Re‐examining the Reported Rates of Return to Food and Agricultural Research and Development

Abstract

At odds with a vast body of economic evidence reporting exceptionally high rates of return to investments in agricultural research and development (R&D), growth in public R&D spending for food and agriculture has slowed in numerous, especially rich, countries worldwide. The observed R&D spending behavior is consistent with a determination that the reported rates of return are perceived as implausible by policy makers. We examine this notion by scrutinizing 2,242 investment evaluations reported in 372 separate studies from 1958 to 2011. We find that the internal rate of return (IRR) is the predominant summary measure of investment performance used in the literature despite methodological criticisms dating back more than a half century. The reported IRRs imply rates of return that are implausibly high. We investigate the reasons for these implausibly high estimates by analytically comparing the IRR to the modified internal rate of return (MIRR). The MIRR addresses several methodological concerns with using the IRR, has the intuitive interpretation as the annual compounding interest rate paid by an investment, and is directly related to the benefit–cost ratio. To obtain more credible rate of return estimates, we then develop a novel method for recalibrating previously reported IRR estimates using the MIRR when there is limited information on an investment's stream of benefits and costs. Our recalibrated estimates of the rate of return are more modest (median of 9.8% versus 39% per year); however, they are still substantial enough to question the current scaling back of public agricultural R&D spending in many countries.

Agricultural R&D is on the move

“…Successive versions of these series have been developed over decades by collating and harmonizing data obtained from many government and international agencies, private firms and unpublished sources, and using statistical approaches developed to infer missing observations 3 . Our global update took 6 years, and involved direct input from more than 60 collaborators at national and international statistical and scientific agencies.…”

Transforming Staple Food Value Chains in Africa: The Case of Teff in Ethiopia

“…13. While there has been a significant debate on the exact estimates of rates of returns to agricultural R&D, they are overall evaluated to be high and to seemingly justify increased investments in this area (Hurley, Rao, & Pardey, 2014;Pardey, Alston, & Chan-Kang, 2013). Using simplified assumptions, the quncho experience illustrates such positive benefits as well.…”

Benefits of Public R & D in US Agriculture: Spill-Ins, Extension, and Roads

“…where f indicates the state that makes the investment in public R & D, g indexes the states hypothesized to benefit from the spillovers from the research investment in state f, and q indicates the total number of states that benefit from the 3 Most studies have calculated internal rates of return, although the study by Alston et al [15] has also calculated a modified internal rate of return [32]. For a detailed discussion of the IRR rule in investment projects see Chapter 8 in Brealey, Myers, and Marcus [33].…”