Vertical and Horizontal Coordination in the Agro

Journal of Agricultural and Applied Economics, 29, l(July 1997):129–1390 1997 Southern Agricultural Economics Association

Vertical and Horizontal Coordination inthe Agro-biotechnology Industry:Evidence and Implications

Nicholas Kalaitzandonakes and Bruce Bjornson

ABSTRACT

Agro-biotechnology is evolving from a pre-commerical phase dominated by basic researchscience to a commercial phase oriented around marketing products. In pursuing innovationrents in the commercial phase, firms are reorienting their strategies around complementarymarketing and distribution assets. This is impacting vertical and horizontal industry struc-ture. Conversely, industry structure is also impacting firm strategies. Horizontal alliancesand consolidation continue from the pre-commercial phase into the commercial phase,while vertical coordination and integration strategies are accelerating rapidly. Interplaybetween firm strategy and industry structure is too complex for firms to anticipate earlyin the pre-commercial phase for long-term strategy formulation.

Key Words: acquisitions, agricultural biotechnology, firm strategy, industry consolidation,

Since

industry structure, mergers.

the development of gene transfer andcell fusion techniques in the mid- 1970s, agro-biotechnology has promised fundamentalchange in food production, processing, anddistribution systems (Molnar and Kinnucan;Organization of Economic Cooperation andDevelopment). Agro-biotechnologies withcommercial potential range from transgenicplants, animals, and fish with improved pro-duction and quality characteristics to enhancedsystems for pest control, animal health care,and waste management (Office of TechnologyAssessment). Admittedly, the rate of productintroduction has been slower than originallythought possible. Agro-biotechnology hasbeen gradually approaching the marketplace inrecent years, however. Although attention hasconcentrated on a few products, such as Bo-

The authors are associate professor and assistant pro-fessor, respectively,in the Department of AgriculturalEconomics, University of Missouri.

vine Somatotropin, the FlavrSavr@’ tomato,Roundup Ready@ soybeans, and Bacillus thu-ringiensis (Bt)-corn and -cotton, over 50 com-mercial agro-biotechnology products are cur-rently in the market and twice as many areexpected to enter the market within the nexttwo to three years.

Much has been written about the potentialreception of agro-biotechnology by farmersand consumers (Lesser, Magrath, and Kalter,Lacy, Busch, and Lacy; Zepeda) and its po-tential impacts on farm structure (Kaiser andTauer; Lemieux and Wohlgenant; Marion andWills). Other favorite topics of social scientistshave involved intellectual property rights(Acharya), food safety (Doyle and Marth; Jus-kevich and Guyer), regulation (Larson andKnudson), and ethics (Thompson). Yet, littleattention has been directed toward the dynam-ics of innovation, firm strategy, and industrystructure. Indeed, agro-biotechnological inno-

130 Journal of Agricultural and Applied Economics, July 1997

vation, by and large, has been treated exoge-nously and its relationship with the structureof agricultural industries has been almostoverlooked. While studies by Just and Hueth,and Goldburg et al. are exceptions, their hy-potheses remained untested.

This omission has parallels in the generalinnovation literature. As Cohen and Levinpointed out, “Theorists and empiricists alikehave devoted too little attention to the dynam-ics of innovation and market structure, theSchumpeterian process of creative destruc-tion” (p. 1098). Yet, important contributionsexist, allowing significant understanding of thedynamics of innovation and industry structure.

Responding to developments in agro-bio-technology, several agricultural and food in-dustries have shown a marked change in theirstructure. Firm incentives and strategies haveinteracted with the nature of the technology todrive firm mergers, acquisitions, strategic al-liances, and joint ventures. Such actions, inturn, may have affected the rate and directionof agro-biotechnology innovation. This paperis devoted to the relationship of agro-industrialstructures and biotechnological innovation andits important implications for both competitivefirm strategy and policy analysis.

Technological Discontinuities and FirmStrategies

Abernathy and Utterback described the basiccharacteristics of innovation cycles which areinitiated through technological discontinuitiesor new technological paradigms. A new tech-nology paradigm is defined as a set of newmodels for solving selected technologicalproblems using specific principles from natu-ral sciences and material technologies (Dosi).During the first stage of the innovation cycle,firms engage in product innovation bringingforward new technical know-how and productconcepts. Over time, specific new productconcepts become the standard through broadmarket acceptance. Then product innovationsubsides in favor of process innovation whichattempts to improve on production and distri-bution processes (Abernathy and Utterback;Utterback).

