Addressing the apartheid industrial legacy: local economic development and industrial policy in South Africa the case of Ekurhuleni

Transcription

1 Addressing the apartheid industrial legacy: local economic development and industrial policy in South Africa the case of Ekurhuleni Johannes Machaka and Simon Roberts Corporate Strategy and Industrial Development research project School of Economic and Business Sciences University of the Witwatersrand Private Bag X3 WITS 2050 Tel: Abstract It is well established that there are collective economic gains that can be realised from local industrial agglomerations. These gains arise from labour market pooling, knowledge and information flows, collective learning and shared business services. Realising the potential gains requires collective action, often facilitated by government and other public institutions. Recent economic policy in South Africa has recognised this potential and has placed great responsibility on local government structures to design and implement integrated development plans. This paper examines what this means in the context of the nature and performance of South Africa s largest industrial concentration, in Ekurhuleni, and the legacy of apartheid industrial policies. 1

2 1. Introduction A new emphasis has been placed on local economic development in South Africa with all municipalities required to draw up integrated development plans. Ekurhuleni is one of five new metropolitan municipalities created in major urban concentrations in the last five years. Unlike the other metropolitan municipalities, it does not represent the extension of an existing city but the amalgamation of several towns. And, Ekurhuleni covers the largest concentration of industrial activity in South Africa, and in sub-saharan Africa. This industrial concentration initially developed on the back of mining, both directly in supplying gold mines with machinery, explosives, and other hardware, and indirectly in meeting the demand from the incomes generated. This legacy is reflected in the structure of industry in Ekurhuleni. Ekurhuleni accounted for 37% of South African output of machinery and 33% of metal products in A major market for both of these sectors is the mining industry, while metal products derive their inputs largely from steel which is made from South Africa s iron ore and cheap coal-derived energy. This article examines the role of local government in industrial development in the context of the imperative of addressing the apartheid legacy as part of economic restructuring and transformation. In doing so it reflects on recent literature examining local industrial development, including contributions explaining agglomeration effects, industrial districts, the development of local economic competencies and institutions, and issues of governance. The industrial policy of government has to some extent made reference to such literatures, in employing a concept of value-matrices and aiming to increase the knowledge-intensity of manufacturing (DTI, 2002). Moreover, an important role is specified for local economic development in the implementation of industrial policy. These policies face the legacy of the targeted industrial policy of the apartheid regime which favoured heavy industry, and reflected the political and economic importance of the mining sector (Fine and Rustomjee, 1996). The significance of heavy industries means that they continue to wield considerable influence. The different literatures on local economic development and industrial policy are briefly reviewed in section 2. We draw out particular implications for local economic development in existing industrial concentrations with particular structural characteristics. Section 3 describes the structure of industry in Ekurhuleni, and its recent development. This draws on a manufacturing firm survey and interviews conducted in Section 4 analyses the implications from the case of Ekurhuleni for a local economic development model to effectively implement an industrial policy for broad-based industrial development and employment creation. Section 5 concludes. The economy of Ekurhuleni Metro Ekurhuleni is an economy of 2.4 million people and is the largest industrial concentration in sub-saharan Africa. It is the workshop of Africa due to its importance as a manufacturer of metals, machinery and appliances. But, it has been relatively poorly performing by comparison with the other large Metropolitan Municipalities in South Africa. This largely reflects the relatively poor performance of manufacturing nationally in the last decade. But, it also reflects the structure of manufacturing in Ekurhuleni. Manufacturing in Ekurhuleni is dominated by downstream manufacturing using material inputs such as basic chemicals, steel, and aluminium which are manufactured elsewhere in the country. The performance of the 1 Calculated from data in the latest available manufacturing census, for

