NATIONAL SCIENCE

Small and Medium Mushroom

Enterprise in Sri Lanka: a Case

Study on the Innovation System

involved

Science & Technology Policy Research Division National Science Foundation

47/5,Maitland Place Colombo -07

20\0

Small and Medium Mushroom Enterp

in Sri Lanka: a Case Study on the

Innovation System involved

Compiled by

P.R.M.P. Dilrukshi Ranathunge, PhD Chathurani Rankothge

and Seetha L Wickremasinghe, PhD

Science & Technology Policy Research Division National Science Foundation

47/5, Maitland Place Colombo -07

2010

Copyright (©National Science Foundation (NSF), Sri Lanka 2 0 0 8 .

No part of this report may be reproduced, photocopied or distributed in any form or by any means without prior written authorization from Director, National Science Foundation, Sri Lanka

All enquiries and suggestions should be forwarded to>

Di rector

National Science Foundation

4 7 / 5 , Maitland Place

Colombo 7

Tele:+094 11 2 6 7 5 8 4 1

Fax: +094 11 2 6 9 4 7 5 4

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URL: www.nsf.ac.lk

Small and Medium Mushroom Enterprise in Sri Lanka

Case Study on the Innovation System involved

Contents

Abstract 2

Introduction 3

Literature Review 4

Methodology 6

Results and discussion 9

Conclusion 16

Acknowledgement 17

References 17

Abstract

Small and medium scale mushroom enterprise is a good opportunity for farmers or

villagers who are interested in an additional income and it is an ideal option for farmers

without much land. In addition to its culinary appeal, the nutritional value and medicinal

properties create a high demand for mushroom in both local market and international

market today. Mushroom growing programmes have been introduced to people in the

rural areas as a self-employment through many government and non-government poverty

alleviation programmes. However, the impact o f this industry to the country's economy

or the actors engaged in this enterprise and their role has not been investigated so far.

Therefore, as an initial step, the present survey was designed to study the small scale

mushroom growers in the country and to find out the problems and constraints faced by

them plus the different people and institutions involved in their enterprise development.

The mushroom growers at villages located in the Kaiutara district was selected for the

case study. The direct interview method using a structured questionnaire was employed

to collect information from 4 0 farmers. The sample contained 5 6 % female and 4 4 %

males o f various age categories. Most o f the farmers ( 5 3 % ) were new to the enterprise

and still in the process o f getting established while 3 5 % was involved for more than one

year and 12% had involved in less than 1 year. O f the total farmers, 1 5 % was involved in

the mushroom cultivation as an additional enterprise while for 7 5 % , it was the main

enterprise. The farmers buy seeds from the government agriculture centers or private

sales outlet in their village or a few burrowed from friends. The sale o f products was

done by themselves, directly to customer or through a retailer or a middle person or they

directly sell to exporters or wholesalers or hotels. Only 2 % o f the farmers were involved

in export and all o f them were male. The lack o f knowledge in mushroom culturing,

disease management, financial assistance, business management, finding local or foreign

markets, producing value added products o f mushrooms were mentioned as problems by

farmers. They also expressed their needs for more cost effective growing media,

packaging methods, viable high yielding seeds, new mushroom types, storing methods as

well as support in terms o f financial and training to expand their enterprise.

Keywords: Mushroom, Cluster study, mushroom growers, Innovation, Sri Lanka

2

Introduction: Sri Lanka has about 7 0 % o f its population living in the rural areas and their main income

source is agriculture. Agriculture sector contributes to 1 2 % o f GDP o f the country

(Central Bank o f Sri Lanka, 2 0 0 8 ) while 2 4 . 6 % R & D expenditure is spent on agriculture

R & D (NSF, 2 0 0 6 ) . Although the contribution o f Agriculture to GDP o f the country has

significantly decreased over the years, it is an important determination o f GDP directly

accounting for about 1/5* o f the national output and employing directly more than l / 3 r d

o f the labour force ( 3 6 % ) providing inputs from the agricultural processing industry and

supplying a large share o f domestic food requirements. However, due to low income

through the existing agricultural practices, the rural sector farmer falls below the poverty

level with a less than monthly income o f around 2 0 US$. Therefore, it is important to

explore the opportunities in agricultural applications to help improving livelihood o f the

rural farming community.

