Our Research posts are about the latest academic research being done in the School of Economics. This week:
THE CONTRIBUTION OF FDI, TECHNOLOGY AND R&D TO SPILLOVERS IN INDUSTRIAL COMPETITIVENESS: A SOUTH AFRICAN FIRM-LEVEL INVESTIGATION
by Ms. Sibulele Zwedala & Prof. Ewert Kleynhans (NWU)
This study investigates the contribution of technological and knowledge spillovers towards the competitiveness of South African manufacturing firms. Literature often emphasizes the role of foreign direct investment (FDI), technology and research and development (R&D) in spillovers, but seldom consider their effect simultaneously. This study focuses on the micro-economic production level and the interaction of these factors. It determines their influence on the competitiveness, profits and eventual industrial development.
The study revealed that direct foreign investments and ownership contribute little towards secondary spillovers, which probably depends on absorptive capacity. Technological advancement is not very significant, while research and development are dependent on absorptive capacity to enhance competitiveness, especially with regard to the investment in human capital. International quality certification, foreign licensing and capacity utilisation all contribute positively towards the ability to enhance productivity growth and the competitiveness of firms.
The assumption is that spillovers have a positive effect on industrial development. Literature on the competitiveness of firms, like for instance the Porter diamond (Porter 1998) or agglomeration economics (Krugman, Obstfeld, and Melitz 2012, 172) often mentions spillovers without defining it. Even though spillovers are regarded as important they are difficult to conceptualise and measure and often ignored in empirical analysis. This study wishes to investigate spillovers and find more clarity on these aspects.
In a previous study by Kleynhans and Swart, published in the African Journal of Business Management(2012) the contribution of various factors that improve sales were also investigated as this could also be an indication of competitiveness.
The research question of the current study is to what extent technological and knowledge spillovers contribute to more efficient micro-economic production and competitiveness. Efficiency leads to higher profits and eventually to industrial development. Following a literature study, an econometric study was conducted on firm-level data of South African manufacturing companies, mainly using regression analysis. Data from the World Bank’s firm-level survey on South African manufacturers was used.
The findings of this current study were that benefits occur mostly when domestic firms have the absorptive capacity and a stage of technology which is high enough to enable firms to take advantage of FDI.
Technological advancement should contribute to spillovers; however, this did not show in the results of this specific study. The reason could be that technological advancement levels in South Africa are too low and hence does not contribute much. If more could be invested in the capacity and capability to utilise and internalise new technology, as well as R&D, the results might be slightly different.
Considering spillovers in general this study found a positive relationship between competitiveness and R&D, especially with regards to capacity utilisation, foreign licensing and international quality certification, while the cost of training was detrimental, probably due to limited absorptive capacity. On the other hand the relationship between competitiveness and foreign ownership was negative. The same applied to the contribution of FDI and technology; although more expenses on IT, especially the internet leads to more spillovers.
With regards to spillovers in relation to human capital, it was found that the degree of managerial experience and educational level of labour contributed positively to competitiveness, but to a decline in spillovers, probably because workers learn to protect the concerns of their firms better. Firms that invest in human capital have the advantage of employees that are capable of discerning what can be shared with other firms, protecting the interests of their firms, which decreases spillovers. They have enough knowledge to know what information may be transferred to other firms and what should remain within the firm. Their knowledge gathered from R&D allows them to protect the firm, its innovations and knowledge.
A unique aspect of this study is that it also considers the possible disadvantages of technological and knowledge spillovers during production. Spillovers have the ability to enhance but, to the other extreme, it can also diminish productivity growth. Spillovers are generally to the advantage of firms and should be promoted, but if they occur in the wrong places, it may be detrimental to the competitiveness of firms. This phenomenon was highlighted by the results of this study. Crime and corruption, among other factors, contribute to the incorrect spillover of knowledge and technology, and this may be harmful. Firm can also fall victim to industrial espionage. Information which a firm would prefer to keep restricted within the firm can also be transferred over the internet; having a negative effect on a firm if it is leaked to its competitors.
Spillovers are good for industrial development and should be promoted; however, the process should be well managed, or else it may harm the competitiveness of firms. The limitations of studies like this one are that spillovers are not easily measurable. It is difficult to determine just how much a firm contributes to its industry in terms of foreign direct investment, how much technological knowledge it shares with other firms or how much R&D benefits it shares with other firms. Basically, it is difficult to determine just how much is spilled over from one firm to the rest of the industry or into a knowledge sharing system.
Much information about the interaction of technology, FDI and R&D, and their contribution towards knowledge and technological spillovers and competitiveness was revealed by this study. A full report on this study is published in the current issue of the International European Research Journal Managing Global Transitions vol. 10(3) See http://www.fm-kp.si/zalozba/ISSN/1581-6311.htm .
Kleynhans, E.P.J. & Zwedala, S. 2012. The Contribution of FDI, Technology and R&D to Spillovers in Industrial Development: A South African Firm-Level Investigation. Managing Global Transitions. International Research Journal. 10(3): Fall 2012.
Keywords: Production, Spillovers, FDI, Technology, R&D, Industrial development, Competitiveness