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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.
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One of the basic tenets of UK industrial policy, that attracting inward investment into the UK stimulates domestic productivity growth, is examined. A model of productivity growth is developed for the indigenous sector of UK manufacturing, linking domestic productivity growth to theoretical explanations of inward investment. The paper demonstrates that inward investment does stimulate productivity growth in the domestic sector of around 0.75 per cent per annum. However, this cannot be attributed to investment or output spillovers, but is a result of the productivity advantage exhibited by the foreign firms. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester
This study found no support for the belief by the governments of most less developed countries (LDCs) that the provision of fiscal incentives is necessary to attract direct foreign investment and that the greater the generosity of these incentive programmes the greater would be the level of such investment. What mattered were the presence of natural resources and a proven record of economic performance. The provision of incentives could not compensate for the absence of either of these two factors. The study is a cross‐sectional one of 27 LDCs for the period 1965–73.
and ) argue that tax rules jointly influence investment decisions and organizational form. The present research uses Chinese data to test these assertions. Specifically, our study investigates whether (1) the creation of special tax incentive zones is an effective tax policy for China to induce new foreign direct investment (FDI) into specific regions, and (2) changes in the tax rules influence the particular form of foreign direct investment selected: equity joint ventures, contractual joint ventures, and wholly foreign-owned enterprises. Our results indicate that tax incentives are effective in attracting FDI to China, and moreover, influence the selection of a particular form of FDI. One limitation of our study is that we were unable to completely control for the correlated-omitted-variable problem.
The use of tax incentives is widespread even though the available empirical evidence on the cost-effectiveness of such incentives in stimulating investment is highly inconclusive. This paper is primarily intended as a primer on the use of tax incentives for policy makers, especially those in developing countries. It discusses the objectives, cost-effectiveness, and transparency of implementing tax incentives; assesses the comparative merits of alternative forms of such incentives; and provides a review of the empirical literature. Its main conclusions are that the justification for the use of tax incentives should be limited to the rectification of market failures, and that the preferred form of tax incentives are those that provide for faster recovery of investment costs.
A generic theoretical model is proposed that provides a holistic conceptualization of the phenomenon of changing trend of FDI flows. Integrating both institutional and strategic factors, a rationale for such a change is provided, and the circumstances under which future shifts might take place are identified. A collection of criteria and incentives that various host governments and their agencies must provide to attract FDI are outlined. Several propositions that lead to empirically testable hypotheses are developed from this model. Statistical evidence is then provided of a shift in FDI flows, and the change in their determinants, by empirically analyzing investment by US multinational enterprises into Western Europe and Asia over the 20-year period, 1981–2000.
Recent research on business investment decisions suggests that real investment in plant and equipment is quite sensitive to changes in the user cost of capital, pointing to the possibility that long-run changes in tax policy may have a significant impact on an economy's capital stock. Indeed, many countries have at times adopted investment tax incentives to stimulate investment. The prevalence of investment incentives suggests that local policy-makers believe these are effective in increasing investment at a reasonable cost in terms of lost revenue. In this paper, we explore this issue by estimating the extent to which countries are price-takers in the world market for capital goods. We find that most countries--even the United States--face a highly elastic supply of capital goods, suggesting that the effect of investment incentives on the price of investment goods is small. Hence effects of long-run changes in investment tax policy are likely to materialize in real investment rather than simply being dissipated in changes in capital-goods prices.
Copyright 1998 by Blackwell Publishers Ltd.
Italy's Law 488/1992 allows firms willing to invest in lagging areas to receive a public subsidy. By comparing subsidized firms with firms with rejected applications, this paper evaluates whether the program made investments possible that otherwise would not have been made. We find evidence that financed firms brought forward investment projects originally planned for the post-intervention period to take advantage of the incentives. We also find some support that subsidized firms may have taken some of the investment opportunities that unsubsidized firms would have exploited in the absence of incentives.
Investment in the state of art machinery, tooling, and R&D is widely seen as a prerequisite for achieving industry competitiveness in the long term. Therefore, the provision for investment-based incentives by countries is perceived as a way of supporting industry competitiveness. Despite this being a global phenomenon, there is no formal process to guide the offer of industry incentives. The process of designing such incentives is often based on intuition rather than on formal models, making it difficult to assess such industry 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 formalising the offer of incentives, applied to the South African governmentpsilas offer of incentives to the automotive manufacturing sector. The model was developed from qualitative and quantitative information on how the incentive dispensation had been structured. Simulations with the incentive model reveal that the incentive dispensation, as a stand-alone intervention, has had a significant and positive effect on industry investment, but has had no specific policy lever to direct investment into R&D and consequent innovative activities. By this measure, the model has not been a strong policy instrument for supporting long-term industry competitiveness.
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