3 Ekurhuleni economy is thus a reflection of the poorer performance of more labour-intensive downstream manufacturing compared with capital-intensive sectors such as non-ferrous metals, basic chemicals and iron & steel. This is also reflected in higher unemployment rates than other major urban centres, and lower levels of per capita income. For example, based on the 2001 Census, the unemployment rate in Ekurhuleni is 40 per cent, compared with 35 per cent for all of Gauteng, and annual per capita income is R compared with R for all of Gauteng. 2. Local economic development and industrial policy Despite international trends to liberalisation and increased international flows of goods and capital, industrial activity is more and more concentrated in local regions or districts (Helmsing, 2001). Different explanatory frameworks exist to explain these phenomenon ad their implications. The new economic geography associated with Krugman emphasises externalities, such as associated with labour markets and skills development, specialist inputs required by firms, and technology spill-overs (see, for example, Krugman, 1998a and b). As firms locate close to markets, so specialisation in a particular location can be a result of historical accident and can persist after the initial demand stimulus has receded in significance. This further implies that purposeful action is required to develop new industrial districts, and that the firm groupings will need to get to a scale where there is division of labour within the cluster (Helmsing, 2001). The realisation of agglomeration effects associated with externalities also implies the need for co-operation between firms. In contrast, a focus on the organisation of production, rather than market failures in exchange underpins frameworks that explain the dynamic of local economic development and the collective development of firm competencies at the local level (Best, 2001; Schmitz, 1995). This approach highlights the gains from collective learning in an evolutionary framework, with informal networks, common understanding and trust all enabling the realisation of collective gains. The learning of firms in developing production capabilities, and research & development activities, are areas in which collective action by government and firms has an important role (Helmsing, 2001). Such action can establish institutions which provide services and training, so enabling positive externality effects (or spill-overs ) to be built on. For example, there may be common elements in the development of a process technology by two firms in different sectors. Or, investment in training by firms contributes to a pool of skilled labour which all may draw from. This role for the public sector is also highlighted by Best (2001) as one of the important features of developing production systems and more dynamic business models. Value chain frameworks highlight the importance of linkages, and they raise questions of governance by firms at different levels in the chain. Governance also relates to the organisation of inter-firm relations, including in the provision of common services, in the nature of business associations, and in government s industrial policy frameworks (Helmsing, 2001). International experience of the development of industrial districts and local industrial clusters demonstrates the importance of the public sector in creating appropriate institutions (see, for example, Best, 2001, Sheehan and Grewal, 2000, and Park, 2000). The institutions may be developed in conjunction with business associations, and represent collective action responses to market failure. In the celebrated case of Emilia-Romagna the regional development agency 3

4 established a network of general, sector-specific and function-specific centres to provide services to targeted industries. The centres were jointly managed with business associations. Important areas for institutional actions are in areas such as education and training, and support for research and development. The institutional framework is, however, broader than this as, taken as a whole, it is effectively the means through which information and integration are achieved. Drawing on these frameworks, local economic development and industrial policy can be approached through understanding: firm production capabilities and performance; firms strategies and decisions (such as around training); the nature of inter-firm relationships; and the role of local government. In this approach, we recognise the potential for positive externality effects and spill-overs, which drive processes of cumulative causation in the returns to firms from location decisions. It is also important to understand the position of firms in terms of their vertical and horizontal relationships, and the role of large firms in governing value chains (Kaplinsky, 2000). Lastly, the orientation of firms and their relationships with government are influenced by the historical development of capitalism in a country (Chandler et al., 1997 and 1998). 3. Industrial performance and industrial restructuring, the case of Ekurhuleni It is important to situate the performance of industry in Ekurhuleni and the implications for local economic development within the wider context of the restructuring of industry nationally, and of the impacts of national trade and industrial policies. In addition, the firms located in Ekurhuleni are part of value chains which spread nationally and internationally. For example, sector case studies reported on in companion papers on metal products and plastics find that the strategies of major upstream producers in ferrous and non-ferrous metals and basic chemicals located elsewhere in South Africa have major implications for the performance of groups of industries in Ekurhuleni. We start by briefly reviewing national trends in manufacturing in section 3.1, before examining manufacturing performance in Ekurhuleni, drawing from a firm survey. 3.1 National trends in manufacturing Manufacturing has undergone far-reaching restructuring under trade liberalisation and increasing international integration. At the same time, the tightening of macroeconomic policy to reduce the government budget deficit and higher interest rates aimed at reducing inflation has meant that demand has been weak and investment by firms has remained at very low levels. With greater competition from imports, and weak overall growth rates, manufacturing employment levels fell sharply as firms sought to increase productivity in a contractionary environment. The 1990s also saw a decline in mining and an apparent shift away from the natural resource oriented industrial development which had characterised the apartheid industrial strategy. This has major implications for the economy of Ekurhuleni, which had been strongly linked to the demand from mining. This might have been expected to herald a new industrial development trajectory, with the growth of more broad-based manufacturing rather than the capital-intensive and resource-based industries supported by successive National Party governments. But, despite trade liberalisation and sharply higher real interest rates, the main feature of developments in the 1990s is the continued better performance of capital-intensive industries. In terms of output growth, the performance of the auto sector under the Motor Industry 4