Given that agro-biotechnology is still at itsearly developmental stages, our interest con-centrates on the dynamics of product innova-tion. We propose that for technological inno-vations that involve long gestation periods ofresearch and development (R&D) before mar-ketable products are developed, Abernathyand Utterback’s product innovation stage beseparated into two sequential phases: (a) a pre-commercial technology development phase,and (b) a commercial phase. The pre-com-mercial phase involves basic and applied re-search which may or may not have a directcommercial target. The commercial phase rep-resents applications of science and technologyto product development with commercial tar-gets. As explained later, the significance ofthis distinction is that firms face different ex-ternal conditions and incentives with resultantstrategy effects.

Firm Strategies in the Pre-Commercial

Phase

Following a technological discontinuity, tech-nological barriers to entry are lowered andnewcomers gain easier entry into affected in-dustries. They bring forward new scientificand product concepts and aspire to capturerents from their innovation, often by integrat-ing forward. Established firms may also joinin and participate in the innovation process.Incumbent firms choose from a variety oftechnology development strategies. They maydevelop technological know-how through in-house R&D. They may develop new technol-ogy jointly with other firms through researchcontracts, strategic alliances, and joint ven-tures where they can leverage their technolog-ical, financial, and market assets. They mayacquire technology through mergers and ac-quisitions, through licensing of intellectualproperty, or through supply agreements (Pi-sano 1991). Finally, they may adopt a wait-and-see (imitation) strategy which seeks totime entry into the innovation race after dom-inant product concepts have become discern-ible and market risks reduced (Bozeman andLink). Minority investments in new entrantsmay be used to monitor new technological de-

Kalaitzandonakes and Bjornson: Coordination in the Agro-biotechnology Industry 131

velopments and provide a platform for sharinginnovation rents captured by newcomers (Pi-sano 1988).

In general, collaborative R&D plays an im-portant role in many high technology indus-tries (Mowery 1983, 1988). In the presence ofcomplex and fast changing science, firms findit increasingly difficult to internalize all R&Dnecessary to take new technical know-how allthe way to the market. Here, collaborativeR&D becomes important. Widening geograph-ic and organizational diversity of new sourcesof technology provide further incentives(Mowery 1988).

Firm Strategies in the Commercial Phase

As the science base begins to stabilize andcommercialization opportunities become in-creasingly apparent, product formulation,scale-up, and other forms of product devel-opment innovation intensify. Complementaryassets (e.g., manufacturing capability, scale-upexperience, marketing, and distribution net-works) become increasingly important. New-comers and incumbents alike decide theircommercialization strategies based on the ap-propriability of innovation rents and their ac-cess to complementary assets (Teece 1987).

A firm’s ability to appropriate the profitsfrom its innovation is decided principally bytwo factors. The first is the degree of inno-vation tacitness and the resultant ease of imi-tation (Teece 1987). A variety of determinantsmay contribute to the tacit nature of technicalknow-how. Accumulated knowledge and man-agement experience in research, regulatorycompliance, scaling up, partnership formation,procurement, and production are significant toperformance. These are difficult to imitate anddifficult to learn. If the technology is not tacitand can be easily codified and copied, imita-tors could appropriate a significant share of theprofits from innovation.

The second appropriability factor is thestrength of intellectual property rights avail-able to the technology (Teece 1987). Firms usea variety of intellectual property rights, in-cluding patents and trade secrets, to protecttheir technology from imitators. Intellectual

property rights that are not strongly defensiblelead to weak appropriability.

If innovations are strongly appropriable,and if the complementary assets required forcommercialization are not specialized, then theinnovator ordinarily can contract or makeopen-market transactions for these assets’ ser-vices while capturing its innovation rents. Ifinnovation is only weakly appropriable and ifthe complementary assets are specialized to anarrow range of potential uses, however, thenthe owners of complementary assets may cap-ture a large portion of the innovation rents. Inthis case, innovators must contract or vertical-ly integrate to gain control of such assets orlose innovation rents to an outside supplier.There are numerous market procurement andcoordinating strategies between these two ex-tremes which may conform to varying degreesof innovation appropriability and control ofcomplementary assets.

