Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions

Synthetic dyes represent the first time when a scientific discovery quickly gave rise to a new industry. The 19-year-old William Henry Perkin serendipitously invents in 1856 the first synthetic dye and successfully commercializes his discovery. Perkin, along with entrepreneurs from Britain and France, dominates the synthetic dye industry for the next eight years. Contrary to contemporary predictions, however, these firms are not able to sustain their leadership position in the new industry. By 1870, Germany has about 50 percent of the global synthetic dye market. Britain falls to second place. By 1900, Germany?s worldwide share climbs as high as 85 percent where it stays with relatively minor fluctuations until World War I. In the 1860s, American firms try to be successful participants in the U.S. market, but cannot compete with German and Swiss firms before World War I and remain relatively small players or go out of business. Adam Smith (1937) and David Ricardo (1911) and more recently Michael Porter (1990) and David Mowery and Richard Nelson (1999) are prominent examples of a wide array of social scientists who have tried to identify the factors that lead nations and firms to prosper. In tracing traces development of one industry within the context of three countries?Great Britain, Germany, and the United States, the book attempts to make a significant contribution toward formulating a much-needed dynamic theory of industrial leadership. The study identifies differences in educational institutions and patent laws as the key reasons for the German leadership position in industry. When the German industry had pulled ahead of its foreign competitors, its superior performance allowed it to lobby government agencies to enhance educational institutions and patent regulations, creating a cumulative spiral of competitive advantage. To observe in greater detail how national institutions help or hurt the competitive position of domestic firms, the study also analyzes the performance individual firms. I examine the development of two companies (one successful and one unsuccessful venture) in each of the three countries. At the level of the individual firm a key finding is that the winners in all three countries shared one thing in common: in contrast to the losers, they had strong ties to the centers of organic chemistry knowledge.