5 Development Programme has been very impressive, although the sector has not recorded any net increase in employment. After motor vehicles the best performing sectors from 1997 to 2002 are the heavy industries of basic chemicals, basic iron & steel, and basic non-ferrous metals, none of which has recorded significant job creation. The sectors in which Ekurhuleni is best represented, such as metal products, other chemicals, plastics and machinery & equipment have tended to perform less well. The performance patterns suggest the importance of previous government policies, and path dependent factors meaning that firms which have developed productive strengths are able to re-invest and continue to grow their businesses. Perhaps the best example of this is Sasol, which leads local industry in ongoing R&D spending to continuously improve its capabilities. The result, however, has been that capital-intensive sectors have continued to grow output, while many labour-intensive sectors have contracted. Such patterns have been reinforced by IDC lending in the mid 1990s which went predominantly to large-scale capital-intensive operations such as the Saldanha steel plant and Alusaf aluminium smelter. Indeed, there is a correlation of capital intensity and output performance over the ten years from 1992 to 2002 (Figure 1). Figure 1. Output growth (%) and factor intensity in manufacturing Capital:Labour ratio, Rth 1000 R 2 = Average annual output growth, Source: Calculated from TIPS data Notes: Capital:labour ratio is measured in thousands of Rand of capital stock per employee in The coke & refineries sector was not included in the figure as it has a capital:labour ratio of R7237 thousand. Altering this dynamic requires concerted government policies, including reoriented IDC lending patterns, incentive measures and skills development. It also requires the strong and effective representation of the interests of downstream and more labour-intensive industries, which can be an integral part of building local industrial clusters. We pick up on these issues following from the firm survey results. 5

6 3.2 Industrial structure and broad patterns of development in Ekurhuleni In the Ekurhuleni Metropolitan Municipality the manufacturing sector accounts for the largest share of gross value added, with 27.5 per cent. This compares with a share for manufacturing nationally of 18.8 per cent. There is a similar concentration in terms of employment, with manufacturing accounting for the largest share at 22.9 per cent. Manufacturing has, however, performed relatively poorly, with an average annual growth of value-added of just 0.4 per cent between 1997 and 2002 (lower than the national manufacturing annual growth of 2.3 per cent). Industrial structure The development of the Ekurhuleni economy has mainly reflected sources of demand, both demand from mining, and consumer demand from Johannesburg. Manufacturing therefore combines a mixture of intermediate goods such as machinery and metals, and more consumer oriented products such as other chemicals (which includes, soaps and paints), food products and plastic products. Of the major manufacturing groupings, the broad grouping of metals, machinery & appliances is by far the largest. This sector however experienced major contractions in activity (valueadded) in 1998 and 1999 (Figure 2), in line with this grouping s performance at the national level. The grouping has since recovered, but value-added remains lower than at its peak in Figure 2. Value-added, of manufacturing sub-groupings constant 1995 prices (R 1000) Food, beverages and tobacco products Textiles, clothing and leather goods Wood and wood products Fuel, petroleum, chemical and rubber products Other non-metallic mineral products Metal products, machinery and household appliances Electrical machinery and apparatus Electronic, sound/vision, medical & other appliances Transport equipment Furniture and other items NEC and recycling Source: Global Insight By comparison, the fuel, petroleum, chemical and rubber products sector has performed better over the period as a whole. The other grouping with significantly positive overall performance is the transport equipment grouping (which includes motor vehicles). There is quite a different picture for employment with little recovery from the massive job losses sustained between 1996 and 1999 in metals, machinery & appliances (Figure 3). The other non-metallic minerals grouping, which includes cement, also shed labour at an alarming rate in 1998 and 1999 reflecting the overall economic slump. 6

7 Figure 3. Formal employment, of manufacturing sub-groupings Food, beverages and tobacco products No.of employees Textiles, clothing and leather goods Wood and w ood products Fuel, petroleum, chemical and rubber products Other non-metallic mineral products Metal products, machinery and household appliances Electrical machinery and apparatus Electronic, sound/vision, medical & other appliances Transport equipment Furniture and other items NEC and recycling Source: Global Insight Groupings with the best employment performance overall are wood & wood products and fuel, petroleum, chemical & rubber products although net employment gains have been marginal. The performance of the Ekurhuleni economy can therefore be understood in terms of the structure of its manufacturing industry and the overall patterns of industrial development. As the major location for the production of metal products, machinery and plastics, accounting for around one-third of total South African output in these sectors, the Ekurhuleni economy suffers when these sectors perform poorly. For example, the demand for structural metal products depends on investment spending in the economy as a whole. The low levels of investment, such as in infrastructure, therefore directly impacts on employment in Ekurhuleni. The effects of industrial structure are also felt in the linkages between sectors. Downstream industries such as plastics and metal products rely on the steel, aluminium and chemicals industries for their inputs. These industries in South Africa are dominated by one or two large-scale producers. Despite low cost South African production of these materials importparity pricing means that none of the benefits are passed on to plastics or metal products firms who have to pay a price as if they were buying from imported sources. A key concern of industrial policy is therefore how to shift the balance from the heavy industries producing upstream goods to downstream labour-intensive industries which predominantly constitute the industrial base in Ekurhuleni. 3.3 Analysis of Ekurhuleni firm survey data The firms survey aimed to draw a picture of the nature of manufacturing in Ekurhuleni and the factors underlying firm performance. Information was collected on firm performance, market conditions and competitiveness, investment and technology, education and skills development, and government policies. A total of 383 firms responded, of which the largest number of firms were in the metal products sector, followed by the chemicals, machinery & equipment and rubber & plastics sectors (Table 1). 2 2 The represents 19% of the total list of manufacturing firms in Ekurhuleni to which the survey was sent. 7

