Genetically modified crops as real options: Identifying regional and country-specific differences

Abstract

This paper employs real options methodology for evaluating profitability of genetically modified (GM) crops in volatile market and regulatory environments. Observed instances of market entry, or product introduction, are viewed as outcomes of profit maximizing decisions based on comparison of market entry costs, expected future returns, and the value of managerial flexibility. The process is estimated using simulated maximum likelihood. The estimates suggest that, in the developing countries, the downward volatility of the returns is higher resulting in lower adoption rates, whereas the environment in the top four industrialized GMO adopting countries appears to be costlier but much more optimistic. Commercial success of GM soybean and maize in Argentina, Brazil, and the U.S. is explained mostly by a combination of high upward return volatility and moderate entry costs. The findings may contribute to the general understanding, measurement, and possibilities of controlling the rate of technical advance in biotechnology.