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2.2.4 Appropriating the rent from biotechnological knowledge Conceptual framework

In capitalist societies, investment for knowledge-creation, like all investment in these societies, is motivated by the promise of expected returns. However, special problems arise under capitalism in the case of investment in knowledge-creation. These arise, as Arrow (1962) has shown, since knowledge has many characteristics of a public good. Once knowledge becomes available it can be used relatively easily (but usually not without cost) by others who did not originally create it. Such unauthorized use reduces the returns to the creator, and brings in question the incentive to create knowledge, for a potential creator may be deterred from making the effort and bearing the cost for fear of 'free-riders' who simply use the knowledge once it becomes available.

To resolve these problems of incentive, a system has evolved in all capitalist societies to protect intellectual property rights. However, state protection is not always necessary to safeguard for the innovator the appropriation of financial returns arising from the innovation. In some cases, the innovator may be able to prevent the knowledge from becoming publicly available by keeping it secret. In other cases the innovator may be able to take advantage of a 'first-mover strategy', which might facilitate development of brand loyalty before competitors move in, and give the firm a head start in 'moving down the learning curve', to the extent that one exists and is a significant determinant of output price and quality.

Despite these three possible ways to ensure that the creator of knowledge is able to appropriate the returns from such knowledge, and that an incentive exists to create knowledge, obstacles frequently remain to adequate appropriation of financial returns by the creator.

For example, competitors are often able to 'patent around' an innovation, using the information about the innovation disclosed as part of the legal requirements to obtain a patent, but ensuring that their own 'innovation' is sufficiently dissimilar to avoid prosecution. Similarly, in some cases it will be difficult to maintain secrecy. This is particularly true in the case of product innovation, since products must be sold and cannot therefore be prevented from being made available to a wider public, although restrictions of various kinds might be imposed. However, it might not always be possible, such as in the case of some chemicals, to 'work backwards' from the product to the underlying knowledge necessary to produce it. Reverse engineering and imitation often have their limitations, are not costless to undertake, and furthermore take time to complete successfully. These limitations may provide a measure of protection to the innovator. Finally, first-mover advantages may be outweighed by second-mover advantages: for example, lower entry costs that arise once a market for the product has been established, and learning from mistakes made by the pioneer.

For these reasons, appropriation of returns from the innovation by the innovator might remain problematic. Following Teece (1986), it is possible to capture these potential difficulties by distinguishing between relatively tight appropriability regimes, in which a firm, through one means or another, is able to limit leakage of its knowledge base or its use by competitors. The converse applies in the case of loose or weak appropriability regimes.

Incentive is only one problem relating to knowledge as a good in capitalist societies. Another problem relates to maximizing the net benefit to society from the use of that knowledge. As Arrow (1962) has shown, the dilemma is that granting incentives to innovators (such as the temporary monopoly conferred by patents) pushes the price of the knowledge above its marginal cost (the addition to total cost of producing one extra unit of that knowledge), and this in turn means that the knowledge will not be purchased and used in a socially optimal way. (Furthermore, the marginal cost of knowledge is usually very low, possibly zero, as a result of the public good nature of knowledge and this increases the problem-an 'idea' once created can be reproduced at little or no cost). To take an example from the field of biotechnology, the benefit to society would be maximized if a successful vaccine for acquired immune deficiency syndrome (AIDS), once developed, were distributed at its marginal cost. (The marginal cost would include not only the extra cost of the knowledge embodied in each additional unit of vaccine, which would probably be zero, but also the cost of materials, labour, depreciation, etc.) However, it is likely that when (and if) an AIDS vaccine is developed, its price will be substantially above the marginal cost as a result of the patents granted. We shall return later in this section to a discussion of the social cost of protecting intellectual property rights in connection with the patenting of new plant varieties.

However, the trade-off between the additional knowledge created on the one hand and the cost to society of the temporary monopoly that results on the other is not as absolute as is often suggested. The reason, as Nelson (1986) notes, is that a good deal of scientific and technical knowledge is created in the public sphere (e.g., in universities and government research institutions), where questions of incentive to invest in creation of knowledge do not arise (even though other problems of incentive do). For Nelson (1986) this is one important reason why the capitalist 'engine' works better than might appear from the trade-off argument. Later in this survey we shall return to the importance of the public sphere and to arguments that its relative significance is decreasing.

