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7 Biotechnology Raine Hermans Northwestern University and ETLA Research Institute of the Finnish Economy Alicia LÃ¶ffler 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 makersâin the United States and abroadâhave 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 programsâeven within regions that have little current activity in the industryâ 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- 231
232 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 âred,â âgreen,â and âwhiteâ 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 âredâ (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, âcluster-drivenâ 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 âhostâ a biotechnology industry of varying importance, the activity within most
BIOTECHNOLOGY 233 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 âcritical massâ is reflected in the increased dispersion of biotechnology employment, entrepreneurship, and measured innovations. This central insightâan increase in the number of regional clusters, rather than a simple dispersion of biotechnology activityâholds 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 âcatch- ing upâ process. A few regions around the world have established infrastructure and conditions to attempt to compete âhead-to-headâ 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
234 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 âdiamondâ 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 âhubâ 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). â There 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 definitionââthe 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 servicesââand 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.
BIOTECHNOLOGY 235 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 (âRed Biotechâ) 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-
236 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 (âGreen Biotechâ) The second major application segment in biotechnology is associated with the development and commercialization of âgreen,â 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 (âWhite Biotechâ) 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
BIOTECHNOLOGY 237 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. 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 âPasteurâs Quadrantâ: Louis Pasteurâs 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 âconsiderations of useâ or, separately, on a âquest for fundamental understanding.â Most biotechnology research takes place in Pasteurâs Quadrantâindividual discoveries both rely on and have influence on science and commercialization. The production of âdual-purposeâ knowledge, particularly in the disciplines â In the traditional âlinearâ 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).
238 INNOVATION IN GLOBAL INDUSTRIES Use-Inspired Pure Use-Inspired Applied Basic YES YES Research Research (Edison) (Pasteur) Consideration of Consideration of (Pasteur) Use? Use? Pure Basic NO NO Research (Bohr) NO YES Quest for Fundamental Quest for Fundamental understanding? understanding? FIGURE 1â Pasteurâs Quadrant. The traditional âlinearâ 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 the center of Pasteurâs Quadrant, dark blue boxes to white for legibility 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 âanticommons effect.â On the one hand, some argue that such expansions of IPRs (in the form of patents or copy- rights) âprivatizesâ 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 modestârela- tive to, say, employment or revenue in the automobile industryâthe potential
BIOTECHNOLOGY 239 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 worldâs population is not only growing, but is, in aggregate, growing older. 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 â 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 worldâs 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 nationâs 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).
240 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 âperpetual immaturity.â 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 firmsâGenentech and Amgen being the prime examples, each with a market cap in excess of $50 bil- lionâthe 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;
BIOTECHNOLOGY 241 Discovery Concept Proof of Laboratory Real World Product Product 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 2â 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
242 INNOVATION IN GLOBAL INDUSTRIES between startup innovators and more established users of industrial biotechnol- ogy products in the Finnish context. Overall, across the three distinct segments, the industry exhibits a highly dynamic structure. The dynamism of the biotechnology industry is based on its foundations in rapidly emerging scientific disciplines; its potential to address important social needs while creating significant commercial value in health, ag- riculture, and industry; and its orientation in terms of the commercial application of knowledge that is simultaneously of independent scientific interest. THE DRIVERS OF LOCATION AND CLUSTERING OF BIOTECHNOLOGY INNOVATION As mentioned earlier, the drivers of the geography of biotechnology industry and innovation are complex and changing over time. On the one hand, the geog- raphy of biotechnology reflects broad factors relating to the overall orientation of an economy to support innovative activity. The geography of innovation of the biotechnology industry is consistent with the role of location and institutions emphasized in the national innovation systems literature (Lundvall, 1992; Mow- ery and Nelson, 1999; Nelson, 1993). This national innovation systems literature focuses on the role that national policies and local institutions play in shaping the location and effectiveness of innovative productivity and emphasizes the important preconditions that must exist for innovative investment to be effective. Such policies and institutions include an effective intellectual property system, the availability of high-quality human resources and risk capital, and institutions (and public-private partnerships) that encourage investment and innovation in particular regions. While the aggregate national innovation system sets the basic conditions for innovation, the development and commercialization of new technologies take place, disproportionately, in clustersâgeographic concentrations of intercon- nected companies and institutions in a particular field. Over the past two decades, there has been an explosion of research concerning the structure and dynamics of industrial clusters and the role of location in industrial activity and innovation (see, among others, Breschi and Malerba, 2005; Krugman, 1991; Porter, 1990, 1998; Audretsch and Feldman, 1996; Saxenian, 1994). The biotechnology industry has been of particular interest to research on industrial clusters, for several reasons. First, within the United States, biotech- nology companies and investment are clustered in a small number of regions, such as San Diego, Boston, and San Francisco (see Figure 3). Moreover, the activities and investments by companies in biotechnology clusters are focused on â The case study and empirical literature on the regional clustering of innovation activities in bio- technology is quite large and cannot be adequately reviewed here. For a very useful recent review, see Cooke (2002).
