Total Factor Productivity in South African Manufacturing Firms
| Date | 01 January 2018 |
| Published date | 01 January 2018 |
| Author | Carl Friedrich Kreuser,Carol Newman |
| DOI | http://doi.org/10.1111/saje.12179 |
TOTAL FACTOR PRODUCTIVITY IN SOUTH AFRICAN
MANUFACTURING FIRMS
CARL FRIEDRICH KREUSER
†
AND CAROL NEWMAN*
Abstract
We use firm-level data for the period 2010-2013 to estimate total factor productivity in the
South African manufacturing sector. We examine differences in the level and growth of produc-
tivity across manufacturing subsectors and examine the heterogeneity in productivity levels within
sectors. We find that productivity grew in most subsectors but that there is heterogeneity across
subsectors in the pace of growth. We find that firm size is positively correlated with productivity
and its growth rate. We also find that there is a productivity premium associated with engaging
in R&D and international trade.
JEL Classification: D22, D24, O12
Keywords: total factor productivity, South Africa, heterogeneity, tax administration data
1. INTRODUCTION
The importance of manufacturing and industry in economic growth is well documented
in the Kaldorian tradition.
1
Manufacturing firms are generally more productive than
firms in the agricultural or services sectors and are an important source of job creation.
2
Several studies support the primacy of the manufacturing sector in determining output
growth and employment creation (Wells and Thirlwall, 2003; Millin and Nichola, 2005;
Li and Zhang, 2008; Mahmood et al., 2014).
3
The manufacturing sector in South Africa accounts for around 13% of gross domestic
product (GDP). This is similar to Brazil (14%) but lower than Russia (16%) and India
(17%), and significantly lower than China (30%).
4
As evident from Fig. 1, the contribu-
tion of the sector to GDP has been in decline over the last two decades. Although the
contribution of the sector to output is also declining in the BRICS countries overall, the
pace of decline has been faster in the case of South Africa. Growth in the sector has been
* Corresponding author: Professor, Department of Economics, Trinity College Dublin, Col-
lege Green, Dublin 2, Ireland. E-mail: cnewman@tcd.ie
†
Economics, Stellenbosch University
1
See Targetti (2005) for a discussion of Kaldor’s (1967) contributions to development
economics.
2
Recent work by Newman et al. (2016) highlights the fact that other sectors of the economy,such
as traded services and agri-business, also hold similar potential for output, employment and pro-
ductivity growth.
3
Specifically, Millin and Nichola (2005) examine the role of the manufacturing sector in South
Africa using data from 1946 to 1998. Their findings, however, do not relate to the post-Apartheid
period.
4
These figures are from the World Bank’s World Development Indicators database (WDI,
2016).
V
C2018 UNU-WIDER. South African Journal of Economics published by John Wiley & Sons Ltd on behalf of
Economics Society of South Africa.
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which
permits use, distribution and reproduction in any medium, provided the original work is properly cited and is not
used for commercial purposes. doi: 10.1111/saje.12179
40
South African Journal of Economics Vol. 86:S1 January 2018
South African Journal
of Economics
slow relative to the rest of the economy and the sector was also hit especially hard by the
recent global financial crisis. This decline is reflected in the employment and investment
numbers, with the sector representing a decreasing proportion of the total numbers
employed and the proportion of total fixed capital formation. Moreover, Aghion et al.
(2008) highlight the poor productivity performance of the sector when compared to
manufacturing internationally and show that higher mark-ups in the sector, due to low
product market competition, has had a negative impact on productivity growth in
manufacturing.
These trends are worrying if the manufacturing sector is an important source of
employment and productivity growth. Indeed, Tregenna (2008) shows the importance of
the South African manufacturing sector as a source of demand for the service sector and
argues that declines in manufacturing growth may have had a negative impact on eco-
nomic growth. This conclusion is supported by Rodrik (2008), who attributes South
Africa’s slow growth and slow employment growth to weakness in manufacturing
exports.
5
To address these concerns, recent policy efforts in South Africa have focused on
employment-intensive economic growth with particular emphasis on the role of exporters
and the manufacturing sector in creating jobs, specifically for low-skilled workers (DTI,
2010; DED, 2011; NPC, 2011).
