FOSTERING INNOVATION AND TECHNOLOGY ABSORPTION IN SOUTH AFRICAN ENTERPRISES The World Bank October 27, 2011 1.

FOSTERING INNOVATION AND TECHNOLOGY

ABSORPTION IN SOUTH AFRICAN ENTERPRISES

The World Bank

October 27, 2011

1

ACKNOWLEDGEMENTS

Based on findings of three analytical products: Fostering Technology Absorption in Southern African Enterprises (book); Input and Performance of Technology Innovation in South Africa

(background paper); Commercialization of Knowledge in South Africa (background paper).

Team : 12 members in different stages, including World Bank staff, international

consultants and experts from South Africa. benefited from comments received in several rounds of internal review.

Special thanks to the Human Science and Research Council (HSRC) for access to the NIS

data. the Multi-Donor Trust Fund for Trade and Development for financial

support. 2

OBJECTIVE: ENHANCE GROWTH AND PRODUCTIVITY

3

INNOVATION AND TECHNOLOGY ABSORPTION AND GLOBAL COMPETITIVENESS

Innovation represents a continuum of entrepreneurial upgrading activities by firms that turn new ideas into wealth through commercialization (new to the world/ country) and re-engineering what’s developed elsewhere to the local markets (technology absorption).

Innovation and technology absorption are of critical importance to South Africa’s global competitiveness.

Technological progress is critical to maximize total factor productivity gains, which are pivotal to increasing global market share and economic growth.

Particularly so, because South African manufacturing industries have very limited competitive advantage in terms of labor cost in competing with Asia.

4

SOUTH AFRICA CAN DERIVE LITTLE COMPARATIVE ADVANTAGE FROM UNIT LABOR COST OVER OTHER BRICS ECONOMIES

Source: Mengistae, 2011 5

HOW INNOVATIVE IS THE “ADVANCED” PART OF THE SOUTH AFRICAN ECONOMY THEN?

South Africa has drastically scaled up its investment in knowledge generation since the mid 1990’s. Total resources committed to R&D in South Africa

have been increasing persistently -In real terms, R&D expenditure in 2007/08 was approximately 3 times the level of expenditure in the mid-1990s.

While all R&D performers have seen an increase in R&D expenditures, the business sector has accounted for by far the largest share - approximately two-thirds of the increase in total R&D expenditure.

The number of researchers engaged in R&D has increased much less than the resources expended- a reflection of the skills shortages in the system.

6

INNOVATION OUTPUTS Using the number of patent as a proxy for output

of the innovation system, South Africa’s innovation output does not seem to have kept pace with the increase in R&D expenditure.

As a share of total patent activity, increases in co-invention activity in South Africa has been modest with co-invented patents being higher quality than indigenous patents.

The cluster of mining technology patents reveals a strong evidence of the inventive excellence in mining technologies.

There has been an increase in the co-publishing with foreign authors, however there is no simultaneous increase in technology exports or patents- pointing to a lack of industry- specific research.

The most binding constraint on improving innovation performance is the scarce supply of skills.

7

WHY TECHNOLOGY ABSORPTION? Technological transfer and absorption play a critical

role in development by allowing technological late-comers to catch up: “learning something is easier than inventing it”.

Catch-up growth through technology absorption from the global economy: “import what they knew, export what they want”. Hence, the importance of technology absorption through trade and FDI.

Technology absorption is particularly relevant to Africa. African manufacturing industries face competitive pressures

on two fronts: knowledge intensive economies, and low labor cost economies.

Southern Africa as Africa’s manufacturing powerhouse does not have significant comparative advantage in terms of labor cost ----- must rely more on productivity to compete.

However, this is exactly the weakness of African economies ----- it takes greater technology transfer and absorption to strengthen competitiveness.

8

CHANNELS OF AND CONSTRAINT TO TECHNOLOGY ABSORPTION AND INNOVATION

9

INCENTIVES Market structure and competition Regulatory and Policy Environment Overall Investment Climate

ACCESS Trade in goods and services

Learning from exporting Imports of machinery and equipment

FDI and technology transfer Trade in knowledge through licensing of

technology

CAPACITY Skills level of workforce and senior management Domestic capacity in Research and Development Industry- Research linkages

10

CHANNELS OF TECHNOLOGY ABSORPTION

TRADE

Acquisition of machinery and equipment Learning By Exporting

FDI Brings in positive spillovers – e.g. access to foreign technologies and

management practices.

TRADE IN KNOWLEDGE Licensing of Technology acquired from the trading partners

SKILLS TRANSFER

Technical consulting services provided by equipment suppliers Hiring skilled expatriate labor

INDUSTRY RESEARCH LINKAGES

Limited in most industries however effective collaboration in the mining sector.