BIOTECHNOLOGY 243 FIGURE 3â Biotech clusters in the United States. The colored states indicate where there are both large and specialized firms in two of the three biotechnology subsectors biotech-3.eps (pharmaceuticals, research and testing, and medical devices). SOURCES: The Brookings Institution; Cortright and Mayer (2002). bitmap image research and innovation (Audretsch and Stephan, 1996). Internationally oriented case studies have also documented that, within individual countries, biotechnol- ogy innovation tends to be regionally clustered in other countries (Cooke, 2002; Hermans and Tahvanainen, 2006; Swann et al., 1998). Regional clustering of innovation-oriented activity in biotechnology is particularly striking since compa- nies do not rely on hard-to-access natural resources, and the sciences underlying biotechnology are dispersed at universities and research institutions across the United States and abroad (Audretsch and Stephan, 1996; Feldman and Francis, 2003). A rich and nuanced literature has developed emphasizing some of the key patterns and dynamics associated with biotechnology clusters in the United States and abroad, with an emphasis on the importance of collaboration and networks among universities, startup innovators, and established firms (Koput et al., 1996; Powell et al., 2005), and the crucial role played by scientists who bridge the university-industry divide (Audretsch and Stephan, 1996; Zucker et al., 1998a,b). As well, there has been significant interest in the science policy community in the distribution of research in biotechnology, often focusing on clustering in specific locations around the world (Hoffman, 2008). To organize our discussion of the clustering of biotechnology activity and integrate the insights of these studies of clustering in biotechnology, we build on Porterâs seminal work on clusters (Porter, 1990, 1998). In Porterâs âdiamondâ framework (Figure 4), four attributes of the microeconomic and strategic envi-
244 INNOVATION IN GLOBAL INDUSTRIES Climate for Climate for Climate for Innovation- Innovation- Based Local Based Local Based Local Rivalry Rivalry Rivalry Factor Factor Factor (Input) Demand Demand Demand (Input) Conditions Conditions Conditions Conditions Conditions Clusters of Clusters of Clusters of Related and Related and Related and Supporting Supporting Supporting Industries Industries Industries FIGURE 4â The âdiamondâ framework adapted from Porter (1990). biotech-4.eps ronment surrounding a cluster support its overall competitiveness and innovative vitality: (1) the presence of high-quality and specialized inputs, (2) a local con- text that encourages innovative investment and intense rivalry, (3) pressure and insight emerging from sophisticated local demand, and (4) the local presence of high-quality related and supporting industries. The four elements of the diamond framework highlight the key resources and dynamics associated with the emer- gence and sustainability of leading clusters in all segments of the biotechnology industry. First, as mentioned earlier, the development of biotechnology innova- tion requires access to specialized inputs, including researchers, risk capital, biological materials, and even intellectual property. By and large, accessing these resources is most easily accomplished within a regional context, rather than across long distances or political boundaries. For example, the development of the agricultural biotechnology cluster surrounding St. Louis depended on the ability of companies such as Monsanto to draw upon and reinforce the significant expertise and research capabilities of Washington University in St. Louis. Second, a key driver of effective clustering in the biotechnology sector seems to be competition among locally based biotechnology companies. These compa- nies compete on the basis of attracting talent, publishing high-quality scientific research, and attracting investment and interest from venture capitalists and downstream commercial partners, many of whom are located outside the cluster. This is perhaps most apparent in some of the clusters associated with health-
BIOTECHNOLOGY 245 oriented biotechnology; for example, the Massachusetts biotechnology cluster includes more than 400 different firms, 235 of which are developing therapeutic drugs (Massachusetts Biotechnology Council, 2007). Third, most leading biotechnology clusters are located not only near sources of high-quality basic research but also around areas with significant capacity in clinical innovation. For example, the pressures on the Massachusetts biotech- nology cluster arise as much from the presence of demanding clinicians in the leading hospitals as from that of specialized genetics researchers. Similarly, the medical device cluster in Minneapolis is pushed by demanding consumers at the Mayo Clinic and related institutions, and industrial biotechnology innovation in Scandanavia depends in part on demanding customers in the chemical industry (Hermans et al., 2006). Finally, the biotechnology cluster depends on the presence of related and supporting industries, most notably an active venture capital industry to supply managerial expertise, risk capital, and relationship experience with downstream partners as well as key pieces of infrastructure (e.g., biological resource centers, specialized seed banks and agricultural research stations, specialized equipment and tools). Each of these factors encourages the investment of sunken assets and the development of specialized capabilities that reinforce the strength and ulti- mately the international competitiveness of that cluster environment. When these factors are present, geographic clustering promotes important externalities in innovation that are relevant to biotechnology. Thus, while loca- tion within a cluster enhances a firmâs ability to identify opportunities for inno- vation, it also promotes the firmâs flexibility and capacity to bring new ideas to market. Within a cluster, a company can more rapidly assemble the components, machinery, and services necessary for commercialization. Suppliers of essential inputs and âleadâ buyers become crucial partners in the innovation process, and the relationships necessary for effective and efficient innovation are more eas- ily forged among proximate firms. Reinforcing these advantages for innovation within clusters are competitive, peer, and customer pressures associated with the proximity of other, often directly competing, biotechnology firms. Clustering enables easy comparisons of performance. As would be expected, the innovation environment of a cluster is funda- mental to its competitiveness. For example, the biotechnology sector serving the needs of the Scandinavian pulp-and-paper cluster benefits from the advantages of pressures from demanding domestic consumers, intense rivalry among local competitors, and the presence of Swedish process-equipment manufacturers that are global leaders (e.g., Kamyr and Sunds, for the commercialization of innova- tive bleaching equipment). The Finnish pulp-and-paper industry utilizes specific biotechnological techniques in its production processes, which has also partially motivated industrial enzyme providers to construct production plants in Finland. As a consequence, enzyme applications form the largest sales within the small- and medium-sized biotechnology industry in Finland (Hermans et al., 2006).
