Incentives and South Africa's automotive industry performance : a system dynamics approach

Abstract

Investment in robotic automotive manufacturing and inherent electronics has played a pivotal role in the growth and competitiveness of the South African automotive industry. Government's offering of incentives was intended to lessen the cost of local industry’s expensive, but necessary investment. Despite the growth, industry trade balance has been declining systematically. To explain the apparent contradiction in industry performance, a model of South Africa’s automotive incentives – including the Productive Asset Allowance (PAA) and the Import-Export Complementation (IEC) – was developed. Model simulations reveal that, while the IEC had a significant effect on the industry trade balance, the role of the PAA in this regard is trivial. Ultimately, the study reveals that combining strictly investment incentives with other ‘non-investment’ incentives can have unintended consequences for the local automotive industry.