Before the returns from knowledge can be appropriated the knowledge itself must first be created. In principle, three alternative approaches, or a combination thereof, are available to firms to create knowledge. (1) Knowledge can be created in-house (the 'hierarchy' alternative). A firm may use existing facilities or extend its boundaries through acquisition or merger. (2) Knowledge may be bought from other firms or institutions (the 'market' alternative). A number of further alternatives are available. The knowledge may be purchased from (a) suppliers (e.g., process plant and equipment suppliers); (b) actual or potential competitors (e.g., through licensing agreements); or (c) universities or government research institutions. (3) Knowledge may be created jointly with other firms or institutions, for example in the case of joint research ventures (the 'mixed-mode' alternative). This third alternative, however, raises the problem of knowledge-leakage.

In general, the more important the knowledge is for the firm's profitability, and the easier it is for the firm to maintain a tight appropriability regime, the more likely it is that the firm will try to rely on in-house knowledge-creating activities. An important constraint, however, will be its existing resources and scientific/technological capabilities.

Possessing the 'core knowledge' underlying a product innovation for which there is adequate market demand is not a sufficient condition for reaping all the rent that accrues from the innovation.¹ This point, which has important implications for biotechnology, will be clarified by an example. For products produced by recombinant DNA techniques, core knowledge might involve the ability to clone a gene for a particular protein or enzyme and express it in a host microorganism (e.g., bacteria, yeast, fungi). However, this core knowledge is usually not sufficient to turn the output into a commercially viable product. Complementary manufacturing knowledge is required to transform the laboratory processes into a viable manufacturing operation. This transformation involves scale-up, and development of efficient techniques for processing, recovery, and purification, all of which are likely to differ significantly from the laboratory processes from which the core knowledge was initially derived.

Even possessing both the core knowledge and the complementary manufacturing knowledge will not be a sufficient condition for reaping all the rent that accrues from the innovation. Additional complementary assets will be required. These include a marketing and distribution network, and, in some cases, possession of brand names and access to the necessary financial resources. A firm that lacks these complementary assets might find that, although it possesses the core knowledge, and even perhaps the complementary manufacturing knowledge, it is forced to relinquish a large proportion of the total rent that accrues from the innovation in return for access to a marketing and distribution network (e.g., by concluding distribution agreements) and to financial resources (e.g., by paying above-average rates of interest). Evidently, the business of reaping rent from innovation involves far more than possessing the core knowledge.

The conceptual framework developed thus far in this section allows us to examine more rigorously (a) the fundamentally different problems confronted by the two main groups of private actors on the biotechnology stage: the large established firms and the new biotechnology firms; (b) the relationship between these two groups; and (c) the relationships of these groups with other institutions, such as universities and government research institutes. In examining these three areas examples will be drawn from the experiences of three firms: Monsanto, one of the largest American chemical companies, which has recently become heavily committed to biotechnology; and Celltech and Genentech, the two most important new biotechnology firms in the United Kingdom and United States, respectively. The case of Monsanto

Monsanto is a large company (the fourth largest chemical company in the United States, behind Du Pont, Dow, and Union Carbide), which has been 'pushed' into biotechnology by declining profits in its traditional areas at least as much as it has been 'pulled' by the expected future prospects of biotechnology.2 In this respect its entry into biotechnology has differed from that of other firms in areas such as pharmaceuticals, brewing, or other fermentation-based industries where pressure in existing product areas has not been as great. Monsanto's traditional concentration on petroleum-based products, such as bulk chemicals and plastics, led to difficulties when demand for these products began to mature in the early 1970s and when international competition in petrochemicals began to increase. Profitability was further hit by the increase in oil prices in 1979; in 1980 the company's earnings fell by 55% with over $300 million being lost in its traditional areas of activity (Fortune, 1984).

