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7 Biotechnology RAINE HERMANS Northwestern University and ETLA Research Institute of the Finnish Economy ALICIA LöFFLER Northwestern University SCOTT STERN Northwestern University National Bureau of Economic Research (NBER) INTRODUCTION Over the past decade, the biotechnology industry has been the focus of increasing academic and policy interest as a potential source of regional and national economic development (Cortright and Mayer, 2002; Feldman, 2003). Although the current size of the industry is quite small, particularly in terms of employment, both local and national policy makers—in the United States and abroad—have proactively encouraged local and regional investment in the bio- technology industry. In many cases, policy interest in biotechnology is grounded in the belief that, whereas traditional sectoral sources of jobs and investment are increasingly subject to erosion due to globalization, the biotechnology industry is associated with superior wages and a high level of economic prosperity and growth (Battelle and SSTI, 2006). The proliferation of biotechnology investment programs—even within regions that have little current activity in the industry— raises concerns about the effectiveness of biotechnology as a driver of regional economic development. Moreover, these policy initiatives will have a long-lived impact on patterns of regional development and on the evolution and long-term structure of the industry. The geography of this industry, and the impact of globalization on bio- technology, will be shaped not only by policy initiatives but also, perhaps more important, by fundamental features of the economic, strategic, and institutional environment. This chapter provides an overview of the drivers, patterns, and consequences of the globalization of biotechnology and offers a preliminary as- sessment of historical and contemporary patterns of the geographic dispersion of biotechnology innovation. Our analysis of the distinctive nature of the globaliza- 2

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22 INNOVATION IN GLOBAL INDUSTRIES tion of biotechnology motivates policy implications aimed at ensuring continued leadership and dynamism in the American biotechnology sector. While there has been a great deal of academic and policy interest in the biotechnology industry, the scope and extent of the industry are loosely defined, and measures of its scope, size, and patterns of geographic activity depend on the specific definitions that are used (Kenney, 1986; Orsenigo, 1989; Cockburn, et al., 1999; Cortright and Mayer, 2002; van Beuzekom and Arundel, 2006). At the broadest level, biotechnology is an industry that includes the commercialization of life science innovations in the health, agriculture, and industrial sectors, which are often referred to as the “red,” “green,” and “white” biotechnology sectors, re- spectively. While the international biotechnology industry incorporates activities in all three biotechnology spheres, the bulk of policy and academic analysis have focused on “red” (i.e., health-oriented) biotechnology. Furthermore, although the majority of privately and publicly funded biotechnology enterprises have been located in the United States, the pattern of regional and international development is quite distinct for the red, green, and white divisions. Despite ambiguities in the scope of the industry and variation across the three subsectors, “cluster-driven” growth in biotechnology has emerged as a key economic development strategy for regions and nations at all levels of economic and technological prosperity (Cor- tright and Mayer, 2002; Feldman, 2003). Beyond its importance for economic development policy, biotechnology is also the setting for a very active debate across several social sciences about the drivers of clustering and the impact of globalization on the importance of location in innovation. In this chapter we examine trends related to the geographic distribution of industrial biotechnological activity, focusing on the following broad questions: What are the key drivers of innovation within biotechnology, and how do these drivers influence patterns of regional development? What are the drivers of loca- tion and clustering within the biotechnology industry, and how does globalization impact the geography of the biotechnology industry? What are the main locational patterns within the biotechnology industry, both in terms of employment and firm formation and in terms of innovation and sales? What are the main strengths and limitations of publicly available data on the biotechnology industry? Finally, how does the current geography of the biotechnology industry impact contemporary debates over the potential for biotechnology to serve as a source of regional de- velopment, innovation, and improvements in human welfare? Overall, our analysis suggests that biotechnology remains a clustered eco- nomic activity and relies strongly on interaction with science-based university research. However, the number of active clusters in biotechnology is increasing over time. An increasing number of distinct locations in the United States are home to a significant level of biotechnology activity, and an increasing number of countries around the world support modest to significant activity within the bio- technology industry. More notably, while many countries around the world now “host” a biotechnology industry of varying importance, the activity within most

