Innovation and productivity: An analysis of the chemical, textiles and machine tool industries in the U.S.

257

Innovation and productivity: An analysis of the chemical, textiles and machine tool industries in the U.S. * Alok

K. CHAKRABARTI

Dean, School of Industrial Management, New Jersey Institute of Technology, Newark, NJ 07102, U.S.A. Final version

received

March

1989

The relationship between innovation and productivity growth in the chemical, textile and machine tool industries is explored here. Information about innovations has been obtained from published sources. Although the linkage between innovation and productivity can be a complex one, it is observed that the slowdown of the productivity growth in the chemical industry coincided with a significant slowdown in innovation. An opposite trend is observed in the textile industry. Althou~ the machine tool industry showed an increase in innovation, the productivity growth slowed down consistently during 1967-1984. Cyclical fluctuation in the demand for machine tools might have created a difficult problem. Moreover, the small companies which were interested in producing machines for special purposes used labor intensive processes which did little to improve productivity and their excess wage could not be reflected in the price because of intense competition. The impact of enviro~ental and other governmental regulations on innovation in the chemical and textile industry is also discussed.

t Work in this area has been supported

by grants from the Brookings Institution and the Division of Science Resources Studies at the National Science Foundation to Drexel University. Additional support was provided by the Mackie Endowment Fund. Dr. Martin Neil Baily at the University of Maryland collaborated on the study. I thank Dr. Donald Buzzelli at the National Science Foundation for his active support and cooperation. I thank the following persons for their advice: Dr. Myles Boylan at the National Science foundation, Dr. William Schreirer at the U.S. Small Business Ad~~stration and Professor Zvi Griliches at Harvard University. This paper was written while I was a visiting professor at Christian Albrechts University in Kiel, West Germany in Summer, 1988.

Research Policy 19 (1990) 257-269 North-Holland ~8-7333/~/$3.50

0 1990, Elsevier Science Publishers

1. Introduction Slowdown in the productivity growth of the U.S. has raised much caution among policy analysts. The President’s Commission on Global Competitiveness, headed by John Young of the Hewlett Packard Company, has stressed the importance of technology and innovation as the cornerstones of U.S. competitiveness in the world marketplace [14]. Hayes and Abernathy [9], Abernathy et al. [l] and Reich [15] have commented that a lack of innovation and a decreased level of emphasis on technology in corporate strategic behavior have led to an erosion of U.S. competitiveness. Pavitt and Soete (131 have shown a strong correlation between a country’s economic prosperity and technological activities. An overview of the dynamics of technological change and productivity with concomitant changes in organization has been presented by Subramanian [19]. The link between innovation and productivity is a complex one. As explained by Baily and Chakrabarti 131, one does not achieve productivity growth during the early phases of the innovation process, i.e. invention and development. Observable changes in productivity occur after the commercial introduction when the innovation diffuses through the industry. The pattern of diffusion differs in different industries; in some cases one can observe the producti~ty gain early, while in other cases the producti~ty gain occurs only after considerable diffusion of the innovation in the industry. Innovation may influence productivity in different ways. As shown in fig. 1, product innovation leads to an increase in the value-added of the

B.V. (North-Holland)

258

A. K. Chakraharti

/ Innovation and productiuit,v in the U.S.

2. methodologicalissues

SUPPLIER INDUSTRY

Fig. 1. Productivity

and innovation

linkage.

product which helps the firm obtain a higher price for it, particularly if it leads to product differentiation. This would be reflected in productivity increase. Innovation in process may lead to cost efficiency or quality enhancement in the product. In the case of increased cost efficiency, the firm would achieve a’gain in productivity in a traditional sense as it would need less resources per unit of output. Process innovations leading to quality enhancement would have a similar effect on productivity as new products would have in the market. According to Scherer [f&17], innovations in the supplier industry have a profound impact on the increase of productivity in the user industry. For example, computer aided design equipment has greatly enhanced the productivity of engineering drafting and design, Moreover, when the supplier industry implements a process innovation, that innovation has a secondary influence on increasing the cost efficiency. It is therefore necessary to understand the trend of innovation not only in the focal industry, but also as innovation in the industries which supply it. We have explored in this paper the linkage between productivity and innovation. More specifically, we have explored the nature of innovations both within the focal industries and the industries which supply them. Finally, we have also examined how government regulations have influenced the trend of innovation in some industries.

