The International Consortium on Agricultural Biotechnology Research (ICABR)


Incentives for private biotechnological research


Claus-Hennig Hanf Holger A. Kray, Christian Albrechts University of Kiel, Germany





The end of the millennium has widely been used to carry out a number of investigations that focus on the long-term world food situation. More or less all of these studies result in a relatively optimistic view. It is expected that food supply in the next decades can follow the increasing demand. It is argued that many factors will contribute to this relative favorable development, but on long run all studies rely on a relevant, if not dominant contribution of biotechnology through genetically modified products. Only Ruttan (1999) has a more skeptical view. His concerns are mainly related to the research process itself and to insufficient funding of public sector research.


This paper is dedicated to a different aspect of biotechnological research. It argues that the prevailing market system does not offer sufficient economic incentives to the large multinational breeding firms to develop high yielding crop varieties that are expected to feed the people in less developed countries.


The argumentation follows Ruttan's (1999) description of the advances in biotechnology. He distinguishes three generations of product developments. The first (and present) generation is mainly characterized by a substitution of purchasable inputs through plant installed pest resistance, and by a loss-reduction due to greater strengths against pests and stress factors. The second (nowadays starting) generation of biotechnology is marked by strengthening of some properties of the plants or implementing new ones that improve the utility to consumers or enhance the economic value in further processing. Finally, the third generation is mainly characterized by yield increases. The yield increase may be realized either by increasing the proportion of utilizable parts, or by shifting the metabolic limits.


The two first generations of biotechnology offer stringent incentives to biotech firms. Due to pest resistance, production cost of farmers decrease without a strong direct effect on supply. That gives the seed producing industry a strong incentive to breed such varieties as the industry has a long run profit chance by reaping the whole or parts of the cost reduction. The incentive to produce varieties of the second generation is also obvious and straightforward. Improved product quality and plants with new properties may increase the value of these products. An increase in quantity of food supply is not connected with these quality improvements, hence, a price increase is to be expected which may be reaped by the seed industry.


Utilization of third generation seed inevitable increases production, and thereby causes a decrease of agricultural prices. Consumers benefit considerably from this type of technical progress whereas farmers are relatively worse of. Cochrane's treat mill even suggests that farmers will likely have a negative rent in long run. Under these conditions, the seed industry has certainly difficulties to regain the innovation costs and it is very uncertain if the industry can make any profit at all.


A relatively simple model is used to analyze the situation. The demand is assumed to be relative inelastic, whereas the supply is assumed to be rather elastic. Under these typical "treat mill" conditions, a monopolistic seed producer can decide whether he develops a new breed of a higher yielding variety and - if he does - how much seed he supplies to agriculture. He has to consider with the supply decision, the research and development costs. First calculations show that a monopoly can receive a profit from breeding in this situation, however, on a level of seed supply what is considerably below that in a competitive situation.



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