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Patents Legislation and German FDI in the British Chemical Industry before 1914

Published online by Cambridge University Press:  13 December 2011

Antje Hagen
Antje Hagen
Affiliation:
ANTJE HAGEN is a research assistant and lecturer in economic and business history at the University of Jena in Germany.
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Abstract

This article analyzes the investments in both manufacturing units and sales subsidiaries by German chemical companies in the United Kingdom prior to 1914. It extends the findings in the existing literature on the subject, as sales subsidiaries have not so far been investigated. In particular, the article focuses on the motives underlying these investments. By building sales subsidiaries, German companies hoped to improve their control over foreign distribution activities and to promote their own brand names. As for the creation of manufacturing outlets, the motives of the companies differed before and after the reform of the British patent law in 1907. Prior to patent law reform, branch plants were set up due to transport cost considerations, resource orientation, or the pursuit of monopoly. Further reasons included restrictions on the use of proprietary technology in the home country and capacity constraints in the home factory. It was only after 1907 that manufacturing units were established to safeguard the companies' British patents. Consequently, the traditionally held notion that it was solely the patent law of 1907 which sparked off German FDI in the British chemical industry needs to be modified.

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Articles
Information
Business History Review , Volume 71 , Issue 3 , Autumn 1997 , pp. 351 - 380
Copyright
Copyright © The President and Fellows of Harvard College 1997

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References

1 As a consequence of this proliferation of products and processes and their mutual interdependence, this paper adopts a wide definition of the chemical industry, which encompasses all branches mentioned above.

2 Cf. e.g. the production of soda and sulfuric acid of which British producers were the main suppliers worldwide. Pollard, Sidney, Britain's Prime and Britain's Decline: The British Economy 1870–1914 (London, 1989), 33Google Scholar.

3 The development of artificial dyestuffs can act as a case in point here. Whereas it was the Briton W. H. Perkin who developed the first artificial dye, the bulk of the subsequent new dyes originated from Germany.

4 Kindleberger, Charles P., “Germany's Overtaking of England, 1806–1914, Part II,” in Weltwirtschaftliches Archiv 111 (1975): 480–481Google Scholar; Chandler, Alfred D. Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass., 1994), 475Google Scholar.

5 This applies both to the production of heavy chemicals, where new production methods (like the Solvay process instead of the Leblanc process in soda production) were only reluctantly adopted, and to the development of new products, which was largely left to German companies. Haber, Ludwig Fritz, The Chemical Industry during the Nineteenth Century: A Study of the Economic Aspect of Applied Chemistry in Europe and North America (Oxford, 1958), 55, 59Google Scholar; Richardson, H. W., “Chemicals,” in The Development of British Industry and Foreign Competition 1875–1914: Studies in Industrial Enterprise, ed. Aldcroft, Derek H., (London, 1968), 282Google Scholar; Landes, David S., The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present (Cambridge, 1969), 272Google Scholar; Reader, William Joseph, Imperial Chemical Industries—A History, Vol. I: The Forerunners 1870–1926 (New York, 1970), 37–49Google Scholar; Coleman, D. and MacLeod, C., “Attitudes to New Techniques: British Businessmen 1800–1950,” Economic History Review 39 (1986): 594CrossRefGoogle Scholar; Pohl, Hans, Aufbruch der Weltwirschaft. Geschichte der Weltwirtschaft von der Mitte des 19. Jahrhunderts bis zum Ersten Weltkrieg (Stuttgart, 1989), 177Google Scholar.

6 Levinstein, Ivan, “Observations and Suggestions on the Present Position of the British Chemical Industries, with Special Reference to Coal-Tar Derivatives,” Journal of the Society of Chemical Industry 5 (29 June 1886): 351–352Google Scholar; Beer, John Joseph, The Emergence of the German Dye Industry (New York, 1981), 47–48Google Scholar; Reader, Imperial Chemical Industries, 263–264; Plumpe, Gottfried, Die I. G. Farbenindustrie AG. Wirtschaft, Technik, Politik 1904–1945, Schriften zur Wirtschafts- und Sozialgeschichte, Vol. 37 (Berlin, 1990), 52Google Scholar.

7 Gottfried Plumpe, IG Farben, 52.

8 Pollard, Britain's Prime, 34; Chandler, Scale and Scope, 432. On the world markets, German chemical companies also encroached upon British suppliers in the fields of heavy, bulk chemicals. They are largely disregarded in the following article, however, as no traces of FDI could be found in these fields.

