Testing Creative Destruction in an Open Economy: The Case of South African Manufacturing

This paper employs a theoretical framework that allows for both direct and indirect impacts of trade liberalization on productivity growth. Indirect impacts operate through both scale effects as well as a differential impact on firms conditional on their distance from the international technological frontier. Empirical results from panel estimations for the South African manufacturing sector are reported for a 3-digit SIC data set, as well as a panel of firm level data. Estimation results confirm positive direct impacts of trade liberalization for both industry level and firm level data. Further, results confirm that the greatest positive impact of trade liberalization will be on small rather than large sectors of the manufacturing sector, while South African manufacturing sectors do not lag sufficiently behind the technological frontier for trade liberalization to exert a negative impact on productivity growth. In addition, we confirm a positive impact of scale of production on productivity growth, while pricing power as well as industry concentration in the manufacturing sector are strongly negatively associated with productivity growth. Policy implications to follow from the analysis affirms the importance of trade liberalization and competition policy as a means of raising productivity growth.