246 INNOVATION IN GLOBAL INDUSTRIES Similar examples of cluster vitality in innovation may be observed in many fields, from pharmaceuticals in the United States to semiconductor manufacturing in Taiwan. Cluster vitality is derived from industries and resources as diverse as the fields they support. The pharmaceutical industry, of course, provides a strong source of support for biopharmaceutical innovative activity. In particular, though the natural resource requirements of the pharmaceutical industry are limited, the industry has been geographically concentrated in a small number of regional loca- tions, including New Jersey and Switzerland, partially as a result of competition for pharmaceutical demand. Porterâs cluster framework is useful for identifying some of the key drivers of international competitiveness for an innovation-oriented biotechnology cluster at a point in time. However, the durability of cluster-driven competitiveness depends on the dynamics and evolution in the scope of clusters over time. While there is less research that focuses specifically on biotechnology clusters in this regard, recent research on clusters and in economic geography emphasizes the key factors that shape Âthe persistence of location and the dynamics of the geography of inno- vation-oriented industries (e.g., Krugman, 1991; Krugman and Venables, 1995). The Convergence Effect Though leading clusters may stay at the forefront of innovation and activity for long periods of time, the advantages of cluster leadership are balanced against the possibility of relatively low-cost, high-growth entry by other regions (Barro and Sala-i-Martin, 1992; Dumais et al., 2002; Henderson et al., 1995). Although the effect of convergence declines as the emerging regions develop in terms of size and sophistication, the convergence effect is an important consideration when examining changing patterns of geographical investment, employment, and in- novation in the biotechnology industry. Maturity and the Dynamics of Geographic Dispersion As industries mature and products and processes are standardized and decom- posed, the benefit of localized innovation may be outweighed by cost advantages in lower-wage locations (Brezis and Krugman, 1997; Duranton and Puga, 2001). In other words, one of the key signs of industry maturity and commoditization is a significant increase in the geographic dispersion of industrial activity. For example, in recent years the diffusion of agricultural biotechnology products has had the consequence that the industrial activities of agricultural biotechnology are more geographically dispersed than the industry was at an earlier stage. While the development of new products continues to be centered in a small number of locations, investments in improvements in how to use the new seed traits and how to adapt farming practices to incorporate the new products are much more geographically dispersed.
BIOTECHNOLOGY 247 National Versus Regional Clusters For medium and large economies, the presence of a cluster will likely be most apparent at the subnational and even local levels (e.g., Martin and Rogers, 1995; Monfort and Nicolini, 2000). This is particularly true in the biotechnol- ogy industry, where total global employment is quite modest, and the industry is located in proximity to leading university research areas. While data limitations will often force us to examine dispersion at the national level, it is important to keep in mind that much of the clustering in the biotechnology industry takes place at the regional or even municipal level. The Emergence of International Hubs Finally, as mentioned earlier, the basic research upon which the biotech- nology industry is built is widely dispersed across thousands of universities on a global basis. As a result, one of the more subtle dynamics of clustersâhub- bingâmay be particularly important in this context. Specifically, it is possible that a location with a strong cluster environment will not only benefit from the dynamics arising from local relationships but will become a âmagnetâ for those who are located in less-favorable cluster environments (Krugman and Venables, 1995; Venables, 1996). For example, a researcher at Johns Hopkins University might maintain a relationship with a company in Boston or Silicon Valley to take advantage of the potential for commercialization in a strong cluster environment. Going forward, there will be tension between the continuing importance of forces that have given rise to agglomeration and clustering and the increasing salience of activities aimed at bridging across clusters and even across national boundaries. THE GEOGRAPHY OF THE BIOTECHNOLOGY INDUSTRY We build on these insights into the geography of the biotechnology indus- try by undertaking a short description of the global distribution of innovation- oriented activities within the biotechnology industry. As described earlier, the industry grew out of a series of fundamental scientific breakthroughs in the 1970s and was initially concentrated among a small number of entrepreneurial firms, mostly in the Bay Area in California and around Cambridge, Massachusetts. Despite interest in the future of biotechnology, relatively little attention has been paid to the current state of the biotechnology industry in terms of regional pat- terns of employment, investment, and firm creation. Employment In Table 1 and Figure 5, we describe the international distribution of em- ployment as of 2005. Drawn from Van Beuzekom and Arundel (2006), Figure 5 reports the total employment of individuals in private biotechnology firms (i.e.,
