Research: The contribution of human capital to industrial competitiveness Reply

Our Research posts are about the latest academic research being done in the School of Economics. This week:


by Prof. Ewert Kleynhans (NWU) & Riaan Labuschagne (National Treasury)

Prof Kleynhans

As part of our on-going research focus on the economic competitiveness of firms and industries, we reported last time on this blog about our investigation into the human capital constraints in South African manufacturing experienced on a micro-economic firm-level. We also discussed our article on that, which we published in an accredited European journal. Our research programme has now shifted to the quality of human capital in South Africa and how it affects various firms’ international competitiveness, using different methods of investigation and data.

This study examined the restrictive nature of human capital in the South African economy, and the impact it has on productivity in the manufacturing sector. These restrictions include an inadequately educated workforce and inflexible labour regulations. Survey analysis along with regression and factor analysis examined the most likely causes of productivity improvements. Factor analysis revealed that productivity is driven by three underlying dimensions, namely human capital development, management’s competitiveness and location. Human capital development was also shown to be inadequate in small and medium-sized establishments.

For the South African economy to expand on its current economic status, several actions are needed to improve the quality of human capital in the country. Budget allocations towards education and training in the region of twenty per cent, for the past decade, signal South Africa’s government’s strong intention towards human capital development. Several reports and studies imply, however, that an inadequately educated workforce and restrictive labour regulations are the biggest threats to South Africa’s international competitiveness. Evidence on this was revealed in recent Global Competitiveness reports and research done by Bhorat and Lundall (2004); Chandra et al.(2001); Fedderke (2005); Rogerson (2008) and the World Bank (2006) report on Governments’ effectiveness in enterprise promotion.

This study also explored the role of education and labour regulations in the productivity environment of the South African manufacturing sector. The aim of the paper was to establish whether these two aspects have an influence on productivity levels. The changing quality of the labour force was also found to be a crucial component in explaining the difference in wage, income and productivity between countries. Although the results of learners in South Africa are relatively low compared to other developing economies, there is no evidence to suggest that workers in the survey are inadequately educated.

Empirical evidence of this study indicated that there is a positive relationship between educational attainment and productivity. Managers with higher levels of education and training achieved higher levels of output. Human capital development was shown to be lacking, especially in small and medium-sized establishments. There is also no clear evidence to suggest that human capital development initiatives such as training and Sector Education and Training Authority (SETA) support increase the productivity of firms in the manufacturing sector.

The majority of firms in the survey indicated that labour regulations do not impact significantly on their productivity. Large firms indicated that they find labour regulations a slightly bigger obstacle than small and medium-sized establishments, and their labour force growth figures confirm this. From this, one can conclude that labour regulations contribute to employment rigidity in the manufacturing sector. However, the impact these regulations have on productivity remains uncertain. Productivity was found to be the highest in the city of Johannesburg, followed by Cape Town and Port Elizabeth. Apart from industries where cartels or monopolies exist, industries with more than five active firms experienced the highest level of productivity, as measured by output per worker. Factor analysis revealed that productivity can be explained by the three underlying dimensions: Human capital development, management’s competitiveness and region.

This study found that the level and quality of human capital in South Africa are insufficient to support modern industrial development, especially on micro-economic firm level. Further studies on these aspects would contribute to a greater understanding of human capital, and its involvement in the economy. Several constraints and challenges still exists that need attention. Another aspect that needs attention is the unavailability of reliable data on human capital development, and the absence of measures to assess human capital formation and quality education.

An article on this research was recently published in the African Journal of Business Management.

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