Buyer-Driven Endogenous Adoption of Improved Technologies Anneleen Vandeplas Postdoctoral researcher, LICOS, KULeuven 16 th ICABR Conference – 128 th EAAE Seminar

Main focus of the paper Technology adoption –Increased productivity Direct income effects on farm households Indirect income effects (labour markets, food prices) Economic growth How do new (improved) technologies reach smallholders? How can local policymakers in developing countries encourage the transfer of technology to local farms (in a cost-efficient manner)? What role does the private sector play?

Vertical coordination Definition Important channel of technology adoption –Dairy sector in India (Vandeplas et al., 2012) –Sugar, dairy, barley in Eastern Europe (Gow et al., 2000; Dries and Swinnen, 2004; Swinnen, 2006) –Broilers in Philippines and Thailand (Gulati et al., 2005) –Hog sector in the US (Key and McBride, 2003) –Horticultural crops for export in SSA Drivers?

Relevance Thorough understanding of conditions under which VC emerges important to policymakers –Competition policy in Indian dairy sector, in SSA cotton, in Central Asian cotton: support for regional monopsonies –Agricultural & food policies to increase productivity and ensure food security –Ensure food safety and quality

Related literature Why do firms want to produce HQ goods? –Monopoly firms can ‘skim off’ consumer surplus through quality differentiation (e.g. Mussa & Rosen, 1978) –Even with identical preferences, consumers choose different products based on differences in income level (Gabszewicz and Thisse, 1979) –Price competition between firms can be ‘relaxed’ through product differentiation; HQ firm will earn higher profits If quality production costs are zero (Shaked & Sutton, 1982) If quality production costs are positive (Motta, 1993) –If quality choice is sequential, first mover will always choose high quality (Lehman-Grube, 1997)

Related literature How do firms produce HQ? –If consumers are prepared to pay for quality (income growth  price premium)… –but farmers are capital-constrained … –and buyers of agricultural products (agrifood processors or retailers) are labour-constrained or land-constrained … –Buyers will vertically coordinate with farmers, investing in technology transfer to farmers through interlinked contracts (input & output markets) –E.g. World Bank 2006; Dries and Swinnen 2004; Swinnen and Vandeplas 2011;

Contracting in dairy vs GDP Source: Swinnen et al. (2011)

But VC may break down… Competition increases producer prices, but: –Price competition may remove incentive to produce quality (Kranton, 2003) –Price competition and lacking quality premium lead VC to break down (Swinnen and Vandeplas, 2011; Poulton et al., 2004) With too much competition and/or too low quality premium: –Diversion of cotton inputs in Ghana (Poulton, 1998) –Sideselling of horticultural products in Kenya and Zambia (Ruotsi, 2003) –Input diversion and sideselling of barley under contract in SSA (Wangwe &Lwakatare, 2004; Jaffee, 1994) –… Trade off between equity and efficiency

Motivation of the paper Observations: Indian dairy sector –Price competition –No quality differentiation/premium (no WTP for HQ) –Still … some firms (the big ones!) engage in VC programs; others don’t Does this conflict with theory? How can VC programs persist in competitive equilibrium? –No guarantee on credit recovery –VC = increased production cost – these firms should be driven out of the market by more ‘efficient’ firms What are the conditions for VC to emerge?

Main argument Argue that VC can emerge/be sustained under –High competition –Lack of price premium if –Dynamic view: quality upgrading with time lag promise of quality premium in future (high income growth) –Large market size (sales volume) –Firm sufficiently forward-looking & patient –Facilitated by firm strategic advantage in HQ provision (access to technology; HQ reputation-facilitating characteristics)

Model: consumer side Utility increasing in quality; concave in remaining income (Tirole, 1988: 97) Demand for HQ products increasing in income

Model: processor side

Model

Decision process

If > O  increase quality If < O  reduce quality

Decision process Firm invests in HQ if –Expected price premium HQ larger (higher income growth) –Expected demand shift to HQ larger –Market size larger (sales volume) –Marginal costs of procuring quality lower –Fixed costs of quality production lower (access to knowledge, technology, international reputation) Firm heterogeneity: –Sales volume –Fixed costs of quality production

Policy recommendations If not market power but market size matters: –Allow for market size expansion rather than local concentration (e.g. removing barriers between markets) –Efficiency does not need to be traded off against equity With weak contract enforcement, rents from investments are not fully appropriable by investor –Recognize positive spillovers & public good characteristics from VC investments

Generalization Same model can be applied to other sectors with –Time lag between fixed cost investment and returns to investment –Weak enforcement institutions (developing country context) Sector-wide relevance for bio-economy