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Volume 10

Springer Series in Supply Chain

Management

Series Editor
Christopher S. Tang
University of California, Los Angeles, CA, USA

More information about this series at http://​www.​springer.​com/​

series/​13081 Supply Chain Management (SCM), long an integral part of
Operations Management, focuses on all elements of creating a product
or service, and delivering that product or service, at the optimal cost
and within an optimal timeframe. It spans the movement and storage of
raw materials, work-in-process inventory, and finished goods from
point of origin to point of consumption. To facilitate physical flows in a
time-efficient and cost-effective manner, the scope of SCM includes
technology-enabled information flows and financial flows.
The Springer Series in Supply Chain Management, under the
guidance of founding Series Editor Christopher S. Tang, covers research
of either theoretical or empirical nature, in both authored and edited
volumes from leading scholars and practitioners in the field – with a
specific focus on topics within the scope of SCM.

Springer and the Series Editor welcome book ideas from authors.
Potential authors who wish to submit a book proposal should contact
Ms. Jialin Yan, Associate Editor, Springer (Germany), e-mail:
jialin.yan@springernature.com
Editors
Jayashankar M. Swaminathan and Vinayak Deshpande

Responsible Business Operations

Challenges and Opportunities
1st ed. 2021
Editors
Jayashankar M. Swaminathan
Kenan-Flagler Business School, UNC Chapel Hill, Chapel Hill, NC, USA

Vinayak Deshpande
Kenan-Flagler Bussiness School, UNC Chapel Hill, Chapel Hill, NC, USA

ISSN 2365-6395 e-ISSN 2365-6409

Springer Series in Supply Chain Management
ISBN 978-3-030-51956-8 e-ISBN 978-3-030-51957-5
https://doi.org/10.1007/978-3-030-51957-5

© Springer Nature Switzerland AG 2021

This work is subject to copyright. All rights are reserved by the

Publisher, whether the whole or part of the material is concerned,
specifically the rights of translation, reprinting, reuse of illustrations,
recitation, broadcasting, reproduction on microfilms or in any other
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electronic adaptation, computer software, or by similar or dissimilar
methodology now known or hereafter developed.

The use of general descriptive names, registered names, trademarks,

service marks, etc. in this publication does not imply, even in the
absence of a specific statement, that such names are exempt from the
relevant protective laws and regulations and therefore free for general
use.

The publisher, the authors and the editors are safe to assume that the
advice and information in this book are believed to be true and accurate
at the date of publication. Neither the publisher nor the authors or the
editors give a warranty, expressed or implied, with respect to the
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been made. The publisher remains neutral with regard to jurisdictional
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Nature Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham,
Switzerland
Introduction
With the increase in climate emergency, global social inequalities, and a
need to develop rural agricultural systems, there is an increased focus
on developing responsible business models. Operations plays an
integral role in delivering value to any business model; therefore, at
present, there is an increased emphasis on responsible operations. The
Brundtland commission defines “sustainable development” as
development that meets the needs of the present without
compromising the ability of future generations to meet their own
needs. There are many dimensions of sustainability which are often
captured through triads such as the “three Es” (Economics,
Environment, and Equity) or the “three P’s” (Profit, Planet, and People).
Responsible operations includes workforce, environmental, as well as
social impact. For example, Goodyear Corporation states responsible
operations “includes our day to day efforts to produce high quality
products in an efficient manner supported by a culture of health and
safety. It also includes managing our environmental impacts. Operating
in a responsible manner worldwide leads to protecting our people, our
customers/consumers and the planet.”
Operations management is defined as the design, operation, and
improvement of the systems that create and deliver a firm’s primary
products and services. The operations function of a firm focuses on
adding value through the transformation process of converting inputs
to outputs. Since operations has an effect on the value delivery process,
from design to procurement to production to delivery, there is
tremendous opportunity for firms to make progress on their
responsibility mandate through their operations. While firm level
corporate responsibility is important, there is also a great need for
governments and international agencies to innovate their models of
execution to promote development, growth, and inclusion across the
world. This book presents a collection of recent innovative research and
ideas around responsible operations from leading researchers of the
world. In particular, it focusses on two important themes: (1)
development of emerging economies and addressing the needs of the
bottom of the pyramid and (2) developing responsible practices both
within and outside the firm.
 Along the first theme, the chapter titled “Value Chain Innovations to
Foster Development” by Hau Lee discusses five effective ways to
develop innovation strategies for emerging economies. These include—
mobilizing ecosystems, product and process innovation, designing the
right value chain, leveraging geopolitical lubricants, and servicization.
This is followed by the chapter titled “The Impact of Crop Minimum
Support Prices (MSP)” by Tang and Chintapalli, which presents
alternative models of support prices. By examining the dynamic
interactions among farmers for the case when there are two
(complementary or substitutable) crops for each farmer to select and
grow, it is revealed that regardless of the values of the MSP, price
disparity between the crops worsens as complementarity between
them increases. Another finding is that offering MSP is not always
beneficial to farmers. In fact, offering MSP for a crop can hurt the profit
of those farmers who grow that crop especially when the proportion of
strategic farmers is sufficiently small. This followed by the chapter
titled “Improving Crop Yield: A Model for Plant Growth and Optimal
Seeding” by Swaminathan and Zhang, the authors present an innovative
model of plant growth and embed that in an optimization framework to
study a farmer’s planting schedule problem under rainfall uncertainty
and planting capacity constraint. They establish the optimal planting
schedule given the soil water content, planting capacity, and future
rainfall uncertainty. In their computational study, they use field weather
data from Southern Africa in a real-size large-scale problem and
demonstrate significant relative crop production advantage of the
optimal planting schedule over commonly used heuristics in practice.
Following this chapter, in the one titled “The Role of Donors in Global
Health Supply Chains,” Rashkova and Berringer discuss the important
role of funding in enabling development and capacity building in
emerging countries of the world. They use the global health supply
chains to provide the context and utilize that to highlight the
shortcomings and potential opportunities. Finally, in the chapter titled
“Prepositioning Inventories at UNCEF,” Swaminathan et al. describe the
benefits of utilizing inventory prepositioning and postponement
strategies in the Horn of Africa for PlumpyNut supply chain. They
describe the costs, benefits, as well as challenges in implementing such
an approach.
 The second part of the book deals with development of sustainable
practices both within and outside the firm. In the chapter titled
“Abilities First Approach to Workforce Inclusion in Organizations,”
Narayanan et al. describe how Pekham Inc. has developed a robust
strategy around inclusion of disabled workers in their firm and the
changes they have made to make it a successful endeavor. In the next
chapter titled “Socially Responsible Co-Product Design,” Lin et al.
examine coproduction technologies that manufacture products of
different qualities from a common source of raw material to reduce
natural resource consumption. Specifically, coproduction technology
allows a manufacturer to introduce a new coproduct using raw material
that would otherwise be discarded because of its inferior quality
relative to conventional quality standards. They examine whether and
how a manufacturer should leverage coproduction technology to design
its product offerings. In the following chapter titled “Vertical
Integration for Corporate Social and Environmental Responsibilities,”
Deshpande et al. study how Taylor Guitars implemented a series of
sustainability efforts related to ebony sourcing. The authors create an
analytical model to study the implications of horizontal sourcing and
vertical sustainable integration and provide managerial insights about
when vertical sustainable sourcing strategy may be beneficial. The next
chapter titled “Environmental Sustainability Tradeoffs in a Product
Supply Chain” by Olsen et al. compares a product’s life cycle perspective
to environmental sustainability and highlight the opportunities therein.
In the next chapter titled “Renewable Energy Sourcing,” Yucel and
Agarwal discuss the growing phenomenon related to solar power
generation by corporations and consumers. In this chapter, they survey
the extant academic literature on sourcing of renewable energy by
utility firms and consumers and shed light on the advantages and
disadvantages of different mechanisms used by corporations to source
renewable energy. Another important aspect of responsibility relates to
supply chain transparency. In the next chapter titled “Supply Chain
Transparency at Goodio Chocholate,” Hamallen et al. examine the topic
of supply chain transparency from both practice and academic
perspectives. They use the Goodio Chocolate as a case example and
discuss how discloser of supply chain practices to consumers can
impact their choice. They also present examples of innovative methods
that companies are using to provide visibility into their supply chains.
In the final chapter titled “Auditing, Inspection and Testing for Social
Responsibility in Supply Networks,” Dawande and Qi discuss research
studies that analyze auditing of suppliers for non-compliance of socially
responsible practices such as child labor as well as those papers that
analyze inspection and testing of social responsibilities violations such
as adulteration of milk.
As a collection, these pioneering chapters uniquely and significantly
advance our knowledge of responsible operations and present a path
forward for future researchers to explore this important topic in
greater depth.
Contents
Value Chain Innovations to Foster Development
Hau L. Lee
The Impact of Crop Minimum Support Prices on Crop Selection
and Farmer Welfare in the presence of Strategic Farmers
Prashant Chintapalli and Christopher S. Tang
Improving Crop Yields Through Better Planting Schedules
Jayashankar M. Swaminathan and Ying Zhang
Role of Donors in Global Health Supply Chains
Gemma Berenguer and Iva Rashkova
Inventory Prepositioning for UNICEF Plumpy Nut Supply Chain
Jayashankar M. Swaminathan, Wendell Gilland, Vidya Mani,
Anthony So and Corrina Moucheraud Vickery
Disability Inclusion in Operations
Sriram Narayanan, Edward Terris and Dustin Cole
Socially Responsible Co-product Design
Yen-Ting Lin, Haoying Sun and Shouqiang Wang
Vertical Integration for Corporate Social and Environmental
Responsibility at Taylor Guitars
Adem Orsdemir, Vinayak Deshpande and Daniel Lin
Environmental Sustainability Trade-Offs in a Product’s Supply
Chain
Mahsa Boroushaki, Mark Ferguson and Tava Lennon Olsen
Renewable Energy Sourcing
Vishal V. Agrawal and Şafak Yü cel
Supply Chain Transparency at Goodio Chocolate
Markko Hä mä lä inen, Tim Kraft, Doug Thomas and Yanchong Zheng
Auditing, Inspections, and Testing for Social Responsibility in
Supply Networks
Milind Dawande and Anyan Qi
Index
© Springer Nature Switzerland AG 2021
J. M. Swaminathan, V. Deshpande (eds.), Responsible Business Operations, Springer
Series in Supply Chain Management 10
https://doi.org/10.1007/978-3-030-51957-5_1

Value Chain Innovations to Foster

Development
Hau L. Lee1
(1) Stanford Graduate School of Business, Stanford University,
Stanford, CA, USA

Hau L. Lee
Email: haulee@stanford.edu

Keywords Value chain innovations – Economic development – Supply

chain reengineering – Supply chain design – Servicization

Despite the rapid economic development of countries like China and

India, there are still many parts of the world where people live in
poverty. The World Bank has used income to group countries.
Sometimes, we refer to parts of the world with very low per-capita
income as “developing world” or “developing economies.” Of course,
such terms have been criticized as the focus was on categorization
instead of the people (Khokhar and Serajuddin 2015). Shifting to
people, the low-income economies are plagued with people living in
poverty. The World Bank (Global Monitoring Report 2016) has
reclassified global extreme poverty as those living on $1.90 or less a
day. In 2015, 9.6% of the world’s population lived under such a
definition of extreme poverty. So our focus should be on how to address
the needs and also help improve the welfare of the people in these
economies.
 Statistics, however, still requires some form of categorization. In the
following figure, we can see the prevalence of extreme poverty in
different parts of the world. The statistics was based on countries,
which perhaps was the basis of the reference to “developing countries”
(Fig. 1).

