Estimating economic value of applied research projects

              To find more resources for your business, home, or family, visit the College of Agricultural, Consumer and Environmental Sciences on the World Wide Web at aces.nmsu.edu
Estimating Economic Value of Applied Research Projects
Research Report 781
Ted Sammis, Mick O’Neill, and Junming Wang1
Agricultural Experiment Station • College of Agricultural, Consumer and Environmental Sciences
ABSTRACT
Universities manage research projects through both in­ternal funding and support systems for the generation of external grant funds. The management of a research project is full of uncertainty and complexity. An eco­nomic evaluation of university research projects can determine the economic impact on society and can gen­erate a return on the investment from federal and state funds. This paper presents a simple method that uses an Excel spreadsheet to estimate the economic value of research at the project level. Three sample calculations were conducted for agricultural research projects (on pecan irrigation, a new variety of bigtooth maple tree, and evaluation of new alfalfa varieties) to demonstrate the methodology. The research on new alfalfa varieties obtained the highest benefit:cost ratio (123:244). This supports the concept that variety trials have one of the highest potential paybacks of any agricultural research. An economic analysis of the benefit:cost ratio and a net present value for most applied research are easy to com­pute with the presented Excel calculator. When the eco­nomic analysis includes a large number of environmen­tal values, more time and effort are needed to conduct the analysis, but an economic analysis remains possible. If used as part of research proposal submission, the eco­nomic analysis could give reviewers another method to rank research proposals and select those proposals that not only propose good science but also have a potential reasonable return on taxpayers’ investments.
INTRODUCTION
Universities manage research projects through both in­ternal funding and support systems for the generation of external grant funds. External grants are awarded by federal and state governments, private industry, and other organizations. The management of a research project is full of uncertainty and complexity. Research has elements of creativity and innovation, and predict­ing the outcome of research is difficult, but that should not preclude an estimate of the economic impact of that research on society.
Universities conduct applied as well as basic research. Applied research is an investigation to acquire new knowledge that is directed toward a specific, practical aim or objective; basic research, which is experimen­tal or theoretical work, is undertaken to acquire new knowledge of the underlying phenomena and observable facts, without a particular application or use in view. Pure basic research is carried out for the advancement of knowledge, without working for long-term economic or social benefits and with no positive effort made to apply results to practical problems or to transfer the results to sectors responsible for their application.
Private industry allocates applied research dollars based on economic analysis. For example, if it is not cost-effective to develop orphan vaccines (vaccines for rare diseases), then private industry generally does not develop such vaccines until government intervenes to decrease the economic risk (Lang and Wood, 1999). Basic research probably should not be subjected to eco­nomic analysis, but universities and state and federal gov­ernments should base the allocation of applied research dollars on economic analysis so that tax dollars are spent more effectively. Hayami and Ruttan (1985) formalized and empirically verified their economic theory that the development of innovative technology through applied research is strongly linked with economic conditions. New innovations are more likely to emerge in response to scarcity and economic opportunities. For example, drip irrigation and other water-saving technologies are likely to be developed in locations such as the California desert where water constraints are binding. This means that requests for applied research proposals are driven by economics. The federal government also requires stake­holder involvement in applied research to help ensure that the research and outreach have an impact on society (Carmin et al., 2003). However, the process of select­1Respectively,
Professor, Department of Plant and Environmental Sciences, New Mexico State University (MSC 3Q, P.O. Box 30001, Las Cruces, NM 88003-8001; tel. 575-646-2104; tsammis@nmsu.edu); Professor, Department of Plant and Environmental Sciences, NMSU; and Research Assistant Professor, Department of Agricultural and Environmental Sciences, Tennessee State University, Nashville, TN.