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ABARES: Public Investment in Agricultural R&D and Extension

03 January 2012

Productivity growth in the broadacre industry has slowed recently, focusing attention on the instruments available to government and industry to enable increased productivity.

Summary

Over time, public investment in R&D and extension has been a key ‘lever’ Australian governments have used to promote agricultural productivity growth. However, debate continues over the role governments should play in funding agricultural R&D and extension.

The objective of this report is to evaluate the economic effect of publicly funded agricultural R&D and extension by investigating the relationship between public investments in R&D and extension and broadacre total factor productivity (TFP) growth in Australia over the period 1952–53 to 2006–07. Productivity growth in the broadacre industry (essentially, non-irrigated crops, beef cattle and sheep) attributable to public R&D and extension was estimated using an autoregressive integrated moving average (ARIMA) model. Conceptually, broadacre TFP was modelled as a function of the stocks of usable knowledge available to farmers (as well as some other factors), where the stocks of knowledge reflect past public investments in R&D and extension accumulated over many years. The average effects of public investment in R&D and extension on broadacre TFP were also decomposed into their short-run (year-to-year) and long-run marginal effects using an error correction model.

The analysis of the average effect of the R&D and extension knowledge stocks on broadacre TFP between 1952–53 and 2006–07 demonstrated that public investment in R&D and extension has had a significant and positive effect on broadacre TFP. Past public investments in broadacre R&D and extension have generated average rates of return that could be as high as 28 per cent and 47 per cent a year, respectively. While little is known about the opportunity cost of public investment in agricultural R&D and extension, this rate of return is comparable to rates of return estimated for other developed countries (Alston et al. 2010a). Further, the growth in domestic public R&D and extension knowledge stocks arising from this investment has accounted for annual TFP growth in the broadacre industry of 0.33 per cent and 0.27 per cent, respectively (an aggregate of 0.60 percentage points a year).

An important aspect of this study was to control for the effect of foreign public R&D on Australian broadacre productivity growth. Technology and knowledge spillovers from foreign public R&D have enabled substantial productivity growth in the broadacre industry. Growth in foreign public R&D knowledge stocks accounted for an estimated 0.63 per cent TFP growth annually in the broadacre industry. The results suggest that the relative contributions of foreign and domestic research (including domestic extension) to broadacre TFP growth have been roughly equal (0.63 percentage points a year and 0.6 percentage points a year, respectively) and account for the bulk (1.23 percentage points a year) of average annual broadacre TFP growth (1.96 per cent a year).

The analysis of the dynamic relationship indicates that public R&D research strategies that invest over the long-term result in higher returns than research strategies that invest over the short-term. This finding can be used to inform the choice between short-term and long-term public investment in R&D at an aggregate level. Although slowing broadacre productivity growth could prompt policy makers (government or industry) to consider a temporary increase in R&D funding, the results from the dynamic error correction model (ECM) analysis suggest that a short-term response is not efficient and will not yield the highest payoff. Notwithstanding the nature of ongoing debates concerning the extent to which government should fund R&D, the results from this study suggest that even plausible and immediate increases in public R&D are unlikely to improve broadacre productivity growth significantly for many years.

Finally, in comparing alternative strategies to increase productivity growth, it is important to consider the likely trade-offs between investing in R&D and extension. Increased investment in extension in the short run can enhance TFP growth by bringing forward the adoption of currently available technologies and knowledge. Although individual projects should be evaluated on their own merits, at an aggregate level, reallocating existing R&D funding toward extension is unlikely to maximise long-term productivity growth.

Introduction

Increasing productivity continues to be an important policy objective of agricultural industries and Australian governments. Productivity growth is important for maintaining farm incomes against a persistent decline in their terms of trade (output prices relative to input prices) and improving the international competitiveness of domestic agricultural industries. Given increasing pressure on the natural resource base, long-term growth in production and the ongoing competitiveness of the sector will depend largely on increases in productivity.

In the long term, agricultural productivity growth largely reflects technical change, and this has been the experience of Australia’s broadacre cropping industry. Between 1977–78 and 2006–07, technical change was the key driver of productivity growth in the broadacre cropping industry (Hughes et al. 2011). With a decline in the rate of technical change since 2000, and slow growth in broadacre total factor productivity (TFP) since the mid 1990s (Sheng et al. 2011), there is renewed focus on the policy instruments available to government and industry to raise productivity growth rates. Recently, key stakeholders with an interest in the grains industry reaffirmed their commitment to achieving total factor productivity growth in the grains industry of greater than 2.5 per cent per a year within a decade (Primary Industries Standing Committee 2011).

Public investment in R&D and extension has been a key ‘lever’ that Australian governments have used to promote agricultural productivity growth. Public R&D has been an important means of developing new technologies and management practices. In turn, facilitating adoption of such innovations through extension has served to improve long-term agricultural productivity growth. However, notwithstanding Australian governments’ commitment to increasing productivity, debate continues over the role governments should play in funding agricultural R&D and extension (Productivity Commission 2011).

As a contribution to the debate, this research uses regression analysis (specifically, an autoregressive integrated moving average [ARIMA] model) to evaluate the economic impacts of public investment in agricultural research by estimating the productivity growth in the broadacre industry (essentially, non-irrigated crops, beef cattle and sheep) attributable to public R&D and extension over the past 50 years. Conceptually, broadacre TFP is specified as a function of public knowledge stocks available to farmers (as well as some other factors), where the stocks of knowledge are determined, in part, by current and past public R&D and extension expenditure (Griliches 1979).

Although public R&D and extension are expected to have a positive effect on broadacre productivity, the relative magnitude of their effects may differ, including over time (that is, in the short and long run). Recognising this, the average effects of public investment in R&D and extension on broadacre productivity are also decomposed into their short-run (year-to-year) and long-run marginal effects using an error correction model. While the results of the ARIMA model may be used to measure average returns, the results of the error correction model are useful for comparing the returns to short and long-term aggregate public R&D and extension investments.

Finally, a measure of the profitability of public investments in R&D and extension—the internal rates of return (IRRs)—are calculated. IRRs can be calculated from elasticities estimated using the ARIMA and error correction models, when the model used to convert past investments in R&D and extension into the corresponding knowledge stocks is known. Estimates of the IRR to public investment provide a measure of the return to public expenditure on agricultural R&D and extension (in terms of increased productivity), which may help to improve industry stakeholders’ understanding of the relative importance of R&D and extension.

Structure of this report

The report is structured as follows. Chapter 2 contains descriptions of trends in public agricultural R&D and extension and broadacre productivity. The literature analysing the relationship between public investment in R&D and extension and agricultural productivity in Australia and overseas is briefly reviewed in chapter 3. The model specification and estimation strategy are outlined in chapter 4. Chapter 5 defines the variables and sources of data used in the analysis. Chapter 6 presents the results and provides estimates of the effects of public R&D and extension on broadacre productivity and the internal rates of return to public investment in agricultural research. Chapter 7 summarises the main findings, outlines policy implications and considers options for further research.

December 2011

Further Reading

- You can view the full report by clicking here.

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