Fig. 1 Prevalence of worldwide extreme poverty. (Source: World Bank 2014)

In the remaining of this chapter, we will simply refer to as

“developing economies” for regions that have significant population
living under extreme poverty. Such economies can be in low-, middle-,
or high-income countries.
Value chains are crucial in supporting innovations so that economic
development can be supported (Lee and Schmidt 2017). There are
many ways in which we can make use of the value chains to accelerate
or foster such innovations. I like to share five, illustrated with business
cases, in this chapter. These five ways are as follows:
Mobilize ecosystem to orchestrate the three flows
Product and process innovation
Designing the right value chain
Leveraging geo-political-economic lubricants
 Servicization

1 Mobilize Eco-system to Orchestrate the Three

Flows
It is well known that the management of a supply chain or a value chain
requires sound coordination of the information, material or service,
and financial flows, which can span multiple organizations of the value
chain. To help create values and stimulate development in developing
economies, we must find ways to re-engineer these three flows under
the often challenging environments of developing economies. In this
section, we present two case examples to illustrate how the
orchestration of the three flows can make a difference.
In Africa, it was estimated that at least 150,000 tons of shea kernels
are consumed annually for cooking, as a skin pomade, for medicinal
applications, in soap, for lanterns, and for cultural purposes at
ceremonies (Rammohan 2010). On the other hand, 90% of shea nuts
internationally were used for the food and confectionary industry and
for cosmetics. Ghana is a major shea butter-producing country. Per-
capita gross domestic product (GDP) in Ghana was $2201 in 2018
(Countryeconomic.com 2018), placing the country 141st out of 196
countries in terms of GDP. Agriculture constituted a major industry of
the country. Shea butter trees grew wild in the country, allowing
women farmers, many of whom illiterates, to easily pick the fruits from
the ground. Loads of nuts were heavy, and it was common that the
farmer had to walk down long dirt roads for several kilometers to the
village market, where she became a price taker as it would be difficult
for her to bring the crops back even if the price was not satisfactory.
Shea butter often had to go through multiple intermediaries before
it reached the real buyer. As a result, the prices paid to the women
farmers were just a fraction of the final price offered by the buyers.
Farmers were also cash-strapped. Hence, when a farmer had
unexpected financial needs such as a child getting sick needing
hospitalization, she might have to sell her crop prematurely to a
middleman who might take advantage of the situation by offering an
extremely low price. A farmer therefore was often in extreme poverty
position with little hope of recovery.
 To alleviate this poverty cycle, SAP, PlaNet Finance, Maata-N-Tudu
(MTA), and Grameen Ghana (GG) joined forces in 2009 to create a
program to help the women farmers. The program required the
orchestration of the three flows in butter production.
To begin, PlaNet Finance, MTA, and GG enlisted women into an
organized group called the Star Shea Network (SSN). Such
organizations had both physical and financial flow implications. The
association gained scale for the farmers, so that they could have better
negotiation power with buyers. This scale also affords more efficient
trainings using videos on how to produce quality nuts and butter,
management of finances, and even group dynamics. One major buyer,
Olam International, was also enlisted to be part of the value chain as the
market for the outputs of SSN. Olam also provided women with
protective gear such as boots and gloves to safeguard against hazards
such as snake bites when harvesting shea fruits. This should enable
them to collect higher quantities over time.
To improve information flow, SAP developed a website (www.​
starshea.​com) to help market the products to buyers all over the world.
A specialized order fulfillment and management software was offered
to the farmers to manage orders from buyers. Women are sent SMS text
messages regarding logistics information, and market prices from
Esoko, a market information exchange. SAP also developed the
Microloan Management software to enable field credit officers to
monitor their loan portfolios and calculate portfolio aging at a glance.
PlaNet Finance conducted research to understand the credit needs
of shea women and key service providers, and with funding from MTA
and Grameen Ghana, microloans were provided for purchasing
processing equipment, transporters and grinders, for hiring extra labor,
or to help cover general expenses during the cash-strapped summer
months before nuts were sold (Fig. 2).
Fig. 2 Innovating with the three flows for Ghana shea butter farmers
Since the launch of the program, the following positive
developments were noticed:
The number of women trained on quality nut and butter
processing had grown to 22,000 in 2016; 40 shea companies have
become buyers now.
Farmers received prices at 0.40 cedi (premium) and 0.35 cedi
(standard) per kg, which were 82% and 59% increase over prices of
distressed sales in the summer.
50% reduction of distressed sales by farmers.
Going forward, proper growing method, sanitized product,
processing capabilities could lead to shea butter to be used as special
products with higher values, for example, 100% natural handcrafted
shea butter, shea body balm, and shea butter oil in cosmetics. This
would further increase the incomes of the farmers.
The second case is based on hazelnut plantation in Bhutan. The GDP
per capita in Bhutan was $3160 in 2018 (Plecher 2019), ranked 161st
in the world. Among the total population, 69 percent lived in rural areas
as farming was their main source of income. Out of this, 40 percent
lived at subsistence level, with income at less than $1 a day (Hoyt and
Lee 2011). To make ends meet, many young men had to leave the
country to serve as migrant workers in neighboring countries,
destroying the harmony and happiness of family life with their wives
and children. Farmers had also deforested to make room to grow crops,
resulting in severe soil erosion. Mountain Hazelnut (MH) was created
as a social enterprise that would provide farming jobs with stable
income, while at the same time improve environmental sustainability in
rural Bhutan.
The co-founders of MH identified hazelnut as a crop that could be
introduced in Bhutan, since the weather and soil conditions there were
suitable. Hazelnut was a high-value crop with increasing demand
worldwide. Yet, there was a constraint in supply, as not too many
countries besides Turkey, Italy, and the United States could be fit for the
cultivation of such a crop.
Farmers in Bhutan were initially skeptical, as they had never grown
such a crop before, and it was known that much knowhow was needed
to get good yield in growing hazelnut. MH has to innovate in new ways
to orchestrate the three flows.
First is the physical flow. It might be too much to ask for the farmers
in Bhutan to grow hazelnuts from seed to tree. Instead, MH found it
more effective to cultivate hazelnuts tissues in in laboratories in
Yunnan, China. Then, the tissues were flown to nurseries in the eastern
part of Bhutan, where the tissues were grown to become baby trees.
The farmers would then grow the baby trees to maturity. When the
crops were ripe for harvest, the collection and transportation flows
needed to be developed as well. Since Bhutan is a land-locked country,
MH had to invest in logistics processes for the collection of the nuts,
processing and warehousing them, then transporting them to cross the
border to ports in India or Bangladesh possibly by trucks and rails, and
then using ocean freight to get the products to the markets in Europe
and China.
Moreover, MH innovated with the hillside conservation methods so
that the trees could be planted on degraded slopes, in fallow land, or
land otherwise unusable for food crops. The hazelnut roots could
stabilize erosion-prone soil. This showed that MH was actually making
a positive contribution to the environment, including stabilizing slopes,
reducing erosion, protecting watersheds, reducing the amount of forest
cut to obtain fuelwood, and sequestering firewood. It was a way to gain
acceptance of the local communities to the introduction of the crop
there.
One major challenge was that the physical road infrastructure in
Bhutan was not well established; hence, it would be very difficult for
the MH experts to travel to the farmers to give them advice from time to
time on the proper ways to grow the crop, make appropriate irrigation
and trimming work as weather changed, monitor their progress,
diagnose potential problems, and help make treatment plans. Doing so
would require innovations in the information flow. MH instituted a
comprehensive system to track all its trees starting at the stage of
tissue culture. The pictures of the tree and the farmer, his ID number,
his field, and the GPS location were taken and tracked. MH built 25
solar-powered standalone weather stations across Bhutan to monitor
weather conditions and climate change. Then, they used technologies
such as mobile phones to make use of the weather information to
provide farmers with advanced information on growing conditions,
advice on orchard management, and adapt farming techniques to
climate change. The phones could also be used to monitor the growth of
the trees; to give instructions to farmers; and to provide right
information to help farmers to irrigate, fertilize, and take care of the
trees. It was possible for farmers to take pictures of the trees and send
them to MH to diagnose problems or monitor progress. The
information flow was supplemented by MH “field monitors” who would
visit each field approximately once a month, depending on the season.
They carried GPS devices and digital cameras, photographed the fields,
filled out forms, and geotagged their photographs.
Besides the information and physical flows, MH also had to align the
financial flows. First, MH could not sell the baby trees from their
nurseries to farmers, even at a low price like $1 per tree. This was
because even $1 was considered to be too high to the farmers, and
many farmers also did not have the confidence that they could grow
hazelnuts well to justify the investment. As a result, MH chose to give to
the baby trees to farmers for free, on the condition that, when nuts
were collected, MH would purchase them from the farmers according to
preagreed upon prices. In addition, a new business model was created
to gain the trust and acceptance of the local government and
communities—MH would give 20% of the revenue back to the local
communities.
MH’s target was to plant 10 million trees over a 5-year period, and
eventually had 15% of Bhutan’s population engaged in hazelnut
farming, reducing the number of migrant workers, restoring complete
families, and lifting many out of poverty along the way (Fig. 3).

Fig. 3 Innovating with the three flows at mountain hazelnuts

Orchestrating the three flows in value chains has always been of
great interest to operations management researchers. The challenge is
to study how the three flows interact: in some cases, one may substitute
another; in another, one can change the timing of another; and finally,
we can use one flow to re-engineer the other flows. In developing
economies, we have to understand the obstacles faced by having
efficient, accurate, and timely flows, due to the lack of infrastructure in
information, logistics, and finance.

