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

Carl E. Pray and Latha Nagarajan

Rutgers University and International Fertilizer Development Center

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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 pathways1. Research productivity

2. Demand for innovations

3. 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

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

Industry

1984-85# 1994-95# 2008-09*

Millions of 2005 US$

Seed and Biotechnology 1.3 4.9 88.6

Pesticides 9 17 35.7

Fertilizers# 6.8 6.7 7.9

Agricultural Machinery 3.7 6.5 40.5

Biofertilizers & Biopesticides 0 0 1.3

Poultry and feeds - 3.5 7.8

Animal Health 0.9 2.7 18.6

Sugar 0.9 2.5 10.8

Biofuels 0 0 13.1

Food, Beverages & Plantations 1.3 10.3 27.0

Total 23.9 54.1 251.3

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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

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Bt genes introduced into cotton and approved in 2002

Event name Source Genes (events) Year of approval # of cultivars a

Bollgard I (IR) Monsanto cry1Ac 2002 200+Bollgard II (IR) Monsanto cry1Ac and cry2Ab 2006 300+

Event 1(IR) IIT, Kharagapur/JK AgriGenetics

Truncated cry1Ac 2006 38

GFM Cry1A(IR) Chinese Academy of Sciences

cry1Ab+cry1Ac 2006 69

CICR Event(IR) Nagpur/University of Agric. Sciences,

Dharwad

Truncated cry1Ac 2008 3

9124(IR) Metahelix Synthetic Cry1C 2009 2Event1+Event 24

(IR)JK AgriGenetics cry1Ac and

cry1ECPending approval NA

Widestrike (HT+IR)

Dow Agro cry1Ac and cry1F Pending approval NA

Roundup Ready Flex Bt (IR+HT)

Monsanto Cry 1Ac, cry2Ab, CP4EPSPS

Pending approval NA

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GM cotton takes off quickly (million ha)

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.0

2.0

4.0

6.0

8.0

10.0

12.0

Total cotton area (Mill Ha)

Bt cotton area (Mill Ha)

Illegal Bt Area

Total Bt area

Cotton Production, Yield, and Area in India

• ISAAA 2009

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1. Technological opportunities to innovate are increased in many fields of agribusiness – plant breeding, animal breeding, pesticides, veterinary medicine, and agricultural processing.

2. Demand for innovations in some industries such as seed will increase – varieties will be more productive and can substitute for other inputs like pesticides

3. Biotech will strengthen appropriability: the ability of firms to capture benefits from introducing new technology.

Hypothesis: Scientific Breakthroughs in Biotechnology increase innovation & R&D by agribusiness through 3 pathways:

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Biotech will increase the productivity of research –In plant breeding biotech 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

Pathway 1: Technological opportunity/Reduced cost per innovation

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Pathway 2: Benefits will increase because demand is upBiotech 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

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Pathway 3. Ability of innovators to capture a share of benefits increasedBiotech 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

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Empirical evidence of P 1: increased productivity of research due to biotech? Big increase in numbers – also big increase in expenditure….

Year

Non Bt

Proprietary

Hybrids(#)

Bt

Proprietary

Hybrids(#)

R&D

Expenses

(Rs.Mill)

R&D

Productivity

(Hybrids/Rs

Mil. Lagged)

1994 8

25

1998 19

145

2000 20

210 1.48

2002 22

460

2004 24 3 710 0.15

2009 25 54 3000 0.11

• # 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

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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

0

.2

.4

.6

.8

1C

um

ulat

ive

Pro

babi

lity

0 10 20 30 40yield

c.d.f. of Bt c.d.f. of Stacked c.d.f. of desi c.d.f. of priv hyb c.d.f. of pub hyb

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

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Value of cotton insecticides & total pesticide market in India (1998 and 2006)

Item/Year 1998 2006

Total Pesticide Market(US$ Mill) 770 900

Cotton Insecticides to total Pesticide market (%) 30 18

Cotton Insecticides to total Insecticide market (%) 42 28

Value of pesticide for cotton bollworm (US$ mil) 147 65

Savings possibly due to Bt cotton in 2006 over 1998

(US$ Mill/ % terms)

82 (56% compared

to 1998)

Source: Reproduced from Chaudhry and Gaur(2010), ISAAA – Chemical Industry, 2007

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Pathway 3 Empirical evidence

• Seed prices up

• Seed company revenue up

• Share of benefits from research is up

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Mean cotton seed prices during different time periods in India (Rs/Kg)

