Volume 26 Number 1 June 2001

Editor - Robert Marks

A s the aftermath of the bursting of the dot-com bubble continues to take its toll in the computer and communications industries, some are pointing to another growing industry with the potential to affect our lives much more than the Internet has ever done: biotech, or more specifically, genetic biotech.

We can look at this industry from the potential demand for its products, and from the advances in knowledge and techniques which are necessary for its supplying new products.

Biotechnology deals with organic compounds, broadly. That is, with carbon-based compounds related to life. (Chemists use 'inorganic' to refer to other, non-carbon-based compounds; and marketers use 'organic' to imply 'naturalness' for their food products, thus turning chemists into an army of lexicographical irregulars, defending their meaning of the word against its perceived misuse.) There are broadly two kinds of demand for organic compounds: as foods and as medicines. Humankind has been breeding plants and animals for millenia, in a kind of artificial selection that has resulted in the main cereal crops, the main livestock species, and also animals as pets and plants for spices, for herbs, and for delight, both visual and psychoactive (Pollan 2001).

Almost a hundred and fifty years ago, Charles Darwin (1859) (& Alfred Wallace 1858), reflecting on economist Thomas Malthus' (1803) argument that with agricultural food production growing linearly while human populations grew exponentially there was bound to be increased scarcity of food, developed the idea of natural selection as the origin of species. In Richard Dawkins' phrase, natural selection was the 'blind watchmaker' (1986) that evolved the diversity of life as we see it, in an entirely undirected way. Dawkins' phrase echoes Adam Smith's (1776) 'invisible hand', although the former describes a force for change that can't see, and the latter a force for change that can't be seen. But both are what we would now call 'emergent', from the struggle in scarcity for life and offspring, and from individual decisions and actions of market participants, respectively. Did Smith's concept in 1776 ease the way for Darwin (& Wallace) to conceive of theirs, sixty-odd years later?

The demands for food and health are as strong as ever at the individual level; indeed, rising standards of living and increased longevity have led to increased demand for health care in industrialised and industrialising nations. The weight of human population growth on the environment and its capacity to feed us, to clothe and shelter us, has also led to a growing desire for the technological fix, such as the Green Revolution in agriculture thirty years ago.

As someone born in 1946, I am also aware of the baby-boomers' rising expectations that the new biotechnology be harnessed, soon, to alleviate their future predicament: to deal with the cancers and dementias they have seen their parents ailing and dying from.* Indeed, this is probably a case of demand being stimulated by perceived improvements in supply, given the media's trumpeting of 'medical breakthroughs'.

* As the innovative custom-designed drugs for cancer reach the clinical level - Herceptin for some breast cancers, Gleevec for some leukaemias and stomach cancers (Wade 2001) - the issue will increasingly be how these therapies (up to $50,000 per year, in some cases indefinitely) should be paid for. The Australian Pharmaceutical Benefits Scheme is already costing ever more millions of dollars per year, and the new designer drugs are not yet subsidised by the Scheme (Sketris & Hill 1998).

Until recently, the 'blind watchmaker' was, like the 'invisible hand', unseen as well. The discovery of the structure and composition of DNA as the watchmaker's blueprint by Frances Crick and James Watson (1968) almost fifty years ago showed us where the veil hung, but it has only been in the past twelve months, with the decoding of the human genome that the veil has been lifted, and the blueprint fully revealed. Understanding how the cell uses its DNA blueprint to develop its character and behaviour from the 30,000 human genes is now the focus of the biologists' research, a combinatorially complex problem (Johns 2001), the new field of proteomics.**

** Marc Wilkins, then at Macquarie University, coined the word in 1994 to describe the large-scale study of proteins coded for by genes (Safire 2001).

But biotech advances are not confined to the Genome Project and to proteomics. Of great concern is the growing resistance of microbes to antibiotics. Indeed, the choice of using large amounts of antibiotics in animal husbandry is a form of the Prisoner's Dilemma know as the Tragedy of the Commons (Hardin 1968): my profits are higher if I do so, but in the long run we all pay the price of increasing resistance because of over-use (Laxminarayan 2001). New, designer antibiotics, together with some means of correcting the perverse incentives facing the users of antibiotics, especially in animal husbandry, may reverse the rise of resistance, at least for some time. Stem-cell research potentially paves the way for hitherto undreampt-of therapies, but at the same time the spectre of whole-body human cloning evokes strong political reactions. Meanwhile, a convergence of biology and electronics, the biological microchip, or biochip, has hugely accelerated the rate at which screening can occur in the search for potentially useful naturally occurring organic compounds from plants and animals.

