0.01 In Part I it was established that biology is one of three elemental natural and engineering sciences. Taxonomically, biology is organized, at present, into the study of six kingdoms of living things: animal, vegetable, fungi, bacteria, protists (slime molds, algae, amoebas, and seaweed), and most recently, archea (archaic anaerobic bacteria-like organism). Phenomenologically, ‘living things’ exhibits distinctive characteristics: (a) they are organized into cells separated one from the other and from the environment by a semi-permeable osmotic membrane; (b) they have an internal metabolism; (c) they exhibit homeostasis; (d) they grow; (e) they reproduce; and, (f) they evolve. Methodologically, unlike it sister natural sciences - chemistry and physics, biology also carries legal and moral imperatives constraining exercise of the experimental method especially when human beings are the subject but also, and increasingly, when higher life forms are involved.

0.02 While biotechnology, in the sense of manipulating living things for human purposes, has existed throughout history, modern biotechnology began with identification (1956), and subsequently development of techniques (1970s) for the direct manipulation of the DNA helix – the molecular basis of heredity. This has produced a ‘scientific revolution’ (Kuhn 1962). In effect, the previous biological paradigm focused on the ‘gross’ morphology, i.e. the form and structure, of the increasing complex and diverse life forms generated by evolution. Epistemologically, with this scientific revolution biological complexity and diversity became simplified into the polymorphous arrangement of five chemical ‘bases’: cytosine, guanine, adenine, thymine, and uraci (found only in RNA, not in DNA). Technologically, this simplification permitted biology to begin to mix, match and manipulate the characteristics and biochemical behaviour of all six kingdoms of life. Economically, it produced a new sector of economic activity that increasingly affects virtually all industries, e.g., agriculture, chemicals, construction, farming, forestry, health care, information technology, mining and pharmaceuticals.

0.03 In Part I it was also established that economics is taxonomically partitioned into three primary parts: micro-, macro- and meso-economics. Furthermore, within meso-economics one subdiscipline, Industrial Organization (IO), serves to link microeconomic behaviour of consumers, firms and markets with the overall aggregate macro-economy.

0.04 IO was the brain-child of the late Joe Bain. His seminal work - Industrial Organization - was first published in 1959 (Bain 1968). Using IO, Bain began what has become an ongoing process within the economics profession of linking macroeconomics (the study of the economy as a whole) to microeconomics (consumer, producer and market theory) to better understand the way the ’real’ world works.

0.05 The IO scheme (Exhibit 1) consists of four parts. First, basic conditions face an industry on the supply- (production) and demand-side (consumption) of the economic equation. Second, each industry has a distinctive structure or organizational character. Third, enterprise in an industry tend to follow typical patterns of conduct or behavior in adapting and adjusting to a specific but ever changing and evolving marketplace. Fourth, an industry achieves varying levels of performance with respect to contemporary socio-economic-political goals.

0.06 The IO model will guide the argument to be presented in this paper. Four elemental economic terms will be used. First, buyers and sellers exchange of goods and services in markets - geographic and/or commodity-based. Second, an enterprise is any entity engaging in productive activity - with or without the intention of making a profit. This thus includes profit, nonprofit and public enterprise as well as self-employed individuals. All enterprises have scarce resources and are accountable to shareholders and/or the public and the courts. An enterprise is defined in terms of total assets and operations controlled by a single management empowered by a common ownership. Third, an industry is a group of sellers of close-substitutes to a common group of buyers, e.g. the automobile industry. Fourth, a sector is a group of related industries and thus the automobile, airline and railway industries form part of the transportation sector. The concept of ‘sector’ was introduced into economics by Colin Clark in 1940 to describe groups or clusters of industries that exhibit distinctive characteristics, e.g. primary, secondary and tertiary industries (Wolfe 1955).

