Infant industry protection of manufacturing firms in the context of international fragmentation: Evidence from South Africa

Abstract

The survival of vulnerable manufacturing firms within infant industries in African countries is threatened by competing final goods imports from foreign more established competitors. The low survival rate of such firms negatively impacts the countries’ economic growth and development. The infant industry protection framework has over the decades been widely purported as key to the growth and nurturing of vulnerable firms, however, its implementation in African countries has been lacking. Nonetheless, its conventional and principal mechanism of application through high import tariffs, quotas and complete bans on competing imports, resulting in the isolation of vulnerable industries from global trade has been deemed too costly and less practicable in poor economies. At the same time, the global economic climate has been rapidly evolving over the past few decades. The advent of the pivotal international fragmentation phenomenon has induced an insurgence of global trade in intermediate inputs that are fundamental to manufacturing processes, particularly in high-technology manufacturing. African countries generally impose high import tariffs on such inputs; a scenario that worsens the survival prospects of their vulnerable nascent firms that utilise the inputs. There is a dearth of literature on studies that integrate infant industry protection into the contemporary international fragmentation system using imported intermediate inputs as the nexus of the configuration. Applying the infant industry protection theory to tap into the benefits from both these paradigms, this study aligns infant industry protection with international fragmentation while retaining a core infant industry protection aspect of improving the survival prospects of vulnerable nascent manufacturing firms. In contributing to theory, this thesis characterises instantaneous integration into international fragmentation as a primary feature of the protection framework while advancing a mere survival motive (rather than a costly dominance motive) based on a low cost of protection in resource-constrained African developing countries. Practically, this study contributes by formulating a novel set of policy prescriptions suitable for application to vulnerable firms in medium to high-technology manufacturing industries. A positivist, deductive, variable-oriented policy evaluation study based on a policy-scenario simulation quantitative analytical technique using a computable general equilibrium model was designed. Because of the complex global trade systems associated with international fragmentation, an apt advanced Multi Region Input Output (MRIO) database that uniquely and accurately allocates imports by agent and region was incorporated in evaluating the impact of imported intermediate inputs tariff reduction on the value of exports from South Africa’s electrical and electronic manufacturing industry. Results indicated an overall 21.36% gain in export value suggesting that a tailormade infant industry protection framework that is integrated into and aligned to international fragmentation could more realistically, and cost-effectively enhance firm survival in a resource-constrained African economy.