4 June 2018

South Africa: How South Africa's Services Sector Can Help Tackle Poverty and Inequality

analysis

About two thirds of South Africa's GDP now consists of contributions from the services sector, which ranges from banks and insurance companies to tourism, hospitality and personal services. This means that policymakers, industry leaders, lobbyists and small business owners should all be concerned about the sector's potential to fix the biggest challenges facing the South African economy - poverty and inequality.

For a long time commentators believed that an economy can only diversify and grow through following a model of industrialisation. But there's a growing consensus that the services sector can contribute to economic transformation in emerging economies.

The South African services sector has traditionally involved low-tech activities. Examples include food, personal or legal services. These are limited to domestic markets which means that, for the most part, they can't be traded or exported.

But recent technology developments have led to a raft of a modern and tradable set of service industries that are delivered digitally. These have popped up in different areas, like finance, transport, hospitality and information, communication and technology.

On top of this, technology has disrupted traditionally non-tradable service industries. Examples include Takealot.com, GetSmarter, and of course, Uber and Airbnb. All of them are models that show how technology and big data can lead to sectors being completely disrupted and overhauled, creating new types of enterprises and jobs.

Unfortunately, debates about changing South Africa's economy usually ignore these developments and the role that innovation and technology can play in transforming the services sector.

Innovation in South Africa

Innovation refers to the introduction of a new good or service (product), a process, or a new organisational or marketing method. It can be new to the firm, the market or the world. Innovation in services has a strong human dimension, selling, marketing and delivery are critical, as well as close customer integration.

Using data collected by the Centre for Science, Technology and Innovation Indicators, which does surveys on behalf of the Department of Science and Technology, we pieced together an understanding of the innovation dynamics in the finance and the wholesale and retail sectors. These are the service sectors that contribute most to GDP.

We discovered trends that show there's huge potential for innovation across the services sector.

Data from 2010-2012 suggests a healthy scale of innovation in South African services sector firms. This is particularly true, but isn't confined to, financial services where one of the most prevalent innovations was in marketing.

We also found significant innovation trends in wholesale and retail, where a higher proportion of firms produced products that were new to the market.

The finance firms spent almost seven times more on innovation activities. Their innovation expenditure as a proportion of their turnover was likewise seven times greater.

Both sub-sectors received almost the same turnover from sales of new to the market products- around 17%. This suggests that there may be a greater return on innovation investment for the wholesale and retail firms, which spend less.

Comparing the two services sub-sectors also suggests that there are a variety of ways that innovations can be implemented.

Incremental innovation, through small improvements that build on one another, was more prevalent in the wholesale and retail firms. This took the form of training and investment in new machinery. Finance firms also spent on incremental innovation. But they were more likely to conduct R&D in-house.

All of these firms experience barriers to innovating on a large scale. The main ones were market uncertainty, competition and lack of qualified people. Firms that innovate in the two sub-sectors experience these barriers in different combinations and scales.

Potential impact

There is significant potential for globally competitive and local job-creating services firms that could help South Africa's economy grow in different ways.

Haroon Bhorat, director of the Development Policy Unit at the University of Cape Town, and other academics argue that South Africa's services sector needs to become more export orientated so that it can access larger global markets. This in turn, they argue, will drive structural transformation so that our economy does not over-rely on the traditional mining or agriculture sectors, and will grow local employment.

Currently, South Africa lags behind other emerging economies when it comes to expenditure on R&D and innovation. But a shift will require businesses to get involved in more innovation and knowledge intensive activities. These, in turn, need support from public funds.

The Department of Science and Technology is developing a new policy framework on science, technology and innovation. Current policy tends mostly to support R&D driven innovation, for example, through a tax incentive for expenditure on R&D. But there's room for more interventions through incentives to support improvements in production systems, branding and marketing activities, as well as export promotion.

Cheryl Moses, Hlamulo Makelane, Precious Mudavanhu and Gerard Ralphs contributed research and writing.

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