Market Power and Market Failure: The Decline of the European Fertilizer Industry and the Expansion of Norsk Hydro

During the 1980s, the fertilizer industry in Western Europe underwent some radical changes. Reduced profitability and overcapacity forced a number of smaller producers to close down, and most of the major firms in the business either withdrew from the market or reduced their capacity. The exception was the Norwegian industrial conglomerate Norsk Hydro, which expanded rapidly and established itself as the largest producer in Europe and later globally.

The article discusses the strategy behind Hydro's expansion in relation to the changing structure of the fertilizer market, which historically was characterized by tacit and explicit agreements on prices and market shares between the major producers. Hydro's strategy and growth are analyzed in relation to some theoretical contributions from the study of transnationalisation of enterprises. A main argument is that Hydro's expansion was not driven by advantages in cost structure or organizational capabilities, nor did the expansion create such advantages. The Norwegian company expanded in foreign markets partly because it had less to lose from a counterattack than competitors in larger markets and partly because of strategic disadvantages. Contrary to most of its large European competitors, Hydro failed to identify the long term threats to the stability and profitability of the Western European market.