8 Table 1. Summary of firms surveyed by sector No. of firms Average size Avge ann empl growth Food and beverages products Textiles, leather and clothing Pulp and paper products Chemicals Rubber and plastic products Glass, cement, brick-making etc Machinery and equipment Electrical machinery Metal products Motor vehicles and transport Wood and wood products Electronic and other appliances Construction Other Notes: Firms could select more than one sector in which they participated. Only firms that completed the employment question were considered for average size and average employment growth. The firms in the survey recorded employment totalling in 2002 with an average of 74 per firm. Most firms are in the small size category. Only 29 firms had over 250 employees and 83 had between employees. Average size also varies greatly across sector with much larger firms in sectors such as paper & pulp, and glass & cement, compared with electronic appliances, electrical machinery and textile, leather & clothing where firms average size is small. Firm performance Performance of firms surveyed has been relatively good reflecting the better performance of the economy as a whole up to Almost half of the firms recorded employment growth between 2000 and 2002, with approximately one-quarter recording a decline. The average change in employment was an increase of 2.4 per cent per annum. In terms of turnover, the number of firms recording turnover growth in excess of 10 per cent increased to 164 in 2002 from 102 in 2000 (Table 2). Table 2. Firms annual growth rates in turnover/output (number of firms) Turnover growth rates: <0% 0-10% >10% Reflecting the relatively better performance in 2001 and 2002, all manufacturing sectors in the firm survey recorded employment growth with the exception of textiles, leather & clothing (Table 1). The highest average annual employment growth rate was recorded by the food, beverage & tobacco sector with an 17.4 percent increase, followed by wood & wood products at 12.2 percent and rubber and plastic products at 10.8 percent (Table 1). The high average increases in employment also reflect better performance by medium sized firms in particular, followed by small firms (Table 3). More than half of medium firms have increased employment and recorded turnover growth in 2002 of more than 10 per cent. Small 8

9 firms have also performed relatively well in terms of employment. But, the performance of small firms in terms of turnover is weaker and that of micro firms is poorer still. Conversely large firms are likely to have grown turnover, but have low average increases in employment, reflecting very large retrenchments in some firms. Table 3. Firm size distribution, and performance by category No. of firms Avge % employment growth, Proportion of firms increasing employment, % Proportion of firms with high turnover growth (>10%) in 2002, % Micro (0-5 employees) Small (6-49 employees) Medium ( employees) Large (>250 employees) As would be expected firms with lower turnover growth also tended to record poor employment performance. Market conditions and firm competitiveness Unsurprisingly, there is a very strong orientation to local markets. Most firms sold the majority of their output in Gauteng, with a large proportion being sold in Ekurhuleni. Exports are relatively low with few firms exporting more than 20 per cent of their output. The importance of local demand was also highlighted in that Ekurhuleni was identified as the place where demand had grown most in the previous 12 months. Of concern is that just under 70 per cent of firms operate below 80 per cent capacity utilization, and 9 per cent operate below 50 per cent utilization. Low levels of capacity utilization suggest low demand for products and the inability of firms to penetrate other potential markets. It also indicates that there is an existing platform for growth once the local economy starts to recover. Firms with some exports (even if small) are, however, better performing. Close to 60 per cent of firms that export recorded positive employment growth compared with 44 per cent of nonexporters. 3 And, 41 per cent of exporting firms have high turnover growth (greater than 10 per cent), compared with just 25 per cent of non-exporters. 4 By firm size category, more than 70 per cent of medium and large firms are engaged in exports, compared with 44 percent of small and micro firms. 5 Similar patterns are evident with regard to inputs. Small and micro firms are more likely to use locally produced inputs than larger firms. 28 percent of medium and large firms import the majority of their inputs as opposed to only 11 percent of small firms. 6 While the sheer concentration of industry, and the proximity of the largest consumer market in the country, mean the extent of local supply is unsurprising, it does not follow that there are also strong local linkages that support improved production capabilities along the value chain. Indeed, given the inland location of Ekurhuleni, the proportion of firms importing the 3 Significant at 5% level. 4 Significant at 5% level. 5 Significant at 5% level. 6 Significant at 20% level 9

