Impact of a new property right regime on industry: industrial structure, industrial output and

able to sell the machine while retaining the exclu- sive right to manufacture it. A person with a registered plant variety certificate is able to sell that plant while retaining the exclusive right to reproduce it for re-sale. The function of this extended right of control is to vest the holder with an exclusive marketing right in the particular good, usually for a limited period of years. This allows the holder to obtain a reasonable rate of return on the book machine, plant variety or other good that is subject to the recognised right. Note that this rate of return is only available to the extent to which users recog- nise and enforce this right after the good has already left the possession of the right-holder. To the extent that the other users are willing to purchase from prior purchasers, the right-holder’s exclusive marketing right will be of little value. There is a substantial increase in the rate of return afforded by allowing right-holders to control the uses of their rights outside of their possession. Right-holders term the unwillingness of other users to enforce their exclusive marketing rights ‘piracy’. Exclusive marketing rights are not required to earn a reasonable rate of return on the manufac- ture and sale of most goods. The vast majority of goods are sold without being subject to any such rights; the purchaser is usually within its rights to purchase the good and then commence producing similar goods after its purchase. For example, in the U.K. the patent-intensive industries produce only about 4.2 of GDP and the copyright-inten- sive industries produce only about 3.7 of GDP. Most goods and services do not require any ex- tended right of control after sale; a reasonable rate of return is acquired although all rights to use and production are transferred with the sale. However, in those industries where the primary product is informational as in RD intensive industries, the use of the intellectual property system is deemed to be necessary in order to reward the production of the efficient amount of information. It is a method for inducing invest- ments in the factors required for the RD to produce the desired information, by promising enhanced rewards to the successful outputs from RD Swanson, 1995b.

5. Impact of a new property right regime on industry: industrial structure, industrial output and

factor demands This section is intended to illustrate how the incentives within the industries dependent upon genetic resources e.g. plant breeding are affected by the introduction of a property rights regime e.g. plant breeders’ rights. It would be expected that the impact of the introduction of a new property right system would be seen in: i an increase in the investment in RD in the affected industries; and ii an increase in the investment in the inputs required to undertake RD in these industries. Since genetic resources constitute both a form of RD process in themselves as well as an input into other RD processes in the agricul- tural and pharmaceutical industries, it would be anticipated that the introduction of a property right system over the outputs from the RD processes within these industries would have a substantial impact on the rates of investment in these resources Sedjo, 1992; Sedjo and Simpson, 1995. Concrete examples are available in an area where a new property right system has recently been introduced in relation to genetic resources. The Union International pour la Protection des Obtentions Vegetales UPOV was established in 1961 and came into force in 1968. This interna- tional convention established for the first time internationally recognised rights in registered plant varieties, so called ‘plant breeders’ rights’. This is an excellent case study of the impact of IPR systems on investments in RD and its associated inputs. Further research is required but preliminary analysis indicates that the benefits from the introduction of this IPR system have reached only part way down this industry. 5 . 1 . The 6ertical structure of the RD in the plant breeding industry In industrial economics, the term 6ertical indus- try is applied to the chain of production required to move the product from the stage of initial idea through production and into the hands of the consumer Fig. 1. Fig. 2 sets forth a depiction of the vertical structure of the industry developing new plant varieties for agriculture the ‘plant breeding industry’. It depicts starting from the bottom upwards how a flow of information orig- inates within the natural environment by reason of the investment in certain inputs lands and diversity and that this flow of information is then channelled towards the market via the farmers the intermediate stage of the industry and finally to the plant breeders. These plant breeders then prepare and market the information to con- sumers. Each level of the industry must invest in certain forms of RD activities in order to gener- ate and appropriate the information flowing from the previous level; this consists of land use invest- ments at the base of the industry and investments in scientists and laboratories at the market-end of the industry. In this schematic there is no produc- tion at the end of this pipeline without flows occurring throughout its entire length. At its base, effective characteristics for new plant varieties develop naturally through the pro- cess of ‘natural selection’: only those which are able to survive existing threats pests and patho- gens remain and reproduce. Since the set of threats is constantly changing, the natural envi- ronment continuously produces new information on the characteristics that are relatively fit under current conditions. The maintenance of a rela- tively greater diversity of genetic resources and the dedication of greater amounts of lands to the retention of that diversity are the investment choices which determine the amount of informa- tion flowing out of this stage of the industry on the nature of the plants that work effectively in the prevailing environments. The next