An exploratory study of factors affecting farm capital formation : Central Luzon, Philippines

Abstract

Private capital formation or investment in agriculture is to a large extent influenced by economic, social and institutional factors. An attempt has been made in this study to investigate and quantify the effects of some economic and other factors which may have influenced the capital formed on rice farms in the Central Luzon Region, Philippines. The study is based on cross-sectional data of a sample of 324 farms. The data pertain to the crop year July 1, 1973 to June 30, 1974. Since data were available for only one time period, a short-term farm investment model was formulated instead of a dynamic investment model. The identification and measurement of the variables in the conceptual model were also determined by the constraints imposed by these data. Based on investment theory and results of empirical studies, it was the a priori belief in this study that the private investment on the farms would be a function of internal finance (e.g. income and savings) and of external finance (e.g. credit). It was also the belief that other factors characteristic of the farms/farm families may have an influence on the investments undertaken by farmers. These other factors are, namely, size of holding, household size, adoption of new farm practices and farm tenure. It was hypothesised that size of holding, income, savings, credit, and adoption of new farm practices would have a positive influence on farm investment. On the other handy household size, and farm tenure were expected to have either a positive or negative influence on farm investment. It was also assumed that net investment and each of the abovementioned factors associated with it have a linear relationship and that the farm investment function used was a single independent relationship. The technique of ordinary least squares was utilised in the estimation of the investment function. Results of the regression analysis were largely theoretically consistent and statistically dependable even though the data used were only cross-sectional. As hypothesised earlier, the estimated marginal investment coefficients for the size of holding,income,savings,credit,and adoption of new farm practices variables were positive and significantly different from zero except for savings. On the other hand/ household size and tenurial status other than owner operator had negative coefficients. The general possible implications of these findings were also stated.