9 Williamson, Oliver E., Markets and Hierarchies: Analysis and Anti-Trust Implications (New York, 1975)Google Scholar. According to the distinction introduced by Williamson between market and hierarchy as the two alternative ways of effecting business transactions, on an international plane market leads to foreign trade. Foreign trade consists of a transfer of goods and services. By contrast, hierarchy on an international level involves the transfer of assets across borders. It can be effected by foreign direct investment. As a consequence of this transfer of assets, the level of integration between the two partners rises. A common governance structure evolves.

10 In this paper, a multinational enterprise is defined in accordance with the definitions advanced in Dunning, John H., Multinational Enterprises and the Global Economy (Wokingham, 1993), 3Google Scholar; Wilkins, Mira, “Hosts to Transnational Investments—A Comparative Analysis,” in Transnational Investment from the 19th Century to the Present, ed. Pohl, Hans (Stuttgart, 1994), 27Google Scholar; and Jones, Geoffrey, The Evolution of International Business: An Introduction (New York, 1996), 4Google Scholar. Following these definitions, a multinational enterprise (MNE) is a company which engages in value adding activities in more than one country. It disposes of assets in a country other than its home country, be it in the form of a sales and marketing subsidiary or a production unit. Foreign direct investment (FDI) is the term applied to the transfer of assets that turns a company into an MNE. The assets involved in this process can be tangible or intangible. Usually they are comprised of a combination of capital, machines and equipment, know-how and personnel.

11 For recent surveys of existing theories see Dunning, Multinational Enterprises and the Global Economy, chap. 4, or Schoppe, Siegfried G., Kompendium der Internationalen Betriebswirtschaftslehre (München, 1994)Google Scholar, chap. 2.

12 Hertner, Peter, “German Multinational Enterprise before 1914: Some Case Studies,” in Hertner, Peter and Jones, Geoffrey, eds. Multinationals: Theory and History (Aldershot, 1986), 123–124Google Scholar.

13 Chandler, Scale and Scope, 479.

14 Harm Schröter, “Foreign Investment of the German Chemical Industry, 1870–1930,” in German Yearbook on Business History, 1993, 91 and 100 respectively.

15 Ivan Levinstein.

16 As defined by Chandler in Scale and Scope.

17 The tables displayed in the article contain those companies which are explicitly mentioned in the text. The remaining firms are smaller companies, which are not explicitly mentioned, but whose analysis underlined the arguments put forward here.

18 Zimmermann, P. A., Patentwesen in der Chemie. Ursprünge, Anfänge, Entwicklung (Ludwigshafen, 1965), 72–95Google Scholar.

19 1890 McKinley Tariff, 1897 Dingley Tariff.

20 The very first reform he and his followers effected was the Patents, Designs, and Trade Marks Act of 1883, which bestowed upon the Board of Trade the right to revoke a patent. The law was not made use of, however. Levinstein consequently resumed lobbying for its reform. See, for instance, Levinstein, “Observations and Suggestions,” 351–359. For Levinstein's role in bringing about the patent law, cf. also Reed, P., “The British Chemical Industry and the Indigo Trade,” in British Journal of the History of Science 25 (1992): 113–125Google Scholar.

21 The amounts produced in the United Kingdom were to cover both British consumption and exports made from the British market.

22 Zimmermann, Patentwesen, 124–128; H. W. Richardson, “Chemicals,” 299–300.

23 The Red Book of Commerce (London, 1913)Google Scholar; Jones, Geoffrey et al. , Impact of Foreign Multinational Investment in Britain since 1850 (Computer File, Colchester, ESRC Data Archive, 1993)Google Scholar.

24 Company Archive of Hoechst AG (CUK-UG), Annual Reports of Chemische Werke vorm. H.& E. Albert, Amöneburg-Biebrich 1909 to 1933; CUK-UG, library (no pressmark); Heincich Albert, Mein Leben (no place or date given); 80 Jahre Chemische Werke Albert, 1858–1938 (Wiesbaden, 1938), 1–18Google Scholar as well as Schwenk, Ernst, 125 Jahre Albert Chemie in Biebrich am Rhein. Bilder und Fakten zur Firmengeschichte (Wiesbaden, 1983), 28–33Google Scholar, 50–53, 56–65.

25 The distinction made between market and resource-seeking investments is based on Dunning, Multinational Enterprises and the Global Economy, 56–59.

