Scandinavian Working Papers in Economics

Working Paper Series,
Swedish University of Agricultural Sciences, Department Economics

No 2013:10: Farmland Investments in Africa: What’s the Deal?

Luca Di Corato () and Sebastian Hess ()
Additional contact information
Luca Di Corato: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden
Sebastian Hess: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden

Abstract: 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 bene…ts 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 re‡ects the typical bargaining situation concerning large land deals in Africa and allows the e¤ect of market- and country-speci…c 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 …xed 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.

Keywords: foreign direct investment; land leasing; real options; nash bargaining

JEL-codes: C61; D81; F23; Q24; Q58

33 pages, December 13, 2013

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