Pre-commercial and commercial phasestrategies require coordination. Firm strategiesduring the pre-commercial phase collectivelydefine the appropriability of technological in-novation and condition strategic choices in thecommercialization phase. For example, re-search contracts and collaborative R&D mayfacilitate entry of new competitors and expe-dite the diffusion of know-how. This dimin-ishes the tacitness and, hence, appropriabilityof the new technology. Similarly, in researchagreements with downstream firms, it mayseem inconsequential during the pre-commer-cial phase that they own complementary as-sets. But later in the commercial phase this canhave fundamental impacts on the innovators’ability to profit. This endogenous appropria-bility contrasts with Abernathy and Utterback’sas well as Teece’s framework of exogenousappropriability determined by institutional ar-rangements and technological parameters.

Firm Strategy Within a TransactionCosts and Evolutionary Framework

Given a variety of possible configurations inthe ownership of technical know-how andcomplementary market assets, what are the ba-sic principles guiding the firm strategy deci-


sions in both the pre-commercial and com-mercial phases of the product innovationcycle? In other words, how do firms choosetheir organizational boundaries from a rangeof options between a fully vertically integratedfirm with exclusive internal R&D to a conceptfirm where all R&D, production, and distri-bution services are procured through contractsand markets ?

If markets were efficient in pricing inno-vation and transacting was costless, special-ized R&D firms could emerge to sell know-how and R&D services to downstream firms(Stigler). In the case of real markets, however,intellectual property rights enjoy limited pro-tection, technology transfer costs can be high,specialized assets can be held up by opportu-nistic contractors, and licensing and interme-diate technology markets tend to have limitedimportance for capturing innovation rents(Joly and deLooze; Teece 1981, 1987; VonHippel).

Transaction cost theory and evolutionaryeconomics provide guidance for the choice offirm innovation strategies (Pisano 1991).Transaction cost theory suggests that, assum-ing constant production costs, firms draw theirboundaries so that they minimize the transac-tion costs of governing economic activity(Williamson). Two broad categories of trans-action costs exist: (a) coordination costs fortransferring information and coordinatingcomplex activities across firm boundaries, and(b) motivation costs arising from information-al asymmetries between transacting parties orfrom imperfect commitment to a bindingagreement (Milgrom and Roberts). Imperfectcommitment and informational asymmetrieslead to incomplete contracts and invite post-contractual opportunistic behavior. This raisesthe cost of monitoring and enforcing theagreement.

Coordination costs increase with the com-plexity and tacitness of the technical infor-mation exchanged. Transfer of scientificallycomplex and not easily codified technicalknow-how between firms typically incurs highcoordination costs. Higher coordination costsdiscourage outsourcing and make firms morelikely to internalize R&D activities.

Motivation costs increase with the specific-ity of the required investment. Thus, contract-ing for the service of specialized assets createsmotivation problems. As the specificity in-creases, contracting efficiency decreases be-cause asset specificity transforms the marketinto an ex post bilateral trading relation that isexposed to opportunistic behavior. The irre-versible investment in specialized assets cre-ates quasi-rents for the owner that can be op-portunistically extracted by the other party.Asset specificity would not pose problems ifcomprehensive contracting were feasible,since this would anticipate all contingencies.However, bounded rationality precludes this(Klein, Crawford, and Alchian). R&D con-tractual agreements are inherently vague sincetechnical outcomes and intellectual propertyrights are difficult to predict and specify exante. When motivation costs are high, firmsare more likely to internalize R&D.

While transaction cost theory provides in-sights on a firm’s motivation to develop newtechnical know-how internally or through ex-ternal procurement, evolutionary theory fo-cuses on a firm’s ability to develop suchknow-how (internally or externally) underconditions of rapid change. Evolutional y the-ory stresses the limits of a firm to change,adapt, and learn in the short run as it is con-strained by its own ability to absorb newknowledge and skills (Nelson and Winter),Existing routines that coordinate internal firmactivities as well as the specific skill set andcapabilities of the firm may define the likeli-hood of a firm’s survival under a new (emerg-ing) technological paradigm.

