This paper deals with bioprospecting defined as the purposeful search for natural compounds undertaken by pharmaceutical or biotechnology firms to find leads necessary for the development of new drugs.
Bioprospecting is the purposeful search for natural compounds undertaken by pharmaceutical or biotechnology firms to find leads necessary for the development of new drugs. It requires cooperation between the bio-prospecting firm---the North---and the country hosting the genetic resources (GR) and/or traditional knowledge (TK)---the South. The host country provides basic or pure information on potential solution concepts, while the R&D firm supplies the practical capabilities for developing these solution concepts into marketable compounds and products. In this manner primary biological information is generated and channelled through a secondary R&D sector to become commercial products capable of addressing consumer needs. An important issue concerns the nature of the incentive mechanism that should govern the production of innovation within this R&D sector. The current arrangement in this industry usually provides for a single property right at the secondary stage of R&D. This raises two problems, one of efficiency and one of equity. The key question asked here is whether it is necessary to institute a distinct and separate system of IPR for TK if a fully functional system of property right for GR has been established. We demonstrate that in world in which TK and GR are complements in the production of R&D, a resolution of the property rights failure in GR also resolves the allocation failure in TK even in the absence of a distinct property rights system. The reason is that TK is akin to a private good, with the comparison of TK with a trade secret being a suitable parallel. The key aspect in the analysis is the degree to which the outside option of the South changes with courts in the North upholding a property right.