Innovation Activity in South Africa : Measuring the Returns to RandD

Improvements in productivity is necessary to effectively increase economic growth in the long term.The literature emphasises a positive correlation between firm-level innovation and productivity gains, although evidence for developing countries has been less conclusive. It is unsurprising then, that policymakers and researchers widely acknowledge that innovation is one of the major drivers of productivity growth, and is therefore of critical importance to the competitiveness and growth of firms and the macro-economy. We look at the dynamics of RandD expenditure in South Africa over the period 2009 to 2014 at the firm level using the South African Revenue Service and National Treasury Firm-Level Panel, which is an unbalanced panel dataset of administrative tax data from 2008 to 2016. Expenditure on RandD is used extensively as a proxy for innovation in the literature as it improves the capability for developing new products and processes and improving existing ones. We use a production function approach to estimate the return to RandD in South African manufacturing firms, a theoretical framework which is the predominant approach in the literature. This paper, however, is one of only a few estimating the return to RandD using firm-level data in a developing country