agricultural GDP), developed countries could have invested 2.8% rather than 2.0%, and
developing countries 1.0% rather than 0.4% in the period 1981-85.
• Low investment in public agricultural R&D in developing countries is caused foremost by a
relatively smaller portfolio of profitable R&D projects to invest in. Underinvestment certainly
plays a role (the gap is bigger for developing countries), but it explains only a modest part of
the difference in agricultural R&D intensity between developed and developing countries.
• While efforts to reduce the underinvestment gap should continue, more emphasis should be
placed on designing policies that help to shift the portfolio of R&D projects higher up on the
ERR scale, even at the risk of increasing the underinvestment gap.
The model of the selection of R&D projects presented here is purely neoclassical. By
assuming full information and economic rationality, it takes the underinvestment argument to its
extreme. The usefulness of the model is not that it is a good approximation of reality, but that it
provides a benchmark against which reality can be compared. The estimated underinvestment gaps
are conditional - they assume full information and economic rationality in the allocation of R&D
resources. In reality, the ex ante selection of R&D projects is suboptimal and this obscures our sight
of the underinvestment gap ex post. It has to be eliminated in order to see the underinvestment gap
more clearly and to be able to estimate its size. Ultimately, however, the model is useful not because
it estimates past R&D underinvestment gaps but because it helps to understand better why they exist.
It is such understanding that can help us to create and better exploit the R&D investment opportunities
of tomorrow.
One set of explanatory factors relates to the position and shape of the distribution of all
potential R&D projects on an ERR scale. There are important differences in innovation opportunities
across companies, industries, countries, and over time. Besides pure technological opportunities
(which may be enhanced by investing in basic R&D), other factors come into play, such as the size
and structure of the market, the rate and speed of adoption, risk and uncertainty, and R&D
effectiveness and efficiency. Each of these factors could, if improved, increase R&D benefits or
reduce R&D costs and hence create a larger optimal R&D portfolio.
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