Development Southem Africa Vol. 21, No. 4.

October 2004

^ f e Carfax Publishing

Development Debate and Practice

Investment in South Africa - a comment on recent contributions

Simon Roberts^
This article questions the interpretation of investment made by Fedderke et al. in the October 2001 issue of Development Southern Africa, in particular the conclusion that the higher investment rates of manufacturing in the 1990s are associated with the reduction in state intervention. Rather than improved manufacturing investment, the striking feature ofthe 1990s is the low level of investment by the government and parastatals. After making a brief review of investment perfonnance over the past decade, manufacturing invejstment at the sectoral level is assessed, highlighting the very large investments in heavy industries. It is state support in the form of development finance from the Industrial Development Corporation that underlies these pattems. and not the withdrawal of the state as argued by Fedderke et al.

1. INTRODUCTION Cross-country studies of growth have consistently found investment to be a significant determinant, especially investment in infrastructure, machinery and equipment (Easteriy & Rebelo, 1993; De Long & Summers, 1993; Temple. 1998). The high ieveis of growth attained by newly industrialising countries have also been characterised as 'investment-led' (see. for example. Rodrik, 1995). The South African govemment placed investment at the core ofthe Growth, Employment and Redistribution (GEAR) macroeconomic strategy (Department of Finance, 1996). Yet, few direct mechanisms were put in place to increase investment. It was largely assumed that macroeconomic stabilisation would in itself encourage investment. The South African investment record has been very poor. According to the South African Reserve Bank, resources allocated to investment as a proportion of gross domestic product (GDP) declined from 19,1 per cent in 1990 to 14.7 per cent in 2001. In the 1970s it had averaged 26.9 per cent. By comparison, high-growth countries such as Malaysia have had investment rates over 30 per cent and, even with the financial crisis of 1997, the rates did not fall below 20 per cent. An understanding of what drives investment is therefore of critical importance. In addition, investment is doubly important in South Africa as the economy undergoes protracted and painful restructuring associated with liberalisation. Restructuring implies that some sectors contract and production shifts to sectors in which the economy is more competitive and/or has greater future potential. Without new investment, productive capacity in potential growth sectors does not expand and the economy gets the 'pain" with little of the supposed "gain".

'Associate Professor. School of Economic and Business Sciences, University of the Witwatersrand. Johannesburg. South Africa. Research assistance was provided hy Johannes Machaka. The article also benefited from the comments of two anonymous referees. ISSN 0376-835X print/ISSN t470-3637 onlinc/04/040743-14 2004 Development Bank of Southern Africa DOI: 10.1080/0376835042000288897

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Figure 1: Investment and real interest rates in South Africa Notes: Real interest rate is calculated from the rate on govemment bonds (0-3 years) and consumer price inflation. The interest rate therefore does not fully reflect changes in short-term interest rates, including the four lOO-basis point increases in interest rates instituted by the South African Reserve Bank in 2002. Source: Calculated from South African Reserve Bank data. Based on an assessment of investment rates over the three periods 1970-9, 1980-9 and 1990-7, Fedderke et al. (2001) argue that South African investment rates can be explained largely by the real user cost of capital, capital productivity and uncertainty associated with political transition. This, they believe, is exactly as economic theory would predict. However, the causal relationships underlying investment are very complex and there is a great deal of disagreement among economists about them. This article comments on Fedderke et al.. together with articles by Fedderke (2001) and Gelb (2(X)1). The discussion highlights the difficulties in understanding investment, primarily through a review of data on South African manufacturing investment. Section 2 gives a brief overview of the investment data. Section 3 makes a more detailed evaluation of the data on manufacturing investment since 1990 and the interpretation of Fedderke et al. Section 4 concludes, and suggests altemative factors that need to be taken into account in understanding investment. 2. THE RECENT INVESTMENT RECORD IN SOUTH AFRICA At 14.7 per cent of GDP in 2001. the ratio of gross fixed capital fomiation (GFCF) to GDP was at its lowest level for more than 20 years (Figure I). While there are many factors contributing to the fall, the real cost of borrowing (i.e. the interest rate corrected for inflation) rose sharply in the 1990s as the govemment tightened monetary policy in order to reduce inflation. This mechanism works by putting downward pressure on lending, thereby reducing demand. It also makes investment more expensive to finance. Tlie Soulh African investment and growth record is also poor in comparison with other middle-income countries (Table 1). Middle-income countries grew on average by 3,5