26 On the organizational level, the British plants were joined together by a holding company, Chemical Works, Late H. & E. Albert, in London. This company was not run separately from its German mother company, however. The German company's annual reports name both German and British directors as managers of the conglomerate. Of the total equity of the company, the British branch accounted for approximately 18 percent (or £15,000) in 1909, the first year for which the annual report of Chemische Werke vorm. H.&E. Albert is preserved. Investments in the U.K. increased in the following years. In the annual report of 1913, Alberts British plants were valued at approximately £27,000.

27 In Middlesborough, Southbank, Parkgate, Frodingham, Wednesbury, Trench, Brymbo, and Round Oak.

28 The following section is based on no author, “Inoffizielle Firmengeschichte”(no date), 51–55, Business Archive of Th. Goldschmidt AG, Essen, and other documents obtained from the Business Archive of Th. Goldschmidt AG.

29 A motive for FDI singled out by Stephen Hymer and others. See Hymer, Stephen, The International Operations of National Firms (Cambridge, Mass., 1976), 1–96Google Scholar; Caves, Richard, “Industrial Economics of Foreign Investment. The Case of the International Corporation,” in Economica 38: 1–27CrossRefGoogle Scholar; Kindleberger, Charles P., American Business Abroad. Six Lectures on Direct Investment (New Haven, Conn., 1969)Google Scholar.

30 This threat was substantial, as there would not have been enough scrap metal to keep all de-tinning plants profitable. Goldschmidt's process was slightly superior technically, which is why competitor firms feared that they would go out of business should Goldschmidt set up its own de-tinning plant in the U.K.

31 Public Record Office-London, (PRO) BT 31/17000/76972. The capital invested in Batchelor & Co. Ltd. was £27,500.

32 The agreement consequently also bore aspects of resource orientation. As the pursuit of monopoly was clearly the predominant motive of Th. Goldschmidt's investments, however, the company is treated under this heading.

33 Investment in the London Electron Works amounted to £26,000.

34 A final direct investment in this context prior to World War I, was the foundation of Glasgow Metal Ltd. in 1913. This company was to procure supplies of scrap metal in Scotland.

35 The holding company had a nominal capital of £5,000. Goldschmidt, Th., ed., A Short Account of the Development of Th. Goldschmidt, Chemical and Tin Smelting Works, Essen-Ruhr, 1847–1903Google Scholar, no pages given. Via its German subsidiary, Allgemeine Thermit Gesellschaft, Essen, Th. Goldschmidt furthermore disposed of a British subsidiary for the working of a process of metal welding as employed in the construction of tramway tracks. This company, Thermit Ltd., founded in 1904, had a nominal capital of £50,000.

36 Koch, E., Ein Unternehmen im Wandel der Zeiten—Messer Griesheim (Frankfurt, 1993), 39Google Scholar; Chandler, Scale and Scope, 450–451; Jones, Impact of Foreign Multinational Investment; indirectly also: PRO, BT 31/11361/87058.

37 Liefering, M., Das Rheinisch-Westfälische Kohlensyndikat und sein Einfluß auf die Kohlenpreise und die Lage der Bergarbeiter (Diss. Tübingen, 1910), 11Google Scholar.

38 Approximately £40,000.

39 German customers received chemical intermediates from suppliers who were members of the cartel.

40 PRO, BT 31/1916/7855.

41 AG für Kohlendestillation was to share profits with Bell Brothers for a twelve-year period, after which AG für Kohlendestillation was again to obtain the whole of the profits for another six years. After this period, a new agreement was to be drawn up to take into account changed circumstances. This was prevented, however, by the beginning of the First World War.

42 Jones, , Impact of Foreign Multinational Investment; Handbook of German Joint Stock Companies 1919/20, vol. 1 (Berlin, 1920), 1837–1838Google Scholar: namely Clay Cross Co. Ltd. in Clay Cross, Lilleshal Co. Ltd. in Priors Lee, North Brancepeth Coal Co. Ltd. in Darlington, and J. & G. Wells Ltd. in Eckington.

43 Handbook of German Joint Stock Companies 1919/20, vol. 1, 1837–1838Google Scholar; Ress, F. M., Geschichte der Kokereitechnik. Im Auftrage des Steinkohlenbergbauvereins (Essen, 1957), 240–241Google Scholar. In the company's balance sheet for March 1914, AG für Kohlendestillation's foreign assets were valued at £220,000. These were made up of five British investments and one Russian coking plant. No individual values were given, but it is to be assumed that the British investments amounted to approximately £180,000. As both its British and Russian interests were sequestrated during World War I, AG für Kohlendestillation lost its main assets. Furthermore, British companies had taken over AG für Kohlendestillation's British plants and were working its technology on their own account. AG's management saw no prospect of resuming business in the U.K. (or Russia, for that matter) after the War. In Germany, the company consequently went into liquidation in 1919/20.