Year Public Hybrids Proprietary

hybrids

excluding Bt

Official Bt

Hybrids

1996/97 419 652 ----

1998/99 383 711 ----

2000/01 389 761 ----

2002/03 397 1017 ----

2004/05 398 963 3517

2009/10 453 972 2636

Source: Calculated from Francis-Kanoi Cotton Data survey on farm households

* 2006-07 – Price control on Bt cotton seed prices introduced

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Revenue realized by seed firms : Hybrids vs Bt Hybrids

1998 2000 2002 2004 2009

Total revenue realized by firms (Million Rs)

Hybrid seeds 1639.2 2881.4 3507.8 2464.0 672.0

Bt seeds 0.0 0.0 128.0 3328.0 9312.0

Net revenue realized by firms (Million Rs)

Hybrid seeds 327.8 1088.5 1325.2 492.8 -97.9

Bt seeds 0.0 0.0 105.6 2745.6 4333.2

Total net revenue realized by

private firms 327.8 1088.5 1430.8 3238.4 4235.3

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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)

Year

Bt cotton area

Net Revenue Bt Cotton

Share of stakeholders in net revenue

Farmers a

+Firms+MMB Farmers Firms MMB

Mill.Ha Mill.Rs Percentage (%)

2002-03 0.05 474.1 71.2 18.2 10.6 2003-04 0.1 1,110.9 60.8 24.8 14.4 2004-05 0.5 5,975.0 56.5 27.7 15.8 2005-06 1.3 15,113.3 58.1 26.9 15.0 2006-07 3.8 26,762.0 95.8 1.9 2.3 2007-08 6.3 45,550.9 93.4 3.1 3.6

2008-09 7.6 56,761.6 90.4 4.2 5.4

2009-10

8.4

63,434.4

89.4

4.4

6.3

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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

Econometric evidence

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

1987 1995 2005 2009

1 R&D expenses (mill.2005 US$) 1.3 4.9 26.9 88.6

2 Research Staff (Includes tech staff) 76 297 Na 1,500

3 Area of experiment stations(Ha) 408 1503 Na 10,948

4 Seed sales of firms (mill. 2005 US$) 34.9 133.7 723.5 1,286

5 Research Intensity (%) 3.72 3.66 3.72 6.89

6 4 firm concentration ratio (% private sales by top 4 firms) 68 51 49 36

7 Share of firms with foreign ownership (% of private sales) 10 33 45 40

8 No. of R&D firms in sample 17 38 28 37

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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

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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

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

Private research determinants

Variable Measurement

Dependent variable

R&D expenditures

Amount of expenditures that includes capital and recurring R&D in Rs. Million

Market size and growth

Sales turnover Annual seeds sales turnover of the firms (Rs. Millions)

Biotech GMO field trials conducted by firms or not Technological opportunity

Location R&D headquarters in Hyderabad which has major public plant breeding and biotech research.

Public research

Number of notified varieties from the public sector in proprietary crops

Control variables

Firm Age Number of years since the firm entered the market

Ownership Firms with domestic or foreign ownership (MNCs)

Diversification Firms with seed business only vs diversified business(es) /part of business conglomerates

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Empirical Model

The basic model:

(1) 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.

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

log R&D expenses (Rs. Million) – Dependent variable Coef. Std. Err. z P>z

log Sales turnover (Rs.Mill) 0.8490 0.1111 7.64 0.000 # of public varieties notified for proprietary crops 0.0019 0.0009 2.06 0.040 GMO trials (0 - No trials/1- trials) 0.3258 0.2593 1.26 0.209 Firm age (years) -0.0158 0.0165 -0.95 0.340 Location code (1-Hyd 0-others) 0.3367 0.2630 1.28 0.200 Firm Ownership (1- MNC; 0-Domestic) 0.0642 0.3124 0.21 0.837 Diversification (1-Diversified; 0 -only seeds) -0.4653 0.2001 -2.33 0.020 Constant/intercept -2.8346 0.6594 -4.30 0.000

Group variable Firm wise R-sq: within 0.7386

between 0.8287 overall 0.7870

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

Log R&D expenses Coef. Std. Err. t P>t

Log Sales turnover of the firm 1.128 0.180 6.250 0.000 Firm age (years) -0.029 0.016 -1.870 0.071 Location code (1-Hyderabad; 0-others) 0.010 0.300 0.030 0.974 Diversification (1-Diversified; 0 -only seeds) -0.373 0.287 -1.300 0.203 GMO trials (1=Yes; 0-No) 1.735 0.416 4.170 0.000 Firm Ownership (1- MNC; 0-Domestic) 0.282 0.465 0.610 0.549 Intercept -5.028 1.310 -3.840 0.001

Number of seed firms surveyed 37 F( 6, 31) 15.0400 Prob > F 0.0000 R-squared 0.7360 Root MSE 0.7917

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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

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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 due Bt– 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…

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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