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per cent from 1990 to 1999, compared with just L9 per cent for South Africa. South Africa had one of the lowest investment rates in 1999, even compared with Asian countries affected by financial crisis and macroeconomic instability. South Africa also had the lowest rate of capital expenditure by the government, compared with countries for which data were available. Part of the ratitmale for constraining government expenditure was to lower the government's budget deficit, but South Africa's deficit was already relatively low in 1998 after the tightening of fiscal policy in the preceding three years. The private sector accounts for the majority of investment in Soulh Africa, with a share of 74,9 per cent in 2001. While private investment rates have not been strong in the 1990s, weaker investment has been due largely to iower levels of investment by the govemment and pubiic corporations. The share of the general govemmeni in total investment fell from 17,9 per cent in 1990 to 15,5 per cent in 2001, and the sbare of public corporations dropped by a far greater extent, from 16,5 to 10.6 per cent. The value of economic infrastructure under the control of the government and public corporations, including roads, bridges, dams, water supply, telecommunications and electricity increased in real terms at an annual average rate of just 0,4 per cent from 1994 lo 2001. This is far below the rate of growth of the economy, and far below the target growtb rates. It is calculated from the South African Reserve Bank data on tixed capital stock at constant 1995 prices. The rate of growth is low despite the inereased investment by Telkom in telecommunication.^, classified under public corporations. Indeed, tbe lower aggregate rates of investment in the 1990s are due almost entirely to the lower investment in infrastructure by the govemment and publie corporations. Tbe recent study of the capital market and investment from 1970 to 1997 by Fedderke et al. (2001) finds the most striking feature to be the stronger investment performance of manufacturing relative to other sectors in the 1990s. While this is due at least partly to the decline in public sector and parastatal infrastmctiu^ investment, Fedderke et al. find that manufacturing investment in machinery and equipment has indeed risen in the 1990s. The rise is attributed lo ihe more cl'licient functioning of linancial markets due to reduced state involvement, and the declining influence of primary products (mining). They also argue that market forces have brougbt the retums to investment more in line with the costs of capital. The continued relatively poor investment perfomiance into the 1990s is further attributed to increased political uncertainty. This article addresses these issues in tum, critically appraising the analysis made and assessing il in the light of more recent dala and a closer assessment of manufacturing periomiancc al the sector level. 3. INVESTMENT IN MANUEACTURING AND SECTOR DEVELOPMENTS The fact that the highest rates of growtb in capital st(x;k in ihe 1990s were recorded by manufacturing sectors is argued by Fedderke et al. (2001) to be evidence of the removal of distortions in South African capital markets. At several points, it is also suggested that the govemment bas crowded out private investment in the past, but that this has altered during the 1990s. This is referred to as a 'structural change". These benefits from removing govemment distortions are also at the centre of Fedderke's (2(X)1) work on growth. The analysis of Fedderke et al. proceeds through several descriptive stages hy sector for the period 1970 to 1997. They examine the total capital slock of different sectors of the economy, the growth in capital stock and investment rates. The higher ranking