44 This description differs from Schröter, “Foreign Investment of the German Chemical Industry,” 98, who states that Lingner's foreign production only started in the interwar period. The view held here has been made possible by the detection of a new source on Lingner, namely Historische biographische Blätter, Sachsen, 5th ed., (Dresden)Google Scholar, no year or pages given, and PRO, BT 8/135.

45 Beer, The Emergence of the German Dye Industry, chap. 5.

46 The name Elberfeld Farbenfabriken Co. was deemed overly complicated by Bayer's British customers. They argued that it was hardly pronounceable. Furthermore, “Bayer” should be in the company name, as this would specify immediately whose products were being sold. To reduce the language barrier and allow for immediate recognition of the brand name the company name was subsequently simplified into The Bayer Co. The original capital of The Bayer Co. was £5,000, whereas Meister, Lucius & Brüning Ltd. started out with £20,000.

47 Chandler, Scale and Scope, 479.

48 Possehl, I., Modern aus Tradition. Geschichte der chemisch-pharmazeutischen Fabrik E. Merck Darmstadt, 2nd enl. ed. (Dreieich, 1994), 56Google Scholar. The London sales subsidiary was founded in 1883.

49 PRO, BT 31/ 18428/ 97893. The nominal capital of this company amounted to £5,000.

50 CA Merck, H1, 9 (b); Riedel-de-Haen, , ed., 150 Jahre Riedel-de-Haen. Die Geschichte eines deutschen Unternehmens (Seelze, 1964), 67Google Scholar; Riedel-de-Haen, , ed., Wir schaffen Verbindungen. 175 Jahre Riedel-de-Haen (Seelze, 1989), 21Google Scholar, 96–97: Riedel, J. D., a pharmaceutical company, founded a sales subsidiary, J. D. Riedel & Co., in LondonGoogle Scholar.

51 PRO, BT 8/ 135; AG, Beiersdorf, ed., 100 Jahre Beiersdorf, 1882–1982 (Hamburg, 1982), 120Google Scholar, letter by Beiersdorf AG, Hamburg, dated 3 Nov. 1994. Beiersdorf AG set up P. Beiersdorf & Co. in London in 1906 as a sales office cum storage facility. It marketed both pharmaceutical and cosmetical products as well as dressing material. In the following years, the company's turnover increased steadily.

52 This quick reaction can be explained in part by experiences the companies had had in other countries. Several German companies had already established branch production units in France several years earlier, after the French government had introduced a regulation that patents had to be worked in the country. Being forced by national legislation to establish a production unit was thus not a new experience for German companies.

53 Company Archive of Bayer AG (Bayer Archiv), 1/6.6.6 Länderübersicht Verkauf Farben, 70.

54 CUK-UG Farbwerke Hoechst AG, Filiale England 1900–1914, 2/000 18, 9, 90; CUKUG, Farbwerke Hoechst AG, Filiale England 1909–1924, 2/000 19.

55 To be precise, the patents were for thioindigo, a reddish brown colorant as opposed to general indigo, which is blue. Cooperation between Kalle and Meister, Lucius & Brüning Ltd. worked as follows: Kalle sent the raw materials for production from Germany. Meister, Lucius & Brüning Ltd. produced Kalle indigo in license and marketed it in the U.K.

56 The pharmaceutical in question was “Nastin,” an early attempt at a cure against leprosy.

57 Zimmermann, Patentwesen, 122–128.

58 No author, “BASF-Farbe für Englands Textilbranche,” in BASF Information, Nr. 15, 4.9.1991, no pages given.

59 Holländer, H., Geschichte der Schering AG (Berlin, 1955), 37Google Scholar; Chandler, Scale and Scope, 482; Jones, Impact of Foreign Multinational Investment.

60 PRO, BT 31/18500/98974. The nominal capital of Weston Chemical Co., which was based at Runcom, amounted to £13,000; Jones, Impact of Foreign Multinational Investment.

61 Of the total nominal capital of £125,000, VGF held approximately 60 percent. Unlike most of the other German companies, which chose the form of a private limited company, VGF created a public limited company.

