A decision support model to identify realistic export opportunities for South Africa

A

Decision Support Model to

identify realistic export

opportunities

for

South Africa

Joseph John Acton Pearson, M S c .

Thesis submitkd for the degrrr Philosvphiae Doctor in

Eronomics at thc North-Wrst University

Acknowledgements

An endeavour of this kind could not have heen achieved without t h e input and snpport of varions important people. I would like t o express riiy sincere appreciation t o t h e folloxvi~rg people:

0 Professor \Vilma Viviers for her support thronghout t h e study. I would like t o thank her for t h e tremrntlous :mount of time she allocated t o w r d s this study. \Tit hout her this would not lime been possible.

0 Professor Ludo Coyvers for his involveme~~t in the review and critical assessmrnt of t h e stnily througl~out all the phases. \Vithont his knowlrdgr and guidancc this study could riot have 11cm snccessfully corrlpleted. I also want t o thank him for tilt: t i r m he always allocated even when his own schedule was hectic.

0 Profrssor Wim Nautlr for his suggestions relating t o the theory of tht: stndy and the critical review of t h e stndy in general.

0 Professor Lesley Greyvensteir~ for language editing

0 ' h e Sonth African D ~ p a r t n i e r ~ t of Trade and Industry1 for their financial assistance

a n d especially Mr. R . le R.oux for his input and feedback.

I l y parents George and Anita for providing rnr with the necessary oppr~rtuuities. for their contitlual iuvolveliierit in my life. support and ericouragenlent throughout this studv.

0 11y fianc; Larnk for her encouragement and support.

'This study has hecn commissioll~d hy the DTI's mport proruotion divisiou (Project Title: A Decisioll Support .\Lode1 to idmtify realistic export opportullities for South Africa).

Jearidri Swancpoel for Iris programming skills.

I I y friends for their patirr~rr, support and motivation

"Now to the Iiirig cternal. immortal, irivisible, the only C k d . he honor and glor>- forever arid cvcr.

An~en" .

Opsomming

Uitvoergeleitlr ekonorniese groei is '11 helangrike kenmerk van hyna alle ekonomic:? \vat die afgelope dertig jaar heduidende groei getoon l e t . Ook in Suid-Afrika na 1994, is die vurl~oging van ekonorniese groei d e w middel van (lie versnelling vari u i t m m d e w die regering as '11 l~elaligrike beleid herkeri.

Outeilrs soos Dunning (1997) en Shankarmahesh. Olseri and Honeycutt Jr. (2005:203) stem saam dat dit rlie rneer is "of' regcrings betrokke moet wees ill tiic toedeling vari

I~nlpbronr~e en die bevorderirlg van liantlel nip. maar eerder "hoeveel" en "\vatter tipe" regcringsbetnrkkcnheid daar moct wees. Sasionale h~rlplxor~rie is cgter skaars. daarom word 'n groot mate van selektiwiteit benotlig vir die ontwikkrling en i~i~plc~iirritering van

nitvuert~rvorderingstr;ltcgiec en -aktiwiteite (Cuyvers. 20111:256). '11 L m d \vat ekor~oniie- se groci wil stirnuleer d e w nitvoerl)cvorrlering rrwwt tusse~i heperktc alternatiewr: onder- skei (.Jaffe. Salazar b: Brarnhila. 1996). "Die uitdagings waarvoor regeririgs tc s t a m korri

is die noot1s:iaklikh~id om op sprsifieke sektc~re vir nitvocrl~evorderirig t e fokns en on1 hul beperkte 111rlpbronrre aari hierdie sektorp toe te ken" (Shankarrndirsh et (21.. 2005:201). Hirrrlie selektiwiteit rrioet gcbaseer word op die orit1t:rling vari realistiese uitvwrgdeent- hetle.

Dir aktietve rol \vat die Asiatiese regrrings gespwl het in die ontwerp van a m - sporingsprogramme vir die bevortiering van spesifieke birlrielantlse sektore het tot die uitwersukses vari (lip Asiatiese "tier-ekor~omieC" 1)ygetlra (Glenda) & IVdii. 2000).

Die privaat- en openhare uitvocrl)evordering-instelli~igs kom in hair uitvoerlande te staari voor 'n dnht)rle toekenningsprobleem. naarnlik hoe om skaars hulphronne aan ak- tiwiteite in verskeie uitvoern~arktc~ te bestre; en hoe om die linlphronne aan alterriatirwe uitvorrhrvortlering-instruriie~~tc: toe te ken (Cuyvers. De Pelscacker. Rayp k Roozen. 1995:173). Sniil-Afrikaanse liandelbevordering-orgariisrr~ies het '11 soortgelj-kr probleem.

soos amgedui in (lie Sasionale Uitvoerstrategie: "Suid-Afrika se hnidige uitvoerbevordc ring-aktiwiteite het staatgcrriaak op historiese uitvoerprestasie-te~~cic,~lsr. Huidige bevorde- ringsaktiwitc4te nee111 nie nuwe uitvoergeleenthede in onontginde markte r ~ f gcleenthede vir nuwe prorlukte in bestaar~de markte in ag nie" (DHN. 2005:47).

Hierdir studir is in opdrag van (lie Drpartenient v;rn Handel en Nywrrhc:id (DHN) uitgevoer m fokus eersterls op die toepassing van 'n bes~llit(~~t~t~r~te1llling~~l0~~f!l vir Slid- Afrilia. Die rriodel is gebaseer op die hesluitontlcrste~~ningsmotlel v a t drur Cuyvers e t

nl. (19'35173.186) ontwerp is. Tw-rerlens het die str~die die bestaande l~esluitor~dcrsteu- riingsmodel aimgrpas deur die, Snid-Afrikaarisr hantlelsituasit: in ag te rieem. Derderis

identifiseer die studir realistiwe ~~itvoergeleerithede tesariie met die uitvoerkeririis van die

DHS. en groepeer hierdic realistiese uitvoergeleentl~edr in 13 groepc volgrns gwgraficse verwar~tskap. Hierdir groepering van uitvoergclernthetle s d die DHN in stnat stel orri hrllle hevorderingsaktiwiteite te fokus asook iiulle in staat te stel or11 heperkte iiulp- l~roiine nieer effektief t,e allokeer.

Die resultate van hierdic stridie dra by tot strategirse heleitlsvorming oor uitvt~er- bevordering as deel van die Nasioriale Uitvoerstategie vari Suid-Afrika en verskaf aan die

V

Abstract

Export-led economic growth has heen an i~nportant feature of alrr~ost all economies wherc: significant economic growth has taken place over t h r previous thirty years. After 1994.

the achievement of economic growth thm~igh the acceleration of cxports has been recog- nised as an imperative policy bj- the South Africa11 governnlent.

