The International Consortium on Agricultural Biotechnology Research (ICABR)


An Option-theoretic approach to forming public-private research partnerships.

Gordon Rausser, Leo Simon Holly Ameden University of California at Berkeley

There is a rapidly widening gap between cutting edge research and development(R&D) in the developed world and publicly-sponsored research in the developing world. One obvious strategy for narrowing this gap is to form private-public research alliances for agricultural biotechnology research based in the developing world. Despite efforts to encourage partnerships, however, collaboration between private firms and public researchers in developing countries has been limited (Rausser et al. 2000). The nature of private research institutions in the developed world is vastly different from that of the public research organization in the developing world. These organization have different goals, assets. Private firms are driven to maximize profits and in doing so are concerned with any aspect of a cooperative partnership that affects commercialization of the research output. Firms are also concerned with public relations, hoping to build a positive public image, especially overseas. Public organizations, on the other hand, strive to maximize social welfare as defined by their doctrine or mission. Agricultural research institutions are interested in advancing agricultural research and technology to serve many goals, including increasing cropproductivity and ensuring food security for growing populations. Private and public institutions also have different assets, with private firms offering financial resources and state-of-the-art scientific resources ( e.g., gene guns and agribacterium) while public research institutes can provide such research assets as banks of elite germplasm. Finally, the scales of the two types of institution are quite different. Withtheir large structural organization and significant resources, life-sciences firms are able to enter many partnerships in different countries at relatively low risk to their central operations. For a public research center, however, even a single research joint venture is likely to encumber a relatively significant portion of its resources. These vast differences exacerbate the uncertainties that are already inherent in the R&D process and raise additional barriers to the formation of research alliances. In this paper, we propose to evaluate the strategies that the public research institute should follow in deciding whether and when to enter a research partnership, with whom, as well as how to structure an agreement that addresses these uncertainties. Our proposed analytic tool is real option theory. We will frame the problem so that foregone opportunity costs (the cost of forfeiting opportunities to enter agreements with other partners) will be considered. In addition, the option values of decisions made on the `front-end' and `back-end' of the research partnership will reflect the uncertainties associated with key aspects of the joint venture. Front-end decisions include specification of research priorities, commitment of resources and determining the scale of operations. These variables determine both research outputs and research costs. Variables in the back-end component determine how research outputs will be developed and commercialized, and how the financial returns will be allocated between the partners. Rausser, Gordon, Leo Simon and Holly Ameden. 2000. Public-private alliances in biotechnology. Can they narrow the knowledge gaps between rich and poor? FoodPolicy, 25, 499-513.

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