it can a l s o rush to the pumps". (20) The c o n c l u s i o n that I reach a f t e r much i n f o r m a t i o n , and agreement, i s that our government i s not and does not see i t s e l f as an economic p a r t n e r , (21) but an economic policeman. While our government may, or may not, keep t h i n g s s a f e l y moving along the economic highway at c o n t r o l l e d , reasonable speeds with t h e i r regul a t i o n s , they sure make it tough to get on the highway. Those of you who have ever t r i e d to k i c k i n t o a 75mph super-highway from a standing s t a r t on your k i d s t r i c y c l e r i g h t between two huge semi's can understand what it's l i k e to be an innovator today. You can get s m a l l comfort from the f a c t that the world needs your i d e a , but you, f o r sure, won't f i n d anybody out there ready to i n s u r e you, l e t alone help you pump f o r dear l i f e . The f a c t that an economic policeman spreads the t r a f f i c out so that it i s n ' t coming i n bunches with a few holes now and then doesn't help your cause, e i t h e r . f

Product and Process Performance Standards. Performance standards i n v o l v e the broad area of product s a f e t y , workplace standards and environmental q u a l i t y . Here we f i n d OSHA, EPA, CPSC, FTC, DOT and many o t h e r s . Most of us are so w e l l acquainted with these types of r e g u l a t i o n s that they have become a day-to-day p a r t of our a c t i v i t i e s . Because they are so f a m i l i a r to us, we may miss the very s i g n i f i c a n t d i s t i n c t i o n i n t h i s c l a s s i f i c a t i o n , the d i s t i n c t i o n between standards r e g u l a t i o n s and pre-market registration. Performance standards r e g u l a t i o n s a t t a c k the problem with a somewhat exact s p e c i f i c a t i o n of "go" or "no go" a c c e p t a b i l i t y . In c o n t r a s t , pre-market r e g i s t r a t i o n or p e r m i t t i n g r e q u i r e s a judgment. With a s p e c i f i c a t i o n an innovator knows what to expect. The r e g u l a t i o n does e x i s t , one can look at it and study it. I t may be that you have to run from home to second to f i r s t to t h i r d to score a run, but at l e a s t you can f i n d that route i n the regulation. With pre-market r e g i s t r a t i o n and some p e r m i t t i n g , the only t h i n g one knows f o r sure i s there will be a t r i a l , r e l a t i v e l y l a t e i n the l i f e of the i n n o v a t i o n , i n which the defendant i s the applicant. T h i s i s a remarkable d i f f e r e n c e f o r the innovator. Furthermore, a s p e c i f i c a c t i o n of pre-market r e g i s t r a t i o n by a


3.

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37

r e g u l a t o r y group i s not, per se, a r e g u l a t i o n . A r e g u l a t i o n cannot j u s t come i n t o being without some p u b l i c comment. Such i s not the case with a pre-market r e g i s t r a t i o n judgment a c t i o n against a s p e c i f i c product or process. A f t e r my review, I must conclude that performance standards, at best, have only been weakly a s s o c i a t e d with innovation. The c o n c l u s i o n that standards r e g u l a t i o n s are only weakly a s s o c i a t e d with innovation i s n t going to be a very popular c o n c l u s i o n with business people, but I r e a l l y f e e l they are n a t u r a l l y r e a c t i n g more to the heavy cost burden of t h i s unbelievable maze of standards than the d i r e c t r e l a t i o n s h i p on innovation. On the other hand, it i s n ' t going to be popular with the r e g u l a t o r s who f e e l r e g u l a t i o n s can f o r c e innovation. As I pointed out e a r l i e r , innovation and r e g u l a t i o n may w e l l be the n a t u r a l , independent e f f e c t s of the need that created both of them.


