Intellectual property piracy in a North-South context: empirical evidence

AGRICULTURALECONOMICS

Agricultural Economics 35 (2006) 335–349

Intellectual property piracy in a North–South context: empirical evidence

Peter Goldsmitha∗, Gabriel Ramosa, Carlos Steigerb

aNational Soybean Research Laboratory Fellow in Agricultural Strategy, Department of Agricultural and Consumer Economics, University of Illinois, 318 MumfordHall, 1301 West Gregory Drive, Urbana, IL 61801-3605, USA

bAgribusiness Program, Universidad de Belgrano, Buenos Aires, Argentina

Received 28 April 2005; received in revised form 6 October 2005; accepted 18 January 2006

Abstract

The protection of intellectual property rights (IPR) has been a contentious issue for more than 20 years. Industrialized nations have movedto knowledge-based economies, and simultaneously, trade barriers have fallen, making intellectual property (IP) vulnerable. Adding to thisvulnerability are conflicting international institutional environments, belief systems, and economic realities. The debate over IPR protection hasbecome a significant global trade issue pitting the net-technology producing “North” against the net-technology consuming “South.” With thisin mind, there has been much debate about the impact of alternative IPR regimes (tight or loose) on the welfare of Southern economies. Policymakers, in both the South and the North, search for arguments to convince recalcitrant Southern countries to follow the Northern model of strictIPR regimes. The South, faced with a dilemma, searches for arguments to justify looser regimes or convince its populace that tighter regimes are inthe best interest of the nation. The objective of this research is to add empirical clarity about the welfare impacts of weak IPR on the firm and hostcountry. To this end, we employ a novel methodological design and unique context. The research design is deductive, in that we use the empiricalsetting of Pioneer-Argentina, S.A., a seller of bioengineered agricultural seeds, to test the existing theory of weak IPR impacts in a North–Southcontext.

JEL classification: F23, O12, O17

Keywords: Intellectual property rights; International development; Agricultural seeds; Argentina; Soybeans

1. Introduction

The protection of intellectual property rights (IPR) has been acontentious issue for more than 20 years. Industrialized nationshave moved to knowledge-based economies and, simultane-ously, trade barriers have fallen, making intellectual property(IP) vulnerable. Adding to this vulnerability are conflicting in-ternational institutional environments, belief systems, and eco-nomic realities. The debate over IPR protection has becomea significant global trade issue pitting the net-technology pro-ducing “North” against the net-technology consuming “South.”The North has a distinct belief system favoring IP (Mittlestaedtand Mittlestaedt, 1997; Steidlmeier, 1993), maintains a compre-hensive IPR institutional environment, and actively employs en-forcement mechanisms. The South, however, is more conflicted.

∗Corresponding author. Tel.: 217-333-5131; fax: 217-333-5538.E-mail address: [email protected] (P. Goldsmith).

Dr. Goldsmith and Mr. Ramos are, respectively, an associate professor and aformer graduate student in the Department of Agricultural and Consumer Eco-nomics at the University of Illinois. Dr. Steiger is the Director of the Agribusi-ness Program at Universidad de Belgrano in Buenos Aires.

In the last 10 years, many Southern countries have agreed tomultilateral agreements on IPR protection, but enforcementand commitment have been lagging (Levy, 2000; Thurow,1997).

With this conflict in mind, much debate has surfaced regard-ing the impact of alternative IPR regimes (tight or loose) onthe welfare of Southern economies. Policy makers, in both theSouth and the North, search for arguments to convince recalci-trant Southern countries to follow the Northern model of strictIPR regimes. The South, faced with a dilemma, searches for ar-guments to justify their looser regimes or convince its populacethat tighter regimes are in the best interest of the nation.

While there has been much analytical work, mostly theo-retical, conducted on the subject, the final results are incon-clusive whether a strong IPR regime is better or worse forSouthern countries (Globerman, 1988; Sherwood and Braga,1996; Vishwasrao, 1994). The impact of the IPR regime is notclear, due to both the complexity of problem and the form ofanalysis. The theoretical models are extremely valuable, high-lighting the drivers of firm and social welfare, but they areabstractions by nature.

c© 2006 International Association of Agricultural Economists

336 P. Goldsmith et al. / Agricultural Economics 35 (2006) 335–349

Empirical models suffer from three effects that weaken theirconclusions. First, firms are not often able to observe lossesfrom weak IPR (Fienberg and Rousslang, 1990) because thelosses are due to investments not made. (The host countryimpact analysis suffers from this problem.) Second, firm im-pacts are estimates from surveys of a cross-section of firms,representing opinions of impact, not factual evidence (Bragaand Willmore, 1991; Evenson, 1990; Fienberg and Rousslang,1990; Sherwood, 1990). Finally, to our knowledge, no workhas attempted to directly measure firm and host country im-pacts from weak IPRs. Therefore, while there has been someattempt to empiricize welfare impacts, evidence supporting ornegating the theory is lagging. The result is ambiguity for policymakers. Economic studies have yet to show where the balancelies (Alster, 1988; Dawson, 1987).

The objective of this research is to add empirical clarityabout the welfare impacts of weak IPR on the firm and hostcountry. To this end, we employ a novel methodological de-sign and a unique context. While previous studies have usedcross-sectional survey or secondary data, our research employsthe critical case-study approach (see Gummesson, 2000; Yin,1994). The research design is deductive, in that we use the em-pirical setting of Pioneer-Argentina, S.A., a seller of bioengi-neered agricultural seeds, to test the existing theory of weakIPR impacts in a North–South context.

2. Theoretical background

The dilemma, both domestically and internationally, for IPRprotection is the trade-off between short-term costs and long-term benefits. Northern countries argue that while prices mayrise in the short run, new technologies will be available over thelong term, and this will raise economic productivity (Stamm,1993). As the result of protected property rights, the South willgain from new investment (Sherwood and Braga, 1996), theflow of technology (Sherwood and Braga, 1996), and technol-ogy spillovers (Zigic, 2000). The preferred mechanism of IPRprotection by the net-technology producing countries (North)is through public institutions, not product process-masking byprivate firms. For the net-technology using countries (South),significant short-term costs directly arise from an increase inthe cost of the inputs due to the lack of complete substitutesand indirectly from the administrative and enforcement costsof a Northern-style IPR protection system. Adding to the com-plexity is the fact that welfare impacts are best understood in adynamic context, as the short-term losses of strengthening theSouth’s IPR regime are believed to be trumped by the long-termgain from economic growth.

To address the complex question of the welfare impacts ofan IPR regime, numerous theoretical models have been de-veloped (Grossman and Helpman, 1995; Maskus and Konan,1994; Zigic, 1998).1 While it is generally agreed that technol-

1 Earlier theoretical models include Dollar, 1986; Chin and Grossman, 1990;Diwan and Rodrik, 1991; Deardorff, 1992; Grossman and Helpman, 1991;Helpman, 1993; Taylor, 1993.

ogy is important for an economy to grow (Dollar, 1986), thetheoretical models are not completely successful in making theargument that IPR protection in the South improves Southernwelfare (Chin and Grossman, 1990; Gould and Gruben, 1996;Helpman, 1993; Zigic, 2000). Additionally, the argument thatstrong IPRs lead to greater innovation is also questioned (Bragaand Willmore, 1991; Gould and Gruben, 1996).