Measures of productivity in different industries have been deveIoped by the Bureau of Economic Studies at the U.S. Department of Labor. The most commonly used measure of productivity is output per labor hour worked. This measure is strongly related with real wages which in turn determine the standard of living. The growth of real wages has slowed down since 1965 signifying a slowdown in labor productivity. Another measure of productivity is output per unit of capital employed. Multifactor productivity measures output per unit of multiple factors of production such as capital, labor and materials. As Baily and Chakrabarti 13, p. 21 mentioned, multifactor productivity growth is preferable to either an indicator or overall economic performance because it measures the efficiency with which both capital and labor are used in production. In this paper, we have adopted the multifactor productivity estimates adjusting for capital utilization rates (Baily and Chakrabarti 127). As discussed by Baily and Chakrabarti 131, there are many plausible rival hypotheses to explain the recent slowdown in productivity in the U.S. Baily and Chakrabarti [3] have examined several plausible reasons for recent slowdown in productivity such as quality of labor, slowdown of capital investment, shortage of energy, management failure as well as methodology for determining productivity. While all these factors are plausible, economists have still been faced with the problem of an unexplained decline in growth. This paper explores the link between innovation and productivity growth using the chemical, textile and machine tool industries as illustrative cases. There are several traditions of research for measuring innovation output. Economists have often used R&D expenditures and the number of R&D personnel as indicators of R&D input and patents as inventive output. Sociologists have used publications of scientific and technical papers as a proxy for scientific and technical output. Although there are some close correlations between patents and publications, there are firm and industry characteristics which determine the relationship between these two measures (Halperin and Chakrabarti [S]). Patents generally represent inventions rather than innovations which have a commercial connotation. Moreover, patent poli-

A.K. Chnkrabarti

/ Innovation andproductivity

ties for firms in different industries differ due to various competitive factors. Even within the same industry, two firms may have very different patent policies for competitive and strategic reasons (Chakrabarti [4]). A number of studies in the U.S., Canada and a few European countries have been conducted in recent years to measure scientific and technological performance in these countries. All of these studies defined innovation as a product or process which has been introduced into the market. However, these studies used different methods for defining the population, sample and method for data collection on these innovations. The studies conducted in the U.S., notably by Gellman Research Associates (Chakrabarti et al. [5]) and by the Futures Group (Edwards and Gordon [7]) used literature as sources for defining the population of innovations. The studies in Canada (DeBresson and Murray [6]), in the United Kingdom (Townsend and Pavitt [20]), and in the Federal Republic of Germany (Schmalholz and Scholz [18]; Meyer-Krahmer [12]), have surveyed firms to obtain information on innovation. The Canadian and British studies used experts as the initial source of information for defining the population of innovations. The studies in the U.S. did not use experts as initial sources of information on innovation. Help from the experts was used by both Gellman Research Associates and the Futures Group to evaluate the innovations and then a survey of firms was made to obtain information on these innovations. The German studies by Schmalholz and Scholz [18] and MeyerKrahmer [12] used the classical survey method in their data collection process. They did not use any experts to define the initial population of innovations. Surveys similar to the ones in Germany are now being conducted in the Netherlands and in Italy without using experts as the filters for defining the population. The survey approach has several difficulties: self-reporting of data often tends to be unreliable, many firms do not want to provide this data to outsiders for competitive reasons, and finally, survey research always creates problems of non-respondent biases (Chakrabarti [4]). Use of experts for defining the population of innovations for subsequent surveys seems to have some problems also. The identification of experts and their willingness to cooperate are both critical. Experts may tend to emphasize the most recent

in the U.S.

259

innovations as they are likely to be remembered more quickly. The most controversial and important innovations are more likely to be mentioned than other types. We followed the U.S. tradition of research in this field (Chakrabarti et al. [5]; Edwards and Gordon [7]) and used published sources of technical information in each industry. Our rationale is that once an item is commercially introduced, the information finds its way to the technical press through a variety of ways. Industrial and trade fairs are also important means through which such information is broadcast. Although some process information is not publicized due to competitive reasons, the technical community comes to know about what is radically new and articles are written about them. We have found that technical magazines are reliable sources of information for innovation.

3. Selection of industries We chose to study the linkage between innovation and productivity during the period of 1967 to 1983. We started with 1967 since it represents a year of prosperity in the United States economy. The 1970s represented a complex period of economic performance due to a variety of factors, such as the Vietnam war, oil crisis, foreign competition, and environmental regulations. The firms were subjected to a rapid succession of various political and economic forces which called for periodic adjustments. The early periods of the 1980s represent some of the adjustments in the United States economy. Against this backdrop of interesting events in the economic history, we proceeded to examine our focal industries. We have selected three industries to explore the linkage between innovation and productivity. The three industries are: chemicals (excluding drugs and pharmaceuticals), textiles and machine tools. We excluded drugs and pharmaceuticals because of the special regulatory requirements imposed on them. It seems to us that drugs and pharmaceuticals belong to a special category by themselves. Figure 2 shows the productivity growth rates for the three industries (Baily and Chakrabarti [3]). They present different patterns of behavior in terms of their ability to adjust with the changes as reflected in the productivity growth rate. The ma-

A.K. ~h~k~aba~ii / Innovation a~dproduct~vi~

260

in the U.S.