248 INNOVATION IN GLOBAL INDUSTRIES TABLE 1â Biotechnology R&D Employees by Country Biotechnology R&D Employees (Headcounts, 2003)a Total Per Firm United Statesb 73,520 33.5 United Kingdomb 9,644 Germany (2004) 8,024 13.2 Korea (2004) 6,554 10.2 Canadac 6,441 13.1 Denmarkd 4,781 17.9 Franceb 4,193 5.6 Switzerland (2004)b 4,143 26.4 Spain (2004) 2,884 10.4 Swedenb 2,359 10.9 Belgium 1,984 27.2 Israel (2002) 1,596 10.8 China (Shanghai)d 1,447 9.2 Finlandb 1,146 9.3 Irelandb 1,053 25.7 Iceland 458 19.9 Norwayb 283 8.8 Poland (2004) 109 8.4 aR&D employment: includes scientists and support staff such as technicians. bDatafrom Critical I Report to the UK DTI (2005), based on all R&D employees in core biotech- nology firms. cExcludes firms with less than five employees or less than PPP $80,000 in R&D. dFull-time equivalents (FTEs). SOURCE: OECD (2006). outside of universities and the public sector). While the definition of which firms are included in the âbiotechnologyâ industry varies across countries (e.g., the United Kingdom reports only companies from âcoreâ biotechnology firms, whereas Germany reports employment for any worker with biotech-related re- sponsibilities), the most striking fact about these statistics is the small absolute size of the biotechnology industry. Using statistics collected in 2006, the global biotechnology industry directly employs less than 500,000 workers in the private sector. While the industry may also support employment in related industries (e.g., pharmaceuticals, agriculture, or industrial engineering), there are no sys- tematic survey data about the global distribution of these employment spillovers, and so we restrict our attention to the biotechnology industry per se. To put these numbers in context, the global automobile industry employs more than 8.4 mil- lion workers (International Organization of Automobile Manufacturers, 2007). â The OECD statistics do not list aggregate employment from Japan, but, based on other (though not strictly comparable) figures, Japanese employment is likely less than that of the EU, which registered at 73,189 as of 2005.
BIOTECHNOLOGY 249 United States (1) 172,391 EU (4) 73,189 Germany (2,3) 24,131 United Kingdom (1) 22,405 Korea (2004) (3) 12,138 Canada (2,3) 11,863 France (1) 8,922 Switzerland (2004) (1) 8,819 Belgium (2,3) 4,261 Israel (2002) (3) 3,892 Sweden (1) 3,716 Ireland 2,940 Finland (1) 2,394 Austria (1) 1,789 Italy (1) 1,532 South Africa (2002) (2,3) 1,020 Norway (1) 970 Iceland (3) 969 Poland (2004) (2,3) 946 New Zealand (2005) (3) 918 Portugal (1) 153 100 1,000 10,000 100,000 1,000,000 Biotech Workforce FIGURE 5â International labor distributions: (1) Data from Critical I report to the UK DTI, 2005, based on total employment in core biotechnology firms. (2) Limited to employ- biotech-5.eps ees with biotech-related responsibilities. (3) Includes employment in both core and non- core firms active in biotechnology. (4) EU11 countries presented in this figure. SOURCE: OECD Biotechnology Statistics (Van Beuzekom and Arundel, 2006).
250 INNOVATION IN GLOBAL INDUSTRIES Figure 5 offers several striking patterns about the global distribution of biotechnology activity. First, the United States supports by far the single largest biotechnology industry. Even though the European Union (EU) has a larger total population than the United States, overall biotechnology employment is less than 50 percent that of the United States. Moreover, within the EU, the distribution of employment is highly uneven, with Germany and the United Kingdom ac- counting for two-thirds of total EU employment. Finally, it is useful to note that a number of small countries support significant biotechnology employment, with an employment intensity exceeding even that of the United States. For example, although Iceland has a population of only 300,000, the biotechnology industry accounts for nearly 1,000 jobs. Table 1 provides a complementary perspective and reports biotechnology research and development (R&D) employment by country (and the number of R&D employees per firm, which we return to later). Two points are of specific in- terest. First, the ratio of R&D employment to total employment is extremely high; for most countries, the ratio is approximately 0.3-0.5; in other words, more than one of out every three biotechnology employees is a biotechnology researcher. This contrasts with an overall R&D employment intensity of less than 3 percent across all industries in the United States (National Science Board, 2006). With that said, it is once again important to emphasize the small absolute size of the biotechnology research workforce. Excluding the United States, no country main- tains a biotechnology R&D workforce in excess of 10,000 researchers. In other words, while the absolute size of the biotechnology workforce is comparatively small, Table 1 and Figure 5 suggest that the international distribution of overall employment captures significant international differences in the distribution of labor-intensive innovation activities. Enterprises Figure 6 extends the analysis to the global distribution of companies. While the United States remains the largest single national home for biotechnology activity, it is useful to note that the EU actually accounts for a greater number of companies than the United States. Along with the earlier employment statistics, this suggests that individual EU biotechnology companies have fewer employees (on average) than their U.S. counterparts. Simply put, the scale of operations for a typical EU biotechnology firm is smaller than that of a biotechnology firm in the United States. This point is illustrated in the second column of Table 1, which records the number of R&D employees per firm by country. While the United States employs more than 33 scientists per firm on average, most EU countries employ from 5 to 15 researchers. The smaller scale of firms extends to countries in other parts of the world as well: Israel, South Korea, and China employ from 9 to 11 scientists per firm. While some of these differences arise from the fact that the United States
BIOTECHNOLOGY 251 European Union 3,154 United States 2,196 Japan (3,4) 804 France 755 Korea(2004) 640 Germany 607 Canada 490 United Kingdom 455 Australia 304 Spain (2004) 278 Denmark 267 Sweden 216 Italy (2004) 172 China 158 Switzerland 157 Israel (2002) 148 Finland (4) 123 Netherlands (5) 119 New Zealand 116 South Africa 106 Belgium (4) 73 Ireland (5) 41 Austria (5) 39 Norway (5) 32 Iceland 23 Portugal (5) 17 Poland (2004) 13 10 100 1,000 10,000 Biotech Workforce FIGURE 6â Number of biotechnology companies in distinct geographic areas (Van Beuzekom and Arundel, 2006; OECD Biotechnology Statistics). maintains a few very large biotechnology companies (e.g., Amgen, Genentech), these differences in average firm biotech-6.eps differences in the origin and size seem to reflect maturity of these companies. For example, according to Europeâs Biotechnol- ogy Industry Association, EuropaBio, Europe has a higher number of younger companies but fewer mature companies than the United States (Critical, 2006).