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of manufacturing sectors in the 1990s is noted as a key development and is explained by the declining 'distortions' due to primary commodities and govemment-led investments. For example: Once again, therefore, the evidence suggests the plausibility of a distortion in the South African capital markets owing to heavy reliance on the mining of primary cotnmodities during earlier phases of development of the South African economy, and the presence of substantial government-led investment in capital stock in a number of core sectors (electricity, gas and water; petroleum refining), (p. 449) And so: The gradual disappearance of a reliance on primary commodities in the South African economy, and reduced state involvement in 'strategic' investments, have at least plausibly triggered a restructuring of the South African capital market, (p. 500) They go on to argue that sectors that have been 'crowded out' from funds for investment are those showing strong growth in capital stock during the 1990s. They continue in Section 3 to explore pos.sible explanations of investment changes in the user cost of capital and capital productivity, and find both to be important. Where productivity is strongly correlated with the user cost, they find higher growth in capital stock which they read to be evidence that well-functioning capital markets generate higher investment rates. In another article (Fedderke, 2(XK). repeated in Fedderke. 2001). a third determinant of investment is found to be the uncertainty associated with political transition. The present article examines the sectoral data on manufacturing in more detail before assessing to what extent this can, in fact, be characterised as a withdrawal of the state, and in particular, we look at the role of the Industrial Development Corporation (IDC). We then address some issues of uncertainty and investment in a separate section below. At the outset, it is worth noting that the use of rankings by Fedderke et al. to assess fixed capital stock and investment rates across sectors means that higher ranks for manufacturing sectors can equally be viewed as falls in the ranks of other sectors. The 'structural change' is therefore due partly to the very low levels of investment by the government and parastatals already noted. Low levels of machinery investment in areas such as electricity, gas and water in the 1990s are mainly due to Eskom's large investments in electricity generation in the previous decades. New investments will have to be made in the future as demand catches up with supply capacity. This is in sharp contrast to govemment investment in electricity, gas and water being characterised as a distortion. Viewing govemment infrastructure investment as a distortion also Hies in the face of studies that have found that investment in infrastructure is a key determinant of growth (see, for example. Easterly & Rebelo, 1993). Contrary to the pattems noted by Fedderke et al., the performance of the manufacturing sector has been poor over the last decade, with average annual growth in output of just 1 per cent from 1990 to 2001. There have also been large employment losses. There were, however, significant fluctuations over the decade, which significantly influenced their results due to 1997 being the last year in their analysis. A year-by-year appraisal indicates that both output and investment grew strongly in the mid-1990s, with a 6,5 per cent increase in output in 1995 and a huge 20,6 per cent increase in investment (Figure 2). It is notable that in the period 1993-5, capacity utilisation increased

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Figure 2: Percentage change in manufacturing output, employment and investment Source: Calculated from South African Reserve Bank data. alongside growth in investment, suggesting that demand factors were largely driving the growth. In 1996 and 1997, the pattern reversed. While investment continued to increase, as did output, the growth in t)ulput did not keep up with the increased production capacity, as indicated by falling capacity utilisation. Furthermore, the increase in investment in 1994 and 1995 wa.s due largely to non-ferrous metals, and in 1996 and 1997 it was due to just two subscctors, namely basic chemicals and iron and steel. Excluding these subsectors, manufacturing investment was stagnant after 1995. In several sectors, such as machinery, metal products, textiles, footwear, wood products, glass paxlucts and furniture, higher rates of investment in the early to mid-1990s faltered in f996 and 1997. These are relatively labour-intensive subsectors in which there needs to be sustained growth in production capacity if there is to be increased employment generation (see also Machuka & Roberts, 2003). The stagnation in the second half of the decade coincided with high real interest rates and weak aggregate demand. Investments in basic iron and steel alone accounted for 14 per cent of total manufacturing investment in 1996 and 16 per cent in 1997 due mainly to large-scale projects with IDC support, such as Columbus stainless steel and Saldanha (Table 2). Similarly, very large investments in non-ferrous metals made in 1993, 1994 and 1995 included those in the Alusaf project. These investments represent a large increase in production capacity, but are lumpy in nature and quite different from sustained investments in increased capacity across manufacturing. Note that taking just investment in machinery and equipment, as do Fedderke et al. (2{K)]), lessens the relative size of these investments, as an important part ofthe investments were construction of new factories.

