Academic journal article Journal of Agricultural and Resource Economics

The Effect of Innovation on Agricultural and Agri-Food Exports in OECD Countries

Academic journal article Journal of Agricultural and Resource Economics

The Effect of Innovation on Agricultural and Agri-Food Exports in OECD Countries

Article excerpt

This paper investigates the effect of innovation on primary agricultural and processed food product exports among the Organization for Economic Cooperation and Development (OECD) countries. A theoretical gravity equation that accounts for innovation is derived. The empirical exercise uses panel data sets covering 21 OECD countries for the period 1990-2003. The R&D capital stock is employed as a tangible way of measuring innovation. Empirical results show that R&D has enhanced exports in the primary agricultural sector. Meanwhile, the market expansion effect of R&D appears to be more than offset by the market power effect in the food processing sector, resulting in a decrease in exports. Also, evidence was found of a positive vertical channeling effect through which R&D in the primary agricultural sector increases exports of processed food products.

Key words: agriculture, food, gravity equation, innovation, OECD, R&D

Introduction

With advances in globalization, innovation has taken on greater importance. One of the desired effects of innovation is to promote the lower cost of goods over time, space, and form (e.g., attributes such as variety, safety, quality, etc.). According to Shy (1996), innovation is "the search for, and the discovery, development, improvement, adoption, and commercialization of new processes, new products, and new organizational structures and procedures" (p. 221). This definition is sufficiently broad to encompass a variety of different aspects of innovation and technological adoption. Although the description and measurement of how innovation affects the level of prosperity in the agricultural sector has been well documented (Alston, Norton, and Pardy, 1995), the impact of an increased investment in innovation on the level of trade is a topic that has received scant attention in the agricultural economics literature.1 This paper uses a gravity equation to measure the impact of innovation on trade in the primary agricultural and food processing sectors for Organization for Economic Cooperation and Development (OECD) countries.

Innovation is thought to influence the level of trade in three important ways:

* First, innovation may result in increased product differentiation, which provides consumers with either more variety choice and/or higher quality products. Hence, product differentiation can lead to the opening up of new consumer markets.

* Second, innovation lowers the cost of production. This is consistent with the textbook explanation of innovation which shifts the supply curve outward. A variant of the sector-specific cost-reducing innovation is the general (non-sector-specific) cost-reducing innovation. For example, innovation leading to reductions in transportation and infrastructure costs may eventually increase exports. Countries with enhanced roads, telecommunications networks, and internet capacity are able to increase trade due to the lower costs of conducting business (Bougheas, Demetriades, and Morgenroth, 1999; Freund and Weinhold, 2004; Martmez-Zarzoso and MarquezRamos, 2005).

* Finally, innovation can reduce transaction costs along the supply chain and make exports more competitive. For example, new business arrangements, such as improved inventory control, can increase the competitiveness of a firm and lead to an increase in trade.

The effect of innovation is not always to increase exports. Innovation associated with differentiated/higher quality products can cause some firms to gain market power and increase their markups beyond direct costs. In the longer run, when spillover and imitation do not induce fast erosion of the price markup, innovation would lead to a decrease in exports. This outcome occurs when there is some degree of appropriation of innovation (e.g., creating a brand name around the new differentiated product or an effective patent system). To this end, the effect of innovation on trade is at best ambiguous. …

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