Autliors such as Dunning (1'397) and StiankarmaIlc?sh. Olseri and Honeyutt J r . (2005: 203) agree that it is no longer "if' governments should be i~lvolved in the allocatior~ of resources antl the prornotio~i of trade. but the pri~~cipal questions are "horn much?" arid "what kind of?" government i~lvolverrient there s l i o ~ ~ l d he. How-ever. national resources are scarce and. therefore, great selectivity is requirrd in tlevclnping and implerneriting esport prornotior~ strategies and activities (Cuvvcrs. 200-1:256). Lirrlited alternatives

shonltl bc considered u.11~11 a nation wish to stimiilatc cronomic growth through export

promotion. (Jaffe. Salazar

6r

Brambila. 1996). "The rhallerlgcs faced by gover~imer~ts. therefore. lie in the necessity to choose speritic sectors for export pronlotior~ antl allocate their limited resources among these sectors" (Shankarrnallesli, r t a1.. 2005:204). This selectivity st~ould bc hased on t h ~ analysis of potential export opportu~lities.

l'he involvemrr~t of gvvernments in the designing of export promotiur~ programmes

to prorriotr specific domestic sectors has led to the export success of the Asian "tiger ecotiornies" (Glenday br Silii, 2000).

vii

tions face a double allocation problem namely how to allocate lin~ited resources to acti- vities in different export markets, and how to allocate the resources t o alternative esport promotion instrammts (Cuyvers. Dc Pelsmacker. Rwyp and Roozen. 1'3'35:173). Soutll African tratle promotion organisations face a similar allocation prohlem as expressed in

the National Export Strategy (SES): "South Afrira's current export promotion activities havc: relied on historical (,sport performauce trends. Current promotion activities do not take into considrratiou nexv export opportunities in unosploited markets or opportunitic.; for new products in existing markets. There was little: if any. scientific justifiration for current funding of rsport promotiorr activities" (DTI. 2005:47)

In the light of the above rnentio~~rd this study was c:on~misiorietl hy the Department of 'l'ratlc, and Intlustry (DTI) and firstlj- forused on the application of a Decision Sup- port hlotlel (DSSI) for South Africa. 'l'he DSSI for South Africa was 1,ased on the DSXI de\-eloped 1,- Cuyvers t.t ( ~ 1 . (1995:173-186). The DSM was adapted by taking tlif South African tratle circun~stances into consideration. The I I P ~ step was to ideutify realistic,

export opportunities with the rlsc of the DSSI and thereafter. with the export expertiso of the DTI. rluster these realistic export opporturiitics into regional clustrr.;. These export clusters will enable the DTI to focus their export promotion activities and t o allocate limited resources nwre efficiently.

The results from this study contribute towards strategic policy makir~g on export prorriotivn and will he part of the NES of South Africa arid will provide the DTI with scientifically justified realistic export opportunities (DTI. 2005:47-56).

Abbreviations

ASEAN Association of Southeast, Asian Katiotls CIS Coinrnon LVealth of Indeyerdrnt States CV Critical Value

DSh[ Decision Support l[Odd DSS Decisioll Support Systerrl

DTI Department of Trade and Industry ECIC Export Credit l n s u r a n c ~ Corporation

ESIIA Export JIarketing tuid Investiiient Assistance Srherrle EPA Export Promotion Agency

FDI Foreigu Direct Investnicnt GDP Gross Donirstic Pruduct

GGIC Credit Guarantee Insurance Corporation HHI Herfindal~l-Hirscllrrl~~~n Intlrx

IDC Iridustrial Developmellt Corporatioil

1 International RIonrtary Fund LAC Lati11 American Colmtries hIENA \lid& East and North Africa NES National Export Strategy

OECD Organisation for Econornic Co-operation and Development ONDD Office National Du Ducroire

RCA Revealed Comparative Advantage R&D Research and Drvelopment

R01 Return on Investment

SlTC Standard International Tsiidc Classificatio~i SSA Sub-Saharan Africa

TISA Trade and Irwestment South Africa

TPO Trade Promoting Organisation

IVTO 1Vt)rid Trade Organisation

Contents

1 Introduction . . . 1.1 Prohlem statenlent . . . 1.2 Background . . . .

1.2.1 The role of governments as t. rarle pronlotion organisatiuus

1.2.2 The need for a decision support model for export pron~otior~ in . . . Sourh Africa

1.2.3 The current situation on the prioririsation of export proruution

. . .

activities in South Afrira

. . . 1 . 3 The objectives of the study

. . . 1.4 The demarcation of the study

1.5 The nlethodology of the study . . .

1.5.1 Literature review . . . 1.5.2 Empirical study . . .

1.6 Importance of the study . . .

7 The outlii~e of the study . . .

. . .

1.8 Summary

CONTENTS

xi

. . .

2.1 Introduction

. . .

2.2 Overview of international trade trrr~ds

. . .

2.3 Overview of South African trade

. . .

2.4 The importance of exports

. . .

2.5 The role of governments a s

TPO

. . .

2.5.1 Export promotion according to the stages of exports

2.5.2 The effectiveness of export promotion programnles . . . . . .

2 ..5 .3 The role of the DTI in export promotion

2.6 Trade and Investment South Africa . . .

2.6.1 Market Intelligence . . .

. . . 2.6.2 T d e - L e a d Facilitation

2.6.3 Matching Buyrrs anti Sellers . . . 2.6.4 In-Xlarket Snpport . . .

2.6.5 Export Marketing and Investment Scheme (EhlIA) . . .

2.7 The DS3I . . .

2.8 DTI and the DSAI . . .

3

T h e

methodology of the

DSM

3.1 Introduction . . .

3.2 Filter 1: hlacro econoniic analysis . . .

3.2.1 Selection on the basis of country risk ratings . . .

3.2.2 Selection of the basis of n ~ a c r o e c o ~ ~ o ~ r ~ i c indicators . . .

COKTEIVTS

xii . . . 3.3.1 Calculat. ion of the Revealed Couparative Advantage 44

3.3.2 Determining short and medium term import growth . . . 45

3.3.3 Determining relative import market size . . . 46

3.3.4 Selection procedure . . . 47

3.4 Filter 3: Determining realistic export opportunities . . . 18

3.4.1 negrre of market concentration . . . 48

3.4.2 Import restrictions . . . 51

3.5 Filter 4: Final aidyses of export opportunities . . . 54

3.6 Summary . . . 56

4 Results from the Decision Support Model 58 4.1 Introduction . . . 58

4.2 Result. s filter 1: Macro-economic analysis . . . 59

4.2.1 Country risk ratings . . . 59

4.2.2 Results of GDP and GDP per capita analysis . . . 5'3 4.2.3 Results of GDP growth and GDP per capita growth analysis . . . 61

4.3 Results of filter 2: Detecting possible export opportunities . . . 63

. . . 4.4 Results of filter 3: Determining realistic export opportunities 69 4.4.1 Results of the degree of nlarket importance . . . 69

4.4.2 Distance as a proxy for import rrstrictions . . . 70

4.5 Results of filter 4: Fii~al analysis . . . 71

. . .

4.6 Ch~st. ering of the results of filter 4 75

...

CON TEXTS xu1

u a . . . 4.6.2

A:'

. . . 4.6.3 U'eskrn Europe . . . 4.6.4 hliddle Europe . . . 3.6.5 Easter11 Europe . . . 4.6.6 Scaudinavia . . . 46.7 Baltic States . . . 4.6.8 Australisia . . . 4.6.9 Nurth America . . . 4.6.10 South America 4.6.11 Caribbean . . . . . . 4.6.12 hIiddle E<ast . . . 4.7 Sumrnary

5 Summary and reconlmendations

. . .

5.1 Introductiori

5.2 Summary of t h e study . . .

5.3 Lirnitations of t h e current

.

study . . .