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Greenfield investments such as these cleariy represent fixed capital stock and should not be omitted. The study's comparison of 1997 with 1990, 1980 and 1970 in order to identify changes in investment pattems means that it captures the five years of positive growth in manufacturing investment which ended in 1997, while by the end of the decade investment levels had fallen again. The main increases in manufacturing investment in the mid-1990s were, therefore, very closely linked to primary resources - both directly in the fomi of smelting of ores, and indirectly in being ver>' energy intensive (and hence linked to coal). In addition, the decline in the significance of primary products of which Fedderke et al. make much is also overstated, especially when more recent daia are examined. If one examines only primary and secondary .sectors (in order to abstract from the increasing importance of .services), then one finds that the share of mining has in fact increased in recent years. Mining accounted for 23 per cent of the output of primary and secondary sectors in 2002. up from a low of 18 per cent in 1997 (calculated from current price GDP data). 3.1 Withdrawal uf the state from finaucial markets? It is difficult to argue that the major increases in manufacturing investment in the mid-1990s in iron and steel and non-ferrous metals represent improved allocation of finance due to the withdrawal of the stale. These investments were strongly supported by the stare-owned IDC and involved a very small number of large companies. Economies of scale and capacity utilisation are important factors for the large and lumpy investments in these sectors (see, for example. Makhaya et al.. 2(K)2). Togetlier with the very large investment by telecommunications parastatal Teikom in 1998. the major capital projects in the iron and steel and non-ferrous metals sub-sectors account for almost all of the overall rise in the GFCF to GDP ratio in the mid-1990s up to 1998. Rather than being surprising, therefore, the fall of the inve.stment ratio from 1999 in fact represented a return to the lower levels at which it has remained under tbe prevailing macroeconomic environment. Active state policy can be seen in other manufacturing sectors tliat have increased investment, such as motor vehicles and leather products. "Hiese sectors have been heavily influenced by the Motor Industry Development Programme (MIDP) (see. for example. Black. 2001). It is notable that the performance of leather products contrasts with footwear, which performed pooriy. Growth in leather products is mainly accounted for by leather seat-covers for cars. The motor vehicle sector itself also had above-average rates of growth in investment. It is notable that the incentives of the MIDP rely on the ongoing protection of the local market, as this provides the benefit of earning duty-free import licences. The scheme is similar in some ways to the programme used to develop the car industry in South Korea, where firms were forced to export if they were to be allowed to import some foreign manufactured m(,>dels (Am.sden. 1989). This achieved the dual goal of forcing firms to work for competitiveness in intemalional markets, while maintaining a level of protection in the domestic market to enable capabilities to be developed. The MIDP is aiso notable as a sector-specific programme based on a clear understanding of lhe structural changes required in the sector, such as the rationalisation of models and the achievement of scale economies. It had clearly specified objectives, time-frames and mechanisms. Its weakness is perbaps that it favours the export of very high-value items.

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such as catalytic converters and seat leather, rather than more labour-intensive components. Fedderke et al.'s (2001) analysis of tbe underlying causes rests on an assertion that more efficient markets have brought returns to investment in line with the costs of capital across sectors. However, the study neither effectively measures the cost of capital across sectors nor the productivity of capital, and so cannot reach any conclusions about the relationship between them. Instead, in the study, the cost of capital is measured by the economy-wide long-term interest rate and not the interest rale actually faced by companies in different subsectors (including cheap finance made available by the IDC). Simiiariy, no sectoral data are available on the effective taxes paid. The only variable in the calculation that differs by sector is the depreciation on capital stock. Instead of the marginal productivity of capital (i.e. the increased output that would result from an increased unit of capital), the study calculates only the average output produced per unit of machinery. Unsurprisingly, this is highest for sectors intensive in labour, including skilled labour. After the 'other manufacturing' category, the highest output to machinery ratios are found in wearing apparel, instruments, machinery manufacture, and footwear. In addition, recent manufacturing sector studies, such as of the auto and textile sectors, point to the importance of scale effects and the need to modernise capital stock in response to increased import competition (Barnes, 2(X)0; Black. 2001; Roberts & Thobum, 2003). For example, mucb of the textile sector in the 1990s operated with Ux^ms that were more than 20 years old, producing for the domestic market. Trade liberalisation and intemational competition meant that investment in new machinery was required in order to improve production capabilities and survive. 3 ^ The IDC and tbe fuiancing of investment The IDC provides both loan and equity finance, mainly for new projects, at low interest rates. (This is true for the 1990s heing focused on here, although the IDC has increased interest rates to commercial levels in recent years.) Its advances directly accounted for around 12 per cent of gross domestic fixed investment in manufacturing from 1998 to 2000 (IDC, 200ia. 2001b). The IDC's impact is much greater than ihis, as it invests alongside private .sector agents, meaning that projects with significant IDC participation account for a very large proportion of manufacturing investment. The projects in the non-ferrous metals and basic iron and steel sectors with major IDC participation alone accounted for approximately 25 per cent of total manufacturing investment from 1992 to 1997 (IDC, 1997). The IDC provided R14,l billion of the R25.4 billion of investment In these projects which, given the submarket interest rates, implies a very significant level of support. This means that the IDC's decision making is certainly one ofthe largest determinants of manufacturing investment. It has historically been oriented to the development of extremely large-scale minerals beneficiation projects and bas close links with previously state-owned industrial enterprises such as Iscor and Sasol, as well as tbe major conglomerates. In 1998. the IDC owned 11,3 per cent of Gencor, 14,4 per cent of Iscor, 9,1 per cent of Billiton and 8,2 per cent of Sasol. Tbis has changed to some extent in recent years with the sale of some of its equity holdings, but the IDC is still a major player in heavy industry. The significance of tbe IDC in manufacturing investment contradicts the assertion by

