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

Murmann has pursued two goals in this painstaking work—to provide a history of the synthetic-dye industry prior to World War I and to offer a general theory of business history, which he terms "coevolution." Synthetic dyes were the creation of an early "high-tech" industry that both steered and rapidly commercialized a new technology. Such industries are common today, and their nurture and development is often seen as a matter of economic and strategic importance. Those who believe that history can offer important insights into today's policy issues will appreciate Murmann's contribution, even if they find that his reach on the second goal has exceeded his grasp. The goal and the attempt to reach it are ambitious, but not always successful.

The first synthetic dye was invented by a British teenager, William Henry Perkin, who was seeking to synthesize quinine. Perkin serendipitously created aniline purple, and, most remarkably, appreciated its potential as a textile dye superior to any natural dye then in use. Perkin abandoned his studies at the Royal College of Chemistry to commercialize aniline purple and to develop new synthetic dyes. Contemporary observers expected Britain to dominate the new industry for the indefinite future. Yet by 1870, German companies held half of the market in synthetic dyes and increased it to 85 percent, a share they held from the turn of the century until World War I. The handful of German firms that dominated this industry included Bayer, AGFA, and BASF. The primary market for textile dyes lay in Britain and the United States, however, and the chief raw material used to manufacture synthetic dyes, coal tar, was primarily available in Britain. Given these disadvantages, how could German firms so thoroughly come to dominate an industry in which the first movers were British?

Murmann discusses the relationships among German firms (most of whom failed) and between the dye industry and universities in Germany, Britain, and the United States. His discussion of the impacts of varying patent regimes is especially interesting in light of current concern about the public policy of intellectual-property protection. In all countries, these institutions (firms, universities, and patent laws) changed over time in response to pressures from each other (coevolved) in ways that may have helped solidify German dominance.

As a framework for understanding German dominance, Murmann's coevolution fails the test of Occam's razor. His own account supports the contention that the initial conditions in Germany gave that country the edge, not the ensuing institutional changes. At the time of Perkin's discovery, Germany had the most organic chemists and the best educational infrastructure for organic chemistry. The new industry enjoyed economies of scale and scope: Large numbers of organic chemists were necessary to develop new dyes. Firms with many dyes had production and marketing advantages over competitors with few. That the yet ununified German states had no patent laws enabled a competitive industry to arise, initially copying and improving upon Perkin's inventions. The patent law eventually adopted protected processes but not products, enabling the competitive environment in Germany to continue while encouraging the development of research and development into new chemical processes. Murmann would have done well to include more detail on the origins of this novel patent approach, which supported the dominance of the national industry but not individual firms.

Evolutionary theory has gained a foothold in economics by relaxing the unrealistic classical assumption that firms know how to maximize profits. Evolutionary theory's substitution of random behavior for omniscience, which lets markets determine which firms come closer to the ideal, is a valuable modification to a technical theory. Any observer of modern public policy sees how firms attempt (and sometimes succeed) in altering their regulatory and economic environment and how government actions can sometimes drastically alter the structure of firms in an industry. Whether terming these alterations "coevolution" provides any better insight into the mechanisms by which they occur...