CHEMICAL

h

-3J

I 1957-z

I

INDUSTRY

WCTOOL

1973.79

YEAR Ea CHEMICALS

Fig. 2. Productivity growth chine toot industries.

1980-83

aa TEXTILES

rates in chemical,

MECHANICAL INDUSTRY

ELECTRONICS INDUSTRY

textile and ma-

chine tool industry has shown a consistent decline in productivity growth rate in this period. The textile industry has shown a steady increase in productivity growth rate. The chemical industry has shown a decline during the 1973-79 period and then an increase during the 1980-83 period. One important point to be noted here is that the machine tool industry has shown a consistent negative productivity growth rate since 1973 and that the matter has worsened during the 1980s. The chemical industry is considered to be a high technology industry as measured by a high R&D expenditure and employment of scientific and technical personnel. Both the textile and machinery industries are considered to be capital intensive as they depend on a high level of capital expenditures for their production operations (Lawrence [lo]; Halperin and Chakrabarti [S]).

4. Information about innovation 4.1. Chemical industr?, Through our initial discussions with experts in the chemical industry, we realized that there would be four types of innovations related to chemical industry: materials innovations which are the result of research and development activities within the chemical industry; process innovations which are again the result of research and development within the industry; equipment innovations come mainly from machinery fabricators who supply to the chemical industry; instrument innovations are from the instrument and electronics industry and required for process and production control (fig. 3).

Fig. 3. Innovation

in the chemical

industry.

Graduate students at Drexel University who had either an engineering or science degree were employed to obtain the innovation data from journals deemed relevant for the chemical industry. ’ We judged new chemical products to be innovations if they were chemically new, or had new physical or structural properties, were significant modifications of existing chemicals, or were chemically reformed or recompounded for different applications. A new chemical process had to show changed input or yields or produce a new product. An equipment innovation often incorporated into new processes, had to operate at new physicochemical parameters or process new materials. A new instrument had to be able to measure the operation of chemical processes with greater precision, in a changed environment, or over a wider range (Baily and Chakrabarti [3]). Our lists of innovations in the chemical industry were provided to a group of experts from the industry as well as universities to check whether we had missed any significant innovations.

The journals consulted for chemical related innovations are: Chemical Engineering, Chemical and Engineering News, Chemicaf Week, and Chemical Engineering Progress. Our experts for the chemicat industry were: Chemical materials: Dr. Dipak Roy, Amoco Chemicals. Chemical instruments: Dr. William Herring, Standard Oil of Indiana; Mr. Robert Russell and staff at Ametek Technical Center. Chemical equipment: Dr. Edward Hogan, PQ Corporation; Dr. Dipak Agarwal, Stearn Catalytic. Chemical process: Dr. Raj Mutharasan, Drexel University: Dr. Elihu Grossman, Drexel University.

A.K. Chakrabarti

/ Innovation and productivity in the U.S.

4.2. Textile industry We consulted the faculty at the Philadelphia College of Textiles and Sciences to identify relevant journals as sources of innovations related to this industry. Textile mills perform very little research and development of their own; innovations are introduced by suppliers to this industry. Figure 4 provides a schematic diagram for the major operations in an integrated textile mill producing cloth. Innovations related to each operation are developed by the suppliers manufacturing this equipment. While the textile machinery manufacturers have played a major role in developing innovations for major operations such as fiber preparation, spinning, weaving, knitting, etc., suppliers of materials such as synthetic fibers (nylon, rayon, polyesters, etc.), finishes, and dyes also have contributed to the innovative force in the textile industry. Textile mills perform some research and development in process technology and the application of the developments from their suppliers to their own manufacturing system. Like the chemical innovations, we obtained information on innovation in various categories, i.e. equipment, materials, process and instruments.