5.4 Recom~nmdations and further research . . .

5.5 Contrihntions of the study . . .

A Appendix A

B Appendix

B

List

of

Figllres

Share in world m ~ r c h a n d i s e and commerrial services trade by ~ q k ~ n . 2005

. . .

(Prrcentage share)

South African total trade . . .

Structure of South A f i i t n n czports . . .

Str-ucture o. f South A f n c n n imports . . .

T E A s rzport offerings . . .

Flowchart of the filtrring procrss of the DSM . . .

Scali7l.q factor as function of the R C A . . .

Determining the . valve of Alpha in filter

.

3 . . .

Flou~chact o f filtrr 1: Countrg risk score . . .

Drtermining thc value of alpha i n ter?nu of G D P arlalysis . . .

Determining the value of alpha in t e r n s of G D P per capita analysis . . .

Flowchart of filter 1: G D P and G D P per capita analyszs . . .

Flotvchart of filter 1: G D P growth and G D P per capita growth analysis .

Flowchtrrt offilter 2: Cutegomation of countries and prodzlcts . . .

Flou~chart of filter %: Degree of nmrket conccntrutton . . .

LIST

OF FIGURES

xv

4.8 Flowchart of filter 3: Distance . . .

4.9 Flowchart of th.e final result of the filteiing process . . .

1.10 Global clusters ac~o~d27lg to overall share of realistic export opportun%t.ies.

. . .

4.11 African Cluster

4.12 Asian Cluster . . . . . .

4.13 Western Europe Cluster

. . .

4.14 Middle European Cluster

4.15 Eastern European . Clusttr . . . 4.16 Scandsiravia Cluster . . .

4.17 Baltic States Cluster . . . 4.18 Azistralisiun Cl.uter . . .

4.19 North Amrrrcan Cluster . . .

4.20 Cu7ibb:art Cluster . . .

List

of Tables

2.1 World trade and output developmrnts

.

2003 . 2005 ( A t constant prices, annual pen:entaye chanyej . . .

2.2

GDP

and merchandise trade by reqion (gro,wl.lr 7.ates)

.

2004 - 2005 (ilnnual percentage constant prices) . . .

2.3 South Afiica: Basic rconornic statrstics (Annunl prrcmtn.ge change) . . .

2.4 Cmnpun,~e.s' nwds and export promotion programmes according to stayes

of export triuulue7rient . . .

3.1 Countr.~ X's risk ratings . . .

3.2 Country X ' s transfornrrd r i d ratings . . .

3.3 Gategorisang of country/pr.udvct rornhinntions . . . 3.4 Determirring the value of alpha numerically . . .

3.5 Market irnpo~tancr and cell assiynmrnt . . .

3.6 Degree o.f markd im.portance . . .

4.1 Total selection of rountri~s entering filter % . .

4.2 SITC-product combinations in tenns o f categorzes

4.3 Countries per category . . .

LIST OF TABLES xvii

1.4 Number of categoCe.u where RC.4

>

1 . . . 69 4.5 Results of cateyorisatzon nn t t n r ~ ? offilters 2 and

4

. . . 72

4.6 Top 25 SITC-product categor-y per nambtr of export opportuni.ties . . . . 73 4.7 Top 20 covr~tries per number of export opportunzties . . . 74

A . l Country risk ratings and coclntry

17.d

score . . . A2

A.

2 Country srlectio7~ o n the basis of GDP and GDP pel . capita . . . A9

A.3 C o w t r y selrction o n the basGs of GDP growth and

GDP

per capita growth . A10 A.4 Couritry per cell clnsslJastiun (Cell 1 to Cell 7) . . . A l l A.5 Country per cell classification (Cell

8

to Cell 1 4 ) . . . A13 A.6 Country per cell clas.s?ficution (Cell 15 to Total) . . . A15

B.1 African. rlustrr . . .

B.2 Asian cluster . . .

. . .

B.3 Western Europe chwter

. . .

B.4 M i d d l ~ Europc cluster

B.5 E a . ~ t e m Europe cluster . . .

R.6 Scandinavia cluster . . .

B.7 Baltzc States cluster . . .

B.8 Australasia cluster . . .

B.9 North America cluster . . .

B.10 South America cluster . . .

B . l l Caribbenn cluster . . .

Introduction

1.1

Problem statement

The involve~nent of govcrnnlents in the designing of export prornotion prograrl~mes to pro- mote specific domestic sectors has led to the export snccess of the Asian " tiger economics"

(Glenda? & Ndii. 2000).

Anthors such as Dlmning (1997) and Shankarnlallesh. Olsen and Honeycutt Jr. (2005: 203) agree that it is no longer "if' governments shonld be involved in the allocation of resources and the prornotion of trade. but the principal questions are "how much?" and "what kind of?': government involvement there should he. However. national resources are scarce and, therefore. great selectivity is required in developing and implerr~enting export promotion st,rategies and activities (Cuyvers. 2004:256). Limited alternatives should he considered when a nation wish to stinnilafe economic growth through export promotion (Jaffe, Salazar & Brarnbila. 1996). "The challenges faced by governments.

CHAPTER

1. IKl'RODUCTlON 2

therefore, lie in the necessity tu choose specific sectors for export promotion and allocate their limited resources among these sertors" (Shankarn~ahesh. et nl., 2005:204). This selectivity should be based on the analysis of potential export opportunities.

The rest of the chapter is comtrncted as follows: section 1.2.1 will give a short overview of the role that governments play as Trade Promotion Organisaliuns (TPO) in the worlcl and section 1.2.2 will focus on the need for a Derision Support hlodel (DSRI) for export promotion in South Africa. In 1.2.3 the current situatiou vn the prioritisation of export, promotius1 will be discussed. The objectives of the study are stated in section 1.3, followed by the demarcation of the study in section 1.4. 111 section 1.5 the niethotlnlogy of the stndy will he disc~ssserl. In section 1.6 the importance of the stndy is highlighted. followed by an outline of the study. The chapter concludes with sectior~ 1.8.

1.2

Background

1.2.1

The

role

of

governments as trade promotion organisations

How effective am government assisted export promotion prograrnrnes? According to Wilkinson and Brunthers (2006:233-252). several studies have shown tiiat government assisfance has proven to be useful and that a positive relationship exists between the firm satisfaction of export perfom~ance and government-sponsor~d trade shows. Ge~ict~lrk and K o t a b ~ (2001:51-723 found that export success can be attributed t,o goverrnrleut in>-olvement, where the competitive positions of firms improved through export assistar~ce. Another study conducted bp Coughlin and Cartwright (1987) considered the effect of a $10110 increase in t,he government's export promotion programmes and found that this resulted in all increase of $432000 in exports. Export success c a t illus be attributed to

CHAPTER

1. IN'I'KOD UCTIOA' 3

the i~~volvement of government,s.

1x1

t h e next sectiorl t h e need for a DShl as a tool for t,he South Afriran government t,o p r o n ~ o t e exports in an efficierit manner will b e discussed.

1.2.2

The need for a decision support model for export promo-

tion in South Africa

The Department of Trade and Industry

(DTI):

as the export promotiou authority of the South African government. has recently indicated that a more extensive study on export promotion in South Africa would greatly wsist senior mauagement to ensure that government resources are nsed to maximum potential in detern~iriirig priority rnarkev to comhat the challenges of globalisation in the followi~ig areas (Erero, 2004):

It will result in a list of priorit,]- mal-kets for South African products that can be pro-actively applied to government financing schemes and foreign promotional strategies.

