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Farmland Investments in Africa: What’s the Deal?

  • Luca Di Corato

    (Department of Economics, Swedish University of Agricultural Sciences, Sweden)

  • Sebastian Hess

    (Department of Economics, Swedish University of Agricultural Sciences, Sweden)

Large-scale foreign investments in African farmland are rising and may contribute to agricultural productivity growth and economic development. However, host countries sometimes have to wait longer for the economic benefits to arrive than initially expected. In this respect, the timing of project development is crucial and depends on the economic incentives provided to the investors. We therefore present a dynamic stochastic programming model that reflects the typical bargaining situation concerning large land deals in Africa and allows the effect of market- and country-specific risks and taxation to be assessed. The model shows that commodity price volatility increases the value of the land development option, but slows down the land development process. Furthermore, it shows that host country attempts to negotiate fixed commitments to the speed of project development may run counter to the structure of economic incentives at the project site. The applicability of the model is demonstrated for a recent 10,000-hectare cotton project in Ethiopia. Response surface estimations suggest that Ethiopia has negotiated a contract under which it will receive about half the expected total project value, as long as it levies the regular corporate tax rate.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2014.23.

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Date of creation: Mar 2014
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Handle: RePEc:fem:femwpa:2014.23
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  1. Luca Di Corato, 2010. "Profit Sharing under the Threat of Nationalization," Working Papers 2010.5, Fondazione Eni Enrico Mattei.
  2. Sarkar, Sudipto, 2012. "Attracting private investment: Tax reduction, investment subsidy, or both?," Economic Modelling, Elsevier, vol. 29(5), pages 1780-1785.
  3. Paul Collier & Anthony J Venables, 2012. "Land Deals in Africa: Pioneers and speculators," OxCarre Working Papers 069, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  4. Feng Song & Jinhua Zhao & Scott M. Swinton, 2011. "Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(3), pages 764-779.
  5. G. Cornelis van Kooten & Robert A. Schipper, 2002. "Forest Conservation in Costa Rica when Nonuse Benefits are Uncertain but Rising," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 150-160.
  6. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  7. Schatzki, Todd, 2003. "Options, uncertainty and sunk costs:: an empirical analysis of land use change," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 86-105, July.
  8. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
  9. Klaus Deininger & Derek Byerlee & Jonathan Lindsay & Andrew Norton & Harris Selod & Mercedes Stickler, 2011. "Rising Global Interest in Farmland : Can it Yield Sustainable and Equitable Benefits?," World Bank Publications, The World Bank, number 2263, October.
  10. von Braun, Joachim & Meinzen-Dick, Ruth Suseela, 2009. ""Land grabbing" by foreign investors in developing countries: Risks and opportunities," Policy briefs 13, International Food Policy Research Institute (IFPRI).
  11. Yu, Chia-Feng & Chang, Ta-Cheng & Fan, Chinn-Ping, 2007. "FDI timing: Entry cost subsidy versus tax rate reduction," Economic Modelling, Elsevier, vol. 24(2), pages 262-271, March.
  12. Clark, Ephraim, 1997. "Valuing political risk," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 477-490, June.
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