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2 BIOTECHNOLOGY countries is highly localized and often centered in a single city or metropolitan area. Although the data are inadequate to allow for a comprehensive analysis, qualitative and quantitative evidence suggests that the number of biotechnology clusters that host a significant number of viable private companies and serve as a recurrent source of innovation has increased; this increase in the number of clus- ters with “critical mass” is reflected in the increased dispersion of biotechnology employment, entrepreneurship, and measured innovations. This central insight—an increase in the number of regional clusters, rather than a simple dispersion of biotechnology activity—holds a number of implica- tions. First, the impact of globalization on biotechnology seems to be distinct from the pattern observed in traditional manufacturing sectors. While the globalization of many industries seems to reflect the increasing availability of low-cost loca- tions for performing low-margin activities that had previously been conducted in the United States or Europe, the globalization of biotechnology reflects a “catch- ing up” process. A few regions around the world have established infrastructure and conditions to attempt to compete “head-to-head” with leading regions in the United States. Second, the analysis highlights the small absolute size of the biotechnology industry. Using a relatively inclusive definition, total biotechnol- ogy employment in the United States accounts for less than 200,000 full-time employees, which itself accounts for well over 50 percent of global employment (van Beuzekom and Arundel, 2006). In contrast, a single company in information technology (IT) such as Hewlett-Packard employs more than 150,000 workers (Hewlett-Packard, 2006). While globalization may affect the broader economy through its impact on sectors such as IT or traditional manufacturing, the small scale of the biotechnology industry precludes it from having a significant employ- ment impact on the U.S. economy, at least at the present time. In other words, while an increasing number of policy initiatives focus on the role of biotechnol- ogy in encouraging job creation and employment, the simple fact is that, if the biotechnology industry remains at roughly the same scale it has achieved after the past decade of rapid growth, it is unlikely to be a major driver of employment patterns and overall job growth, either in the United States or abroad. Finally, the analysis raises several interesting questions for further study. The most important issue is one of data collection. While our understanding of the biotechnology industry is greatly facilitated by detailed public and private data-gathering efforts (including the extremely useful Organisation for Economic Co-operation and Development [OECD] Biotechnology Statistics program), there seems to be an important gap between qualitative evaluations focusing on the role of subnational clusters and the fact that most international statistics are measured only at the country level. While there have been several ambitious attempts to document the clustering of biotechnology activity among regions within the United States, there is no single source of data or unambiguous ap- proach that allows for a comparison of biotechnology clusters on a global basis. Second, although most analyses of the industry focus on the red biotechnology

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2 INNOVATION IN GLOBAL INDUSTRIES sector, patterns of locational advantage and the impact of globalization are quite distinct for the green and white sectors. For example, countries such as Japan and Denmark hold leading positions in the industrial applications of biotechnology. Moreover, in contrast to the high level of academic entrepreneurship that char- acterizes the red sector, the green sector is largely dominated by a small number of large firms such as Monsanto and DuPont. These alternative patterns make it problematic to extrapolate from detailed studies of the health-oriented sector in analyzing the growth and geographic evolution of the industrial and agricultural sectors of the industry. The remainder of the chapter is organized as follows. The second section provides a concise introduction to the biotechnology industry and the key drivers of innovation in this industry. Among other issues, we highlight the importance of proximity to the creation of knowledge in fostering agglomeration. We then turn to an explicit discussion of the drivers of location and clustering in the industry, extending the “diamond” framework (Porter, 1990, 1998). In adapt- ing that framework to the biotechnology industry, we highlight the potential for catch-up by lagging regions, the potential for disagglomeration as the industry or segments of it mature, and the potential for a leading region to establish itself as a global “hub” for biotechnology research and innovation going forward. In the fourth section, we consider broad patterns and data regarding firm location, employment, and sales in the biotechnology industry. As discussed earlier, the data illustrate the small size of the industry overall and the dominance of the United States within the industry. We then turn in the fifth section to an empirical assessment of the geography of innovation, in terms of both patenting behavior and commercial sales. A concluding section discusses the key findings and im- plications for policy. THE DRIvERS OF INNOvATION IN THE BIOTECHNOLOGy INDUSTRy The Origins and Scope of the Biotechnology Industry Biotechnology is a relatively young and still emerging sector of the economy that is focused on the application of cellular and biomolecular processes to de- velop or make useful products (Biotechnology Industry Organization, 2006).1 1There is no single definition of the industry, and different criteria are often used to define the scope of the biotechnology industry in different countries. For example, the OECD employs both a functional definition—“the application of science and technology to living organisms, as well as parts, products and models thereof, to alter living or nonliving materials for the production of knowledge, goods and services”—and list-based definitions in which firms or workers are included in biotechnol- ogy if their activities fall within the scope of a set of listed categories (van Beuzekom and Arundel, 2006). To the extent possible, we are careful to define the definition and sample by which international or intranational comparisons are made.