10 majority of their inputs is surprising. And, of greater concern is that these firms are also slightly more likely to have recorded better performance. Despite linkages not appearing to be strong, the importance of firm strategies which are based on production capabilities and being able to timeously deliver the quality and type of product customers require is highlighted by much of the survey results. While firms in the survey rated quality and price as the most important factors for their competitiveness (Figure 4), firms focusing on quality and delivery time tend to be better performing. Firms that rated quality as very important for competitiveness were 24 per cent more likely to have grown employment. 7 And, firms that ranked delivery as very important for competitiveness were 16 per cent more likely to have increased employment. This suggests that firms realise that people will pay for quality products, while delivery times suggest the significance of good logistics and transport infrastructure. Figure 4. Importance of factors for firms competitiveness 250 No. of firms very high high medium low zero 50 0 Price Quality Design Delivery time Dist/marketing That firms whose strategies are oriented to non-price factors perform better is strongly reinforced by findings on production costs, investment and training. Across all these areas, firms which have taken the high road of skills development, upgrading machinery and equipment and, as a result, have increased spending on wages, as well as on delivery, have reaped the benefits in terms of higher turnover growth and employment levels. Firms overwhelmingly ranked raw materials as the largest production cost, followed by wages and salaries. These are also the cost categories in which firms were most likely to have experienced cost increases in excess of 10 per cent (Table 4). This is consistent with the sharp price increases experienced in import-parity priced materials such as steel and polymers. Weak local supply linkages are also reflected in the fact that the 23 per cent of firms sourcing the majority of inputs from abroad are slightly better performing than firms using mainly local materials. 7 Significant at 5% level. 10

11 Table 4. Number of firms recording different changes in production costs over past yr Negative 0% 0-10% >10% Raw materials Interest charges & depreciation Wages and salaries Delivery and marketing Firms with high increases in wages and salaries are not more likely to have reduced employment, suggesting that salary increases are also linked to upgrading of skills and productivity. And, firms with above 10 per cent increases in wages and salaries were 23 per cent more likely to have recorded high turnover growth. 8 Firms experiencing high increases in the costs of delivery and marketing were also 38 per cent more likely to have recorded high turnover growth. 9 Together these suggest that growing firms are ones which have invested in skills and better delivery and service. This is consistent with the better performance of firms choosing to compete on quality rather than price. Investment and technology There seems to be a mismatch between the importance of technology and the average age of machinery. While a majority of firms rated the importance of up-to-date technology for competitiveness as high or very high, the machinery & equipment of most firms in the survey is old. 38 per cent of firms reported an average age of machinery of more than 10 years and a further 41 per cent an average age of between 5-10 years. Medium and large firms are more likely to have old machinery than smaller firms. Between 2001 and 2002 most firms did increase their investment rates and in 2002 investment averaged R2.6mn per firm while investment per employee was R Investment in domestic and imported machinery & equipment grew by 35 per cent and 22 per cent respectively from 2001 to Investment in new vehicles recorded the biggest increase at 46 per cent although it still only accounted for 17 per cent of total capital investment by firms in Domestic machinery & equipment accounted for the largest share of new investment made in 2002 with 49 per cent followed by imported machinery & equipment at 21 per cent. Larger firms were much more likely to have made investments in 2002, and to have increased their investment levels. All large firms made some investment in 2002 and 66 per cent had increased the amount of investment over the 2001 level. This compares with 75 per cent of medium firms having made investments, 60 per cent of small and 34 per cent of micro. 10 While the importance of up-to-date technology was not directly associated with better employment and turnover performance, there was a strong positive association between investing and better performance. Firms that had increased employment were 30 per cent more likely to have made investments in 2002 and 46 per cent more likely to have increased investments. 11 And, firms that recorded high turnover growth were 33 per cent more likely to have investments in , and 23 per cent more likely to have increased investment. 13 Exporting firms were also slightly more likely to have made investments in 2002 and to have increased investment. 8 Significant at the 10% level. 9 Significant at 5% level. 10 Significant at 5% level 11 Significant at 5% level 12 Significant at 5% level 13 significant at 10% level 11

12 Firms indicated a number of factors as being the main motivations for investment (Figure 5). By far the most important factor is expected sales growth, followed by raising efficiency and the need to improve quality through employing more up-to-date technology. Increased exports and pressure from competitors were also identified as important but not that significant. 140 Figure 5. Motivations for investment No. of firms most important very important important least important not important domestic demand/expected sales growth 0 increase export competitiveness pressure from competitors raise efficiency through technology improve quality through technology Important motivations for investment other Rather than investment being labour replacing as firms increase automation, the survey results strongly suggest that firms which are upgrading their capital stock are more competitive and that this is part of a dynamic growth path which involves increases in output and employment. There is also a virtuous link with domestic demand. This is consistent with the relatively low levels of capacity utilisation. In this context increased demand allows greater capacity utilisation and firms can increase retained earnings used to finance investment. It suggests both that tight macroeconomic policy and low levels of investment have been damaging for the competitiveness of manufacturing firms, and that a move towards a more neutral macroeconomic policy will have a major stimulus in the longer-term through increased investment, as well as in the short-term. Education and skills development Similar issues emerge from the survey results on education and training. While overall education levels are poor, reflecting the legacy of apartheid on the mass of the population, there is a dynamic group of firms that are building production capabilities through training and are not held back by education levels. In other words, it is the strategy and orientation of the firms that is more important; average levels of education of the workforce was not a determinant of performance. In so far as the skills development levy induces firms to increase their training activities, it reinforces the positive dynamic which is evident from the survey results. 12