Transaction cost and evolutionary viewsare complementary. Applied to product inno-vation strategies, evolutionary theory suggeststhat only part of the menu of all possible pre-commercial and commercial strategies is infact available to firms. Given the firms’ sep-arate histories, organizational routines, skills,and capabilities, different subsets of thesestrategies are effectively available to them.Firms then choose specific strategies from arelevant sub-menu of strategic options thatminimize production, coordination, and moti-vation costs. For R&D that does not require

Kdaitzandonakes and Bjomson: Coordination in the Agro-biotechnology Zndustry 133

specialized investments and for which expect-ed technical outcomes and intellectual prop-erty rights can be delineated ex ante, down-stream firms will more likely opt foroutsourcing R&D with research specialists, es-pecially when they lack in-house expertise. Ifsuch procurements are foreign to the firm’sculture and organizational routines, then itmay choose to internalize R&D even with alack of expertise and the implied higher costs.Similarly, firms with organizational routinesgeared toward outsourcing and licensing oftechnical know-how may opt for collaborativeR&D even when technological outcomes areuncertain, intellectual property rights arevague, or exposure to hold-ups is apparent.

Based on the development in the two pre-vious sections, we now specify the firm’sproduct innovation decision process. We pro-pose that during the pre-commercial phase,firms maximize technological outcomes andthe degree of appropriability from a givenstream of R&D investments, restricted to asubset of options defined by their organiza-tional routines. During the commercial phase,firms maximize intertemporal net profits fromany additional investment in R&D or comple-mentary assets. Their strategy is conditionedon their technology and their appropriabilityposition secured during the pre-commercialphase. Organizational routines remain deter-minant. The significance of separability be-tween the two phases is that firms’ choices inthe commercial phase are constrained by thosein the pre-commercial phase, and that theirtechnological bases are sunk costs as firms ap-proach the market.

Innovation Strategies and IndustryStructure

The number, relative size, and concentrationof suppliers of technical know-how and com-plementary assets, as well as their degree ofvertical integration into downstream or up-stream industries, affect the transaction costsof strategic interactions among firms and theirbargaining power. Hence, industry structurehas a fundamental impact on firm strategy for-

mation in both the pre-commercial and com-mercial phases.

In the early part of the pre-commercialphase, technical barriers to entry are low andmany specialized technology firms with simi-lar technical expertise may enter the innova-tion cycle, Given their low technical differ-entiation, their bargaining power may be weakin selling R&D services to contracting buyers.Ex ante, their bargaining power is reducedthrough competitive bidding. Ex post, poweris limited through exposure to potential hold-up tactics whereby buyers could terminate therelationship in favor of a new supplier.

The bargaining power of technology firmscould be enhanced as time goes by and as spe-cialized desirable technical expertise is devel-oped. The technology firm’s bargaining posi-tion may be further strengthened if buyersmust make specialized investments in order toincorporate the purchased technology intotheir own operations and product develop-ment. As their bargaining power increases,technology firms can increase the prices oftheir R&D services or appropriate a greaterportion of the technology they develop. If buy-ers are exposed to hold-ups, however, and ifthere are few other suppliers to resort to, thenmarket or contract purchases of technologymay fail. Buyers may be forced to turn to in-ternal R&D, acquisition of a technology firm,or a joint venture or strategic alliance whereboth transacting parties make irreversible in-vestments.

Firm size and imperfections in capital mar-kets may also drive technology strategies to-ward vertical integration. Long investmentperiods required for research and the devel-opment of commercial products often depletethe capital resources of specialized startuptechnology firms. If capital markets were per-fect, then they could assess firm prospects andefficiently allocate capital to firms with a highpresent value of expected future profits. Butthe technology is often relatively difficult toassess, and much of the firm’s value lies in thetacit knowledge held collectively by employ-ees. This drives many of these firms to devel-op relations with larger firms that are betterable to evaluate their prospects than are capital


markets. Large firms receive technology in ex-change for capital investments if not outrightacquisition. Thus, a concentrated technologyindustry structure and failure in technologyand capital markets can motivate firm strate-gies that lead to a more vertically integratedsector.