Prion diseases, most spectacularly bovine spongiform encephalopathy and Creutzfeld-Jakob Disease in humans, have turned the spotlight on variant foldings of proteins, which apparently have the power to elicit sympathetic refolding when they come into contact with standard proteins. Understanding and predicting these possible foldings is taxing the largest computers.

With our increased understanding of the genome (ours and other species') has come the temptation to improve on nature's handiwork by introducing genes from other species, in order to confer on the donor offspring such characteristics as resistance to plant pests, therapeutic values, better drought tolerance, new colours (the blue rose), and so on. But, perhaps as a consequence of the dismay felt by many at the behaviour of the UK officials during the early years of the mad-cow epidemic, public opinion has been suspicious of official reassurances that transgenetic organisms are not merely safe in the environment, but that genetically modified foods are safe to eat. It is not always clear that what is being transferred is information, not protoplasm. Indeed, the genetic biologist's role is increasingly that of manipulating information, both in vivo and in silica (in life and in computer), using computer simulations. Johnson (2001) reports that biology has now outstripped physics in its demand for computer power, first in genomics, latterly in proteomics.

What are the prospects for windfall profits among genetics biotech firms in the industry? Even with recently strengthened intellectual property rights, not too good. Adoption of the Internet is just the most recent technological revolution in which competition among the new firms (previously, railways, automobile companies, electricity utilities) has kept their profits down while accelerating the spread and adoption of the new technology with falling prices, to the great benefit of the final customers, as The Economist argued in a recent survey (The Economist 2000). Nonetheless, the growing demand for cancer cures, for bespoke antibiotics, for healthier old age, for cures for dementia, means that, despite the daunting costs of such research, competition among firms for these glittering prizes will not slacken.

Papers in This Issue This issue contains two papers on finance, one on organisational behaviour, one on marketing, and one on economics. As such, the range is broader than has been the case for the past few years, but reflects, perhaps, the influence that we hope the special issues will bring to bear on the range of papers submitted to the Journal. The first of these, last September on Market Orientation, was edited by Mark Uncles, the Marketing area editor. Future special issues will be edited by Sharon Parker (the Organisational Behaviour area editor) with Robert Wood, by Ian Marsh (the area editor responsible for Government Policy and Regulation), and by Garry Twite (the Deputy General Editor) on Mergers and Acquisitions.

The Capital Asset Pricing Model, developed in the 1960s, revolutionised empirical analysis of equity markets. Yet other models have also been suggested, sometimes in response to perceived shortcomings of the CAPM and its beta coefficient. One of these is the Fama & French three-factor model, which introduced size and the book-value-to-market-value ratio of the asset as additional possible determinants of the return to an asset. In order to operationalise this model, however, there have been difficulties surrounding the nature and construction of the size and book-to-market factors, especially in smaller markets without ready access to extensive and reliable data over sufficiently long periods. Faff uses a relatively simple way around this problem: to use industry-based portfolio as 'test assets' to derive the three Fama & French factors (which include the excess market return factor of the CAPM model). He finds that this technique does appear to work, allowing the Fama & French model to be tested: his data support the F&F three-factor model, although he finds that taking into account the estimated risk premia reduces the confidence of this conclusion somewhat. His main perverse finding is that the size risk premium is significantly negative.

The equity markets of Faff's paper are related to two other markets: markets for bonds and markets for money. To what extent are these three markets seen as substitutes? As complements? To what extent are they related at all? The second paper, by Kim, In, and Vine, explores the dynamic interdependence of the Australian financial futures markets: those for 10-year Treasury bonds, 90-day bank-accepted bills, and the All Ordinaries share price index futures. They also posit that the free flow of capital, increased globalisation, and deregulation of international capital markets, combined with the Internet, have led to increased market interdependence, where there is a close association between volatility movements on these markets, spillovers, and information flows. If an investor, anticipating increased share-price volatility, switched a proportion of her portfolio from stocks into bonds to better manage her risk exposure, she would be stymied if volatility between stocks and bonds were highly correlated. Indeed, the author found significant volatility interactions across the three markets, so that news originating in one of these markets affects the volatilities of the other two, positively or negatively.

