WELFARE IMPACTS OF CROSS-WELFARE IMPACTS OF CROSS-COUNTRY RESEARCH COUNTRY RESEARCH

SPILLOVERS SPILLOVERS

Sergio H. Lence and Dermot J. Sergio H. Lence and Dermot J. HayesHayes

Iowa State UniversityIowa State University

ISSUESISSUES Advances in plant and animal genetics often have Advances in plant and animal genetics often have

applicability outside country where research was applicability outside country where research was conducted.conducted.

Historically, firms who conducted successful Historically, firms who conducted successful research captured some of the research captured some of the internationalinternational benefits by charging a premium for the improved benefits by charging a premium for the improved input.input. For example, rents from improved hybrid breeds and varieties can For example, rents from improved hybrid breeds and varieties can

be captured by charging a premium for these seeds, and this be captured by charging a premium for these seeds, and this premium can be maintained for many generations by controlling premium can be maintained for many generations by controlling access to purebred parental lines. This premium pricing solution access to purebred parental lines. This premium pricing solution has had less relevance in breeds and varieties where commercial has had less relevance in breeds and varieties where commercial traits are passed on in retained seed and in offspring of traits are passed on in retained seed and in offspring of commercial farm animals.commercial farm animals.

ISSUESISSUES Governments have attempted to stimulate private sector Governments have attempted to stimulate private sector

ag R&D by providing intellectual property rights (IPRs). ag R&D by providing intellectual property rights (IPRs). But ability of countries to impose IPRs on farmers in other But ability of countries to impose IPRs on farmers in other countries has not been universally accepted.countries has not been universally accepted.

In some instances, private sector has been willing to In some instances, private sector has been willing to conduct research in response to incomplete IPRs afforded conduct research in response to incomplete IPRs afforded in one or two major markets.in one or two major markets. For example, work on Roundup Ready© soybeans progressed because of For example, work on Roundup Ready© soybeans progressed because of

IPR available in US domestic market and despite relative lack of IPR in IPR available in US domestic market and despite relative lack of IPR in other soybean growing countries. US farmers who planted Roundup other soybean growing countries. US farmers who planted Roundup Ready© seeds paid a technology fee to the developer of the technology, Ready© seeds paid a technology fee to the developer of the technology, but this company was typically not able to collect technology fee from but this company was typically not able to collect technology fee from farmers in other countries.farmers in other countries.

How do different IPRs across countries affect R&D and How do different IPRs across countries affect R&D and welfare in the presence of spillovers?welfare in the presence of spillovers?

OBJECTIVESOBJECTIVES Develop a model to allow policy makers Develop a model to allow policy makers

and those who design domestic ands and those who design domestic ands international mechanisms to protect international mechanisms to protect intellectual property to determine who intellectual property to determine who benefits from, and who should pay for benefits from, and who should pay for associated research.associated research.

Analyze welfare implications of IPRs in Analyze welfare implications of IPRs in agriculture, when associated research has agriculture, when associated research has commercial application in more than one commercial application in more than one country/region.country/region.

RELEVANCERELEVANCE There has been a large reduction in R&D capacity in developing There has been a large reduction in R&D capacity in developing

countries due in large part to a reduction in international funding. countries due in large part to a reduction in international funding. This suggests that these countries will rely more and more on This suggests that these countries will rely more and more on research spillovers from more developed countries to remain research spillovers from more developed countries to remain competitive.competitive.

Recent development of genetic use restriction technologies (GURTs) Recent development of genetic use restriction technologies (GURTs) can be viewed as an extreme form of IPR, and this technology has can be viewed as an extreme form of IPR, and this technology has received criticism from some less developed countries.received criticism from some less developed countries.

It has recently become possible to trace in a legally acceptable way It has recently become possible to trace in a legally acceptable way particular genetic improvements through to genetic lines sold by particular genetic improvements through to genetic lines sold by other companies. This scientific development has provided a much other companies. This scientific development has provided a much stronger legal basis for cross-country and cross-company IPRs.stronger legal basis for cross-country and cross-company IPRs.

The topic of cross-country IPRs in agriculture continues to stimulate The topic of cross-country IPRs in agriculture continues to stimulate discussion and controversy at international bodies such as the World discussion and controversy at international bodies such as the World Trade Organization via the 1994 Agreement on Trade-Related Aspects Trade Organization via the 1994 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).of Intellectual Property Rights (TRIPS).

MODEL OVERVIEWMODEL OVERVIEW Two countries/regions (e.g., Two countries/regions (e.g., USUS vs. vs.

ROWROW))

USUS provides IPRs on new technology provides IPRs on new technology USUS IPRs provides incentives to R&D firms to IPRs provides incentives to R&D firms to

develop new technology targeting US ag develop new technology targeting US ag productionproduction

SPILLOVERS: New technology may enahnce SPILLOVERS: New technology may enahnce ag production in ag production in ROWROW

ROWROW may or may not provide IPRs may or may not provide IPRs

MODEL OVERVIEWMODEL OVERVIEW Timing Issues:Timing Issues:

At time 0, R&D firms invest resources to compete in a At time 0, R&D firms invest resources to compete in a race to develop a more productive version of an race to develop a more productive version of an existing farm input (e.g., seed, or breed).existing farm input (e.g., seed, or breed).

At At randomrandom time time tt the “new” input is first obtained, the “new” input is first obtained, ending R&D competition. First developer of “new” ending R&D competition. First developer of “new” input is granted IPRs for input is granted IPRs for TT periods. periods.