2 Product and Process Innovations

For enterprises in developing economies to prosper and grow, or to add
value to the overall value chain, innovations in products or processes
may help or accelerate the development. Often times, such innovations
may have to be initiated or resulted from investments by global
enterprises. This is because global companies have the financial means
and the engineering resources for such innovations, and that they have
the necessary network of other companies to participate in making the
innovations scalable. With the innovations, enterprises in developing
economies can participate in the value chain, adding values and gaining
from such participation. Global companies, of course, benefit from such
developments, since the innovations can bring forth better products or
improved processes to begin with, and they also gain valuable partners
from these economies in the overall value chain. Partners can
contribute as supply sources, as additional innovation collaborators, or
as channels of markets.
The McDonald’s India case (Rammohan 2015) is one that I like to
use to illustrate this point. McDonald’s entered the Indian market in the
early 1990s. French fries were very popular with Indian customers, and
the supply of MacFries was critical to the company’s success in India. In
the beginning, McDonald’s joint venture partner McCain, itself the
largest producer of frozen French fries and potato specialties, invested
in French fry processing plant and machinery, and storage facilities. The
resulting fries, however, were oily and limp, since the locally sourced
potatoes did not contain the ideal amount of solids and the desired size.
As a result, McDonald’s had to resort to imports from the United States,
which was tricky, since the Indian government had many restrictions
with high customs duties of 56% for potatoes, in order to protect the
domestic industry. The lead time for imports was also long, at around
60 days. The alternative was to import frozen fries from New Zealand,
the United States and Europe, again with steep import duties. As the
market grew, it was clear that imports would not be a long-term
solution to satisfy the demand for MacFries.
Recognizing that innovating in developing the right potato using the
right growing method locally was the way to go, McCain’s began to
work on potato agronomy―a branch of agriculture dealing with field
crop production and soil management. This way, they could develop the
right variety of potato so that potatoes could be grown and produced
into French fries within India.
The first big focus would have to be cultivating the appropriate
variety of potato where current suppliers had failed. McCain learned
that cultivating potato seeds in high elevations was ideal, because seeds
grown at high altitude had high vigor, enabling a commercial crop
planted with those seeds to have higher yield and larger-sized potatoes.
So, it instituted a Shepody potato seed multiplication program in the
13,000-foot high part of the Himalayan mountain range in Northern
India. Seeds were sown in May, and harvested and brought back by
donkeys in September.
Second, farmers would need to grow the full potatoes in a suitable,
more accessible location than the Himalayas. Here, McCain conducted
regional trials to locate the ideal growing area, and experimented with
13 types of potatoes to pinpoint the right variety. They also conducted
management trials to identify the best combination of growing
practices, and storage trials to figure out the best protocol for storing
potatoes. From this experimentation, McCain zeroed in on the central
Indian state Gujarat as the prime growing area. Three varieties were
identified that could work. McCain established a one-acre
demonstration farm to show farmers how to improve yields through
better sowing, drip irrigation, and better harvesting techniques. The
company transformed storage practices by applying a potato sprout
suppressant in combination with using controlled temperature storage.
This helped to avoid deterioration in potato quality during storage.
With seeds planted in September and October, the potatoes were
harvested in February and March. Once they were processed into fries,
the fries were frozen and sent to third-party logistics storage facilities
or to McDonald’s distribution centers. From here, they were shipped to
restaurants.
In 2007, after many years of refinements to agronomy and
developing farmer partnerships, McCain was finally able to produce
fries that met McCain and McDonald’s specifications. By 2008, 30
percent of McDonald’s India’s supply was being manufactured locally.
By 2010, that number had grown to 75 percent. In 2012, imports had
become necessary only on rare occasions (Fig. 4).
Fig. 4 McDonald’s potato supply. (Source: McDonald’s India with permission)
The benefits to McDonald’s from using local fries were a 30 percent
lower cost structure and no exposure to the fluctuating exchange rate.
With local fries, inventory levels were reduced from an average holding
of 15 days for imported fries to 6 days for local fries. The reduction in
shipping time (60 days from the United States to less than a day for
getting local product) also had a significant benefit for risk
management and contingency planning.
There were benefits to farmers as well. Traditionally, farmers sold
produce at the local “mandi,” or village market. Mandi sales and prices
could fluctuate dramatically. The benefits to farmers of doing business
with McCain were guaranteed sales of farm output, an increase in yields
of 30–40 percent compared with “regular” potatoes, reduction in
operating costs, increased and predictable farm income, and reduction
in consumption of natural resources like water.
This case illustrated how local farmers could participate in the
global value chain and increase their economic value capture, as a
result of innovations created by a global enterprise. The innovations
include experimentations to find the right potato types (product
innovation) and the right farming and growing method (process
innovation). The original objective of the global enterprise could be a
selfish one, which in this case was about getting local supply to avoid
the headache of having to import potatoes and fries with complex
restrictions, heavy customs duties, and the risk associated with long
lead time and fluctuating exchange rates. But the innovations have
resulted in value-creation for the local farmers.
As discussed, product and process innovations often have to be
initiated by a large-scale global enterprise that has the financial means
and R&D capability to pursue such innovations. The beneficiaries are
the small- and median-sized enterprises in developing economies, as
well as the global enterprise itself. But how can one safeguard that such
innovations might not spill over to competitors of the global enterprise,
or does it matter? In addition, to convince and induce the players in the
developing economies, such as the farmers in the case of McDonald’s, to
be willing to take part in this undertaking, which was not without risks,
what kind of incentive systems are necessary? These are all interesting
research questions.

3 Designing the Right Value Chain

Besides the product and process innovations of the last section,
innovations can be in the form of the value chain design, that is, the
right configuration of what part to own and what part to outsource, and
what part to be offshored and what part to be done on-shore. In
developing economies, with uncertain environment and challenging
infrastructure, figuring out the right configuration, or the right value
chain, is important for successful ventures.
I will use the Mekelle poultry case to illustrate the importance of
designing the right value chain (Elist and Kennedy 2014). The case was
based on Ethiopia, a country in which chicken price was higher than
that of beef due to chronic supply shortage, and had been rising over
100 percent in merely 5 years from 2005 to 2010. Despite the rising
chicken price, many poultry farms had gone out of business in Ethiopia
because of the steep cost of animal feed, contributing to the
undersupply problem.
Mekelle Poultry Farms was formed in 2010 by two young
entrepreneurs, after intensive negotiations with the regional
government. To launch the company, the pair gave minority equity
stake to the regional government, which enabled Mekelle be granted a
10-year lease on the poultry farm. Their deal with the government also
came with some difficult stipulations: the pair could not legally sell any
part of the farm; the chickens had to be sold at a certain size; and
chicken sales were capped at $2.25 for month-old chickens. Mekelle
planned to import live day-old chicks (DOCs), raise them, and then sell
them to the government 1 month later for distribution to local markets.
Their initial calculations suggested that they could achieve gross
margins of 20 percent under this model. Thus, the initial value chain
design was to procure DOC from abroad, and focus on raising the DOC
to one-month old chicken. Thereafter, distribution was provided by the
government. Mekelle felt that this would minimize its risks, as egg
hatching to raise DOC required more substantial investment, and was
risky, while with the government taking control of logistics distribution
and sales, there was a level of stability and reliability that reduced risks.
However, Mekelle soon found that their design did not work well.
First, their costs were much higher than they had anticipated. Each DOC
would cost them $0.45, and the cost to transport them from India (a
global leader in exporting DOCs) was $0.55 per DOC. Moreover,
working with the government turned out to be not easy. While the
government had guaranteed sales, distribution, and the cost of
transportation, there was no stipulation on repercussions or remedies
for Mekelle Farms should the government be late in picking up the
chickens. In the initial months of operation, the government was
picking up chickens closer to the 60-day mark than the 30-day mark,
adding significant costs to feeding, vaccinating, and raising the
chickens. They were also late in distributing the chickens to the local
farmers after they had been picked up.
More damaging was the fact that it was unclear whether or not the
government’s price cap included sales taxes, which ran up to 15 percent
of the retail price. The government insisted that the $2.25 cap included
taxes, which Mekelle Farms had not accounted for in their financial
projections.
Faced with mounting losses, Mekelle had to revamp their value
chain. Instead of importing live DOCs, Mekelle Farms decided to import
eggs, which cost about $0.60 each, including transportation to the farm.
The variable costs for hatching the eggs were minimal, and Mekelle
Farms had to acquire the necessary equipment. The key is to ensure
that the hatching process was sanitized to allow for healthy hatching of
the eggs at a 60 percent rate to break even, and continue improving the
rate so as to get some decent margin. This turned out to be a very
difficult task, since it was not possible to control the quality of the
imported eggs. Plus, there was the unexpected delay incurred at
customs in Dubai, so that the inventory of imported eggs was stuck for
days.
To succeed, Mekelle needed to gain greater control over the eggs,
that is, they had to continue the vertical integration of the egg and DOC
production stages. They decided to build a parent stock by importing
3450 chickens to produce eggs on-site. Eggs produced by the parent
stock were incubated and hatched. With well-controlled process and
sanitary conditions, they finally achieved an averaged hatch rate of 76
percent.
With egg-production brought in-house, input costs were now under
control. But there were still significant costs related to raising the
chickens for 30 full days. Mekelle Farms redesigned the outbound part
of their value chain by selling DOCs to local farmers who would then
raise the DCO to maturity, thereby capturing the highest margin
segment of the value chain and offloading the riskiest portion of the
operation.
The biggest question facing Mekelle Farms management was
whether they could establish a network of local poultry farmers who
could effectively and efficiently raise DOCs into month-old chickens. It
was important to enlist model farmers who would be trained to do a
good job, and who would then serve as their stable outlets as well as
recruiters of other farmers. To support these farmers with high success
rate, Mekelle Farms provided vaccinations for the chickens, sold feed to
the farmers at cost, provided equipment to raise the chickens, offered
marketing assistance, provided mortality coverage for any chickens
that died in transit, and offered free delivery of the DOCs to the model
farmers (Fig. 5).
Fig. 5 Evolution of Mekelle Farms’ value chain design
In order to achieve this brand equity and establish greater trust
with model farmers and end users, the team looked to leverage their
relationship with the regional government, given the fact that the
government was held in such high esteem among residents of the
region. The partners realized that, as in most frontier markets, it was
not a question of whether to work with the government, but rather a
question of how. Their initial value chain design was built on the
assumption that the government would be efficient, formal, and timely
in logistics—assumptions that ultimately proved naive. Nevertheless,
the government was adept at farmer mobilization, communication, and
messaging, and proved to be a successful platform for building brand
recognition and trust with farmers. The partners worked to incorporate
the government’s strengths into their business model. Since taking over
the poultry farm, Mekelle Farms had increased production from 15,000
chicks per year under government ownership to over 360,000 DOCs
per year.
Value chain design requires answering the question of what to
outsource and what to do in-house, as well as whether to do the task
locally or remotely. In standard operations management problems, such
design decisions have been the subject of research. In developing
economies, the added complexities of the significant role of regional
governments in either being help or obstacles must be factored into
such decisions. Often, incentive alignment under special institutional
and cultural settings is also necessary to make the right design
decisions.

