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 1.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 2

3. India private R&D is growing fast, now about 30% of total, & seed/biotech R&D is the largest & growing fastest 3 Industry 1984-85 # 1994-95 # 2008-09* Millions of 2005 US$ Seed and Biotechnology 1.34.988.6 Pesticides91735.7 Fertilizers # 6.86.77.9 Agricultural Machinery3.76.540.5 Biofertilizers & Biopesticides001.3 Poultry and feeds-3.57.8 Animal Health0.92.718.6 Sugar0.92.510.8 Biofuels0013.1 Food, Beverages & Plantations1.310.327.0 Total23.954.1251.3

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 4

5. Bt genes introduced into cotton and approved in 2002 Event nameSourceGenes (events)Year of approval# of cultivars a Bollgard I (IR)Monsantocry1Ac2002200+ Bollgard II (IR)Monsantocry1Ac and cry2Ab2006300+ Event 1(IR)IIT, Kharagapur/JK AgriGenetics Truncated cry1Ac200638 GFM Cry1A(IR)Chinese Academy of Sciences cry1Ab+cry1Ac200669 CICR Event(IR)Nagpur/University of Agric. Sciences, Dharwad Truncated cry1Ac20083 9124(IR)MetahelixSynthetic Cry1C20092 Event1+Event 24 (IR) JK AgriGeneticscry1Ac and cry1ECPending approvalNA Widestrike (HT+IR) Dow Agrocry1Ac and cry1FPending approvalNA Roundup Ready Flex Bt (IR+HT) MonsantoCry 1Ac, cry2Ab, CP4EPSPS Pending approvalNA 5

6. GM cotton takes off quickly (million ha) 6

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

8. 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. 8 Hypothesis: Scientific Breakthroughs in Biotechnology increase innovation & R&D by agribusiness through 3 pathways:

9. 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 9 Pathway 1: Technological opportunity/Reduced cost per innovation

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 10

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 11

12. Empirical evidence of P 1: increased productivity of research due to biotech? Big increase in numbers – also big increase in expenditure…. 12 # 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 13

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) 15 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 16

17. Mean cotton seed prices during different time periods in India (Rs/Kg) 17 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 vs Bt Hybrids 18

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) 19

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 20

21. Econometric evidence 21

22. Indian Private Seed Industry R&D and other characteristics (data from surveys by Pray and collaborators) 22 1987199520052009 1R&D expenses (mill.2005 US$)1.34.926.988.6 2Research Staff (Includes tech staff)76297Na1,500 3Area of experiment stations(Ha)4081503Na10,948 4Seed sales of firms (mill. 2005 US$)34.9133.7723.51,286 5Research Intensity (%)3.723.663.726.89 64 firm concentration ratio (% private sales by top 4 firms)68514936 7Share of firms with foreign ownership (% of private sales)10334540 8No. of R&D firms in sample17382837

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 23

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 24

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

26. 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. 26

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

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

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 29

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 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… 30

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 31