Determinants of Agricultural Investment: An Application to Rural China

China, a country developing at unprecedented levels, has experienced drastic changes throughout its recent economic history. Of primary interest is the continuing development and improvement of the rural agricultural sector, with even the slightest changes in this sector having dramatic ripple effects on rural economies. Estimates of rural households involved in agricultural production range from 65 to 70 percent (de Brauw & Rozelle, 2008; Rozelle, Taylor, & de Brauw, 1999). Improvements in agricultural production therefore have a direct impact on the livelihood of rural households in China. Thus, of primary interest are the factors influencing the smallholder farmers' agricultural investment strategies to improve agricultural yields. Households involved in agricultural production can primarily improve their yields through the use of various agricultural improvements made available by ongoing agricultural research. Of utmost interest is the following question: If the returns to agricultural technologies, such as fertilizers, pesticides, genetically-modified seeds, and fixed land improvements, have had positive effects for agricultural households, then what constrains households from applying them? Due to the complexities of the household production decision, literature devoted to finding the answer to this question is limitless and spans almost all regions of the world. However, this analysis focuses on the barriers to investment, potential strategies used to overcome them, and their joint impacts on agricultural investment in rural China. Data in this analysis are cross-sectional, collected over a period of three years between 2006 and 2008 from rural villages within six provinces in China. This analysis is applied over Hunan, Yunnan, and Heilongjiang provinces, intended to capture effects on the investment decision that may differ by region. Households surveyed over the three years total to 4,178, with a total of 3,718 used in this analysis. Of these households, 3,347 (90%) were registered under agricultural hukou, with 3,269 (87.9%) involved in agricultural production during the year of 2008. Major contributions of this analysis stem from the joint assessment of four main factors that influence the household’s agricultural investment decision. More specifically, the impacts of land tenure security, access to credit, education, and migration on agricultural investment are examined. Analysis of each of these four factors is conducted using a Heckman sample selection model across three surveyed provinces. Use of the Heckman model allows us to account for the existence of sample selection bias that exists between those farmers who choose to invest and those who do not. In the first stage of the Heckman model, impacts of each of the four core factors on the likelihood of agricultural investment are quantified. This is followed by a second stage examination of factors influencing the intensity of investment, conditional on the fact that the investment decision has been made. Preliminary findings indicate that each of the four core factors have an influential role on both the likelihood and intensity of investment across rural agricultural households. Across all provinces, agricultural households with more than 80 percent of their landholdings being rented in are less likely to invest. However, conditional on investments being made, these households will tend to invest more intensively than those farmers with a greater proportion of allocated land. Additionally, access to credit has a significant positive impact on both the likelihood and intensity of investment across all agricultural households. Lastly, impacts of education and migration have been mixed, with larger positive impacts noticed from remission income sent home from migrant household laborers. Given negative impacts of land tenure insecurity on the likelihood of investment, it is clear that more should be done to improve the security of rental contracts. The need for this is real and apparent, as nearly 88 percent of rental contracts had not set a clear duration of the lease, and so many rented plots of land are rented under insecure terms (Gao, et al., 2012). Additionally, given positive impacts of credit access on the likelihood and intensity of investment, expansions to the rural credit market could encourage further agricultural investment. Combined, policy improvements and expansions to the rural credit market will produce positive multiplier effects and thus help improve the rural economies within China.