Moving forward through innovation and productivity

THERE is a saying that one cannot be an artist without creativity. Is this far-fetched? Can we work to become innovative, if we do not have what it takes? Before continuing on the subject of innovation, it is helpful to look at the origins of innovation. During the Industrial Revolution, continual growth of output could no longer be explained only in increase of inputs used in the production process, hence the birth of total factor productivity/ multifactor productivity leading to innovation economics.

According to Wikipedia, innovation economics is based on two fundamental tenets that the central goal of economic policy should be to spur higher productivity through greater innovation, and that markets relying on input resources and price signals alone will not always be as effective in spurring higher productivity, and thereby economic growth. Thus, the country depends on the ability of businesses to be innovative in order for the economy to prosper. We cannot talk about poverty eradication, job creation, and economic growth in the absence of innovation. Regardless of the efforts of economies, especially emerging ones, countries will continue to struggle if they lack "innovativeness".

The yardstick of innovativeness is a multifactor productivity index (Organisation for Economic Cooperation and Development (OECD), 2003). Multifactor productivity (MFP), sometimes referred to as total factor productivity (TFP), is a more informative measure of productivity changes and often relates to a change in output in relation to several types of inputs. In OECD countries, multifactor productivity has been widely used as a measure of productivity performance. According to the OECD, the multifactor productivity growth rate incorporates increases in technical progress and policies that favour competition promote innovation and subsequently lead to increased economic growth.

The OECD says the recovery in multifactor productivity growth in the US over the 1990s was directly linked to innovation improvements, especially in the information and communication technology industries. This coincides with the same period when the penetration of mobile phones in South Africa was on the rise accompanied by higher economic growth. Before 1994, South Africa was characterised by riots, boycotts, sanctions and disinvestment by a significant number of foreign countries and companies. During this period, a number of incentives were available to domestic companies who pooled their products into sector marketing boards.

These boards enjoyed government support as well as secured markets, including the protection of the markets in the South African Customs Union region. Imports were minimised and domestic companies became insulated from the global markets. During this period, the growth rate in multifactor productivity was stable but on a downward trajectory leading to a slowdown in economic growth which registered1.4% and multifactor productivity of 2.4%, compared to post 1994 when economic growth rate reached 3.5% and multifactor productivity 3.2%. This suggested that the country has turned the corner in terms of innovativeness. However, the rate of innovation is still at a lower quadrant. Looking at the period where most challenges in innovation were experienced since 1994, over 10 years (20032013), the total economy of South Africa registered an average annual multifactor productivity growth rate of 1.3%.

The poor multifactor productivity during this period accompanied the real output growth rate of 3.5% during 2003-2013 (Productivity Stats, 2013). Whereas the country started on the right foot after 1994, the level of depletion during the period under question signified the vulnerability of the South African economy. The best performers of multifactor productivity growth in the 10-year period (2003-2013) were found in the sectors of agriculture, forestry and fishing that recorded the highest growth rate in multifactor productivity of 3.9%; followed by the finance, real estate, insurance and business services sector with a growth rate of 3.3%.

The worst performer over the 10-year period (2003-2013) was the electricity, gas and water sector with a growth rate of -4.2% over the 10 years (Productivity Stats, 2013). This sector continues to show signs of lack of innovation.

Given the interdependencies between industries, the sector as critical as electricity, gas and water could impact the innovativeness of the competitiveness of the economy negatively. It is critical that innovation is prioritised by all decision makers concerned.

By: Bongani Coka - CEO of Productivity SA