Trade, productivity and efficiency: testing for innovative spillovers from Asia’s newly industrialized countries (nics) on manufacturing in South Africa
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Date
2019
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University of Zululand
Abstract
This study primarily speaks to the current debate on technology transfer by testing whether Chinese, South Korean and Japanese service imports affect productivity and efficiency of South Africa’s manufacturing industries through transferring innovation embodied in foreign services. This is a relatively underexplored area as previous literature on international technology transfer has given more attention on imports of physical goods.
In achieving the central aim of the analysis, the study makes several contributions to the body of knowledge. Firstly, it modifies and improves open economy endogenous growth theories by accommodating trade in services as a channel through which technology can be transferred across borders. Secondly and most importantly, it constructs a composite innovation spillover index that comprises several indicators of innovation namely R&D stock, researchers in R&D sector, trademarks and patent applications. Thirdly, it applies a Bayesian approach in one of the chapters (chapter five) which allows us to circumvent model uncertainty in the technology transfer model. Fourthly, unlike the majority of previous studies, it also focuses on technical efficiency as the outcome variable which allows us to establish not only whether Chinese, South Korean and Japanese innovation spillover pushes domestic technology frontier outwards but also how it influences the industries’ movement towards the existing technology frontier. Fifthly and for the first time in literature, it examines the response of labour productivity to exogenous innovation shocks through impulse response functions derived from the local projections method.
Using the R&D stock measure and physical intermediate imports as the transmission mechanism, the study is able to first replicate the result obtained in previous studies that innovation spillovers from China, South Korea and Japan significantly influence productivity growth of manufacturing industries in South Africa and that the effect increases with institutional quality and human capital accumulation. In particular, Generalised Method of Moments (GMM) results in chapter four confirm that Chinese, South Korean and Japanese innovation spillovers raise total factor productivity of South Africa’s manufacturing industries in the 0.003 – 0.012 per cent, 0.005 – 0.022 per cent and 0.0150 – 0.0151 per cent range respectively. When the study moves from the simple R&D stock measure and physical intermediate imports to a composite innovation measure and service imports as the transmission channel in chapter five based on a Bayesian analysis, the study reaches a different conclusion which is that China’s imported innovation exerts a negative effect on total factor productivity of South African manufacturing industries in the -0.015 – 0.176 per cent range. For South Korea and Japan, the effect is plausible and positive in the 0.023 – 0.061 per cent and 0.132 – 0.141 per cent range respectively which is consistent with open economy endogenous growth theories.
Chapter six focuses on labour productivity in the entire manufacturing sector. Results based on the Autoregressive Distributed Lag (ARDL) model are similar to those reported in chapter five despite the use of different outcome variables (i.e. labour productivity and total factor productivity). It is confirmed that South Korean and Japanese innovation spillovers are positively associated with labour productivity and the results are robust to alternative estimators and the decomposition of the total
x
sample. For China, the result of a negative effect on productivity still emerges this time in the – 0.01 – 0.036 per cent range.
Chapter seven focuses on technical efficiency as the outcome variable and the results from a True-Fixed effects stochastic frontier model show that innovation spillovers from South Korea and Japan improve technical efficiency of manufacturing industries. South Korean spillovers have a larger effect (0.310 per cent) when compared with Japanese spillovers (0.129 per cent). Meanwhile, China still enters with a negative effect on technical efficiency which is akin to a positive effect on technical inefficiency.
With respect to the local projections method in chapter eight, it is empirically confirmed that productivity growth in South Africa’s manufacturing sector increases with Japanese and South Korean exogenous technology spillover shocks particularly in long term horizons (above 6 quarters). For China, South Africa’s productivity response is significantly negative.
At the outset, the study raises four arguments. Firstly, Chinese innovation reduces productivity growth adding to the on-going concerns of China’s resource predatory presence in Africa. Secondly, innovation imported from the remaining countries particularly Japan and South Korea correlates positively with domestic productivity and the effect increases with human capital accumulation and the quality of institutions. Thirdly, despite observing a positive effect innovation from Japan and South Korea on domestic productivity, it is domestic innovation that enters with the most sizeable effect implying that foreign innovation should not substitute but rather complement domestic innovation efforts. Fourthly, trade in services plays an important role in transferring innovation across international boundaries.
As far as domestic industrial policy is concerned, the policy implication arising from this study is that service trade with Japan and South Korea is a relevant mechanism through which South Africa’s manufacturing industries can make technological upgrades but that with China should be a source of concern and an important area that requires further research. Two possible explanations for China’s negative effect are suggested. Firstly, China’s services in Africa hardly employ domestic workers as they normally come with their own workforce. This means when Chinese services (or service providers) leave South Africa, none of their technology is left for the domestic manufacturing industries to utilise. Secondly, China has been recurrently accused of providing services in Africa at the expense of natural resource extraction. This implies that the technology effect of China might be outweighed by the resource extraction leading to an overall negative effect of Chinese presence.
For South Korea and Japan in which the technology spillover effect is positive, evidence suggest that the effect is smaller when compared to that of domestic innovation index implying that Japanese and South Korean imported innovation ought to be treated as a complement rather than a substitute of domestic innovation effort. Also confirmed is that the positive impact of imported innovation increases with human capital accumulation and institutional quality implying that domestic absorptive capacity plays a huge role in ensuring that South Africa is able to fully absorb technology coming from Japan and South Korea
Description
Thesis Submitted for the Degree of Doctor of Philosophy (PhD) In the Department of Economics Faculty of Commerce, Administration and Law at the University of Zululand, 2019.
Keywords
Trade, industrialized countries (nics), manufacturing