Investing in Agricultural Innovation: A Market Economy Perspective
Johannes Roseboom, Innovation Policy Consultancy, The Netherlands
For most of the twentieth century, two economic models competed with each other in the political arena as the best way to organize the economy: the ‘centrally-planned economy’ and ‘the market economy’. With the falling apart of the former USSR and the Eastern Bloc, the market economy model seems to have won this battle. Nowadays, most countries have adopted, often under guidance of the World Bank and the International Monetary Fund, some form of market economy model. While this ‘Washington Consensus’ (Williamson, 1989) has been heavily criticized in the past for its extreme market fundamentalism, the point is that also most of its critics concur with the market economy model but in a more moderate form.
In this paper, we want to explore how the adoption of a market economy perspective is affecting/ redefining the role of government in agricultural innovation. In this context, it is important to realize that in many developing countries, the centrally planned economy model was quite popular during the 1960s and 1970s, which influenced the way how they defined the role of government in agricultural innovation. Even today, there are still many remnants left of this thinking.
Our exploration will focus on two key questions that policymakers investing in agricultural innovation in a market economy are struggling with:
- What should be the role of government in agricultural innovation in a market economy?
- How much should be invested in agricultural research, extension and other innovation stimulating measures? What is the optimal public and private investment level?
The role of government
In an ‘ideal’ market economy, the business enterprise sector (including agriculture) takes care of its own innovation activities and the government only plays an enabling and stimulating role by:
- Supporting education and basic research (this is typically research for which there is no clear economic application in sight yet).
- Creating the right incentives for the private sector to invest in innovation, most importantly by operating an intellectual property rights (IPR) regime (which grants the private inventor a temporary monopoly on the use of the technology) and an antitrust policy in order constrain monopolistic behaviour in the market.
- Coordinating the country’s innovation capacity strategically.
This is more or less the bare minimum that governments should take responsibility for in a market economy. In addition, governments may have to step in where there is significant market failure in generating innovation. There are two serious problems when leaving innovation to the market:
- Even with proper IPR legislation in place, businesses often have difficulties capturing the economic benefits from their investment in innovation in the market. A great deal of these benefits spill over to others (both competitors as well as consumers), which very much reduces the incentive for individual companies to invest in innovation; and
- Significant duplication of innovation effort because companies tend to pursue the same innovation opportunities. This is particularly an issue in highly fragmented industries such as agriculture. Moreover, in such industries, lack of critical mass will allow individual companies to go only for the very simple innovation opportunities. Anything more advanced requiring research facilities and employing professional scientists will be out of reach.
These two problems of not being able to capture the benefits of your investment in innovation and duplication of effort do not occur in a centrally-planned economy, where investments in innovation are controlled by the central planning office for the whole economy. However, by eliminating market competition one takes out the very engine that drives innovation. The only competition left is that between countries, which explains the relative success of the former USSR in military and aerospace but failure in consumer goods.
In order to repair the failure of the market to generate the optimal amount of innovation, governments can take the following measures:
- Increase the benefits or reduce the costs of innovation activities by companies. The former can be achieved by strengthening the IPR regime so that companies are in the position to capture a larger part of the benefit stream generated by their innovations, while the latter can be achieved by offering companies tax deduction facilities or direct subsidies for innovation activities (often this support is limited to the R&D component of innovation only). This should make it more attractive for companies to invest in innovation.
- Facilitate collaboration on innovation within industries, while not compromising competition. This should reduce the duplication of effort and create sufficient critical mass. This type of collaboration requires the necessary legislative support, including, for example, the permission to collect a levy or cess for joint innovation activities. Ideally, such joint collaboration is managed by the industry. Governments may also consider offering subsidies to stimulate such collaboration.
- Stimulate the take-off of new technologies with positive externalities for the society at large (e.g. cleaner technologies) by offering tax incentives or subsidies to consumers, using the purchasing power of government or sharpening environmental or product standards.
