Competition and Innovation: The Breakup of IG Farben
By Felix Poege
IG Farben used to be the world’s largest chemical company and a major innovator – until it was broken up in one of the largest antitrust events in history. This paper explores how the breakup affected innovation activity in postwar Germany.
The 21st century has seen two notable trends: a “big company” is bigger than ever, and the pace of innovation is slowing. Large superstar firms may be responsible for notable innovations now but have the potential to erode innovation incentives later. The classic Schumpeterian refrain of economic growth through “creative destruction” has become murkier recently, as incumbent firms have become increasingly persistent. Are megafirms good or bad for innovation? How do concentrated markets relate to the pace of innovation? If large firms were broken up, how does the breakup impact innovation? Empirically, these are challenging questions because the connection between concentration, the presence of dominant firms, and innovation is hard to pin down.
In cases like the breakups of Standard Oil or AT&T, the government has stepped in to restructure the market, which allows researchers to investigate effects of direct changes to the market. Yet, such cases are rare. The breakup of IG Farben offers important lessons.
Before its breakup, IG Farben was one of Germany’s most innovative firms and the world’s largest chemical company. For example, the company was home to three Noble Prize winners, who received prizes for developing the world’s first commercial antibiotics (1939), and for work in high-pressure chemistry (1931) that enabled the production of artificial fertilizer through nitrogen fixation. Both had a considerable impact and shaped the modern world. Yet, due to IG Farben’s industrial capabilities regarding synthetic fuel, rubber, and explosives, the firm was critical to the German war machine and became deeply involved in the atrocities at Auschwitz. This ambivalent history has long captured the interest of historians, led to the perception of IG Farben as “Hell’s cartel” and contributed to its eventual breakup in 1952.
My main results show an increase in aggregate innovation post-breakup. Empirically, I analyze how innovation – measured as the quality-weighted patent count – reacts to changes in concentration caused by the breakup. The breakup had a geographic structure and separated IG Farben plants that overlapped in product and technology profiles into several successor companies, so the reorganization introduced horizontal competition in technologies and product markets. Before 1952, patenting in technologies that were later affected by the breakup of IG Farben was trending in the same way as unaffected technologies. In the post-war period, patterns diverged substantially, suggesting a positive innovation effect from the breakup. Additional analyses juxtaposing technology-level and product-level exposure to the breakup suggests that technology spillovers, rather than product market interactions, drive the rise in innovation.
For IG Farben itself, I also find positive innovation effects when comparing the patent output of IG Farben and its later successors to a synthetic control group of companies from the German electronics industry.
The history of IG Farben tells the story of a successful government-mandated breakup and opens questions about the role of such breakups as a last-resort instrument in antitrust policy toolkits. While the breakup of IG Farben occurred 70 years ago, the implications of a megafirm breakup remain relevant. Large companies with enormous in-house research investment drive technology and innovation much as IG Farben did in German chemicals. Recent high-profile mergers in the chemical industry like ChemChina-Syngenta, Dow-DuPont, or Bayer-Monsanto only underscore the importance of understanding the relationship between competition and innovation. This paper also highlights the importance of technology spillovers and the need to analyze merger and breakup effects beyond the directly involved firms.