Analysis | The pace and direction of innovation is critical to South Africa’s economic recovery*

South African businesses may need to change how they innovate in order to survive the ‘new normal’, say the writers. (Illustration: Adobestock)

*First published on Daily Maverick, 28 July 2020.

Are South African businesses innovating quickly – and strategically – enough to improve their performance in the short to medium term? The results of the South African Business Innovation Survey, 2014-2016, released earlier in July 2020 by the Department of Science and Innovation, can help to answer this question.

Public policy debate about South Africa’s economy right now has tended to focus overwhelmingly on big picture explanations and recovery plans. Missing from this debate is a micro perspective, which places the emphasis on firm-level decisions and how these decisions ultimately drive or constrain business growth.

This is a harder discussion to enter into because of the evidence barrier in firms that are not publicly traded. Usefully, South Africa’s national business innovation surveys, which have been carried out since the 1990s, collect data retrospectively from businesses across the industrial and services sectors, through surveying a random sample of formal businesses, stratified by sector and size-class. 

This method ensures that survey results can be extrapolated statistically to the national population of businesses, resulting in unique and vital data for business leaders, industry lobbyists and government policy-makers, as well as for international comparison.

Most South African businesses do actually innovate

At the aggregate level, the 2014-2016 survey results paint a promising picture of an innovative formal business sector. That is, 69.9% of businesses were trying to innovate through, for example, performing research and development (R&D), training their staff, or purchasing new tech and equipment. And nearly all (96%) of these “innovation-active” businesses actually ended up with an innovation. 

An innovation, as measured by the survey, refers to the introduction to market of a new or significantly improved product (good or service), or the use of new or significantly improved process (methods for the production or supply of goods and services). 

From this definition, which comes to us from the Organisation for Economic Co-operation and Development’s (OECD) statistical handbook for innovation surveys, the Oslo Manual, the focus is both on novelty (new or improved) and implementation (introduction to market or firm). 

Looking back at the 2014-2016 period, businesses spent 1.97 % of the total turnover on innovation activities. Product innovations were found in 48.2% of South African businesses and process innovations in 34.6% of businesses. Marketing and organisational innovation was also reported for 41.7% and 42.0% of businesses, respectively. 

Encouragingly, businesses that were trying to implement products and/or processes during the period 2014-2016 reported positive product, process and market outcomes of innovation. 

For instance, improved quality of goods and services was considered by most (38.0%) of these businesses as a highly successful outcome of innovation, followed by increased revenue (31.8%), and improved profit margins (30.9%). 

Improved health and safety (27.0%) and reduction in environmental impacts (23.3%) were also rated by these businesses as highly important, compared to financial and quality outcomes.  

By contrast, entering new export markets or increased export market share was reported as a highly important outcome by only 7.5% of these product and/or process innovators.

Execution of innovation could be faster

A deeper dive into the data, however, points to some issues that should concern leaders from business, industry associations and government. 

Key among these issues is that 80.5% of business turnover in 2016 (down from 85% in the 2005-2007 results), was generated from products that were marginally modified or unchanged, with the balance of turnover generated from products new to the market (10.8%), new to the business (7.0%), or new to the world (1.8%). 

Put differently, at the end of a three-year period, only about 20% of total sales were brought about by new or improved goods or services (innovations), and less than 2.0% were accounted for by products considered by respondents as first-of-its-kind in the world.

Commentators may argue that businesses may just have been benefiting from innovations carried out prior to the survey reference period, or that innovation – especially R&D-led innovation – takes time to “bear fruit”. 

These are both legitimate explanations, though would bring little comfort to businesses facing down uncertainty brought about by global dynamics and “exogenous shocks”, like the Covid-19 pandemic.  

Indeed, in the current era of rapid change, driven to a large extent by technological advancement, the pace of innovation in some sectors can result in dramatic consequences for businesses and entire industries. There are countless examples of disruptive or radical innovations that demonstrate this. 

For example, it took Uber’s founders just five years from 2009 to launch ride-hailing services in all the major global capitals, including the South African service in 2013, resulting in what, by 2019, was a business with assets in excess of $30-billion. 

In this context, the company innovated relentlessly, introducing Uber Eats in 2014 and a plethora of market-specific services, like auto rickshaw rides on UberAuto in India, Sri Lanka and Pakistan. 

Equally, the Covid-19 pandemic has forced massive layoffs by Uber, about 14% of its workforce, and closed 45 offices, in a bid to keep the company afloat. 

And yet, in this extremely challenging business context, the launch of Uber Cash in South Africa in June 2020, represents just one example of how the company is using innovation to pivot towards new business growth opportunities. 

Strategy is key

In the context of the current global Covid-19 pandemic, which is fundamentally changing how businesses operate, South African businesses may need to change how they innovate in order to survive this “new normal”.

