Rising to the challenge or perish? Chinese import penetration and its impact on growth dynamics of manufacturing firms in South Africa

Abstract

Using firm-level tax administrative data from 2010 to 2017, we study the extent to which Chinese import penetration has affected the growth performances of manufacturing firms registered in South Africa. By instrumenting Chinese imports to South Africa with Chinese exports to other developing countries, this paper analyses both the systemic and heterogeneous impact of Chinese import penetration on South Africa-based manufacturing firms. First, we study whether China's import competition has been associated with a downsizing of manufacturing firms in terms of decreasing employment and sales growth, and higher probability of exiting the market, both within the same sector (direct import penetration's effect) and across sectors along domestic value chains through input–output linkages (indirect import penetration's effect). Second, we test whether firms investing more intensively in their capabilities development—notably in their skills development, production technologies and related process upgrading —are better able to cope with such direct and indirect competitive pressure. Our results indicate that rising exposure to Chinese imports—not only direct one, but also in downstream segments of the domestic value chain—leads to slower sales and employment growth for the entire sample of surviving firms and to a higher probability of shutdown for firms not undertaking significant investments in their capabilities development. However, we also find that, within industries, firms investing relatively more intensively in skills development, production technologies and related process upgrading are more likely to survive and grow despite rising import competition.