,

EQUIPMENT

i::’ \

INDUSTRY

mic

CAROING\;NITTING

261

These broad classes of innovations were further divided into the following subclasses: Equipment: Since weaving looms are major capital intensive equipment and the key to productivity in a textile mill, we separately analyzed the development in this type of equipment. Material: The material innovations were divided into the following classes: fibers, dye and finish. Finishing is the last stage in cloth production where the fabric is treated to impart to it some desirable properties such as crease resistant, anti-static, etc. Instrument: Instruments for measurement and production control were included in this category. As in the case of the chemical industry, we submitted the lists of innovations to a group of technical experts from industry and academic organizations to review the validity of our coverage. * These experts rated the innovations in regard to technical novelty and also their impact on quality enhancement, productivity increase and meeting of regulatory requirements. To test the reliability of the expert ratings, we submitted a file of about 1,300 “finish” innovations to two experts. In about 1,100 cases, they were in complete agreement. In the remaining 200 cases, their disagreement was in the order of 1 point, i.e. one might call an innovation imitation, while the other would call it improvement. There was no disagreement over what constituted a “radical change” or a “major technical change”. 4.3. Machine

tool industry

Innovations can be different types in the machine tool industry as shown in the schematic diagram fig. 5. In the primary area of metalworking, innovations can take place in main functional areas: forming, stamping, welding, pressing and cutting. Cutting is the most important function in

’ The journals consulted for textile related innovations are:

/ CLOTH

\

i

CHEMICAL

INDUSTRY

Fig. 4. Innovation in the textile industry.

FIBER

Textile World, Textile Industries, American Dyestuff Reporied, Textile Chemist and Colorist, and America’s Textiles Bulletin. Our experts for the textile industry were: Textile equipment: Dr. Robert Barnhardt and staff at the Institute of Textile Technology, Textile process and instruments: Dr. Jerry Cogan and staff at Milliken Research; Dr. James Hendrix and staff at Springs Industries. Textile dye, finish and fiber: Professor Fred Fortess, Philadelphia College of Textile Science; Mr. Vincent Moser, Rohm and Haas Company. Textile yarn and fabric: Professor Frank Ko, Drexel University.

262

A.K. Chakraharii

COMPUTERIZED

TRADITIONAL

/ Innovation

andproductioity

in ihe U.S

NEW TECH

N/C

DRILLING

CHEMICAL Fig. 5. Innovation

INDUSTRY

in the machine

tool industry

the machine tool industry and innovations have taken place in various categories. Innovations in the traditional cutting operations such as drilling, grinding, milling and lathe continue to occur. With the advent of computer technology, we have seen the development of numerically controlled machine tools, computerized numerically controlled (CNC) machine tools and machining centers. The NC machine tool is controlled by instructions received from tape, punched cards, plugs or other media. CNC, on the other hand, stores and conveys information directly to NC control from an on-board computer using microprocessor technology. Machining centers incorporate an automatic changing of tool and thus makes the machine a multifunctional one. New technology such as robotics, laser and optical technology are incorporated in machine tools to perform various functions such as cutting, welding, etc. As the machines operate faster and at higher temperatures, improved means for cooling, lubrication, sealing, etc. are needed. Recent applications of microprocessor technology have also helped in developing controls for machine tools. Finally, innovations in material handling and flow are also needed to keep pace with developments in functional areas. 3

5. Results 5.1. Chemical

Table 1 provides the data on the average number of innovations introduced per year during the three time periods under the different categories. From this table, it is obvious that the rate of innovation in the chemical industry slowed down considerably during the 1970s except for process innovations. The most dramatic change is the rate of innovations in materials. Process instrument innovations have increased significantly in the 1980s due to the application of microprocessor technology. We next examine the nature of the innovations in the chemical industry. Table 2 provides detailed information on the novelty of the innovations in materials, equipment, instrument and process categories. From table 2, we observe that the nature of innovations in the materials area has also changed significantly. Not only has the rate of innovation dropped, but the novelty of these innovations has Table 1 Innovations

related

Type of innovation

For the machine tool industry, we consulted Tool and Production for the various types of innovation. This journal seemed to be the most comprehensive one covering all aspects of machine tool innovations. Machine tool innovations have not been rated by experts.

industry

New material Process Equipment Instrument

to chemical

industry

(av. no. per year)

Period 1967-73

1974-79

1980-82

322.28 39.00 105.00 29.57

39.00 32.33 54.56 18.16

64.00 34.66 101.33 54.00

A.K. Chakrabarti Table 2 Novelty of innovations

related

Category

Period

to the chemical

/ Innovation and productivity in the U.S.