Competencies built on strong linkages for the capital goods sector with mining firms and research institutes (MINTEK).

11

CONSTRAINTS TO GREATER TECHNOLOGY ABSORPTION

SKILLS SHORTAGES Skills mismatch Difficulties in hiring skilled expatriate labor Low training levels in the firm Outflow of skilled personnel out to more advanced economies

INSUFFICIENT INDUSTRY RESEARCH LINKAGES With the exception of the mining sector in SA, there are virtually no industry-

research linkages. Symptom also of the lack of industry specific research conducted at

universities and research institutes.

BARRIERS TO FDI Skills shortages Crime Labor Market rigidities Regulatory and Political Uncertainty

OTHER CONSTRAINTS High logistics costs Broadband costs (for IT sector in South Africa) High labor costs

12

POLICY OPTIONS FOR GREATER INNOVATION AND TECHNOLOGY ABSORPTION

13

GOVERNMENT SUPPORT FOR INNOVATION AND TECHNOLOGY ABSORPTION Basic level: Creating a supportive business

environment, in which firms driven by profit motives will seek to update their technology in the best way they can.

A more coordinated approach to innovation and technology policy and framework.

Addressing market failure: Beyond those general policies, governments may also need to intervene at the industry and firm levels.

Four potential areas of public policy intervention based on findings in this study: Skills development; Learning through trade; FDI spillovers; R&D activities.

14

BUSINESS ENVIRONMENT

Allocation of entrepreneurial talents between productive and non-productive usages: to be the best in innovation or rent-seeking?

Competition: why invest in innovation when there is better way to make money?

Infrastructure: A vast majority of the firms interviewed were also constrained by logistical and infrastructural factors.

Get the basics right.

15

DIRECTION AND PRIORITIES OF REFORM

Public-private partnership: the government concentrates on financing and quality assurance, mobilizing both public and private service providers to increase service provision.

Addressing the urgent challenge of NEETs: instill any form of learning. NEETs in 2007: 2.8 million. Post-secondary system capacity: 1.3 million.

Rapidly scaling up the capacity for TVET in general and workplace learning in particular.

Strengthening position in the international competition for talents to address HR constraints. 16

LEARNING THROUGH TRADE Financial assistance to defray a portion of the

cost that the firm would have to incur in order to acquire the requisite technological capability to export. E.g. costs of consultancy and certification, product testing or conformity assessment.

Public provision of basic infrastructure for technology transfer and absorption. E.g. Metrology, Standards, Testing and Quality Certification (MSTQ) infrastructure.

Brokering relationships – including referral to experts and private consultants.

Technical assistance and training activity accompanying importation of machinery and equipment.

Technology diplomacy: governments make use of their bargaining power in trade to promote technology transfer to their domestic economies.

17

FDI SPILLOVERS

First-order challenge is to attract FDI, but spillover does not happen automatically. Need proactive action.

Providing incentives to foreign investors for engaging in deliberate actions of technology transfer. Ensure the extra cost is fully compensated for. Linked to performance and results. Can be offered by government as well as

domestic firms. Encouraging domestic firms’ learning efforts

and strengthen their absorptive capacity. 18

WHAT DOES IT TAKE TO TURN R&D INVESTMENT INTO PRODUCTIVITY AND GROWTH?

R&D ACTIVITIES

R&D and research-industry collaboration is of strategic importance to building absorptive capacity.

Making the SA R&D tax incentive easier to access, allowing for applied R&D costs and carry forward of the tax deduction.

Scaling up the success of Technological Human Resources for Industry Program (THRIP) in SA, starting with a study to assess how THRIP might be extended more widely.

Supporting intra-country technology diffusion: the mining and mining related equipment and specialist services in SA --- could be considered as a priority area for support in various government programs.

20

INNOVATION CYCLE

Knowledge &

Innovation

Growth Stage

Mature Stage

Sustained Job

Creation

EXIT

Early Stage

Direct Government Intervention

VC Activity

Equity Funds

FUNDING FOR INNOVATION To increase financial support to early stage innovation by a system

of matching grants to product and business development in its broadest sense

The SPII program which provides support via matching grants for early stage has many good features, has not been widely accessed- some recommendations include:

allowing a broader range of expenditures to qualify in addition to developing a prototype,

allowing spin offs from large companies to qualify and; broader information outreach.

Encourage private VC to support growth stage of the innovation cycle- the government could mitigate private investors’ risk by investing as a founding and passive Limited Partner not holding a majority stake with investment decisions being solely at the discretion of general partners.

Making exit more attractive- to enable access to global Initial Public Offering (IPO) at the exit stage in order to maximize returns for both innovators and private VC while, at the same time, ensuring national benefit through allowing South African innovations access to the wherewithal to exploit international markets 22

THANK YOU

23