As product innovation approaches its com-mercial phase, access to marketing and distri-bution assets becomes increasingly important.Strategy emphasis shifts toward the structureof downstream industries. If downstream in-dustries are characterized by a large numberof firms operating in competitive markets, thensimple market transactions should be adequatefor technology firms to appropriate innovationrents. If the new technology is weakly appro-priable, or specialized to or dependent oncomplementary marketing and distribution as-sets, then the bargaining power of technologyfirms is reduced and a large portion of inno-vation rents may be appropriated by down-stream firms. The bargaining power of down-stream industries increases further as theybecome increasingly concentrated. Under suchconditions, the technology firms may pursueforward integration, as long as capital re-sources allow it and barriers to entry are nottoo high.

Based on the above discussion, industrystructure and transaction costs influence strat-egy. Conversely, firm strategies also influenceindustry structure by means of firm coordi-nation and integration. Hence, there is an in-timate interplay between industrial structureand firm strategies fueled by the pursuit of in-novation rents. This interplay defines the pro-cess of creative destruction and shapes inno-vation cycles.

It is now apparent why it is necessary toseparate product innovation into pre-commer-cial and commercial phases. In the beginningof a new technological paradigm with longR&D investment horizons, it is impossible forfirms to predict (a) relevant technological out-comes, (b) competitors’ future intellectualproperty rights positions, or (c) the futurestructure of downstream industries. Hence, inthe beginning of a product cycle it is unlikelythat firms can formulate a strategy that effec-

tively maximizes innovation rents because keyparameters are unknown. Firms begin to shapestrategies for the commercial phase only aftertechnological expertise and intellectual prop-erty rights positions of competitors are clari-fied, downstream industry structures appearstable, and R&D outcomes become predict-able. These strategies must be tailored to thefirm’s idiosyncratic technology and comple-mentary asset position in order to maximizeinnovation profits from additional R&D in-vestment and complementary asset acquisi-tion.

Innovation Strategies inAgro-biotechnology

We have described a dynamic interplay amonginnovation, firm strategy, and industry struc-ture relevant to complex new science and tech-nology with long R&D gestation lags. Howmuch of this description, however, is relevantto agro-biotechnology? Should we expect thatagro-biotechnology innovation cycles followpredictable patterns? If so, what are the im-plications for competitive strategies and in-dustry structure? To shed some light on thesequestions, we analyzed some 1,600 collabo-rative agreements, joint ventures, mergers,partial and total acquisitions, licensing agree-ments, and equity investments related to tech-nology development and commercialization inthe area of agro-biotechnology over the period1980 to 1996. This information was collectedfrom a variety of trade magazines, on-line da-tabases, company annual reports and news re-leases, and books and journals related to agro-biotechnology.

The development of genetic engineeringtechniques in the mid- 1970s provided the tech-nological discontinuity that initiated the agro-biotechnology innovation cycle. The new sci-ence permitted new product concepts andprocesses for a variety of traditional agri-foodindustries (e.g., pesticide, seed, animal health,and food processing). Numerous new research-oriented firms entered these industries in pur-suit of these concepts and the associated inno-vation rents (figure 1). Under these conditions,agri-food industries were soon characterized by


35

30 –

25 –

20 –

15 –

10 –

5–

o~75 7779 81 83 85 878991 93 95

Year

Figurel. Number ofnewagro-biotechnologyfirms

abi-modal structure of technology startups andtraditional established firms. This environmentcreated opportunities for R&D collaborationbetween established firms that needed newtechnology, and startups that needed capital re-sources to finance costly R&D.

Collaborating to Compete

Table 1 shows that in the 1980s, R&D agree-ments grew at significant rates. Approximately90% of all R&D agreements included in oursample were between large established firmsand technology startups. Collaborative agree-ments involving complementary market assets(e.g., manufacturing, distribution, and market-ing services) also grew as time progressed.Most of the growth in these agreements oc-curred in the 1990s, implying the maturation ofthe technology and its approach to the market.Figure 2 illustrates the temporal progression ofstrategic alliances in R&D and complementaryassets agreements. This progression maps thepre-commercial and commercial phases ofagro-biotechnology product innovation. R&Dagreements are important during the pre-com-mercial phase of product innovation. As prod-uct concepts approach the market, agreementsthat marshal the necessary complementary as-sets for commercialization become important.Figure 2 shows the transition from the pre-commercial to the commercial phase in thecase of agro-biotechnology.

