Modelling South Africa’s incentives under the motor industry development programme

Abstract

Despite it being a global phenomenon, there is no formal process to guide governments’ offer of incentives to industry. Specific to South Africa, the offer of incentives to the automotive industry to support its competitiveness has had mixed results. Industry trade deficit has consistently increased and investment in R&D has remained minimal. The purpose of the study was to develop a formal model to determine the effect of changes in the value and basis of the Productive Asset Allowance (PAA) incentive on industry competitiveness and on industry trade balance. An overview of the South African automotive industry, automotive policy and industry performance under the country’s Motor Industry Development Programme (MIDP) was done. This was followed by literature review on investment, investment incentives, R&D and competitiveness. Quantitative and qualitative data was collected through observer participation in the study situation and expert opinion interviews. A formal modelling process of the PAA based on the system dynamics modelling protocol followed. The PAA model had to be extended to incorporate the Import-Export Complementation (IEC) incentive structure because of the intertwined nature of the effect of PAA and IEC on industry dynamics. The study findings as per the specific study objectives were as follows: • The prospect of the PAA to support the competitiveness objective was dependent on the extent to which the incentive would motivate technological innovation in the automotive industry. • The often-assumed positive relationship between investment and investment incentives was not universal. Each case of industry incentive offer has to be judged on its own merit. • The PAA had a significant and positive effect on industry investment, but limited ability to support long-term industry competitiveness though R&D and innovative activities. • The IEC rather than the PAA incentive was the major contributor to the industry trade balance trend. • The PAA-IEC incentive model exhibited time-bound constraints. The model demonstrated saturation as benefits awarded to industry tended towards the domestic market size over time. • The PAA-IEC incentive model had no specific policy lever to direct investment into R&D and innovative activities. By this measure the model was not a strong policy framework for supporting long-term industry competitiveness. For the South African automotive industry, the study introduced and showed the usefulness of applying system dynamics modelling in understanding causes of unintended consequences of government incentives to the industry. For countries in which offer of incentives is part of the national industrial policy, the study provided scientific means through which the question of how to structure incentives can be objectively investigated as a means of improving policy decisions on such industry intervention.