252 INNOVATION IN GLOBAL INDUSTRIES Furthermore, the European biotechnology companies seem to grow more slowly than their U.S. counterparts. By and large, young European firms are often overtaken by international competitors and even some of the oldest European biotechnology companies have been acquired by U.S. companies that have bet- ter access to financial and commercialization resources (Critical, 2006). As in the employment statistics, this concentration of small companies seems to reflect the international distribution of employment activities. Most companies report- ing that consider themselves to be part of the biotechnology industry focus on innovation-oriented activities, and Figure 6 highlights the role of entrepreneurial firms in this industry. R&D Expenditures Finally, we examine the global distribution of R&D expenditures in Figures 7 and 8. Perhaps even more so than with the employment and enterprise activ- ity statistics, these statistics are only partially informative data since they only measure biotechnology-related expenditures for a subset of firms that are focused in biotechnology (i.e., defined as a âcoreâ biotechnology firm for many of the countries), and the data seem to primarily cover firms specialized in health- oriented biotechnology. While these data are flawed and should not be taken to offer a precise measure of the level of expenditures, they are still useful for highlighting broad contrasts across different countries and regions. In particular, as with the employment statistics, investment expenditures are concentrated in the United States (see Figure 7); in 2003, the U.S. investment pace is an order of magnitude higher than for any other individual country. Interestingly, there are some important differences in the investment levels of countries, relative to their employment levels. For example, while France registers a much lower level of biotechnology employment than Germany, the level of investment expenditures is similar between the two countries; moreover, this reflects real differences in investments because both countries share a common currency. As well, mod- est but still significant employment statistics for several countries outside the United States and Europe are also reflected in R&D investment: New Zealand and Australia support a relatively high level of investment activity, as do Asian countries such as South Korea and China (although China obviously has a very small industry on a per capita basis). This skewed pattern of global biotechnology investment is reinforced in Figure 8, which reports the distribution within the OECD of venture capital investments. If anything, the investment bias toward the United States is even more apparent (venture capital investments are more than 12 times as large in the United States than in the second-largest target country, Germany). To the extent that venture capital funding also offers a particularly effective model for fund- ing innovation (Kortum and Lerner, 2001), this skewed distribution of financial
BIOTECHNOLOGY 253 United States 14,232 Germany (2004) 1,347 France 1,342 Canada 1,194 Denmark (1) 727 Korea (2004) 699 Switzerland (2004) 469 Israel (2002) 251 Italy (2004) 236 China (Shanghai) 205 Australia 201 Spain (2004) 199 New Zealand (2004) 95 Finland 88 South Africa (2002) 84 Iceland 67 Norway 29 Poland (2004) 5 1 10 100 1,000 10,000 100,000 $ Million PPP, 2003 FIGURE 7â Total expenditures for biotechnology R&D by biotechnology-active firms, biotech-7.eps OECD biotechnology statistics (Van Beuzekom and Arundel, 2006). investment suggests that the United States may be extending its historical domi- nance in the creation and evolution of biotechnology enterprises. Overall these empirics highlight three very important findings about the geographic distribution of innovative activity in the biotechnology industry. First, this is an industry of relatively modest size by any measure. The absolute level
254 INNOVATION IN GLOBAL INDUSTRIES USA 9,526 Germany (2004) 769 Canada 721 UK 502 Sweden 323 France 303 Denmark 159 Netherlands 127 Belgium 124 Switzerrland 98 Norway 74 Finland 29 Italy 23 Spain 14 Austria 6 Ireland 3 Venture Capital ($million) 2001-2003 Iceland 2 Portugal 1 1 10 100 1,000 10,000 Biotech Workforce FIGURE 8â Total venture capital investments in biotechnology, 2001 to 2003 combined, OECD biotechnology statistics (Van Beuzekom and Arundel, 2006). biotech-8.eps of employment is relatively low, and the total expenditures (and even the number of entrepreneurial firms) are relatively low in terms of absolute value. Second, relative to other industries, measures of employment and entrepreneurship activ- ity are closely linked to innovative activity. More than one-third of all employees in the global industry are considered R&D employees (much higher than in most other industries) and most companies are focused on innovation-oriented strate- gies and investments. Finally, although there is an increasingly dispersed global set of locations for biotechnology (e.g., United Kingdom and Germany, South Korea, Australia), the overall level of the United States in terms of total activity is much higher. THE GEOGRAPHIC DISTRIBUTION OF INNOVATIVE OUTPUT IN BIOTECHNOLOGY In this section, we move beyond the general patterns of the geography of biotechnology to examine global patterns of innovative performance. Attempts to measure and benchmark innovative outputs have become common across advanced economies. One approach to this activity (Furman et al., 2002; Porter and Stern, 1999) is based on a clear distinction between measures of the outputs â A review of this process is beyond this chapterâs scope. However, a good starting point is the benchmarking programs of the EU (http://trendchart.cordis.lu/).