f

Pre-Market R e g i s t r a t i o n Regulation r e q u i r i n g pre-market r e g i s t r a t i o n of products has been i n d i c t e d i n the l i t e r a t u r e as a major negative f a c t o r on innovation. In a d d i t i o n , there i s data that these r e g u l a t i o n s have a c t u a l l y created s a f e t y and h e a l t h problems. There are three major pieces of l e g i s l a t i o n that are a modern out-growth of minimum product standards which r e q u i r e pre-market registration* These are, the 1962 Drug Amendments of the Food and Drug Law covering drugs; FEPCA, r e g u l a t i n g i n s e c t i c i d e s ; and the Toxic Substances C o n t r o l Act, r e g u l a t i n g chemicals. In each of these,, an agency, commission, or r e g u l a t o r y group of some s o r t would meet, ponder and i s s u e or deny a pre-market r e g i s t r a t i o n . In all f a i r n e s s to Congress, such l e g i s l a t i o n was an innovation as s p e c i f i c standards d i d not need to be s e t . This would allow the p e r m i t t i n g group, using judgmental g u i d e l i n e s , to make the best f i t c o n s i d e r i n g the s p e c i f i c s i t u a t i o n . In concept, a product i n the hands of the p u b l i c should be an i s s u e d i f f e r e n t from the same product i n the hands of s k i l l e d processors. Congress may have had an i d e a l i s t i c model i n mind based on the success of the American j u r y system, our p o l i t i c a l system of checks and balances, an education system that produces an e x c e p t i o n a l l i t e r acy r a t e and j u s t p l a i n good sense of who wears what c o l o r hat. These f a c t o r s should have made the innovative l e g i s l a t i v e concept of pre-market r e g i s t r a t i o n work but, if the l i t e r a t u r e i s meaningf u l , it has f a i l e d . The Grabowski study mentioned e a r l i e r shows us the steep d e c l i n e i n new drugs approved from an average of 56 per year to 17 per year s i n c e the 1962 Drug Amendments. P r o f e s s o r W i l l i a m Wardell, whose s t u d i e s c o n t r i b u t e d much to the Grabowski work, even estimates i n Therapeutic Implications of the Drug Law (22) that a s u b s t a n t i a l number of Americans have died because of the f a i l u r e to r e g i s t e r an i n n o v a t i v e drug i n the United States that already being marketed i n Great B r i t a i n . w

a

s



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AND CHEMICAL INNOVATION

Documentation of i n n o v a t i o n depression i n p e s t i c i d e s , another area that r e q u i r e s pre-market r e g i s t r a t i o n i s e q u a l l y as dramatic. W i l l i a m Tucker, i n h i s very recent Of Mites and Men, (23) d i s cusses the f r u s t r a t i o n of s e v e r a l i n n o v a t i v e companies t r y i n g to develop b i o l o g i c a l c o n t r o l s i n s t e a d of t a r g e t - s p e c i f i c t o x i c insecticides. L i k e Grabowski and drugs, Dr. Wendell M u l l i s o n reported i n 1975 that s i n c e the enactment of FEPCA, the p e s t i c i d e Act of 1971, the number of major p e s t i c i d e s introduced has f a l l e n from two per year i n the 1960 to 1970 decade to l e s s than one per year f o r the p e r i o d 1971 to 1975 (24). Although the Toxic Substances C o n t r o l Act i s h i s t o r y , j u s t the inventory accumulation has been such a mouthful f o r the EPA that pre-market r e g i s t r a t i o n has not s t a r t e d y e t . Thus, there are no f a c t s and, o b v i o u s l y , no references to i n n o v a t i o n impact i n the l i t e r a t u r e yet. By and l a r g e , people are w a i t i n g to see what a c t i o n will be taken by the EPA i n 1979 on the pre-market r e g i s t r a t i o n of new chemicals or s i g n i f i c a n t new uses. However, a very recent study prepared f o r the EPA by Arthur D. L i t t l e , Impact of TSCA Proposed Premanufacturing N o t i f i c a t i o n Requirements, (25) makes three i n t e r e s t i n g f i n d i n g s on i n n o v a t i o n . "Based on the d i s t r i b u t i o n of the sample of r e c e n t l y i n t r o duced chemicals, 50% of chemicals c u r r e n t l y being introduced f o r commercial s a l e s would not be introduced if the TSCA n o t i f i c a t i o n c o s t s are $10,000 per chemical. At a u n i t n o t i f i c a t i o n cost of $40,000, 90% of the chemicals would not be introduced. This r e d u c t i o n i n the r a t e of chemical i n n o v a t i o n does not r e f l e c t the number of chemicals h e l d o f f the market because of t o x i c i t y problems." "Medium and small s i z e chemical companies are l i k e l y to be more s e v e r e l y impacted by the n o t i f i c a t i o n requirements than l a r g e r companies. The reasons are that smaller companies are l e s s l i k e l y to be w i l l i n g to cope with the u n c e r t a i n t i e s and c o s t s of the n o t i f i c a t i o n process and will be l e s s able to take on the higher r i s k s of R&D." "The Impact of the TSCA Premanufacture Notice Requirements will vary among the segments of the chemical i n d u s t r y and the firms i n any one segment. The r o l e of i n n o v a t i o n v a r i e s from segment to segment and d i f f e r s from f i r m to f i r m w i t h i n a segment. The segments p o t e n t i a l l y most h i g h l y impacted by TSCA a r e : Soaps and Detergents, Surface A c t i n g Agents, and I n d u s t r i a l Organic Chemicals, n.e.c. A l s o p o t e n t i a l l y h i g h l y impacted are r e l a t i v e l y small chemical producing firms throughout the chemical i n d u s t r y , but e s p e c i a l l y i n the f o l l o w i n g segments: I n d u s t r i a l Inorganic Chemicals, n . e . c , P l a s t i c M a t e r i a l and Resins, Synthetic Rubber, T o i l e t P r e p a r a t i o n s , Perfumes, and C y c l i c Crudes and I n t e r mediates." In the way of r e t r o s p e c t on the s u b j e c t , which may a l s o be a f o r e c a s t f o r chemical i n n o v a t i o n , few, I t h i n k , would disagree with former FDA Commissioner Alexander Schmidt, a r e g u l a t o r hims e l f , when he s t a t e d , "For example, i n all of FDA's h i s t o r y , I am