To understand market behaviour and reactions it is necessary to be aware of events, news and perceptions. Perceptions may matter too within organisations. For instance, to what extent will employees' perceptions of how an organisation is managed, of the shared value systems within an organisation, affect their attitudes to working for the organisation, and so their decisions and behaviour at work? Further, to what extent will the relationship between managers' involvement in their organisation's budget deliberations and their work behaviour be moderated by their perceptions of the organisation's culture? This is the question asked by Subramaniam and Ashkansy. Their empirical study considers how the impact on managers' job-related tension of their involvement in the organisation's budget is affected by their perceptions of the organisation's culture. They find that higher budgetary participation is associated with lower job-related tension (and presumably with better managerial performance) when there is a perception of a high level of innovation within their organisation, and when there is a perception of a low level of innovation and a low attention to detail. A perception of a high attention to detail reduces the positive impact of budgeting participation on job-related tension, however. The overall lesson seems to be to give a higher degree of involvement and autonomy to managers, while not being too intrusive (attending to details), although whether the lower levels of job-related tension result actually lead to better organisation performance in the market, say, will have to wait further research.

Management is increasingly about change. Change within the organisation, and change beyond. Marketers, for instance, are in the business of inducing changed behaviour, or at least changed perceptions, in consumers, by pricing, by packaging, by information and so on. Hence measurement of these changes becomes necessary. A common form of measurement of changed perceptions is the difference measure. Dowling, borrowing from the organisational behaviour literature, argues that this may well be flawed, conceptually and practically. Changes in the level of perceptions may be confounded by recalibration of expectations as a consequence of the changes, but worse, changes in the definition of one or more measured constructs may mean that measured changes in levels, even if recalibrated to revised expectations, will be meaningless. Dowling illustrates these three relationships in an example of change in service quality.

The final paper is also concerned with changes in firm performance, specifically, the impact on firm survival and performance of the imposition of tighter regulations (the US Occupational Health and Safety Administration cotton dust standards after 1981). Feroz, Raab and Haag argue that, although regulation forced some firms from the industry because of higher costs and their reluctance to invest in the new, capital-intensive technology, the surviving firms, those that could afford to invest in the required new technology, benefited from the increased efficiencies that followed, especially in their rivalry with increased foreign competition. Whether the regulation actually benefited the firms (as opposed to their employees and their neighbours) or whether the regulations merely hastened the demise of the non-efficient 'tail' of the industry is not really resolved.

Housekeeping I have referred to the three upcoming special issues above. For the first time we have used the pages of the eAJM to call for submissions for the special issue in Organisational Behaviour. Meanwhile EBSCO are preparing to make the full text of the Australian Journal of Management back to 1976 available to their clients, and we are continuing discussions with publishers about possible future relations. Our production manager, Kristie Clemow, has prepared this issue after hours, having taken a new day job in the music industry. Thanks, Kristie.

References Biochip Commercialization Project, http://www.anl.gov/oPA/news98/biobackgrounder.htm Darwin, C. 1859, The Origin of Species by Means of Natural Selection, John Murray, London. Dawkins, R. 1986, The Blind Watchmaker: Why the Evidence of Evolution Reveals a Universe Without Design, Norton, New York. The Economist, 2000, Survey: The New Economy, 23 September. Hardin, G. 1968, 'The Tragedy of the Commons', Science, vol. 162, pp. 1243-48. Johnson, G. 2001 'All science is computer science', The New York Times, March 25. Laxminarayan, R. 2001, 'Fighting antibiotic resistance: Can economic incentives play a role?' Resources, vol. 143, Spring, pp. 9-12. Malthus, T., 1803, An Essay on the Principle of Population, J. Johnson, London. Pollan, M. 2001, The Botany of Desire: A Plant's-Eye View of the World, Random House, New York. Safire, W. 2001, 'On Language: Proteomics', The New York Times, February 18. Saint-Paul, G. 2000, 'The economics of human cloning', Toulouse GREMAQ-IDEI Centre for Economic Policy Research, Discussion Paper No. DP2674, November. http://www.idei.asso.fr/English/ECv/CvChercheurs/PageEcvSt-Paul.html Sketris, I.S. & Hill, S. 1998, 'The Australian national publicly subsidized Pharmaceutical Benefits Scheme: Any lessons for Canada?' Canadian Journal of Clinical Pharmacology, vol. 5, no. 2, pp. 111-18. Smith, A. 1776, The Wealth of Nations, John Murray, London. Wade, N. 2001, 'Scientists view new wave of cancer drugs', The New York Times, May 29. Wallace, A.R. 1858, 'On the tendency of varieties to depart indefinitely from the original type', Proceedings of the Linnean Society of London, vol. 3, pp. 53-62. Watson, J.D. 1968, The Double Helix: A Personal Account of the Discovery of the Structure of DNA, Atheneum, New York.

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