The lack of clear benefits from IPR protection can be due toa fundamental difference in belief systems about private versuscommunal property (May, 1998; Mittlestaedt and Mittlestaedt,1997; Steidlmeier, 1993; Thurow, 1997), the negative effectsof a monopolist on future innovation (Chin and Grossman,1990; Gould and Gruben, 1996; and Zigic, 2000), a “tit for tat”view in which the South is “owed” the technology based on ahistory of Northern resource extraction policies, or the South’sassessment of the hardship a patent enforcement system wouldcreate. Whether it is an intrinsic skepticism about Northernproperty rights regimes, or a skepticism based on the realitiesof the moment, the end result is recalcitrance on the part ofSouthern countries to actively engage IPR protection.

2.1. Theoretical propositions

The theory of welfare and IPR protection hinges on its the-oretical propositions about how weak IPR in the South affectsthe welfare of firms (suppliers), consumers (demanders), andSouthern countries as a whole. The following is an overview ofsix propositions to be empirically analyzed.

Proposition 1: Welfare in the South improves as demandpreferences for a product between the Northand South are more homogeneous. Diwan andRodrik (1991) and Deardorff (1992) argue thathomogeneity allows for free riding, and morereadily transfers benefits to the South under aweak IPR regime. Under strong IPR, the Southloses from a lack of access to the products itprefers.

Proposition 2: The smaller the demand for a product in theSouth relative to the North, the more advanta-geous it is for the South to maintain weak IPR(Chin & Grossman, 1990; Diwan and Rodrik,1991; Zigic, 1998). This is due to the South’sability to gain technology for free combinedwith the lack of incentive by the North to marketto the South, even in a world of strong IPR.

Proposition 3: Northern firms are harmed by weak IPR and, asa result, they will engage in masking, enforce-ment, lobbying, or internalization to try and pro-tect their IP (Taylor, 1993; Vishwasrao, 1994).

Proposition 4: Under a weak IPR environment, Northern firmsreduce investment in the South. Stamm (1993)refers directly to investment and its diversionaway from the South to the North. Vishwasrao

P. Goldsmith et al. / Agricultural Economics 35 (2006) 335–349 337

(1994); Globerman (1988); Mansfield (1994);Sherwood (1990); and Benko (1987) refer tolowered R&D spending in the South. Benko(1987); Chin and Grossman (1990); Diwanand Rodrik (1991); Helpman (1993); Mansfield(1994) hypothesize about how innovation is sti-fled in the South. Zigic (1998), and Moschiniet al. (2000) raise the issue of the loss of wel-fare spillovers.

Proposition 5: Under a weak IPR environment, Northern firmsoffer inferior products and services in the South-ern market. Technology diffusion is slowed.Sherwood (1990) believes that production pro-cesses will be outdated. Stamm (1993) statesthat service levels will be lowered and the dis-tribution system will be less reliable.

Proposition 6: Alternatively, weak IPR promotes technologydiffusion improving the welfare of the South(Chin and Grossman, 1990; Gould and Gruben,1996; MacLaughlin et al., 1988; Vishwasrao,1994).

3. Methodology

The subject of our study is the firm Pioneer-Argentina, awholly owned subsidiary of Pioneer Hi-Bred International,which is a business unit of Dupont. Pioneer-Argentina pro-duces and sells agricultural seeds to farmers. The firm employs105 people, with total sales in 2000 exceeding 35 million US$(mUS$). The firm sells a variety of cultivars, but its dominantbusiness is corn and soybean seeds. Corn and soybeans serveas complements in temperate climates. Monoculture, thoughpracticed, is not nearly as common as annually rotating cornand soybeans.2

Our unique empirical setting rests on the fact that corn seedis agronomically protected from IP piracy while soybean seedis not. Pioneer maintains separate Corn and Soybean Divisions.Because of opposed IP vulnerabilities for corn and soybeans,respective business divisions are structured and perform differ-ently. Assessing whether these differences in fact exist, and thenature of the differences, will provide insight into the welfareimpacts when IPRs are protected compared with when theyare not.

IPR protection differences between corn and soybeans existbecause corn is a hybrid and soybeans are not. A corn plantis pollinated only by means of another corn plant (cross polli-

2 In temperate regions corn and soybeans are complements. Agronomic con-vention holds that neither corn nor soybeans be grown in the same field in acontinuous fashion. A producer may be able to employ two to three years of acontinuous mono-cropping program, but beyond that soil fertility suffers andweed and disease impacts increase. Therefore corn and soybeans tend to begrown in a 50:50 rotation. In any given year though, relative prices and inputcosts may provide an incentive to move away from a balanced rotation.

nation). If corn seed is saved from one year to next, the cornplant loses its hybrid vigor (heterosis) and performs very poorly.Therefore a farmer must return each year to the seller of seed toreceive an updated version of the hybrid that has been properlycrossed.

Soybeans are self-pollinating and can keep reproducing inperpetuity with only minimal yield reductions (drag) from yearto year. A farmer can take seed from the harvested crop andreplant them the following year. A farmer who plants soybeansdoes not have to return to the seed supplier every year for newseed, dramatically lowering the cost of the seed input for thefarmer. When the firm sells corn seed it does not defeat its ownmonopoly by putting a substitute on the market. With soybeansthe firm’s monopoly is defeated by farmers saving seed or bymultipliers who do not respect the patent.

With the advent of Roundup Ready� (RR) biotechnology3 insoybeans, farmer-saved seed (legal in Argentina) and brown-bagged seed4 (illegal in Argentina) has grown dramatically(Fig. 1). The informal marketing of soybean seed now domi-nates the sector with up to 90% market share. Pioneer reportsthat though crop land in soybeans increased over 1 millionhectares (10%) in Argentina in 2001 and they are a major brandin the market, they saw no increase in sales of their RR contain-ing soybean seed. The seed for the additional acres came fromprofessional seed multipliers and farmer-saved seed.

In the United States, up to 25% (Hayenga, 1998) of thesoybean seed was thought to be saved seed. Saved seed in theUnited States has shown to have a yield drag on average of 2.4%(Agrinews, 2001).5 Monsanto has introduced and enforced agrower contract in the United States that stipulates that seedcannot be saved as it infringes on their patent rights (Goldsmith,2001).

A second feature that makes the case unique and valuable forstudying the IPR issue is that Argentinean crop production isvery similar to that in the United States. A key theoretical driverof the welfare balance from IPR environment is the degree ofhomogeneity of markets between the North and South. In ourcase homogeneity is high. The center of the corn and soybeanarea, e.g., the province of Buenos Aires, is the 32nd parallel(south) and is very comparable to the mid-South region of theUnited States. Thus, U.S. varieties and agronomic practicestransfer readily to Argentine producers.

4. The case study method

For the purposes of this inquiry, a deductive approach isemployed. The case study is used to help provide empirical

3 A herbicide resistant gene developed by Monsanto and placed in Pioneer’sseed.

4 Called “Bolsa Blanca” in Argentina and “Brown Bagging” in the UnitedStates, this is when independent firms produce, package, and market piratedseed.

5 In interviews with farmers and industry representatives in Argentina, yielddrag (reduced yields) from saved-seed was estimated to be closer to 1–2% peryear and well worth absorbing.