The small-scale mushroom production represents an opportunity for farming

community interested in an additional income and is an ideal option specifically for those

without much land. Mushroom farming also can play an important role in managing farm

organic waste when agricultural and food processing by-products are used as a growth

media for edible fungi. In addition to its culinary appeal, the nutritional value and the

medicinal properties create a high demand for mushroom in the international and local

market today.

3

The government o f Sri Lanka and many other government and non government

organizations are involved in promoting mushroom farming as a self-employment in the

country and the production o f these mushrooms have high demand in both local and

foreign market. However, the impact o f this small and medium enterprise to the country's

economy or the actors engaged in the whole activities o f the mushroom industry has not

been investigated in the country to date. This case study describes an innovation based

small scale entrepreneurship in Sri Lanka with intervention that brought together rural

community, public sector research and scientific institutions, private sector companies,

banks, market dealers, extension services etc. , and how these actors are involved in a

network that forms a small innovation system towards the socio-economic development

o f the country.

L i t e r a t u r e Review

The National Innovation System (NIS) concept towards country's socio-economic

development was first gained attention when Freeman ( 1 9 8 7 ) and Lundwall ( 1 9 9 2 )

brought forward their discussions on the idea o f innovation and how it operates as a

complex system o f phenomenon. According to them, this system operates through

networks o f research, entrepreneurial and other actors interacting to produce and use new

knowledge. As observed by Nelson i n l 9 9 3 , the NIS is a set o f institutions whose

interactions determine the innovative performance o f national firms. Patel and Pavitt

( 1 9 9 4 ) were o f the view that the national innovation system is a web o f national

institutions, their incentive structures and their competencies, that determine the rate and

the direction o f technological learning (or the volume and composition o f change

generating activities). Metcalfe, 1995 explained that a set o f distinct institutions which

jointly and individually contribute to the development and diffusion o f new technologies

and which provides the framework within which government form and implement

policies to influence the innovation process. As such it is a system o f interconnected

institutions to create, store and transfer the knowledge, skills and artifacts which define

new technologies. Edquist ( 1 9 9 7 ) stresses that NIS can evolve further knowledge that

involves new uses o f old knowledge or new combinations o f existing knowledge. As a

result, capabilities, linkages, networks, and changes in the institutional arrangements may

4

change from time to time with new technology based results and supportive policy

regimes that are o f equal importance. Application o f the innovation systems approach has

been also explored by the Organization for Economic Cooperation and Development

( O E C D , 1 9 9 7 ) and its members (Arnold and Bell, 2 0 0 1 ) , the United National

Commission on Trade and Development, the European Commission, and more recently,

the World Bank. Other applications o f this innovation concept can be seen in the work o f

Douthwaite ( 2 0 0 2 ) ; Hall et al. ( 2 0 0 3 ) ; Biggs and Matsaert ( 2 0 0 4 ) ; Raina ( 2 0 0 4 ) etc.

Further, the role o f knowledge in an innovation system is also very important.

Knowledge can be categorized in many ways as scientific /technical knowledge or

organizational/managerial knowledge, as well as codifies/explicit and tacit /implicit

knowledge (Hall et al., 2 0 0 2 ) . Knowledge may also be embodied in some good or

service; or technology; or it may be distinct, disembodied, and complimentary,

knowledge can be obtained through public research organizations, private laboratories,

and universities and also can emerge through the practice and behavior o f individuals,

households or civil societies (Clark, 2 0 0 2 ) . According to Wickremasinghe ( 2 0 0 6 ) , the

NIS concept, which deals with important elements such as innovation and learning, is

still novel to Sri Lanka where interaction among various actors and institutions involved

in technological innovation play a vital role. She mentions the importance o f paying

attention to the fact that how the entities such as government policies, R & D activities,

education system, culture, history, traditions etc. , play their roles in this system towards

ouo-economic development in Sri Lanka.

