A NEW PERSPECTIVE ON UNDERINVESTMENT IN AGRICULTURAL R&D

overinvestment may very well take place if profitable innovation opportunities are scarce or
nonexistent. Lack of economies of scale, for example, may place many innovation opportunities out
of reach economically for small production areas or countries. More generally, institutional
constraints such as non-existent or poorly functioning markets may hold back innovation
opportunities and, hence, the level of R&D investment.

Developed countries invest far more in agricultural R&D per unit value-added than
developing countries for three reasons: (1) in relative terms their portfolio of profitable R&D projects
is far larger; (2) their social cutoff rate or optimal cutoff rate is lower (7% against 12% in developing
countries); and (3) their estimated (implicit) cutoff rate is substantially lower (20% against 40% in
developing countries). Moreover, their portfolio of profitable R&D projects has grown considerably
faster than their AgGDP, which has resulted in more than a doubling of the agricultural research
intensity ratio in 20 years’ time. In contrast, the R&D opportunity curve for the developing countries
has moved only slightly. This leads to the following postulate:

(5) Differences in research intensity across countries and industries and over time are due
primarily to differences in the number of profitable innovation opportunities.

6. Possible explanations for the underinvestment gap

While Ruttan’s claim that there is substantial underinvestment in agricultural R&D has been generally
accepted, it has not been completely undisputed. Pasour and Johnson, for example, argued in their
critique of Ruttan’s claim that:

“The only legitimate conclusion that can be drawn when the analyst’s estimates do not
coincide with those of his subjects’ is that the analyst has incorrectly estimated the expected
cost and benefits as perceived by decision makers.” (Pasour and Jonhson 1982, p. 306)

This argument is of course also valid for the underinvestment gap as estimated by our model.
In other words, are there rational explanations why underinvestment gaps exist and why they are so

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