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Source: AACREA, 2001.

Fig. 1. Brown bag and farmer-saved soybean seed growth in Argentina.

evidence about phenomena that have been understood fromtheoretical, anecdotal, and limited empirical perspectives. Yin(1994) calls this the critical case study model and is built uponexisting theory and guided by specific propositions. Its goal isto test theory instead of creating theory.

4.1. Evidence

The study used the following sources of evidence: key in-formant interviews, direct observation, and quantitative data(financial documents analysis and industry statistics). To

Pioneer A rgentina

M anage m en tC EOD irector o f M arketingD irector o f A dm in is tration and F inance

Sa lesD istric t Sales M anager C ornD istric t Sales M anager So ybeansSouthern R egional Sales M anagerC entra l R eg ional Sales M anager

SupplyD irector o f P lan t O pera tions M anagerD irector o f Q ua lity C ontro l

R & DD irector o f R esearch

G overn m entIN A SE (Institu to N ational de S em illas (N ationa l Seed In stitu te ) and C ontro lD irector o f V arie ty R eg istra tionD irector o f C ertifica tion and C on tro lIN TA (Ins titu to N aciona l de Tecno log ia Agropecuaria (N ational Ins titu te of Agricultu ra l Techno log y)Form er D irector of S trateg ic P lanningU S Em bassyU ndersecretary fo r C om m erceAgricultu ra l A ttache

Industry A ssociationsASA (Asoc iacion de S em illeros Argen tinos (S eed M asnufactu re rs Association of Argen tina)AR PO V (Asociac ion de l R eg istro de P roteccion de O btenciones Vege ta les (Association of R egistered Plan t Variety Pro tection)Association Presiden tC orporate A tto rne y

M u ltip liers and D istributorsA . S . -P residentA . L . G . -C h ief O perating O ffice r

C omp etitors

N ovatis S .A .M anager- Sa les and M arke tingM anager In form ation S ystem s

Zeneca S.A .I.C .M arke ting D irec to rProduc t M anager

Farmers and O ther Supp ly C ha in M em b ersE. D . A .-F arm erA . C . C .- F arm er 1st handlerI. C . -G rain M arketerA C A ñ D istributor, 1 st hand le r(Associacion de C ooperativas A rgen tinas (A ssociation of A rgentinean C ooperatives)-V ice presiden tSpecia l Pro jects M anagerA grositio.com -C om m erc ial D irector

Fig. 2. Overview of key informant interviews.

conduct the interviews, a semi-structured interview instrumentwas administered individually to over 30 key informants repre-senting; Pioneer and its various units, the Argentine seed indus-try, supply chain members, and government officials (Fig. 2).Following Kumar (1989) guidelines for rapid appraisal, theseinterviews were qualitative and directed to carefully selectedsubjects.

The instrument comprised a mixture of over 180 redundantand unique questions, drawn and organized thematically fromthe theory. Depending on the informant’s role or organization,some of the questions might not have been asked. In general,questions focused on business operations, investment, and IP.Surveyors considered how to elicit responses useful for com-paring the Corn and Soybean Divisions. While an attempt wasmade to introduce the questions in the same order, it was notuncommon for respondents to shift the topic. The interview-ers kept track of questions that remained unanswered and askedthem later in the interview. At least two researchers were presentat every interview. The multiple-informant question redundancytechnique allowed for answer triangulation so that informantsand redundant questions provided validation. Following Kumar(1989), interviews were conducted with help of an interviewguide taking special care to the way questions were worded inan attempt to maintain as neutral an attitude as possible and toallow consistency in questioning. Almost all interviews wereconducted in Spanish. Spanish language transcripts were pro-duced and were analyzed using qualitative data analysis soft-ware called QSR NUD ∗ IST-N5� (QSR International, 2000).


4.2. Direct observation

Structured direct observation, according to Kumar (1989),can be extremely useful in the data triangulation process. Armedwith theoretical expectations about investment and expendituredifferences between the Corn and Soybean Divisions, analy-sis was made of Pioneer’s infrastructure, technology, humanresources, and advertising and marketing. Our use of digitalvideo equipment, as well as photographs, helped to documentinvestments and equipment used for each business unit. Visitswere made to Pioneer R&D, production facilities and multiplierfarms to observe physical assets.

4.3. Firm documents

Yin (1994) suggests using documents to augment evidencefrom other sources. Pioneer, Argentina gave us access to balancesheet, income statements, and pricing data, which are main-tained separately between the two business divisions. Due toprivacy concerns with such material, ratios, comparing the Cornand Soybean divisions rather than actual figures, were used. Thefinancial data serves three purposes: it is useful to corroboratethe responses of Pioneer managers as to the state of each ofthe businesses; the data can be used to analyze propositionspertaining to the financial impacts that weak IPR protection hason a firm; and the data helps to quantify the welfare impacts.

5. Results and discussion

Proposition 1: Under weak IPR, welfare in the South improves,as demand preferences for a product between the North andSouth are more homogeneous (Deardorff, 1992; Diwan andRodrik, 1991).

Given, as noted above, that demand in our context is homoge-neous and corn is isolated from the effects of a weak IPR regimewhile soybeans are not, the first proposition asks how demandhomogeneity affects the firm’s behavior. Then, given firm be-havior, are users of the product better or worse off? Pioneer hasa strategic choice, to adapt soybeans to the local environmentthrough local R&D (moderate investment) or to forfeit adap-tation, and leverage demand homogeneity by selling the sameproduct sold in the United States (minimal investment).

Looking first at the corn business, Pioneer operates a five-stage process from production to sale (Fig. 3). The first stage(the most technical) occurs entirely in the United States whereall new products, such as foundation seed, are developed andthen shipped directly to the Argentine division.

Pioneer has the choice of bringing the germplasm from any-where in the world, in fact most of it is imported from theUS and sometimes used directly in Argentina or adapted tothe particular agronomic conditions by breeding with localgermplasm; this is part of Pioneer global strategy (MarketingDirector, Pioneer).

Beyond basic R&D, all corn seed production stages from localR&D to classification and packaging are internal to the firm andlocal to Argentina. Seven different respondents were asked tocompare the corn seed production system in the United Stateswith the system in Argentina. All seven concurred that the cornsystems were almost the same, with only slight differences.

The research program in Argentina owns around 15 ha ofland, machinery, buildings, labs and employs 6 people, whichis exactly the same as any Pioneer’s research station in theUnited States. . . . However there is a slight difference regard-ing field personnel, which in Argentina is mainly temporary(Director of Research, Pioneer).

Pioneer’s supply plant in Argentina is specifically designedfor processing corn and is quite similar to any plant in theU.S. (Director of Plant Operations, Pioneer).

Pioneer’s soybean business structure is quite different (Fig. 3)with most activities occurring in the United States, fully lever-aging the product demand homogeneity between the countries.Initial product development takes place in the United Statesand foundation seed is imported. No breeding and testing isconducted in Argentina. The research division is nonexistent.The imported products go without modification to the domes-tic parent seed division for the first volume increment. Then,also dissimilar to the Corn Division, the parental seed is sold todomestic dealers/multipliers who pay Pioneer royalties for theuse of the seed. The multiplier/distributors are in charge of thevolume production and final sales.

