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Abstract

This paper focuses on the private and social rates of return to R&D capital in the three vertically linked sectors, primary agriculture, food processing, and farm machinery and equipment. Evidence supporting a divergence between these rates is found for primary agriculture and food processing. Using a cost function approach, the private rates of return to R&D capital ranged from an average of 10.2% per annum for food processing to 22.3% for farm machinery and equipment. In the case of agriculture, the direct return to public R&D averaged 37.3% per annum. The social rates of return to R&D capital in agriculture and food processing are significantly larger than the private rates due to the existence of spillovers. While the divergence between rates is small in the farm machinery and equipment sector, its high direct rate may suggest relatively large intra-sector spillovers. We find that spillovers from public agricultural R&D to food processing exceeds the spillovers from food processing to the other two sectors. Thus, to a degree, public R&D in agriculture mitigates the market's failure in food processing to fully appropriate the returns to their R&D capital.

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