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2 BIOTECHNOLOGY The origins of the biotechnology industry can be traced back to a confluence of technological, economic, and institutional shifts during the late 1970s and early 1980s: the development of recombinant DNA technology and other fundamental advances in life sciences research during the 1970s; a significant increase in funding and resources for life sciences research (both public and private, in the U.S. and abroad); and a set of policy decisions, such as the 1980 Diamond vs. Chakrabarty Supreme Court decision and the Bayh-Dole Act, that allowed the assertion of intellectual property rights over innovations based on genetic engi- neering, even those funded by the public sector. The conceptual ideas underlying biotechnology date back almost 12,000 years with the domestication of plants and animals through selective breeding. However, it was not until 1973, when Stanley Cohen, Stanford University, and Herbert Boyer, University of California San Francisco, demonstrated the ability to manipulate genetic material in a practical way, that the potential for commer- cial applications from the science of molecular biology became apparent. Indeed, Herbert Boyer himself was one of the founders of one of the first and among the most successful biotechnology companies, Genentech. While the discoveries of the 1970s represented fundamental scientific breakthroughs and offered isolated commercial applications, such as the development of synthetic insulin and human growth hormone (McKelvey, 1996; Stern, 1995), the growth of the biotechnol- ogy industry has relied on a series of complementary technological and scientific breakthroughs of similar magnitude. These include but are not limited to the development of rapid genetic sequencing methods such as the polymerase chain reaction in the 1980s to the use of increasingly advanced IT in bioinformatics in the 1990s and the ability to integrate genomic information through initiatives such as the Human Genome Project. Biotechnology represents the confluence of many emerging disciplines and relies on discoveries from academic and govern- ment laboratories as well as commercial institutions. While the precise boundar- ies of the industry are admittedly fuzzy, it is useful to consider three related but distinct spheres: health-oriented, agricultural, and industry biotechnology, which are referred to as red, green, and white biotechnology, respectively. Health-Oriented Biotechnology (“Red Biotech”) Private investment in health-oriented biotechnology has been concentrated in a small number of regional clusters, which are also home to leading universities and other research institutions. On the one hand, publicly funded life sciences re- search serves as an extremely important source of discoveries for health-oriented biotechnology and is dispersed broadly across universities and research institutes in the United States and abroad. However, private-sector investment in the health- oriented biotechnology industry is much more regionally concentrated. In the United States, a small number of regional clusters in areas such as San Francisco, Boston, and San Diego have served as the origin for a large share of all biotech-

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2 INNOVATION IN GLOBAL INDUSTRIES nology innovative investment and activity (Cortright and Mayer, 2002). Although the health-oriented biotechnology sector is concentrated largely in regional clus- ters in the United States, there are a significant number of small- to medium-sized clusters outside of the United States, including concentrations around Cambridge (UK), the Medicon Valley (Sweden/Denmark), Singapore, Sydney, and Mel- bourne, among other locations. More generally, although the commercialization of health-oriented biotechnology innovation has largely involved cooperation with more established firms (many of which are pharmaceutical firms located outside of the regional clusters), health-oriented biotechnology has been closely associated with academic entrepreneurship, whereby leading university research faculty are associated with the creation of new biotechnology firms. Agricultural Biotechnology (“Green Biotech”) The second major application segment in biotechnology is associated with the development and commercialization of “green,” or agriculture-focused, bio- technology products, particularly the development of new seed traits for staples and specialized agricultural products, from corn to papayas. While cluster-driven entrepreneurship has also played a role in this sector, the bulk of investment and commercialization has been centered around a small number of large, established players, including companies such as Monsanto and DuPont. Relative to health- oriented applications, the earliest commercial applications for agricultural bio- technology were not brought to market until the mid-1990s. While diffusion of products such as pest-resistant corn and soybeans was rapid in the United Sates, there was significant opposition to the adoption of these technologies in inter- national markets, particularly in Europe, which enacted a ban on most products until 2004. In other words, both development and initial use of agricultural bio- technology have been centered in the United States, and companies and farmers who invested in these technologies at an early stage have benefited as markets for genetically modified organisms have globalized over the past several years. Industrial Biotechnology (“White Biotech”) Industrial biotechnology is the application of biotechnology for industrial purposes, ranging from more effective enzymes in the chemical and textile sectors to biofuels to bioremediation (i.e., environmental applications). By and large, industrial biotechnology has served as a useful source of process innova- tion in established industrial settings. For example, in the chemical sector, bio- engineered enzymes significantly enhance yields in chemical manufacturing by lowering costs and raising productivity. Relative to the other two spheres, white (i.e., industrial) biotechnology applications appear to be far more geographi- cally dispersed than those of red biotechnology. For example, while industrial biotechnology applications are found in the United States, leading users of these