The respondents were asked to compare the soybean seedsystem in the United States and the system in Argentina. Allconcurred that there are several significant differences betweenthe countries. The following are selected comments:

In the supply division, which is only in charge of parentalincrements, there are important differences in the processingplant; even though the plant is specific for corn, we have man-aged a way to handle the soybean process with no significantproblems (Director of Plant Operations, Pioneer).

Possibly the most important difference is that while in theUnited States, Pioneer sells certified seed to the farmers (finalconsumers) in Argentina, they sell parent seed to multipliers. . . who are in charge of selling it to the farmers under theirsole responsibility and risk. (CEO, Pioneer)

There is an important inter-play between product demandhomogeneity and IPR protection. Pioneer chooses a low invest-ment strategy for its soybean division as a second best optionavoiding low returns on investment due to the rent appropriabil-ity problem. It leverages the relatively high degree of demandhomogeneity, while bearing some brand risk for a product fail-ure. In this way, homogeneity of demand compensates for theeffects of weak IPR and Pioneer’s underinvestment. On theother hand, for the corn division, demand is not as homoge-neous and in turn, ceteris paribus, there are significant risks of


Basic R&D

Breeding

Multiplication

Parent increments

Parentincrements

Volume production

Classification and packaging

Classification and packaging2

Farmer

Distribution

Classification and packaging1

Distribution

Corn Soybean

Pioneer U.S.Pioneer ArgentinaDealer/MultiplierConsumer

I nt e

rna l

i ze d

Ou t

sour

c ed

Not Performed

Not Performed

Corn and SoybeanDivision Structures

1. Of parent seed only2. Of final product

Fig. 3. Organizational structures.

product failure. Pioneer is able to choose its first best option,a direct investment strategy, because appropriability is not aproblem due to the IP being naturally protected.

We asked nine experts about soybean yields and the lackof soybean seed production investment in Argentina. Eight ofthe nine respondents stated that while at the present time theeffects of the lack of soybean testing and quality control arenot obvious, in the future problems would become evident.6

When specifically asked about the risk Pioneer faced, a seniorexecutive replied that the risk was minimal in light of the ap-propriability (pirating) problem.

Demand homogeneity clearly offers producers access tothe latest technology without the technology provider mak-ing domestic investments. Producer welfare losses in termsof production risk rise with decreasing homogeneity. Hypo-thetically, a pernicious problem could exist for farmers if aproduct was unbranded, information about its performance waslimited (problem of information asymmetry), and the demandwas relatively heterogeneous between the North and the South.In such a case, Southern farmers would bear the risk of re-ceiving an inappropriately tested product. In this scenario, thehost country not only ends up using inferior products, but

6 Further discussion about product quality and performance can be found inProposition 5.

does not receive investments from the technology producingfirm.

Proposition 2: The smaller the demand in the South relativeto the North, the more advantageous for the South to maintainweak IPR.

Having a weak IPR regime is beneficial when a country repre-sents a small market in the global context (Chin and Grossman,1990; Diwan and Rodrik, 1991; Taylor, 1993). The logic is thatsmall markets are unattractive in a global portfolio of oppor-tunities especially when other local business risk factors areconsidered.

Assuming a stylized setting, pirating is beneficial to thesouthern country because its market is small and it would haveno access to the technology otherwise. Small markets engagedin pirating would pose less of a threat to a multinational andwould be less subject to state-level retaliatory tariffs or quotas.Even under a strong IPR regime, the firm may have an incentiveto under-invest if the host country is a small market, and returnson investment would be suboptimal.

The small market situation poses a simultaneity problemwhen empirically studying the effects of weak IPR. If a firmunder-invests is it due to the weak IPR or is it simply due tothe small market effects? The Pioneer case provides insight intothis phenomenon.

For Pioneer, is Argentina a small or large market? CurrentlyArgentina plants approximately 3 million hectares of corn and


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+ 216,411 *

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+ 887,525 ****

Average Annual Increase in Soybean Hectares* 1971-1980; ** 1981-1990; ***1990-1995; ****1996-2001

Source: SAGPyA, 2001 and authors’ calculations.

Fig. 4. Corn and soybean hectares Argentina (1971–2001).

10 million hectares of soybeans (Fig. 4).7 Corn, while rep-resenting a smaller market, exhibits high levels of investment.Soybeans, the considerably larger market, show low levels of in-vestment. This is not what Proposition 2 would have predicted.Corn is still attractive for investment because its IPR featuresaddress the appropriability problem and relative demand homo-geneity relieves the firm of having to extensively adapt its prod-uct to the local conditions. Therefore it is not true, prima faciethat small countries (markets) benefit from weak IPR. While atthe limit small countries would be unattractive to investment,other factors such as IPR regime, degree of product demandhomogeneity, and production economics are also important.

Furthermore, it is naıve to assume that market size is de-terministic. The IPR environment may affect market size. InArgentina, land in corn production is stable at around 3 millionhectares per year. However in the case of soybeans with thearrival of transgenics in 1996, soybean hectares increased at arate of 887,525 hectares per year, nearly triple the annual rate ofgrowth for the previous 25 years. The shift from a small marketto a large market happened because of a revolutionary trans-genic product that needed no adaptation (was homogeneous)and an environment of weak IPR. Thus the Pioneer case servesas an example in which market size is not deterministic but afunction of the IPR environment.

Proposition 3: Weak IPR reduces a firm’s financial perfor-mance (Stamm, 1993). If severe financial impacts are evidentthen the firm responds by masking, enforcing, lobbying, orinternalizing (MELI) (Braga and Willmore, 1991; Chin andGrossman, 1990; Globerman, 1988; Taylor, 1993; Vishwasrao,1994).

7 Argentina is the seventh largest corn producer in the world (FAO, 2001);its crop area represents 2% of the World’s total corn area and 11% of U.S.production. Meanwhile, Argentina is the third largest soybean producer in theworld and the area dedicated to soybeans represents 33% of the U.S. crop areaand 13% of the world soybean area.

During the 2000/2001 crop season there were 10,300,000hectares of soybeans planted in Argentina (SAGyPA, 2001).Soybean seed average price was around 7 US$ per 50 lb bagand average seeding rate in the country was 3.30 bags perhectare, creating a demand of 34 million bags and a potentialmarket size of 364 mUS$. The formal seed industry controlled20% of this market putting its estimated revenues at about 73mUS$ (Table 1).

To estimate the welfare differences for farmers and the for-mal seed industry between a weak and strong IPR environment,five assumptions are employed. The first assumes that under anenvironment of strong IPR, that soybean seed prices would riseto levels comparable to the ratio of US corn seed prices to Ar-gentinean corn seed prices; 93% (Table 2). The second involvesthree demand elasticity scenarios: planted soybean hectares re-mains unchanged reflecting inelastic demand; demand falls toa soybean:corn ratio of 2:1; and elastic demand where the ratioof soybeans to corn is 1:1, as is the case in the United States.

In the long term (corn and soybean) crop areas will level. Inthree to five years, half of Argentina’s farmers will disappearand only the ones with healthy financial situation and hightechnology, who understand the importance of crop rotation,will survive. I am not sure if they will be willing to payvoluntarily for certified soybean (seed) but at least they aregoing to utilize a corn-soybean rotation, even though they donot make profits on soybeans, they can still sell corn and thebusiness as a whole will be good (CEO, Pioneer).

