Modeling Rural Business Innovation: A Farm Diversification Application

This paper examines optimal business development strategies for rural firms given thespecific characteristics of their rural business environment. An investigation of rural businessstrategy informs public policy formation by helping to determine how rural firms would reactto changes in their market and policy environment. Moreover, an explicit rural businessstrategy analysis should help rural business managers and advisers to identify appropriateresponses to changes in factors external to the business. A mathematical businessoptimisation model, that is set within a spatial market framework, has been developed. Themodel incorporates factors such as spatial market orientation and technology use, andidentifies 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 tomeat processors or processing on-farm and selling direct to consumers. Model simulationsreveal when it is optimal for the farm business to innovate in this way and how this decisionis affected by changes in key parameters. The model’s predictions are discussed in thecontext of local food supply, which is considered to have the benefits of being traceable,supporting the local economy and reducing food miles.