Identifying new product and service export opportunities for south africa using a decision support model



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IDENTIFYING NEW PRODUCT AND SERVICE EXPORT OPPORTUNITIES FOR SOUTH AFRICA USING A DECISION SUPPORT MODEL1


ABSTRACT
In the face of slow economic growth and development, and the perennial problems of unemployment, poverty and inequality, the South African government and business community have long recognised the importance of growing and diversifying the country’s tangible goods and services export sectors.
One of the challenges in designing and implementing effective export promotion strategies is identifying the right markets, given South Africa’s ever-fluid skills, capacity and trading relationships. The Decision Support Model (DSM) is an export market selection tool that makes use of a sophisticated filtering process to sift through an extensive range of product-/service- and country-related data to reveal those product-/service-country combinations (‘export opportunities’) that are the most realistic and sustainable. The DSM, which has been applied for Belgium, Thailand and South Africa, not only brings greater precision to the export market selection process, but also unveils opportunities that may not have been contemplated before – thus supporting the quest for export diversification.
This paper examines the role of the DSM for products and the DSM for services, respectively, and illustrates how, using the results from the application of these models, they herald the start of a new era in export market selection and promotion in South Africa.



  1. INTRODUCTION

Like many developing countries, South Africa faces significant economic challenges, from tackling persistently high unemployment and widespread poverty, to improving the country’s image as a trade and investment partner, and generating sustainable economic growth. Many government initiatives have been launched in recent years – at national, provincial and local level – to stimulate greater economic opportunities and put the country on a better economic footing. A key component in several of these initiatives is a stronger and more focused export drive.