The third is that Pioneer would maintain its current market share(13%). The fourth is that at the current price of 10.71 US$/bag,no economic profits are earned. The fifth is that soybean seedingrates would fall to Pioneer’s recommended levels of 2.86 bagsper hectare.8

Under a 1:1 elastic demand scenario with strong IPRs, thewelfare surplus would shift significantly from farmers to seedcompanies. Soybean hectares planted and use of the technologywould fall 67% to 3.3 million hectares. Market size would fallfrom 364 to 186 mUS$ (based on 2000–2001 data), but all ofthat market would be captured in formal channels (Table 3).Formal seed company revenue would rise 155% (113 mUS$).The industry with no surplus under the weak IPR environmentwould see its welfare surplus rise to 84 mUS$, while farmersurplus would fall 92% from 208 to 16 mUS$.9 Farmers’ wel-fare loss occurs because they are not only producing fewersoybeans, they would be paying significantly higher prices fortheir soybean seed. For Pioneer, sales would rise to 24 mUS$.

Relative to the Corn Division, Pioneer financial recordsshow that soybean sales and profits were considerably lower(33 times and 38 times, respectively) than corn in 2000–2001

8 It is reasonable to assume that seeding rates would fall. With brown-bagging,seed is plentiful and because it is uncertified it is necessary to “over plant” toensure yields.

9 The calculation of farmer and industry welfare changes can be seen graphi-cally in Appendix 1.


Table 1Soybean seed market overview in Argentina

Year Units 1996 1997 1998 1999 2000 2001

Area ha 6,002,155 6,669,500 7,176,250 8,400,000 8,790,500 10,300,000Seed rate bags/ha 3.71 3.31 3.71 3.74 3.18 3.30Demand bags 22,267,995 22,076,045 26,623,888 31,416,000 27,953,790 33,990,000Average price $/bag 7.65 8.16 11.00 8.00 7.00 10.71Total market value $ 170,350,162 180,140,527 292,862,763 251,328,000 195,676,530 364,032,900Formal seed industry share % 52% 47% 35% 30% 25% 20%Formal seed industry share $ 88,582,084 84,666,048 102,501,967 102,501,967 48,919,133 72,806,580

Sources: AACREA, 2001; Accari, 2000; AREI Updates 1996, 1997; GAO, 2000; SAGPyA, 2001 and authors’ calculations.

(Figs. 5 and 6). All of the interviewees (9) within Pioneer con-curred with the financial analysis that the lack of IPR protectionwas significantly affecting their soybean seed business.

The lack of IPR reduces the potential market for Pioneer,and its remaining size is not sufficient to justify a specificbreeding program (Director of Marketing, Pioneer).

Soybeans nowadays are not a good business; there is notenough control of the brown bag problem (District SalesManager, Soybeans, Pioneer).

5.1. MELI tactics

Theory posits that these losses would necessitate MELI tac-tics by the industry in general and Pioneer more specifically.The preferred mechanism among the developed countries isa functioning property rights protection system combined withretaliatory trade sanctions (Globerman, 1988). The U.S. and Eu-ropean pharmaceutical industry has been severely affected bythe weak property rights environment in Argentina. The indus-try estimated its losses due to piracy in Argentina in 1995 at 540mUS$ and urged the U.S. government to intervene (ChemicalMarket Reporter, 1997). By March of 1997, the United States

Table 2Agricultural seed prices in Argentina

Corn (US$/80 k) Soybean (US$/50 lbs)

U.S. Argentina Pioneer U.S. Argentina Pioneer

1996 78 n/a 53 15 n/a 131997 84 n/a 54 16 n/a 91998 87 87 42 17 11 231999 88 87 45 17 8 192000 88 65 50 17 7 302001 92 n/a 21 n/a n/aAverage 86 80 49 17 9 19

% of U.S. price 93% 57% 51% 110%GAO Estimate (1998)Average price 95 87 18 11

% of U.S. price 92% 61%

Sources: AREI updates 1996, 1997; NASS agricultural prices, 2001; GAO,2000; Pioneer Argentina financial documents; Accari, 2000.

invoked sanctions against Argentina consisting of a partial with-drawal of the Generalized System of Preferences (Humphreys,1997). In light of the pharmaceutical industry’s losses and re-sponse through lobbying, we sought to compare it with theresponse by Argentina’s seed industry.

The pharmaceutical industry has maintained a very activelobbying effort in Argentina, including the local companies. . . they have achieved having their patents recognized here,but as far as I know there has not been any case where theyhave imprisoned somebody for violating medicinal patents(Corporate Attorney, Argentinean Seed Association).

They (pharmaceuticals) are very well organized, I think thatsooner or later we (seed industry) are going to that kind ofcontrol . . . but right now this (weak IPR) represents a strategicadvantage10 against the economic power of the US, Europeand Japan . . . however I do not agree on basing a country’scompetitive advantage on something illegal. . . (COO, Largefarmer/distributor in Argentina).

There is an enforcement effort coordinated by the govern-ment agency INASE (Instituto Nacional de Semillas, NationalSeed Institute) but its efforts are fairly anemic. The seed com-panies support the enforcement effort by contributing to INASE0.10 US$ per bag as part of the seed certification process. There-fore this program only generates an estimated 740 thousandUS$ per year (∼1% of sales) for all seed enforcement andcertification.

The seed industry also invests in lobbying through the Ar-gentinean Seed Dealers Association (Asociacion de SemillerosArgentinos, ASA) and Association of Registered Plant Pro-tection (Asociacion de Registro de Propriedad de ObtencionesVegetales, ARPOV). These two industry groups also are tryingto address the problem by raising awareness of the illegality ofbrown bagging as well as the potential harm to the country.

10 The observation made by a large farmer/distributor astutely reflects thetradeoff for the country of maintaining weak IPR. The soybean industry includesthe crushing sector, which is one of the most vibrant sectors in the country interms of investment and exports. Violation of soybean seed patents allowsArgentina to readily expand soybean production, thus providing cheap inputsto the crushing sector.


Table 3Strong IPR welfare scenarios

IPR environment Surplus Market size Informal share Formal share Appendix 1 coordinates

Weak CurrentPlanted hectares 10,300,000Farmer surplus $208,147,585 $364,032,900 $291,226,320 $72,806,580 NGJIndustry surplus $0 assume no economic profits

Strong Elastic demand 1:1Planted hectares 3,326,000Farmer surplus $16,302,177 $185,776,391 $0 $185,776,391 NKLIndustry surplus $83,899,015 JILKFarmer change ($) −$191,845,408Industry change ($) $83,899,015Farmer change (%) −92%Industry change (%) —

Strong 2:1Planted hectares 6,652,000Farmer surplus $106,657,227 $371,552,782 $0 $371,552,782 KMOIndustry surplus $167,798,030 JHMKFarmer change ($) −$101,490,357Industry change ($) $167,798,030Farmer change (%) −49%Industry change (%) —

Strong Inelastic demandPlanted hectares 10,300,000Farmer surplus — $663,824,700 $0 $663,824,700 IndeterminateIndustry surplus $299,791,800 JGPKFarmer change ($) —Industry change ($) $299,791,800Farmer change (%) —Industry change (%) —

We are aware of the brown bag problem; also the govern-ment is concerned, because we are looking for a fair return to(R&D) investments. Brown bag is not completely legal andwe are working on campaigns to increase awareness (aboutIPR importance). We want to talk to producers and make themunderstand that they are compromising their future availabil-ity of better varieties (by buying brown bag seed) . . . we areintensifying this program and also proposing new and moreproactive policies that promote the use of legal seed, probablywith tax advantages (Association President, ASA/ARPOV).

