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Technological Extinctions of Industrial Firms: An Inquiry into their ...

Technological Extinctions of Industrial Firms: An Inquiry into their ...

to keep royalties

to keep royalties reasonable. 25 32 The natural place to look for a process innovation that could have triggered the shakeout a la the innovative gamble theory is the three innovations just reviewed. The timing is right for two of them, the drum tire building machine and the Banbury mixer. Gaffey [1940, p. 90] singles out the drum tire building machine as the only revolutionary process innovation in 1915-1940, and Jovanovic and MacDonald identify the Banbury mixer as the best candidate for their refinement innovation. It seems doubtful, though, that either innovation could have qualified as the triggering innovation in the innovative gamble theory. The drum tire building machine had limited ramifications beyond tire assembly, was licensed at modest rates, and was widely adopted by the mid-1920s while the shakeout continued long afterward. The Banbury mixer was confined to the compounding stage, which along with calendering involved only 17% of the direct labor hours used to manufacture tires and tubes, 26 thereby limiting the savings from adopting it. Indeed, even by the 1930s a number of plants had no Banbury mixers or were using both mixing mills and Banbury mixers (Stern [1933, p. 41]). It was also not a challenging innovation to adopt, with mixers of many different sizes available and its supplier helping firms to adapt their production lines to accommodate the mixer. Moreover, rather than increase the optimum size firm, as conjectured in the innovative gamble theory, Nelson [1982, p. 201] notes that it reduced the minimum efficient size firm, enabling tire producers to locate plants outside the Akron region in the 1930s to escape the rubber workers union. Consider next the dominant design theory. Process innovation surged starting in 1909, well before the emergence of any kind of dominant design. Indeed, even as late as 1919, Table 7 indicates that the shift to cord tires and later the balloon had not proceeded very far, with cords accounting for only 25% of the tires produced. 25 The patent for the drum tire machine was later overturned in an infringement suit against Firestone after a 1901 patent purchased by Dunlop was found to incorporate a similar cylindrical drum principle. 26 This was computed from the average man hours worked in 1922-1931 in the preparation of crude rubber (page 44) versus stock preparation (page 55), curing and finishing (page 63), and inner tubes (page 72).

33 Furthermore, the shift to process innovation also preceded the start of the shakeout by over ten years, suggesting that the shift did not redefine the basis for competition in such a way as to trigger a shakeout, as envisioned in the dominant design theory. Not only did the shift to process innovation not induce a shakeout, but the bulk of entry into the industry came after the rise in process innovation, which is contrary to the pattern predicted by the dominant design theory. The history of process innovation in tires is broadly consistent with the increasing returns theory. Process innovation accelerated when the industry’s output started to take off. With the exception of one or two innovations, it involved continual, modest innovations that cumulatively were quite significant (Gaffey [1940, p. 90]). All indications are that the leading firms were consistently in the vanguard of process innovation, which is further supported by data from the Census of Manufacturers for 1935 and 1937 indicating that value added per man hour was significantly higher in the larger tire plants. 27 It is not hard to envision how in such an environment smaller firms might have found it difficult to remain competitive. Indeed, in his analysis of tire innovations, especially process innovations, in the period 1913-1920, Nelson [1988, p. 48] concluded that: Generally, however, mass production in the tire industry resulted from an inconspicuous process of adjustment and innovation rather than notable inventions. Because of this gradual development, and because it was possible to make money during the war boom with obsolete equipment and labor-intensive methods, the new technology evoked comparatively little comment until the 1920s...By the late 1910s, however, the die was cast. The structure of the industry and the fate of the vast majority of firms that did not embrace mass production and its concomitant, vertical integration, were apparent by 1920. By that date the new machinery was too expensive, the competition too severe, and the profits too meager for the laggards to catch up. 27 In 1935, the value added per man hour of plants with 501 to 2,500 employees was 25% greater than plants with 51 to 500 employees, and plants over 2,500 employees had yet higher value added per man hour. A similar pattern applied in 1937 (U.S. Bureau of Labor Statistics [1938, 1939]).

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