Our Research posts are about the latest academic research being done in the School of Economics. This week:
BARRIERS TO INTERNATIONALISATION: FIRM-LEVEL EVIDENCE FROM SOUTH AFRICA
By Marianne Matthee & Waldo Krugell
Exports are considered good for economic growth. The benefits of exports for growth include knowledge spillovers, economies of scale, accumulation of foreign exchange and efficient allocation of resources (Foster, 2006). Exports, as a generator of economic growth, are therefore always included in government policy. South Africa is no exception (Edwards et al., 2008). In 2010, the South African government launched its new strategy for economic growth and development. The New Growth Path sets forth a plan to increase the economic growth rate to 7% per annum over a 20-year period, thereby eliminating the persistent and large-scale unemployment that the country faces. One component of the New Growth Path is to grow South Africa’s market through increased exports to the Southern African region and other fast-growing economies (South African Government, 2010). Alongside the New Growth Path, and the emphasis on exports, is the much-debated topic of the overvalued rand exchange rate. Recently, there have been calls from business and trade unions for the South African Reserve Bank to weaken the value of the rand, stating that the overvalued rand is the reason for South Africa’s inadequate export performance (Creamer, 2010).
Export performance is, however, not only influenced by macro-economic factors such as the exchange rate. It is also influenced by the exporting firms’ supply-side capabilities and the barriers they experience in both the entry into foreign markets and in expanding their exporting activities (Hollensen, 2007). This, in turn, influences the export performance of the country and the extent to which exports contribute to economic growth. It is therefore imperative that both private and public sector decision-makers understand the extent of exporting firms’ capabilities and the barriers that they face (Ramaseshan &Soutar, 1996).
The aim of this paper is to analyse the impact of resource barriers, more specifically firm size, productivity, firm-specific capital and labour market constraints, on South African firms’ decision to internationalise. Using a panel data set constructed from the World Bank Enterprise Survey data for 2003 and 2007, the following findings became evident. Consistent with previous empirical evidence, there is a strong positive relationship between firms’ exports and productivity and size. Therefore, South African firms (and exporters) need to operate in an environment that fosters their growth. More specifically, electricity supply is negatively correlated with exports. Those exporters who have access to a generator correlate positively to exports, which further emphasises the need for investment in electricity in South Africa. Secondly, transportation presents barriers to exporters. The majority of firms in the panel are situated in Gauteng, which highlights the skewed distribution of international economic activity in South Africa. These exporters are located around 600km from the nearest harbour. The inland distance implies higher domestic transport costs and this, together with customs delays, erodes their competitiveness. Finally, the results show that there is a positive relationship between South African exports and imported inputs. This adds another perspective to the South African rand exchange rate, as a weaker rand would in fact also erode exporters’ competitiveness.
In conclusion, exporting firms have the capacity to overcome resource barriers such as financial constraints and labour market constraints. The exporters in this dataset perceive more obstacles (in doing business) as their export levels increase. These constraints do not, however, lower their export levels. Removing these constraints is important in improving the business environment in which the firms operate. Such a business environment enhances a firm’s ability to trade internationally and for other firms to enter the export market.
Read the complete article in the latest issue of Studia Ubb, Oeconomica, 57(1)
Creamer T. (2010) OECD says activist currency policy to avoid overvaluation could benefit SA.http://www.engineeringnews.co.za/article/oecd-says-activist-currency-policy-to-avoid-overvaluation-could-benefit-sa-2010-07-19 (Date of access: 30 May 2011).
Edwards L., Rankin N., Schoër V. (2008) South African exporting firms: what do we know and what should we know?, Journal of Development Perspectives, 1(4): 67-92.
Foster N. (2006) Exports, growth and threshold effects in Africa, Journal of Development Studies, 42(6): 1056-1074.
Hollensen S. (2007) Global Marketing: A Decision-Oriented Approach, Prentice Hall, Milan.
Rameseshan B., Soutar N. (1996) Combined effects of incentives and barriers on firms’ export decisions, International Business Review, 5(1): 53-65.
South African Government. (2010) The new growth path: The framework. http://www.info.gov.za/view/DownloadFileAction?id=135748 (Date of access: 31 May 2011).