The substantial number of strategic alli-

Table 1. Numbers of Inter-Firm Activities inthe Agro-biotechnology Industry

PeriodTotal

1981– 1986- 1991– 1981–Activity 85 90 96 96

Mergers and Acquisitions 19 115 274 408Equity Investment 24 41 47 112R&D Agreements 84 244 147 475Joint Ventures 24 77 81 182Licensing Agreements 6 78 122 206Distribution Agreements 9 66 109 184Production Agreements 1 3 21 25

Total 167 624 801 1,592

antes in both R&D and market activities sug-gests that expected synergies exceededexpected transaction costs enough to encour-age contractual arrangements without full in-tegration. Thus alliances were struck among avariety of firms interested in the new technol-ogy. The large number of technology startupswith high but weakly differentiated technicalcapability indicates that the possibility ofholdups was small or their bargaining powerlimited. Such conditions apparently encour-aged large established firms to outsource ini-tial efforts to engage with the new technologyrather than investing large sums for buildinginternal technical capability.

As the complexity of the new science be-came increasingly apparent and R&D cycleswere elongated, investment capital for re-

70

60

50

40

30

10

o~81 83 85 87 89 91 93 95

Year

Figure 2. Strategic alliances in agro-biotech-nology


search became a binding constraint for moststartups. These capital constraints furtherweakened the bargaining position of technol-ogy startups and further encouraged their col-laboration with well-capitalized establishedfirms. Following the stock market crash of1987, venture capital and investor capital re-sources seeking technology startups were re-duced. This encouraged collaborative agree-ments as an alternative means of financingR&D and commercialization (figure 2).Hence, financing constraints at the end of the1980s may have speeded the transition ofagro-biotechnology to its commercial phase.

Internalizing Technological Capability

Mergers and acquisitions (M&As) have grownsignificantly since the mid- 1980s, but the bulkof these have occurred during the 1990s. Un-like smategic alliances and licensing agree-ments which encourage technology transfer,however, growth in M&As marked the begin-ning of the internalization of technological ca-pabilities by firms and the consolidation of theagro-biotechnology industry. Almost 60% ofthe M&As we have counted were carried outby technology firms attempting to create suf-ficient financial and technological resources tointegrate forward. Selective partial and totalacquisitions of technology assets by estab-lished downstream firms were also an impor-tant part of the observed M&A activity.

Increased integration has occurred primar-ily during the commercial phase of agro-bio-technology product innovation. Low innova-tion appropriability may be a primarymotivating factor because technology firmsmay integrate forward to capture their inno-vation rents. Conversely, firms established indownstream industries may integrate back-wards to increase the value of their assets byinternalizing R&D and associated innovationrents. The profitability of integrating back-wards improves when their bargaining powerrelative to technology firms increases.

While the degree of innovation appropria-bility is best assessed at the firm level on acase-by-case basis, we provide an initial gen-eral appraisal with some informative

Table 2. Appropriability of Agro-biotechnol-0 m’

No. of FirmsExperimenting

with:No. of

No. of Single MultipleFirmsw/Technology Crops Trait Trait Patents

HerbicideTolerant:Glyphosate 10Bromoxynil 4Phosphinothricin 16Sulfonylurea 6

Product Quality:Amino acid content 5Fruit ripening 10Oil profile 3Protein 5

InsectResistant:Coleopteran 9Lepidopteran 15

Viral Resistant:Mosaic virus 15Other 13

Fungal Resistant:Phytophthora 4Rhizoctonia 3

Agronomic Properties:Cold tolerant 3Male sterility 7

284

309

51648

1239

1718

72

415

53

242

3311

823

147

12

02

4242

121015ala

79

1817

27

314

indicators. As the number of firms with exper-tise or intellectual property rights on a particulartechnology increases, the degree of appropria-bility of the technology will tend to decrease.Table 2 reports the number of firms experi-menting with specific agro-biotechnologies withcommercial outlook and the number of firmsowning related patents. It is apparent that nofirm has exclusive claims or expertise on mostagro-biotechnologies with commercial potential.A number of firms seem to have staked a tech-nological position. Further, agro-biotechnologyapplications tend to be weakly differentiated.Most differentiation actually comes from rele-vant complementary downstream assets (e.g.,brand name of pesticide with which the seed istolerant, or brand name of the seed). Under suchconditions, appropriability of the technology in-novation is weakened.