Export promotion is important for creating employment opportunities, generating foreign exchange reserves, and improving the living standards of a country’s citizens. However, whereas large numbers of possible export opportunities exist, relatively few have a realistic chance of being successfully exploited.
This paper first provides an overview of economic policies and initiatives introduced by the South African government in recent years, with special emphasis on their role in boosting the country’s exports.
Secondly, the paper evaluates South Africa’s current export performance and traces the country’s trade statistics since 2000. The firms responsible for generating the country’s exports are profiled, highlighting the dynamic character of the export sector. This analysis reveals that the majority of exports produced by the firms in question are within the intensive margin, which points to the need for export diversification and the role of South Africa’s trade promotion organisations in steering firms towards the most promising export opportunities.
Thirdly, the paper discusses the importance of sound and forward-thinking export promotion, and demonstrates how an international market selection method, called the Decision Support Model (DSM), can be applied to identify the most promising realistic export opportunities for South Africa’s products and services, against the backdrop of a rapidly changing international trading environment. This study updates, refines and extends – for South African conditions - the Decision Support Model (DSM) originally developed by Cuyvers et al. (1995) and Cuyvers (1996). A DSM for services was developed by Grater and Viviers (2012), and the results of the export opportunities relating to various services sectors are also analysed as an important component of the drive to diversify South Africa’s exports.
The product-country and service-country combinations identified in this study can be used by South African trade promotion organisations to inform and focus their promotion activities. These export opportunities are not only for new exporters; they can also guide existing exporters that want to expand their sales reach into foreign markets. Furthermore, they offer alternatives to current exporters that are facing saturation and/or declining growth in their traditional markets.
The research methodology and findings outlined in this paper are intended to contribute to one of the aims of the South African government, namely, to increase the country’s exports and ultimately achieve higher economic growth rates, lower unemployment and less inequality in the country.
2. RECENT SOUTH AFRICAN GOVERNMENT INITIATIVES
The importance of increased industrialisation, as well as the need to enhance and diversify South Africa’s exports, are highlighted in a number of national documents, e.g. the National Growth Path, the National Development Plan, the National Industrial Policy Framework (NIPF) (DTI, 2010a), the South African Trade Policy and Strategy Framework (TPSF) (DTI 2010b), as well as the Industrial Policy Action Plan (IPAP)(DTI, 2011).
The National Growth Path (NGP) and National Development Plan (NDP) are the two over-arching and complementary strategies that aim to guide government departments and businesses alike in their quest to achieve an inclusive, innovative and productive society.
The NGP emphasises the importance of the state in bringing about much-needed development in South Africa, as well as economic and trade policies that are designed to boost economic growth while also supporting labour-absorbing manufacturing. Furthermore, it states that South Africa should be focusing on the BRICS countries and regional partners for international trade and investment opportunities, and selecting foreign markets on the basis of South Africa’s ability to competitively and sustainably supply such markets.
The NDP also has job creation as a core component, and subscribes to the idea of the state playing a developmental and transformative role. However, it asserts that the capacity of the state needs to be built up so that it can fulfil its mandate effectively. Export growth and greater competitiveness are two of the cornerstones of the NDP, along with the recognition that other emerging economies (including the rest of the BRICS grouping) are a valuable source of export and FDI opportunities for South Africa. A recurring theme in the NDP is that economic growth and development can be accelerated if there is greater efficiency in both the public and private sectors, value-added and innovative sectors are given priority, and business, labour and government cooperate in determining the best way forward.
South Africa’s National Industrial Policy Framework (NIPF) is the government’s broad approach to industrialisation and was adopted by the National Cabinet in 2007. The NIPF seeks to encourage value-added, labour-absorbing industrial protection, and diversify the economy away from its current over-reliance on traditional commodities and non-tradable services, thus creating the catalyst for employment growth (DTI, 2010a). Other features include building a knowledge economy and enhancing the country’s productive capacity, especially among previously disadvantaged and marginalised communities. Key ingredients in this process include innovation, education and skills development, a sector-specific focus, and a trade policy framework that supports greater inroads being made into the African continent and South-South collaboration.
The Industrial Policy Action Plan (IPAP) was adopted by the National Cabinet in 2010 (DTI, 2011). Its latest revision, IPAP2, identifies priority sectors for industrialisation, and outlines associated actions and success factors. A major theme of IPAP2 is the need for South Africa to diversify its export mix, and focus on value-added manufactured and service exports that can help to address unemployment and poverty head on. The TPSF, in turn, which was released in 2010 and supports the objectives of South Africa’s industrial policy, clarifies the country’s trade initiatives at multilateral, regional and bilateral levels, and suggests various tariff adjustments with a view to boosting trade.
Given the knowledge and skills deficiencies that permeate the export sector in the country, the DTI’s recently launched (in 2013) National Exporter Development Programme (NEDP) is particularly timeous. The NEDP is a multi-faceted initiative aimed at boosting exporter readiness through the identification of viable products and markets, as well as training, knowledge sharing, and support. Small businesses are the primary target of the development programme, which takes its broad direction from the NDP, NGP, NIPF and TPSF. According to the DTI, “the programme aims to build on existing activities and capacities at the DTI, provincial economic development departments, provincial trade and investment agencies, the Small Enterprise Development Agency (SEDA), and other international and local stakeholders to ensure the delivery of key interventions to emerging and experienced exporters” (Parsons, 2013).
Even the most well-informed and coherent trade policies and initiatives cannot on their own deliver on the challenges of diversifying the export mix, gaining greater market access, and seeing off the competition. Much is dependent on whether the business environment is conducive to the development and expansion of a viable export sector. This assumes, inter alia, that businesses have sufficient incentive to get involved in exporting, and can rely on ongoing and accessible information and practical assistance from both government and private sector trade specialists.
3. EXPORTER DYNAMICS
3.1 South African exports
Since the onset of the new millennium but before the global financial crisis, South Africa experienced an average annual export growth rate of 14.32% (in nominal value terms). Since 2008 (through 2012), the growth rate averaged 6.37% (UnctadStat, 2013). Unfortunately, in volume terms, a similarly bleak picture has emerged. According to Parsons (2013), export volumes grew by only 3.9% between 2000 and 2007, and since 2008, the growth rate has declined to 2%.
For many years, South Africa’s top export destinations were mainly the high-income countries, such as the United States, Germany, the United Kingdom and Japan. However, given the growing influence of the emerging markets and the slowdown in the United States and Europe in recent years, South Africa’s trade alliances and patterns have been changing. China is now South Africa’s largest single export destination, although Europe remains the country’s biggest export region. Africa, though not without its challenges, is seen as a priority by South Africa’s trade officials, as is the BRICS grouping, though time will tell whether BRICS will deliver economic benefits in addition to its obvious political benefits.
South Africa’s export performance is extremely important to the country’s overall economic wellbeing, contributing 29% to the country’s GDP in 2011 (World Bank, 2013). Despite appeals and efforts to build capacity in the manufacturing sector and increase the range of value-added exports, South Africa is still very reliant on commodities for its export earnings. Metals and mineral products, for example, account for at least 50% of the country’s merchandise exports. Relatively little agricultural output finds its way to export markets. However, one shining star in terms of its ability to deliver large volumes of high-value manufactured exports is the automotive industry, which has benefited from a very focused government investment and export promotion campaign in recent years.
Among the many challenges that South Africa’s exporters have to face is the reality of the country’s declining global competitiveness, which is making it increasingly difficult to run successful operations and attract sustainable business. Though it is a very complex problem that requires a collective effort to fix, competitiveness needs to take centre stage in South Africa’s export promotion efforts.
Taking an aggregate view of a country’s export performance, however, encourages blunt policy interventions like high-level trade agreements, or incentives that benefit only specific industry interest groups. To achieve focus in the country’s export drive, more needs to be known about the firms that export and their behaviour. The following sub-section puts South Africa’s exporters under the microscope.
3.2 South African exporting firms
In 2012, the World Bank published a new database on exporting firms. The Exporter Dynamics Database contains customs data from 38 developing and 7 developed countries spanning the period 2001 to 2009 (Cebeci et al., 2012). This database provides information on different types of exporters, which illustrates the dynamics of exporting firms. Cebeci et al. (2012:15) offer the following definitions of firms included in the database:



  • An exportert is any firm that exports in year t,

  • an entrantt is a firm that does not export in year t-1 but exports in year t,

  • an exitert is a firm that exports in year t-1 but does not export in year t,

  • an incumbentt is a firm that exports in both years t-1 and t

  • a survivort is a firm that does not export in year t-1 but exports in both years t and t+1.

The point of departure in describing the dynamics of South African exporting firms is to consider their basic characteristics, i.e. arrive at a profile of the types of firms that get involved in exporting. Table 1 presents this information for the period 2003 to 2007, as this timespan coincides with the data used in the application of the DSM (see section 5). The number of exporters declined somewhat during the period, whereas the average export value per exporter increased. Furthermore, the number of new exporters decreased, but the number of firms no longer exporting also tapered off. This was also evident in the firm entry and exit rates. On average for the period, the firm survival rate was 47% (this shows that 53% of new entrants in a particular year did not export in the following year). The number of incumbents remained more or less steady over the period, and the same holds for the number of survivors. Moreover, the growth rate of the incumbent exporters over the 5 year period was 6% and that for survivors was 34%. New entrants contributed very little (2%) to the total export value.


Table 1: Basic characteristics and firm dynamics in South Africa’s export sector




2003

2004

2005

2006

2007

Average

Number of exporters

22 544

21 661

20 634

21 251

21 399

21 498

Number of entrants

7 852

6 936

5 853

6 114

5 904

6 532

Number of exiters

8 328

7 819

6 880

5 497

5 756

6 856

Number of survivors

3 194

2 906

2 946

3 026

2 983

3 011

Number of incumbents

14 692

14 725

14 781

15 137

15 495

14 966

Firm entry rate

35%

32%

28%

29%

28%

30%

Firm exit rate

36%

35%

32%

27%

27%

31%

Firm survival rate

41%

42%

50%

49%

51%

47%

Average export value per exporter (in SA rands)

1299333

1712595

2075348

2272435

2706501

2013242

Source: World Bank (2012)
The second aspect to consider when examining firm dynamics is the export growth rate over the period. More specifically, the goal is to determine whether the growth in total export value (19% from 2003 to 2007) was the result of increases in the number of exporters (the extensive margin) or increases in the average size of established exporters (the intensive margin). From the calculations it is evident that the growth of South Africa’s exports was the result of the intensive margin, i.e. the average export value of existing exporters increased. A further decomposition of the period shows that the share of the top 1% of exporters in the total export value was 77%, the share of the top 5% of exporters in the total export value was 91%, and the share of the top 25% of exporters in the total export value was 99%. This represents a high concentration of exports in the hands of a relatively small number of established firms. The rest export very little.
For the majority of countries, particularly those in the middle and high-income categories, most export growth takes place in the intensive margin, i.e. selling more of the same products to the same markets (Brenton & Newfarmer, 2009). This is certainly true for South Africa as well (see Table 2). As is the case with other developing countries, it is critically important for South Africa to expand its exports in the extensive margin, which includes creating new trade flows through new product innovation and selling existing products to new markets. This diversification will reduce the country’s vulnerability to external shocks. However, to achieve long-term, broad-based growth, a large cross-section of firms must be able to take advantage of the identified export opportunities (Reis & Farole, 2012:5). Furthermore, it is important that these firms are able to overcome the many constraints that are threatening the firms’ export operations in their early, start-up phase.
A study of African exporters by Cadot et al. (2011a) found that less than 20% of new export initiatives survive the first year. Recent research on export survival suggests that exporting has an element of ‘learning by doing’ to it, and that exporting the same products to other markets, or exporting other products to the same markets strongly increases the chances of export survival. Furthermore, export survival appears to be affected by spill-overs. For example, Cadot et al. (2011b) found that the prospects of a firm surviving in exporting improve in line with the number of other firms also exporting the specific product to a specific market. These findings highlight the importance of knowledge spill-overs across exporters, and point to the potentially valuable role of trade promotion agencies in facilitating information exchange and collective action (Reis & Farole, 2012:5).
Table 2: Intensive and extensive margin in South Africa’s export sector




2003-2004

2004-2005

2005-2006

2006-2007

Average

Intensive margin

117.04%

133.97%

75.47%

96.17%

105.66%

Extensive margin

-17.04%

-33.97%

24.53%

3.83%

-5.66%


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