In the late 1970s, Monsanto developed a longer-term strategy that would enable it to reduce its dependence on low-return petroleum-based products. A central feature of the strategy involved an increase in activity in the areas of nutritional chemicals and agricultural products and a move into the new area of health care. Biotechnology, particularly genetic engineering, was attractive since it affected all three of these areas. In 1979 Monsanto hired Dr. Howard A. Schneiderman, a biochemist from the University of California, Irvine, who became a senior Vice-President and Chief Scientist in charge of the Corporate Research and Development Division. It was Schneiderman who spearheaded the company's drive into biotechnology and genetic engineering. To facilitate its move into new areas, the company's R&D budget was increased considerably, from 2.6% of sales in 1979 to 5% in 1983 and 7% in 1985 (Monsanto, 1985). In 1985, 57% of R&D expenditure was in the area of life sciences (ibid., p. 30). With 1985 sales of $6,747 million, the R&D budget for 1986 is around $470 million, implying a research budget of about $270 million in the life sciences.

In the area of nutritional chemicals the company moved into new kinds of nonsugar sweeteners. This is not a new product area for Monsanto since it began producing saccharin more than eighty-five years ago. However, in the early 1980s, a new low-calorie sweetener was introduced, and approved by the U.S. Food and Drug Administration in 1981. In 1985 sugar-free soft drinks accounted for about 25% of grocery store soft-drink sales in the United States, with sugar-free brands growing at 11 % annually compared to 2% for sugar-based soft drinks.3 Since then, Monsanto has achieved considerable success with its non-sugar sweeteners in this and other markets.

In the area of agricultural chemicals, Monsanto is using biotechnology to extend the application of existing products as well as introduce new ones. One example is herbicides, where two products dominate the sales and profits of the company's agricultural division. Lasso was introduced in 1969 and became very popular with farmers growing maize and soybeans. It selectively destroys weeds without harming the crop. In 1983 Lasso captured about 50% of the U.S. herbicide market among maize farmers and about 33 % among soybean growers (Fortune, 1984). However, the Lasso patent expired in 1987 and the company is searching for ways to prevent market loss once competitors enter. The second product, Roundup, is a nonselective herbicide that kills both the leaves and roots of anything it is sprayed on. Roundup was introduced in 1974 and has captured a large part of the market; it is currently used in about 100 countries. Roundup has the environmental advantage that it breaks down without damaging soil. Despite the patent on Roundup, Monsanto has faced competitive challenges. Both ICI and BASF Wyandotte Corporation in 1983 began to market herbicides that use different chemicals but have similar effects as Roundup. In the same year, Stauffer Chemical applied to the courts for permission to introduce a herbicide with a chemistry similar to that of Roundup, but with different active ingredients. Monsanto not only denied the claim that the active ingredients were different 'but also claimed that the formula was leaked to outsiders by someone at the Environmental Protection Agency when the company was trying to get the product cleared in 1982' (Fortune, 1984). These examples provide a vivid account of the dangers companies face in their attempt to reap the rent from their knowledge base.

Biotechnology offers Monsanto the potential to develop an agricultural package that benefits from both marketing and technological synergies. For example, herbicide-resistant seeds could be developed from genetically engineered plants, and sold together with a herbicide, such as Roundup. Some progress has already been made in research on herbicide resistance. Calgene in California has developed Roundup-resistant tobacco (Monsanto Chemical Corporation, personal interview, July 1986). This resistance has not yet been achieved in other crops, such as maize, wheat, and soybeans. An agricultural package might also include seeds for plants engineered to have new characteristics. 'Longer term, the Monsanto goal is to use new technology in the seed industry. This might include plants that produce more protein, supply their own fertilizer, grow in dry or cold conditions or protect themselves against pests. Work also continues on developing microbes that produce natural pesticides for protecting plants' (Monsanto, Annual Report, 1985, p. 9).

To internalize the potential externalities to be derived from these synergies, chemical companies like Monsanto have extended their knowledge base and their distribution capabilities by purchasing seed companies. In 1982 Monsanto acquired the wheat research programme and research facilities of De Kalb Ag Research and used it to form Hybritech Seed International. In 1983, this subsidiary acquired the soybean research programme and facilities from Jacob Hartz Seed (Chemical and Engineering News, 1984, p. 8). These two divisions are involved primarily in the development of proprietary varieties of high-performing hybrids of wheat and soybeans. In the future, however, their activities and profitability may benefit from research on genetic engineering being undertaken in the company's research laboratories.

