Elliott, Kimberly Ann (2010).  “Pulling Agricultural Innovation and the Market Together.”  Center for Global Development Working Paper 215, June.

This article examines the potential for using advance market commitments and proportional prizes to stimulate agricultural innovation in developing countries.

Over the next four decades, global food production will need to meet the demand of three billion additional consumers.  Elliot investigates novel methods to stimulate global food production, in particular examining “pull” rather than “push” mechanisms.  Traditional “push” funding entails funds donated for agricultural research and development.  With “pull” mechanisms, on the other hand, “donors seek to engage the private sector, which is almost entirely absent today in developing country R&D for agriculture, and they pay only when specified outcomes are delivered and adopted.”

Elliot suggests that pull mechanisms may be warranted in agricultural R&D in developing countries because of several market failures.  Firstly, it is difficult for inventors to reap the benefits of their innovations because many agricultural inputs can be re-used.  Even in the United States, private R&D steers away from the agricultural sector, comprising 55 percent of agricultural R&D compared to 72 percent of total R&D in 2000.  Secondly, there are principal-agent problems with push funding—donor funds can be wasted if the end research product is not as expected.  Thirdly, developing country markets are often small and fragmented, which can make R&D an unprofitable venture.  Additionally, African consumers prefer staples such as sorghum, millet, and cassava that are not in demand elsewhere, reducing the incentive for private companies to develop improved varieties.  These factors have reduced private agricultural R&D in developing countries to very low levels.  In 2000, the private fraction of developing country agricultural R&D spending was only 2 percent. 

Though there is an inhospitable environment for private agricultural innovation in developing countries, there is a substantial need for it.  Africa never experienced a Green Revolution, while yield growth is slowing in post-Green Revolution Asia, where there are also growing environmental concerns.  Elliot reports that research priorities in this context are four-fold: new agricultural techniques that conserve water and limit carbon emissions; more efficienct energy and fertilizers; safer pest control techniques; and storage and processing innovations to diminish product losses. 

She notes that stimulating private agricultural R&D may be particularly difficult in Africa.  There, improved crop varieties face several challenges in development and adoption.  Green Revolution variety improvements focused on maize, wheat, and rice rather than African staples.  Differences in climate, soil, weeds, pests, and irrigation and fertilizer practices necessitate the development of new varieties tailored to African conditions.  There are also low incentives for intensification due to poor market access and land abundance in some areas and weak property rights in others.

Given these market failures, additional incentives are necessary to stimulate agricultural innovation in Africa.  Since 2003, the Center for Global Development has been investigating ways to stimulate innovation in another area, vaccine development.  A CGD working group developed 12 proposals to encourage such commercial investment, five of which were “pull” mechanisms: advance market commitments, proportional prizes; prizes; best entry tournaments; and patent buyouts. 

Elliot disqualifies the latter three in the agricultural case.  Because prizes and best entry tournaments are winner take all, they could facilitate monopolies and a “race-to-patent” mindset that gives insufficient attention to product implementation.  Patent buyouts would not necessarily encourage developing country-specific innovations.  Therefore, Elliot focuses on advance market commitments and proportional prizes, which she argues could be enormously beneficial in encouraging private sector R&D in developing country agriculture. 

Under an advance market commitment system, donors would guarantee to pay on delivery for a targeted innovation developed by private actors.  Elliot argues that “In situations where desirable characteristics of a new technology are known, for example a nutrient-fortified staple food crop of a new or improved storage technology, then an advance market commitment from donors, to ensure there will be a sufficiently remunerative market for the resulting product, can be useful.  A problem in many developing countries is that potential purchasers are too poor, and markets too small, to provide a reasonable assurance that R&D costs will be recouped.  A commitment by donors to pay an above-market price up to a certain number of units of a new product demanded by consumers reduces this risk.  …an AMC could be used either for an early stage product, such as a malaria vaccine, to spur new innovation, or at a later stage, such as with the existing pneumococcal vaccine initiative, to stimulate adaptation and the construction of new production facilities.  Another key element of the AMC idea is to ensure long-term access by requiring suppliers to continue to supply the product at an affordable price for some period after the donor commitment ends.”

Elliot notes that advance market commitments would face a few roadblocks in stimulating agricultural innovation, but suggests that these are navigable.  Principally, the returns to agricultural innovation may be less appropriable than for vaccines, and the success of agricultural advance market commitments would hinge on functioning markets.  Specifically, if innovations increase production in the face of fragmented markets that cannot absorb that production, prices and farmer incomes will fall, and the innovation will be abandoned.  Elliot argues that public investment in infrastructure and information would therefore be necessary alongside agricultural advance market commitments.

Under proportional prizes, “donors would set an overall prize amount which would then be divided among applicants who could compile evidence showing the impact of their innovation.”  Prize allocation would be determined by the productivity gains created by the innovation and farmer adoption rates.  For example, William Masters recently proposed a $12 million African fund “that would be used to reward productivity-improving innovations using any technology, wherever they occur, with individual rewards based on the estimated dollar value of the improvement that can be attributed to a particular innovation.”

Overall, Elliot concludes that advance market commitments and proportional prizes “free donors from having to pick winners in advance and they pay only for demonstrated results.”  They are complementary in that proportional prizes could be used to identify promising innovations, and advance market commitments could create the demand necessary to scale them up to a very large size.  Elliot suggests that these two novel “pull” mechanisms, already being tested in the healthcare and vaccine fields, could be potentially useful in stimulating the private investment in agricultural R&D necessary to meet future developing country food security needs.