263

industry

Percent

of innovation

Major tech change

in category Improvement

Imitation

Total

Material

1961-13 1974-79 1980-82

0.75 0.44 0.00

29.39 23.07 8.34

69.86 76.49 91.66

100.00 lOQ.00 100.00

Equipment

1967-73 1974-79 1980-82

5.98 0.60 1.31

17.42 5.80 4.21

76.60 93.60 94.42

100.00 100.00 100.00

Process instruments

1967-13 1914-19 1980-82

14.47 10.08 5.55

55.56 51.37 58.65

29.97 38.55 35.80

lOQ.00 100.00 100.00

Process innovations

1967-13 1974-79 1980-82

8.05 8.06 6.12

58.26 49.07 68.27

33.69 42.87 25.01

100.00 100.00 100.00

also decreased. This table systematically shows the technological stagnation in innovative output. Some executives have told us that the technological opportunities in this area have been exhausted. Another executive put it more succinctly, “We have caught all the easy butterflies!” From this table, we observe that the novelty of innovations in equipment and instrument areas has not changed dramatically, and that they have becomes slightly more imitative. It leads to the conclusion that process innovations have become less imitative in later years. 5.2. Textile industry Table 3 provides the data on innovations related to the textile industry. It shows that equipment innovations grew steadily during this period. Innovations in dye increased during the 1974-79 period, but then declined in the 1980s. Innova-

Table 3 Innovations

related

to textile industry

(av. no. per year)

Type of innovation

Period 1961-73

1974-79

1980-82

Equipment Dye Instrument Finish Process Fiber

134.50 109.14 53.80 117.71 16.15 15.00

140.50 158.20 44.30 99.17 14.17 10.66

154.30 89.00 37.10 68.00 9.33 3.61

tions in instrument, finish and process declined slowly during this time period. From our interviews with corporate executives, we have learned that the rapid decline in fiber innovation has coincided with the decision of many major chemical companies to shift their emphasis away from this product line. Trade restrictions and the increased value of the dollar during the 1970s were thought to be the main factors for this strategic shift. Table 4 summarizes the data on novelty of innovations in dye, finish, fiber and processes. Innovations in dye were increasingly imitative. After 1973, we did not find any single example of radically new or major technological change in dyes. Innovation in finish also showed the similar pattern as dye. There was some major technical change in fiber innovation in 1967-73, but not after that period. Since many fibers are based on petroleum feedstock, the oil crisis of 1973 severely affected fiber production. Textile process innovations showed more improvement in existing technology than simple imitation. Compared with chemical process innovations, textile processes were less imitative, particularly during the first two time periods. 5.3. Machine

tool industry

Innovations in machine tools in different functional areas are shown in table 5. Except for forming, innovations in each category have shown

264

A.K. Chakrabarti

Table 4 Novelty of innovations Period

/ Innovation and productivity in the U.S.

in the textile industry Percent

Type

of innovation

in category

Major tech change

Improvement

Imitation

Total

1961-73

Dye Finish Fiber Process

0.27 0.23 28.53 12.39

43.31 28.28 53.33 68.16

56.42 71.49 28.24 19.45

100.00 100.00 100.00 100.00

1974-79

Dye Finish Fiber Process

0.00 0.33 4.69 3.53

9.69 9.08 68.76 83.55

90.31 90.59 26.55 12.92

100.00 100.00 100.00 100.00

1980-82

Dye Finish Fiber Process

0.00 0.00 0.00 0.00

14.99 10.78 45.50 85.74

85.01 89.22 54.50 14.26

100.00 100.00 100.00 100.00

a growth. Miscellaneous machine tools also exhibited a steady growth. In traditional cutting tools, the grinding, drilling, lathe and milling machines area, we observe a slight decrease in the rate of innovation in 197479, except in grinding machines. The rate of innovation in this area has almost doubled in the 1980s compared with the late 1960s as shown in table 6. During this period, we observed a very interesting development in computerized cutting tools as shown in table 6. The Numerically Controlled (NC) machine tool was predominant in the first period, but in the 1980s it became obsolete. In its place, we see the introduction of Computerized Numerically Controlled (CNC) and multifunc-

Table 5 Innovations

in the machine

Innovations

Type of function

Cutting Forming Stamping Welding Press Total for functional Misc. other machines Total

tool industry

machines

by function per year

1967-73

1974-79

1980-82

64.95 76.51 18.14 6.00 3.71

65.66 37.00 17.00 9.50 5.00

152.25 44.00 23.50 16.25 3.25

169.37

134.16

239.25

88.85

248.33

356.75

258.22

382.49

596.00

tional machining centers. This has a direct impact on innovations in controls and softwares. During this period, we have also observed a rapid deveIopment in the application of new technologies such as robotics, laser and optics. Innovations based on these new technologies perform functions of different types. For example, laser technology can be used for welding, precision cutting, etc. Sometimes a robot may also apply laser technology. Robotics innovation increased rapidly during the 1980s along with laser and optics. However, the growth rate for optics is much slower than for the other two technologies. From table 6 we observe a spectacular increase in the rate of innovations. The reason is the advent of the application of new computer related technology. It is interesting to note that with the decline of NC machine tools, innovation in the control of NC has also decreased rapidly. The growth of innovations in control for CNC machine tools as well as programmable controllers has been extremely high in the 1980s. Innovations in related processes such as cooling, cleaning, lubrication and sealing, increased steadily during these periods. A need for these innovations arose since the new tools could operate at a faster speed without changing tools and thus have less idle time for traditional means of cleaning and lubrication, etc. Table 6 also shows the rate of innovation in cutting related areas which consists of various cutting components,

A. K. Chakrabarti Table 6 Different

/ Innovation

and productivity in the U.S.