Sliced Button Mushroom

5

Methodology:

Background knowledge to the small and medium scale enterprises ( S M E s ) and

Innovation Systems (IS) was gathered through literature survey and a cluster o f village

community who are involved in cultivation, production and marketing o f mushroom

products was selected in consultation with the Vidatha Project Division o f the Ministry o f

Technology and Research.

The rural village community who was engaged in mushroom production in the Kaiutara

District o f Sri Lanka was selected for this case study. The cluster study method was

employed to collect data by making several field visits, direct interviews and also using a

structured questionnaire designed for the purpose. Using the primary information

gathered from the mushroom growers, the study was further extended to investigate the

role o f various actors and linkages. The qualitative and quantitative data gathered were

then analyzed to understand how the system operates and a framework was then

developed to explain as to how this small and medium scale enterprise works as an

innovation system.

Packed mushroom bags after inoculation

Mushroom growing stage

Women entrepreneur examining growing mushrooms

Results and discussion:

Research team having discussion with village community

Forty farmers representing different villages in the Kaiutara district were interviewed to

collect the primary information pertaining to the study. The sample contained 5 6 %

9

female and 4 4 % male farmers o f various age categories. Most o f the farmers ( 5 3 % ) were

new to the enterprise and still in the process o f getting established while 3 5 % was

involved in more than one year and 1 2 % was involved in less than 1 year. O f the total

farmers, 1 5 % was involved in the mushroom cultivation as an additional enterprise while

7 5 % as their main enterprise. Their monthly income due to mushroom cultivation varied

from SL Rs. 5 0 0 0 / - to 2 0 , 0 0 0 / - (US$ 5 0 - 2 0 0 ) . All o f them managed the industry as a

family business. The main capital for the commencement o f the enterprise was gained by

family funds and loans obtained by the government, private banks or personal loans from

others. Since this enterprise was mostly managed by family or friends, the labour was

shared among themselves. 8 2 % o f the farmers had undergone training from the

government departments, centers or through the projects conducted by non-government

organizations. The farmers obtained seeds from the government agriculture centers or the

sales outlet in their village or a few burrowed from friends. The majority ( 7 3 % ) used the

saw dust as growing substrate o f the mushroom. They bought this substrate material from

the village saw mills. The sale o f products was done by themselves, directly to customer

or through a retailer or a middle jperson or they directly sell to exporters or whole sale

dealers or to hotels (Table 1).

Table 1: Selling method of mushroom

Activities of rural community towards marketing % farmers involved

1 Packing and selling directly to consumer 21 2 Packing and selling to retailers 15 3 Through middle person to consumer and retailers 32 4 Sell stock to one direct buyer (hotel, exporter etc ) 2 1,2 Packing and selling to consumer and retailer 16 1,2,3 Selling directly to consumer, retailer and middle person 5

Packing and selling to consumer and middle person 5 2,4 Packing and selling to retailer and selling stock to one

person 2

1,2, 3 ,4

Packing and selling to consumer, retailer, middle person, and selling stock to one person

2

Total sale 100

10

Mushroom soup Other mushroom products

Most o f the mushrooms produced in home based farms are the common varieties such as

Oyster and Abalone. However, there is growing demand for other special mushroom

types from exporters and hotel industry in the country. O f the farming community who

took part in this case study, nearly 6 0 % were females. Some o f them were new to the

enterprise and still in the process o f getting established while others were involved in

quite a long duration. O f the total farmers, 1 5 % was involved in the mushroom

cultivation as an additional enterprise while 7 5 % as their main enterprise. All o f them

managed the industry as family business. The main capital for the commencement o f the

enterprise was gained by family funds and loans obtained by the government, private

banks or personal loans from others. Since this enterprise was mostly managed by family

or friends, the labour was shared among themselves. 8 2 % o f the farmers had training

from the government departments, centers or through the projects conducted by non­

government organizations. The farmers obtained seeds from the government agriculture

centers or the sales outlet in their village or a few burrowed from friends. The majority

( 7 3 % ) used saw dust as growing substrate o f the mushroom. They bought this substrate

material from the village saw mills. The sale o f products was done by themselves,

directly to customer or through a retailer or a middle person or they directly sell to

exporters or whole sale dealers or to the hotels.