Biotechnology has also facilitated the introduction of entirely new products by Monsanto. One example is bovine somatotropin, a growth hormone that substantially increases milk production in cows. Commercial approval has not yet been granted by the authorities but Monsanto expects to begin marketing the hormone and anticipates a worldwide market of more than $1 billion (Monsanto, 1985, p. 20). We will examine below a number of pioneering studies that analyse the likely economic effects of the introduction of bovine growth hormones. Although in 1985 agricultural products accounted for 17% of Monsanto's sales, compared to 60% for chemicals, fibres, and plastics, the development of agricultural products using biotechnological methods is likely to increase its proportional contribution.

The third area that Monsanto intends to develop is pharmaceuticals. This is a new area for the company, and accounted for only 4% of sales in 1985. To expand its knowledge base in this area, Monsanto in 1984 acquired Continental Pharma, a privately owned research-oriented Belgian pharmaceutical firm, which produced a blood circulation enhancer being studied for the treatment of senility (Chemical and Engineering News, 1984, p. 8). Monsanto's biotechnology and distribution capabilities were further strengthened in 1985 with the acquisition of G.D. Searle & Co., a pharmaceutical company, for $2,754 million. In its 1985 Annual Report, Monsanto explained the latter acquisition:

G.D. Searle and Co. significantly expands and complements Monsanto's research capabilities in biotechnology and human health care, adding both experienced professionals and facilities to Monsanto's existing research organization. In addition, Searle provides Monsanto with established organizations skilled at developing and marketing products that flow from the research program. The combination of [Monsanto's! strengths in basic and applied research in molecular biology and biotechnology, Washington University's powerful biomedical discovery capabilities and Searle's strengths in product development and marketing will further Monsanto's goal of becoming a leading supplier in the pharmaceutical industry.
(Monsanto, 1985, p. 30)

Monsanto's university links The importance of biotechnology for Monsanto's long-run strategy is clear from the above. The company has followed a number of paths in its attempt to build its biotechnology-related capabilities. To begin with, Monsanto has established links with universities. Most important of these has been a link with the School of Medicine at Washington University in St. Louis. Monsanto provided the university with $23.5 million over five years in return for cooperative research projects in biotechnology (Daly, 1985, p. 27). One benefit the company has received from this relationship is Searle's development of atrial peptides, which control high blood pressure; these compounds were originally isolated and identified by Professor Philip Needleman, Head of the Pharmacology Department at the University. Monsanto has signed research agreements with a number of other universities, including Harvard, Oxford, and Rockefeller Universities. The company's university links were the subject of a congressional enquiry, headed by then congressman Al Gore, which concluded that the relationship was not detrimental to the university system.4

Unlike many other industry-university links, the Monsanto-Washington University link is intended to facilitate cooperative work between company and university scientists working collaboratively on research projects. An eight-member advisory committee divided equally between Monsanto researchers and Washington University faculty makes the final decision regarding research funding. The agreement stipulates that 30% of the research will be basic research, while 70% will be research directly applicable to human disease. The United States Congress, Office of Technology Assessment Report on Biotechnology (1984) summarized the provisions regarding intellectual property rights: 'Washington University faculty members will be at liberty to publish results of any research done under the Monsanto funding. Monsanto will exercise the right of prior review of draft materials, because they may contain potentially patentable technical developments. If they do, Monsanto can request a short delay of submission for publication or other public disclosure in order to begin the patent process' (p. 574). Patent rights will be retained by Washington University but Monsanto will have exclusive rights to licences. If Monsanto chooses not to license a patent then the university will be free to issue the licence to others. Royalties will go to Washington University and not to the individual researchers, but will normally go to their laboratory.

These details on Monsanto support some of the conclusions reached by Nelson (1986) in his discussion of the survey by Levin et al. (1984) on R&D appropriability and technological opportunity undertaken. The survey of U.S. Corporations yielded 650 replies from respondents in 130 different businesses. Summarizing the importance to different industries of a link with university research Nelson (1986) notes that

those industries whose technologies rest on the basic and applied biological sciences seem to be closely tied to the universities for research as well as training. The same seems true for computer science.
(p. 36)

Nelson argues that presently in these areas,

The driving force is public new scientific knowledge, and the proprietary part of the system seems largely involved in exploiting this. The particular new applications are proprietary. The basic generic knowledge which is moving the system is public.
(p. 37)