4 Leverage Geo-Political-Economic Lubricants

While economic values are often created in the private sector, we
should not forget about the nonmarket forces that could either be
lubricants or deterrents to business success. Deterrents could be in the
form of taxes and customs, government regulations, corruptions and
bureaucracy, and potential interventions by groups of vested interests
such as NGOs. But there are lubricants, in the form of favorable trade
treaties and agreements, local support in subsidies, and existing
infrastructure investments by governments.
In Cohen and Lee (2020), the exponential growth of regional trade
agreements indicated that there were opportunities in understanding
the implications of the often complicated agreements. These
agreements may serve as lubricants provided that they covered the
right products and regions that could impact a company.
Similarly, there have been massive infrastructure initiatives that
often involved multiple countries, which can also be lubricants for
business opportunities. The Belt and Road Initiative is one such
example (Lee and Shen 2020). Although there have been many skeptics
as to whether this initiative was a political strategy for China’s
expansion agenda, and whether many of the big-budget infrastructure
projects could really come to fruition, the initiative did open up
opportunities. The Belt and Road Initiative was supposed to aim at
policy coordination to make it easier to cross borders between China
and the countries along the Belt and Road; financial cooperation for
easier flow of capital to invest in capacity and capability building in
these countries; and investment in capacity building in logistics
infrastructure and knowledge and technology transfer; and finally,
harmonization of trade to reduce cross-border frictions.
I will focus on one example in which leveraging on such an initiative
could lead to economic growth of a developing economy. The country of
interest here is Ethiopia. Located in East Africa, the country has a
population of 109 million in 2019 (ranked 12th in the world), 60% of
which were below the age of 25. The country was among the poorest in
the world, with per capita GDP of $790 in 2018 (The World Bank 2019).
Yet the country had potentials, as the working population was relatively
well educated, with English being a common foreign language. Their
working wage was among the lowest in Africa, only 1/10 of that in
China (Lee and Shen 2020). How could such potentials be developed?
The first lubricant was internal government support. The Ethiopian
Government had identified the textile and apparel industry as a focal
industry as part of its ambitious target to steer the country to be the
leading manufacturing hub in Africa. Industry associations had been set
up to provide training and skill improvements of workers. While the
Belt and Road Initiative was being developed, major apparel companies
started to explore and build up Ethiopia as part of their value chain. For
example, H&M and PVH had started to source from the country. The
moves by such major companies signaled that this could be a promising
country to source from. Chinese manufacturers such as Huajian has
also started manufacturing shoes in Ethiopia.
The second lubricant was external trade treatments. Ethiopian
apparel and shoe exporters enjoyed duty-free access to the US market,
thanks to the African Growth and Opportunity Act, which was renewed
by the American government in 2015 for another decade. In addition,
the country also enjoyed duty-free access to EU as well as preferential
treatment to Japan.
Some lubricants were natural resources that required proper
investments and developments to turn them to be of value. Ethiopia
had great potential of cotton supply as inputs to textile and garment
manufacturing. It was also one of the largest untapped livestock
resources in the world. Working with the tanning industry, cattle,
sheep, and goat hides could be turned into a variety of leather, thereby
providing material sources for the shoe industry. Ethiopia also enjoyed
low electricity cost, due to the country having one of the largest
hydroelectric power dam in the continent.
Finally, the biggest break came in as logistics infrastructure support.
Ethiopia is a landlocked country without a sea port. The only way to get
products out through ocean freight is to get the products trucked to the
nearest seaport in Djibouti, a neighboring country. The road to Djibouti
was highly congested, and the port capacity of Djibouti in handling
cargoes had already maxed out. Lead time delays would have deterred
expansion of the manufacturing sector in Ethiopia. Under the Belt and
Road Initiative, Chinese firms have invested heavily in a new national
road network as well as an electrified railway line that connect Ethiopia
to the port in Djibouti. Chinese firms had also invested in capacity-
building in Ethiopia. The Hawassa Industrial Park was built by a
Chinese contractor at an unprecedented speed of 9 months. The park
was devoted solely to apparel and textile. The Chinese firms also
brought in know-hows for the Ethiopian factories to improve their
sustainability performances. For example, the Hawassa Industrial Park
boasted zero-emission water treatment plant. The initial positive
results had lured global brands, such as Calvin Klein and Tommy
Hilfiger, to manufacture in Ethiopia.
In the “Vision and Actions on Jointly Building Silk Road Economic
Belt and 21st-Century Maritime Silk Road” in 2015 (NDRC et al. 2015),
the Chinese government has declared that “The Belt and Road Initiative
aims to …, and establish entrepreneurial and investment cooperation
mechanisms.” Hence, it was part of its game plan to foster
entrepreneurial development in developing economies, so that there
could be more new supply sources as well as demand points, leading to
economic growth along the Belt and Road.
Besides government-led efforts, lubricants could exist through
investments by global enterprises. In March 2017, Alibaba launched its
first global digital free trade zone in Malaysia, as part of the electronic
world trade platform (eWTP) that Alibaba founder Jack Ma wanted to
champion. The vision of eWTP was to lower trade barriers and provide
more equitable access to markets for small- and medium-sized
enterprises (SMEs) around the world. The digital free trade zone
consisted of a regional logistics center near Kuala Lumpur International
Airport, with speedy storage, fulfilment, customs clearance, and
warehousing operations. A one-stop solution platform had been set up
to provide export facilitation support to local SMEs, with services
ranging from marketing and customs clearance, to streamlined permit
application procedures and tax declaration, etc. Such a platform would
help stimulate developments of SMEs, enabling them to participate in
the global value chains. In turn, such developments would bring forth
economic benefits to the communities where such SMEs reside.
In 2018, a US$600 million Technology and the Innovation Fund was
launched by eWTP (Daily Times 2018). “The fund’s mission is to drive
strategic investments that helps companies accelerate their
international expansion and support ideas that drive life-changing
technological innovations around the world, including initiatives
closely related to the “One Belt, One Road” push.” Lubricants therefore
included direct financial support.
Lubricants are helpful to foster development, provided that your
products or service and the geographies match up with the lubricants.
However, these lubricants are not risk-free. For example, favorable
trade agreements are subject to renewals, and changes in the terms of
the trade agreements are common. They are often the result of political
negotiations between countries that is beyond economic rationales. In
addition, we have to recognize that a lubricant to you may also be a
lubricant to your competitor. When multiple companies move in the
same direction, it changes the economics of the original initiative. For
example, as more and more companies are manufacturing in Ethiopia,
even the new highways connecting the manufacturing hubs to Djibouti
will become congested, and the logistics bottlenecks may make it no
longer attractive to manufacture there. This calls for research that
incorporates new dimensions in risk management and modeling the
effects of externalities and network effects.

5 Servicization
Developing economies face challenges that the local workers might not
have the education and skill level for the particular business needs for
growth, and the poor logistics infrastructure would also inhibit easy
access and movements to provide support in such situations. The result
is that, even if there were powerful equipment that could enhance
productivity in the developing economies, the full potential of such
equipment could not be realized. Here, one can innovate in the form of
providing the usage of the equipment as a service, that is,
“servicization.” Orsdemir et al. (2018) defined servicization as
“Servicization is a business strategy to sell the functionality of a
product rather than the product itself.” It is a way to enable workers
and small businesses in developing economies to make use of
productivity enhancement tools and equipment, so as to improve their
business performances.
I will use the Netafim case (Michlin 2006) to illustrate this.
Agriculture had traditionally been a low-tech industry. However,
innovative technologies have been introduced into the agricultural
industry that could improve the productivity of the farm, enhanced
logistics and distribution, and allow the farmers to capture greater
values of their farm produce (see Lee et al. 2017). Irrigation was one
part of the farming production process, which has seen significant
technological advancements.
Water shortage has been a major challenge faced by many parts of
the world, and it was estimated that, by 2050, two-thirds of the
population will be faced with water scarcity (Mancosu et al. 2015).
Agriculture required fresh water and so it has been the industry that
had been hit hard with the water shortage problem. Farm irrigation
consumed significant amount of water and, hence, innovative methods
to reduce water usage in irrigation have been a major focus.
The irrigation market was generally divided into two segments:
low-pressure irrigation and high-pressure irrigation. Low-pressure
irrigation was almost synonymous with flood or furrow irrigation, a
method that was based on flooding all or part of a field. Though flood
irrigation wasted water and caused soil erosion, it was still widely used
around the globe, especially in underdeveloped countries due to its low
cost. Drip irrigation was a method of controlled, high-pressure
irrigation in which water was either dripped onto the precise part of
the soil surface, or delivered to the root system of plants. Drip irrigation
saved water usage significantly, and it prevented leaf diseases and
improve crop yields. The main barriers to adoption were its relatively
high price and that it required the farmer to be skilled in installing and
operating the equipment to achieve maximum benefit from the system.
Netafim was one of the world leaders in drip irrigation. Its irrigation
system consisted of networks of drip-points that were armed with
microprocessors, which allowed direct control of the timing, speed, and
duration of the drips. Such controls could be customized based on
weather conditions, the soil environment, and the kinds of crops that
the farmers were growing. By 2017, Netafim’s annual revenue had
reached almost $1 billion with earnings of $133 million (Arnold 2018).
While Netafim had been successful in selling their powerful drip
irrigation systems to farmers in the United States, Italy, and Australia,
etc., the company’s global expansion in developing economies faced
roadblocks. Agriculture was the most important industry sector for
many developing economies, and so the potential of Netafim’s system
for such economies was great. But the challenges in these economies
were many. First, farmers were often uneducated and so requiring them
to operate such a sophisticated system was almost impossible. Second,
farmers lacked financial means to purchase such a system, and financial
institutions like the IFC, which usually would be the source for such
applications, were reluctant to give out loans to farmers as it was
difficult to expect that the farmers would be able to use the system well,
improve crop yields, and increase their incomes, thereby being able to
pay the loan back. Third, even if Netafim was willing to invest in having
their engineers to travel to the farms to help tune the controls of the
system periodically, the logistics to reach the farmers could be equally
challenging, as many of the farms were in rural areas without access to
paved roads.
To penetrate to the markets in developing economies, Netafim
initiated the development of a system called Crop Management
Technologies (CMT). The first models included a collection of sensors,
some of which were soil-installed, while others worked in the air. These
sensors received regular input on levels of soil water content, salinity,
fertilizer, and meteorological data. Also included was an irrigation
computer that controlled irrigation and fertilization frequency, as well
as scheduling. The input received was radio-transmitted to a central
control system, with figures/graphs made visible on the computer
screen, thus enabling a controller to review the results and make any
required modifications. CMT’s latest generation device allowed Netafim
agronomists stationed in Israel to monitor data over the Internet and
guide farmers by phone, mail, or online communications. Netafim’s
narrow plastic pipes, which revolutionized the field of drip irrigation a
half-century ago, also contained sensors and software that allowed
farmers to monitor and control their fields via mobile phone (Fig. 6).
 The value of CMT was that a farmer, who did not have much
knowledge or skill in operating such an advanced system, could enjoy
the productivity benefits of having such a system. The Netafim
controller would be doing the job of what a sophisticated farmer in
developed economy in monitoring and controlling the system. Indeed,
with the advanced data analytics inside Netafim, the drips were even
more precise and optimal than what most farmers would be able to do.
The CMT setup could also be used to help farmers apply fertilizers and
manage energy in more optimal manner. This is like servicization of the
irrigation task of the farmers.
As an added benefit, the collection of Web-based version of the CMT
would enable Netafim to receive direct streams of information from
hundreds of thousands of fields around the world. Netafim’s
agronomists would then use this data for research and would serve as
online consultants and as facilitators of information-sharing between
farmers. For example, farmers, growing similar crops in similar
growing conditions in different countries around the world, would be
able to share best practices through the portal and help each other with
fertilization formulas, pesticide fumigation, irrigation plans, etc.
It is interesting to note that, in the past, Netafim aspired to be the
“Best drip irrigation equipment company.” Today, they viewed
themselves as a solution provider, and the motto of the company now
read “Grow More with Less”.
Fig. 6 Netafim’s crop management system
Servicization is a useful way to help farmers and business people in
developing economies to make use of advanced technological tools
available in developed economies. Servicization often resulted in new
business models, and so is a key part of the emerging field of operations
management research on business model innovations. As part of
servicization launch, a company is selling service instead of a product.
Service can be paid based on fixed fees, or on performance. The latter
showed that the research on performance-based contracts would be
important. Finally, although farmers in developed economies might be
limited to the servicization model, some of the more sophisticated
farmers there, or farmers in developed economies as strategic
customers, could potentially have the choice of owning the equipment
versus buying the service. In pricing their equipment and service,
Netafim needs to consider some of their customers as strategic, and
make the proper pricing decisions in light of such strategic customers.

