Modeling Rural Business Innovation: A Farm Diversification Application

This paper examines optimal business development strategies for rural firms given the specific characteristics of their rural business environment. An investigation of rural business strategy informs public policy formation by helping to determine how rural firms would react to changes in their market and policy environment. Moreover, an explicit rural business strategy analysis should help rural business managers and advisers to identify appropriate responses to changes in factors external to the business. A mathematical business optimisation model, that is set within a spatial market framework, has been developed. The model incorporates factors such as spatial market orientation and technology use, and identifies the business strategy that is optimal in different market and policy environments. The model is applied to a beef and sheep farm that can choose between selling livestock to meat processors or processing on-farm and selling direct to consumers. Model simulations reveal when it is optimal for the farm business to innovate in this way and how this decision is affected by changes in key parameters. The model’s predictions are discussed in the context of local food supply, which is considered to have the benefits of being traceable, supporting the local economy and reducing food miles.