-

20

40

60

80

100

120

1996 1997 1998 1999 2000

Year

Ind

ex *

corn soybean

Source: Source: Pioneer internal documents, 2000∗ Indexed to 1996 soybean sales.

Fig. 5. Pioneer Argentina corn and soybean sales.

5.2. Pioneer and MELI tactics

Though losing millions annually, Pioneer engages in fewunilateral MELI activities. They consider the IPR problem tobe difficult to solve and beyond their scope.

We had problems in the past with our dealers that were mul-tiplying and selling illegal seed, but we got rid of them . . .

the truth is that now we are not doing enough we should beputting pressure as an industry through ASA/ARPOV and

-

50

100

150

200

250

1996 1997 1998 1999 2000

Year

Ind

ex

Corn soybean

Source: Pioneer internal documents, 2000∗ Indexed to 1996 soybean profits.

Fig. 6. Pioneer net profits.


joining efforts with the pharmaceutical industry . . . thereshould be a much more organized effort with much moremoney spent on lobbying to make the government realizeabout all the lost investment and lost jobs . . . I am sure thatthey would understand the importance of this . . . but thisshould be an industry wide effort, not only from Pioneer(CEO, Pioneer).

Pioneer is not responsible for solving this problem, officialinstitutions like INASE should regulate and control to avoidthe brown bag commercialization . . . but they are not doingtheir job as they should (Central Regional Sales Manager,Pioneer).

Theory also offers internalization as an option to solve therent appropriability problem (Vishwashrao, 1994). Pioneer hasnot chosen this tactic, preferring to outsource. Pioneer main-tains control over the parental seed and then allows distribu-tors to produce, package, and market the seed. Though no onewould directly admit it, there was strong evidence (contrary tothe earlier comments by the CEO) that brown bagging was stilloccurring within Pioneer’s own distribution channel. However,Pioneer needs its distribution channel to move other productsand bundle Pioneer products with other input and service offer-ings. In essence soybeans serve as a loss leader.

The demand for second generation (not produced by Pio-neer) soybeans in a weak IPR environment is almost com-pletely elastic. Substitutes abound whether they be saved seed,brown-bagged seed, or parallel imports. Even if Pioneer were toattempt greater channel control by contracting with farmers andtaking control of the grain at harvest, they realistically couldnot prohibit contraband trade and seepage.

This reality drives a firm such as Pioneer to employ alter-native marketing strategies as a “second-best” solution. Theydo not employ any of the MELI strategies, to any degree, butinstead focus on a full marketing mix of products and servicescombined with a reduced investment in the soybean businessunit. Pioneer manages its product offerings to maximize profitsin a second-best world by minimizing costs and leveraging thehomogeneity of the product and its complementarity with corn.MELI strategies are costly, especially with limited prospects ofseeing any changes in rent appropriability in the short run.

6. Research and development

Proposition 4: Weak IPR will reduce investment in the South(Stamm, 1993) and could specifically reduce R&D expendituresaffecting the rate of innovation (Helpman, 1993; Mansfield,1994; Vishwasrao, 1994).11

Pioneer records show that over the last five years the CornDivision has received 33.6 times more investment in researchand development than the Soybean Division (Fig. 7). In terms

11 Earlier references are: Benko, 1987; Globerman, 1988; Sherwood, 1990;Chin and Grossman, 1990; Diwan and Rodrik, 1991.

-

10

20

30

40

50

60

70

80

1996 1997 1998 1999 2000

Year

Ind

ex

Corn Soybean

Source: Pioneer internal documents, 2000.∗Indexed to 1996 soybean division research assets.

Fig. 7. Research division net assets∗.

of R&D expenses, the Corn Division is significantly higher(Fig. 8). Interviews with management confirm this disparity inR&D investment and claim it is due in part to Pioneer’s inabilityto protect IP:

I consider that if the (IPR) conditions would change, therewould be a soybean breeding program similar to corn. I rec-ognize that doing soybean breeding is easier, but I am surethat the testing program would be much bigger than what itis right now (Director of Marketing, Pioneer).

Argentinean farmers do not value that we go and demon-strate the quality of our products, that we provide him withan adequate technological package; the research behind ourproduct. . .. (So) Pioneer invests and it is not profitable be-cause the farmers chooses the brown bag, while doing thishe (the farmer) is discouraging marketing or research in soy-beans (District Sales Manager, Soybeans, Pioneer).

Pioneer Corn Division’s R&D has a budget of approximately3 mUS$. The lack of investment specifically means a loss offacilities, technical equipment, specialized soil preparation andharvesting technologies, and technology jobs.

-

5

10

15

20

25

30

35

1996 1997 1998 1999 2000

Year

Ind

ex

Corn Soybean

Average corn: Soybean ratio = 7

Source: Pioneer internal documents, 2000.∗ Indexed to 1996 soybean expenses.

Fig. 8. Pioneer research expenses.∗


In corn research, the whole industry expenditure should bearound 15 mUS$ with 20–30 researchers per firm, that isaround 300 people, probably half of them with M.S. andthe other half with Ph.D. (degrees). . . within Pioneer wehave 18 researchers and a budget of around 3 mUS$. . .but insoybeans nobody has anything, nothing serious, because it isnot profitable, nobody invests . . . there are some groups thatshould be concerned about this, but nobody seems to care . . .

the situation is similar with sunflower (CEO, Pioneer).

6.1. Supply

The supply division takes product developed in R&D andincreases production of the product for commercial purposes.The supply function involves field operations to generate thenecessary quantities of seed and processing infrastructure toclean, sort and package the finished product. The investmentdifferences between the supply stages of corn and soybean aredramatic. Over the last five years, net assets in supply operationsof the Corn Division were 174 times greater than the investmentin the Soybean Division.

Interview responses support the financial data. Pioneer’s Di-rector of Plant of Operations describes how the company lever-ages the corn infrastructure to produce soybeans in an attemptto maximize the company’s returns.

I will answer that in terms of our infrastructure, this plant isspecific for seed corn production, we have been producingsoybean all these years using the corn technology . . . wetry to synchronize the soybean crop so that the plant is freeof corn and we can process soybeans . . . we have to takespecial care to process soybean seed because it is very easyto damage (Director of Plant Operations, Pioneer).

In soybeans, zero investment in infrastructure, that is it, wedo not invest in soybeans; we use what we have here andmaximize it (Director of Plant Operations, Pioneer).

7. Distribution and marketing

In terms of the distribution and marketing stages, weakIPR affects the Corn and Soybean Divisions differently.Vishwasrao (1994) raised an important theoretical argumentoffering internalization as a strategy for protecting a firm’s IP.This is consistent with the theory of the multinational enterpriseas a risk attenuating mechanism (Caves, 1990; Goldsmith andSporleder, 1998; Rugman, 1982). The Pioneer case shows anopposite result. Outsourcing is preferred in the Soybean Divi-sion where independent seed dealers perform multiplication,final packaging, and distribution stages. Internalization occursin the Corn Division, not because of weak property rights, asmight be expected, but because of strong property rights. Thefirm’s ability to appropriate the rents from its technology in its

corn division justifies investment in specific assets, reflectingthe more favorable risk environment.