6 Summary
Poverty alleviation requires economic growth in the developing
economies. The best way to foster economic growth is through
entrepreneurship as well as increasing engagement of those economies
into the global value chains. There are inherent challenges faced, due to
underdeveloped infrastructures and skill gaps. But innovations in the
value chain could help to overcome these challenges, unleashing
potential economic and social values. Hence, value chain innovations
can be a significant enabler or accelerator for value creation in such
economies.
Finally, this topic can also be a great opportunity for creative,
impactful, and rewarding research ground for supply chain and logistics
professionals.

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J. M. Swaminathan, V. Deshpande (eds.), Responsible Business Operations, Springer
Series in Supply Chain Management 10
https://doi.org/10.1007/978-3-030-51957-5_2

The Impact of Crop Minimum Support

Prices on Crop Selection and Farmer
Welfare in the Presence of Strategic
Farmers
Prashant Chintapalli1 and Christopher S. Tang2
(1) Indian Institute of Management, Bangalore, India
(2) UCLA Anderson School of Management, University of California,
Los Angeles, CA, USA

Christopher S. Tang
Email: chris.tang@anderson.ucla.edu

Abstract
In many developing countries, governments often use minimum support
prices (MSPs) as interventions to (i) safeguard farmers’ income against
crop price falls and (ii) ensure sufficient and balanced production of
different crops. In this chapter, we examine two questions: (1) What is
the impact of MSPs on the farmers’ crop selection and production
decisions, future crop availabilities, and farmers’ expected profits? (2)
What is the impact of strategic farmers on crop selection and
production decisions, future crop availabilities, and farmers’ expected
profits? To explore these questions, we present a model in which the
market consists of two types of farmers (with heterogeneous
production costs): myopic farmers (who make their crop selection and
production decisions based on recent market prices) and strategic
farmers (who make their decisions by taking all other farmers’
decisions into consideration). By examining the dynamic interactions
among these farmers for the case when there are two (complementary
or substitutable) crops for each farmer to select to grow, we obtain the
following results. First, we show that, regardless of the values of the
MSPs offered to the crops, the price disparity between the crops
worsens as the complementarity between the crops increases. Second,
we find that offering MSP is not always beneficial to the farmers. In fact,
offering MSP for a crop can hurt the profit of those farmers who grow
that crop especially when the proportion of strategic farmers is
sufficiently small. Third, offering a wrong choice of MSPs can cause the
expected quantity disparity between crops to worsen. By taking these
two drawbacks of MSPs into consideration, we discuss ways to select
effective MSPs that can improve farmers’ expected profit and reduce
quantity disparity between crops.

Keywords Minimum support prices – Subsidies – Agricultural supply

chains – Government and public policy

1 Introduction
In many developing countries, the agricultural sector is important
because (1) it offers a source of income to a large number of small rural
households and (2) it provides a stable food supply for the country. As
such, developing efficient and effective agro-policies to improve
farmers’ earnings and to stabilize crop availabilities and prices is
critical (Thorbecke 1982). While governments in developing countries
design and develop a wide variety of agro-policies ranging from input
subsidies (for seeds and fertilizers, power, etc.) to output subsidies (for
storage and transportation), we shall focus on a particular type of
output subsidies that is called the credit-based minimum support price
(credit-based MSPs) in this chapter. MSPs can be classified into two
types: (a) procurement-based MSPs and (b) credit-based MSPs. While a
procurement-based MSP requires government to procure crop from
farmers, credit-based MSP does not entail such a procurement and
transfer of crop inventory from farmers to government. In credit-based
MSP, a government compensates the difference between the pre-
announced MSP and the realized market price, should the latter be
lower, for a crop. Thus, by guaranteeing minimum prices for crops,
governments intend to provide incentives for farmers to protect their
income and to entice them to grow a more balanced mixture of crops.
A form of credit-based MSP has been launched in the state of
Madhya Pradesh in India that is known as the Price Deficit Financing
Scheme (named as Bhavantar Bhugtan Yojana) for eight crops.
Motivated by this emerging credit-based MSP scheme, we develop a
parsimonious model to analyze the impact of credit-based MSPs on
farmers’ earnings, crop availabilities, and crop prices in this chapter. We
consider a setting in which there are two (complementary or
substitutable) crops available for each farmer to cultivate. In addition to
heterogeneous production costs for each crop, we also consider the
case when the market is comprised of myopic farmers (who make their
crop selection and production decisions based on recent market prices)
and strategic farmers (who make their decisions by taking all other
farmers’ decisions into consideration). By examining the dynamic
interactions among myopic and strategic farmers, we aim to examine
two research questions:
1. What is the impact of MSPs on the farmers’ crop selection and
production decisions, future crop availabilities, and farmers’
expected revenues?

2. What is the impact of strategic farmers on crop selection and

production decisions, future crop availabilities, and farmers’
expected revenues?

Our equilibrium analysis enables us to obtain the following results.

First, we show that, regardless of the values of MSPs for crops, the price
disparity between the crops worsens as the complementarity between
the crops increases. Second, we find that offering moderately low MSP
for a crop will degrade the expected profits of the farmers growing the
crop if the number of strategic farmers is very small. Third, we find that
offering a wrong choice of MSPs can cause the production quantity
disparity between crops to worsen. Hence, to reduce quantity disparity
between crops, a carefully designed MSP policy is critical.
2 Literature Review
Our research pertains to agro-policies that affect both crop selection
and crop production by myopic and strategic farmers. The literature on
MSPs is vast in the agricultural economics discipline, and the reader is
referred to Tripathi et al. (2013) and the references therein for a good
synopsis on MSPs in developing countries. Without accounting for the
price interactions between crops with MSP support and those crops
without MSP support, Fox (1956) develops macro-economics analysis
to evaluate the impact of MSPs and finds that MSPs can mitigate the fall
in GNP during a recession. Dantwala (1967) finds that in spite of the
increasing MSPs, the crop market prices continue to rise. More recently,
Subbarao et al. (2011) show evidence that the increase in market price
is caused by the increase in MSPs. In the same vein, Chand (2003)
presents qualitative assessment of the ill effects of the wheat- and-rice-
centric MSPs on the Indian economy. Chhatre et al. (2016) point out
that many farmers in India moved to cultivating high-yield varieties of
rice and wheat due to the wheat- and-rice-centric MSPs offered by the
Indian government. The authors also identify the various
socioeconomic and environmental problems associated with an
improper choice of MSPs. Besides the Indian context, Spitze (1978)
analyzes the impact of federal policy (The Food and Agriculture Act of
1977) on agriculture in the United States. The author states that
continuous improvement in gathering and analyzing information is a
prerequisite for the design of effective MSPs. Finally, Guda et al. (2016)
examine the role of MSPs in emerging economies, but there are two
fundamental differences. We consider heterogeneity in farmers’
production costs (instead of homogeneous costs), and we examine the
impact of the MSPs of two crops (instead of one crop).
Recent papers on agricultural operations in OM literature can be
classified into four groups: (i) Tang et al. (2015), Chen and Tang (2015),
Parker et al. (2016), and Liao et al. (2019) focus on the economic value
of disseminating agricultural information to the farmers; (ii) Kazaz and
Webster (2011), Dawande et al. (2013), and Huh and Lall (2013)
examine the issue of resource and inventory management; (iii) Huh et
al. (2012), Federgruen et al. (2015), and An et al. (2015) focus on
contract farming and farmer aggregation; and (iv) Hu et al. (2016),
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phenolic resins afford an example of patent-licensing of several
corporations by another with the payment of royalties as
compensation. In a number of other branches of the resin industry,
such as the laminated tar-acid resins and the alkyd resins, the
mutual desire of producers to avoid litigation has apparently resulted
in “gentlemen’s agreements” not to sue.

Vertical relationships of resin producers.