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2 BIOTECHNOLOGY technologies are also located in Denmark, Japan, and Finland. Over the past few years, increased interest in biofuels and biotechnology solutions for the energy industry has greatly increased the level of policy interest in this third sphere of the biotechnology industry. In the remainder of this section, we emphasize some of the distinctive fea- tures of the industry, each of which will influence the ultimate geographic disper- sion of activity within the industry. The Nature of Biotechnology Research One of the most distinctive and pervasive characteristics of innovation in biotechnology is duality. Duality arises when biotechnology research makes a simultaneous contribution to both basic research and applied innovation (Rosen- berg, 1974; Stokes, 1997). For example, the developments in recombinant tech- nology and cloning in the 1970s and genomics in the 1990s allowed scientists to understand the fundamental mechanisms of gene expression and also served as the foundation for novel therapies, diagnostics, transgenic crops, biofuels, and so on. The impact of duality is extensive and undermines some of the implica- tions of the traditional linear framework for science, technology, and innovation.2 While the linear framework allows for a concise formulation of the relationship between the nature of knowledge and the incentives provided for its production and distribution, it fails when knowledge has both basic and applied value. Stokes (1997) reformulated the traditional linear distinction between basic and applied research by highlighting the duality of research; a discovery could simultane- ously have both applied and basic characteristics (Figure 1). Stokes identified the importance of research in “Pasteur’s Quadrant”: Louis Pasteur’s research on fermentation simultaneously offered fundamental insights that led to the germ theory of disease and was of immediate practical significance for the French beer and wine industry. Stokes argues that, rather than placing research on a single linear dimension ranging from basic to applied, it is more useful to consider two dimensions: in terms of whether research is dependent on “considerations of use” or, separately, on a “quest for fundamental understanding.” Most biotechnology research takes place in Pasteur’s Quadrant—individual discoveries both rely on and have influence on science and commercialization. The production of “dual-purpose” knowledge, particularly in the disciplines 2 Inthe traditional “linear” model, the norms and institutions supporting the production and use of basic versus applied research are separable and distinct. Under this model, applied research exploits publicly available basic research as an input, transforming that knowledge into innovations with valu- able application. Although the linear model has been sharply criticized (Klein and Rosenberg, 1986), most formal theoretical and empirical economic research remains premised on the linear model, from assessment of the impact of university research (Jensen and Thursby, 2001; Mowery et al., 2001; Narin and Olivastro, 1992; Zucker et al., 1998a,b) to the impact of science and basic research on economic growth (Adams, 1990; Romer, 1990).

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2 INNOVATION IN GLOBAL INDUSTRIES Use-Inspired Use-Inspired Pure Basic Applied YES YES Research Research (Pasteur) (Edison) (Pasteur) Consideration of Consideration of Use? Use? Pure Basic Research NO NO (Bohr) NO YES Quest for Fundamental Quest for Fundamental understanding? understanding? FIGURE 1 Pasteur’s Quadrant. The traditional “linear” framework fails when knowledge biotech-1.eps has both basic and applied value. Since its inception, biotechnology research has been at changed type in and so individual discoveries rely on and influence both dark blue boxes to white for legibility the center of Pasteur’s Quadrant, science and commercialization. SOURCE: Adapted from Stokes (1997). that underpin modern biotechnology, raises important new challenges for policy makers. For example, the past decade has seen a significant rise in the use of intellectual property rights (IPRs) over research that had traditionally been dis- closed only through scientific publication. The increased role of IPR has sparked a vigorous academic and policy debate over the “anticommons effect.” On the one hand, some argue that such expansions of IPRs (in the form of patents or copy- rights) “privatizes” the scientific commons, reducing the benefits from scientific progress (Argyres and Liebskind, 1998; David, 2004; Heller and Eisenberg, 1998; Murray and Stern, 2007). On the other hand, a significant amount of research sug- gests that IPRs may also facilitate the creation of a market for ideas, encourage further investment in ideas with commercial potential, and mitigate disincentives to disclose and exchange knowledge that might otherwise remain secret (Arora et al., 2001; Gans and Stern, 2000; Merges and Nelson, 1990, 1994; Lerner and Merges, 1998). While there are many questions surrounding the use and misuse of IPRs, particularly at the interface between university and industry research, its availability may allow startup biotechnology firms to focus on the early-stage research and contract with pharmaceutical, agricultural, and chemical companies for downstream activities, including manufacturing, marketing, and distribution (Arora et al., 2001; Gans and Stern, 2003). The Biotechnology Value Proposition and the Structure of the Value Chain While the size of the biotechnology industry is still quite modest—rela- tive to, say, employment or revenue in the automobile industry—the potential