62 PRO, BT 31/ 18500/ 98979; Chandler, Scale and Scope, 443, notes that branch production was possible for VGF, because its production process did not allow for large economies of scale anyway. At first, VGF endeavored to promote its process, which was based on the use of cupprannium as a raw material. It transpired, however, that a rival process, which was based on viscose rather than cuprannium was superior to VGF's own method. In the event, VGF tried to get hold of the patents for the viscose based process which in the U.K. was practiced by the market leader Courtaulds, in Germany by J. P. Bemberg. So while the VGF investment needs to be seen in the light of the patent law, it also had other motives. At first it resulted from the desire for monopolistic control of the artificial fibers market. When it became obvious that the company's own process was inferior to the rival one, a switch to this process occurred, and the British investment was upheld to secure VGF's share of the British market. By World War I, VGF and its British subsidiary had become the second biggest producer of artificial fiber after Britain's Courtaulds Ltd.

63 PRO, BT 31/ 18367/ 96998; the capital invested in Glidine Ltd. amounted to £65,000. PRO, BT 31/19583/110903. A similar producer of nutritious chemical mixtures was Roborat Co. Ltd., set up in London by the Weiss Family from Karlsruhe. Roborat Co. manufactured food and other chemicals in London from 1910.

64 PRO, BT 31/ 19208/107317. The company (nominal capital £6,000) produced various greases, oils and pastes to be used in the dying and manufacture of textiles. The products were patented and traded under the company's own brand names, like “Duron Wool Cream,” “Duron Paste,” or “Amid.”

65 Handbook of German Joint Stock Companies 1911/12, vol. 2,1026. The nominal capital of Formate Products Co. Ltd. amounted to £9,500.

66 Born in Belgium, Baekeland had subsequently settled in the United States, where he invented his products. He took out patents internationally for these inventions.

67 PRO, BT 31/20305/118614. Nominal capital: £2,500.

68 PRO, BT 31/ 21072/125660. Nominal capital: £ 5,000; State Archive of Saxony at Leipzig (SächsStA Leipzig): Registrar of Companies, HR B 455 (Fritz Schulz Junior AG).

69 Company Archive E. Merck (CA Merck), f3, 15 (a), Annual Report for 1911.

70 CA Merck, H 1, 9 (a), memorandum by Frederick Boehm to E. Merck, Darmstadt, sent at Easter 1909; CA Merck, H 1, 9 (b).

71 CA Merck, H 1, 9 (a), notes taken during a meeting between Darmstadt directors and Boehm in London from 20 to 22 Sept. 1909; CA Merck, H 1, 9 (b), rentability calculation of possible London factory together with letter sent by Darmstadt director to Frederick Boehm dated 22 Dec. 1911.

72 They feared that the benefit of reduced transportation costs which would result from bulk transportation would be offset by the higher wages that had to be paid to British workers.

73 CA Merck, H 1, 9 (a), letter by Boehm dated 14 Dec. 1911.

74 CA Merck, H1, 10 (b).

75 PRO, BT 8/ 135; Beiersdorf AG, 100 Jahre Beiersdorf, 1882–1982, 120, letter by Beiersdorf AG, Hamburg, dated 3 Nov. 1994.

76 CA Merck, H1, 9 (b); Riedel-de-Haen, ed., 150 Jahre Riedel-de-Haen, 67; Riedel-de-Haen, ed., Wir schaffen Verbindungen, 21, 96–97. The sales outlet was turned into a subsidiary company of its own right in 1912. It was of limited size, however. The premises consisted of a sales room and a small office, for which an annual rent of £45 had to be paid.

77 PRO, BT 31/ 18579/ 99953. Gebr. Heyl founded their London sales subsidiary in 1908. The initial nominal capital of £1,500 soon proved too small, however, which is why £5,000 in debentures were issued in 1910. Apart from pharmaceuticals, Heyl Brothers also distributed certain dyestuffs and chemical intermediates.

78 PRO, BT 31/ 19554/110612. Radium Heil GmbH had developed ways in which radioactivity in water was used for medical purposes. The company internationally held patents for its cures. In Britain they were marketed by Radium Ltd.

79 PRO, BT 31/ 21464/ 129037. In 1913 the existing sales outlet of Knoll & Co. in London was transformed into a private limited company with a nominal capital of £3,000.

80 PRO, BT 31/ 20945/ 124472; CUK-UG, Chemische Fabrik Griesheim-Elektron, 2/20 9. Griesheim Elektron Ltd. was founded in London with a nominal capital of £10,000.

81 PRO, BT 31/ 20945/ 124472; CUK-UG, Chemische Fabrik Griesheim-Elektron, 2/20 10; Koch, Messer Griesheim, 59, 69; Schreier, A.E./Wex, M., Chronik der Hoechst AG 1863–1988 (Frankfurt, 1990), 104Google Scholar.