stage of the industry consists of the individuals who observe the natural process of selection and aid in the dissemination of its infor- mation. ‘Traditional farmers’ have themselves sur- vived by means of a process of observing this naturally produced information and the dispro- portionate use and transport of those plant char- acteristics which have aided survivability. They invest in the production of this information both by means of their land use decisions as men- tioned above and by dedicating their time and resources to the observation and discriminatory use of those genetic resources which are revealed by nature to be of greater fitness. Their choices each year result in the capture of some of the flow of information on what was successful in the environment prevailing in the current year. This information also accumulates as a ‘stock’: tradi- tional plant varieties landraces encapsulate the accumulated history of the information which na- ture has generated that farmers have observed and used disproportionately Swanson and Goeschl, 1998. Fig. 1. Vertical industry. Fig. 2. Vertical industry for plant breeding. At the end of this process, the ‘plant breeding industry’ has collected the set of varieties that farmers have created over millennia and hence the stock of naturally produced information that is encapsulated within them. By investing in labora- tory equipment and scientists, the breeding pro- cess becomes focused on the use of this set of information for the preparation of the best possi- ble variety for current environmental conditions. The modern plant breeder has then used its in- vestments to create a variety that is an amalgam of some subset of the traditional varieties. 2 To what extent is the stock of information within agriculture represented by the accumu- lated set of landraces in storage adequate to deal with the problems arising in agriculture at present and in the future? Although the past 30 years have seen an unprecedented rate of investment in the storage and general availability of landraces, it is interesting to note that the plant breeding in- dustry has continued during this period to make use of ‘new information’, i.e. information that is coming in from the natural environment Swan- son, 1996. Hence the entirety of the vertical industry remains relevant to the maintenance of agriculture; it is not simply a matter of using the stock of information that we have accumulated, but also a matter of managing the flow of infor- mation that is currently arriving. Fig. 2 also indicates at which levels of this industry property rights systems have and have not been developed. As mentioned above, a large number of countries recognise the existence of plant breeders rights. The registration of a plant variety by a seed producer under national plant registration legislation gives exclusive rights to the marketing of that variety internationally by all countries that are members of UPOV. The value of the information generated by the RD process is appropriable by companies marketing a final product under this system of rights. Other rights at other levels of the industry are necessary to aid appropriability by the suppliers of other factors or inputs into this industry. However, at the very base of the industry, there has been until recently little or no recognition of the need to reward the flow of information that results simply from retaining a diversity of genetic resources on lands dedicated to that purpose. These sorts of land use decisions also provide inputs into this RD process but there has been no attempt to create a property rights mechanism that would reward this factor for this output. 3 5 . 2 . E6idence of impact of new property right regime on in6estments in information There is some evidence that the recent introduc- tion of the new property right systems affecting genetic resources, and the expansion of others, has had some positive effect on the flow of infor- mation within these industries. The US was the first jurisdiction to afford IPR protection to a living organism. The well-known case involved a bacterium useful in the petroleum industry that was the subject of the US patent ruling in 1980 which first allowed the patenting of human- modified natural organisms Chakraborty vs. Dia- mond. The screening of microorganisms has been occurring at unprecedented rates in recent years, partially in response to the anticipated increase in appropriability of any information discovered in this process and partially in response to the re- duced costliness of the screening process Ayl- ward, 1995. It is clear that the expansion of IPR systems into this area has increased private invest- ment in RD relating to these organisms, but further research is required to assess and analyse this link. 3 In this regard, the International Undertaking on Plant Genetic Resources propounded by the FAO Commission on Plant Genetic Resources has attempted to stake a claim to a return for the traditional farmer, but this remains to be implemented. In June 1998, the World Intellectual Property Organisation WIPO declared that it plans to extend the 1PR system to — what is termed — ‘new beneficiaries’, i.e. to create protection of rights of holders of traditional knowledge, indigenous peoples and local communities. WIPO remains unclear, however, about the nature of these rights and the mechanism through which claims would be assessed and set- tled WIPO, 1998. Many of the benefit sharing mechanisms being discussed elsewhere also concern this level of the indus- try, and the need to share benefits with those individuals who have created the stock of information on which we rely. 2 There are exogenous factors inherent in the nature of plant breeding and pharmaceutical development that may contribute to increasing the potential returns on investment in RD when genetic information is involved. In particular, there may be cumulative effects in RD such that the marginal produc- tivity of RD increases over time. The reason is that there may be 1 increasing returns associated with combining infor- mational inputs and physical and human capital, and 