Working more collaboratively, for example, could be one strategy. The 2014-2016 survey results show that less than 10% of innovative businesses partnered with government research institutes (8%), universities (6.8%), or private research institutions (4.9%) to develop their innovations during 2014-2016. Indeed, leveraging synergies between formal knowledge producers, such as universities, and businesses through co-creation of innovations is an area of focus for the South African SME fund.

Additionally, reflection on the type of innovation activities in which to invest, against the survey’s data disaggregated by sector could inform firm-level strategy development processes.

It’s worth pointing out that innovation surveys also assess the constraints faced by businesses in deciding whether or not to innovate. 

In 2014-2016, for example, financial barriers such as a lack of funds, or a lack of credit, coupled with market barriers, such as markets dominated by established businesses, impacted on innovation decision-making. 

Much less significant, in this regard, were institutional factors such as legislation, regulation, standards and taxation, or lack of skills. 

It is knowledge of these barriers, and other indicators delivered by a national innovation survey, that provides a critical starting point for businesses and government to consider how to support innovation within the formal business sector. 

Within the context of the country’s economic recovery, leaders across the political, corporate and small business landscape would do well to consider this data, as well as the analysis thereof, as part of their decision-making toolboxes. DM/BM

Dr Moses Sithole, a mathematician and statistician, is Research Director at the Centre for Science, Technology and Innovation Indicators at South Africa’s Human Sciences Research Council. Dr Yasser Buchana is a Post-Doctoral Research Fellow at the Centre for Science, Technology and Innovation Indicators at the Human Sciences Research Council. Gerard Ralphs is Policy Analyst and Programme Manager at the Centre for Science, Technology and Innovation Indicators at the Human Sciences Research Council. 

Analysis | Survey shows South African firms in some sectors are highly innovative

Mining and utilities businesses have low levels of innovation. Getty Images

Glenda Kruss, Human Sciences Research Council and Moses Sithole, Human Sciences Research Council

The ‘one good thing’ caused by COVID-19, according to a recent Harvard Business School publication by Hong Luo and Alberto Galasso, is that it has catalysed innovation. This is apparent in South Africa too, where businesses are introducing changes to mitigate the risks of the pandemic. They are adjusting their practices and strategies, introducing new technologies, products and designs, and determining how they can use digital and automated technologies.

But will they last?

The country’s Centre for Science, Technology and Innovation Indicators, with the Department of Science and Technology and Statistics South Africa, has released the latest national business innovation survey. The survey helps to answer critical questions facing business leaders, industry groups and government policy-makers. The data can help the country’s understanding of the innovation taking place in businesses, so that more firms can be encouraged to innovate. The survey covered the period 2014 -2016.

How innovative are South African firms and what types of innovation have they implemented?

The survey found that innovation was pervasive across all sectors, but particularly in engineering and technology, manufacturing and trade. A high percentage – nearly 70% – of South African businesses were innovation-active. This meant that they had taken some scientific, technological, organisational, financial or commercial steps towards implementing an innovation. The proportion of innovation-active businesses compares favourably with trends in OECD countries.

But, to respond to current challenges, it is critical to understand what kinds of innovation firms are able to implement, and whether the kinds of benefits that result from them can contribute to business strategies and to inclusive and sustainable growth.

What types of innovation have firms implemented?

Innovation surveys typically measure four types of innovation. These are product, process, organisational and marketing.

The survey found that there were distinct patterns of these types of innovation in different economic sectors.

For example, mining and utilities businesses reflected low levels of innovation. For its part, manufacturing had the largest proportion of businesses with product innovation (59.8%) and marketing innovation (43.4%).

Process innovation was most prominent in logistics businesses (61.7%). More finance (52.0%) and manufacturing (49.1%) businesses reported organisational innovations than businesses in any other sector.

Each type of innovation requires specific forms of support.

Businesses most typically invested in innovation activities that helped them to prepare for technological and organisational change. They did this by training their workforces and investing in new information technology capabilities (Figure 1).

For both the industrial and services sectors, the biggest-ticket item of innovation spend was the acquisition of machinery and equipment.

Figure 1.

A substantial number of innovation-active businesses reported the use or development of advanced new technologies. These included computerised design and engineering, material handling, supply chain and logistics technologies, business intelligence technologies, and green technologies (Figure 2).

Figure 2.

These innovation capabilities suggest that there is a foundation for promoting more innovation that can lead to more positive economic outcomes.

The benefits

Innovation was less likely to have an immediate impact on turnover, and was far more likely to be incremental than radical.

Innovations with high degrees of novelty, such as new to the market or to the world products, did not have a strong effect on the turnover of the businesses that reported product innovations. So, just over 80% of their turnover was generated by goods and services that were unchanged or marginally modified. This was in contrast to a product that was new to the market (10.8%), new to the business (7.0%), or new to the world (1.8%).

Quality improvement was the top-rated innovation outcome for innovation-active businesses. Improved quality of goods and services was considered by 38.0% of product and process innovators as a highly successful outcome of innovation. This was followed by increased revenue (31.8%) and improved profit margins (30.9%).

