Institutional Learning and Change Initiative

The following text is drawn from ISNAR (2003).

The theoretical underpinning of these approaches is found in the economist's concepts of supply, demand, consumer surplus, alternative costs, and willingness to pay. This form of analysis seeks to assess private and public investments in R&D in terms of both the economic and social benefits generated for society by the investment as well as the economic and social costs incurred by society to execute the project. Benefit-cost analysis provides a strong theoretical framework for analyzing the economic and social impacts of R&D activities. It is always carried out on a project by project basis, and it attempts to assess the project in terms of both the economic and social benefits generated for society, as well as the economic and social costs incurred by the society to execute the project. The net benefits of the projects are then calculated as follows:
There are several variants of cost benefit measures:

• Net present value;
• Benefit - cost ratio;
• Pay-back period; and
• Rate of return calculations.

All these essentially involve the same techniques.

Costs

There are three types of costs associated with R&D projects that should be included in the analysis:

• The cost of generating the research results;
• The cost of introducing and supplying the results to the end users; and
• The cost incurred by the end users to implement the results.

Each of these categories of costs needs to be identified and included into the analysis. Any additional cost to the society also needs to be included. In terms of the costs of the R&D activity, they are calculated as “opportunity” costs, which represents the value of the goods and services that society forgoes when resources are transferred from one occupation to another. It is assumed that under this methodology, that society's land, labor and capital resources are approximately fully employed. Hence, they can only be utilized on a new R&D project if they are withdrawn from their alternative areas of employment.

Benefits of R&D

The benefits which result from the new or improved product, processes or systems which result from the research, are valued at the price society is willing to pay for them. These benefits include:

• Those for which prices are paid;
• Benefits associated with increased educational and training opportunities;
• Reduced environmental damage; and
• Improvement in health and safety.

It is worth noting that in many cases it may not be possible to associate an explicit value with such benefits. Many of the research benefits are intangible and existing valuation techniques do not readily apply.

In ex-ante analysis, in addition to costs and benefits, the probabilities associated with the realization of these costs and benefits must be determined. The time sequence of the relevant costs and benefits must also be determined. The (expected) value streams of annual costs and benefits must be discounted to their present value in order to estimate the net benefit of the project.

The calculations must be based on incremental benefits and costs, i.e., the difference between the “with” and “without” scenario (those costs and benefits which would not have occurred in the absence of the R&D project). It is often very difficult to meet this requirement because many social and economic benefits result from a combination of complementary R&D investments, incurred over substantial period of time, and it is often not possible to isolate the influence of a specific R&D project.

Benefit-cost analysis is technically demanding and time consuming. However, the main value of benefit - cost analysis in R&D impact assessment is that it offers a systematic framework for identifying the costs, benefits and wider implications of R&D.

Suitability of the Benefit - Cost Method

Benefit - cost methods are much more appropriate for past research than for on-going or future research. The benefit - cost method is very useful for assessing applied research dealing with a product/process development. In the past, studies have focused on “big winners.”

Benefit - cost methods can be used for ex-ante analysis of R&D within those sectors where the connection between R&D and sectoral impacts are clearer and more direct, such as agriculture. In order to use it in on-going or future research, one must have:

• A good idea of the likely outcomes of R&D;
• Their probability of occurrence;
• When they will occur;
• Who and when they will be applied; and
• The market for products or processes developed.
   

Source: ISNAR (2003) Monitoring, Evaluation, and Impact Assessment of R&D Investments in Agriculture, The Hague: International Service for National Agricultural Research.