Pioneer financial records support greater expenditures andinternalization in distribution and marketing in the Corn Divi-sion. The costs of goods sold (COGS) and marketing expenseshave on average been 2.75 times higher than in the SoybeanDivision.

. . . my boss asks me to mainly focus on corn, and that isreasonable, because it is in corn where we conduct moreresearch, where we spend more and also gives us the bestprofitability, and that is the goal of a firm . . . (District SalesManager, Corn, Pioneer).

The COGS differences also reflect differences in human re-source training costs.

During training to marketing staff, the first priority is corn,second soybeans and alfalfa and finally sorghum, sunflower,but that depends on the agro ecological zone that a dealercovers (District Sales Manager, Corn, Pioneer).

Not only do direct cost functions differ as a result of weakIPR, but the indirect effects as well. Focusing simply on theR&D units, the Corn Division returns over 310,000 US$ morein the form of wages and salaries12 to the economy as a whole(Pioneer, 2001a). There are not only fewer people employedin the Soybean Division but the quality of their jobs also suf-fers. This case highlights that for a developing country suchas like Argentina, with an excellent education system, weakIPR inhibits the development of high quality jobs. One ofthe executives of a large farming and input supply companycommented that young people graduating from the univer-sity system become frustrated with domestic job prospects andare forced to look outside the country for rewarding types ofemployment.

Proposition 5: Weak IPR causes firms to offer inferior prod-ucts and services (Globerman, 1988; Sherwood 1990; Stamm,1993) and technology transfer will be slower in the weak IPRenvironment (Chin and Grossman, 1990; Stamm, 1993).

As shown in Proposition 4, Pioneer effectively reduces itsinvestment in Argentina as a strategic response to the weakIPR environment of the country. Proposition 5 asks whetherthis reduced investment causes a negative performance biason Pioneer’s Southern operations. In a weak IPR environment,Sherwood (1990) predicts that production processes will beoutdated while Stamm (1993) expects that service levels will belowered and distribution systems will be less reliable. Thereforein the context of this case study, product offerings should differbetween the North and South and/or a marketing time lag couldexist before products are released in Argentina.

12 Using U.S. agricultural industry output multipliers due to labor (calledinduced effects) of 1.35 (see Goldsmith and Kim, 2002), there are indirectlosses of over 100 thousand US$ from Pioneer’s R&D division alone.


Pioneer’s U.S. corporate website seeks to tailor a product spe-cific to a farmer’s unique situation and agronomic subregion.13

According to Pioneer, this high degree of product differenti-ation is necessary “due to the wide range of agronomic andgrowing conditions across North America” (Pioneer, 2001b).This level of differentiation does not occur for the Argentineanmarket. Pioneer-Argentina only presents its product offeringsin a traditional, inexpensive color brochure with little specificagronomic information. “The area of agronomic research of-fers potential for the company, but no one has explored it yet inArgentina” (CEO, Pioneer).

Directly analyzing promotional materials reinforces theCEO’s comments above. There are 44 corn hybrids in theUnited States and 22 in Argentina, a 2:1 ratio (Pioneer, 2000;Pioneer, 2001b). The diversity of product offerings is not sig-nificantly different. In the U.S. high oil corn is offered whilePioneer-Argentina offers tropical and stacked hybrids. In thecase of soybeans only seven varieties are offered in Argentinawhile U.S. producers may select from 32, a 5:1 ratio. As well,herbicide resistant (genetically modified) and nonresistant (notgenetically modified) varieties are offered in the United Stateswhile Argentina is limited to only herbicide resistant varieties.

Similarly, technology speed from North to South should beslower (Chin and Grossman, 1990; Stamm, 1993) and this wasborn out in our discussions with management.

It is a consequence of the program intensity. In soybeans, wedo not bring the latest innovations to Argentina; instead webring varieties that have been already tested and (commer-cially) planted in the United States. We bring 10 varieties andselect the best one with no additional effort, because there isno interest on obtaining the best variety in the market. Thiscontrasts with the United States where we want to have thebest variety in the market (Director of Marketing, Pioneer).

Fewer and poorer offerings and services in the weak IPRenvironment are not the result of low willingness to pay, oftenfound in poorer countries. As noted above, the corn business inArgentina is a first world market with first world investment,prices, products, and industry competitiveness.

And when the farmers realize that the companies are notdoing any kind of (soybean) research and they will not haveproducts that are three years old, instead they will be fiveyears old and they start to notice effects in the yields, theywill start to be concerned . . . (CEO, Pioneer).

That risk is real, if the genetic development of a species isstopped, there could appear new problems, some of them inthe short term. That is our concern in auto pollinated crops(Director of Certification and Control, INASE).

These results demonstrate that the welfare impacts con-cerning technology flow are more complex than previously

13 For this reason, in order to make appropriate comparisons, we focused onthe state of Tennessee, which has similar weather and geographic conditions tothe main crop area in Argentina.

thought. These results describe a slowing of the technologyflow in a weak IPR environment. This is contrary to the the-ory supporting Proposition 6 that technology speed would beslowed, not accelerated, in a strong IPR environment due tomonopoly pricing. The tradeoff becomes the classic welfaredebate of equality, providing traditional technologies to all;versus efficiency, providing advanced technologies to some(Goldsmith, 2001; McNulty, 1968). In our case, is South-ern welfare greater with a broad diffusion of dated technolo-gies or a narrow diffusion of novel technologies? Added tothe debate are the lag effects. Currently, as discussed above,Argentina’s production and competitiveness is little affectedby the use of dated products, but over time is Argentina’sglobal leadership in soybean production and processing atrisk?

Proposition 6: Weak IPR allows the South to have access tonew, welfare-improving technologies and promotes its diffu-sion (Chin and Grossman, 1990; Gould and Gruben, 1996;McLaughlin et al., 1988; Vishwasrao, 1994; Stamm, 1993).

It is assumed that weak IPR promotes technology transferfrom the North to the South, allowing farmers in Argentinaaccess to novel technologies. Also, once the technology arrivesin the Southern country it rapidly diffuses because of low pricesand good product performance. This hypothesis implies thatlax IPR would allow the South to obtain technology that wasdesigned for the North, at the marginal cost of “pirating.”

Globerman (1988) and Diwan and Rodrik (1991) predictthat under weak IPR prices should fall allowing for greaterdistribution of the product. In Argentina this is the case assoybean seed prices are significantly lower while corn prices(including transgenics) are comparable with those in the U.S.(GAO, 2000). The president of the Argentinean Seed Associa-tion concurs. “Sometimes it is necessary to adapt the productprice to local conditions, that is a reality . . . the brown baghas driven down the (soybean) seed market prices” (President,ASA).

