Short and long-run returns to agricultural R&D in South Africa, or will the real rate of return please stand up?

This paper briefly presents the results of a total factor productivity (TFP ) study of South African commercial agriculture, for 1947-1997, and illustr ates some potential pitfalls in rate of return to research (ROR) calculatio ns. The lag between R&D and TFP is analyzed and found to be only 9 years, w ith a pronounced negative skew, reflecting the adaptive focus of the South African system. The two-stage approach gives a massive ROR of 170%. The pre determined lag parameters are then used in modeling the knowledge stock, to refine the estimates of the ROR from short- and long-run dual profit funct ions. In the short run, with the capital inputs treated as fixed, the ROR i s a more reasonable 44%. In the long run, with adjustment of the capital st ocks, it rises to 113%, which would reflect the fact that new technology is embodied in the capital items. However, the long-run model raises a new pr oblem since capital stock adjustment takes 11 years, 2 years longer than th e lag between R&D and TFP. If this is assumed to be the correct lag, the RO R falls to 58%, a best estimate. The paper draws attention to the possible sensitivity of rate of return calculations to assumed lag structure, partic ularly when the lag between changes in R&D and TFP is skewed. (C) 2000 Else vier Science B.V. All rights reserved.