Testing creative destruction in an opening economy : the case of the South African manufacturing industries

Abstract

This paper employs a theoretical framework that allows for both direct and indirect impacts of trade liberalization on productivity growth. Indirect impacts operate through both scale effects as well as a differential impact on firms conditional on their distance from the international technological frontier. Empirical results from panel estimations for the South African manufacturing sector are reported. Results confirm that the greatest positive impact of trade liberalization will be on small rather than large sectors of the manufacturing sector, while South African manufacturing sectors do not lag sufficiently behind the technological frontier for trade liberalization to exert a negative impact on productivity growth. While there does appear to be a positive direct impact of protection on productivity growth, the impact is small, and once indirect trade impacts are accoutned for, the net effect of liberalization on growth is positive for South African manufacturing. Further results confirm the positive impact of scale of production on productivity growth, while pricing power as well as industry concentration in the manufacturing sector are strongly negatively associated with productivity growth. Finally, while nominal depreciation of the exchange rate is associated with increased productivity growth in South African manufacturing, the effect is economically very small. Policy implications to follow from the analysis affirms the importance of trade liberalization as a means of raising productivity growth, and the inferiority of nominal exchange rate depreciation in raising productivity growth.