IPRs expire at time IPRs expire at time tt + + TT. Innovator's ability to charge . Innovator's ability to charge monopoly prices is greatly restricted afterward.monopoly prices is greatly restricted afterward.

Figure 1. Timing framework for the R&D analysis. 0 t t + T time

R&D firms invest to compete in a race to

develop improved input x1

Random time at which one of the R&D firms wins race and obtains IPRs to supply "new" input x1 to farmers over next T

units of time

Expiration of IPRs granted to developer

of "new" input x1

R&D race to develop improved agricultural

input x1

Improved agricultural input x1 sold to

farmers by innovator enjoying IPRs

Improved ag. input x1 sold to

farmers by innovator without

IPRs

MODEL OVERVIEWMODEL OVERVIEW

MARKET EQUILIBRIUM: Solving MARKET EQUILIBRIUM: Solving model requires simultaneous model requires simultaneous equilibrium in three markets at all equilibrium in three markets at all times:times:

R&D market.R&D market.

Relevant input market.Relevant input market.

World crop market.World crop market.

MODEL OVERVIEWMODEL OVERVIEW Other detailsof the model:Other detailsof the model:

IPRs last for 20 years.IPRs last for 20 years.

5 R&D firms.5 R&D firms.

Same baseline production and consumption shares for Same baseline production and consumption shares for USUS vs. vs. ROWROW (50% each). (50% each).

We look at different spillover levelsWe look at different spillover levels(from 0 = no spillover to 1 = same effect in (from 0 = no spillover to 1 = same effect in ROWROW as in as in USUS).).

We look at different levels of IPR protection in We look at different levels of IPR protection in USUS(from 0 = no IPR to (from 0 = no IPR to = perfect IPR). = perfect IPR).

We look at 2 scenarios for IPR protection in We look at 2 scenarios for IPR protection in ROWROW:: Scenario 1 = no IPR in Scenario 1 = no IPR in ROWROW Scenario 2 = harmonized IPR (i.e., same IPR in Scenario 2 = harmonized IPR (i.e., same IPR in ROWROW as in as in USUS).).

CHANGE IN R&D SECTORCHANGE IN R&D SECTORWELL-BEINGWELL-BEING

CHANGE IN CONSUMERCHANGE IN CONSUMERWELL-BEING (WELL-BEING (USUS same as same as ROWROW))

CHANGE IN CHANGE IN USUS FARM FARMWELL-BEINGWELL-BEING

CHANGE IN CHANGE IN ROWROW FARM FARMWELL-BEINGWELL-BEING

CHANGE IN CHANGE IN USUS WELL-BEING WELL-BEING

CHANGE IN CHANGE IN WORLDWORLD WELL-BEINGWELL-BEING

SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS

World welfare rises as spillover increases, World welfare rises as spillover increases, and it increases up to an optimal point in and it increases up to an optimal point in the US IPR level.the US IPR level.

Relationship between WORLD welfare and Relationship between WORLD welfare and US IPR level flattens and turns negative at US IPR level flattens and turns negative at high US IPR levels.high US IPR levels.

From a world welfare standpoint, optimal From a world welfare standpoint, optimal US IPR level also increases as spillovers US IPR level also increases as spillovers increase because spillovers magnify increase because spillovers magnify benefits of research.benefits of research.

SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS

Consumers always gain from Consumers always gain from spilloversspillovers

Consumers benefit from stronger US Consumers benefit from stronger US IPRs, up to a certain level.IPRs, up to a certain level.

SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS

ROW farmers are always worse off ROW farmers are always worse off when there are no spillovers.when there are no spillovers.

If there are spillovers, whether ROW If there are spillovers, whether ROW farmers benefit from stronger US IPR farmers benefit from stronger US IPR levels depends on the extent of levels depends on the extent of spillovers and whether ROW has IPRs spillovers and whether ROW has IPRs or not.or not.

SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS US farmers always lose with large spillovers, and US farmers always lose with large spillovers, and

gain with small spillovers.gain with small spillovers.

With intermediate spillovers, US farmers may gain With intermediate spillovers, US farmers may gain the most if IPRs are harmonized.the most if IPRs are harmonized.

Whether US consumer gains offset US farm Whether US consumer gains offset US farm losses depends on the relative magnitudes of losses depends on the relative magnitudes of farm and consumption sectors in the US. When farm and consumption sectors in the US. When farm sector is similar or greater than farm sector is similar or greater than consumption sector (i.e., when US is an exporter consumption sector (i.e., when US is an exporter of the crop), farmer losses tend to exceed of the crop), farmer losses tend to exceed consumer gains as spillovers increase.consumer gains as spillovers increase. This calls into question the use of producer paid technology fees This calls into question the use of producer paid technology fees

to fund and stimulate research, and suggests that some other to fund and stimulate research, and suggests that some other mechanism be found to finance this researchmechanism be found to finance this research

SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS US farmers almost always lose but US US farmers almost always lose but US

consumers always gain from spillovers. consumers always gain from spillovers. Whether latter gains offset former losses Whether latter gains offset former losses depends on the relative magnitudes of farm depends on the relative magnitudes of farm and consumption sectors in the US. When and consumption sectors in the US. When farm sector is similar or greater than farm sector is similar or greater than consumption sector (i.e., when US is an consumption sector (i.e., when US is an exporter of the crop), farmer losses tend to exporter of the crop), farmer losses tend to exceed consumer gains as spillovers exceed consumer gains as spillovers increase.increase. This calls into question the use of producer paid This calls into question the use of producer paid

technology fees to fund and stimulate research, and technology fees to fund and stimulate research, and suggests that some other mechanism be found to suggests that some other mechanism be found to finance this researchfinance this research