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The Technological Structure and Performance of South African Manufactured Exports

Working Paper Number ######

The Technological Structure and Performance of South African Manufactured Exports, (2010 – 2014):

Are South African manufactured goods becoming more sophisticated?

Wayde Flowerday; John Gabriel Goddard, Andre Steenkamp

Abstract here:

August 2017

Acknowledgements

-Treasury

-SARS

-Support team

-DST et al.

Abbreviations

BRICS Brazil, Russia, India, China, and South Africa

CIT Company Income Tax

HS Harmonised System

IMF International Monetary Fund

ISIC International Standard Industrial Classification

NDP National Development Plan

NEC Nowhere Else Classified

NT National Treasury

OECD Organisation for Economic Co-Operation and Development

R&D Research and Development

SAEU South African Economic Update

SARS South African Revenue Service

SITC Standard International Trade Classification

VAT Value Added Tax

WBG World Bank Group

Contents Acknowledgements 2 Abbreviations 3 1. Introduction 5 2. Background 6 3. Data and methodology 10 4. Analysis of technological sophistication of South Africa’s manufactured exports 16 4.1 What is the composition of South African exports in terms of technology? 18 4.2 How diversified are South African exports? 21 4.3 Where are South African exports going? 22 4.4 Who are the high technology firms – what do they look like? 25 4.5 How Much Do Firm Characteristics Matter For High Technology Exporting? 29 XXX. References 31 Appendix A – Description of used variables from SARS-NT dataset 32

The Technological Structure and Performance of South African Manufactured Exports, (2010 – 2014)

W. Flowerday, J.G. Goddard, A. Steenkamp; (2017)

31

1. Introduction

Reducing poverty and inequality by generating better job opportunities remains the number one priority of development policy in South Africa. The urgency of faster economic growth, as well as more inclusive economic growth, has long been recognized by South African policy makers and is well reflected in the National Development Plan (NDP) of 2012. However, structural and policy bottlenecks make the challenge of reducing poverty and inequality difficult to resolve. One key area mentioned n the NDP is “the legacy of highly concentrated industries that have limited competition and efficiency gains”. The document goes further to note that South Africa suffers from uncompetitive goods and services as a result of pre-1990s growth patterns and the autarchy of the economy in earlier years. Whilst this results in higher profit margins, the incentives to invest and innovate remain weak; new firms are not entering the market or growing to the point where they can effectively compete with the industrial champions of the past, and as a result, employment creation is low (Banda et al., 2015).

Cyclical factors and external shocks have impacted aggregate demand and employment, as well as the fiscal space available to the Government, magnifying the challenges facing South Africa. South African growth slowed to 1.5 percent in 2014 owing to the end of the commodity super cycle, which continued throughout 2015. The fall in global commodity process and the slowdown in China have largely driven the deceleration in South Africa. Domestic factors and policy missteps have also contributed to the slowdown by deterring investment. To reactivate growth, the World Bank (2016) South African Economic Update has underlined several areas for growth and development, one of the more critical being that of innovation.

Despite greater openness to trade over the past two decades, the South African export sector remains highly concentrated[footnoteRef:1]. The top 5 percent of South Africa’s exporting firms account for more than 90 percent of exports. Despite their dominance, these super-exporters appear to be losing dynamism and competitiveness, particularly after the global financial crisis, which saw them create fewer new products and enter fewer, new markets abroad (World Bank, 2016). [1: A fact which holds true even when commodity exports are excluded.]

Realising the shortcomings of the commodity-driven growth model, the South African government committed to programmes and policies that promote industrial development. Such policy orientation builds on the expectation that industrial development could potentially generate several positive outcomes (SAEU, 2016). Coupling this sentiment with the context of increased economic globalisation as well as increased worldwide technological spill-over, technology emerges as a key factor in enhancing growth and competitiveness of an economy.

The last decade has shown that products which embody higher technological aspects are the fastest growing segment of international trade. Furthermore, due to greater openness of trade, and faster diffusion of new technologies across countries, developing nations have increased their contribution towards high-tech products in international trade.

Utilising new-to-the-world, highly disaggregated trade data, this paper explores the linkages between technology embedded in South African exports, innovation, and economic growth for South Africa.

2. Background

There is growing body of evidence that argues that what a firm/country exports is important for growth – especially within the context of developing nations. Hatzichronoglou (1997) claims that firms which are technology-intensive, innovate more, win new markets, and use available resources more productively while generally offering a higher rate of remuneration to their employees – the end result being an increase in economic growth of a country.

Hausmann et al., (2007) illustrate that a significant predictor of economic growth within a developing country is the extent to which the developing nation’s export basket overlaps with that of developed countries. Not all goods are created equal in terms of their consequences for economic growth. Certain goods may offer greater potential for forward and backward linkages, yield higher knowledge spillovers, or even offer an easier pathway towards products with such characteristics (IMF, 2012). Over time, the sophistication of a country’s exports may evolve, and hopefully move into newer, more sophisticated products.

Considering earlier literature only bolsters this argument; Dalum et al. (1999) stresses that better growth prospects are typically interlinked with exporting products with higher income elasticity[footnoteRef:2]. Furthermore, Lall (2000) states that low technology products tend to grow slower than that of high-technology products. Sophisticated sectors are more likely to act as an engine of growth for the broader economy, rather than turn into isolated enclaves (IMF, 2012). Effects of this nature in South Africa have already been partially captured by the work of Rankin and Schöer (2013). The authors illustrate that there is a link between export destination and product quality in South Africa – interpreting this another way allows us to state that in order for South African firms to adequately export into different regions, they must have a product of higher quality (sophistication), thus in essence implying that some form of product or process innovation must have taken place at the firm level. [2: This is often the case with technologically-intensive products.]

One of the noticeable trends in South Africa is that innovation expenditure has been falling relative to GDP while other fast-growing emerging countries have forged ahead (shown in figure 1). The ratio of research and development (R&D) expenditure to GDP in South Africa – 0.73% (2012) - is the lowest among the BRICS countries (e.g. China 1.93%, Brazil 1.15%). The number of Triad patents is also lower than in the other BRICS. The exception is the mining and fuels sub-sectors which have patents and research and development R&D comparable to its competitors, the US, Canada and Australia.

Figure 1: R&D expenditure as a percentage of GDP

Source: World Bank Group (2017)

The relatively slow absorption of new technologies and limited domestic investments in innovation are two likely explanations as to why South Africa has experienced declining productivity at a time when most BRICS peers were experiencing rapid gains in productivity and overall growth. This slowdown in growth has also been accompanied by stagnating performance of South Africa’s exports. Poor export performance has resulted in a 15 percent decline in South Africa’s share of world exports since 2011.

Moreover, South Africa has larger public innovation expenditure relative to private expenditure, which limits the short-to medium term economic impact. This public expenditure is allocated largely towards scientific innovation. While South Africa was known as a global leader in specific industries such as mining, but innovation expenditures have been shifted to other countries, and firms in mining equipment are less prone to developing their intellectual property locally. Outside of mining and related areas, South Africa has few patents, and producers tend to be technological followers rather than leaders.

Looking at the highly aggregated levels of high-technology exports (as a percentage of manufacturing export value) over time, it can be seen that South Africa is lagging relative to comparator BRIC nations (figure 2).

Figure 2: High-technology exports as a percentage of manufactured exports

Source: World Bank Group (2017); Com