A vertical relationship is one between producers operating at
different stages of industrial production, such as a firm producing
resin and a firm producing a resin raw material or between the
former and a firm that is a resin consumer. The incentive for a
consuming industry operating on a large scale to make its own
resins is naturally greater than for one using only small quantities.
Therefore we may expect to find instances where a process
consuming the resin in quantity and resin manufacture are both
performed by the same company provided other conditions (such as
the patent situation and knowledge of the art of manufacture) are
favorable.
Tar-acid resins for molding.—The present practice of molding
resins is favorable to large-scale production. The shaping of the
mold is expensive, involving skilled labor upon hardened steel; but
once the mold is made it may be used to produce tens or hundreds
of thousands of units. Subsequent labor upon the molded product is
usually limited to the simple task of smoothing the line where the
flash is broken off, since the product comes from the mold in the
color and with the surface and shape desired.
The usual arrangement at the present time is to have a battery of
presses, grouped around central units which supply hydraulic
pressure and steam for heat. A measured amount of molding powder
or a pellet of compressed molding powder is applied to each cavity
by the press operator, who controls by hand the time of application of
heat and pressure and removes the article from the press. The cycle
is a matter of minutes, and since each cycle produces a finished
article if the molding is large, or a number of them if it is small, daily
production per worker is high. The estimated average costs of the
different elements in the process have been apportioned as follows:
the cost of raw material is about one-third the cost of the finished
product; and the combined cost of the mold allocated per unit, the
labor cost per unit, and overhead the remaining two thirds.[5] On
small runs labor cost and particularly allocated mold cost would be
much higher, so that molding is usually uneconomic where only
small quantities of the finished product are desired.
In 1937 there were eight molders that produced their own tar-acid
resins in whole or in part. One of these molders was the third largest
producer of such resins. In the same year six producers of tar-acid
resins for molding, including the first, second, fourth, and fifth largest,
confined their activities to resin making. One producer of raw
materials for tar-acid resins also made the resin on a moderate
scale.
This picture of interstage relationship as it existed in 1937 may be
somewhat modified by new developments in molding presses. There
are now available self-contained presses which are not dependent
upon other units for their supplies of heat and pressure and which
are either semiautomatic or automatic. The semiautomatic press
requires an operator for charging the cavity and removing the
molded product, but once adjusted automatically applies the heat
and pressure and controls the time of the pressing cycle. The
automatic press, adapted as yet only to the simpler moldings,
requires no attention whatever. These presses are more expensive,
but may be set up anywhere and require less skilled labor. There is
the possibility that they may be installed by some industrial users of
molded articles, and thus take some business from the custom
molder. If this occurs, such molders will presumably buy their resin
from companies that are primarily resin makers, since their
requirements of the material would not ordinarily be large enough to
justify making their own.
Tar-acid resins for laminating.—The manufacture of laminated
resin products is most economic when done on a large scale, in
which case the impregnation of the paper or fabric becomes a
continuous process, the material feeding from a roll through resin
sirup and then through drying towers, where time and heat may be
controlled. The impregnated material contains resin in the B-stage.
The material is then cut up and the sheets piled together (the
number depending on the thickness desired) and sent to huge
presses which, with heat and pressure, compact and unite the layers
and convert the resin to the C-stage. If it is desired to produce
decorative panels with a smooth surface, the top sheet used is one
colored or printed with a design (perhaps a photographic
reproduction of the surface of a cabinet wood) and placed between
polished chromium-plated metal sheets before going to the press.
Rods and coil forms as well as flat sheets are commonly made from
laminated material. Any of these forms may undergo subsequent
fabrication; rods and coil forms cut to required length, thin sheets
stamped to shape, gear blanks cut to final form on automatic gear
machines, and decorative panels sawed to shape.
Many laminators purchase all their resin requirements, but a
number of them make part or all of the tar-acid resin they use. In
1937 there were seven laminators who made tar-acid resins
(including the second, third, and fourth largest producers of such
resins) and four producers of tar-acid resins for this use (including
the largest) which did no laminating.
Cast phenolic resins.—The firms producing cast phenolic resins
market them in sheets, rods, and tubes. The castings are made in
molds of lead or glass, and the range of possible shapes is limited.
The consumers of these products fabricate them into finished form
by cutting, turning, and polishing, much as they might fabricate wood
or soft metal. Since considerable labor is required per unit,
fabrication is not particularly adapted to large-scale production. In
1937 there were nine producers of cast phenolic resins. One of the
smaller producers was also a fabricator of cast resins, and another a
producer of raw materials used in making the resin.
Tar-acid resins for coatings.—The use of tar-acid resins in surface
coatings has been overshadowed by the more rapid development of
alkyd resins. Nevertheless the volume of tar-acid resins used as raw
materials by varnish and lacquer manufacturers is growing rapidly.
They are used in marine varnishes unmodified by other synthetic
resins, but to a greater extent in combination with other plastics,
especially the alkyds and nitrocellulose. The coating industry
includes many units producing on a large as well as a greater
number producing on a smaller scale. In general, they are not
producing their own tar-acid resins. In 1937 there were 11 producers
of tar acid resins for coatings (including the three largest) who
confined their activities to resin production. In addition there were
eight manufacturers of varnishes and lacquers and one producer of
resin raw materials, who also produced tar-acid resins for use in
coatings.
Tar-acid resins for miscellaneous uses.—The chief uses for tar-
acid resins other than for molding, casting, laminating, and in
coatings are as a bonding material, and as an adhesive. These
resins form a valuable bonding agent for asbestos in brake linings
and chemical tanks, for abrasives and for ground cork in special
uses. As an adhesive they are used in making moisture-resistant
plywood.
In 1937 there were five producers of tar-acid resins for
miscellaneous uses, including the largest, who confined their
activities to the making of resins and two, including the second
largest, who also made products in which these resins were
consumed.
Alkyd resins made from phthalic anhydride.—The rapid increase in
the production of alkyd resins for use in coatings is one of the most
remarkable in the whole resin industry. They go into varnishes,
lacquers, and enamels for spraying, brushing, and dipping. The
coatings may be air-dried, with a wide range of drying time, or dried
by oven baking. The volume of alkyd resins used by the coating
industry has grown so large that a number of coating firms have
gone into the production of alkyds and now make part or all of their
own requirements. In 1937 there were 24 paint, varnish, and lacquer
firms producing alkyd resins. Included in this number were the first
and second largest producers of such resins. Eleven producers of
these resins, including the third and fourth largest, made alkyd resins
for sale only. Each of these groups included one firm which also
made phthalic anhydride.
 Alkyd resins made from maleic anhydride.—In 1937 there were
seven producers of alkyd resins from maleic anhydride who
produced for sale only. This group included the two largest
producers and also one firm which produced maleic anhydride. In
addition there were five paint, varnish, and lacquer firms producing
part or all of their needs of resins of this type. The general conditions
under which these resins are consumed are the same as for alkyd
resins made from phthalic anhydride.
Urea resins for molding.—The conditions under which urea resins
are molded are not greatly different from those already discussed for
tar-acid resins. The molding cycle is somewhat longer and, because
of the light colors used, special precautions must be taken to prevent
discoloration of the molded product by dirt or flecks of molding
powder from other operations, carried through the air or upon the
person of the laborer. In 1937 there were four producers of urea
resins for molding. Three of them, including the two largest,
produced for sale only; the other consumed his own production.
Urea resins for other uses.—Until recently urea resins were
thought of exclusively for molding, but they are now being used for
laminating, for surface coatings, and also as an adhesive. Ordinarily
the ureas are used only in impregnating the outside laminae of a
laminated sheet where they are valuable for the light colors they
make possible. The volume of urea resins used in surface coatings
is small compared with the alkyd or tar-acid resins used for this
purpose, but is increasing. The use of urea resins in adhesives is still
new but promises to become important.
In 1937 there were four producers of the ureas for uses other than
molding, who produced for sale only; and two producers who
consumed their own product.
Coumarone and indene resins.—Coumarone and indene resins
are produced in connection with the production of solvent naphtha.
There were three producers in 1937, all of whom sold their product.
These resins go into varnishes, where they replace natural resins or
ester gum.
 Other resins.—In 1937 there were four producers of vinyl resins in
the United States, and two of these also produced their raw
materials. The vinyl resins were used chiefly in surface coatings,
molding, and in safety glass. The polystyrene resins, used chiefly for
molding and laminating, were offered by two producers for the first
time in 1937. Two other producers offered acrylate resins, which are
cast, molded, or used in surface coatings. In the same year
petroleum resins were sold in good volume, their only producer
obtaining them as a byproduct of the oil industry.

Relationship of the resin industry to other

industries.
The term “synthetic resin industry” is a very broad one, referring in
reality to a group of industries producing the varied synthetic resins
—much as the term “steel industry” includes the manufacture of pig
iron, structural steel, tin plate, and wire. But it is interesting to
examine briefly the connection of the synthetic resin industry with
some of the other large industrial groupings.
Relationship to the chemical industry.—Since the processes
involved in the production of the synthetic resins are essentially of a
chemical nature, the whole industry might be legitimately classed as
a branch of the chemical industry. Historically, the synthetic resin
industry in the United States developed outside of the chemical
industry as it was constituted at the time, but with the passage of
years and the development of a greater variety of resins the
connections have multiplied. Chemical companies supply some of
the important raw materials for synthetic resins; their skilled experts
possess the technical training to develop new resin processes; their
research programs from time to time lead to the discovery of
valuable facts regarding resin; and they possess, or can, more easily
than a new company, obtain the capital necessary to exploit a
process.
At present the interest of the large chemical corporations in
synthetic resins ranges from active participation to apparent
indifference; but the growing number of corporations thought of as
chemical which are now engaged in experimental production would
seem to indicate that in time they will be increasingly important in the
production of synthetic resins. Some of the larger chemical
companies that are important producers of synthetic resins in 1938
are:

American Cyanamid Co Urea resins.

Carbide & Carbon Chemicals Vinyl resins.
Corporation
Dow Chemical Co Polystyrene resins.
E. I. du Pont de Nemours & Co Alkyd, acrylate, vinyl
resins.
Monsanto Chemical Co Petroleum resins.

Relationship to the surface coating industry.—The use of tar-acid,

alkyd, urea, and vinyl resins as raw material for the surface coating
industry has already been mentioned, and also the fact that the
coating industry is manufacturing a substantial part of its
consumption of alkyd resins.
At present the synthetic resins go chiefly into varnishes, lacquers,
and enamels for inside use and into finishes for outside use on
metal. Now that coatings incorporating synthetic resins are
successfully adapted to outside finishes on wood, the incentive for
the production of resins by the coating industry will presumably
increase because of the large volume of house paints sold.
Relationship to the electric industry.—The electric industry offered
one of the first large markets for synthetic resin products. Molded
and laminated parts for appliances and fixtures gave good insulation
at ordinary voltages, and frequently allowed a simplification of the
design. This development, coming at a time of rapid expansion in the
manufacture of electric equipment, was a distinct benefit to both the
electrical and synthetic resin industries. The larger electrical
manufacturing firms soon began to do their own molding and
laminating and became important as custom molders. Later the
General Electric Co. and the Westinghouse Electric & Manufacturing
Co. manufactured their own tar-acid resins.
Another important outlet for synthetic resins appeared with the
development of the radio industry. Radio now offers a market for
special synthetic resins possessing high dielectric constants at radio
frequencies, and much larger volumes of tar-acid and urea resins
are used in molding the smaller cabinets. As a rule the radio industry
purchases its resin products already molded to order.
The relationship to the auto industry.—The automobile
manufacturing industry and makers of automobile parts together
furnish a substantial market for synthetic resins. In general, the
automobile manufacturers purchase parts made of resin, already
fabricated; parts makers usually purchase the resins they require.
The Ford Motor Co. makes tar-acid resins for its own use. Working
parts, such as timer heads and horn buttons, are usually of molding
tar acid resin; the timing gear usually of laminated tar-acid resin. For
decorative parts, such as dash instrument knobs and radiator
ornaments, urea and cast phenolic resins have been used. Most of
these parts are small, but altogether they have taken a substantial
volume of synthetic resin. Safety glass for automobile windshields is
now being made from vinyl resin.
The future possibilities are difficult to appraise. The automobile
industry is constantly experimenting with new materials and
methods, and its policy of bringing out models annually makes
possible rapid adoption of new developments. Molded window
frames have been tried, and such a use, or use for the complete
instrument panel, would obviously consume synthetic resins in much
larger volume. Even whole motor car bodies of laminated resin have
been suggested.
 13. THE UNITED STATES TARIFF AND
INTERNATIONAL TRADE IN SYNTHETIC
RESINS
Synthetic resins enter into the foreign trade of the United States only to a
small extent. This becomes apparent if a comparison is made between the
United States production of these resins and our imports and exports of them.
Table 13 gives the imports and production of synthetic resins in the United
States for 1934 through 1937. Exports are so small that they are not separately
reported.

Table 13.—Synthetic resins: United States production and imports, 1934-37

[Pounds]
1934 1935 1936 1937
Production in the United
States1 56,059,489 95,133,384 132,912,821 162,104,713
Imports into the United
States 2 19,795 2 21,120 3 626,608 3 673,880

1 Does not include coumarone and indene resins, sulfonamide resins.

2 Does not include imports of vinyl acetate resins which were not shown separately until
1936.
3 Includes vinyl acetate resins and all other types imported.

The small size of the international trade in synthetic resins is also

emphasized if we compare the imports of all synthetic resins with the imports
or exports of some of the important raw materials used in their manufacture.
Table 14 makes such a comparison.