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Fedderke et al. (2001) that ihe improvements in manufacturing investment up to t997 represent the bciier timctioning of the financial system with the reduction of slate involvement. It appears to be precisely the success of public institutions that is responsible for the higher investment, as the IDC has been very successful in its own right in being entirety self-sustaining due to the good performance of most of its investments. Fedderke et al. essentially start from an assumption that markets are efficient. Most economists would agree that financing of investment is an area where this assumption is least warranted (Stiglitz, 1993. 1998; Rodrik. 1999). Tbe nature of finance, and in particular the importance of infomiation, mean that market 'failures' are intrinsic to the financial sector rather than being rare and temporary' aberrations. Tbe far-reacbing interventions in tbe financial sysicm by East Asian govemments sucb as in South Korea and Taiwan were a very important part of tbeir ability to support large-scale investments in developing new industrial capabilities (Harris, 1988; Amsden. 1989; Wade. 1990; Rodrik, 1999). The IDC's orientation did perpetuate the bias to capital-intensive manufacturing linked to its heavy indu.stry orientation. From June 1994 to June 1999, over half tbe IDC's investments by value were classified as being in basic metals (IDC, 1999). Based on data for 1993 to !99S. the IDC invested an average of R8,2 million in creating an additional job in the basic iron and steel sector and R5,5 million in non-ferrous metals. A greater focus on small and medium enterprises (SMEs) and on tourism and agriculture projects in the last tbree years bas shifted tbe project mix to some extent in favour of employment creation. Lending to SMEs accounted for around 75 per cent of the number of projects and 15 per cent of the amount of finance authorised in 2001. (SMEs are delined by tbe IDC as those with total assets oi less than R30 million.J 3 3 Uncertainty and investment In addition to ibe cost of capital and capital productivity, Fedderke (2O(X)1 also finds both systemic and sectoral uncertainty to be important determinants of investment. Tbe implications of uncertainty for investment and related policy recommendations are also empbasised in Gelb (2(H)1). In particular. Fedderke employs an index of 'systemic uncertainty", wbicb includes measures of political instability and property rigbts. and finds it lo be an impwrtaiit explanation of investment and growtb. Tbis leads to discussions of low growth in the I99()s and appropriate economic policies in Fedderke (2001). wbich are essentially focused on an orthodox menu of enforcing property rights, lowering taxes, trade liberalisation and macroeconomic stability. The index of political instability is based on a subjective weighting of selected legal measures provided by an anonymous group of 'leading authorities' in political science, sociology, law. economic bistory and bistory. By using measures such as prosecutions under the 1951 Suppression of Communism Act, the measure capttires major periods of uprising against apartheid. It is, however, a long step from the effects of upheaval and protest before 1994 to the claims made by Fedderke for tbe implications of his regression results for govemment policy post-1994, and in particular ibe constraints he claims should be placed on redistribution. It is also notable that ihe improved investment performance in 1994 and 1995 does not fit with tbe political instability factor, The best performance straddled tbe transition period when presumably uncertainty was relatively high, and ihen investment rates

