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PROMOTING INVESTMENT IN
AGRICULTURE FOR FOOD SECURITY AND AGRICULTURE DEVELOPMENT
TC Knowledge-Sharing Session
7 July 2011
Policy Assistance Support Service, TCSP
TC Knowledge-Sharing Session 7 July 2011
Before we can plan to promote investment, the question
that seeks an answer is:
What is investment?
It is not easy to give a clear definition of the frequently used
word “investment”. We can repeat what Augustine Hippo
said 1,500 years ago in reference to Time :
“What then is investment? If no one asks me, I know
what it is. If I wish to explain it to him who asks, I
do not know”
What is investment?
TC Knowledge-Sharing Session 7 July 2011
It can be defined (as done in Economics ) as a
change in the stock of existing capital:
I = δKIncrease in capital is necessary for growth and
development, but what kind of capital?
Defining Investment
TC Knowledge-Sharing Session 7 July 2011
Capital comes in many forms:The different forms are not mutually exclusive
PhysicalPhysical
Fixed Fixed
HumanHuman
EnvironmentalEnvironmental Working/Working/
financial financial
NaturalNatural
FinancialFinancial
CAPITAL
TC Knowledge-Sharing Session 7 July 2011
Who invests and why?
There are different agents of investment and
Factors/motivations influencing investment decisions of the
different agents are often different :
Individuals/HH/
Farmers
Entrepreneurs Public Sector Corporate private
Mainly in fixed
assets and
human capital
For Profit with
Risks
Public goods/
economic
return
Profit for share
holders/
Financial return
TC Knowledge-Sharing Session 7 July 2011
• Investments by different agents are
complementary. This is very well recognised.
• What is not well recognized is that they are
not easily substitutable. Public sector and/or
Private corporate can not substitute for investment
that needs to be made by farmers themselves.
Investments by different agents
TC Knowledge-Sharing Session 7 July 2011
Given that reasons for investment by different agents
are different and almost every one invests:
• There are no unique set of policies for promoting
investment.
• It needs enabling environment and cannot be
planned or promoted by decree
• Only public sector investment (a small proportion of total
investment) in any economy can be planned by the
government.
Policy Implications
TC Knowledge-Sharing Session 7 July 2011
For investments to have a positive impact on production and
productivity, they must contribute to capital formation at
the farm level.
Capital/land and/or capital/labour ratio must increase.
What determines capital formation at farm
level?
Capital formation at farm level
TC Knowledge-Sharing Session 7 July 2011
The main agent of investment for farm level capital
formation is farmers and the main sources of financing
farmers’ investments are:
• Own savings
• Credit: (Using fixed assets as collateral for Loans/credits)
Implications of the findings:
• The farmers who can not save (and/or without fixed assets)
can not invest.
• Public and Private corporate can not substitute farmer’s
investment (or compensate for lack of investment by the
farmers).
Determinants of farm level capital
formation/investment
TC Knowledge-Sharing Session 7 July 2011
sources for financing investment at farm level
�Credit provides less than 25 percent of the
investment in Agriculture as well as other sectors.
�Borrowing more than 40-50 percent of the total
investment contributes to increased indebtedness.
�Without fixed assets, access to credit is almost
impossible (exception: micro credit –but very little
in agriculture production).
Role and limitation of credit
TC Knowledge-Sharing Session 7 July 2011
Sources for financing investmentWB survey for more than 32,000 firms from 100 developed,
developing and transition economies
• Retained earnings are the main source of investment
finance in all the regions. About two thirds of firms’
investments.
• Bank loans account for another 16 to 23%.
• Equity financing accounts for only 3% of investment
financing, that is even smaller than financial support
from family and friends.
TC Knowledge-Sharing Session 7 July 2011
• Increased domestic savings is essential for sustainable development and poverty reduction.
• No country has succeeded in achieving high growth, reduction of poverty and hunger, without increasing domestic savings [the Growth Report].
• Generation of fixed assets also depends on savings.
Savings, growth and generation of fixed assets:
TC Knowledge-Sharing Session 7 July 2011
Sources of farm-level investment.Evidence from India
• More than 98 per cent of investment is funded by
domestic savings.
• With about 90 per cent share, households dominate
the private investment activity.
• These investments enable farmers to grow existing
crops more productively and intensively and take up
non-conventional/high value crops.
TC Knowledge-Sharing Session 7 July 2011
• The findings demonstrate that generation of
savings and creation of fixed assets are
fundamental for promoting investment.
Questions:
• Should investment policies shift in favor of
farmers with positive savings?
• How to generate fixed assets?
Policy Implications of the findings
TC Knowledge-Sharing Session 7 July 2011
• Most individuals invest their savings in
generation of assets, such as real-estate, and
human capital [education].
• The assets subsequently contribute to
generation of financial markets.
• Among several other factors, opportunities to
generate assets and develop human capital
encourage savings.
Savings and generation of assets
TC Knowledge-Sharing Session 7 July 2011
Factors that allow fixed capital formation
are:
• Clearly defined property rights; and
• Rule of law to uphold those rights.
Unless these issues are addressed, attempts to
increase farm level capital formation will be
encumbered.
Policy Implications of the findings
TC Knowledge-Sharing Session 7 July 2011
• Available information/data show that in
agricultural production, they are negligible.
• They are important in the higher level of the
value chain and in high value cash crops.
• They may have significant impact at local level
and contribute to Non-farm income.
Foreign and Domestic Corporate Private Investment in Agriculture
TC Knowledge-Sharing Session 7 July 2011
TCSP Policy work investment is largely funded by the Japanese Trust Fund Project GCP/GLO/267/JPN
and MDF.
Major activities include conducting of analytical work, in collaboration with other divisions to:
Clarify:
• the concepts and definition of investment and contributing to the preparation of the SOFA Special Chapter on Investment
What is TCSP doing to promote investment?
TC Knowledge-Sharing Session 7 July 2011
Collect:
• information and data on level of investment and capital formation by sources, such domestic, FDI and ODA
• Information on policies, rules and regulations related to investment in agriculture in various countries.
What is TCSP doing to promote investment?
TC Knowledge-Sharing Session 7 July 2011
Identify:
• Who invests in agriculture and why
• What drives their motivation to invest
• Factors influencing their decisions
• Sources of investment financing
Prepare
• Policy configuration which will reinforce the decisions/motivation to invest by farmers, domestic and foreign private corporate and public sectors.
What is TCSP doing to promote investment?
TC Knowledge-Sharing Session 7 July 2011
Assess:
• Countries capacity to formulate and implement policies for promoting investment
• Training needs for formulation and implementation of the policies
• TCSP’s capacity to provide the required training to the countries
What is TCSP doing to promote investment?
TC Knowledge-Sharing Session 7 July 2011
Prepare:
• Handbook on policies for promoting investment
• Training materials for providing training to
countries as well as FAO policy officers at HQ
and Decentralized offices
• A web-based information system on policies,
data, and others related to agricultural
investment
What is TCSP doing to promote investment?
TC Knowledge-Sharing Session 7 July 2011
Investment Policy Support Website
http://www.fao.org/tc/policy-support/investment-policy/en
TC Knowledge-Sharing Session 7 July 2011
Thank you!