Denis Nadolnyak
Department of Agricultural Economics and Rural Sociology, Auburn University

Introduction of crops genetically engineered to increase agricultural productivity has the potential of dramatically increasing returns in the agricultural sector and alleviating the problem of feeding the growing world population. Further advancement and direction of biotechnology research and development (R&D), as well as marketing of biotechnological innovations, depend critically on current and potential foreign market opportunities. The strengthening and harmonization of global intellectual property rights via the WTO rules, especially via the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement, may increase market potential in many parts of the world where, heretofore, agricultural biotechnology has been only marginally profitable.
However, little is known about the potential profitability and marketability of GM crops in different parts of the world. Yet it is largely the profitability of agricultural biotechnology products that determines the future direction of R&D, the pattern of GM crops diffusion worldwide, and thus the magnitude and distribution of the gains. Consequently, methods should be sought that circumvent these data limitations.
In this article, we study market entry decisions of biotechnology firms. Observed instances of market entry, or product introduction, are viewed as outcomes of profit maximizing decisions based on comparison of unobserved entry costs, expected future returns, and the value of managerial flexibility, i.e., the right but not the obligation to enter a market with a GM product. The market entry process is estimated using a model grounded in real options theory. The process is estimated using simulated maximum likelihood.
The estimates suggest that, in the developing countries, the downward volatility of the returns is higher resulting in lower adoption rates, whereas the environment in the top four industrialized GMO adopting countries appears to be costlier but much more optimistic. The costs of market entry relative to the expected returns decrease over time in all the regional markets considered. The industrialized countries have a notably higher return (revenue) to market entry cost ratio than the developing countries. This explains the fact that only a small proportion of the available pool of GM crops is marketed in the developing world.
Estimates for Argentina, Brazil, and the U.S that account for almost 80% of the total area planted with GM crops show that the costs of market entry with GM crops decline very slowly, most likely because of the initially low entry costs due to the initial lack of bias against herbicide and pesticide tolerant GM crops, leaving less room for later entry cost reductions.  Higher relative entry costs for the three dominant crops are offset by higher upward, and significantly lower downward, return volatility which is consistent with the overwhelming commercial success of the three crops in the region. The low variance of the initial return distribution is indicative of the similarity of marketing potential of the traits developed primarily with these countries in mind. Unfortunately, data scarcity and less transparent GMO approval regulations do not allow estimation of market entry in other interesting regions, such as China and the EU.
The findings may contribute to the general understanding, measurement, and possibilities of controlling the rate of technical advance in biotechnology.