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2 BIOTECHNOLOGY global demand for biotechnology products is large, mostly driven by the needs of a growing and aging world population. The promise of biotechnology to find solutions to some of the critical problems arising from population growth and demographic change, from new medical treatments to improving agricultural output and developing new sources of energy, creates a favorable environment for this sector. The world’s population is not only growing, but is, in aggregate, growing older.3 As life expectancy increases, a need to find new approaches to treat chronic diseases that affect a more elderly population will increase. At the same time, rising global trade and travel, highly porous international borders, increased urbanization, and an uneven distribution of wealth are creating optimal conditions for outbreaks of new infectious diseases with no available treatments. Similarly, the need to increase the productivity and efficiency of agricultural products to feed the rising population is becoming a critical global issue for which biotechnology may offer important solutions. The pressing need for new treatments is creating a great demand for biotechnology innovations. Likewise, global climate change, caused in part by economic development and population growth, has intensified the need for finding solutions for alternative sources of energy. Industrial biotechnology could provide some means of producing envi- ronmentally friendly biofuels. Despite these promising opportunities, the industry faces a series of dis- tinctive challenges in translating innovations into commercialized products and services for global markets; at least in part, these challenges are a consequence of duality. On the one hand, close interinstitutional collaborations in biotechnol- ogy contribute to the need for geographic proximity around centers of research excellence. Moreover, one manifestation of the complex networked relationship between biotechnology firms and other institutions is that many researchers in biotechnology work not only at the convergence of multiple scientific fields but also at the boundaries of multiple institutions. While these overlapping institu- tional affiliations are most apparent in the area of health-oriented biotechnology (Zucker et al., 1998b), agricultural and industrial biotechnology innovation also 3 Demographic projections estimate world population gains from 6.5 billion in 2005 to 7.9 billion in 2025 (United Nations, 2004). The greatest growth in total population is projected in the rising nations of China and India, whose populations are expected to benefit from improved socioeconomic condi- tions and should drive increased needs for biotechnology innovations. The global population is also growing older. Individuals over age 60 represented 10.4 percent of the world’s population in 2005; by 2050 this segment is expected to grow by 1 billion, with a total number representing 21.7 percent of a much larger total population. This trend will undoubtedly spur greater demand for new biomedical innovations and treatments worldwide. Today, the U.S. population over age 65 consumes 40 percent of the nation’s biomedical output products and it is reasonable to expect similar trends worldwide. Persons aged 60 and over comprised 10.4 percent of the global population in 2005; by 2050 this component will amount to 21.7 percent of a much larger total population. By midcentury, the number of persons aged 60 and older will grow by 1 billion. The greatest advance is expected in the rising nations of China and India, whose populations will come to benefit from drug treatments and medical devices formerly available mainly to consumers in the United States and Europe (Magee, 2005).

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20 INNOVATION IN GLOBAL INDUSTRIES takes place at the university-industry interface (Graff et al., 2003). Biotechnolo- gists often need to have both scientific and commercialization acumen; they work for and with multiple organizations and institutions. At the same time, while proximity to scientific and commercial knowledge led to the rise of concentrated geographic clusters for biotechnology innovations, the jobs created by the products of these innovations are far more dispersed. In each of the three areas of biotechnology, the value chain is highly fragmented and requires significant capital expenditures, meaning that an entrepreneurial innovator can rarely afford or find it worthwhile to commercialize an innova- tion independently all the way to market. As a result, the downstream users of biotechnology (e.g., physicians, farmers, or industrial managers) may have only limited if any interactions with the initial innovators or research teams. As a con- sequence, in each of the three segments of biotechnology, the location of innova- tion may be very different from the location of application and greatest use. This pattern is most apparent in red biotechnology (Figure 2). Close con- nections with university and public researchers, as well as more geographically dispersed relationships with those that commercialize innovation, have contrib- uted to a highly entrepreneurial structure in red biotechnology. This structure, combined with the presence of multiple revolutions in science and technology, has kept the industry in a state of “perpetual immaturity.” The continuous flow of scientific innovations and the fragmentation of the value chain encourage the bio- technology sector to create new companies continuously. Since its inception and looking across all three industry segments, the biotechnology sector had around 1,300 companies in the United States and around 5,000 worldwide (Burrill & Company, 2004). Although successful individual biotechnology companies in the health-oriented sector have grown from startups to large firms—Genentech and Amgen being the prime examples, each with a market cap in excess of $50 bil- lion—the sector as a whole is a study in dynamism, with new entrants appearing on the scene every year, attracting capital from both public and private sources. Once companies in the red biotechnology sector establish a proven commercial path, they often consolidate or partner with established companies for develop- ment and distribution. Consolidation, however, does not result in a gradual win- nowing of companies. This trend is offset by the continuous rate of company formation that keeps the sector fragmented, particularly in health-oriented appli- cations. The biotechnology supply chain is filled with specialized players. Firms often do not integrate vertically but instead continue to play within specific and limited stages of the value chain. Though not as extreme as red biotechnology, green and white biotech- nologies are also characterized by a reliance on the combination of university research, startup innovators, and established firms. For example, Monsanto, the leading agricultural biotechnology firm, initiated its efforts to diversify from its agrochemicals business through the establishment of research partnerships with leading universities such as Washington University in St. Louis (Culliton, 1990;

