Modelling effects of incentives for industry competitiveness using a system dynamics approach

Abstract

Investment in the state of art machinery, tooling, and R&D is widely seen as a prerequisite for achieving industry competitiveness in the long term. Therefore, the provision for investment-based incentives by countries is perceived as a way of supporting industry competitiveness. Despite this being a global phenomenon, there is no formal process to guide the offer of industry incentives. The process of designing such incentives is often based on intuition rather than on formal models, making it difficult to assess such industry interventions objectively and to improve on them. Specific to South Africa, the offer of incentives to the automotive industry to support its competitiveness has had mixed results. In particular, investment in R&D has remained minimal. The paper presents a system dynamics model as a proposed instrument in formalising the offer of incentives, applied to the South African governmentpsilas offer of incentives to the automotive manufacturing sector. The model was developed from qualitative and quantitative information on how the incentive dispensation had been structured. Simulations with the incentive model reveal that the incentive dispensation, as a stand-alone intervention, has had a significant and positive effect on industry investment, but has had no specific policy lever to direct investment into R&D and consequent innovative activities. By this measure, the model has not been a strong policy instrument for supporting long-term industry competitiveness.