BIOTECHNOLOGY 255 of technological innovation (for example, international patenting) and its driv- ers: infrastructure, clusters, and linkages. While one must be very careful in interpreting patterns based on patent data, patenting trends across countries and over time are highly likely to reflect actual changes in innovative outputs rather than spurious influences, especially in measuring innovation at the global level. Also, international patenting captures the degree to which a national economy develops and commercializes internationally important new technologiesâa pre- requisite for building international competitiveness on a platform of quality and innovation. In short, international patenting is âthe only observable manifestation of inventive activity with a well-grounded claim for universalityâ (Trajtenberg, 1990). With that said, our analysis of international patenting in biotechnology comes with several important caveats. In particular, the standard for patentability for many biotechnology-related innovations differs across countries (and across time within countries). To cite one example, as of 2006, the United States had- granted more than 40 human embryonic stem cell patents, whereas the European Patent Office (EPO) had granted none due to an EU directive to reject human embryonic stem cells patents on âmoralâ grounds (Porter et al., 2006). While U.S. patent office practice has tended to allow patents that are relatively close to the arena of pure scientific âdiscoveries,â EPO practice has tended to only allow patents when a specific industrial application has been identified. More gener- ally, the use of patent data to identify the geography of innovation is of course limited by the fact that many innovations (even important innovations) are not patented or patentable; although this critique is particularly important in the context of a broad cross-industry study, biotechnology is an arena with a close connection between innovation and patenting (Cohen et al., 2000). With these caveats in mind, we now turn to a detailed discussion of international patterns of biotechnology patenting. Global Biotechnology Patenting We use several different measures reflecting the number of international biotechnology patents. In particular, we focus on the number of patents granted â In addition to patent counts, there are some alternative measures to illustrate the distribution of biotechnology innovations. For instance, other forms of intellectual capital could also be useful to measure. On the one hand, some forms of human capital are often held as critical success factors in the science-driven business, such as outcomes of scientific research and a level of education and busi- ness experience of employees. On the other hand, the measures related to relational capital, such as collaboration networks, would be useful in assessing the significance of location of the biotechnology industry (Edvinsson and Malone, 1997). â Trajtenberg (1990) provides a thorough discussion of the role of patents in understanding innova- tive activity, referring to their early use by Schmookler (1966) and noting their increasing use by scholars (e.g., Griliches, 1984, 1990, 1994). Our use of international patents also has often been used as a precedent in prior work comparing inventive activity across countries (see Dosi et al., 1990; Eaton and Kortum, 1996).
256 INNOVATION IN GLOBAL INDUSTRIES to inventors from a given country by the U.S. Patent and Trademark Office (USPTO), the EPO, and the Japanese Patent Office (JPO). We then combine these measures in our analysis by examining the number of triadic patent families (i.e., patents granted in each of the three major patent jurisdictions). Figure 9 graphs the number of biotechnology patents issued by the USPTO and EPO, by the region of origin of the inventor. Several striking patterns stand out. First, the United States is the dominant country of origin for biotechnology innovations, even those that are patented in Europe (i.e., where the âhome biasâ would favor the European inventors). Second, there was a sharp increase in U.S. biotechnology patenting by U.S. inventors during the late 1990s, a trend that is partially reflected in the EPO data and partially ameliorates from 2000 onward. USPTO patents with European inventors are associated with a much more gradual rise and achieved a 20 percent share of USPTO biotechnology patents by 2003. Clearly, the regional patenting patterns reflected in the USPTO and EPO figures reflect a âhome biasâ; inventors tend to prefer domestic patent offices to foreign ones (as documented and discussed in detail by Criscuolo ). This suggests at least in part that domestic biotechnology companies tend to apply for patents first in their domestic patent office and only seek foreign patents for their most significant and valuable products and processes. We attempt to address the home-bias problem by moving toward triadic patent family counts to perform more strict comparisons among biotechnology patents filed in the USPTO, the EPO, and the JPO.10 Triadic patent families provide a more valid proxy for the economic value of patents. Patent application processes differ by country; most companies or individuals will undertake the costly process of fil- ing a patent abroad only if the invention or process in question has significant earnings prospects. When we turn to triadic patent families in Figure 10, a similar set of pat- terns emerges. The United States continues to have a dominant share, on both an absolute and a per capita basis. Furthermore, when we calculate patent per capita estimates, Japanâs innovative productivity appears to be at the same level or higher than that of the EU. It is useful to note that, on a per capita basis, the â Unfortunately, we are unable to obtain disaggregated data on assignee location using the Derwent database. The location of the inventors is often distinct from the location of the assignee of the pat- ent. This distinction may confound an analysis of global sourcing of R&D activity. The decrease in the share of U.S. inventors described earlier does not necessarily imply a decrease in U.S. patent ownership. Therefore, we cannot rule out a geographical shift in R&D activity by U.S.-based firms. However, given the strong entrepreneurial element of the biotech industry and the findings of the OECD 2007 Compendium of Patent Statistics, biotechnology R&D work does not seem to be heavily outsourced from the United States at this point. However, constructing a database of triadic biotech- nology patents by assignee country is a strong priority for future research in this area. 10âEurostat defines triadic patent families as follows: âA patent family is a set of patents taken in various countries for protecting a single invention. . . . Patent is a member of a triadic patent family if and only if it is filed at the European Patent Office (EPO), the Japanese Patent Office (JPO) and is granted by the US Patent & Trademark Office (USPTO).â