3.

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39

unable to f i n d a s i n g l e instance where a Congressional committee i n v e s t i g a t e d the f a i l u r e of FDA to approve a new drug. But, the times when hearings have been held to c r i t i c i z e our approval of new drugs have been so frequent that we aren't able to count them. The message of FDA s t a f f could not be c l e a r e r . Whenever a controversy over a new drug i s r e s o l v e d by i t s approval, the Agency and the i n d i v i d u a l s involved l i k e l y will be i n v e s t i g a t e d . Whenever such a drug i s disapproved, no i n q u i r y will be made. The Congressional pressure f o r our negative a c t i o n on new drug a p p l i c a t i o n s i s , t h e r e f o r e , intense. And it seems to be i n c r e a s i n g , as everyone i s becoming a s e l f - a c c l a i m e d expert on carcinogenesis and drug t e s t i n g . " (90 The a b s t r a c t to the yet-to-be published paper of John DeKany, Meeting the Challenge of TSCA with T e c h n i c a l Innovation, (26) r e f e r s to e l i m i n a t i n g the need f o r r e g u l a t i o n with a p o s i t i v e , i n n o v a t i v e response. I've already given my thoughts on r e g u l a t i o n and innovation both being responses to a need. For DeKany to take a r t h e r step that innovation could e l i m i n a t e a r e g u l a t i o n makes me view him as a f e l l o w p r o g r e s s i v e . As an example, i n h i s a b s t r a c t , he s p e c i f i c a l l y p o i n t s to an i n n o v a t i v e chemical p l a n t that might be designed at the outset to minimize t o x i c e f f l u e n t discharges. To be as c h a r i t a b l e as p o s s i b l e , I would assume that Dr. DeKany i s not aware of a $500 m i l l i o n chemical complex that was to be b u i l t adjacent to a Dow Chemical p l a n t i n P i t t s b u r g , C a l i f o r n i a , that d i d not have a s i n g l e drop of e f f l u e n t . In f a c t , some water was even needed f o r make-up. Further, a i r emission f o r the multi-chemical complex would have equalled i n q u a l i t y and kind the emission of only 14 automobiles, measured i n the p l a n t areas. Even t h i s would have been undetectable at the p l a n t fence. The e n t i r e complex p r o j e c t , a f t e r a Dow expense of $4 m i l l i o n , was abandoned with only 4 of the 65 permits obtained and with EPA a i r r e g u l a t i o n s p r o v i d i n g the f a t a l blow. I f Dr. DeKany suggests that such a complex i s d e s i r a b l e , Dow people would assume he i s speaki n g f o r the EPA of the f u t u r e . There i s one remaining problem we might have w i t h the drug and p e s t i c i d e r e g u l a t i o n ; that i s , the a p p l i c a b i l i t y of these s t u d i e s to other f i e l d s such as chemicals. I hope that my suggested c a t e g o r i z a t i o n of r e g u l a t o r y types to d i f f e r e n t i a t e between s p e c i f i c a t i o n r e g u l a t i o n and judgment r e g u l a t i o n explains t h i s problem. The l i t e r a t u r e i s q u i t e c o n c l u s i v e that where judgmental premarket r e g i s t r a t i o n r e g u l a t i o n i s invoked, innovation i s markedly crippled. I f t h i s i s c r e d i b l e , and because we are i n the process of using pre-market r e g i s t r a t i o n i n chemicals, l o g i c and h i s t o r y would not be on the s i d e of the new chemical or p l a s t i c innovator as he searches f o r support f o r h i s ideas. Summary and We