If the pace of advance of academic science slows down, or becomes less relevant to technical advance, the technology begins to stabilise, in broad form, and the particular special knowledge and R&D capabilities of corporate R&D becomes a longer and more independent part of the story. Technical change may still be rapid, but along routes where university research is not needed to clear the way. The industry may remain dependent on academia for training, but the industrial and university systems part.
(p 37)

Several comments may be made on the importance of industry-university links in biotechnology. First, to the extent that biotechnology remains driven by basic research, as it largely is now, universities will continue to play a significant role and it will be necessary for firms to retain a link with the science base in the universities. However, to the extent that biotechnology becomes increasingly driven by applied technology (particularly in technologies related to large-scale processing) - a tendency that is already emerging, as we saw above-universities are likely to become less important in terms of direct contact. Large firms are better adapted than universities to undertake large-scale processing and the attendant applied research. At present it is not possible to foresee which of these tendencies will dominate over the next fifteen to twenty years.

The second comment is that there is a danger that industry- university links, by their very nature, will have the effect of undermining, or at least diminishing, the basic science base which provides their raison d'être. This fear is expressed strongly in the main report commissioned by the Organization for Economic Cooperation and Development (OECD) on biotechnology (Bull et al., 1982), which was produced by a team of scientists working in this field. Regarding industry-university links they note that

Some people have been concerned by a number of recent events-excessive secrecy, withholding publication of findings, refusal to make available strains and vectors relating to published work and increased motivation towards financial gain have been noted amongst academics-and it is argued that fundamental values and important freedoms of the academic life are at risk.
(p. 60)

The report concludes by warning 'of the danger that excessive business orientation of university researchers could result in a reduction of fundamental research, or that certain types of industry-university links could lead to a loss of knowledge due to trade secrecy' (p. 12). Interestingly, this concern is not voiced strongly in the main American report on biotechnology (U.S. Congress, Office of Technology Assessment, 1984, Chapter 17, which deals with university-industry relationships)-a report which is concerned primarily with the international competitiveness of American firms in this area.

Monsanto's links with new biotechnology firms If one leg of the Monsanto strategy for structural transformation has been to develop links with the scientific base in universities, another, as we have already seen, has been to extend its boundaries through acquisition. The latter has enabled the company to internalize potential externalities and benefit from synergies in technology and marketing. A third leg of the strategy to build a knowledge base in biotechnology has been to create research ties with some new biotechnology firms. This has involved investment in emerging firms such as Genentech, Genex, Biogen, and Collagen (Chemical and Engineering News, 1984).

From Monsanto's point of view, although the new biotechnology firms are potential competitors, at least in some market segments, they are also possible sources of access to biotechnological knowledge. Failing access, Monsanto gains, by investing in the new biotechnology firms, the potential to share in profits that may result from the innovations these firms make.

From the point of view of the new biotechnology firms, the strategic problems appear in a very different light. This will be discussed in the following section with the aid of the conceptual framework developed earlier and with particular reference to two important new biotechnology firms: Genentech and Celltech.5 New biotechnology firms: Genentech and Celltech

Upon entering the field of biotechnology, the greatest strength of the new biotechnology firms lay in their core knowledge base. For example, Genentech, which was the most important new biotechnology firm in the United States, was founded in 1976 jointly by an industrialist, Robert Swanson, and a biologist, Herbert Boyer. Boyer, together with Cohen, had earlier developed the basic technique employed in recombinant DNA. Genentech may therefore be regarded as a direct spin-off from university-based research. Celltech was set up in 1980 by the British Technology Group, which was controlled by the British Government, with the expressed aim of commercializing knowledge generated within the public research domain. This followed the Millstein debacle, discussed above, in which the cell fusion technique, developed by Millstein and Kohler at the Medical Research Council laboratories at Cambridge University, failed to be patented. As with Genentech, Celltech's core knowledge base derived directly from its links with the public research system and is one of its principal sources of strength.

With a strong core knowledge base, one of the first problems confronted by new biotechnology firms is development of complementary manufacturing knowledge. A further problem is obtaining access to complementary assets, particularly distribution and marketing networks, and in some cases access to brand-names. In principle, a new biotechnology firm can acquire the required knowledge and assets using one, or a combination, of the three alternatives discussed on page 69: (2) the 'market' alternative, whereby a contractual agreement is reached to provide the assets; (1) the 'hierarchy' alternative' that is to develop the assets and knowledge in-house, possibly by expanding employment and through acquisitions and mergers; and (3) the 'mixed-mode' alternative, where joint ventures are set up with other firms.

