Competition and Innovation: The Breakup of IG Farben

Abstract

The relationship between competition and innovation is difficult to disentangle, as exogenous variation in market structure is rare. The 1952 breakup of Germany’s leading chemical company, IG Farben, represents such a disruption. After the Second World War, the Allies occupying Germany imposed the breakup because of IG Farben’s importance for the German war economy instead of standard antitrust concerns. In technologies where the breakup reduced concentration by creating multiple successor firms with technological capabilities, patenting increased strongly, predominantly by domestic firms unrelated to IG Farben. The increase in patenting is not driven by alternative explanations such as product market competition, an increased propensity to patent, duplication of research, or mobility of IG Farben inventors. Instead, the breakup seems to have increased innovation among the IG Farben successors, which then spilled over to the broader industry: The IG Farben’s successors also increased their patenting activities and specialized relative to the pre-breakup period.