TNCs and National Systems of Innovation

The Case of South Africa

The position and evolution of TNCs in South Africa Patterns

• FDI flows to Africa are still low by global standards (0.7% of FDI outflow absorption, world wide • Since democracy South Africa absorbs the largest portion of FDI in Africa (a substantial portion were mergers and acquisitions) • Most FDI comes from the UK (using FDI stock figures) • The fastest growing FDI stock came from Latin America and the Caribbean • Most FDI has been concentrated in mining and the share has grown dramatically over 1994-2005 • The services sector is dominated by finance in the form of cheaper funding (relative to the SA market) from abroad

The position and evolution of TNCs in South Africa Effects

• A bolster to investment rates, which are still insufficient in SA • Balance of payments effect • Wage increases (for skilled and semi-skilled workers) • Enhancement of capabilities; this is mostly limited to the transfer of managerial and marketing capabilities, rather than technology transfer; affiliates in the machinery and equipment sector are the ones that spend most on R&D

The position and evolution of TNCs in South Africa Effects

• Export- vs market orientation (81% of foreign affiliates served the domestic market [2000]) • Effects on employment are limited, given the prevalence of M&A in FDI; most FDI demands skilled labour; there is a weak correlation between increases in turnover and increases in employment • Competition: market oriented firms seek sectors which have high market concentration and low competition • Loss in the knowledge base in some sectors where the R&D activity was relocated to a developed economy, following acquisition

The position and evolution of TNCs in South Africa The internationalisation of R&D

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Theoretically, the tendency for the internationalisation of R&D through FDI depends on

– The absorptive capacity in the host country, i.e. technological capabilities including managerial capacity – Institutional framework in place – The relationship between internationalisation and the local production of innovation

The position and evolution of TNCs in South Africa The internationalisation of R&D

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In the case of South Africa, we can note the following

– Affiliates in South Africa are large R&D spenders but spend little of their R&D budget in South Africa – Foreign and local enterprises operate independently in significant innovation – Exceptions where South Africa has become a technological global player, in cooperation with TNCs, such as catalytic converters, healthcare, aerospace and biotechnology – South Africa is well placed, through its infrastructure, for access to the regional markets

Local determinants of innovation Private sector innovation

• General recovery in R&D spending since 2000 • SA is and average to mediocre country in terms of innovation indicators • While private sector is a major role player in innovation, the public sector’s relative role is still stronger than the global average • Bimodal distribution of R&D: chemicals and transport equipment • Strong concentration of R&D: Gauteng (61%) and Western Cape (14%); Gauteng is equivalent to an R&D intensive region in Europe

Local determinants of innovation: Government policy towards TNCs

• Conducive to FDI with specific incentives for: – Relocation of new plant and machinery – Large size investments – Specific R&D tax incentive programme – THRIP (dti/nrf) – Substantial funding for HEI and research institutes’ R&D • Full commitment to international agreements regarding the protection of FDI, the local operations of TNCs and IP rights

Local determinants of innovation: Government policy towards TNCs

• Trade and Investment South Africa (TISA) – Links small local firms with TNCs too facilitate access export links – Promotion of a BBEE component in FDI partnerships • Incentives to relocate new machinery and equipment to South Africa • R&D tax incentives • Technology and Human Resources for Industry Programme (THRIP) • Funding for HEI and RI collaboration

Local determinants of innovation: Deficiencies of government policy

• Administrative obstacles in terms of bureaucratic delays, specifically in the case of applications for work permits for experts • STI policy focuses on R&D while ignoring the fostering of capabilities The ability of state institutions to innovate is poor • The development of basic education is slow • The protection of state owned corporations sets up obstacles to innovation; this is especially true in the case of telecommunications with restrictions on the expansion of IT investments

Local determinants of innovation: Universities and Research Institutes

• HEIs and RIs account for 21% and 17% of all R&D • Cooperation between HEIs/RIs and TNC R&D programmes (68% of foreign R&D in collaboration with HEIs and 44% with RIs) • HEI research output is low by international standards and is concentrated among few universities • Concentration in (a) geology and minerals extraction and (b) broad agriculture (specifically biotechnology) • Low and declining researcher/student ratios • Uneven flow of funding for some RIs

Local determinants of innovation: Local costs

• Labour productivity/labour costs is low by international standards • Tension between labour market flexibility and workers’ rights • Low skills base • Labour costs are only one (and not necessarily the major) determinant of FDI – Labour costs tend not to be critical for R&D intensive FDI – Skills are an important determinant for R&D intensive investment – Market access

Local determinants of innovation: other factors

• Intellectual property rights – Lack of skills in in securing IPR in universities • Education and skills – Lack of skilled personnel, specifically in engineering, sets up a major bottleneck in the flow of R&D intensive TNCs – Instances of TNC/local partnering to address specific skills shortages • BEE and equity regulations – Initially an impediment but progressively less so as TNCs become more acquainted with the local conditions

TNC/local companies spillovers and linkages

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Competition

– Evidence generally suggests that TNCs do not enhance competitive behaviour; in many instances studies have shown that the entry of a TNC has reduced competition •

Other spillovers

– Learning effects – Enhanced skills pool available to local firms (due to non appropriability) – Demonstration effects on local R&D activity (reduces search costs) – Vertical spillovers to local suppliers through technology transfer, staff training, etc.

TNC/local companies spillovers and linkages

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Negative effects

– FDI pressure can distort regulatory framework (e.g. lower taxes for export oriented FDI) – Crowing out of local investment due to preferential government treatment and access to cheaper capital – Environmental impact – Negative social impact •

Regional impact

– Spillovers: TNCs to SANSI to SADC

SA TNCs and outward FDI

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Size issues

– SA is the biggest source of FDI in Africa – Accounts for the majority of African TNCs (43 0f the largest 49)

Key sectors

– Mining and energy – Transport – Retail – Telecommunications – Financial services

Most outward FDI is in SADC, due to

– Poor infrastructure north of SADC – Cultural differences – Threshold limits on other economic activity, such as banking

Conclusions

• Lack of data and research • Effects of IP protection on R&D unclear • Volatile FDI outflows and inflows • Skills – TNCs tend to train in their relevant areas – Negative spillover of sectoral lack of skills on to other sectors – High end skills generation has been enhanced at the cost of broad based workers’ skills • SA and SADC – Start of R&D collaboration in specific R&D areas – Danger of SA dominance in the region

Conclusions

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Inter-country collaboration

– Technological gaps still not sufficiently investigated •

Limitations on state policy

– TISA and BEE – No explicit differentiation between local and foreign firms – Inability to promote spillovers – Market relevance of publicly funded R&D – Uneven geographic spread of institutional capacity to attract FDI – Policies promoting TNCs R&D may detract from the promotion of pro-poor policies – The promotion of TNCs may sideline the protection of indigenous knowledge