1. Simulating the Impact of the New EU Chemicals Regulation (REACH) on the Innovativeness of the European Chemical Industry David Hofmann University of Kassel Department of Economics Einvironmental and Innovation Economics EMAEE Conference, Manchester, May 17-19 2007

2. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. Overview Goal of the presentation  Analysis of the impact of REACH on the evolution of an industry (and especially on innovations and industry structure) Contents –What is REACH? –Critical aspects of the new EU chemicals regulation –The modelling approach –Model structure –Simulation results –Some concluding remarks

3. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. What is REACH? New chemicals regulation of the EU (from June 2007) REACH = Registration, Evaluation, Authorisation and Restrictions on Chemicals Goal: improvement of health and environmental protection and of the competitiveness of the EU chemical industry Reaction to the current dual system of chemicals regulation in the EU –New and existing substances Shift of responsibility and potentially new responsibilities for manufacturers/dealers/importers and users of chemicals regarding the provision of information

4. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. Critical aspects of the new EU chemicals regulation Market access –Will a substance/process be allowed on the Common Market after the introduction of REACH? Cost effects –Information requirements, testing, bureaucratic costs –Depend on number of chemicals, quantity, toxicity, knowledge, inter- firm co-operations Time effects –Time delays due to additional testing, time delays due to bureaucracy Imitation effects –Due to publication of substance information on websites/databases Substance rationalisation –Due to decisions of other agents/firms about registration –Depends on costs, portfolio decisions, potential compatibility of substances currently used with the new regulation

5. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. The modelling approach Assumptions –Different levels influence innovation behaviour: competitive environment, firm and individual factors –Regulation influences these different levels Nelson-Winter framework as a starting point –Nelson/Winter (1982), Andersen (1994) Some modifications of the original framework –Budget formation –REACH impacts: market access, time effects, imitation effects, cost effects Basic idea: –Illustrate the evolution of an industry in which firms compete in a market for chemicals (=industry model). Firms can improve their position by introducing process innovations.

6. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. State of firms in in t Cost of innovative search Cost of imitative search Innovation lottery and results Imitation lottery and results Technology and product choice of firms Output of firms Price of products Profits of firms Financial restrictions Desired investments Current investments State of firms in t+1 Aspiration level Aspiration discrepancy Search expenses in t+1 Costs Time Publication Restrictions Revenues of firms Model structure Source: Andersen 1994, p 104 (modified)

7. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. Results (I): Market structure

8. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. Results (II): Maximum productivity

9. Simulating the Impact of the New EU Chemicals Regulation David Hofmann. EMAEE 2007, May 17 2007, Manchester. Some concluding remarks Impacts of REACH  Costs and strictness of the regulation seem to be the most important impacts  Costs do not necessarily slow innovation dynamics down  Strictness might lead to a more concentrated market structure Problems  No empirical validation  Other shortcomings  No product innovations  Model structure, especially the conceptualisation of the search space  Other aspects of REACH (substance rationalisation, international competition)