In practice the new biotechnology firms have pursued all three alternatives. For example, Genentech initially concluded marketing agreements with other large corporations. These included an agreement with Eli Lilly to market human insulin produced by recombinant DNA techniques. Similarly, the company established a marketing agreement with the Swedish company KabiVitrum, which gave the latter worldwide marketing rights (except in the United States) for Genentech's human growth hormone. Genentech also has marketing agreements with Kyowa Hakko and Mitsubishi Chemical to sell tissue plasminogen actinogen activator and human serum albumin in Japan and other East Asian countries. In similar fashion, Celltech formed a 50:50 joint venture with The Boots Company called Boots-Celltech Diagnostics. Celltech also had a marketing arrangement with Sumitomo Corporation and with Sankyo, the second largest Japanese pharmaceuticals group (Celltech, 1985). Agreements have been signed to give the new biotechnology firms access to the manufacturing facilities of the larger firms. For example, Genentech's agreement with Eli Lilly provides for the latter to manufacture human insulin and its agreement with Corning Glass Works allows that company to manufacture industrial enzymes.

In-house development of complementary manufacturing knowledge (the 'hierarchy' alternative) has also in some cases been important. Celltech has developed large-scale fermentation facilities (currently a 1,000-litre fermenter specially designed to produce monoclonal antibodies and other high-value proteins, with future plans for a fermenter with a 10,000-litre capacity). The company claims that this is 'the world's largest monoclonal antibody fermenter' (Celltech, 1985, p. 4).

There has also been resort to the 'mixed-mode' alternative. Examples are Genentech's joint ventures with Hewlett-Packard to develop instrumentation for biotechnology and with Travenol Laboratories to develop human clinical diagnostic products (Daly, 1985, pp. 70-75). [See also Pisano et al. (1989) for a detailed and illuminating discussion of cooperative ventures in biotechnology and Fransman et al. (forthcoming) for mixed mode agreements reached by Japanese Companies.]

Despite the options open to new biotechnology firms in their bid to survive and grow, and the current competitive strength of the core knowledge that underlies their product innovation, it is possible that their relative significance will decline over time. (It should also be recalled that the phenomenon of new biotechnology firms is largely American and to a lesser extent British; most European countries and Japan are dominated solely by large firms.) One possibility is that their competitive strength will be undermined if process technology becomes an increasingly important determinant of profitability. Large companies, and those which are members of broader groupings, are likely to be better adapted to the development of bioprocess technology, as was discussed earlier. If this does happen then the same forces which contribute to the divergence between firm and university biotechnology research may also lead to the demise of many new biotechnology firms. However, even if product innovations based on basic research continue to be important determinants of corporate profitability, the attraction of new biotechnology firms may result in increasing rates of take-over. Recent acquisitions, such as that of Hybritech by Eli Lilly and Genetic Systems by Bristol-Myers, may become more common in the future (see Chesnais, 1986, pp. 22-25). In this connection it is sobering to remember that Celltech's total 1985 sales of around £6 million compared with Monsanto's research budget of £313 million for the same year, a 52-fold difference.

Dramatic evidence has recently emerged to support the proposition developed here that new biotechnology firms are likely to decrease in significance in the future. In 1990, Genentech decided to cede 60% of its shares to the large Swiss company, Hoffman-La Roche, for a price of $2.1 billion. This signalled Genentech's failure to develop its own distribution and marketing 'complementary assets', and thus its failure to become a large, independent, biotechnology-based company. In 1988 Genentech was by far the largest of the top ten new biotechnology firms. In that year, Genentech had total revenues of $334 million, net income of $21 million, R&D expenditures of $133 million, and employment of 1,700. The second-largest firm was Biosystems, which had total revenues of $132 million, net income of $17 million, R&D expenditures of $16 million, and employment of 1,000.6 Social welfare effects: the case of patents