Only 2 % o f the farmers interviewed were involved in export and all o f them were male.

The main reason for limited involvement in export business was the lack o f knowledge in

export activities, as well as the inadequate facilities, knowledge or experience in

11

providing continuous supply o f mushroom harvest. The number o f growers involved in

value added products o f mushroom was low ( 3 0 % ) and they were all females. The

extension service o f the government is in practice but this link should be further

improved. The details o f constraints and the problems faced by the farmers are indicated

in Table 2. In addition, the farmers also expressed their needs for knowledge in disease

management, cost effective substrates, packaging, storing methods as well as support in

terms o f financial and training for expanding their enterprise. The main organizations that

farmers have links with, for training and obtaining seeds and other relevant information

were the Export Development Board, Department o f Agriculture, and Vidatha Centers

operated under the ministry o f Science & Technology. They did not have direct links

with researchers or training institutions that conduct training programmes in mushroom

cultivation, packaging or business management etc.

Mushroom products for export market

Table 2: Problems and constraints faced by mushroom growers

Constraints % farmer response

Lack o f guidance to culture mushroom and to carry out business 92

Financial problems in initiation anc expansions 8 0

High cost o f fertilizer and other chemicals 62

Labour cost involved 16

Lack o f proper storing facilities 4 8

Lack o f proper cold room facilities 9 9

Inadequate knowledge in packaging 18

12

The study revealed that extensive research has been done by the Department o f

Agriculture ( D O A ) to address all sorts o f research problems from mushroom cultivation

and seed production to value addition. A separate Division has been established in the

DOA to deal with research and extension work relevant to mushroom. However, the

discussions with researchers and extension officers attached to the DOA indicated that

due to limited funds for R & D , mushroom production, as an agricultural commodity, does

not get priority funding. Due to this reason there are gaps in extension services, they

admitted.

The scientific institutions such as National Science Foundation also have conducted

various supportive programmes in collaboration with Sri Lanka Association for the

Advancement o f Science ( S L A A S ) , Institute o f Post-harvest Technology ( IPHT) ,

Industrial Development Board ( IDB) , Industrial Technology Institute etc. , to educate

farmers in overcoming diseases, packaging, value addition etc.

Through various micro-financing schemes, the state banks such as the Peoples Bank

o f Sri Lanka, S A N A S A Development Bank, and Lanka Puthra Development Bank

support mushroom enterprise as a commodity under the sub sectors o f agriculture. The

Peoples Bank also has established a Vidatha (taking technology to village) Loan Scheme

to provide credit facilities to entrepreneurs who are being trained and introduced by the

Vidatha Resource Centres established by the Ministry o f Science and Technology.

The local NGOs such as Sarvodaya and a few foreign NGOs are also involved in

assisting the mushroom growers: mainly via training and participatory approach and

extension and knowledge dissemination activities.

The private companies that are involved in mushroom production, marketing and

export expressed that they rarely have any contact or links with the government R & D

institutions. They get their employees trained via overseas contacts that they establish by

taking part in various business exhibitions in the neighboring countries. There was

reluctance by the private sector to:establish direct links with the government departments

and research institutions due to IPR issues. However, they admitted that there will be a

big impact if their research problems could be solved by the support o f the government

R & D institutions through the public private partnership (PPP) .

13

The exporters who are involved in mushroom export also did not have any health

linkage with R & D institutions especially in regard to packaging and cold storage

problems. They said that it is mainly by learning and doing practice they employed.

The consumers were o f the view that mushrooms were not available in the market

as and when required. In addition, due to its high water content, they had to pay more to

prepare a dish that is sufficient to the family when compared to other vegetables. They

agreed that they all loved to eat mushroom otherwise.