It will give govrrnrnent a clear sense of where it should deploy it's Foreig~i Economic Reprrs~ntatives to hest effect.

It would lead to optimal u s r uf financial and humar~ resources in governme~it to

proniote exports.

Results from t,his st,udy introduced into the Custoniised Sector Prugramn~e may enhance t,he irnplenientation of this programme.

From this it can h e cor~cluded that t h e South African govenlmcnt wants to fnlfill it's obligation. not only to assist potential exporters, hut, also t o prioritise export promotion activities in such a mariner that will lead t o the highest success rate for exporters in

CHAPTER

1. 1.N'I'RODUCTIOA' 4

foreign markcts. In the next sect,ion t h e current need to justify export pru~nut,iou nclivities

srientificnlly from a goverrlment perspective will be discussed.

1.2.3

The current situation on

the

prioritisation of export pro-

motion activities

in

South Africa

Various export promotion schemes are available for South African exporters and these export promotion schemes will he discussed in chapter 2 of the study (sec section 2.6).

"The current fnnding of export promotion activities in Suut11 Africa relies on historical export prrfor~nance trends. Lit& if any, scieritific justification could be given for the cnlmmt funding of export, prornotion activit,ies and these export promotion activities do not take into consideration new export opportunities iri unexploited niarkets or opportu- nities for new products in existing nlarkets" (DTI, 2005:47)

According t o the Xational Export Strategy

(NES)

these export prornotion srhemrs need t o address

r

he following shortcomings (DTI, 2005:55):

rn Increase t h e competitiveness of exporters ill order t o gain access to foreign markets.

rn l~irrease t h e number of existing exporters in South Africa

rn Increase t h e value and volume of exports fur South Africa.

A Decision Support Model (DSRI) approach will help to justify export pro~notion activities sci~ntifically in the future and act

a

s

a tool for the Sout,h Africa11 govern~ncnt t o address the shortcomings mentioned above.

From a n export prornotion perspective, a DShI will enable thc DTI, as t h e TPO in Sout,h Africa, wit11 a powerful tool to ideutify realistic cxport opportnnitirs for Sout,h

CHAPTER 1.

INTRODUCTION

5

Africa on a country/product level: but more importautly t o prioritise export assistance for potentially successful exporters. This assistance will in turn lead to exporters that have the ability t o access forcign bnsiness opportunities for their specific products. The

identification o l these rcalist,ic export markets will lead t o all iucrease iu export pro- fitability of firms and increased export volnnies aud in turn address the shortcumings nientior~cd in sections above. T h e results from the application of the DSSI for South Africa will contribute towards strategic policy design oil rxport promotiur~ and will be intrgratcd into the DTIk NES for South Africa (DTI, 2005:47-56).

1.3

The

objectives of

the

study

The objectives of this study are to:

0 First,ly, apply a DShl for South Africa: ba.sed or1 the DShI which was developed by Cuyvers. De Pelsmackcr. R a y and Ri~ozen (1995:173-186) taking into consideration the specific export condit,ions for South Africa (including data on country risk, ~~racrcrecor~omic d a t a and international trade statistics).

0 Secondly, analyse and discuss the results obtair~ed from each of the filters of the DShI and adapt these filters where necessary to accommodate the South African trade circim~stances.

0 Thirdly. provide t h c DTI with the resr~lts from t h e

DShI

in order for them t o justify export promotion activities scientifically in the future.

0 Lastly. to provide export clusters for goverrlnmlt t o prioritise their cxport promio- tion activities in the future.

CHAPTER

1. INTRODlJCTlON

1.4 The demarcation of the study

T h c study will apply the

DShI

as developed by Cuyvers r t al. (1995:173-186) employing

the niost recent available data as provided by t h c DTI (see sections 1.5.2, 3.2.2, 3.3.2). The sequential filtering process will be followed a3per t,he original DShl. but some ad-

justments are made within filter 3 to incorporate the SoUh African trade circumst~anc.es (see sections 3.4.2 and 4.4.2). After consultation with t h r DTI it was indicated that a clustering exrrrise of the prioritised countries will enable them to allocate their resources more efficiently (see section 8 . 6 ) . The methodology of the study will he discussed within the nexr section.

1.5

The methodology of the study

1.5.1

Literature review

The likratnrt. survey will give an overview on the theory relating to the importance of exports as a determinant of growt,h (see section 2.4). The literature study will discuss t h e

role of governments as TPO and how governmclrts rat1 provide assistance to firms taking into consideration the different stages oE export involvement of these firms. Tile effec- tiveness of these export promotion activities perfor~ncd by governments will subsequently be discussed. Thereafter, an overview of current export p r o m d o n activities provided by the DTI, the TPO in South Africa, will be given. The DShI will be introduced as a tool used by the DTI to iclentify rcnlistic export opportt~nities for Sout,h Africa in an effort to allorate limited government resources more efficieutly.

T h c DShI is a detailrd examination of markets and products. which provides a snb- stantial filtering proress of potential trading partners and product comhinatior~s. an11

CHAPTER

1 . INTRODUCTION 7

narrowing down thr list of g l o M opport,unitics in terms of both count,ries and pro- ducts. The results from this study contribute toxvards strategic policy making on export promotion and are part of the NES of South Africa (DTI. 2005:47-56)

1.5.2 Empirical

study

The empirical study will concentrate on the application and adaptatioll of the DShf de- veloped hy Cuyvers

et

al. (1995:li3-186) to the South African trade circumstances.

With the application of the

DSM.

realistic export opportunities for South Africa will be identified at a country of destination level and at Standard International Trade Classi- fication (SITC) 4-digit product level. The DShl uses a sequential filtering process (using

4 filters) that will eliminate less profitable export opportunities and focus or1 thnsr mun- tries and product con~hiriations that show the most potential.

In ordcr t o implement t h m ~ filters. various data will be required. The first filter exa- mines political and cotnniercial risks. and combines these risks with economic size and growth of potential trading partners. Country ratings provide vital inforrnatiou regar- ding the political and commercial risk associated with a sppcific country. Country ratings are provided by various private arid public institutions, one such institution is the Office

National

Du

Ducroire (ONDD) (OYDD, 2005). The ONDL) provides risk assess~nmt on export trailsaclions in terms of political risk in the short, medinm and long term as well as commercial risk of the country. In filter 1 of the DShl tnodel the country ratings provided by the ONDD will be used to determine whether a romtrv sliould be further investigated as a potential export market. The reason to use the ONDD country ratings

CHAPTER 1.

INTRODUCTION

8

was t,hree fold: the first reason is Credit Guarantee's. the South African counterpart of

the ONDD, country risk ratings were less detailed than those pn~vided by ONDD. The second reason was that the ONDD country ratings were used as a reference point when the OECD country ratings were developed and the last reason was that the original DSM

developed by Cuyvers et al. (1995:173-186) employed t,he country ratings of the ONDD and thus a comparison could be done. The World Development Indicators and World Ecor~ornic Outlook provide data on the size and growth of the economies of countries.

Data on GDP and GDP per capita as well as GDP growth and GDP growth per capita arr obtained from the above mentioned sources.