Similarly, for nearly 50% of organisational innovators, improved quality was the main innovation outcome.

Entering new export markets – or increased export market share – as a highly successful innovation outcome was reported by only 7.5% of product and process innovators.

Innovation-active businesses also accessed national and global markets more than their counterparts with no activity. This included markets in the rest of Africa, Europe and Asia. Businesses with innovation activity were more likely to have sold their goods and services on national markets (58.1%), when compared to non-innovation-active businesses (37.7%).

Firms that were not innovation active were more restricted in their reach. They accessed selected provincial markets (57.4%) more than any other market.

The challenge is to grow the scale and range of types of innovation, to ensure that such outcomes and benefits are more widespread across more sectors and businesses.

Solutions

Businesses’ perceptions of the barriers to innovation were grouped into four sets of factors. (See Figure 3.) These provide critical insights into potential spaces for intervention.

The most significant barriers relate to market factors. These include market dominance of established firms, too much competition, and uncertain demand. For non-innovation-active businesses, the most widely reported barrier was a lack of demand for innovation.

To address these barriers requires stimulation of new and expanded markets. In the South African case this requires structural economic reforms. There are a number of steps government can take. It can, for example, ensure that regulatory conditions are more conducive for creating new businesses. It can also improve the transport and communication infrastructure.

Government also has an important role in stimulating demand in the context of the economic, social and health challenges of COVID 19.

Cost factors were also significant. These ranged from the costs of innovation being too high, to lack of funds for innovation within the business or from external sources such as government or private equity.

The vast majority of innovation-active businesses relied on their own funds to innovate (77.0%). Only 1.7% relied on government as a source of funds.

This points to the fact that public sector funding can be targeted more effectively to stimulate innovation. Examples include the new Sovereign Innovation Fund proposed in the 2020 budget or the R&D tax incentive.

But it’s equally important to create conditions that make private equity funding more attractive.

Knowledge factors were not as significant. Nevertheless, strengthening the link between innovation and skills development strategies would be valuable.

Institutional factors, such as legislation, regulatory and intellectual property rights frameworks, and infrastructure were not perceived as significant barriers.

Figure 3.

Way forward

In local, national and global contexts, rapidly advancing digital technologies and their applications have opened up the space for innovations as yet unimagined in products, processes, marketing and organisation.

The evidence from the business innovation survey is an invaluable opportunity to reflect on where South Africa’s innovation strengths and challenges lie. It also opens the door to interrogate how existing policies and funding mechanisms can be used more effectively to facilitate business innovation in the country.

Glenda Kruss, Executive Head of the Centre for Science, Technology and Innovation Indicators, Human Sciences Research Council and Moses Sithole, Research Director, Centre for Science, Technology and Innovation Indicators, Human Sciences Research Council

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Results | SA Business Innovation Survey, 2014-2016

8 July 2020 – South African Minister of Higher Education, Science and Technology, Dr Blade Nzimande, today released the results of the 2014-2016 Business Innovation Survey.

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Produced by the HSRC’s Centre for Science, Technology and Innovation Indicators (CeSTII) for the Department of Science and Innovation (DSI), the Survey delivers national data on the formal business sector’s innovation performance in the three-year reference period.

“In our current COVID-19 context, these results help us to reflect on the distinctive nature of innovation in South Africa, and point toward spaces for policy intervention so that we can encourage more firms in all economic sectors to innovate,” says Executive Head of CeSTII, Dr Glenda Kruss.

“To respond to the current economic, ecological and health challenges, we need to understand what kinds of innovation firms are able to implement, and whether the kinds of benefits that result from these forms of innovation can contribute to firms’ business strategies and to inclusive and sustainable growth.”

Alongside the annual R&D Survey, the HSRC has performed national innovation surveys since CeSTII was established in the early 2000s. 

“South African innovation surveys follow the widely adopted OECD Oslo Manual methodology to enable international comparisons, and are conducted using a random sample of businesses stratified by size-class and across across the industrial and services sectors,” according to Dr Moses Sithole, CeSTII Research Director and the Survey’s technical lead.

“Data is then weighted to reflect innovation performance across the national population of businesses in those sectors, allowing for a unique snapshot of innovation performance in the formal economy.”

Adds Kruss: “The survey provides critical data on the kinds of barriers that prevent more firms from innovating, whether relating to cost, market, knowledge or institutional factors.”

“We tend to promote ‘islands of excellence’, the small number of firms that innovate at the technology frontier in ways that are new to the world. Most firms however, utilize incremental innovations that marginally modify their existing products and processes, or that are new to the firm and local market. So, it is essential to design policy support mechanisms that can mitigate the constraints on these incremental forms of innovation more widely across the business sector.”

Watch media briefing

South African Minister of Higher Education, Science and Technology, Dr Blade Nzimande, addresses media on  on 8 July 2020 on measures implemented by the National System of Innovation and Higher Education in response to the COVID-19 epidemic.