Suggested

Studies

have a strong case that economic r e g u l a t i o n a f f e c t i n g r i s k



40

FEDERAL REGULATION AND CHEMICAL

INNOVATION

c a p i t a l and pre-market product r e g i s t r a t i o n have a s u b s t a n t i a l and negative e f f e c t on i n n o v a t i o n . As such, I do not f e e l comp e l l e d to suggest t o p i c s f o r f u t u r e s t u d i e s . Such s t u d i e s will come, f o r sure, and will be welcome, but the problem i s not knowing more, but communicating what we now know to those who would cherish innovation. A n t i - t r u s t r e g u l a t i o n i s a s e r i o u s problem that must be s t u d i e d and t r e a t e d b e t t e r . There are v a s t d i f f e r e n c e s o f o p i n i o n that we cannot a f f o r d t o leave unresolved. E i t h e r the l a t e Senator Hart o r the l a t e Joseph A. Schumpeter was r i g h t . The u n b e l i e v a b l e numbers of product and process s p e c i f i c a t i o n r e g u l a t i o n s are a whipping boy f o r i n n o v a t i o n . In s p i t e of a great d e a l of r e f e r e n c e s , the d i r e c t connection with i n n o v a t i o n has not been w e l l made. Perhaps, as my boss would say, "there i s s t i l l some meat i n t h i s stew", but one must conclude that these r e g u l a t i o n s are r e a l l y "cost adders" and, while they c e r t a i n l y a f f e c t our general business h e a l t h and may w e l l bleed us to death, they do not stab r i g h t to the heart o f i n n o v a t i o n . I have a l s o discovered two new thoughts about the f i e l d o f government r e g u l a t i o n and i n n o v a t i o n as a r e s u l t o f my review. They need some examination and c r i t i q u e . F i r s t , I contend that r e g u l a t i o n and i n n o v a t i o n are both primary responses t o a need stimulus, but only r a r e l y t o each other. Because we i n s t a l l the r e g u l a t o r y response so q u i c k l y , we b l o c k out the slower i n n o v a t i v e response as having the same cause. Second, product and process r e g u l a t i o n must be d i v i d e d i n t o two e n t i r e l y d i f f e r e n t types - minimum performance s p e c i f i c a t i o n s and pre-market r e g i s t r a t i o n judgments. F a i l u r e to do so will s i g n i f i c a n t l y reduce the all-important communication of the r e s u l t s o f s t u d i e s already c a r r i e d out that could help us improve our sagging i n n o v a t i o n r a t e . Abstract While many acknowledge and much has been written about the effect of government regulation on chemical innovation, most references only assume that there i s a strong negative or positive relationship between government action and chemical innovation. Relatively few attempts have been made to study and quantify the relationship and fewer publications have been made. Because chemical innovation i s an issue of national p r i o r i t y , there i s need to assemble and report what is known in order to create a broader understanding of the problem, aid the developers of new products, assist legislators and foster further studies. Based on the existing l i t e r a t u r e , the paper categorizes the various types of regulations by their influence on innovation, reports the major studies undertaken, and concludes with the need for future effort.