T h r second filter examines trade Rows of product groupings betwrm countries, taking into account both short and medirnn term growth rates. It alsu cxnmines the respective import market sizes. Import data for the period 2000 to 2002 (SITC 4-digit) wcrr 01,- tained from t,he World Trade Ar~alyser database provided by the DTI on those counLries chosen in filter 1. as well export data for South Africa and the total market for the same period. This data will form the basis of the second filter.

The third filter is more product and market-specific. and examines market concentra- tion of countries, and other market access issues related specifically t o particular product groupings. An alterrra.tive filter was introduced a s a proxy for t,rade barriers (see section 4.4.2) to adjust for the South African trade circumstances. In filter 4 the final analyses of the results wrre done. A clustrring exercise was done after consultation with the DTI

CHAPTER I .

INTRODUCTION

1.6

Importance of the study

Export prulnution policics are instrulnrntal in triggering econoniic growth of nations in a global world econoniy. However. as resources for public export promotion activities are

scarce. it is of primary importance to allocate the limited rrsuurces t,o activities which will generate the highest contribution to exports. The DShI developetl by Cuyvers el al.

(1995:173-186) allows the identification of realistic export opportunities in the world for South Africa.. By combhing this information with data on the planned export promotior1 activilirs of the DTI, an assessment can be made of these activities in the past, present, arid future. with the airn of improving tllc success ratio of s ~ ~ c h activities in ternis of generating exports. This is a topic for further research.

1.7

The outline

of

the study

In chapter 2 the importance of exports as a deterrninarit of growth will be discussed (see sectioi~ 2.4). The chapter will discuss the role of guvernrnents as T P O and the need for govrrnments to provide export assistance. Export promotion activities performed by governments will subsequently be r v a l ~ r ~ t e d . Thereafter, an overview of current esport promotion activities provided by the DTI: thc TPO in South Africa, will be given. The DS4I will be ir~troduced as a tool to identi@ realistic export upportunitks for South Africa in an effort to allocate limited government resources mure efficiently.

In chapter 3 the methodology of the various filters in the

DSU

will be discussed. This chapter will f o c ~ ~ s on t,he data requirements for each of these filters as well AS tthe criteria used within each filter to identify the realiqtic export opportunities in t,erms of country/product combinations for South Af~.ic:a.

CHAPTER

1. INTRODUCTION

The results from t,he application of the filtering process of the DSL1 will be give11 in Chapter 4. The chapter will also, after consultation with the

DTI,

cluster realistic export upportunitics according to geographic proximity in 12 regious. Finally Chapter 5

will conclude with a summary and recommendations for the sLudy and possible further research.

1.8

Summary

Export promotion activities by governnlerlts are to a large extent driven by historical trends and existing trading partners (DTI. 2005:47). Various st,udies show that export promotion activities provided by guverrinwnts can enhance export success. The applica- tion of the DSSl to the South African export market will provide the DTI w-ith a tool to justify export promotion activities scientifically in the future. The DShI will identify realistic export opportunities for South Africa a d this will cnable t h e DTI to allocate thrir lilnitcd resources in such a manner that it can contribute towards increasing export growth.

Export's and export promotion

2.1

Introduction

Chapter 1 highlighted the expurl success achicvcd by the Asian "tiger economies" through the iriterverition of their governments by designing incentive prograrnrnes aud promoting specific tluinest,ic sectors (Glenday et al.. 2000). The focus of chapter 2 is to firstly eni- phasizr the importance of exports as a determinant of economic growth within countries

in general. Secondly t,he chapter focuses on the role that governments need to play in ~ x w i d i n g export promotion programmes to stirr~ulate exports through puhlic resources. Public resources are limited and have to be assigned optimally to achieve the highest Re- turn on Investment (ROI) a i d governnients should take the export involvenimt/stages of the firm into consideration to determine the most be~ieficial promotional activity.

The outline of the chapter will be as follows: sect,ion 2.2 will give all uverview of tht. current international trade trends whereafter the South African trade environlrient

CHAPTER 2. EXPORTS AND EXPORT

PROMOTION

12 will bc discussed in section 2.3. I11 section 2.4 the focus will be high on the importance of exports as a determinant of econoniic growth and section 2.5 will outline the role of goverrin~ents as public Trade Promotion Organisations

(TPO).

the objective of their export promo ti^^^ programmes as well as a literature review of the stages of exports and effwtiveness of export proniotiori programmes. 'The chapter focuses o n the DTI as the public TPO of Sonth Africa and gives an overview of the current offerings provided b.v Trade and Irivestment South Africa (TISA) in section 2.6. In sections 2.7 and 2.8 t,he

DSXL

which was developed by Cuyvers et al. (1995:173-186) will be discussed as well as the reason why DTI wantcd to conduct this study. The chapter col~cludes with a summary in section 2.9.

2.2

Overview of international trade trends

To put South Africa's trade iu perspective. a11 overview of world trade will be givcn. The world ecoriornic growth rate was 3,3 percent in 2005 which was higher than the average growth for the decade. GDP growth in real terms as well as merrhanclise trade growth declined due to a worldwide economic slowdowrl in 2005 and the volatility in the oil market. Dcvcloping regions and the Comnionwralth of Independent States

(CIS)

real import growth rates exceeded their exports growth mainly due to the import of oil and

the higher oil price (M'TO, 2006).

The worldwide ecouolnic slowdown can be contribnted t o the slowdown experienced by thc European countries. The rnajor economies within the European region (Germany. France. United Kingdom and Italy) experienced a lower than 271 GDP growth, in contrast to some of the newer members that experienced a

GDP

growth of

4%.

On the positive

CHAPTER

2.

EXPORTS

A N D

EXPORT PROhfOTION

13

side the CIS rccordrd a GDP growth rate of 6.6% which was stimulated by higher export,

earnings. An average GDP growth of between 4 and 5% has been recorded for Africa. the Middle East and South arid Central America (including the Caribbean). Once again China achieved the highest GDP growth in 2005 of 9.9% and Italy with a GDP growth rate of 7.1% (WTO, 2006). I11 Table 2.1 world trade and output developmrnts for 2003 to 2005 are given

Tablc 2.1: World trade and output developments, 2003 - 2005

(At

constant prices, nnnud

prrcmtnge change)

I

2005

/

Somcrb. WTO, IhIF, N'orld Economic Outlook, 2006

In terms of merchandise trade the expansion in real merchandise imports in 2005 was less than in 2004. This caused a decline in world merchandise trade. North America's real merchandise exports and imports for 2005 increased at a rate of abont 6%, the same

as that of world trade. The growth rate of 10% and 14% in ternis of real merchandise exports and imports for South and Central America were due to high world prices and delriand for their export products. This caused increased ecu~lo~riic growth and in turn expanded the exports and imports of the regiou to double-digit ratcs. The Chinese econoniy performance in 200.5 of growth of 25% in real merchandise exports and 11% in real merchandise itnpurts. shaped Asia's trade development. The nil exporting countries of .4frica and RIiddle East and the CIS had very strong increases in thew real merrhandisr imports exceeding world tradr growth On thp other hand Europe showed a significdnt slowdown and a cbcline in trrrrih of both real merchandise exports and imports (LVTO.

CHAPTER

2.

EXPORTS AND EXPORT P R O ~ ~ O T I O A V

14 2006). Table 2.2 illustrates GDP and merchandis~ trade by regions for the period 2004 t o 2005.

