What matters more, time or money when it comes to innovation?

Innovation impacts are the ripples of change we experience in our lives and throughout the entire supply chain for products. The impacts of innovation come in a range of forms such as the introduction of new techniques to produce a product, to consumers having access to new products, or the reduced cost due to cutting edge technology. To ensure that innovation continues, benefits have to exist and some level of benefits need to be distributed along the supply chain for any given product. The benefits of innovations are commonly measured in terms of money (increased profit or reduced costs) or the amount of time saved. For innovators increased profit is important, while adopters of innovations may seek out benefits of a cheaper product and/or one that saves time.

The distribution of benefits is crucial to innovation, if each stage of the supply chain isn’t sharing a proportion of the benefits, then there is no incentive for that component to participate in the adoption within the supply chain for that product. Many think that the developers of new technologies are the ones who gain virtually all of the benefits, with consumers gaining very little. If consumers don’t benefit, they won’t buy, in the case of a technology when a manufacturer doesn’t benefit, it won’t make it to market. To gain a better understanding of the distribution of the impacts of innovation, I have conducted research that uses the innovation of herbicide tolerant (HT) canola as an example. I have worked with Peter Phillips, Johnson Shoyama Graduate School of Public Policy at the University of Saskatchewan, to develop a baseline value of the benefits of HT canola in Canada. After we developed the baseline values, we then subjected the values to several money and time cost impacts and assessed the deviations from our baseline.

Putting a value on the benefits of HT canola innovation

assessing the innovation of canola

Our conservatively estimated baselines found that the three multinational enterprises (MNEs) involved in the development of HT canola (Bayer, BASF & Monsanto) gained $233 million from 1985 – 2020. As farmers switched to adopt the MNEs canola varieties, other development firms and public canola breeding programs lost an estimated $400 million as farmers as they didn’t offer the same HT innovation. Ultimately, public research institutions such as universities, the National Research Council and Agriculture and Agri-Food Canada stopped investing in the development of canola varieties. Farmers that adopted HT canola gained $208 million, nearly as much as the technology developing MNEs through higher yields and reduced input costs. Canadian consumers also gained $26 million through lower canola oil prices. The rest of the world gain an estimated $19 million through the lower price of Canadian canola.

Impact analysis

With the baselines estimated, we applied five different policy options to assess their impacts. The five policy options applied were:

  1. a $50 million research and development (R&D) subsidy to encourage innovation spread evenly over the period;
  2. a $50 million R&D subsidy to encourage innovation provided at the start of the period;
  3. doubling the cost of the regulatory approval process;
  4. adding a two-year delay to the regulatory approval process; and
  5. changing the intellectual property rights (IPR) system such that it was diluted by 50%.

While each policy option offered different impacts, we can establish three key impacts. First, providing innovation incentives upfront generates a larger positive impact than spread out over time. Second, imposing a two-year delay on regulatory approval has a larger negative impact than doubling the cost of regulatory approval. While a two-year approval delay costs nearly all sections of the supply chain, the net impact of delays is actually less than double the cost of approval. Finally, by weakening the IPR system by 50%, there is little incentive for the three MNEs or the rest of the canola industry to endorse this policy as all the benefits shifted to farmers.

Time and Cost Impacts on Canola Innovation (1985-2020) ($CDN Million)
Three MNEs Rest of industry Canadian producers Canadian consumers Rest of the world
Baseline net present value* (1985-2020) $233 -$400 $208 $26 $19
Deviations from baseline
1. R&D subsidy ($50M evenly) $27 $2.6 N/C $29 N/C
2. R&D subsidy ($50M upfront) $36 $3.8 N/C $40 N/C
3. Regulatory change (2x cost) -$37 N/C N/C -$56 N/C
4. Regulatory change (2 year delay) -$65 $77 -$48 -$37 -$3.9
5. Change IPR system (50% dilution) -$150 -$2.6 $125 -$28 N/C
* A discount rate of 10% was used.
N/C – no change from the baseline
Full details of table can be found below in attached working paper.
Setting the right innovative policy

Funding innovation is a crucial issue for all governments as it attracts new economic investment and creates jobs. The results of our study found that financial incentives to encourage innovation result in a higher level of benefits if the incentive is provided up-front. The efficiency of the regulatory system is of importance as time delays are costly as they reduce the overall level of benefits. If a government provided $50 million in innovation incentives, yet the country’s regulatory system was inefficient, the potential exists that the net benefits of any innovations could be reduced by greater than $50 million. Depending on the length of delay, the entire innovation benefit could be eroded.

This blog is based off of the working paper “Profitable Genomic Innovation Challenges: A Canadian Canola Case Study” by Dr. Stuart J. Smyth & Peter W.B. Phillips.
Reference for working paper:
Smyth, S.J. & P.W.B. Phillips. 2020. Profitable Genomic Innovation Challenges: A Canadian Canola Case Study. SAIFood, https://saifood.ca/wp-content/uploads/2020/01/Smyth-Phillips-Investment-thresholds.pdf. Working paper.

2 Comments

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Paul Thiel· 01/30/2020 at

Stuart – enjoyed this brief article. The increased financial incentive at the start of the innovation cycle was particularly intriguing, but begs the question of a “probability of success” factor. I realise for the purpose of this article (retrospective), it does not come into play, but I think it is an important consideration, especially when public funding is considered.

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    Stuart Smyth· 01/30/2020 at

    Thanks, glad you enjoyed it. I agree the next step would be to use commercialization data to determine whether a front end incentive affected the commercialization rate or not, and if so, how. Economics doesn’t really know much about the ‘valley of death’ in the innovation process and examining the success rate would be a crucial part of shedding more light on what factors are crucial in the decision to proceed with further funding for an innovative product or technology and what factors are crucial when deciding to end the R&D project. Another think that the insights into whether there are differences between public and private R&D would be fascinating.

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