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2 BIOTECHNOLOGY Proof of Laboratory Real World Product Product Discovery Concept Scale-up Market Concept Validation Validation Designed Validated Preclinical Phase II/III Manufacturing / Basic Science Labs Phase I Regulatory Universities Innovation Large Corporations Start-ups FIGURE 2 Typical value chain for a biotechnology product. Commercialization takes biotech-2.eps many steps, and, while there is geographic confluence between universites and startups, the value chain is both complex and fragmented. Biotechnological product development in biotechnology is a long and fragmented process. For example, it is estimated that an agricultural biotechnology product might take 10 years to bring to the market and an investment of $50 million to $200 million (McElroy, 2004). Similarly, a drug might take about 12 years and around $800 million (DiMasi et al., 2003). Rarely the innovator has the resources to bring the product to the market and outlicense or sell their technology to a large pharmaceutical company, which can more feasibly undertake the most expensive development (i.e., approval) phases. The value chain is fragmented with smaller companies specializing at the innovation and discovery stages and larger companies specializing in the development and distribution stages. Nelkin et al., 1987). Since that time, Monsanto has developed significant in-house research and commercialization capabilities in agricultural biotechnology and relies on an extensive network of strategic partnerships and licensing relation- ships. In other words, although large established companies such as Monsanto and DuPont are ultimately responsible for the commercialization of agricultural biotechnology innovations, the origins of those innovations are divided among university research projects, startup innovators, and internal development (Pierre- Benoit, 1999). A similar pattern, but one that is less documented in the academic and business literature, is the case for industrial biotechnology, although there seems to be a smaller role for the university sector. For example, Hermans, Kul- vik, and Tahvanainen (2006) document the licensing and alliance relationships

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22 INNOVATION IN GLOBAL INDUSTRIES TABLE 4 Biotechnology Patenting from 2000 to 2003 by Country A. Genetic B. C. Sensors Engineering and Biochemical and D. E. Fermentation Engineering Analysis Pharmaceuticals Agriculture WPO/IB 7,979 213 139 6,488 1 USA 7,125 196 124 5,564 1,249 Canada 111 6 90 36 Mexico 4 3 2 Cuba 1 1 Argentina 5 Brazil 1 EPO 797 44 24 587 110 UK 653 21 16 520 93 Ireland 3 1 3 1 Germany 712 73 27 496 104 6 192 46 France 258 16 Netherlands 21 2 1 13 7 Belgium 4 3 1 Switzerland 10 7 Austria 17 3 1 14 4 Denmark 86 2 46 4 Sweden 44 2 46 4 Finland 19 1 9 5 Norway 10 5 Italy 31 4 28 7 Spain 21 19 5 Portugal 4 1 Greece 1 1 Hungary 4 3 1 Czech Republic 2 1 1 Slovakia 1 1 1 Poland 1 Serbia and Montenegro Republic of 1 Macedonia Russia 33 1 28 1 Turkey 1 Israel 51 2 2 39 9 Japan 1,655 103 55 1,110 236 Republic of Korea 67 2 1 52 10 China 465 2 1 416 37 Taiwan 1 1 India 6 4 4 Singapore 6 2 4 Malaysia Australia 146 8 2 111 42 New Zealand 23 14 South Africa 8 7 4 Total 12,138 479 245 9,250 2,010 SOURCE: Derwent Biotechnology Resource (2006).

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2 BIOTECHNOLOGY G. Fuels, M. Waste F. Food Mining L. Purification- Disposal and Food and Metal H. Other J. Cell K. Downstream and the Additives Recovery Chemicals Culture Biocatalysis Processing Environment 352 61 197 1,190 765 71 113 260 44 160 1,058 593 54 122 3 2 21 10 2 9 1 1 3 102 14 87 112 160 11 32 22 6 15 99 67 9 23 1 2 2 92 24 70 128 179 19 81 39 10 11 47 43 7 28 1 2 5 1 5 1 5 1 1 2 1 2 2 4 1 1 2 2 3 5 9 5 6 7 12 55 1 9 6 1 2 5 1 6 3 1 2 2 1 4 7 7 3 2 2 2 7 1 1 1 1 1 1 1 1 1 1 1 1 6 2 3 4 1 1 9 4 3 186 45 176 249 492 16 232 7 1 9 9 17 5 12 11 2 33 2 12 1 1 1 1 1 6 5 2 22 2 5 1 2 2 1 1 4 712 171 504 1,779 1,604 127 563