BIOTECHNOLOGY 257 USPTO Biotechnology Patents 7 000 USA 6 000 EU Number of Patents 5 000 Japan 4 000 3 000 2 000 1 000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year EPO Biotechnology Patents 3 500 USA 3 000 EU-25 Number of Patents 2 500 Japan 2 000 1 500 1 000 500 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year FIGURE 9â Biotechnology patent counts in USPTO and EPO by inventorâs country of origin. SOURCE: OECD. biotech-9.eps United States has only about two times the innovative capacity of Japan and the EU. Perhaps more important, these patterns provide some interesting insights into the evolution of the global biotechnology industry over the past decade or so. In particular, despite the fact that countries outside the United States started from a very low level of activity (and may benefit from the âconvergence effectâ), the gap between the United States and the rest of the world has persisted. While there has been a very slight convergence in the last years of our data (i.e., applications from 2000 onward), these broad patterns are consistent with the hypothesis that regional agglomeration remains an important driver of the geography of the bio- technology industry. There are several potential explanations for this continued persistence. First,
258 INNOVATION IN GLOBAL INDUSTRIES Triadic biotechnology patent families (est.) 1800 1600 USA 1400 EU-25 Number of Patents 1200 Japan 1000 800 600 400 200 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Triadic biotechnology patent families per capita (est.) Number of Patents per 1 mill Inhabitants 7.00 USA 6.00 Japan 5.00 EU-25 4.00 3.00 2.00 1.00 0.00 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year FIGURE 10â Triadic biotechnology patent counts and per capita measures by inventorâs country of origin. SOURCE: OECD and authorsâ calculations. biotech-10.eps and perhaps most important, the extremely rapid advances in the scientific and technological frontier in biotechnology likely reinforce the strengths of preex- isting clusters, such as San Diego and Massachusetts. In contrast to environ- ments where a single âmacro innovationâ diffuses first locally and then globally (resulting in convergence in incremental innovation over time), biotechnology innovation remains âperpetually immature.â Second, the scale of private and public research funding in the United States continues to be very large rela- tive to any other individual country or region. The National Institutes of Health has experienced rapid increases in its funding, and this seems to have been a
BIOTECHNOLOGY 259 complement, rather than a substitute, for venture capital and private investment. Finally, even though there are an increasing number of biotechnology innova- tion clusters around the world that are operating at least at âminimum scale,â the United States has benefited from an environment that by and large encourages the commercialization of new biotechnology products. This is perhaps most ap- parent in the agricultural sector, where the strength of clusters is probably less salient than in health-oriented biotechnology, but resistance to development and commercialization efforts in Europe have allowed the United States to establish and maintain a dominant position.11 Together, while future U.S. leadership will depend on the continued vitality of cluster environment, these patterns suggest that the United States has by and large provided a favorable environment for biotechnology innovation. Global Biotechnology Patenting by Application Segments We now provide a more detailed analysis of innovative output as measured by patent counts based on inventor location, which are divided into 12 patent subcategories by the same regions considered earlier. Our analysis utilizes Der- went biotechnology abstracts, the most widely utilized classification system for biotechnology patent analyses (DalpÃ©, 2003). Table 2 presents biotechnology patent counts and regional shares from 2000 to 2003. Note that we are no longer looking only at patent triads. While the overall results reflect our more aggregate findings (i.e., the United States as a dominant player), Table 2 also reveals some striking differences across industrial applications. U.S. leadership in biotechnology is centered on the patent classes most closely related to red biotechnology. More than 75 percent of all U.S. patents are in the categories genetic engineering and fermentation, pharma- ceuticals, and cell culture. While these classes are also active in the portfolio of the EU and Japan, an important share of patenting activity by the EU and Japan is in classes associated with green and white biotechnology. These patterns of comparative advantage can be seen most clearly when we calculate the share of patenting recorded by each region within each industrial application. We define comparative advantage as those patent classes with a higher share of domestic patenting than the countryâs share of the total number of biotechnology patents. 12 For example, the United States has a comparative advantage (as indicated by the boldface entries) in the classes for which it holds over 55.4 percent of all 11â This pattern may be reversed in the case of stem cells, where restrictions on U.S. federal funding of early-stage embryonic stem cell research have spurred numerous international initiatives to attract key scientists and create a favorable cluster environment for stem cell commercialization efforts. Pij P 12â The formal condition for flagging a quotient is > i , where P is the number of patents, i Pj Ptotal denotes the country, j indicates the application area, and total stands for the entire number of biotech- nology patents within the period 2000-2003 in Derwent Biotechnology Resource.