Pioneer’s recent strategy to raise the price of their soybeanseed demonstrates an important impact of weak IPRs on theseed industry; the creation of two types of markets. The pri-mary supply (80% of the market) for soybean seed is almostperfectly elastic due to an abundance of substitutes (replantedand brown-bagged seed). The secondary market is much smallerand is derived from the industry’s need to “prime the pump”periodically with new genetic material. The demand associatedwith this pump priming is inelastic and more similar to the styl-ized model of a technology monopoly. Most of Pioneer’s Soy-bean Division income now comes in the form of royalties paidby the distributors/multipliers. Interviews describe this pumppriming process where “brown-bagged” seed is marketed notonly as originating from Pioneer seed stock but also originatingfrom a specific Pioneer variety; pirating the product as well asthe brand.

In the case of Argentina, weak IPR has allowed for greaterdiffusion of the technology. RR soybean technology came to


Argentina in 1996. By the year 2000 it represented over 90% ofArgentina’s crop. Low prices combined with the high demandfor the RR technology stimulated high rates of adoption in Ar-gentina. RR soybeans fit very well with local cultural practiceswhere soybeans are double cropped using no-till planting14 withcorn or wheat.

Not only has weak IPR allowed for greater diffusion, but thetechnology requires fewer inputs and its performance is moreconsistent than corn. In this way Argentina could achieve com-parable performance from the product with little local technicalor R&D support. It is a unique feature of Pioneer’s soybeanproducts that contain the RR technology that almost all of thevalue of the product is derived from the IP (the technologybundled in the seed). If you own the seed, you can successfullydeploy the technology. This is a case study in which weak IPRallows for full transfer of the product between the North andthe South. Diffusion is enhanced because nothing is left behindallowing for suboptimal performance.

8. Conclusion

The Pioneer case study provides insight into the complexempirical outcomes surrounding the North–South debate overweak IPR. We used six theoretical propositions to assess thewelfare impacts of weak IPR. Not only are there different win-ners and losers among the six propositions but within eachproposition the sectors within the agricultural value chain are af-fected differently. In this way the sector under analysis emergesas critical when drawing conclusions about welfare impacts.

At the transactional level of analysis, clearly our resultsshow how the Northern firm loses while the Southern consumer(farmer) gains (Proposition 3). The loss for the firm is not com-plete though. The Pioneer case shows an endogenous processwhereby the firm adjusts to this difficult institutional environ-ment through a second-best strategy. There are compensatingmechanisms at the transactional level to help offset the negativeimpacts of a weak investment environment due to weak IPR.Pioneer adapts to the local conditions by shifting investments,explicitly managing costs, and bundling products and services.Product homogeneity emerges not only as a windfall15 for theArgentinean farmer, but Pioneer is able to capture investmentalready made in the North (Proposition 5). Any technology andquality vacuum is filled by the domestic “brown-bag” industry.

Finally, the notion of the hierarchy of markets in a globaleconomy is not new and applies to Pioneer’s use of Argentinaas a secondary market for soybean seed. Not only does the ho-mogeneous product move from the North to the South in thecase of RR biotechnology, but also in the case of the entire tech-nology (Prop #6). Once the RR technology is sold in Argentina

14 No-till planting involves placing the seed directly into the ground with nocultivation. Mechanical weed control is replaced by chemical weed control.

15 Alternatively, there are other North–South institutional differences thatfavor the northern farmers over the southern farmers. This was discussed aboveas the motivation for the “tit for tat” trade policy strategy.

it can fully and rapidly be adopted because neither the domesticuser nor the intermediary need add any value for the product toperform optimally. This has tremendous implications for firms.International competitiveness and future growth prospects in-creasingly are shaped by a firm’s ability to protect their intel-lectual capital. Within the soybean industry, the United States’once dominant market position has now been eroded, due inpart to the rapid expansion of brown-bagged RR soybeans mar-keted in Argentina and southern Brazil that needed little in theway of complementary infrastructure, technical assistance, orproduct support.

When the unit of analysis is the industry, there are both win-ners and losers in the value chain from technology spillovers.While producers have access to fairly new technology (Propo-sition 6), the seed industry does not (Proposition 5). The lat-est soybean technology at the R&D, production, or market-ing stages is not being used in country even though almostall producers are utilizing the technology. The domestic soy-bean seed industry is not receiving any technology spillovers.This is because much of the value of the seed is containedin the seed itself, bypassing the domestic seed industry. Thisdoes take costs out of the system though by avoiding duplica-tion of seed production capabilities between the North and theSouth (Proposition 1). If the concern is only about access toa certain technology or product, and demand is homogeneousbetween the North and the South, spillovers are not importantand the concern is moot. But the Pioneer case poses a ques-tion about those needs that may be unique to Argentina and thelack of capacity to satisfy those needs. In-country technologyspillovers are essential for a country to be able to address id-iosyncratic needs. The Pioneer case supports Zigic’s concern(2000) about inequitable welfare balances because the Northcan assert its position as net-technology producing while theSouth remains net-technology consuming. The process maybe self-enforcing as Argentina, for example, gets further andfurther behind because the benefits of technology flows andthe spillovers remain in the United States with the technologyproducer.

At the national level the welfare analysis reveals additionaldimensions. As discussed above, the case describes how weakIPRs distort Pioneer’s investment pattern, strategy, and productmix (Proposition 4). The host country directly loses from thelack of investment and lost tax revenue, and indirectly fromsuppressed multiplier effects and the loss of high-quality jobs(Proposition 1). However, the risk that the industry is underin-vesting to the brink of catastrophe is overstated. Though under-investment clearly is occurring, the Argentinean soy processingindustry is one of the most competitive and dynamic in theworld. Inexpensive and plentiful raw inputs (soybeans) that areproduced by local farmers are critical to the industry’s compet-itive advantage (Propositions 1 and 2). The soybean feed andfood sector is one of the few bright spots in the current Ar-gentinean economy as it provides an important source of hardcurrency and tax revenue. The varied welfare impacts along thedomestic value chain create significant tensions as down-chain


producers and processors benefit from weak IPR while up-chainseed suppliers, like Pioneer, lose.

In the end the Pioneer case is a story about investment andhow firms adapt to their environment. IPR protection does allowfor investment that facilitates technology transfers, spillovers,and important employment opportunities. Pioneer’s Corn Divi-sion exemplifies these properties. As multinational enterprisesbecome an increasingly critical source of local capital in theglobal economy, their in-country behavior becomes more im-portant. How and in what they invest becomes significant for thehost country. Pioneer chooses corn over soybeans, not becausethey “like” corn more than soybeans, but because in corn thereis a viable business proposition. IPR protection is fundamentalto this proposition. The Pioneer case shows how the institu-tional environments in which firms operate distort investmentand firm behavior.

This gives the Pioneer case much broader implications. Notsurprisingly, firms invest in those activities in which rents areappropriable. If the product under analysis had been a criticalfoodstuff or pharmaceutical product instead of simply seed, Pio-neer’s investment choice would have much more vital short andlong-run social implications for Argentina. Weak IPR distortsproduct and service offerings. So the most compelling implica-tion of weak IPR may be that the South loses the capability toaddress its own needs and priorities, and over time the technol-ogy lag becomes increasingly more difficult to surmount.

Appendix 1: Strong IPR welfare scenarios

30.74

Price/bag ($)

Quantity of bags

52.16 63.71

22.95

10.71

33.99

19.53

9.51 19.02

Decreasing Elasticity

GHI

DCB

ML

FE

P

A

J

N

K

O

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Intellectual property piracy in a North-South context: empirical evidence

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