Impacts of investment in agricultural research on value-added for selected commodity groups

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Virginia Polytechnic Institute and State University


One method of estimating returns to agricultural research as an alternative to the commonly used aggregate output production function approach is to calculate returns based on estimates from a value-added production function. Value added is the value of consumed inputs in the production process subtracted from the value of total production. The value-added function alleviates several problems found in the aggregate production function, allowing for more reliable estimates. One objective of this study is to compare the rates of return to research based on estimates from the value added and gross production functions.

The estimation of the research coefficients are conducted through the use of the Ordinary Least Squares and Ridge Regression of a Cobb-Douglas production function. Four commodity groups are examined; cash grains, livestock, poultry, and dairy using cross-sectional 1978 data for the United States.

The results of the analysis show that in most cases the research variable was more significant and therefore explained the dependent variable better in the value-added functions than in the gross production functions. A larger internal rate of return to research in the value-added function for models excluding a spillover of research variable suggests an underinvestment in research dollars oriented towards improving value added. Therefore, future research should concentrate on improving the efficiency of fixed and non-consumed inputs used in the production of most commodity groups in general. Also, results from both the value added and production functions show an underinvestment of research in the cash grain commodity group relative to the other three commodity groups in this study. More research should be conducted in the area of improving the efficiency of all inputs used in the cash grain production process.