Low appropriability for the new technolo-gies is coupled with moderately concentrateddownstream industries. For example, the top20 firms in the chemical, seed, and animalhealth industries have, respectively, 8890,47’ZO,and 68?Z0shares of the total global mar-ket (Heijbroek, deSchutter, and vanGaasbeek;Watkins). Hence, complementary assets inthese industries may be difficult to acquire andrather specialized. Low appropriability, highcomplementary asset specificity, and down-stream industry concentration therefore canprovide an adequate explanation of the recentintegration and consolidation of the agro-bio-technology industry.

As consolidation decreases the number oftechnology firms, the motivation of down-stream firms to internalize R&D through ac-quisitions or internal growth increases as well.Hence, the recent patterns of consolidation andintegration in the agro-biotechnology industryshould be expected to continue.

Implications

Treating agro-biotechnology as a uniform tech-nology, as we have done in this study, is due toanalytical convenience in describing concepts,rather than due to a need for realism. Agro-bio-technology is indeed an amalgamation of vari-ous applications of a similar science. The de-velopmental stage of various applications is inmany cases quite different. Animal biotechnol-ogy, for example, is less advanced than plantbiotechnology. Thus, although the proposedframework and data apply broadly, one may be-gin to more effectively analyze the dynamics ofinnovation, firm strategy, and industry structureby refining the concept of agro-biotechnologyand focusing on particular applications, Bearingthis in mind, we draw possible implications ofthe forces and concepts analyzed.

Consolidation

As the rate of product innovation in agro-bio-technology diminishes, industry consolidationwill eventually result in a few remaining firmswith significant technical and complementaryasset positions. During this period of consoli-

dation, the market valuation of key comple-mentary assets is likely to increase. Acquisi-tion price tags—such as the $1 billion paid bythe Monsanto Company for Holdens Founda-tion Seed, or the $750 million paid by Germanchemical giant AgrEvo for the technologystartup Plant Genetic Systems—may be un-precedented but not surprising.

Integration

The speed and pattern of integration of up-stream and downstream industries affected byagro-biotechnology will likely vary acrosssubsectors and industries. The degree of con-centration and ownership of technology ordownstream complementary assets will be im-portant determinants. For example, the animalhealth industry should anticipate less changesince most new technology and complemen-tary assets are in the hands of existing domi-nant players. This contrasts with the seed in-dustry, which has few dominant firms andhundreds of small regional companies that de-pend on technology firms for access to agro-biotechnology. This industry could experiencesignificant structural change and consolida-tion. The likelihood and patterns of such con-solidation will depend on the outcomes of cur-rent competitive games among key players.

Firm Competitive Position

If our conceptual framework and data are rep-resentative of the agro-biotechnology industry,then it is implied that future dominant playersalready have a presence in the industry. Whilethe basic science and technology are becomingincreasingly accessible, the accumulated tech-nology base and complementary assets ownedby incumbent firms will increasingly act asbarriers to new entrants. It is becoming un-likely that new key players will emerge asproduct innovation winds down and as com-plementary marketing and distribution assetsare controlled by incumbent networks. Newbiotechnology startup firms will continue toenter the industry. However, their likely rolewill be limited to contract R&D for tasks thatestablished firms can easily outsource, es-


pecially when intellectual property rights areclear (e.g., gene and protein discovery). Eco-nomic rents to this R&D will be minimal. Yet,as process innovation in agro-biotechnologyprogresses, opportunities for efficient divisionof labor among established firms and researchspecialists should expand. Key new technolo-gies, however, will be increasingly developedinternally by established firms that have builtthe necessary technological base for funda-mental research and product development. In-ternalization will increase the appropriabilityof innovation and will mark a more proprie-tary era for agro-biotechnology. Their posi-tions could be dominant.

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Vertical and Horizontal Coordination in the Agro