The Fall of German Biotech

New research from Klaus Weber and colleagues argues the anti-biotech movement in Germany altered the dynamics of corporate decision making. The movement created uncertainty that made biotech investments look risky, says Weber, an associate professor of management and organizations at the Kellogg School of Management. This uncertainty, he argues, undermined the influence of internal champions of the new technology while strengthening the hands of those in established fields. Diversified German drug companies tilted resources toward more predictable businesses like chemicals and consumer products or moved their biotech operations to other countries, including France, Japan, and the U.S.

Meanwhile, non-diversified companies with no alternative businesses were less concerned about the uncertainty of their biotech ventures, Weber points out. Normal “business factors”—access to know-how, patents, and financial resources—do not explain their successes compared to the results for their diversified competitors.

A New Look at the Anti-biotech Movement

Weber’s research offers a fresh perspective on how social movements impact corporate decision making. Previous studies have identified several paths through which social movements influence corporate behavior, such as lobbying for government regulation or organizing consumer boycotts and shareholder actions. These studies view corporations as unitary actors that respond to outside pressures based on well-defined interests.

This framework, however, does not fully explain the reactions of German pharmaceutical firms, Weber says. Anti-biotech activists were not able to disrupt company operations or win support from shareholders. Regulations adopted in Germany in 1989 permitted the commercialization of biotechnology, albeit with certain safeguards.

Weber’s framework instead views corporations as heterogeneous polities connected to and affected by an external political economy. He found social movements can affect private corporations through two mechanisms: threatening the image and status of corporate elites, which makes it difficult to form broad coalitions, and creating investment uncertainty, which affects the way investments are evaluated within corporations.

Executives of Germany’s large, diversified pharmaceutical companies did not consciously bow to pressure, Weber maintains. Rather, the anti-biotech movement impeded formation of effective internal coalitions in support of biotechnology. “The effects were more subtle,” he remarks. “It was not about caving in or winning.”

For their study, Weber and colleagues Hayagreeva Rao, a professor at Stanford University, and L.G. Thomas, a professor at Emory University, collected details on the anti-biotech movement and on six domestic German pharmaceutical firms between 1980 and 1990. The six companies—Bayer, BASF, Boehringer-Mannheim, Boehringer-Ingelheim, Hoechst, and Schering AG—accounted for 80 percent of the research-intensive segment of the pharmaceutical industry. The researchers examined hundreds of newspaper articles on the controversy, documentary footage, company reports, activist organization newsletters, and internal company documents, and conducted interviews with people who were key executives, scientists, activists, and industry lobbyists at the time of the controversy.

Members of the movement, led by the Green Party, made several arguments against biotechnology. They maintained that bacteria that had been genetically engineered to produce drugs could be dangerous if they escaped from laboratories into the environment. They also made a moral argument against manipulating living organisms. Some activists viewed genetic engineering as a “continuation of Nazi eugenics.”

These arguments altered the public’s perception of biotechnology, Weber found. After 1980, reporting on biotechnology focused on risks instead of benefits. At the same time, the clout of the Green Party grew. It gained seats in local, state, and federal parliaments. In 1985 it joined a coalition government in Hessen and succeeded in blocking, at least temporarily, the issuance of building permits to Hoechst for a biotechnology drug factory.

The Perils of Low Credibility

The pharmaceutical industry argued that the new biotech sector would create jobs and produce improved drugs. But the industry had little credibility with the public. Its moral standing had been damaged by a series of scandals, including the German drug-maker Grünenthal’s initial refusal to voluntarily withdraw thalidomide after the morning sickness drug was found to cause birth defects in the late 1950s and early 1960s. In addition, large, diversified companies such as BASF, Bayer, and Hoechst operated chemical units, a prime target of environmental protests about air and water pollution.

Weber found no evidence that corporate elites bought any of the activists’ arguments. Still, the movement’s attacks were felt inside companies in a number of ways. Scientists who favored biotechnology risked a loss of status within their companies and communities by championing a technology painted as dangerous and immoral. One scientist told Weber he did not express support for biotechnology because his children would be criticized in school.

The protests, meanwhile, gave ammunition to scientists who felt threatened by the new technology. Biotechnology, Weber points out, is a “competence-destroying technology.” Scientists with backgrounds in traditional biochemistry believed biotechnology threatened their careers.

The extent to which companies internalized these concerns was related to the diversification of corporate elites and the companies as a whole, Weber found. Boehringer-Mannheim and Boehringer-Ingelheim were focused on pharmaceuticals and had a high percentage of executives with medical or pharmacological backgrounds. They were inclined to view biotechnology as a necessary investment. By contrast, Bayer, Hoechst, and BASF were diversified into chemicals and consumer products. More of their executives and scientists had no natural stake in biotechnology and were inclined to see it as unnecessarily risky and challenging compared to other alternatives. (Schering AG was diversified at the beginning of the study period but divested itself of its non-pharmaceutical businesses in 1990.)

The diversified companies did not reject biotechnology entirely—they recognized its importance to the future of their industry—but took steps to mitigate risks. They allocated investments to alternate businesses, shifted biotech investments to politically conservative regions within Germany, and reduced or isolated their commitments to biotechnology.

Relocations No Panacea

The case of Hoechst is illustrative, Weber says. In 1985 Hoechst, an early mover in biotech, made a major investment in ceramics, an alternative business. In 1988 it decided that future biotech investments would be made outside Germany to reduce the risk of approval delays and bad publicity. Other diversified pharmaceutical companies took similar steps. Bayer, for example, set up biotech production in Berkeley, Calif., and BASF established its biotech research facility in Boston.

Many of these business decisions seemed sensible at the time, given the internal logics of the companies. Nonetheless, they had downstream effects that made it harder for diversified German drug-makers to catch up to their more focused rivals after the German government moved to protect the biotechnology industry in 1989. Weber says the moves had the effect of compartmentalizing biotechnology from the development, marketing, and commercialization expertise within each company. This slowed introduction of new biotechnology products and impeded the sharing of knowledge within firms, he adds.

“Saying, ‘Let’s locate R&D in the U.S.’ seems simple enough, but it creates new problems,” Weber says. “They didn’t foresee or anticipate all the consequences.”

One implication of his research, Weber notes, is that executives should consider the ramifications of their responses to social movements. Before deciding to locate a business in another country, a corporation should “think through the organizational challenges that decision creates and actively address them,” he suggests.

The most important takeaway from his research is that internal corporate structures and decision dynamics mediate the influence of social movements, Weber says. Though smaller than their diversified competitors, Boehringer-Ingelheim and Boehringer-Mannheim, which were narrowly focused on pharmaceuticals, enjoyed greater success in biotechnology, he notes. “The way the company is set up matters,” Weber says.

Related reading on Kellogg Insight

Why Boycotts Succeed – and Fail: Corporate vulnerability and damaged reputations

Growing Socially Responsible Markets: Grass-fed meat and dairy products

How to Map and Compare Culture Across Firms: Cultural differences between U.S. and German pharmaceutical companies due to nationality have decreased since the 1980s