3. LEENHOUTS


41

Selected Bibliographies Adams, J. F., "Consumer Attitudes, Judicial Decision, Government Regulation, and the Insurance Market", The Journal of Risk and Insurance (1975) 501-512.


Ancker-Johnson, Betty, "Current Policies and Options for the Future", Research Management (January 1977) 7-12. Baltera, Lorraine, "Federal Curbs Inhibiting Growth, Says Smithline", Advertising Age, Vol. 46, No. 19 (May 12, 1975) Brooks, Η., "Technology Assessment as a Process", Int. Soc. Sci. J, Vol. 25, No. 3 (1973) 247-256. Chemical and Engineering News, "NSF Gets Fresh Input on Bars to Innovation", (October 29, 1973) 17. Chemical and Engineering News, "FDA New Drug Rules Called Too S t r i c t " , (August 18, 1975) 6. Chemical and Engineering News, "New Spur Needed for U.S. Innovation", (April 26, 1976) 6. Clauser, H. R. Ed, "The Future for R&D Gloom but not Doom", Research Management, (July 1977) 2-4. Cohn, H. B., "The Rationale and Benefits of Regulation", Public U t i l i t i e s Fortnightly, (October 7, 1976) 71-74. Drug, Cosmetics Industries, "Keeping Posted", (August 1975). G i l l e t t e , D., "How Regulations Encourage and Discourage Innovation", Research Management, (March 1977) 18-21. Gilman, G., "Technological Innovation and Public Policy", California Management Review, Vol. 13, No. 3 (Spring 1971) 13-24. Grether, Ε. T. and Holloway, K. J., "Impact of Government Upon the Market System", Journal of Marketing (April 1967) 1-7. Hlavacek, J. D. and Thompson, V. Α., "Bureaucracy and New Product Innovation", Academy of Management Journal, Vol. 16, No. 3 (September 1973) 361-372. Karber, J. W., "Competition and the Regulatory Process", Chuart. Review of Economy and Business, Vol. 9, No. 3 Autumn 1969) 57-64.


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AND CHEMICAL

INNOVATION

Kleinman, H. S., "A Case Study of Innovation", Business Horizons, Vol. 9 (Winter 1966) 63-70.


Kohlmeier, L. M., "Federal Regulation in Industry Seen as Inefficiency Verging on Comedy", NAII Convention Special Issue (November 30, 1970) 30-31. Laubach, G. D., "Dr. Laubach Dispels Myths About Status of U.S. Research", Pharmaceutical Manufacturers Association (PMA) Bulletin, (July 1978) 5. Lehner, U. C., "Work-Safety and Anti-inflation Agencies Split over Drive to Cut Regulatory Costs", Wall Street Journal (August 3, 1978). Levy, L., "National Science and Technology Policy-Needed: Institutional Breakthroughs", Research Management (January 1977) 21-24. Nieburg, H. L., "Social Control of Innovation", The American Economic Review, (May 1968) 666-677. Oster, S. M. and Quigley, J. Μ., "Regulatory Barriers to the Diffusion of Innovation: Some Evidence from Building Codes", Bell Journal of Economics, Vol. 8, No. 2 (Autumn 1977) 361-377. Reinhardt, C. F., "Upgrading Testing and Evaluation for Regulatory Standards", Research Management (March 1977) 27-28. Schultze, C. L., "The Public Use of Private Interest", Harper's (May 1977). Schweitzer, G. Ε., "Regulation and Innovation-The Case of Environmental Chemicals", Abstract (February 1978) Simon, W. Ε., "Restoring Competition to the American Marketplace", Treasury Papers (March 1976) 3-6. Sommer, C. Η., Interview "Government Interference", Nation's Business (February 1962) 34-35, 80-83. Swearingen, J. E., "Complex Regulatory Process Poses Threat to our Economic Strength", The Commercial and Financial Chronicle (March 8, 1962). Vanderslice, Τ. Α., "Technology and Jobs: The V i t a l Link is Weakening", Dun's Review, Vol. 110, No. 1 (July 1977) 25.


3.