So far, this has been a fairly generic and abstract picture of the role of government regarding innovation in a market economy. When looking at agriculture specifically, it is clear that its highly fragmented production structure causes serious market failure in generating innovation from within. This may affect food security adversely, which is a major public concern. Therefore, unlike in most other industries, direct government involvement in agricultural innovation tends to be quite significant, if not dominant. Nevertheless, it remains an exception to the rule and there is political pressure building up to explore whether this exceptional situation can be ended and the responsibility for agricultural innovation handed over to the economic actors in agriculture – either individually or collectively. Such transfer of responsibility fits quite well with the agricultural innovation system notion of involving the users of technology more closely in the development of it.
Whether privatization of agricultural innovation is feasible and how far it should go very much depends on the level of market failure regarding agricultural innovation. Such feasibility is, in particular, weak in agricultural value chains with a highly fragmented production structure, inelastic demand, weak integration into the market, and weak collective action. This privatization of agricultural innovation is never really absolute – there are usually all kinds of gradations on the public-private continuum.
Moreover, the privatization option does not apply equally across all innovation activities. For example, agricultural advisory services have moved in most countries far further down on the privatization path than agricultural research. A similar differentiation can be made between basic and applied agricultural research. Basic agricultural research is generally accepted as a government responsibility, while in the case of applied agricultural research, private participation is a lot more common.
Another element that has to be brought into the picture is the fact that during the transition from subsistence to market-oriented agriculture, both the forward and backward linkages of agriculture with the rest of the economy become a lot stronger (Roseboom, 2003). By starting selling produce in the market, farmers earn cash with which they can buy inputs from other industries (such as seeds, fertilizers, agricultural machinery, agro-chemicals, veterinary medicines, insurance, etc.). As a result, as economic development progresses, purchased inputs not only assume a significantly more prominent place in the cost structure of agricultural production, but also in the agricultural innovation landscape. The innovation intensity of these supplying industries often exceeds that of agriculture and some of them (such as the seed, agro-chemical, and veterinary medicine industry and to a lesser extent the agricultural machinery industry) are really high-tech, spending major sums on research and development (R&D) and related innovation activities. For example, the big international seed and agro-chemical companies such as Monsanto and Syngenta spend about 8-10% of their turnover on R&D. This means that for every dollar that a farmer spends on these products, 8-10 cents is for R&D. By selling their products all over the world, the impact of their R&D travels far and wide.
Over the past 25 years, the structure of most agricultural input industries has become more concentrated internationally. Nowadays, in most agricultural input industries a limited number of big multinationals capture a major part of the global market. The advantage of such concentration is that these big multinationals have the scale and finances to address complex innovation issues (e.g., both Monsanto and Syngenta had each an R&D budget of more than US$1 billion in 2010). At the same time, however, there are concerns about these companies becoming too powerful and adopting monopolistic practices. The problem is that there is no international antitrust agency that can address this issue.
In conclusion, in a market economy, innovation in the business enterprise sector is considered to be primarily an internal responsibility. Governments should focus on creating an enabling and stimulating environment for innovation to take place and only step in when the market fails to invest sufficiently in innovation. Such market failure is traditionally quite evident in agriculture and hence the long and widespread tradition of direct government involvement in agricultural innovation. If possible, however, this market failure should be eliminated or at least reduced and the responsibility for agricultural innovation handed over to the economic actors in agriculture. This is a process that does not happen overnight, but the pressure to privatize (at least partially) is there in the background, all the time pushing the balance towards more private innovation and public-private partnerships. Another (and probably even stronger) factor causing the balance to shift towards private innovation is the growing importance of agricultural inputs purchased from other (often high-tech) industries.
 At the national level, the opposite may have taken place, as many countries have opened up their agricultural input markets for foreign companies, which often helped to eliminate national monopolies in agricultural input industries.
Roseboom, J. 2003. The contribution of agricultural input industries to agricultural innovation. International Journal of Agricultural Resources, Governance and Ecology 2 (3/4): 295-311.
Williamson, J. 1989. What Washington means by policy reform. In: Williamson, J. (Ed.): Latin American Readjustment: How Much Has Happened? Institute for International Economics, Washington, D.C., USA.
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