6. Discussion categories

Type of machine, or control

in machine

innovation

Innovations

per year 1974-79

22.00 4.28 13.14 12.10 51.52

15.66 11.17 13.83 8.50 49.16

28.00 43.00 23.25 16.00 110.25

12.86 0.00 0.57 13.43

7.83 3.33 4.34 16.50

0.50 25.00 16.50 42.00

Tools using new technology Robotics Optical Laser Total

1.28 4.72 3.57 9.57

2.33 4.15 0.50 6.98

20.50 7.00 10.50 38.00

Materials handling & flow Material handling Gage Valve Total

68.14 23.86 6.85 98.85

59.00 24.83 22.00 105.83

60.00 35.25 16.50 111.75

Control for machine tools Digital read out Programmable CNC control N/C control Software for control Control materials Misc. controls Total

6.00 0.42 OS? 2.00 0.29 0.29 70.28 79.85

19.50 12.83 5.50 0.00 1.34 2.50 151.83 193.50

19.25 37.00 31.24 0.00 21.00 1.74 172.00 282.25

in metal working 2.14 5.14 2.29 0.72 10.29

13.83 10.66 6.00 6.83 37.32

21.2s 12.50 1.75 11.25 56.75

121.00 52.17 10.67 183.84

202.00 98.00 18.75 318.75

cutting

Ancillary processes Lubrication Cleaning Cooling Sealing Total

Cutting related function Cutting components Cutting equipment Cutting materials Total

equipment Innovations also.

1980-%2

tools

Computerized cutting tools Num controlled Comp. num. controlled Machining center Total

of the results

tool industry

1967-13

Traditional Drilling Grinding Lathe Milling Total

265

80.14 56.85 3.00 139.99

-

and materials for making cutting tools. have increased steadily in these areas

We have presented the above data on innovation and productivity in three different industries. In the textile industry, we have seen a steady increase in productivity. In this industry, our technological indicators point to a growth of innovations in various industries which supply to this industry. Although the textile mills themselves can not be credited with much research and development, we find that by adopting the innovations introduced by the suppliers, textile mills have shown a steady productivity growth rate. This has been critical for the survival of the textile industry in the U.S. since during this time period an influx of goods from foreign competitors, particularly low wage countries, has offered stiff competition. By continuously innovating and modernizing their plants, textile mills have increased their productivity and survived. In the case of the chemical industry, we see a very significant drop in innovation in the mid 1970s and only a slight increase during the 1980s. The productivity growth rate in this industry follows the same pattern. Before we jump to a causal relationship between innovation and productivity, let us cautiously examine others confronting this industry during this time. Prior to the 1970s large chemical companies achieved productivity gain through building large plants (see Levin [II] for a discussion on innovation and economy of scale in the chemical industry). Companies manufacturing commodity chemicals, such as polyethylene, concentrated on the economy of scale to achieve cost efficiency and used that as a competitive weapon. In the mid 1960s these companies made a strategic decision to expand their plant capacities to achieve this cost efficiency. This seemed to be a good strategy in the 1960s but not so in the 1970s as the environment of the chemical industry changed radically. The industry experienced a problem of overcapacity in the early 1970s when the demand for products did not materialize. Underutilization of plants led to a rapid decline in productivity. The firms were driven so intensely by the economy of scale concept, that the problem of overcapacity was not considered seriously in their strategy. Competition from other countries was important during this period. Various trade restric-

266

A. k: Chakrabarti

/ lnnovutio~ and pr~du~t~uit~ in the U. S

tions favoring the producers in newly industrialized countries in the Pacific prevented American manufacturers of chemical fibers and commodity chemicals from free trade. This added to the problem. Environmental regulations became more stringent in the early 1970s. The Nixon Ad~nistration initiated the enforcement of stricter environmental regulations. This led to a significant shift in R&D programs in many companies. Projects meant to help comply with regulatory requirements became a priority at the expense of projects meant for new products or processes. Firms were required to spend substantial sums of money on such projects utilizing their best technical personnel. There is an interesting difference in the nature of process innovations in the textile and chemical industries. As table 7 indicates, most of the textile process innovations were geared to productivity and quality enhancement. In the chemical industry only one fourth of the process innovations were meant for quality and productivity improvement. A sizable proportion of the chemical process innovations were meant for compliance with environmental regulations and saving energy. This finding does not surprise us since we have learned from executives in chemical companies that a major emphasis in R&D was focused on environmental regulations during the 1970s. Table 8 provides the data on the impact of dye, finish and fiber innovations on quality and productivity enhancement, energy saving, pollution control, etc. This table shows that all three types of innovations were designed to improve the quality or productivity of the textile industry.

