New Analysis Reveals The Breakup of IG Farben Elevated Innovation

IG Farben was the world’s largest chemical firm and a significant innovator—till it was damaged up in one of many largest antitrust occasions in historical past. My analysis finds that the breakup elevated innovation exercise in postwar Germany.

The 21st century has seen two notable developments: “Huge firms” at the moment are larger than ever, and the tempo of innovation is slowing. Giant celebrity companies could also be liable for notable improvements at first, however in addition they have the potential to erode innovation incentives later. The basic Schumpeterian chorus of financial progress by “artistic destruction” has develop into murkier not too long ago, as incumbent companies have develop into more and more persistent. Are megafirms good or dangerous for innovation? How do concentrated markets relate to the tempo of innovation? If giant companies are damaged up, how will the breakup affect innovation? Empirically, these are difficult questions as a result of the connection between focus, the presence of dominant companies, and innovation is difficult to pin down. The focus stage in a market is nearly actually associated each to innovation and to different elements that affect innovation, making the true impact of competitors on innovation difficult to research.

In instances just like the breakups of Customary Oil or AT&T, the federal government has stepped in to restructure the market, which permits researchers to research the results of those direct adjustments to the market. But, such instances are uncommon. The breakup of IG Farben affords necessary classes. 

Rise and Fall of IG Farben

Within the early 20th century, IG Farben was one among Germany’s most modern companies and the world’s largest chemical firm. The corporate was house to a few Noble Prize winners, who had been awarded prizes for creating the world’s first industrial antibiotics (1939) and for work in high-pressure chemistry (1931) that enabled the manufacturing of synthetic fertilizer by nitrogen fixation. Each developments had a substantial affect on the chemical business and on each business that makes use of its merchandise. General, IG Farben performed a vital function within the German innovation system, accounting for five.8% of all patents by German inventors (16.5% in chemistry).

IG Farben was fashioned in 1925 in a mega-merger between a number of of Germany’s largest chemical firms, which had earlier fashioned a cartel. With the merger, the businesses aimed to extend the effectivity of their operations and rationalize manufacturing. Nonetheless, the unified firm maintained a follow referred to as “centralized decentralization” with redundancies and plenty of spatially distributed analysis laboratories. On account of its industrial capabilities concerning artificial gas, rubber, and explosives, the agency was critically necessary to the German battle machine and have become deeply concerned within the atrocities at Auschwitz. This ambivalent historical past has lengthy captured the curiosity of historians and led to the notion of IG Farben as “Hell’s cartel”.

Within the aftermath of World Conflict II, the victorious Allied Powers nervous that IG Farben’s financial affect would give it undue political energy. After years of deliberation, in 1952 the Allies broke IG Farben right into a dozen small companies and three giant new firms: BASF, Bayer, and Hoechst. The foremost successors had been largely organized in keeping with the Allied occupation zones in Germany, every containing main manufacturing and R&D services of IG Farben. All of the sudden, publicity to focus in chemical markets and expertise fields had modified.

Evaluation of the Breakup

The IG Farben breakup is especially instructive as a result of it was externally imposed and carried out and since it was surprising by the breakup goal. Usually, breakup instances (and mergers) consequence from strategic concerns of companies and antitrust authorities that deliberate in regards to the state of competitors and potential outcomes—together with the results on innovation. Within the IG Farben case, breakup enforcement was not accomplished by antitrust authorities however by a collection of legal guidelines of the Allied Excessive Fee overseeing the post-war administration of Germany. Concerns had been strongly associated to political elements: first the impression left by the corporate’s involvement within the battle, and later the distribution of IG Farben factories throughout occupation zones in mild of the looming chilly battle. Since IG Farben had not anticipated the breakup and had not directed investments in keeping with such expectations, the case permits conclusions to be drawn about competitors and innovation in a way more rigorous trend than in different instances or autopsy merger analyses. Lastly, the breakup had a geographical construction, and redundancy in expertise and product portfolios between the successor firms led to horizontal competitors. Relative to the breakup of AT&T, the place the vertical separation between the analysis unit and distribution community is central for an innovation evaluation, the breakup of IG Farben highlights a unique, and arguably extra related, side.