Table 2.2:

GDP

and merehandwe trade b y regzon (grouith rates), 2004

-

2005 (Annual

1 1 - 3

1

9.5 ... ...

Note 1: Including the Caribbean

Note 2: Trade volume data are based on Japans rustorlls stalistics. National account data report a markedly stronger export and import growth in 2005.

Source: WTO. 2006

In value terms world merchandise exports increased to US$10.1 trillion or a n incrtase

of 13%:. Similarly world commercial services exports rose by 11% to US$2.4 trillion. Figure 2.1 shows the share of world merchandise a d commercial serviccs trade by regions. In terms of world merchandise trade Europe contributes 44% and 43X, to csports and imports respectively followed by Asia with 25% and 27% respectively for csports and imports. North America is a net importer of merchandise trade contributing 15% and 22% to exports and imports respectively. The composition of trade ill commercial scrviccs is as follows in terms of exports: Europe 52%. Asia 22%. Nort,h America 1776, South and Central America 3% and t,he rest. all contributing 2% respectively.

CHAPTER 2. EXPORTS AND EXPORT PROMOTION 15

Merchandise

Exports Imports

fiiD NorthAmerica

.

CIS

.

South and Central Arrenca

D Aha

.

Middle East

D

Europe ~ Asia

Commerciil services

Imports

Source: WTO, 2006

Figure 2.1: Share in world merchandise and commercial services trade by region, 2005 (Percentage share)

CHAPTER

2.

EXPORTS .4ND

EXPORT

PROMOTION

2.3

Overview

of South African trade

Although South Africa only contributes less than 1% of world t,rade, the in~portance of mole rxports t o cam foreign reserves t o pay for the increasing imports as well as to encourage joh creation cannot he u~~tlerestimatcd (see section 2.4). Given the data on world trade, the Sout,h African trade data will be analysetl. The South African nctr~al exports to the world increased from R296,246.261 in 2004 to R.331.405,258 in 2005. The South African actual imports increased from R306,927.027 in 2004 to R351.664,964 in 2005. The stronger increase in imports than in exports caused a deficit on the trade balance of R20.259.704 in 2005. In 2006 t h e deficit on t,he current account increased to R-12,5 billiori. This was mainly due to import of capital goods (SARB. 2007). An increase in the export b a ~ e will iniprove the balance of paymerits and the results of this study hope to iniprove the success rate of exporters due to the identification of realistic export opportunities. In Figure 2.2 the actual total South African trade from 1992 to 2005 is capt~tretl as d l as the trade balance for the same period. Figwe 2.2 shows a surplus on the tradc bnlar~ce from 1992 t o 2003 and a deficit on the trade balance for the period 21104 to 2005.

Figure 2.2 also shows the expansion in both exports and imports for South Africa for the period 1992 t,o 2005. When considering the structure of South African exports. agri- culti~re coritributes 4.55%, mining 31.14%. manufacturing 64.08% and other trade 0.23%

t o exports. The contribut,ir)n of different sectors is also illustrated in Figure 2.3. The per- centage contribulion of these sectors in t,crms of imports is as follows: agriri~ltltrr 1.34%. mining 14.49'7', manufacturing 83.85% and other imports 0.32%. The contributions arc

CHAPTER 2. EXPORTS AND EXPORT PROMOTION 17

illustrated in Figure 2.4.

South African Total Trade(R'OOO)

400000000 50000000 350000000

/

40000000 300000000 30000000

i

250000000

/

20000000

~

200000000 i 10000000 o r= 150000000

.

0 100000000 -10000000 50000000 -20000000 o -30000000 19921993199419951996199719981999200020012002200320042005 Year

---

Exports -.-Impats Trade Balance Source: DTI, 2006

Figure 2.2: South African total trade

In Table 2.3 basic economic statistics on South Africa are given. The Table illustrates

that real GDP growth for 2004 was 4.5% and for 2005 a growth rate of 4.9% was achieved.

South Africa achieved an economic growth rate of 5% in 2006 (SARB, 2007). In the same

periods export volume growth was reported as 2.5% for 2004 and 6.7% for 2005.

-CHAPTER 2. EXPORTS AND EXPORT PROMOTION 18

Structure of South African exports

III~ricultu re

.

Mining

o Manufaturing o Othertrade

Source: DTI, 2006

Figure 2.3: Structure of South African exports

Structure of South African imports

.

~ricultu re

. Mining

oManufaturing

o Other trade

Source: DTI, 2006

Figure 2.4: Structure of South African imports

Given the overview of current international trade trends as well as the situation of

South African exports and imports, the next section will discuss the importance of exports

in general and focus on the importance of exports as a determinant for economic growth.

---CHAPTER 2. EXPORTS AND EXPORT PROhJOTION

Table 2.3: South Afvica: Basic economic statistics (.4nnual peleeninge change)

Note 3: In U.S. dollars: annual percent cbange. Note 4: In U S dollars: ar~ur~al percent change.

Nott: 5: Annual average: Information Notice System (INS) definition. Note 6: Annual average: Information Rotice System (INS) definition.

Sources: South African Reserve Bank (SARB): IIZIF, International Financial Statistics: and Fund staff projections.

2.4

The

importance

of

exports

The importance of exports have been theoretically justified by Smith (1776) and Ricardo (1517) with t h e introdnction of t h e absolute and colnparative advantage theories respec- tively. These tf~rorirs l~elped to idcntify export industrips that could he of particular benefit t o their nations Governments realise t h e importance of exports because from a government perspective exports can influence not only monetary and fiscal policies. but also currency values (Czinkota, 2002:123). Alhaum, Strantlskov and Duerr (2002) ac- knowledge that exports do not only improve t h e halance of payments (Bop) of a country. but also contribute towards the development of domestic econonlv competencies Exports also rleterminr t h e competitiveness level of a nation as well as determine t h e amount of

CHAPTER 2. EXPORTS AND EXPORT

PROMOTION

20

imports that can be afforded. This in turn influences the quality of life experienced by a nation (Czinkota, 2002:124). Leonidou and Katsikeas (1996) agree that export develop- ment creat,es foreign reserves and a higher quality of life.

Czinkota (2002123-121) also emphasises the iniportance of exports on a firm level.

A

firm can benefit from export in the following ways:

opportunities for economy of scale:

more efficient production of products;

dccrcase in costs and an increasr in profits:

increases the sensitivity of firms in regard to different markets and cultures; and

develops competencies to outperform dornestic producers.

But. do exports also determine growth'? The new endogrnous growth theory &;I-

blishes a theoretical base for the positive relationship between international trade and econwiic growth arid development in hie long-run (Ron~er. 1986; Lncas. 1988).

According t o Salvatore (2004:360), a reduction in trade barriers (more oprn economy) ma,y influcncc the rate of economic growth and development in the following ways: adopt technology from advanced nations faster, benefit fi-urn research and developinent /R&D).

benefit from economies of scale, allocate domestic resources more efficiently as well as reduce price distortions. achieve greater specialisation a r ~ d production efficiencies and introduce new products onto the market mure rapidly.

