Role of biotechnology in stimulating agribusiness R&D investment in India

1. Role of biotechnology in stimulating agribusiness R&D investment in India Carl E. Pray and Latha Nagarajan Rutgers University and International Fertilizer Development Center

2. Today’s presentation on the determinants of private R&D focusing on the role of Biotech • Summary of R&D expenditure and spread of biotech in India • Conceptual frame work of how scientific breakthroughs in biotech could affect firms’ decisions to do research through 3 pathways • Research productivity • Demand for innovations • Stronger appropriability • Look at data on R&D in the seed industry in India to see if it provides support for each pathway • Econometric model of the seed industry to measure importance of different factors

3. India private R&D is growing fast, now about 30% of total, & seed/biotech R&D is the largest & growing fastest

4. Biotech research in India takes off during this period • Number of companies registered to do biotech research goes from 3 in the mid 1990s to 35 in 2009 • Biotech transforms cotton production starting in 2000

5. Bt genes introduced into cotton and approved in 2002

6. GM cotton takes off quickly (million ha)

7. Cotton Production, Yield, and Area in India • ISAAA 2009

8. Hypothesis: Scientific Breakthroughs in Biotechnology increase innovation & R&D by agribusiness through 3 pathways: • Technological opportunities to innovate are increased in many fields of agribusiness – plant breeding, animal breeding, pesticides, veterinary medicine, and agricultural processing. • Demand for innovations in some industries such as seed will increase – varieties will be more productive and can substitute for other inputs like pesticides • Biotech will strengthen appropriability: the ability of firms to capture benefits from introducing new technology.

9. Pathway 1: Technological opportunity/Reduced cost per innovation Biotech will increase the productivity of research –In plant breedingbiotech makes it 1. Relatively easy to identify and transfer useful genes 2. Cost of plant breeding is reduced by using molecular markers 3. Once GM trait is in a hybrid it is easy to develop new hybrids Reducing the cost and uncertainty of innovation makes investing in research more profitable

10. Pathway 2: Benefits will increase because demand is up Biotech increases demand for innovative plant varieties by: a. Increasing the productivity of varieties through higher yields or quality traits b. By allowing seeds to take over markets from other industries “Creative Destruction” • Insecticides replaced by insect resistant crops • Herbicide tolerance allows seeds and herbicides to substitute for hand weeding, machinery weeding and land preparation in low and no–tillage cropping systems • Nitrogen use efficient varieties and microbes potentially can reduce chemical fertilizer use Increased sales of inputs allows some firms to invest more & increase expectations about future sales from innovation

11. Pathway 3. Ability of innovators to capture a share of benefits increased Biotech increases the appropriability of benefits from research by allowing seed & biotech firms to charge more for traits and varieties • Can patent genes since 2005 but not crop varieties • Biosafety regulations make it difficult to enter the market (Monsanto spent > $1 million between1996-2002 to get approval of Bt cotton) • Environmental bureaucracy and environmental NGOs help enforce property rights (even when no patents) • Illegal Bt seeds violate Environment Act and the company that sold seed prosecuted under this act

12. Empirical evidence of P 1: increased productivity of research due to biotech? Big increase in numbers – also big increase in expenditure…. • # of “important” cultivars is from Francis-Kanoi data on the use of cotton cultivars among surveyed farm households in each time period • R&D expenses and productivity are from Author’s estimates

13. Empirical evidence on P2: increased demand for seed • Yields • Best evidence Qaim and Zilberman in Science – 80% yield increase • Our new evidence below • Seed as substitute for pesticides • Trends in pesticide use in India • Regression analysis on pesticide use

14. Cumulative Distributions of Cotton Yield Over Cultivar Types from 1998 to 2009/10 data from 20,000 farmers

15. Value of cotton insecticides & total pesticide market in India (1998 and 2006) Source: Reproduced from Chaudhry and Gaur(2010), ISAAA – Chemical Industry, 2007

16. Pathway 3 Empirical evidence • Seed prices up • Seed company revenue up • Share of benefits from research is up

17. Mean cotton seed prices during different time periods in India (Rs/Kg) Source: Calculated from Francis-Kanoi Cotton Data survey on farm households * 2006-07 – Price control on Bt cotton seed prices introduced

18. Revenue realized by seed firms : Hybrids vsBt Hybrids

19. Pathway 3: share of companies went from about 10% to 40% of benefits before price controls (but most increased income from Bt went to farmers)

20. Summary of empirical evidence • No evidence innovation increased along with R&D expenditure – no obvious increase in innovations per unit R&D • A substantial amount of demand has been generated by biotechnology • Appropriability increased due to GM regulatory

21. Econometric evidence

22. Indian Private Seed Industry R&D and other characteristics (data from surveys by Pray and collaborators)

23. Factors associated with R&D growth in previous table • Sales goes up rapidly but not as fast as R&D • Industry becomes more competitive – 4 firm concentration ratio down • Multinationals gain market share

24. Question remains how much did GM cotton contribute and how much could GM traits in other crops contribute in the future? • Estimate a simple induced innovation based model of R&D expenditure by seed firms in India • Then plug in data on sales due to biotech so far and potential sales in future for a rough simulation of possible future R&D

25. Variables in seed R&D models & measurement (data from 20 to 33 firms in 1987, 1995, 2005,2009 from surveys by authors)

26. Empirical Model The basic model: • R&D Expenses (i, t) = f (market size, appropriability, technological opportunity, cost of research inputs); where i= firm; t = time period/year Empirical version basic model (1) with defined variables as (2) R&D Expenses (i, t) = Sales turnover (i, t) + GMO trials (i, t) +Location (i, t) +Public varieties (i, t) + Age of the firm (i, t) +Ownership (i, t) + Firm Diversification (i, t) Here ‘i’ denotes the firm and ‘t’ for time periods viz., 1994, 2000, 2005 and 2009.

27. Factors influencing the growth of seed and biotech industry from 1994 to 2009 in India (Random-effects GLS regression)

28. Factors influencing the growth of seed and biotech industry during 2009 in India (Log-linear regression)

29. Summary of econometric findings • Firms’ sales the major factor related to R&D • For entire period a 10% increase in sales would lead to about a 9% increase in R&D • For most recent period a 10% increase leads to a 11% increase • If firms have GM field trials, this has a positive impact on R&D but significant only in regression for recent period • Public sector R&D induces private R&D • MNCs spend same amount as Indian firms • Diversified firms spend less than specialized seed firms

30. Contribution of biotech through sales to R&D • Seed Industry total sales about Rs 75 billion • Cotton seed Rs 18 - 20 billion hybrid cotton - Rs 6 to 7 billion dueBt • Rs 8 billion hybrid maize sales and is expected to grow rapidly with demand for poultry, meat and milk • Add Rs. 4 billion for GM • Bt cotton increased seed sales by 9 % which accounted for 6 to 10 % increase in seed R&D (Rs 400 to Rs 600 million) • Adding GM maize in future could easily increase sales by 5% add another Rs 270 to 330 million in R&D • This only captures the revenue effect not the expectation affect…

31. Policy implications • Taken together with other studies which that find substantial social benefits from increasing private sector research, our finding suggests Indian governments should: 1. Increase size of private seed sales through a. Encouraging sales of private hybrids b. Permitting more GM crops c. Eliminating restrictions on GM seed prices d. Enforcement of IPRs on traits and varieties 2. Invest in public research that makes more public varieties and GM traits available 3. Reduce central & state restrictions on GMO field trials