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Abstract
This paper applies cointegration techniques to a model of induced innovation based on the two-stage constant elasticity of
substitution (CES) production function. This approach results in direct tests of the inducement hypothesis, which are applied
to data for South African commercial agriculture for the period 1947-1991. South African data is used because the policy
changes have been substantial enough that the factor and price ratios have turning-points, rather than being monotonic. The
time series properties of the variables are checked, cointegration is established, and an error correction model (ECM)
constructed, allowing factor substitution to be separated from technological change. Finally, the ECM formulation is subjected
to causality tests, which show that both the factor price ratios and R&D and extension expenditures are Granger-prior to the
factor-saving biases of technological change. Thus, each stage of the analysis corroborates the inducement hypothesis.
However, straightforward price-inducement is only part of the explanation of changes in factor ratios. Policy-induced
innovation, in response to tax concessions and subsidised credit, is also present. © 1998 Elsevier Science B.V. All rights
reserved.