LEENHOUTS


43

Weidenbaum, M. L., "The High Cost of Government Regulation", Business Horizons, (August 1975) 43-51. Williams, D. Ν., "Economic Concentration i n Industry S t i f l e s Innovation", Iron Age (July 24, 1969) 48.


Literature Cited 1.

"Breakdown of U.S. Innovation", Business Week, (February 16, 1976) 56-58. 2. "Vanishing Innovation", Business Week, (July 3, 1978). 3. Lepkowsi, W., "Innovation and National Security: A Complex Relationship", Chemical and Engineering News, (July 17, 1978) 24-29. 4. Weidenbaum, M. L., "Where Overregulation Can Lead", Nation's Business (June 1975) 26-32. 5. Lewis, J. D., "National Science and Technology PolicyIts Impact on Technological Change", Research Management (January 1977) 13-16. 6. 7.

Leenhouts, J. W., "Inflation vs. Innovation", Chemtech (January 1976) Vol. 6, 30-31. Takayama, Akira, "Behavior of the Firm Under Regulatory Constraint", American Economic Review (1969) Vol. 59, No. 3, 255-260.

8.

Chenea, Paul F., "The Costs and Effects of Regulations", Research Management (March 1977) 22-26. 9. Grabowski, H. G., "Drug Regulation and Innovation", American Enterprise Institute for Public Policy Research, Library of Congress Catalog Card No. 76-25709 (1976). 10. Oreffice, P. F., "Let's Stop Dumping U.S. Jobs", Commonwealth Club of California (January 27, 1978). 11.

12. 13.

14.

Gerstenfeld, Arthur, "Government Regulation Effects on the Direction of Innovation: A Focus on Performance Standards", Transactions on Engineering Management, Vol. EM-24, No. 3 (August 1977) 82-86. Lessing, L., "Why the U.S. Lags i n Technology", Fortune, (April 1972) No. 85, 68-73. Hill, C. T., Greenberg, E., Newburger, D. J., et a l , "A State of the Art Review of the Effects of Regulation on Technological Innovation i n the Chemical and A l l i e d Products Industries", Center for Development Technology for National R&D Assessment Program, St. Louis, Mo: Washington University (February 1975), Three Volumes. Kamien and Schwartz, "Market Structure and Innovation", J. Economic Literature (March 1975).



44


15.

Foster, R. N. and Gluck, F. W., "Impact of Antitrust and Regulatory Actions on Progress of Technology", Research Management (July 1975) 7-10.

16.

Kelly, P. Κ., "Governmental Overregulation and the Capital C r i s i s " , Financial Executive (November 1976) 12-18.

17.

Staats, Ε. B., "Improving the Climate for InnovationWhat Government and Industry Can Do", Research Management (September 1976) 9-13.

18.

Schweitzer, G. Ε., "Regulations, Technological Progress, and Societal Interests", Research Management (March 1977) 13-17.

19.

Nason, Η. Κ., "National Science and Technology PolicyPerceptions of Barriers to Innovation", Research Manage ment (January 1977) 17-20.

20.

Rogge, Β. Α., "Will Capitalism Survive?", Imprimis (May 1974) Vol. 3, No. 5, Hillsdale College, Hillsdale, Michigan.

21.

Kawase, Takeshi and Rubenstein, A. H., "Reactions of Japanese Industrial Managers to Government Incentives to Innovation - An Empirical Study", Transaction on Engineering Management (August 1977) 93-101.

22.

Wardell, William Μ., "Therapeutic Implications of the Drug Lag", C l i n i c a l Pharmacology and Therapeutics (January 1974) Vol. 15, No. 1, 83.

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24.

Lewert, Η., "Silent Autumn", The Dow Chemical Company.

25.

L i t t l e , Arthur D., Inc., "Impact of TSCA Proposed PreManufacturing Notification Requirements", Office of Planning and Evaluation, U.S. Environmental Protection Agency (December 1978).

26.

DeKany, J., "Meeting the Challenge of TSCA with Technical Innovation", In Print This Volume.

RECEIVED March 8,

"Of Mites and Men",

Harper's (August 1978).

1979.


Federal Regulation and Chemical Innovation - ACS Publications

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