0.07 For purposes of this paper biotechnology is assumed to constitute a distinct sector of the economy based upon manipulation of the DNA helix and messenger RNA that generates proteins or the building blocks of life which is the subject of a relatively new subdiscipline, proteomics. Thus use and application of a complex of techniques involving genetic analysis and engineering, rather than production of specific goods and services, serves as the foundation for the industrial organization of the biotech sector.

This powerful technology base, combined with the development of enhancing technologies, such as genomics, bioinformatics, and proteomics, is speeding up the identification of genes that control valuable traits, shrinking the timelines to commercialize new products, and expanding the commercial potential of biotechnology across a growing number of market sectors, including agriculture (Shimoda 1998).

0.08 These techniques can be used to generate new and improved goods and services in many industries, e.g., herbicide-tolerant and insect-resistant plants in agriculture (Oehmke 2002), improved textiles (Noble 2002), and, bio-computers (Reaney 2001). In this sense, biotechnology is a pervasive disembodied or enabling technology generating general progress and improvement across the economy. As will be seen, biotechnology is a ‘process technology’ used to generate new or improved inputs for other producers, i.e., biotech goods and services are intermediary or producer goods rather than final or consumer goods.

0.09 In this paper I will only highlight selected salient aspects of the IO model of the biotech sector. It should be noted that I have entitled this paper “Industrial Dynamics’ rather than ‘Industrial Organization’ because the biotech sector is in its early stages of development and, as will be seen, it is in a state of flux.

1.0 Basic Conditions Index

1.01 Basic conditions in an industry involve demand for its outputs and supply of its inputs. I will first review demand conditions and then supply conditions in the biotech sector.

a) Demand

1.02 On the demand-side, biotech is a ‘process’ or ‘enabling’ technology (Research & Analysis 2000, p. 7) used by firms to generate new or improved inputs for producers of final or consumer goods and services, i.e., the results of biotech are ‘intermediary goods or services’ used by other producers, not by final consumers. In agriculture, for example, firms use biotechnology to produce new or improved seeds, e.g., herbicide-tolerant or insect-resistant seeds for use by farmers. Thus demand is from farmers not final consumers. Similarly in the pharmaceutical industry, firms use biotech to produce new or improved drugs for use by doctors in treating patients, i.e., demand is generated by physicians as an input to a treatment regime for patients. Thus demand is from physicians not final consumers.

1.03 There is, however, an important dimension of final demand for biotech products. While consumers tend not to be concerned about production methods in the automobile industry, e.g., whether by workers or robots, there is well documented consumer concern about biotechnology in production of final goods and services (Katz 2001). Thus consumer attitudes towards biotechnology can play a significant role in encouraging or inhibiting use and application as well as development of biotechnology.

1.04 Given the legal and moral constraints on the experimental method in biology it is not surprising that legal, moral and ethical concerns are expressed about biotechnology. Thus while the scientific community is primarily concerned with generating new knowledge and producers are primarily concerned about efficiency and profits, consumers harbour deep-seated cultural and moral values about the manipulation of living things for human purposes. This concern is apparent in the description of genetically modified foods by some consumer groups as ‘frankenfoods’ (the reference being to Mary Shelley’s 1818 book: Frankenstein; or, The Modern Prometheus). It is interesting to note, etymologically, that the word ‘biology’ entered the English vocabulary from the German in 1819.

1.05 Consumer and public sector attitudes towards biotechnology products tend to vary across countries and cultures. Thus in the United States, the federal government does not financially support fetal tissue research through the National Science Foundation (not because it is bad science but because of religious attitudes towards abortion) while, by contrast, the Government of the United Kingdom has formally approved human embryonic tissue research (BBC Mar. 1, 2002). By contrast, in North America genetically modified food has been generally accepted by consumers while in Europe there is significant resistance (Kalaitzandonakes 2000). At least one observer has noted the insensitivity of producers even in press releases announcing new biotech products and processes to the deep seated ‘value conflict’ of consumers (Katz 2001).