CHN4PTER 2. E;.XPORTS A N D EXPORT PROhIOTION 21 The new endogenous growth theory postulates that externalities are cmsed by t,ech- nological change. Thcse extrrnalitim can "offset any propensity to diminishing returns to capit,al accunlulation" (Salvatore, 2004:360). Fujita and

Hu

(2001) state that the new endogenous growth theory i d e r s that tccl~nology transfer and spill over effects can effect cconolnic growth

Studies such Chcn and Fen8 (1999). Wei, Lui, Song and Romilly (2001) and Lewer and Vandenberg (2003) also suggest that domest,ic eco~mmies that are more open t o trade should grow faster than closed economirs. Other empirical studies such as Frankel and Rorner (1999) as well as Sachs and Warner (1995) have found a positive correlation be- tween ecor~olnies which are more open towards Irade, thcir manufacturrd exports and eco~iumic growth According to Wacziarg (2001)> the openness of an economy can in- Ruence economic growth through six potential channels: nlacro-rcoilomic policy quality,

price distortions. investliient share of GDP. government size.

FDI

and technology im- provenlent.

Empirical studies such a s Fujita p t nl.. 20011 Wri et al.. 2001 and Yao. 2006 suggest

that export perforn~ance is a instrument for growth and Cilyver-s and Dumnnt (2005) found that in Hvng Kong, Indonesia, South Korea. and lIalaysia economic growth was rausrd by exports. Lewer r t al. (2003) found that a 1% increase in the growth of exports is associated with a 0,2% increase in economic growth. Lai (2006) considers exports as the basic driving forrr in China's macroeconomic perfornlance. A study done by Medina-Smith (2001) on Costa Rica for the period 1950 to 1997 suggests that a long term relationsl~ip exits betwmn GDP, iuvestn~ent. population and exports.

CHAPI'5R

2 EXPORTS AND EXPORT PROJV(IT~O,V

Is this also trne for .4frica? In a study set ant t o show that manufact,uring exports is a key determinant to the economic success in Africa. Soderbom and Teal

(2003:25)

found that expnrts in general and income growth are related. However, it s e e m to be a corisensns that economic growt,h and techriological progress are a c c e l ~ r a t d by manu- facturing exports t h m ~ ~ y h the usage of cutting-edge technologies associated with inter- national firms, which helps countries to start with their economic spesialisation. This in turn helps a country t o acqnirr the foreign exchange needed t o import capital goods which the country cannot produce itself. Growth in manufaclured exports is pron~oted by various stabilising macreeconomic policies such as s n d l budget deficits, non-volatile exchange rates and a low and steady inflation rate. as well as other preconditions such as access t u duty-free imports of capital goods and raw material, political stability and reliable and unwavering infrastrncture (Radelet. 1999:2). Exports also encourage int,erna- tional factor mobility that improves ecorioniic efficiency through technological progress. (Campenhont, 2002; Lin, 2001).

The preceding discnssion suggests that exports are a key deter~ninant of economic growth. However, there is a growing r~umher of studies which are qnestioning the

dc

peridability of the empirical findings for such a reconirriendation.

Firstlg: there might be a potential problem in the form of the endogeneit? of exports. That means that the observed relationship between exports and Gross Domestic Pro- duct (GDP) growth might be partially reflecting the possibility that those countries that are better able to prodnce efficiently and. ther~fore, gruw their economics nre also the

CHAPTER

2. EXPORTS AND EXPORT PROMOTION

ones that show a superior export performance. Specification tests seem to mini~nise this coricern however (Fosn, 2002294).

Second and relatedly, thcre is the issup of causality. Do exports really foster growth or is it the increase in overall growth that improves compet,itiveness and, tl~us, prornotc exports? Contrary to the findings of the new endogenous growth theory that states t,hat a positive relationship exits between international trade arid econonlic growth and de- velopment in the loug-run (Romer, 1986; Lucas, 1988). Y~irnanda (1908) found that the assu~nption that exports and investments increase economic growth could not he proven unambiguously because of causation. l h u s high economic growth may as well be respon- sible for inrreased exports. Khalafalla m d Webb (2001) suggest that economic growth is a result of structural changes which influence exports and imports a d Krishna. Ozy- ildirim and Swanso11 (2003) nlentior~ that a n u m b ~ r of studies agree that productive firms

export and that exports do not cause firms t o become more productive. Most. however. believe that the causality bet,ween r~mm~factrrred exports and ecotioinic growth rates rnns both ways in t1 righteous circle: fast export growth helps t o facilitate the acquisition of capital goods and the transference of techl~ology which drives economic growth. and that fast cconomic growth in tnrn grants the means through which financial investment is inade in the respective physical and human capital that supports more rapid cxport growth (Radelet, 199963. Furthermore. Czinknta (2002j argues that increased co~npeti- tiveuess of firn~s determine export performanre. .Jung and hlarshall (1985), using all~lual data for 37 countries, performed 'causality' tests and found that. in 22 of the cases, it was impossible to establish t,he direction of causation. In only four cases. Costa Rica, Ecuador. Egypt. and Indonesia, did they slrow the direction of causation from exports to

CILWTER 2. EXPORTS AND

EXPORT PROhIOTIOIG

24

growt,h. However, according to Hutchinson and Singh (1992), a one-way causation fron~ exports to output could he established. This was achieved by taking into acconnt the declining marginal productivity differentials fur a substantially larger numher of countries as quoted by Fasu (2002:49'2).

Fnrtherniore, applying a stronger test for causality haseti on Engle. Hendry and Richard (1983) t o data on China, Kwan and Kwok (1995) reported evidence t h a t vali- dates the export-led growth theory. Evidence thus appears to he in favour of the theory that expurls came output as qnoted by Fosn (2002:294).

Criticism car1 also he fonnd according to Naude and Vm Renshnrg (1999). alien on ernpirid investigation to determine the causality between export and productivity growth in 22 South African n~anufacturing industries showed that only in the case of chenlicals and wood processing sectors an increase in exports caused an increase in pro-

rlllctirity.

Tliis section ontliried the importance of exports as H determiuant of cconornic growth in countries. T l n ~ if exports can be stiniulated within a countryl the country will be able to benefit from the inrreased exports and in turn increase economic growth. Although some of the literature suggests lliat exports may not cause economic growth. other be-

nefits still exit from increased export activities within a country. In the next seetic111 the focus will be on the role that government can play in promoting export activities within a country.

CHAPTER 2. EXPORTS A N D EXPORT PROhlOTION

2.5

The role of governments

as

TPO

2.5.1

Export promotion according to the stages of exports

Export promotion activities across the globe are either performed by public or private institutions. In this study the focus is on the contribution that public TPOs can achieve through export promotion activities (see 1.2.1). The focus is narrowed down to the con-

tribution that the DTI a s the South African national TPO can achieve through export

promotion activities by applying the DShl t,o identify realistic export opportunities as

discussed in chapters 3 and 4.

