Short and long-run returns to agricultural R&D in South Africa, or will the real rate of return please stand up?
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This paper briefly presents the results of a total factor productivity (TFP) study of South African commercial agriculture,
for 1947-1997, and illustrates some potential pitfalls in rate of return to research (ROR) calculations. The lag between R&D
and TFP is analyzed and found to be only 9 years, with a pronounced negative skew, reflecting the adaptive focus of the South
African system. The two-stage approach gives a massive ROR of 170%. The predetermined lag parameters are then used
in modeling the knowledge stock, to refine the estimates of the ROR from short- and long-run dual profit functions. In the
short run, with the capital inputs treated as fixed, the ROR is a more reasonable 44%. In the long run, with adjustment of the
capital stocks, it rises to 113%, which would reflect the fact that new technology is embodied in the capital items. However,
the long-run model raises a new problem since capital stock adjustment takes 11 years, 2 years longer than the lag between
R&D and TFP. If this is assumed to be the correct lag, the ROR falls to 58%, a best estimate. The paper draws attention to
the possible sensitivity of rate of return calculations to assumed lag structure, particularly when the lag between changes in
R&D and TFP is skewed. © 2000 Elsevier Science B. V. All rights reserved.