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declined after the commiiments made in the government's 1996 macroeconomic framework and cuts in tax rates. Rather, the reductions in manufacturing investment rates in the iate 1990s are consistent with the higher levels of interest rates and constraints on aggregate demand frotn a tighter fiseal poiicy. In addition, while much is made by Fedderke of systemic uncertainty, the implications of the estimates are that both capacity utilisation and the user cost of capital also have significant effects (Fedderke, 2000: 29). Despite the implications that these have for aggregate demand and monetary policy, the effects of macroeconomic policy are not explored. This is also despite wide-ranging research, by Fagerberg (1988) and others, that finds reinforcing effects running from strong demand to high levels of capacity utilisation, and further to investment and improved competitiveness and productivity resulting from firms' upgrading of capital stock. Instead, it is taken for granted that macroeconomic stability i.s the narrow concern with lower inflation and a reduced fiscal deficit rather than stability in real variables. Interestingly, the regression results in Fedderke (2(XX)) also find no link between openness in intemational trade and investment, although this does not deter Fedderke (2001) from making strong arguments in favour of further trade liberalisation. In addition to political stability, systemic uncertainty draws on a proxy of property rights given by the number of patents registered in South Africa. The rationale for this is that filing a patent is evidence of faith in the protection of intellectual properly rights. Other possible explanations for patents, such as research and development effort, often linked to government support for research, are not considered. Uncertainty over economic policy, taxes and the security of property rights (among other areas) was also found to be important in an extensive firm-level study conducted by Gelb (2001). While it is plausible that uncertainty inhibits investment. Fedderke et al.'s and Gelb's views of it are open to question, especially as explanations of the changes in investment perfonnance in the 1990s. Political uncertainty and instability have undoubtedly decreased rather than increased since the 1980s and early I99()s. Tax rates have also come down. However, uncertainty over demand growth, infrastructure spending by the govemment and parastatals. and social stability are al! potentially important factors for investment. Failure lo deliver the levels of public investment that were set out in the macroeconomic framework could, in this interpretation, be seen as contributing to uncertainty. The reference to uncertainty factors by the firms surveyed by Gelb may also be an after-the-event rationalisation of decisions. There is some similarity here to allusions that are often made in the press to 'business confidence". Business confidence measures, such as those used by the South African Chamber of Business, are generally based on backward-looking indicators (such as new car sales and movements in the currency) rather than measures of expectations linked to firm decision making and strategies. (This has led to the confidence index improving in late 2003 due to the strong rand, while companies are simultaneously issuing profit warnings due largely also to currency strength.) If these are portrayed as causal factors in investment, then the argument risks becoming circular, with low growth and investment being attributed to weak business confidence. The latter, in turn, is measured in terms of historical patterns of growth, investment and demand. Gelb (2001) also highlights the 'hold-up' of investment by firms based on iheir concems about government policies., crime, and protection of property rights under

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widening inequality. The evidence for this is, however, speculative. Other sources of uncertainty, such as volatile exchange rates given capital account liberulisation. may also be important and suggest that current market signals are unreliahle for planning future exchanges. Recent work has found that firms view exchange rate instability to be the single most important deterrent to investment (Kaplan, 2(X)3). Finally, the discussion of uncertainty highligfits major gaps in the methodology of neoclassical economics in addressing issues of firm strategy and decision making. This is even more so given the relatively small number of firms that dominate much of investment and economic activity in the South African cconi>my. To date, research on investment has done little to explore these firms' strategic decision making. 4. SOME CONCLUSIONS There is littie disagreement that the investment record has heen very poor and that it is closely related to the p<Kir growth of the South African economy. In the singie largest sector, namely manufacturing, investment improved in the mid-1990s hut the growth was not su.stained. Closer examination reveals that it was due to only two industries rather than being part of an expansion of ihe broad produciive hase of the economy. The investments in iron and steel and non-ferTous metals were supported by the govemment in the form of the IDC and were made by a small number of large companies. Fedderke et al.'s (2001) finding that better manufacturing investment in the 1990s (to 1997) is due to lessening of distortions and a 'withdrawal of the state' is simply not consistent with a more careful examination of the data. !n addition to ignoring the concentration of investment in several rcsource-hased sectors of manufacturing and the role of the IDC. it is a partial characterisation that ignores many of Fedderke's own results, such as the positive effects of government invesuncnt and capacity utilisation on private investment (Fedderke. 2(X)0). As noted, a major feature of the 1990s has been the low investment hy the govemment and parastatals through to the end of the decade. Instead of simplistic answers ahout the withdrawal of the state and an exercise that appears largely one of fining data into predetermined conclusions, the complexity of factors affecting investment needs to be acknowledged. Investments in increased productive capacity are affected by expectations about a range of factors such as available inputs, growth of markets and the ability to access technology and skills. Govemment economic policies, including spending on infrastructure and suppt>rt for research and development, affect these expectations. Uncertainty about demand and exchange rates is important, along with factors that can be characterised as 'political'. Investment needs to be understood as part uf the corporate strategies of companies, especially in large-scale industries with lumpy investments. Exploring reasons for investment needs to acknowledge contributions from different theoretical perspeetives. ln orthodox neoclassical economics, investment is attracted to activities with a higher productivity of capital and hence a higher rate of retum. While this incentive is undoubtedly important there is a whole missing dimension, which deals with where the productivity and improved capuhilities come from. Similarly, rather than the simplistic dichotomy of markets versus the govemment employed hy Fedderke et al.. it needs to be acknowledged that the ways in which financial markets work mean that they are intrinsically biased against financing investment in relatively