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2 INNOVATION IN GLOBAL INDUSTRIES counts presented earlier. Instead, Derwent Biotechnology Resources relies on an idiosyncratic algorithm for assigning patents (e.g., fractional patent shares) to dif- ferent countries, by the country of origin of the inventors (Derwent Biotechnol- ogy Resource, 2006). With that caveat, the results are intriguing, as they deepen the broad patterns observed in our earlier U.S.-EU-Japan comparisons. In particular, while we do not engage in a detailed application-specific examination of individual countries, there seem to be several distinct “tiers” of global activity within the biotechnology industry. First, there are several countries that exhibit a high level of overall activity, realized across several different ap- plication areas with a high number of patents in each area. These multifunctional biotechnology centers include the United States, Japan, Germany, the United Kingdom, and Australia. The presence of Australia in this category is signifi- cant; it has a strong history of basic research in the life sciences and has made significant investments in nurturing biotechnology companies and applications. Second, there is a grouping of countries that either have a broad base with only a few patents in each category (e.g., the Netherlands) or have intensive activity in a few categories (e.g., Israel). Finally, a large number of countries have only a small number of patents in biotechnology, often exhibiting only one or two patents in total. These include several European countries (e.g., Portugal, Greece), most of the Latin American and former Eastern European countries, and several of the less developed Asian economies (India, Malaysia, etc.). Overall, these country-specific patterns reinforce several of the themes al- ready mentioned. First, the United States exhibits persistent innovation leadership in biotechnology by a wide margin. Second, an increasing number of countries around the world seem to be displaying significant activity within biotechnology, and there is significant heterogeneity among countries in their biotechnology in- novation intensity. For example, although Belgium has an advanced economy, it is a clear laggard in biotechnology innovation. Finally, as the biotechnology industry begins to spread from its origins in the life sciences sector, it will be increasingly important to distinguish the geography of innovation by individual applications; while the United States exhibits leadership in life sciences and agri- culture, Denmark and Japan seem to have established leadership positions within industrial biotechnology applications. kEy FINDINGS AND POLICy CONCLUSIONS key Findings Overall our analysis suggests that both the biotechnology industry and bio- technology innovation in biotechnology remain clustered economic activities, with a strong reliance on and interaction with science-based university research. However, the number of active clusters in biotechnology is increasing over time, both in terms of the number of distinct locations in the United States that serve as

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2 BIOTECHNOLOGY the host for activity in the industry and in terms of a globalizing activity. While many countries around the world now host a biotechnology industry of varying importance, the activity within most countries seems to be highly localized. In other words, the data, though clearly inadequate to provide a complete pic- ture, suggest that the number of biotechnology clusters that achieved “minimum scale” has increased, which is reflected in an increased dispersion in terms of employment, measures of biotechnology entrepreneurship, and measures of the geographic origins of biotechnology innovation. This central insight—an increase in the number of regional innovation clus- ters, rather than a simple dispersion of biotechnology activity—holds several important implications for (1) evaluating the global biotechnology industry going forward and (2) developing effective policy to ensure continued U.S. leadership in this area. First, our analysis suggests that the impact of globalization on biotechnology innovation seems to be different than that of traditional manufacturing sectors, such as the automobile industry or the IT sector. Specifically, the globalization of other industries reflects the increasing availability of low-cost locations to conduct activities that previously had been done in the United States. In contrast, the globalization of biotechnology reflects a “catching up” process by a small number of regions around the world that seek to compete head-to-head with lead- ing regions in the United States. Second, it is important to account for the range of activities now included within the biotechnology industry, including diverse applications in the life sciences, agriculture, and industry. Although most discussion focuses on life sciences—which remains the largest single segment of biotechnology in terms of employment, enterprises, investment, and patenting—the globalization of biotechnology is occurring most rapidly in industrial applications. Moreover, although the United States continues its historical advantage in agricultural ap- plications, this may be due to political resistance in Europe and other regions rather than the presence of strong agglomeration economies within the United States. For example, the presence of extremely strong clusters with a high level of entrepreneurship that characterizes life sciences biotechnology seems to be a bit less salient for agricultural applications. The presence of multiple industrial segments—each of which is associated with distinct locational dynamics—raises the possibility that, even as individual clusters become more important within each application area, the total number of global clusters may increase with the range of applications. Third, at least in terms of the available data, the United States maintains a very strong, even dominant, position within biotechnology. While some concep- tual frameworks (e.g., the convergence effect) would suggest that early leadership by the United States would have been followed by a more even global distribution of biotechnology innovation, the “gap” between the United States and the rest of the world has remained relatively constant over the past decade or so. Indeed, it