Arcmrding to Lederman. Olarreaga and Payton (2006:l). tlie objective for TPO's is to help expc~rters to obtain rr~arkets for thcir relevant prodi~cts as well as to create an understanding of demand structures in different export markets. Wheeler (1990) argues that export prolnotion programmes should a~ldress limitatioris sirch as lack of expertise of exporters. limited resources and other real or perceived obstacles experirrlced hy rxporters. TPOs provide services tha.t range from collating inforn~ation regarding foreign markets, competitors. products. barriers etc. with the aim to tlissemi~late this information for the exporters benefit (Coyvrrs. et nl.: 1995:173). Lederman

et

ul. (2006:l) classifj- the services provided by TPO into the following four categories:

"country image building"

"export support serciues"

"marketing"

CHAPTER 2. EXPORTS AND EXPORT

PROMOTION

26

Howevcr, the focus of this study is to illustrate the role that the public

TPO

in South Africa can play in providing the services mentioned above. From a government perspective export promotion programmes aim t o improve a country's tra,de balance and increase the competitiveness of exporting firms (Diamantopoulos. Srhlegelmilch &- Tse, 1993). Lederman

et

a/. (2006:Z) argue that the involvement of govern~nent in export pro- nmtion is justified based on asyrnetrir information a.nd other market failures, but pnblic and private TPO face an allocation dilemma in distinguishing between a l t e r l d v e export pro~not,ion instruments and different export markets (Cnyvers et

d..

11)95:173).

Export promotion activities performed by puhlic TPOs should be focused according to the export expertise within firms. Segrnentntion of firms in stages of export deve- lopment can aid public export promotion organisations in providing the necessary ser- vices according to the stagc of export involvelnent of the firm (Francis

6:

Collins-Dodtl, 2004:474:495). Bilkey (19781, Cavusgil (1980) and Czinkota (1982) were first to propose thc stngrs of esport involvrment. Viviers and Calof (1999:917) classify the stages of ill- ternationalisation a s a conibinatiorr of "non-exporters. partially intcrcstcd firms wtm will fill unsolicited export orders. experimental exporters. active and cornnlitted exporters within any conntry". Tha reference framcwork used in this study will be the four-stage model of development developed by hloini (1995). The nlodel classifies firms into the following four cntcgories:

partially intercstcd exporters

CH.4PTER 2. EXPORTS AND EXPORT

PRORIOTION

regular exportels

Dia~nantopoulos

r t

al. (1993) and Kotahe and Czinkotn (1993) argue t,hat nor]- expc~rters lark the motivation. export expertise and know-how with respect to markets and export practices. According to Francis et 01. (2004:487), the usc of export pru- motion programmes cnhances both t h e marketing and export marketing competence of

firms. These nowexporters should be motiv~ted and informed about appropriate export practices and potential export opportunitirs. Viviers rt nl. (1999:917) argue that un- solicited export orders are a starting point to entice nun-exporters t o becomr irlvolved in exports. They alw argue that government mnst play the role of initiator and help managers to lower their perception of the risks and costs involved in exports. Viviers

rt ol. (1999:Y17) also argue that in tllr South African c;wr, governn~erit should initiate rxport development as a first s t e p

A t each stage of export involvement the firm requires different fornis of <assistance. The assistance that these export propranilnps offer should enhance export and inarke- ting abilities that, are relevant to the firm's level of rxport involvemrnt (Francis et al.. 200-1:490). Viviers e t al. jlYY9:919)'s recommenclatio~~s suggest that the South African government should rlewlop firms to get ready to become aggressive exporters as a second step. Diarrrar~topoulos et al. (1993) argue that at later stages of export involvement the firms require information regarding exporting and export planuing, whereas in the final stages of export i~lvolvemrnt the exporters require informatiorl regarding sales of t,hcir relevant products.

CHAPTER

2.

EXPORTS

AND

EXPORT PROMOTION

28 Because of the allocation of resources problem that public TPO's experience and the export assistance that should be provided at the different stages of export involvement. Cuyvers e t al. (1995:173) suggested a DShl that could address prohlertis such as the need for information regarding foreign markets, export promotion efficiency arid actions in export markets. In section 2.7 the DSY i n general as well as the DShI that will be applied for South Africa will be discussed.

The question. however, arises at what stage of internationalisation government export assistance would be most beneficial. According to the fintlings of Francis et. al. (2004:490). export promotion programmes greatest impact resides with firrns in the earliest stage of

export involvement

At this point it is important to note that Hogan. Keesing and Singer (1991) argued that public export proniotion orgar~isations in developing couritries follow similar HI)-

proaches as thosr in developed markets by providing information, marketing and other services. but usually these developing markets fail to achieve the objectives clne to the lack of expertise to select appropriate export assistance arcording to the specific needs for their exporters. Thus, in order for the DTI to achieve their aims they should heave the caution highlighted by Hogan et al. (1991) and, therefore, develop programmes according to the needs and stages of export involve~nent of South African exporters. In Table 2.4. Ahmed, hlohamed, Johnson and Rleng (2002) and Seringhaus and Rosson (1991) s u n - rnarise the needs of export companies and the appropriate export promotion progranmies that could be offered. In section 2.5.2 the study investigates the efiectiveness of export, promotion programmes.

CHAPTER 2. EXPORTS

AND

EXPORT PROMOTION 29

Table 2.4: Companies' needs a i d eq)ort promotion progra7nmes according to stages o j

To br made aware

I

of opportunities New exporter To determine the feasibility of exporting Seminars, export bulletin/newsletter Market reviews, custom market research Trade missions. financing, insurance Expanding exporter To select the most promising market and Market visits, export seminars. export newsletters Trade fairs, trade missions financing, insurance Continuing exporter To inlprove and finetune existing operat ions entrv method Export seminars, export newsletters Trade fairs. foreign buyer

visit, sales offices, financing, insurance Source: Adapted from Ahmed r t u1. (2002). Seringhaus et ul. (1991)

2.5.2

The effectiveness of export promotion programmes

Publicly funded export promotion programmes are regularly critisetl on the basis that, only large companies reep t h e benefit from assistance provided by government. which they could have funded on their own. Porter (1990) argues that these government funded pro- grarnmes should increase competitiveness rather t h a n increme restraints in the form of regulations. In this section t h e aim is t o highlight the effectiveriess of export promotion

activities and how bpst to allocate limited resources according t o findings in the literature.

Richards, Ispelen and Kagan (1997336) found that export pronlotion activities aimed a t products that are easier to differentiate, such as mar~ufactured or processed goods, are

CHAPTER

2.

EXPORTS

A N D

EXPORT PROhfOTION

30 more effective. According to a process lnodel presented by Czir~kota (19'36). export pro- nmtion and, therefore. rxport assistance has an indirect influence on export performance. Erihanceir~eiit of orgariisational and managerial capabilities/competencies is the basic out-

come of the aforrinentioned programmes. Orgar~isational capabilities can be defiried as advanced research capacities. knowledge and interactive corinections with the market and human and techriological resources. hfanagerial competeiicies can be described as suffi- cient education. pxposure to the international arena, expertise pertaining to the proposed export product and a very frarik international commitment. Thereforel through the en- hancement of these aspects exports can rise. Seringhaus and Rosson (1990) also found that export pron~otion programmes have an indirect effect or1 export sales a s quoted by Francis et (11. (2004:476). It is, tlierefore. clear that governmerits can improve export perfornlarlce through the effective use of their export promotion programmes.

Dianlantopoulos et al. (1993) have founded a ladder model through which they ex- plain the several hmefits that a firm iniglit experience in the various stages of their involvement with nn export promotion assistance programme. They depict that through the early stages a fir111 can take advantage of such a programme by becoming aware of

thc various exporting possibilities and benefits facing them. By hecorning aware of these possibilities, it can also be perceived as a catalyst in the motivation pnxess t o act upon these possibilities. Later, firms will require more information related to exporting and export planning support. 111 the third and final stage of their model, firms will need support with their selling of the export product in the international market.