Table 3: Summary of the actors or institutions involved and their roles in mushroom industry

Actors/ institutions Role/responsibility

Male and female farmers (Rural farming community)

Mushroom cultivation and/or sale

Government policy (Mahinda Chinihana)

Village development and prosperity

Researchers (Dept. of Agriculture i.e. HORDI)

Research and extension activities

Scientists (S&T institutions)

Knowledge dissemination and other services

Banks (Venture capital)

Financial support through various loan schemes

Inst.of Post Harvest Technology (IPHT), Industrial Technology Institute (1TI)

Promote and develop technology for value added products

Vidatha Resource Centres (Ministry o f Science & Technology)

Taking technology to village

Industrial Development Board (IDB) Handling and Packaging

Export Development Board (EDB) Export related activities

NGOs Assist farmers via participatory approach

Middle men Direct purchase from farmers

Private companies Production, marketing & export

Exporters (Private sector)

Buying and export

Funding agencies (Council for Agricultural Research Policy-CARP, National Science Foundation)

Provide financial support through research grants

IPR issues (Intellectual Property Office)

Granting patents for researchers

.

14

Based on the qualitative analysis conducted all views and observations expressed by

the different parties involved the following framework was worked out to the how the

mushroom industry operates as an innovation system in Sri Lanka.

Government Policy Govt, institutes i.e. EDB, HORDI, CARP, ITI etc.

Figure 1: MappnW of kev^fiors in the mushroom production syst at the l o ^ a l X e l (arrows show the strength of linkage)./

Hotels

Govt, finding agencies

Banks

The study further revealed the importance o f strengthening the mushroom production in

the country as a S M E because it benefits the rural farmers are the main beneficiaries

since it involved their livelihood. Hence, by establishing the mushroom producing farmer

clusters all over the country the sustainability o f mushroom industry would be

maintained. The farmers need to provide a constant and better quality yield at a

reasonable price that is affordable to consumer while targeting the foreign market as well.

To achieve this target, availability o f better and low cost substrates, methods o f

maintaining hygienic conditions in the culturing sheds, effective disease controlling

methods, introduction o f new edible mushroom types to the farmers etc. , are essential.

Since there are R & D aspects relevant to above issues, it is necessary to disseminate

15

research findings o f the R & D institutions to small home based farmers as well as to the

large scale mushroom enterprise in the country. Since the availability o f viable and high

yielding seeds has been another problem faced by farmers, a proper mechanism should be

developed to provide viable seeds to farmers through reliable government sources or

training farmers to produce their own seeds. There has to be an effective interaction

between farmers and agriculture extension officers in regard to advice, guidance and

knowledge in new technologies. Farmers also should be educated and trained in business

management to maintain their business efficiently and also on the availability o f financial

support from Banks. Most o f the farmers are not involved in making value added

products o f mushroom due to inadequate knowledge in such product preparations, lack o f

funds for initiation and lack o f knowledge in finding market for their products. The

policy interventions promoting public private partnership is a must. For example, the

government institutions that are involved in the above tasks must publicize their functions

and improve links with the farmers and other actors who play significant roles in the

network o f this industry such as exporters, retailers, wholesale people, researchers as well

as consumers to make this enterprise more profitable and sustainable. It is also important

to make the public aware (as consumers), on the nutritional and medicinal value o f the

mushrooms.

Conclusion:

This case study o f mushroom showed the importance o f actor-oriented approach and the

institutional arrangements that are useful to support a viable innovation system in a small

and medium scale enterprise. It has highlighted the gaps in the contemporary system such

as identifying actors and linkages in mushroom production and marketing. Once such

gaps are filled through policy intervention, the system as a whole will have a

considerable impact on the socio-economic development o f the country via the rural

village community. However, the said actors, their roles and linkages involved in the

system may have their own strengths and weaknesses and therefore, it is cautioned that

one needs to have patience, experience and in-depth understanding when evolving

suitable approaches in this direction.

16

Acknowledgement

The services provided by Mr. Roshan Seneviratne, and Ms. Nanthake Sirikumaran,

Research Assistants in data collection and data entry are thankfully acknowledged.

The Research Team o f the Science & Technology Policy Research Division ( S T P R D )

also thanks Mrs Deepika STO/ VIDATHA Center Biyagama and STO/VIDATA Center

in Bandaragama, for making arrangements for data collection and the National Science

Foundation ( N S F ) o f Sri Lanka for providing funds.

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