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2 INNOVATION IN GLOBAL INDUSTRIES is likely that the United States has a historic opportunity to establish a long-term position as a global hub for biotechnology innovation, particularly in the life sci- ences and agricultural areas. In contrast to traditional debates about outsourcing, it is possible that increased global activity in biotechnology can complement rather than substitute for U.S. investment, employment, and innovation. Finally, our analysis highlights the small size (in terms of absolute levels of employment) of the biotechnology industry. While industries such as IT may plausibly be associated with a large impact on the total workforces of individual states and regions, total employment in biotechnology is very small, although associated with very high average wages. The simple fact is that, if the biotech- nology industry remains at roughly the same scale that it has achieved over the past decade or so, it is unlikely to be a major driver of employment patterns and overall job growth, either in the United States or abroad. Policy Conclusions The analysis holds a number of important policy implications. First, and perhaps most important, effective innovation policy concerning biotechnology must account for the broad differences between biotechnology and other sectors of the economy. The globalization of innovation in biotechnology is occurring in a much different way and for different reasons than the globalization of in- novative activity in other manufacturing sectors, such as automobiles or IT. Consequently, policies that may be beneficial for these more traditional sectors (e.g., domestic R&D tax credits) may have little impact in biotechnology, where the vast majority of firms do not report positive accounting profits subject to significant taxation. Second, there are policies that are likely to be particularly important in biotechnology, even though they may do little to stem the broader pattern of the globalization of innovation. Specifically, the biotechnology industry is extremely reliant on effective intellectual property institutions, most notably patents. U.S. leadership in biotechnology has benefited historically from a strong intellectual property environment, in many cases protecting innovations that received limited protection in other jurisdictions (e.g., transgenic mammals). Similarly, innova- tion in biotechnology benefits from the promotion of early-stage venture capital, including seed investments, and an effective system for technology transfer from university to industry (Mowery, 2004). While such considerations may be of modest importance for many of the sectors currently undergoing globalization, policies ensuring effective operation of the patent system, providing favorable treatment of early-stage venture capital investment, and enhancing the effec- tiveness of technology transfer are likely to enhance the strength of the U.S. biotechnology sector. Recent patent reform proposals illustrate the challenge of ensuring continued U.S. leadership in biotechnology in a changing policy environment. Spurred in

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2 BIOTECHNOLOGY part by key studies emphasizing significant inefficiencies in the patent system (Cohen and Merrill [2003]; Jaffe and Lerner [2004]), numerous patent reform proposals have been advanced in the last few years, including legislation and administrative reviews. While some of these proposals seek to limit the strength of patents in areas such as business methods, biotechnology will be impacted by these reforms. Continued dynamism in the U.S. biotechnology sector requires strong and enforceable intellectual property protection, and would benefit from significant improvements in the operation of the patent system, such as reduced administrative delay and a higher level of consistency in patent grant decisio mak- ing. The danger is that reforms targeting sectors very distant from biotechnology will undermine the ability for biotechnology innovators to effectively commer- cialize their discoveries. Third, the distinctive nature of biotechnology innovation suggests that the globalization of biotechnology innovation need not detract from U.S. strength in this area. Both the underlying science and the industry are still at a relatively early stage, and long-term American prosperity will benefit from establishing the United States as a global hub for biotechnology innovation. This can be ac- complished in several ways, most notably through investments in education and immigration policy. International leadership by American universities in the life sciences is a fundamental precondition for continued American leadership in biotechnology innovation. The biotechnology sector will benefit from policies that encourage the “best and brightest” on a global scale to study and potentially work in the United States. Significant restrictions on the ability of researchers liv- ing abroad to travel and collaborate with researchers in the United States in both public and private sectors or significant restrictions on the free flow of capital in- vestments undermines the likelihood of translating current U.S. cluster leadership into a position of durable centrality as a global biotechnology innovation hub. Finally, an increasing number of state policy initiatives are focused on biotechnology in terms of encouraging job creation and employment. While providing a favorable local environment for biotechnology innovation and en- trepreneurship is important, policy makers should be careful to avoid focusing too heavily on attracting external investments in biotechnology. As emphasized by Feldman and Francis (2004), effective local economic development in bio- technology focuses on encouraging entrepreneurship and an effective interface with preexisting scientific institutions, rather than focusing on attracting a single large company. While there are of course cases where the “match” between an individual company and region are particularly favorable, most qualitative and quantitative evidence about the growth of biotechnology clusters emphasizes the centrality of indigenous entrepreneurship and the key role played by local university research. In addition, local policy makers must avoid excessive opti- mism about the promise of biotechnology for short-term economic development. Relative to the size and scope of other industries undergoing globalization, the absolute size of the biotechnology industry is quite modest and is likely to have

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