Economic Analysis of Cost Reducing Research for Agricultural Commodities

By Musunuru, Naveen | Indian Journal of Economics and Business, December 2007 | Go to article overview

Economic Analysis of Cost Reducing Research for Agricultural Commodities


Musunuru, Naveen, Indian Journal of Economics and Business


Abstract

Twenty-first century has witnessed worldwide increases in food production, especially due to improvements in agricultural research and development (R&D). Production of high yielding, pest and disease resistant varieties and improved management skills are some of the reasons for this increased productivity. After years of increased agricultural research spending, the rate of growth has slowed down in many countries. This is especially true in the case of United States because of its increased spending on homeland security following the events of 9/11. Research funding is particularly lacking in the areas of crop productivity and environmental issues that have the potential of improving overall social welfare. The purpose of this paper is to asses the effects of cost reducing research and its impact on the aggregate level of benefits. A disaggregated horizontal multi-market model was used in the present study to analyze the costs and benefits.

JEL Classification: Q10, Q16

I. INTRODUCTION

American society has benefited economically and socially over the past five decades due to large investment of taxpayers' money in agricultural research and developmental programs. Agricultural output increased nearly 2.6 times from 1948 to 2002. At the same time, farm input use has declined (Figure 1). Much of this growth comes directly from increased productivity through higher yielding crop varieties, more effective chemicals, efficient machinery, and improved agribusiness management skills. A key factor for this phenomenal growth has been attributed to public investments in research. During the last three decades, public investment in research has increased from approximately $2.4 billion to $3.8 billion (Figure 2). However, since 2001, many public agencies were reorganized and a majority of the governmental programs including agriculture have faced budgetary constraints due to sudden changes in the implementation of national security polices. As the public funding for agricultural research continues to decline, private sector has undergone important changes in terms of its investment policies. Increased global demand for agricultural products along with reductions in trade barriers of many countries has stirred many opportunities for private agribusiness industries to expand sales and increase research efforts. Pray and Fugile (2000) in their research, pointed that there is an increasing demand for agricultural inputs in the global market. Their statement was based on the data indicators, which exhibited a 2.23% real annual growth rate for agricultural inputs from 1983. Many private companies have invested millions of dollars in their research and product developmental activities, especially in the last ten years. Private sector agricultural research expenditures have increased from $2.2 billion in 1970 to $5 billion in 1998 (Figure 2). Generally the public sector spends most of its money on basic research whereas private sector spends its major portion on applied research programs (Koltz-Ingram, 2002).

[FIGURE 1 OMITTED]

[FIGURE 2 OMITTED]

Norton et al. (1981) reviewed and compared the most common approaches that were used to evaluate public research investment. According to the authors, Ex post studies fall into two categories: a) consumer and producer surplus analyses, estimating average returns to research, and b) production function analyses, estimating marginal rates of return to research. Ex ante studies fall into four groups: (a) those using scoring models to rank research activities, (b) those employing cost-benefit analysis to establish rates of return to research, (c) those using simulation models, and (d) those using mathematical programming to select an optimal mix of research activities. Carew (2001) presented quantitative data to show how research expenditure patterns have evolved in response to institutional and organizational changes in research policy. …

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