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undeveloped sectors and by newer firms (Stiglitz. 1993). This has major implications in a restructuring economy and suggests that detailed work on the actual flow of funds through the financial system is required. In many ways South Africa has been relatively successful in developing scale-intensive industries sueh as iron and steel, as well as some knowledge-intensive industries, such as polymer chemicals and defence-related electronics. These capabilities, along with world-class capabilities in areas such as deep-mining, have been devetoped by big businesses with close support from the state, in the form of direct ownership and finance, amongst others. Investment, therefore, cannot be separated from the different production systems and business models that govern the organisation of production. It is difficult to generalise about what drives the adoption of different business mtxleis and production systems, it depends on the difterent interests that shape the orientation of business in a given country, and the broader political economy. The govemment has an important role to play through industrial policy, and support for research (Amsden, 1997a, 1997b; Best, 2001). The processes are path-dependent in that the options facing firms and the economy at any given point in lime depend on previous decisions and choices that cannot simply he reversed. Many of the important factors are also country-specific. Tbe difficulty in making generalisations provides a note of caution, but not reason tor inaction. Rather we require an appropriate methodology, detailed research and appropriate strategies based on country-specific conditions.

REFERENCES AMSDEN. A, 1989. Asia'.^ next giant: South Korea and late industrialisation. New York/Oxford: Oxford University Press. AMSDEN. A. i997a. Bringing production back in: understanding government's economic role in late industrialization. World Development. 25(4): 469-80. AMSDEN. A. 1997b. South Korea: enterprising groups and entrepreneurial govemment. In Chandler. A Jr, Amatori. F & Hikino, T (Eds), Big business and the wealth of nations. Cambridge: Cambridge University Press. BARNES. J. 2000. Global trends in the automotive industry: their likely impact on South African automotive assembly and component manufacturers. Tramfommtion. 43:

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BEST. M, 2001. The new competitive advantage. Oxford: Oxford University Press. BLACK, A. 2{K)1. Globalization and restructuring in tbe South African automotive industry. Joumal of International Development, 13(6): 119-96. DE LONG, JB & SUMMERS. L, 1993. How strongly do developing economies benefit from equipment investment? Journal of Monetary Economics, 32: 395-415. DEPARTMENT OF FINANCE. 1996. Growth, emptoyment and redistribution: a macroeconomic .strategy. Pretoria: Department of Finance. EASTERLY, W & REBELO, S. 1993. Fiscal policy and economic growth. Journal of Monetary Economics, 32: 417-58. FAGERBERG. J. 1988. Intemational competitiveness. Economic Jounud. 98: 355-74. FEDDERKE, J, 2000. Investment infixed capital stock: the South African manufacturing industry 1970-1997. Working Paper No. 16, Econometric Research Southem Africa. Johannesburg: University of the Witwatersrand. FEDDERKE, J. 2001. Explaining the growth absence: reviewing the evidence that can account for the poor growth performance of the South African economy. Paper

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