Insecure Property Rights and Plant Varieties: Effects on the Market for Seeds in Argentina

During the 1990s the market for biotechnology in agricultural and pharmaceutical sectors have became an international economic force. Investment in research and development (R&D) of new seed varieties has become a key factor for market success. In the last decades the investment in R&D switched from state sponsored research to private funding. At the same time, the market moved towards a strong concentration in a few multinational firms, which now control most of the biotechnological research and development around the world. These changes are happening at the same time that a revolution on biotechnology is advancing on agriculture and pharmaceutical industries. In this new environment, with wide private participation in an international market, the protection of intellectual property rights and its role in shaping the biotech market has been highly debated. Governments, international organizations, the private sector (firms and farmers), scholars and scientists are discussing the implications of these changes for the market for seeds and how property rights should be defined and enforced to promote social welfare. Developed countries have tried to enforce intellectual property rights over new varieties of seeds in developing countries in order to promote and protect the investments of their companies abroad. On the other hand, developing countries have insisted on sustain a loose property rights system in order to favor their farmers and obtain new technologies at the lowest possible cost. The creation of effective property rights legislation to promote a high level of R&D, even though this implies the presence of some monopoly power in the market, is a key instrument for biotechnology in agriculture. Accordingly, property rights should protect the creators of new plant varieties and they should be thoroughly enforced. Of course, the scope and definition of rights will depend on the characteristics of the plant to be protected. In this paper we analyze the incentives seed producers have in investing on R&D, given different degrees of property rights protection. In order to analyze the effects of insecure property rights in research and development we develop a theoretical model in which the producer of a new variety faces partial excludability and appropriation in the market. Differently from other studies we assume that this inventor produces two different varieties of plants (corn and soybean). This particular setup allows us to address the effects of insecure property rights on one variety and how it affects investment on the other variety. This cross effect inside the production process of seed companies has not been addressed in the literature, and we find it to be very important for the research and development decisions. From this model we obtain a series of empirical implications: First, the price and quantity of new varieties will depend on the level of property rights in the market. Second, the quality of the new varieties will have a positive impact on prices and quantities offered, but a negative effect on quantity demanded. Third, the level of investment in the new varieties will depend positively on the definition of property rights and the research effort. Fourth, changes in the level of property rights protection or research effort in one of the markets will have an inverse relationship with the quality of the new variety in the other market. Then we use the case study of Argentina and the United States to evaluate the empirical implications of our theoretical model. We observe that in countries like the United States soybean utility patents can protect research, while simple Plant Variety Protection Certificates (PVPCs) may be enough protection for some seeds like corn. However, in Argentina patent protection is not generally available for plant varieties and seed producers only have PVPCs according to the guidelines established by the UPOV 78. This lack of protection has prompted diverse protests from seed producers. For example, Monsanto decided to leave the market and stop offering its Round-Up Ready soybean variety because of the lack of protection. The Argentine government has tried to bargain with the company proposing the creation of a tax on farmers' crop as a way to compensate for the losses on licenses and royalties. Given that Argentina is the third world exporter of soybean and one of the main producers of Genetically Modified soybean, the study of the lack of property rights protection on the soybean market, as compared to the corn market, would provide insightful results for the effect of property rights on biotechnology research. From our empirical case study we obtain the following conclusions. First, increases on market appropriation will increase investment in all varieties only if the increase in appropriation is similar for all market varieties. As we show, change on legislation and increase in enforcement effort in the early 1990s in Argentina produced an increase in the number of new corn varieties, given that the legal system in Argentina provides for PVPCs for plant protection. Accordingly, soybean varieties, which need stricter property protection, like patents, did not experienced such an increase in the number of new varieties. Second, if the changes in appropriation affect just the market for one variety, then investment for this variety should increase, while investment for other varieties should decrease. In our case study we observe that the research and development activities of the private sector in Argentina follow our theoretical model. Because property rights could be protected much better in the case of corn, there is a higher allocation of resources to the production of new corn varieties, which reached a higher number than in the United States, while the investment in soybean varieties stagnate, reaching much lower levels than in the United States. This result corroborates the implication of our theoretical model, in which there is a strong relationship in the research process between varieties, i.e. an increase in property rights in the market for one variety will increase the research and quality of this variety but it will decrease the quality level of the other one. Third, more secure intellectual property rights will lead to higher market prices for new seeds and higher quantity supplied of seeds. As we show, in the case of Argentina corn seeds' prices were closer to the ones in the United States, because of the higher level of appropriation in the corn market, while prices for soybean are very low, close to the level of the black market, and much lower than the United States' prices. This evidence is also according the results of our theoretical model. Fourth, we should observe productivity gains for the higher investment in the varieties with more secure property rights. In the Argentine case we observe that the increase of investment in research and development in corn is positively correlated with the increase in yields, producing a convergence to the levels of yields observed in the United States. This allowed the country to increase production and exports, even when there was a substitution from corn to soybean crops, because of higher international prices for soybean. Farmers also benefited from this situation, since they could buy cheap soybean seeds in the black market and sell their crops in the international market. Fifth, even though foreign companies have the highest share of the market for seeds, we observe a very dynamic domestic seed production sector, which has evolved similarly to their foreign counterparts. This is an indication that foreign and domestic firms face similar restrictions and opportunities offered by the property right regime. Finally, resorting to alternative means to protect property rights, i.e. the use of a consumption tax on seeds, can increase the level of investment in the market for seeds, but at the cost of reducing social welfare. As a consequence, the implementation of a secure property rights system is a better instrument to foster investment and market development than taxes and government regulations. From the results of our model we can conclude that the type and strength of property rights regimes are important for research and development. As it has been showed, PVPCs type of protection can be sufficient for crops like corn, but they are ineffective in the case of self-pollinating seeds, like soybean, which need patent protection. We found a strong relationship between property right enforcement and definition and research effort. Furthermore, and very importantly, property rights definition in one market will have an effect on the research effort in other varieties. This result is key to understand the complex relationship between property rights and investment in agriculture markets. Furthermore, our evidence has important insights for the design of property rights regimes in other countries, both developed and developing ones.