For the reasons mentioned earlier, it is widely accepted in capitalist societies that legal protection is necessary to safeguard incentives for invention and innovation. Recently a new slant has been given to the issue of the protection of intellectual property rights. This is evident in the conclusion by the Office of Technology Assessment of the U.S. Congress (1984) that

The U.S. intellectual property system appears to offer the best protection for biotechnology of any system in the world, thus providing the United States with a competitive advantage with regard to this factor. This advantage results from the fact that the system provides the widest choice of options for protecting biotechnological inventions, the broadest scope of coverage, and some of the best procedural safeguards.
(p 17)

Together with university-industry relationships and health, safety, and environmental regulations intellectual property law was judged to be of 'moderate importance' as a determinant of U.S. international competitiveness in biotechnology. On the other hand, financing and tax incentives for firms, government funding of basic and applied research, and personnel availability and training were seen to be the 'most important' determinants (U.S. Congress, Office of Technology Assessment, 1984).

However, advances in the biological sciences have presented fundamental problems for the protection of intellectual property rights. As the main OECD publication on patent protection has put it (Beier et al., 1985),

In the past the patent system rested safely on a semantically clear [and] objectively defensible separation between (patentable) invention' and (non-patentable) 'discovery'. The recent development of biotechnology where some scientific discoveries could be turned into commercial products almost immediately has blurred this separation. This may have far-reaching legal and practical consequences.
(pp. 88-89)

The last sixteen years has seen some important changes in the area of intellectual property rights relating to the biological sciences. [For an excellent survey see Crespi (1985)]. For example, in the United States until 1970 the property rights to new varieties of open pollinated crops were not appropriable by those who developed the varieties. This changed in 1970 with the introduction of the Plant Variety Protection Act (PVPA), which provided patent-like protection for open pollinated crops. In 1972 an Indian scientist working for General Electric in the United States applied for a patent for a newly created Pseudomonas bacterium (not made with recombinant DNA) which had the ability to break down the major components of oil. The case [Diamond v. Chakrabarty (1980)] was referred to the Supreme Court by the U.S. Patent and Trademark Office and became seen as a test case of whether life forms could be patented (Yoxen, 1983, p. 98). In this celebrated case, the U.S. Supreme Court ruled to allow the patent. The Court held that 'The claim was not to a hitherto unknown natural phenomenon but to a non-naturally occurring manufacture or composition of matter, a product of human ingenuity having a distinctive known character and use' (Beier et al., 1985, p. 104). Despite the Chakrabarty case, the U.S. Patent and Trademark Office (PTO) continued to deny patent protection on seeds until September 1985 when an internal PTO appeal in Ex parte Hibberd ruled that it is permissible to patent any seed meeting the legal requirements (Lesser, 1986, p. 2).

Most studies on patents and biotechnology have been concerned primarily with (1) the extent to which patent legislation adequately safeguards incentives; (2) international differences in legislative provisions; and (3) the need for international harmonization of standards. In general, therefore, only the social benefit side of the equation has been examined, and that only insofar as the incentive to invent and innovate is concerned. Social costs have been largely ignored.

Two exceptions are work done by Butler and Marion (1985) and by Buttel, Cowan, Kenney, and Kloppenburg (Buttel, 1986a,b; Buttel and Kenney, 1985; Buttel et al., 1985a,b; Cowan, 1986; Kenney, 1986; Kloppenburg, 1988). After hearings on amendments to PVPA in 1980, the Agriculture Committee of the U.S. Senate requested the U.S. Department of Agriculture to analyse the economic impacts of PVPA. The study by Butler and Marion (1985) was a response to this request and their main conclusions will be reviewed briefly here.

With regard to incentives, Butler and Marion concluded that while 'PVPA has stimulated the development of new varieties of soybeans and wheat', there was 'little evidence that PVPA has affected R&D input or output for other open pollinated crops'. Although there was 'little evidence that ... PVPA has significantly impacted on public plant breeding' they went on to note that 'in recent years, large seed companies have encouraged Agricultural Experimentation Stations to reduce their involvement in cultivar development and concentrate on "germ plasm enhancement" and basic research'. The reason for this, according to Buttel et al. (1985a), is the desire of seed companies (most of which are controlled by large agrochemical companies) to (1) reduce competition from the public sector and (2) encourage development in the public sector of generic applied and basic research that will enhance the international competitiveness of these companies. Significantly, while Butler and Marion showed that by '1982 nearly 50% of the PVPA certificates issued were held by 14 conglomerates', they went on to argue that there 'is little evidence that current market shares of privately protected varieties or of leading companies seriously hamper competitive forces in the open pollinated seed markets'. The reason for this conclusion was that 'public varieties still dominate most seed species and are generally produced and sold by a large number of seed companies'. Furthermore, 'entry barriers into plant breeding are moderate for most seed species. Entry into the conditioning and distribution of seeds is still relatively easy because of access to non-protected and public varieties'.