Table 14.—Comparison of international trade of the United States in synthetic

resins and in certain raw materials for resins, 1934-37

[1,000 pounds]
 Imports into or exports from the United 1934 1935 1936 19371
States
Imports:
Resins 20 21 627 674
Crude cresylic acid2 7,332 7,010 13,794 16,745
Crude naphthalene 47,995 48,455 39,806 52,664
Crude glycerin 15,081 8,220 11,149 13,441
Refined glycerin 2,214 69 3,447 7,535
Exports:
Phenol 329 323 149 (3)
Formaldehyde 2,597 2,598 1,844 2,865

1 Preliminary.

2 Conversion factor 8.7 pounds per gallon.

3 Not available.

There are three factors that together largely account for the small size of our
foreign trade in synthetic resins. As a result of the comparative youth of the
resin industry, the complicated patent situation, and the substantial tariff rates
upon imports of resins into the United States, domestic producers have
experienced little competition from abroad. The first two of these forces plus
the tariff barriers of other countries have caused them to pay little attention to
export markets. But it should be observed that both of the first two forces will
become less important with the passage of time. When home markets have
been more fully exploited, problems of production have become less pressing,
and most of the basic patents on resins have expired, international trade in
synthetic resins may be expected to increase from its present low levels. If this
occurs, the United States, with its large scale production for the home market
and with its generally favorable position with regard to the raw materials and
the technical skills necessary, is more likely to become a net exporter than a
net importer of synthetic resins.

Rapid expansion of business in home markets.

Being young industries and having potentially large home markets awaiting
development, the synthetic resin industries in the United States naturally
began by concentrating first on their numerous production problems to meet a
rapidly expanding domestic demand, improving their products and devising
useful applications.
 The tar-acid-formaldehyde resins for molding were the first to develop. The
industry producing them may be said to have started around 1910, but did not
become important until after the World War, when the drop in price of phenol
made the resins available at lower prices. The alkyd resins and the urea-
formaldehyde resins in the United States began to be important in 1929 and
1930, respectively. The others may be said to be still in their earliest stages of
development as industries, however much research work may have been done
as to their properties and production.

The effect of patents on international trade.

A second factor involved in limiting international trade in resins is that
relating to patents. The basic patents on tar-acid resins have expired; but while
they were in force, they prevented imports into the United States. In the United
States a valid patent can be enforced at law not only against domestic
products which infringe but also against imports. In addition to court action, the
provisions of our tariff law prohibiting unfair competition in the import trade
were invoked to prevent entry of synthetic phenolic (tar-acid) resin, form C, but
when the basic patent for this material expired, the exclusion order no longer
applied to single color material, except in the matter of certain marking
requirements.[6]
The patent situation may militate against exports as well as imports. Where
a company owns foreign patents it may set up a company to exploit them
abroad, or it may license their use by others. Again, mutual interest may dictate
an exchange (by cross-licensing) of certain patents. International licensing of
patents is usually accompanied by divisions of international markets through
formal or informal understanding. Such agreements may outlive the life of the
patents, especially if bolstered with financial connections. But unless the
original producers continue to dominate their respective markets, any
agreements between them are likely to diminish in importance, because after
the patents expire new competitors would have a free hand in foreign as well
as domestic markets.
The original United States producer of tar-acid resins set up or licensed
companies to manufacture in a number of foreign countries. The urea-
formaldehyde process was developed in Europe and the first American
producer was a licensee of a British corporation. Similar arrangements exist
with regard to most of the other resins.

The United States tariff on resins and resin products.

 Synthetic resins.—Imports of tar-acid, alkyd, coumarone and indene, styrol,
adipic, and aniline resins are dutiable under the provisions of paragraph 28 of
the Tariff Act of 1930, which reads in part: “synthetic phenolic resin and all
resinlike products prepared from phenol, cresol, phthalic anhydride,
coumarone, indene, or from any other article or material provided for in
paragraph 27 [coal-tar intermediates] or [paragraph] 1651 [coal-tar crudes], all
these products whether in a solid, semisolid, or liquid condition; ... 45 per
centum ad valorem [based on American selling price[7] or United States
value[8]] and 7 cents per pound.” Where these resins are produced in the
United States, imports are “competitive” and the dutiable value is based upon
American selling price. If the American selling price is higher than the foreign
value, the effect of this method of valuation is to increase the duty to which
imports are subject. The duty of 45 per cent ad valorem and 7 cents per pound
was equivalent to 54 per cent ad valorem on the American selling price of the
small imports of coal-tar resins in 1937. If it could calculated upon foreign value
it would be much higher.
Synthetic resins of non-coal-tar origin, except vinyl resins, are dutiable under
paragraph 11, which reads “synthetic gums and resins not specially provided
for, 4 cents per pound and 30 per centum ad valorem” on foreign value. This
rate was the equivalent of 48 per cent ad valorem upon the small amount of
imports in 1937. The most important resins included are the urea and acrylate
resins.
Between 1930 and 1936 there was some doubt whether vinyl resins were
dutiable under paragraph 11 at the rate quoted or under paragraph 2 which
provided for “vinyl alcohol ... homologues and polymers of all the foregoing;
ethers, esters, salts and nitrogenous compounds of any of the foregoing,
whether polymerized or unpolymerized, ... not specially provided for, 6 cents
per pound and 30 per centum ad valorem” on foreign value. But the Canadian
trade agreement, effective January 1, 1936, reduced the rate on vinyl resins
under either paragraph 2 or paragraph 11 to 3 cents per pound and 15 percent
ad valorem.[9] The reduced rate was equivalent to 25 percent ad valorem upon
the imports in 1937.
Under these rates, imports of synthetic resins, other than vinyl resins, have
been insignificant.[10] After the reduction of duty, imports of vinyl resins in 1936
amounted to approximately 600,000 pounds, valued at $145,000 and in 1937
to 650,000 pounds, valued at $200,000. (See table 11.)
Articles made of synthetic resins.—Laminated products of which synthetic
resin is the chief binding agent and manufactures of such products are dutiable
under paragraph 1539 (b) at the following rates: 15 cents per pound and 25
percent on laminated sheets or plates[11]; 50 cents per pound and 40 percent
on laminated rods, tubes, blocks, strips, blanks, or other forms; and 50 cents
per pound and 40 percent on manufactures of such laminated products.
Paragraph 1539 (b) also provides a duty of 50 cents per pound and 40 percent
on manufactures of any other product of which any synthetic resin is the chief
binding agent. These are, for the most part, molded synthetic resin articles.
Paragraph 1539 (b) does not cover articles made entirely of synthetic resin
(cast synthetic resin articles). Such articles unless specifically provided for in
the law are dutiable under paragraph 1558 as manufactured articles, not
specially provided for, at 20 percent ad valorem.
A great many articles, which are made in whole or in part of synthetic resin,
are not dutiable under either paragraph 1539 (b) or paragraph 1558. These are
articles which are specifically mentioned in other paragraphs and subject to the
duties provided therein. Table 15 lists a number of them.

Table 15.—Tariff classification and rates of duty in Tariff Act of 1930 on certain
articles made of synthetic resin

Tariff
Article Rate of duty
paragraph
Beads 1503 75 percent ad valorem.
Buttons 1510 45 percent ad valorem.
Dice, dominoes,
chessmen, and
poker chips 1512 50 percent ad valorem.
Phonograph records 1542 30 percent ad valorem.
Cigar and cigarette
holders 1552 5 cents each plus 60 percent ad valorem.
Ash trays, humidors,
etc. 1552 60 percent ad valorem.
Umbrella handles 1554 75 percent ad valorem.

In general, the available statistics of imports do not segregate imports of the

specified articles made of synthetic resin from those of the same articles made
of other materials; and the same situation is true of imports of unspecified
articles wholly of synthetic resin which enter under paragraph 1558. Imports of
manufactured articles, n. s. p. f. in which synthetic resin is the chief binding
agent under paragraph 1539 have been small. Figures for recent years are
given in table 16.
Table 16.—Manufactured articles n. s. p. f. in which synthetic resin is the chief
binding agent: United States imports for consumption, 1931-37

Type 1931 1932 1933 1934 1935 1936 19371

Quantity (pounds)
Laminated products:
Sheets and plates 10 13
Rods, tubes,
blocks, etc. 215 13 609 514 668
Manufactures, n.
e. s. 203 453 787 783 1,703 3,260 10,397
Nonlaminated 17,623 8,511 5,352 5,729 8,423 8,069 8,759
Total 18,041 8,987 6,139 6,525 10,735 11,843 19,824
Value (dollars)
Laminated products:
Sheets and plates 9 16
Rods, tubes,
blocks, etc. 612 71 579 1,329 1,920
Manufactures, n.
e. s. 1,001 883 2,133 2,299 3,778 9,468 39,232
Nonlaminated
products 31,992 10,113 7,914 10,673 11,064 10,846 18,001
Total 33,605 11,076 10,047 12,988 15,421 21,643 59,153

1 Preliminary.

Source: Compiled from Department of Commerce statistics.

14. SYNTHETIC RESIN PRICES, PROPERTIES, AND USES
Synthetic resins as substitutes.
Any new material will in the course of time be applied to the uses for which it has special advantages,
displacing older materials which formerly served those purposes. The resulting product may sometimes
be used in the same manner as before, or the properties of the substitute material may widen the
usefulness of the finished product, or even make possible a product almost wholly new.
Before the development of molded synthetic resins, electrical plugs and sockets were usually made of
porcelain or molded of marble dust and shellac. In this use substitution has been almost complete. Wall
plates for electric switches and outlets were usually of brass. Today molded tar-acid or molded urea
resins are substituted in part. In neither of these examples has the substituted material any important
effect upon the use of the product.
An example of a substitute material widening the usefulness of the product is afforded by a new
computing scale, where a molded urea resin casing (substituted for metal in the older model) has aided
in decreasing the weight and has improved the appearance. Another example is the use of laminated
synthetic resin coil forms in radio frequency transformers which, because of their better electrical
properties at high frequencies, have aided in the design of more compact units.
Examples of synthetic resins making possible a wholly new product are more difficult to find, but the
following will serve as illustrations: Cast acrylate sheets to form curved cockpit enclosures for airplanes;
molded acrylate buttons for reflecting road markers; and new special coatings, which make possible the
use of metal cans for preserving foods and beverages hitherto impossible to can without loss of flavor.

Motives for substitution.

One of the most important reasons why a manufacturer may decide to substitute a synthetic resin for
another material is the resulting economy in the sense of economy in total costs. As a rule, the synthetic
resin will be more expensive pound for pound than the material for which it is substituted; but frequently
the manufacturing cost is enough lower to more than make good the difference in material cost,
because the resin part will come from the mold almost in finished form, whereas the part made of wood
or metal will require considerable fabrication. In some cases there may be a saving in marketing costs.
For example, the shades for large office fixture lights are now made of synthetic resin as well as of opal
glass. The resin shades are less expensive to ship because they are lighter and require less expensive
packing.
Another incentive toward substitution is to give novelty, and hence sales appeal, to an old product. In
many cases the use of synthetic resins fits in with the present tendency to redesign an old-style product
so that it will be more compact, have more pleasing lines, and more color.
Still another incentive toward substitution is to give the product greater usefulness, or lower costs in
use. The great expansion in the use of synthetic resins in surface coatings has come about because,
with these materials, coatings can be developed to fit special purposes, and dry rapidly, which means an
important saving to those who use them.

Materials displaced by synthetic resins.

