1. 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)

2. 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

3. 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

4. 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 , universities’ ownership of IP is legally
approved.

5. 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

6. 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

7. 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

8. 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