South African companies are accumulating reserves and not investing in the economy while acquisition-led growth has increased concentration and led to anticompetitive behaviour, says research from the University of Johannesburg’s Centre for Competition, Regulation and Economic Development.
Cash reserves in the JSE’s largest 50 companies had increased from R242bn to R1.4-trillion between 2005 and 2016, said Thando Vilakazi, senior economist at the centre.
The government needed to design policy that would incentivise firms to invest domestically, Vilakazi said this week on the release of the Industrial Development Research Project.
Funded by the Department of Trade and Industry, the research considers the investment decisions of the largest JSE-listed companies to offer solutions for the apparent investment strike.
Separately, it explores Remgro as an influential investment holdings company that could shape developmental outcomes and also reports on the food production and processing and metals and machinery sectors.
The need to effect structural change in the ownership and control of SA’s economy is at the centre of economic and industrial policy debates. The department’s Black Industrialists Programme seeks to more substantially involve black people in the operation and ownership of industrial enterprises.
The research found that large firms with high levels of retained profits, and concentration levels that reinforced barriers to entry, characterised the South African economy. "Patterns of ownership in the economy are skewed in favour of the white population, large conglomerates and incumbent firms."
Twelve of the companies that were in the JSE’s top 20 in 2000 were still in the top 20 in 2016, reflecting a lack of dynamism in the economy. There were indications that concentration had worsened, with investment largely in the form of mergers and acquisitions rather than new production, Vilakazi said.
This created powerful economic incentives to abuse dominance or collude, with negative consequences for the economy in the long term. The Competition Act should be amended to more firmly address anticompetitive behaviour, he said.
Real investment in the economy by companies grew from 2002 to 2008, but then levelled out at an average rate of 10% of GDP. The property, paper, internet and media, investment services and industrial sectors ranked highest in terms of retention of profit after dividends. The mining, consumer services and telecommunications sectors retained less than 50% of profit after dividends.
"Firms with low retention rates are usually companies that no longer have expansion capacity or do not plan to invest in new projects," the research found. There had also been considerable internationalisation of JSE-listed companies since 2000, which meant that funds from the domestic capital market were deployed elsewhere.
The only companies in the top 10 that derived a considerable share of their revenue from domestic operations were Standard Bank and FirstRand.
Nearly half of the top 50 firms were dual-listed. If policy was concerned with growing local productive investment and increasing black ownership, it was perhaps less relevant what share black South Africans held of companies that were largely no longer South African. If these firms were not investing in the economy, "a pattern of stagnant growth in fixed capital formation and de-industrialisation of the economy will continue".
Policy certainty and distrust between the public and private sectors was a big problem, said Fatima Vawda, MD of 27Four Investment Managers.
Multinationals that were about to make big investments in SA walked away when the country was downgraded. "There are lots of opportunities all over the world that people with big money can invest in."
Policy uncertainty aside, it was important to develop black-owned businesses so that when the economy recovered it was off the back of more diverse ownership, Vilakazi said.
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