Table 7 Relative comparison textile and chemical Period

Industry

of impact industries

of process

innovations

in the

Percent of innovation in impact category Quality & productivity

Energy saving, pollution

Undefined

196-J-73

Textiie Chemical

82.30 24.10

6.30 23.90

11.40 52.00

1914-19

Textile Chemical

71.70 14.90

13.00 32.50

9.30 52.60

1980-82

Textile Chemical

89.00 21.90

11.00 39.40

0.00 32.70

Table 8 Impact of dye, industry Period

finish

and

Inno-

Percent

vation

Quality & productivity

fiber

innovations

of innovation

in the

in impact

textile

category

Energy saving, pollution

Undefined

1967-73

Dye Finish Fiber

97.00 97.60 84.40

0.00 0.50 0.00

3.00 1.90 15.60

1974-79

Dye Finish Fiber

88.60 95.80 100.00

3.70 0.00 0.00

11.40 0.50 0.00

1980-82

Dye Finish Fiber

98.90 97.00 100.00

3.00 0.00 0.00

1.10 3.00 0.00

The textile industry benefited greatly from innovation in the weaving loom. During the 1980s major technological changes occurred through the development of weaving technology involving water-jet and air-jet looms and other shuttleless looms. These looms increased the speed of weaving. The quality of fabric produced from these mills was improved. During 1970 to 1984, we encountered 152 new weaving looms. Thirteen of these new looms incorporated major technological changes. Forty of these represented an improvement of existing technology. Innovation in weaving technology necessitated innovations in related areas, such as finishes, instruments, etc. Thus the textile industry became a center of interacting innovations coming from different industries supplying it. Major innovations in weaving looms occurred outside the United States. Innovations from the U.S. represented only 8.9 percent of the total. Japan, Switzerland, Italy and the Federal Republic of Germany were the leaders in this area. Another major problem in the mid 1970s was the oil crisis of 1973. Since most of the producers of chemicals depended on oil as both the raw material and the source of energy, they were severely affected by the sudden increase in oil prices. Moreover, their customers were also affected by the increase in oil prices. These abrupt changes affected the demand for chemicals in many ways. The chemical industry experienced a turbulent environment in the 1970s for which the firms in this industry were not prepared. Some of the prob-

A. K. Ch~k~abarti

I Innvv~ii~n and~~oductiv~~

lems were beyond their control. Some of the problems were embedded in earlier strategic decisions. The changes in the environment forced the chemical industry to change its direction of R&D. New products and processes were not as important as finding a solution to problems due to regulatory requirements and the oil shortage. We see a correlation between decrease in innovation and productivity in this industry. The relationship between innovation and productivity in the machine tool industry does not appear to be positive. Although productivity has declined consistently in this industry, we do not see the same pattern in innovation. Instead, we see an increase in innovation in this industry. The machine tool industry has developed innovations based on advances in computer, microprocessor, robotics, optics as well as laser technologies. Apparently the linkage between innovation and productivity growth in this industry does not match what we have observed in the chemical and textile industries. To explain this we should look at several issues. Many of the new innovations such as CNC and machining centers were new technologies which would add new performance features to the products, rather than increase the efficiency of production of these machines. Manufacturers are supposed to benefit from higher prices in the market through product differentiation. Since other machine tool manufacturers abroad introduced similar technologies in their products, American producers did not achieve any special advantage. Innovation in controls helped many machine tool users to adapt their machines to incorporate these controls, rather than buy new machines from scratch. Demand for machine tools is highly cyclical in nature. This creates a problem in labor productivity as it is not possible to adjust the labor force according to production. This industry is dominated by a large number of small firms, the average size being sixty-two employees. Only seventyone companies had more than 250 employees. The average size has decreased from seventy-three employees in 1967 to its current figure for 1982. The small companies often engaged in making machines from special applications in a labor intensive process which may not be the most productive process (Baily and Chakrabarti [3]). The machine tool industry was adversely affected in the 1980s when the value of the dollar

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made it less competitive with respect to manufacturers in Japan and the Federal Republic of Germany. Technological developments in these countries have to be compared to understand the true competitive position of the machine tool industry in the U.S.

