New research by the Centre for Competition, Regulation and Economic Development (CCRED) shows the largest 50 companies listed on the JSE expanded their financial reserves to R1.4-trillion by the end of 2016, contradicting arguments that investment in South Africa was being undermined by a lack of savings.

Moreover, the CCRED argues that the current lack of investment by these companies cannot be put down to an “investment strike”, as is often alleged by certain political and union leaders, as this would imply coordinated action by the firms.

Nevertheless, the University of Johannesburg think-tank says it raises serious questions for policymakers as to how to stimulate higher levels of investment by these companies, which would also help raise investment levels across the economy.

The research, which was commissioned by the Department of Trade and Industry, shows that real investment in South Africa has plateaued at around 10% of gross domestic product since 2010.

CCRED senior economist Thando Vilakazi tells Engineering News that reserve accumulation by large JSE-listed companies has increased materially over the past several years, rising from R242-billion in 2005.

Changes in reserves between 2005 and 2016 indicate that, when the amount contributed to reserves decreases on a yearly basis – as it did, by R110-billion, between 2005 and 2009 – real investment increases. Between 2005 and 2009, investment increased by a substantial R51-billion.

From 2010 onwards, funds contributed to reserves increased at a pace faster than investment, probably as a consequence of the greater caution exercised following the global economic crisis. However, the CCRED says this does not explain the continued accumulation of reserves in later years.

Vilakazi says this “worrying trend” shows business is not reinvesting in the growth of the economy. He stresses, though, that there could be “legitimate” reasons for the accumulation of reserves, including uncertainty about demand, low growth and the poor investment climate in South Africa in the past few years.

The CCRED also indicates that firms are less inclined to invest when they are in a position of entrenched market power, where barriers to entry are high and where their position is not likely to be challenged by new emerging companies.

“The challenge for policymakers is to determine the appropriate set of incentives to stimulate further investment in new capacity in particular, rather than simple replacement or ‘buying’ market share through mergers and acquisitions, which has the effect of further concentrating industries.”

Meanwhile, the study also cautions that the levels of internationalisation of the top 50 firms on the JSE should be taken into account when measuring black ownership.

Of the Top 50, 23 companies, which account for 65% of total JSE capitalisation, are cross-listed. The remaining 377 firms, which Vilakazi dubs the ‘real JSE’, account for a mere 35% of market capitalisation.

“Measuring black ownership needs to take into account levels of internationalisation and whether companies owned by an increasing number of black South Africans actually have operations in South Africa. Increasing black ownership and industrial development support for companies with significant operations in South Africa should matter most, given they can contribute to investment, employment and productive growth domestically.”