13 Just 35 per cent of firms reported the average level of education of their workforce as being matric level, and a further 11 per cent reported the average level as post-matric training or a tertiary qualification. Interestingly, smaller firms tend to have higher average levels of education. Close to 50 percent of small and micro firms had an average level of education of either matric or above, compared to 41 percent of medium and large firms. There is no difference, however, in terms of performance between firms with different average levels of education. Rather, it is firms use of the skills development levy and their training expenditures which are linked with better performance. 36 per cent of firms claim back the skills development levy, with a strong bias towards large and medium firms. 90 per cent of large firms claim the levy, compared with 61 per cent for medium, 27 per cent for small and just 8 per cent for micro firms. Firms claiming back the levy were 23 per cent more likely to have recorded employment growth and 46 per cent more likely to have high turnover growth. 14 Claiming back the levy is also strongly associated with firms investment record. Firms that claimed back the levy were 57 per cent more likely to have invested, and 39 per cent more likely to have increased investment. 15 The total spent on training by firms surveyed in 2002 was R101 million, of which R51 million was spent on in-house training and R50 million was spent on training conducted outside the firm. This equates to an average of R3700 per employee. Large and medium firms were much more likely to train, and more likely to use outside training providers. Firms which spent on training were also 61 per cent more likely to have increased employment and a massive 86 per cent more likely to have recorded high turnover growth. 16 The preferred sources of outside training are industrial training boards and private training schools followed by business partners, technikons and universities. Government support incentives and polices The survey collected information on national policies and on local economic development priorities. The findings suggest that while the national incentives have not been widely used, the provision of public transport and reliable services are both crucial issues for improving manufacturing performance. In terms of national incentive programmes for industry, the survey revealed that a very small proportion of firms have actually used incentives although awareness is relatively high (Figure 6). Overall, 16 per cent of firms have used any one or more incentives. The most widely used incentive is the Small & Medium Enterprise Development Programme (SMEDP) used by 7 per cent of firms (SMEDP), followed by the Export Marketing & Investment Scheme (EMIS) used by 6 per cent of firms, and the Export Finance Scheme. The purpose of EMIS is to assist exporters for costs incurred in developing export markets. The least used incentive scheme is the Sector Partnership Fund with only three firms. 14 Significant at 5% level. 15 Significant at 5% level. 16 Significant at 5% level. 13

14 Figure 6. Number of firms aware of, and using, incentives aware used No. of firms comptitiveness fund sector partnership fund SMEDP venture capital THRIP innovation fund SPII standard leased scheme export finance scheme export markt & inves As might be expected, use of government incentives is strongly associated with firm size. 59 per cent of large firms have used at least one incentive programme, compared to 26 per cent of medium firms, 11 per cent of small firms and just 2 per cent of micro firms. This suggests an urgent need to make the programmes more accessible to small and medium firms, especially as the survey evidence is that these firms are much more likely to be creating employment. It is concerning that overall, firms using incentives are not more likely to be better performing, to have invested or to be exporters. Two individual schemes the SMEDP and EMIS - do stand-out, however. Firms using the SMEDP are 27 per cent more likely to have recorded employment growth 17 and are 55 per cent more likely to have high turnover growth. 18 Firms using the EMIS are 39 per cent more likely to have recorded employment growth 19 and 22 per cent more likely to have recorded high turnover growth. Despite being its primary target, smaller firms are still less likely to have used the SMEDP than larger firms. The two most important local economic development policies were identified by firms as being reliable services, and ensuring reliable and safe public transport (Table 5). Moreover, these are particularly important for the more dynamic firms. Following this, were policies to ensure a high quality of life and reasonable tariffs. Over fifty per cent of respondents identified local economic development policies as being important in supporting skills training. Firms that rated reliable services as important were 45 per cent more likely to have high turnover growth. 20 And, firms that identified public transport as an important local economic policy were 55 per cent more likely to have recorded high turnover growth. 21 This is consistent with the need for better public transport if firms are to move to running more shifts, 17 Significant at 20% level. 18 Significant at 5% level. 19 Significant at 5% level. 20 Significant at 5% level. 21 Significant at 5% level. 14