1.06 The implication of consumer attitudes towards biotechnology may have profound implications for the competitiveness of companies and countries. To the degree consumer resistance inhibits the development of different lines of biotechnology, e.g., genetically modified foods v. medical goods and services, different countries will tend to develop relative strengths or weaknesses. Thus there appears to be a movement of fetal tissue researchers out of the United States and into countries like Britain and Sweden which are more hospitable towards such research. The opposite movement of researchers is anticipated with respect to genetically modified foods, i.e., from Europe towards North America. The long-run implications of such ‘cultural specialization’ could be significant for the competitiveness of nations.

(b) Supply Index

1.07 On the supply-side of the biotech sector, the dominant factor is generation of new knowledge and development of facilitating technologies. In this regard it is important to distinguish between intrinsic and instrumental values (Jantsch 1967, p.51). Intrinsic knowledge is valuable in and of itself. It improves our understanding of the world and the way it works. It corresponds to fundamental knowledge where the value is “knowledge-for-knowledge’s sake”. Instrumental knowledge, by contrast, is valuable because it allows us to do things, e.g., create new or improved goods and services that either contribute to human well-being or serve to achieve other human ends such as military victory or making a profit. Instrumental knowledge corresponds to the OECD’s use of: know-what, know-why, know-how and know-who. All relate to the competitiveness of nations and companies in a knowledge-based economy (OECD 1996, p.12). Instrumental knowledge is thus an input rather than a final good or service.

1.08 With respect to production of new biotech knowledge, a contrast can be drawn between the capital requirements of biotechnology and high energy physics. In high energy physics, the rising cost and scale of equipment, e.g., synchrotrons and particle accelerators, required to generate new knowledge and test hypotheses increasingly limits experimentation and the generation of new knowledge. In biotechnology, by contrast, the cost of equipment, e.g., gene synthesizers, is relatively modest. The contrast may reflect the different stages of development of the science involved. Thus biotechnology is a relatively recent and revolutionary development (30 years old) while high energy physics is a well-established discipline dating back to the late 19^th century.

1.09 In this regard, major information technology companies have made significant commitments (IBM to MDS Proteomics, Hitachi to Myriad Genetics, Compaq to Celera Genomics) in the belief that the huge data-crunching needs of nascent biotechnology firms will grow into a multi-billion dollar market for IT equipment and consulting services over the next decade (Reuters January 11, 2002). These developments also include joint ventures (e.g. Hitachi and DoubleTwist, Motorola and TissueInformatics Inc., to develop information processing hardware tailored to biotech research reflecting a belief that the next generation (Reuters January 16, 2002). These developments may represent the beginning of a shift away from physics (especially nuclear physics and weapons production) as the most complex (and financially rewarding) information processing task towards biotechnology.

1.10 On the labour-side, in the past it was physicist and chemists (as well as engineers) who were most sought after by commercial enterprise. Today, however, the increasingly pervasive nature of biotechnology has created significant new employment and entrepreneurial opportunities for biological researchers and scientists (Zucker et al 1998). Audretsch and Stephan found that 50% of ‘scientific founders’ of new biotech pharmaceutical firms had followed a traditional academic career trajectory while only 12.5% had established their careers exclusively with large pharmaceutical companies like SmithKline or Beckman (Audretsch and Stephan 1999, p. 103).

1.11 In a sense, all physical capital is knowledge capital in that new plant and equipment embodies instrumental knowledge. Furthermore, as established in Part I, ultimately only the individual human being can ‘know’. Everything else is storage of extrasomatic knowledge, it is not ‘knowing’ and has, without competent human intervention, no meaningfulness other than as an indecipherable artifact. This is especially true in a new and rapidly emerging industrial sector like biotechnology. Put another way:

The ultimate repositories of technological knowledge in any society are the men comprising it, and it is just this knowledge which is effectively summarized in the form of a transformation function. In itself a firm possesses no knowledge. That which is available to it belongs to the men associated with it. Its production function is really built up in exactly the same way, and from the same basic ingredients, as society’s. (Graf 1957)

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