The wide range of uses to which synthetic resins are now applied implies that the materials displaced
are numerous. For example, cast or wrought iron or steel is displaced in timing gears and in many small
machine parts, such as cradle-type telephones; nonferrous metals in small machine parts and novelties,
such as inexpensive bracelets; glass in lamp shades and in cosmetic containers; natural resins in
lacquers; plastics, such as cellulose acetate in safety glass or cellulose nitrate in colored lacquers; other
adhesives in bonding plywood; and cork or metal in bottle closures.
In general, the quantity of material displaced is a very small part of that material’s total market.
Frequently, however, industries producing the finished product have had to make substantial changes in
their equipment in order to use synthetic resins. This has been true in the button industry, in the bottle
closure industry, in the varnish and lacquer industry, and in the various electrical supply industries; and
readjustment is now proceeding in the fancy container industry and in the safety glass industry.

Competition between synthetic resins.

Any particular synthetic resin must compete for its market with other synthetic resins, as well as with
other materials. The basis of choice or substitution will be the same as that which has already been
briefly discussed in connection with the displacement of other materials by resins. As between a number
of resins with properties fitting them for a particular use, the total costs of using each will be compared
and the choice will go to the least expensive; but where a resin has special advantages in a particular
use it may win out over a less expensive resin.
It should be emphasized that this battle of materials for markets is a never-ending one. The fact that a
specific synthetic resin has achieved a certain position is no guarantee that it may not lose it wholly or in
part to some newer resin or other material. Thus cast phenolic resin was for a time the only resin
available in light colors but urea resins became available in pastel shades and more recently water-clear
polystyrene and acrylate resins have come on the market. Until recently tar-acid resins were without
competition in laminating, but urea resins now are used to some extent for the surface laminae and the
tar-acid resins now face a potential threat in a new product offered to laminators. If the use of this
cellulose sheet, which looks much like blotting paper and which has lignin incorporated in it to act as a
binder in the press, should materially decrease the cost of laminated sheets, it will mean serious new
competition for the tar-acid laminating resins.
The general effect of the increase in number of types of synthetic resin has been to modify the market
outlook of the producers of each type. They are now more inclined to view the market as being limited
by the price at which they can supply their product and by the physical properties of each resin rather
than attempt to exploit it as a universal resin for all purposes.

Resins classified by cost.

At present the resins produced in largest volume are the alkyd resins for use in surface coatings; the
tar-acid resins for molding, laminating, and surface coatings; the urea resins, chiefly for moldings; and
the cast phenolic resins. Roughly, the price per pound of pure resin material[12] for these various resins
may be compared as follows:

Average sales price

Type of resin: of net resin, 1937
(per pound)
Cast phenolic $0.41
Tar-acid:
For molding .18
For laminating .13
For coatings .17
Alkyd .20
Urea .45

Because the cost of the filler is less per pound than the cost of the resin, the cost of the tar-acid and
urea molding powders will be less than the figures given for the pure resin. On the other hand,
wholesale prices paid by consumers will include transportation and distribution costs not included in the
figures of manufacturers’ sales.
 Vinyl resins, acrylate resins, and polystyrene resins are at present produced in much smaller volume
than those just listed. If and when the volume of production is increased the price may be decreased. In
1937, the price per pound of pure resin[12] was as follows:

Average sales price

Type of resin: of net resin, 1937
(per pound)
Vinyl $0.69
Acrylate 1.66

Early in 1938, acrylate resins were being offered for sale at 85 cents per pound for molding powder
and $1.25 per pound for the cast material; polystyrene resins at 72 cents per pound.
Petroleum resins, in 1937, sold for an average of 2 cents per pound net resin content.[12] This low
price puts them beyond competition of the other synthetic resins in the uses in laminating and coating to
which they are adapted.

The physical properties of a resin and its uses.

A more expensive resin will be used in preference to a cheaper one, only if the higher cost is more
than offset by some physical property, such as color, which makes it more desirable in a particular use.
The most common molding resin at present is the tar-acid type, but it is available only in the darker
colors and therefore has been at a disadvantage, where a light color is desired, in competition with
cellulose nitrate (celluloid) and cellulose acetate plastics or with urea and cast phenolic resins. In recent
years the production of cellulose acetate molding compounds and of urea resins has increased rapidly,
largely under this stimulus. The desire for color also promises well for the future of the acrylate and
polystyrene resins which are produced in water-clear grades or colored with dyes or pigments.

Table 17.—Synthetic resins and other plastics: Properties that affect appearance

Machining Color
Type Clarity Burning rate Effect of a
qualities possibilities
Synthetic resins:
Tar-acid—Formaldehyde:
Molded, wood flour filler. Fair to Opaque Limited Very low None
good.

Molded, mineral filler. do do do Nil do

Molded, fabric filler. do do do Approximately do
nil
Laminated, paper base. Fair to do do Very low Improves
excellent. mechanic
and electric
properties
Laminated, fabric base. do do do do do
Laminated, asbestos cloth base. do do do Approximately do
nil
Cast Excellent Transparent, Unlimited Very low Hardens
translucent, slightly
opaque.
Tar-acid—Furfural:
Wood flour filler. Fair to Opaque Limited do do
good
 Mineral filler. do do do Nil do
Fabric filler. do do do do do
Urea—Formaldehyde. Fair Translucent, Unlimited Very low do
opaque pastel
shades
Vinyl, unfilled. Good Transparent, Unlimited Nil Strength
translucent, pastels to unaffecte
opaque black
Vinyl, filled. Excellent do do Approximately None
(organic nil
filler).
Acrylate Very good Transparent Unlimited Slow do
(95% light
transmission).
Polystyrene Poor to Transparent, do do do
good translucent,
opaque.
Other plastics:
Shellac compound. do Opaque Limited, High (wood
pastels filler)
excluded
Cold molded:
Nonrefractory. Poor do Dark colors Nil
only
Refractory. do do Gray do
Rubber compounds:
Chlorinated rubber. Translucent, Unlimited do Slight
opaque embrittleme
Modified isomerized rubber. Good Transparent do Slow None

Hard rubber. Fair Opaque Limited Medium do

Casein Good Translucent, Unlimited Very low Hardens

opaque slightly
Cellulose compounds:
Ethyl cellulose do Transparent, do Slow Slight
translucent,
opaque
Cellulose acetate sheet do do do do do
Cellulose acetate molding do do do do do
Cellulose nitrate do do do Very high Slight
hardening

1 Specified refractive degree.

Note.—The values for the properties in this table are based upon maximum and minimum figures
submitted to Modern Plastics by a number of manufacturers of each type of material. Differences in
test procedures and sizes of test specimens may lead to erroneous conclusions in some cases if
 direct comparisons are attempted. Special grades of materials are often available which excel in one
particular property.
Source: Modern Plastics, vol. 15, no. 2, opp. p. 120. October 1937.

Table 18.—Synthetic resins and other plastics: Molding properties

General Compression Compression Injection Injection

Co
Type. molding molding molding molding molding
qualities temperature pressure temperature pressure

Pounds per Pounds per

°F. °F.
square inch square inch
Synthetic resins:
Tar-acid—Formaldehyde:
Molded, wood flour filler Excellent 280-360 1,600-4,500 275-375 2,000-
10,000
Molded, mineral filler Excellent 270-350 1,600-6,000 275-350 2,000-
to fair 15,000
Molded, fabric filler Good to 270-330 3,000-8,000 2
fair
Laminated, paper base 250-365 1,000-3,000
Laminated, fabric base 250-365 1,000-3,000
Laminated, asbestos cloth base 250-325 1,000-3,000
Cast
Tar-acid—Furfural:
Wood flour filler Excellent 330-400 1,000-3,000 250-290 300-
5,000
Mineral filler do 330-360 1,000-3,000 250-290 300-
5,000
Fabric filler Good to 300-360 1,000-3,000 250-290 300- 4
fair 50,000
Urea—Formaldehyde (alpha Excellent 290-325 1,500-6,000
cellulose filler)
Vinyl, unfilled Good 240-275 1,500-2,000

Vinyl, filled Excellent 250-300 2,000-2,500

Acrylate do 285-315 1,500-5,000 325-475 3,000-
30,000
Polystyrene Good 280-325 300-2,000 300-375 3,000-
30,000
Other plastics:
Shellac compound do 240 1,000-1,200
Cold molded:
Nonrefractory Fair 4,000-12,000
Refractory do 4,000-12,000
Rubber compounds:
Chlorinated rubber do 200-225 2,000-5,000
Modified isomerized rubber Good 260-300 1,200-4,000
Hard rubber Fair 285-350 1,200-1,800 180-220 2,000-
5,000
Casein Poor 200-225 2,000-2,500
Cellulose compounds:
Ethyl cellulose Excellent 212-300 1,000-5,000
 Cellulose acetate sheet do 210-320 500-5,000
Cellulose acetate molding do 250-350 500-5,000 300-440 3,000-
30,000
Cellulose nitrate Good 185-250 2,000-5,000

1 Positive and injection 0.002-0.003; semipositive 0.005-0.007; flash 0.008-0.009.

Note.—The values for the properties in this table are based upon maximum and minimum figures
submitted to Modern Plastics by a number of manufacturers of each type of material. Differences in
test procedures and sizes of test specimens may lead to erroneous conclusions in some cases if
direct comparisons are attempted. Special grades of materials are often available which excel in one
particular property.
Source: Modern Plastics, vol. 15, No. 2, opp. p. 120. October 1937.

Table 17 lists the properties which affect appearance and gives in addition to the color range, the
clarity, material, the burning rate, the effect of age and sunlight, the refractive index, and the machining
quality of each synthetic resin.
Table 18 lists molding properties of synthetic resins. Of special interest are the possibilities of using a
resin in injection molding. The thermoplastic resins and plastics (see softening point in table 20) are
generally preferred to the thermosetting materials for injection molding because they permit the reuse of
material otherwise wasted.
Table 19 lists the strength properties of the synthetic resins; table 20 the heat properties; table 21 the
electrical properties; and table 22 the resistance to acids, alkalies, and solvents. All of these qualities
are important in some uses and each quality may be paramount in a few. Each material has its
limitations and its special advantages and the consuming industry must choose the one best suited to its
purposes. The tie-up between specific properties and particular uses is exemplified by vinyl resins,
which because of their great elasticity at low temperatures, are used in safety glass, and by the
polystyrene resins, which because of their electrical properties at high frequencies, are used in
laminated electrical parts. As production of the various resins increases new uses will probably be found
for most of them.

Table 19.—Synthetic resins and other plastics: Strength properties

Modulus
Tensile Compressive Flexural Impact s
Type Elongation of
strength strength strength p
elasticity
Pounds per
Pounds per Pounds per Pounds per
Percent square inch
square inch square inch square inch
× 10³
Synthetic resins:
Tar-acid—Formaldehyde:
Molded, wood flour filler 6,000- 10-15 16,000- 8,000- 0.10
11,000 36,000 15,000
Molded, mineral filler 5,000- 10-45 18,000- 8,000- 0.11
10,000 36,000 20,000
Molded, fabric filler 6,500- 7-12 20,000- 10,000- 0.4
8,000 32,000 13,000
Laminated, paper base 6,000- 5-20 20,060- 13,000- 0.4
13,000 40,000 20,000
Laminated, fabric base 8,000- 5-15 20,000- 13,000- 0.8
12,000 44,000 20,000
Laminated, asbestos cloth base 9,000 18,000- 17,000
40,000
Cast 5,000- 5-15 15,000- 0.1