15 directly increasing employment and the usage of capital stock. Other obstacles to investment and growth, such as crime, are also clearly areas for action by local government. Table 5. Local economic development policies identified as important % of firms Supporting skills training 54 Marketing the area 39 Ensuring reasonable tariffs Overall quality of life Reliable services (elec, water) 87 Public transport Industrial policy at Metro and national levels The painful restructuring process undergone in a contractionary environment was confirmed by in-depth interviews held with more than 50 firms, business organisations, institutions and organised labour. The interviews broadly confirmed the patterns evident from the statistical data. In particular, they reinforced the difference between firms which have taken a defensive cost-minimisation approach, and those which have been able to develop a more constructive strategy based on upgrading capabilities. Overall, however, the environment to support the second orientation is weak, and there are important areas where collective action initiatives are required. To develop these themes we briefly discuss issues of location, linkages and institutions in more detail. Location, linkages and agglomeration effects As revealed in the survey data, and reinforced by firm interviews, agglomeration effects appear to be relatively weak despite the concentrations of firms in related activities. The historical decisions of firms to locate in the area were generally based on the proximity to market, but linkages do not appear to have been deepened. This reflects the historical reasons for the growth of industry in Ekurhuleni, and the lack of any coherent industrial policy by the apartheid government for the development of downstream manufacturing. Static, cost-based, advantages were also highlighted by firms as underpinning their location decisions, such as the availability of relatively cheap factory space and good infrastructure. Firms view competition as fierce and are generally not pursuing co-operative strategies to realise collective benefits such as in penetrating new markets, adopting new technologies or in addressing skills needs. The retrenchments in the second half of the 1990s across almost all industries means that skills shortages have not been as important as might be expected. One result of this has been firms scaling down their training facilities. Instead there has been a shift towards using labour-contractors to increase short-term flexibility and reduce labour costs. This is part of a narrow focus on cost-minimisation strategies in response to restructuring pressures which has been reported on in several industry studies (see, for example, Roberts, 2001; Roberts and Thoburn, 2003 and 2004). Large employers acknowledged in interviews that this is potentially creating major problems as the system of apprenticeships is breaking-down and alternatives to meet skills needs when growth resumes will take time to implement. 15

16 The survey results reflect these patterns, but also provide important indicators as to the emergence of an alternative development path. In particular they indicate that those firms which have followed a longer-term constructive strategy of investing in their production capabilities, rather than short-term cost minimisation strategies, have reaped the rewards and recorded higher turnover performance and have created employment. This is reflected in the results across the different areas of the survey, including the competitive orientation of firms, investment, skills development, and spending on delivery and marketing. Overall, positive linkages and agglomeration effects have not extended beyond being located close to major markets and the benefits of proximity in being able to draw on a ready supply of labour. The latter effect has supported shifts towards short-term labour contracting which in itself militates against longer-term approaches to building capabilities. There has been relatively little development of deeper co-operative relationships between firms, such as around skills development, learning and developing production capabilities, and more effective sourcing of inputs and negotiation of the price of those inputs. 22 The dynamic in many sectors remains one driven by the power of the upstream producers of products such as steel and basic chemicals, or by the large and powerful downstream purchasers such as the mines. This reflects the dynamics of the apartheid industrial development trajectory and represents major challenges for local economic development policies with regard to industry. Institutional considerations The network of institutions is very important for the realisation of collective benefits from externalities and agglomeration effects. Beyond this, they are central to the development of local competencies in industrial districts and the governance of inter-firm relationships governing common services and functions, and the dynamic evolution of industrial groupings. The historical context of Ekurhuleni means that institutions at the Metro level are weak. The bringing together of nine different towns, which largely saw themselves as rivals, meant that the common institutions had to be built. New institutions have also been established under provincial and national initiatives, such as the BlueIQ, GauMAC, and Sector Education and Training Authorities. Two levels can be distinguished. At the more fundamental level, the challenge is to address the historical orientation of firms, and the broad legacy of the apartheid industrial structure. This requires addressing the balance of power through building more coherent bodies representing the interests of downstream manufacturing, small and medium enterprises, and empowerment and equity objectives. At the second level, the challenge is to provide appropriate institutions to support firms adopting more constructive strategies. This is provided for in the skills development framework and policies to develop technological capabilities. 23 These measures need to be fully realised. At present, predominantly large and medium firms draw back the skills development levy for training initiatives. And, the auto sector is the only really notable case of effective local initiatives for industry, such as the supplier park in Rosslyn. This reflects the well-organised and influential nature of the motor vehicle producers. 22 Collective action appears only to be occurring where there are concerns about crime. The responses are limited in that they represent a cost-sharing of improved security arrangements such as cameras and personnel. 23 For example, the technical centres envisaged under the Advanced Manufacturing Technology Strategy of the Department of Science and Technology. 16

