Summary Of Model And Major Findings

The legal framework in the United States, Europe, and other developed countries has gradually evolved so that those who decipher genetic structures, discover the functions of genes, or identify mechanisms to alter genes can register patents and own the IPRs for the utilization of these discoveries. Private parties have an incentive to conduct research leading to new discoveries because they expect to gain financially from selling the rights to utilize the IPRs, or to utilize them directly in their own commercialization efforts. However, the extent to which IPRs are protected and traded varies among nations, and these variations may affect the way the products and processes of biotechnology are managed and utilized.

In our conceptual analysis, we consider the case of an agricultural industry sector that produces a single crop where producers are characterized by high degrees of heterogeneity. Variation in land quality, topography, and climatic conditions, even within a region, may result in growers adopting different varieties of the same crop. We assume that, technically speaking, all the existing varieties can be modified using biotechnology. This modification, for example, may reduce susceptibility to pests and diseases or increase the efficiency of nutrient uptake. For simplicity, we assume that the effect at the farm level is an increase in yields.

It is assumed that utilization of a biotechnology-based innovation, such as a Bacillus thuringiensis (Bt) gene that codes for the expression of an insecticidal protein in plant tissue, requires a large fixed cost in infrastructure for technology development, a modest fixed cost to obtain the capacity to incorporate the technology into each specific variety, and a relatively small variable cost of seed production.

We argue that biodiversity and the impact of a new biotechnology-based innovation on grower and consumer welfare depend on the manner in which its introduction and pricing strategies relate to the existing cropping system. In particular, we distinguish between situations where private sector companies introduce the technology and situations where it is introduced by the public sector. We also distinguish between situations where traditional local varieties are replaced by "generic" GMVs and situations where specific genes are introduced to local varieties, which continue to be planted in the new, modified form. The generic GMV may be an imported variety that, on average, performs well, but since it may not be highly suited to each location's conditions, will likely not perform as well as GMV versions of local varieties. These features will determine the outcomes of farmer and consumer welfare and biodiversity preservation.

When a private company introduces GMVs, we assume that it charges a monopoly price. This price is set at a level where marginal revenues are equal to marginal costs of producing the modified seeds. When farmers are heterogeneous in their conditions, the impacts of the technology may vary. GMVs will be adopted only where the gain from adoption is sufficient to cover the technology fee. The technology fee will increase with the variable cost of modification (and when the cost of modification is assumed to be fixed, only the cost of seed production is variable). Therefore, low variable costs increase the adoption of GMVs.

When a local variety is genetically modified (GM), the effect of environmental heterogeneity is likely to be an increase in the yield effect and cost savings compared to the case in which the local variety is replaced by a generic GMV. However, the modification of each variety entails a fixed cost. In deciding whether to genetically modify a specific variety or to offer growers a generic GMV, the private company will compare the extra cost of modification with the extra revenues earned from a modified variety relative to a generic variety. Two factors that will affect this decision are the cost of modification and the size of the market. When modification costs are high or when the market is small, it will be more profitable to sell a generic GMV. Thus, regions where the crop-breeding industry has low capacity and the cost of modification is relatively high are more likely to adopt generic GMVs, and their introduction may lead to a reduction of crop biodiversity.

Thus far, private sector companies have developed and introduced most of the GMVs globally. The history of the Green Revolution (Evenson and Gollin, 2003) suggests that eventually public sector institutions will also develop and introduce GMVs, and these varieties will be distributed through small seed companies. We analyze outcomes where the public sector makes the choice of whether or not to introduce a GMV to a region, and whether there will be a genetic modification of the local variety or a generic GMV imported from elsewhere. The public sector organization is assumed to maximize the domestic economic surplus, including seed producers, farmers, and consumers. Under these scenarios, the seed companies will charge competitive prices that are less than the price charged by a monopoly seller. As a result, adoption levels are likely to be higher than under the monopolistic scenario if all the other parameters are the same. Furthermore, since the total domestic surplus is larger than the profit of monopolistic seed companies, the public sector is more likely to invest in development of GMVs than a private sector monopolist. The public sector is more likely to develop local GMVs rather than import generic GMVs, since the development of local GMVs is likely to have a larger yield effect that benefits growers and consumers rather than seed producers.

The decision whether to introduce a local or an imported generic GMV, in any context, depends on the difference between the gain and the cost of development. Countries with more advanced crop-breeding capabilities and sufficient public sector resources for developing GMVs are more likely to modify existing varieties, which will lead to preservation of biodiversity. On the other hand, in situations where public sector resources are limited and where investment in GMVs is not profitable for the private sector, the public sector may develop or import a small number of generic GMVs and, in spite of limited adoption, it may lead to a loss of biodiversity.

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