Complementary technology adoption and smallholder commercialization: Panel data evidence from Ethiopia

Abstract

AbstractAgricultural transformation involves the transition from subsistence agriculture marked by cultivating crops for auto‐consumption to cultivating crops for output markets. This transition from subsistence agriculture to market‐oriented agriculture can be a key policy boost to economic development, but evidence on the key entry points to increasing smallholder commercialization remains scarce. We examine the relationship between the adoption of improved maize varieties (IMVs), inorganic fertilizers, and smallholder commercialization. We model commercialization as a two‐step decision process involving market participation and the extent of participation (sales quantity) conditional on participation. Given these two related steps, we estimate a double‐hurdle model in both linear and non‐linear forms. Employing a three‐wave panel dataset from Ethiopia, we use the household fixed effects and correlated random effects model with the control function approach. We find the adoption of IMVs to be significantly associated with both market participation and the extent of participation. This relationship is also true for fertilizers, where we show a positive association between fertilizer use and commercialization. Given the seeming complementarity in the use of both IMVs and fertilizers, we further estimate their joint adoption. We use the multinomial endogenous switching regression model where we show greater commercialization gains under joint adoption. These findings are in line with a growing literature supporting the bundling of agricultural technologies. Given these insights, we provide empirical and policy support to the scaling of agricultural technologies as they have the potential to induce agricultural transformation by unlocking market opportunities.