17 The industrial base in Ekurhuleni reflects existing strengths in sectors such as plastic products, foundries, and mining machinery. Interventions need to develop appropriate measures to support firm capabilities, training, and collective learning in these sectors, in conjunction with the building of more coherent industry organisations. With the relative weakness of such organisations, there is a much greater onus on government to play a leadership role. 5. Conclusions The industrial structure of the Ekurhuleni economy is particularly reflective of South Africa s industrial development under apartheid. Key characteristics include the importance of the broad grouping of metal products and machinery stimulated by the demand from mining. While production capabilities of firms reflect the stimulus of specific niches such as products within mining machinery, overall the industries have suffered from the lack of government support for the downstream and relatively labour-intensive manufacturing which predominates in Ekurhuleni. Government support under apartheid for strategic industries in basic iron & steel and basic chemicals means South Africa has industrial strengths in these sectors, but this has not translated into advantages for downstream industries using these materials as inputs. Instead, vertical linkages are weak and import parity pricing by the upstream firms means that downstream industries pay for steel and basic chemicals as if they had to import them. The ability of firms to respond to the changed incentives under liberalisation depends on their production capabilities in terms of their ability to enter export markets and draw on international sources of technology. Unfortunately, the relatively weak position of most manufacturing firms meant that increasing international integration of the South African economy in the 1990s brought painful restructuring and large employment losses. The outcomes are reflected in much higher levels of output growth being recorded for large-scale and capital-intensive sectors such as non-ferrous metals, basic chemicals and basic iron & steel, while overall manufacturing performed poorly. The Ekurhuleni firm survey came after a degree of recovery had been recorded in 2001 and It provides important information by which to assess the position of firms, and provides a basis to identify the characteristics of better performing firms. The findings strongly support a framework based on understanding firm production capabilities, and suggest areas for policy action to support a dynamic growth path for manufacturing from here on. Better performing firms are those that are not focusing on price, but on quality and delivery for competitiveness. Moreover, they are investing in upgrading their machinery and in skills. Both of these are linked with employment growth meaning that, although firms may becoming more capital-intensive, this tends to be part of a dynamic growth path and not a simple substitution of capital for labour in a static context. An important result is that it is not higher levels of education as such that characterises better performing firms, but the engagement in training and skills upgrading, including drawing on the skills development levy. This suggests that although many firms cut back on their training facilities in the 1990s as they sought to cut costs, there are signs of a reversal under the emerging policy framework. The dynamic firms cut across size categories, with medium firms on average performing better. But, it is perhaps unsurprising that small firms are less likely to be making investments, to be training and to be using incentives and government support programmes. Making such measures more readily accessible is an important challenge for government. 17

18 The size of the Ekurhuleni economy and its location in South Africa s economic heartland is reflected in the sourcing of inputs and the main markets for outputs of firms being in the Province. But, this does not appear to have translated into strong local linkages to realise agglomeration effects. And, firms using locally produced materials do not perform any better than those importing the majority of their inputs. Taken together, these findings suggest a very important role for industrial policies to provide appropriate support for building technical capacities, and for training facilities, sourcing of inputs, logistics and infrastructure. At the more fundamental level, the re-orientation of South African industrial development requires translating the priorities expressed in government policy documents to measures for industries that are less well organised, composed of large numbers of small and medium firms and are relatively labour-intensive. A co-ordinated approach embodying the evolving technology mission, industrial policy and skills development framework requires local institutions to encourage firms to realise the benefits from co-operation as part of building vibrant industrial clusters. But, the legacy of high levels of support for the concentrated, largescale upstream industries is that they continue to build their own capabilities and to represent their interests very effectively, both to government and in governance of the value chains of which they are part, meaning that the industrial performance of the last decade reflects strong elements of continuity. References Chandler, A. jr, F. Amatori and T. Hikino (eds.) (1997), Big business and the wealth of nations, Cambridge: Cambridge University Press. Chandler, A. jr, P. Hagström and Örjan Sölvell (eds.) (1998), The Dynamic Firm, Oxford: Oxford University Press. Dunning, J. (ed.) (2000) Regions, Globalization, and the Knowledge-based economy, Oxford: OUP. Fine, B. and Z. Rustomjee (1996) The Political Economy of South Africa- from Minerals- Energy Complex to Industrialisation London: Hurst Helmsing, A.H.J. (2001) Externalities, Learning and Governance: New Perspectives on Local Economic Development, Development and Change, 32, Kaplinsky, R. (2000) Globalisation and Unequalisation: What can be learned from value chain analysis? Journal of Development Studies, 37(2): Krugman, P. (1998a) Space: The final frontier, Journal of Economic Perspectives, 12(2), Krugman, P. (1998b) What s New about the New Economic Geography?, Oxford Review of Economic Policy, 14(2),