A method to consider the IG Farben breakup is from the angle of a merger. Breakups and mergers each change who owns the property used to provide a very good or service. In a merger, the impact on innovation is ambiguous, because it relies upon available on the market construction and on any synergies the 2 becoming a member of companies would possibly obtain. In a breakup, not solely will the “new” companies born from the big incumbent react to the breakup, however so will all different companies within the business. If the breakup will increase innovation by the successors, all different companies will concurrently face new competitors within the product market and see expertise spillovers. Rivals’ decisions to reply strategically decide the combination affect on innovation from a breakup. Theoretically, the response by exterior incumbents can be ambiguous, as expertise spillovers improve innovation whereas product competitors could lower innovation.

For the evaluation, I digitize knowledge from over 1.2 million German patents and product catalogs for the German chemical business. With this knowledge, I can describe the panorama of expertise fields and product markets nicely and over time. 


German patent 703500, owned by IG Farben, with highlighted key details about expertise class, inventor and applicant location, and utility 12 months.


1952 product catalog entry of a chemical substance supplied by each Bayer and Hoechst (entries 3 and 4), indicating direct post-breakup product market competitors.

My most important outcomes present a rise in mixture innovation post-breakup. Empirically, I analyze how innovation—measured because the quality-weighted patent depend—reacts to adjustments in focus attributable to the breakup. I measure breakup publicity with the focus change ensuing from the breakup. Earlier than 1952, patenting in applied sciences that had been later affected by the breakup was trending in the identical approach as in unaffected applied sciences. Within the post-war interval, patterns diverged considerably, suggesting a constructive innovation impact from the breakup. Extra analyses juxtaposing technology-level and product-level publicity to the breakup recommend that expertise spillovers, slightly than product market interactions, had been driving the rise in innovation. 

For IG Farben itself, I additionally discover constructive innovation results. Evaluating the patent output of IG Farben and its later successors to an artificial management group of firms from the German electronics business, I once more doc a parallel pre-war and pre-breakup growth and huge will increase in innovation output after the breakup. The electronics business, just like the chemical business, was a high-tech business with a comparatively giant focus. Its duopoly of AEG and Siemens was affected by most of the identical post-war difficulties as IG Farben, but it was not damaged up. Additional, these companies function in technologically completely different areas, so there’s little product market overlap. Subsequently, the electronics business offers a related comparability group.

After all, there are a number of potential confounding elements for which a wide range of robustness checks are included within the paper. Most significantly, the evaluation takes place inside chemistry, evaluating applied sciences and companies with completely different publicity ranges. Consequently, the evaluation inherently accounts for macro-trends. Nonetheless, in a collection of robustness checks and historic discussions, I management for results of battle destruction, Allied occupation, competitors insurance policies, and site inside or exterior the Soviet sector. Whereas there could also be different historic particulars to contemplate, the noticed results solely materialize after the breakup, and the results are pushed by applied sciences wherein the breakup elevated competitors, making it unlikely that any single issue can clarify the rise in innovation higher than the breakup itself. 


Whereas the breakup of IG Farben occurred 70 years in the past, the implications of a megafirm breakup stay related. Giant firms with huge in-house analysis funding are nonetheless driving expertise and innovation. Current high-profile mergers within the chemical business like ChemChina-Syngenta, Dow-DuPont, or Bayer-Monsanto solely underscore the significance of understanding the connection between competitors and innovation. This paper additionally highlights the significance of expertise spillovers and the necessity to analyze the results of mergers and breakups past these few companies which can be instantly concerned.

IG Farben is one instance of a profitable government-mandated breakup. It demonstrates the usefulness of such breakups as a last-resort instrument in antitrust coverage toolkits. A coverage of repeated breakups, nevertheless, would more than likely scale back every firm’s incentives to put money into innovation and to develop. Within the IG Farben case, the German authorities later launched formal competitors laws, just like the US mannequin, and dedicated to a coverage atmosphere with out additional breakups. Future analysis ought to examine how the doubtless damaging dynamic incentives of breakups might be prevented or mitigated. Nonetheless, the IG Farben case highlights the significance of market and expertise competitors and of a sturdy antitrust coverage for innovation.

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Originally posted 2022-10-05 10:00:00.