7. Conclusion Our central question in this paper has been whether innovation and productivity growth rates are related. It seems to us that the relations~p is a complex one. Not only innovations in the focal industry would effect its productivity, but also the innovations in the industries which supply it are important for productivity enhancement. In the case of two industries, the chemical and textile industries, it seems that innovation is related with productivity growth. Although the textile mills themselves spent very little money on research and development, innovations introduced by its suppliers helped increase productivity. Innovations in weaving looms and other equipment helped the productivity grow significantly. Innovations in other areas such as dye, finish, etc. helped increase the productivity. Industries related to the textile industry experienced new opportunities for innovation as major changes in weaving and spinning were introduced. For example, opportunities for innovations in instruments and controls increased during this time. Our study of the chemical industry shows the same pattern of relationship between innovation and productivity. In contrast with the textile industry, firms in the chemical industry are major performers of research and development and therefore sources of their own technology. Manufacturers of equipment and instruments also played an important role in providing innovation to this industry. Ironically, the slowdown in innovation in the chemical industry was the result of decisions made by the firms themselves. Many manufacturers of commodity chemicals relied heavily on the economy of scale as the major source of competitive strength and increased their plant capacity in anticipation of a steady rate of growth demand for their products. In the early 1970s they were disappointed with the rate of growth of demand for their product. By then, the

industry was burdened with over capacity and the inflexibility of their strategic choice. The problem was compounded with protective trade laws of the newly industrialized countries in the Pacific region. manufacturers of specialty chemicals who were protected through patent or use of proprietary manufacturing technology were better off. They had relied on the development of technology as a competitive weapon and could succeed in the turbulent environment. The 1970s were also problematic for two more reasons. Environmental protection became more inlportant during this period. Chemical companies had to comply with stricter rules related to enviro~ment and occupational health. Much of the R&D effort was directed towards this area, This adversely affected their efforts for innovations which could have increased productivity. The oil crisis in 1973 added a new dimension to the existing problems of the manufacturers of chemicals. This created a sudden shortage of both raw materials and a source of energy. The demand for chemicals was also adversely affected, as the oil crisis affected customers too. Some of the R&D efforts were directed to deal with this problem of oil shortage. Some of the executives also told us that the lack of technolo~cal opportunities were the cause of the slowing down of il~~ovation. We have seen that no radical new material or process innovation was developed during this period. In their view, basic research in this area had slowed down. The pool of knowledge from which innovations could be developed, had been exhausted. These executives advocated more research both at the university and corporate levels. The machine tool industry was interesting to the extent that its stowdown in productivity growth can not simply be explained by the lack of innovation. On the contrary, there has been a steady increase in innovation in this industry. The application of new technologies, such as microprocessor, robotics and laser created opportunities for inll~vation. The problem, however, was that this industry faced stiff competition from manufacturers in Japan and the Federal Republic of Germany. Since these competitors were in the forefront of these new technologies, American manufacturers did not gain any product differentiation. It was a strategic necessity to survive. Sec-

ondly, in the 1980s the value of the dollar put American manufacturers at a competitive disadvantage. Cyclical ffuctuation in the demand for machine tools also created a difficult problem for the manufacturers as it was not easy to adjust labor accordingly. Moreover, the small companies which were interested in producing machines for special purposes used labor intensive processes which did little to improve productivity and their excess wage could not be reflected in price because of intense competition. In conclusion, we would point out the importance of technology in productivity growth and competitive strengths. Technology generated w-ithin an industry is important; but innovations introduced by the suppliers are also important driving forces for increasing productivity growth. In times of prosperity it is easy to neglect technology and focus on items like economy of scale as a strategic weapon, as many firms in the chemical industry did. Encouragement for the continued development of technology through effective research and development is necessary. Government has an important role to play in stimulating technology development just as it has played an important role in redirecting technology development to areas of energy and pollution control The importance of basic research has been pointed out by some executives to us as an important source for developing techn(~log~caI opportunities. Universities and corporations have to share the responsibility of being actively involved developing basic research for future technological opportunities. Government can be a major player in this process by fostering research and development on a continued basis.

References El] William J. Abernathy, Kim B. Clark and Alan M. Kantrow, Industrial Remissante (Basic Books. New York, 1984). [2] Martin N. BaiIy and Alok K. Chakrabarti, Innovation and Productivity in U.S. Industry, 3ro~ki~~s Papers on Emnomc Activftier 2 (19%) 609-632. [3f Martin N. Baily and Alok K. Chakraharti, ~ff~~~u~~~~a& the Productiuiry Cr~srs (Brookings Institution, Washington DC, 1988). [4] Alok K. Chakrabarti, Trends in Innovation and Productivity: The Case of Chemical and Textile Industries in the U.S., R&D ~ana~e~e~t 18 (2) (1988) 131-140.

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