6
8%
10%
12%
14%
16%
18%
20%
22%
24%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Share of value added Share of fixed capital stock
Share of gross fixed capital formation Share of total employment
Figure 1. Manufacturing industry’s share in gross value added, fixed capital stock, fixed
capital stock formation and total employment
Note: All values are at constant 2010 prices. Note that the primary axis is on a loga-
rithmic scale. Employment figures are obtained from the Post-Apartheid Labour Mar-
ket Series (1994–2012) using cross-entropy weights.
Source: Authors’ calculations based on DataFirst (199422012) and SARB (2014).
5
There is some disagreement on the extent to which the decline in the manufacturing sector is of
concern for economic growth. For example, Fedderke (2014) argues that the decline in employ-
ment in manufacturing in South Africa is partially due to high total factor productivity (TFP)
growth in the sector and shows that TFP growth in manufacturing is high relative to the rest of the
economy. Moreover, growth in South Africa has been more in the service and tertiary sectors, and
so focusing on the manufacturing sector alone only gives a partial picture.
6
This is evident in the Department of Trade and Industry’s Industrial Policy Action Plan (DTI,
2010), the Department of Economic Development’s New Growth Path (DED, 2011) and the
National Planning Commission’s National Development Plan (NPC, 2011; see also Black and
Gerwel, 2014)
41South African Journal of Economics Vol. 86:S1 January 2018
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C2018 UNU-WIDER. South African Journal of Economics published by John Wiley & Sons Ltd on behalf of
Economics Society of South Africa.
Given the importance of manufacturing in the South African context, understanding
the productivity performance of the sector and its drivers is important in designing
policies to promote the growth of the sector. The recent availability of firm-level tax
administration data through collaboration between the South African National Treasury,
United Nations University World Institute for Development Economics, and South
African Revenue Services (SARS) has made it possible to accurately measure and analyse
the productivity of manufacturing firms in South Africa for the first time. Indeed, the
scarcity of South African firm-level studies has thus far been primarily driven by a lack of
data (Bhorat and Lundall, 2004; Behar, 2010). Providing accurate and robust measures
of total factor productivity (TFP) at the firm level allows for a comparison of productiv-
ity distributions and trajectories across manufacturing subsectors. It also allows for a bet-
ter understanding with respect to the heterogeneity in productivity levels within sectors
and its relationship with government policies, local labour markets and exposure to inter-
national markets, among others.
In this paper, we use the methodology of Ackerberg et al. (2006) on the South African
administrative database to analyse the evolution of productivity in South Africa’s manu-
facturing sector. We find that productivity grew on average between 2010 and 2013 but
that there are some sectors that have seen productivity decline. We also find that produc-
tivity growth is largely driven by the firms that are most productive at the start of the
period. We find significant heterogeneity in productivity within and between sectors. We
find that TFP is increasing in the size category of the firm and that TFP growth is driven
by the larger firms in terms of number of employees. We find that older firms are gener-
ally more productive as are firms that are engaged in international trade. We also con-
sider the correlation between productivity and research and development (R&D) and
find a positive relationship between R&D expenditure and TFP.
The rest of the paper is structured as follows. In Section 2, we describe in detail the
data. In Section 3, we outline our approach to estimating productivity and present our
core results. Section 4 presents a simple analysis of the factors related to productivity. Sec-
tion 5 concludes.
2. DATA
We use tax administrative data obtained from SARS for the 2010–2013 period. The pri-
mary data source is the South African Corporate Income Tax (CIT) data. CIT data are
collected by SARS annually with respect to the tax year that ends at the end of February
each year. Firms are required to submit a corporate income tax return where they self-
report items with respect to income, expenditures, equity and liabilities, capital items
and tax credits. Almost all reporting items are compulsory, although firms are allowed to
submit a “zero” where a specific field is not applicable to them. Firms are aware that they
may be audited by SARS but do not know in any given year whether they will be
selected for audit. More details on the steps involved in compiling the CIT database are
provided in Supporting Information Appendix A.
The CIT database does not include information on the number of persons employed
in the firm. We use employee income tax certificates (IRP5 forms) to construct a measure
of labour employed by each firm (see Supporting Information Appendix A for more
details). IRP5 data are aggregated for each Pay-As-You-Earn (PAYE) reference number. A
table linking the PAYE reference numbers to the tax reference number of the firm in the
42 South African Journal of Economics Vol. 86:S1 January 2018
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C2018 UNU-WIDER. South African Journal of Economics published by John Wiley & Sons Ltd on behalf of
Economics Society of South Africa.
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