Modelling effects of incentives for industry competitiveness using a system dynamics approach

Abstract

Investment in state of the art machinery and tooling and in R&D is widely seen as a prerequisite for achieving industry competitiveness in the long term. Investment-based incentives that countries provide for these inputs are perceived as a way of supporting industry competitiveness. Despite this being a global phenomenon, there is no formal process to guide the offer of these incentives. The process of designing such incentives is often based on internalized judgment rather than on formal models making it difficult to assess such interventions objectively and to improve on them. Specific to South Africa, the offer of incentives to the automotive industry to support its competitiveness has had mixed results. In particular, investment in R&D has remained minimal. The paper presents a system dynamics model as a proposed instrument in formalizing the offer of incentives, applied to the South African government's offer of incentives to the automotive manufacturing sector. The model was developed from qualitative and quantitative information on how the incentives had been structured. Simulations of the model reveal that the incentives model, as a stand-alone intervention, had a significant and positive effect on industry investment, but had no specific policy lever to direct investment into R&D and subsequent innovative activities. By this measure, the incentives model has not been a strong policy framework for supporting long-term industry competitiveness.