2 increasing returns associated with combining different infor- mational inputs with each other. The latter aspect is explored in depth in Weitzman 1998. Table 1 Private RD activity wheat case study a 1979 1975 1970 1965 1960 1991 Number of RD Programs 1 3 6 9 9 11 3 23 25 Number of private plant breeders 31 4241 1036 3102 6480 6937 RD expenditure 1989, 1000 61 Number of PVPCs 5-year period 17 41 35 a Pray and Knudsen 1994. There is clear evidence that the introduction of IPR systems in the plant breeding industry de- scribed above expanded private sector RD in this area. Studies in the US indicate that RD expenditures in just one field of research small grains increased in real terms by more than a factor of one hundred between 1960 and 1991 Perrin et al., 1983; Butler and Marion, 1985; Pray and Knudsen, 1994. In the US, passage of the implementing legislation for UPOV occurred in 1970, and Table 1 below demonstrates how RD increased in anticipation of the receipt of the exclusive marketing rights acquirable since 1970. The number of RD programmes in this area, the total number of plant breeders, and the aggregate amount of RD expenditure all rose dramatically since 1970. 5 . 3 . Impact of IPR structure on in6estment into inputs especially genetic resources It is also clear that investment in some of the inputs required for plant breeding expanded with the introduction of plant breeders’ rights. There was an expansion in the number of scientists trained and operating in the field, and as men- tioned previously a marked increase in the amount of genetic resource stocks in storage Huffman and Evenson, 1993. In general, in- creased investment was directed at methods of preserving genetic resources that were of known usefulness. This evidence indicates the increased importance placed upon RD in this field once IPR protection became available. Investment was not increased for all of the RD inputs potentially affected by this IPR regime. At the same time that RD was expand- ing, generally from the introduction of plant breeders’ rights, there has been little evidence of increased investment in the other essential inputs — those which would maintain a flow of genetic resources into the future. Although there is very little precise information available, it is widely believed that this same period 1960 – 1990 has been an era during which plant diversity in agri- culture has been in decline throughout the devel- oping world see, e.g. Table 2 from WCMC, 1992. This decline in the investment in diversity in agriculture during this period was occurring despite the introduction of the IPR system regard- ing plant varieties. 4 Any decline in diversity at the aggregate level is attributable to changes in land use at the global level. Global land use patterns were being shifted away from diversity-based uses and toward mod- ern agriculture. The only means by which ‘nature’ can supply its inputs to the production system is by means of land use decisions that retain ‘natural systems’ across large areas of land. In fact, the trend during this period was toward the conver- sion of lands in the developing countries away from pre-existing uses. Between 1960 and 1980 the total amount of land in modern agriculture within developing societies increased by over a third Table 3. 4 This subject is hotly contested on the grounds that: a no real data exists on a global basis; b the trend has been in the opposite direction in most parts of the developed world since 1900, e.g. diversity has probably been increasing in agriculture in the US from its point of least-diversity earlier this century Pray and Knudsen, 1994; and c even if the phenotypic diversity has declined, this provides no real evidence about aggregate diversity at the genotype level see Smale, 1997. Table 2 The decline in diversity at the level of varieties a Crop Number of varieties Country Rice Sri Lanka From 2000 varieties in 1959 to five major varieties today. 75 of varieties descended from one maternal parent Rice From 30 000 varieties to 75 of production from less than ten varieties India Rice 62 of varieties now descended from one maternal parent Bangladesh 74 of varieties now descended from one maternal parent Indonesia Rice a World Conservation Monitoring Centre WCMC, 1992. Have IPR systems had any positive impact upon the supply of genetic resources to the plant breeding industry? Clearly, there must be a coun- tervailing force within the developing world. The developing countries should have perceived an increased incentive to maintain the diversity they hold in order to supply the demands for informa- tion of the plant breeding firms, but at the same time they must also be perceiving the benefits to be derived from switching to the use of the products from these same plant breeders. The aggregate figures indicate that the incentives to switch to- ward modern agriculture have overwhelmed the IPR-based incentives to maintain diversity in the developing world over the past few decades. In summary there is clear evidence that the adoption of IPR protection for plant varieties increases investments in the development of new plant varieties in one sector of this industry: the plant breeding sector. However, as set forth in Fig. 2, there are two other parts to this industry which are often precursors to the plant-breeding sector: the roles of natural selection and the traditional farmer. In order for these sectors of this industry to continue to generate their flow of inputs to the modern plant-breeding sector, it is necessary for land to continue to be dedicated to these uses. As indicated in Table 3, global land use patterns are moving rapidly in the opposite direction. The amounts of land available for and dedicated to the generation of a flow of genetic resources for use in modern RD activities has been reduced dramat- ically. Existing IPR systems create incentives to invest in RD at the end of the industry the plant-breeding sector but are not generating in- vestments in the earlier parts of the industry the genetic resource providers. Why is this the case?

6. Efficiency: the importance of ownership