With regard to the effect of PVPA on prices, Butler and Marion concluded that 'Prices for seed have risen in the past decade' and that 'PVPA contributed to this increase'. Nevertheless, they concluded that 'price increases have not been unreasonable or unjustifiable' since there are 'two important checks in many species on the pricing of privately protected varieties'. These 'checks' are, first, the existence of 'farmer saved seed' and secondly 'the availability of publicly developed varieties which tend to be competitively priced'. They went on to point out that the 'pricing discretion of seed companies is greatest for those species (e.g. alfalfa) in which neither of these constraints are [sic] important'.

PVPA has also influenced industry-university relations, particularly the exchange of both scientific information and plant breeding materials. 'PVPA has probably reduced the flow from companies to universities and has increased the flow in the opposite direction as private plant breeders have aggressively searched for information and germ plasm developed in the public sector'.

From their survey Butler and Marion conclude that the public plant breeders have a particularly important role to play. 'Public varieties contribute to genetic improvements and also provide an important check on the prices of privately protected varieties'. If public institutions discontinue their breeding activities in some species,

Firms without plant breeding programs may be foreclosed from the market. the exchange of scientific information and breeding material is likely to be substantially reduced, genetic diversity would be expected to decline, the proportion of sales accounted for by the leading firms in each species would significantly increase, and entry barriers into the breeding and marketing of many seed species would likely increase.

In weighing up the social costs and benefits, the authors conclude that while there 'is no evidence that PVPA has triggered massive investments in R&D', the main intended social benefit, 'there is little evidence of substantial public costs from PVPA. Increases in prices, market concentration and advertising, and declines in information exchange and public plant breeding-the feared costs of PVPA- have either been nil or modest in nature'. Accordingly they conclude that 'at the present time' the Act 'has resulted in modest private and public benefits at modest public and private costs'. Nevertheless, while this conclusion is optimistic regarding the effects of PVPA, the authors stress that the 'impact of PVPA will depend on the long-run balance between public and private plant breeding' and note that 'currently this is shifting toward the private sector'. Furthermore, they point out that the 'growth of biotechnology - and particularly genetic engineering-will also influence the future organization of plant breeding, although it is not entirely clear in what ways' (pp. 1-3).

It is precisely the caveat contained in these conclusions that constitutes the point of departure for Buttel, Cowan, Kenney, and Kloppenburg (as cited above). They argue that

1. The shift in plant breeding towards the private sector, a tendency noted by Butler and Marion, is well under way and is significantly increasing the social cost side of the social cost-benefit equation.

2. In the future, biotechnology as applied to agriculture, together with the right to patent new plant varieties and associated microorganisms that might increase the productivity of plants, will accentuate the social costs.

3. Large private firms that will control an increasingly large proportion of applied research funds are likely to push technical change in this area in a direction that will enable them to maximize profits on their seed-chemical packages rather than maximize social benefits. For example, while biotechnology-related innovations like pest-resistance and nitrogen-fixation might have desirable social effects as well as increasing the sales and associated profits of seeds, they will reduce the sales of agrochemicals such as pesticides and fertilizers and are therefore likely to be resisted by the large agrochemical companies.

It remains to be seen how much control large companies will have over the trajectory of technical change in this area. Their control over biotechnologies combined with the regulatory regime for intellectual property rights will put them collectively in a strong position. Nevertheless, the public sector worldwide will continue to play an important role and potential competition from other international companies in areas like pest-resistance should not be underestimated. Clearly though there is a need for rigorous research which tracks and analyses events such as these as they unfold. As we shall see in Sections 2.3 and 2.4, the impacts of biotechnology on plant breeding will be significant in the future and it is important to anticipate, as much as possible, the likely consequences.

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