Privatizing the intellectual commons: Universities and the commercialization of biotechnology BA549 Session 4: Property Rights – Theory & Application Nicholas S. Argyres Julia Porter Liebeskind Journal of Economic Behavior & Organization (1998) Eva Herbolzheimer (Updated by Nate)

Internal Organizational Standards Agenda Research Question: Why is it difficult for universities to design technology transfer programs to commercialize biotechnology? Theory Social-contractual Commitment Narrow Definition of Property Rights Limit organization boundary Internal Organizational Standards

Mission and Standards of Universities Conserving past knowledge, imparting knowledge to students, and contributing new knowledge of all kinds (Bush, 1945). Practice Knowledge as ‘open science’ in universities (as compared to knowledge as secrecy to enhance competitive advantage in private firms) Universities’ standardized internal governance rewarding academic achievements instead of commercial ones self-governance in administration autonomy in choosing research projects and collaborators separation of hiring and promotion from budgetary processes prohibitions to enter into private contracts internal checks: faculty institutions (e.g. ,departmental or school-level committees, academic senate) External enforcement Internal organizational arrangements are enforced and monitored by external parties (e.g., alumni and donors) and the concern of prestige

The Case of Biotech Highly patentable nature Dilemma Leads to the increase of the private value which increases the opportunity cost of maintaining it public rather than private Dilemma Universities maintain separate incentives and contracting policies for biotechnology besides being intellectual commons Key conditions for the emergence of pressures to recontract (Libecap, 1991) Relative prices Production and enforcement technology Preferences and other political parameters Factors affecting re-contracting for property rights over biotechnology Dramatic increase in prices especially after the discovery of gene-splicing technology by Cohen and Boyer (1973) – the discovery that launched industrial biotechnology National priority change: Universities can help US global competitiveness (David, 1994) and stimulate economic growth (Feller, 1994) A bureaucratic interest by university administrators (Feller, 1994) Necessary Regulatory Changes of Ownership Per Bayh-Dole Act in 1980 and further supported by Public Law 98-620, universities’ ownership of IP is legally approved.

Adaptive Efforts: Privatization of IP Why Task of establishing, allocating and administering IP rights in biotechnology was significant deviation from universities' historic mission Privatization (patenting and licensing) erosion of standards of open science new incentive for universities to withhold knowledge Ownership Faculty ownership conflict of interest with ”intellectual commons” standard agency problem– faculty may use university resources for personal financial gains Universities are different from firms in terms of providing social value Licensing Concern of license exclusivity ‘bench rights’—universities can use the IP contained in the license to pursue research but not to use it for commercial ends or transfer it to other parties (so firms can’t ‘choke-off’ research) Concern of the breadth of licensing rights Restrict the granting of broad-based licensing rights Royalties as incentive Faculty could withhold inventions by publishing research before any patent filed or selling to third parties High monitoring cost Effects of envy and inequities All kinds of knowledge should be equally important

Adaptive Efforts: Commercialization Why Privatization of patented inventions can be costly to licensees because of further investment and innovation to bring them to market. To lower down the cost, universities have tried organizational changes. Technology transfer offices Applying for patents, protecting the university against legal liability, negotiating license agreements, etc. Staffed by professional marketers and business professionals License revenue increased, from 1 million in 1980 to 259 million in 1991, as well as equity concern Long-term contracts with individual firms  double-bonding mechanism  firms make commitment to support ongoing research, and universities provide ongoing faculty collaboration University-owned ventures Universities invest in start-up firms to commercialize inventions (e.g. Harvard) Concerns of envy and equity problems, judgements of faculty tenure qualifications Selective intervention (second evaluation standards) is an impossible solution, because it is not convincing that commercial considerations never influence academic decisions, or because the acceptable organizational arrangements are not enough to attactat private investments (e.g., Engenics). University-based research institutes A selective intervention mechanism with the purpose of attracting more private investments Whitehead case: being criticized by its faculty appointment only minor organizational differentiation

Reactive Adaptation: Controlling Faculty Behavior More vigorous organizational standards Conflict of interest rules Outside Management Many universities (e.g. UC, Harvard, Stanford, & MIT) explicitly prohibit faculty from taking managerial roles in outside ventures and from owning equity in firms which also provide them with research funds Consulting Consulting contracts may lead to close collaboration between faculty and private firms Consulting contracts may divert faculty’s attention from teaching and research Traditionally informal conflict of interest rules become formally written ones

Conclusion Governance structure and path dependence Social Constraints Universities are a discrete governance structure The historical mission of universities being intellectual commons can create barriers to the commercialization of technologies Social Constraints Social-contractual commitments and supporting organizational standards are important constraints on university action Inertia Organization ”inertia” may have its source of social constraints This inertia may lead to new organizations or organizational forms