260 INNOVATION IN GLOBAL INDUSTRIES TABLE 2â Patent Counts and Share of Patents in Biotechnology Patent Classes, 2000-2003 Code Patent Class U.S. EU15 JP Total A Genetic engineering and fermentation 7,125 2,671 1,655 12,138 58.7% 22.0% 13.6% B Engineering, biochemical engineering 196 166 103 479 40.9% 34.7% 21.5% C Sensors and analysis 124 77 55 245 50.6% 31.4% 22.4% D Pharmaceuticals 5,564 1,978 1,110 9,250 60.2% 21.4% 12.0% 60.2% E Agriculture 1,249 391 236 2,010 62.1% 19.5% 11.7% F Food and food additives 260 286 186 712 12.1% 7.6% 9.0% G Fuels, mining, and metal recovery 44 66 45 171 25.7% 38.6% 26.3% H Other chemicals ââ 160 204 176 504 31.7% 40.5% 34.9% J Cell culture â 1,058 423 249 1,779 59.5% 23.8% 14.0% K Biocatalysis âââ 593 ââ 548 ââ 492 â 1,604 37.0% 34.2% 30.7% L Purification, downstream processing âââ 54 âââ 52 âââ 16 âââ 127 42.5% 40.9% 12.6% M Waste disposal and the environment ââ 122 ââ 185 ââ 232 âââ 563 21.7% 32.9% 41.2% Total 16,375 6,815 4,433 29,582 granted patents. Consider, then, the areas of relative strength for the EU, such as fuels, mining, and metal recovery; other chemicals; purification, downstream processing; and waste disposal and the environment. These patterns seem to reflect historical strength by the EU in the chemical industry and related indus- trial applications of biotechnology. Similarly, the relative strength of Japanese inventors is apparent in areas such as waste disposal and the environment and other chemicals. Indeed, it is useful to note that the EU and Japan both register a higher number of patents on an absolute basis in several application categories: fuels, mining, and metal recovery; other chemicals; and waste disposal and the environment. Finally, while the bulk of U.S. patents are in classes related to red biotechnology, the United States also exhibits advantage on a relative basis in green biotechnology (the agriculture sector), reflecting in part the leading global position of Monsanto and DuPont in this application segment. Overall, these patenting patterns suggest that U.S. leadership in biotechnology is by no means monolithic. While the United States does tend to have a dominant position in red and green biotechnology, the EU and Japan exhibit innovation leadership in areas
BIOTECHNOLOGY 261 TABLE 3â From R&D Activity to Patenting and Sales of the Biotechnology Industry R&D Per Capita Index Patents Per Capita Index Sales Per Capita Index USA 1.00 1.00 1.00 EU 0.37 0.41 0.28 Japan n/a 0.46 0.45 SOURCE: OECD biotechnology patents and authorsâ calculations (OECD, 2006, authorâs calculations). related to white biotechnology. This is consistent with qualitative assessments that specific areas of biotechnology tend to be organized around clusters, with a small number of global innovation hubs. From Innovation Activity to Sales Of course, our analysis so far provides a limited perspective on the intensity of biotechnology activity across different regions: while evaluations of R&D employment and investment capture the intensity of R&D inputs, and patenting provides an imperfect measure of early-stage research outcomes, the impact of biotechnology ultimately depends on the ability to commercialize new technolo- gies in the marketplace. As such, Table 3 provides a brief examination of the relative intensity of in- puts and outputs of the biotechnology industry. Biotechnology R&D expenditure, patent counts, and sales are divided by the total population within each distinctive geographic area to calculate per capita measures for each category, which are then indexed to the U.S. level (U.S. = 1.0). Both R&D investment and patenting in the EU are approximately 40 percent of the U.S. level on a per capita basis, yet sales per capita are nearly one-third lower, at 28 percent of the U.S. level. As mentioned earlier, this may reflect the earlier stage of development of many Eu- ropean biotechnology firms or the fact that European firms are more specialized in areas such as industrial applications, which may be associated with a lower level of sales for a given level of innovative investment (and patenting output). In contrast, although Japan is also concentrated in white biotechnology, Japanese companies exhibit a slightly higher level of patent per capita than Europe (0.46) and a much higher level of sales per capita (0.45). Country-Specific Innovation Performance Finally, Table 4 presents the distribution of biotechnology patent counts across a range of countries from 2000 to 2003, divided by individual application areas. These data are not strictly comparable to the official OECD triadic patent
262 INNOVATION IN GLOBAL INDUSTRIES TABLE 4â 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 France 258 16 6 192 46 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 Serbia and 1 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).
BIOTECHNOLOGY 263 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
264 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 âtiersâ 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
BIOTECHNOLOGY 265 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 âminimum scaleâ 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 insightâan increase in the number of regional innovation clus- ters, rather than a simple dispersion of biotechnology activityâholds 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 âcatching upâ 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 sciencesâwhich remains the largest single segment of biotechnology in terms of employment, enterprises, investment, and patentingâthe 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 segmentsâeach of which is associated with distinct locational dynamicsâraises 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 âgapâ between the United States and the rest of the world has remained relatively constant over the past decade or so. Indeed, it
266 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
BIOTECHNOLOGY 267 part by key studies emphasizing significant inefficiencies in the patent system (Cohen and Merrill ; Jaffe and Lerner ), 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 âbest and brightestâ 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 âmatchâ 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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