The South African economy requires a new approach to regulation, competition and industrial policy to open the economy to greater participation, particularly by black industrialists, according to research released last month by the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg.

In a series of studies funded by the National Treasury on barriers to entry and participation by rival entrepreneurs, the CCRED identified “substantial” barriers to the entry and development of new entrepreneurs and producers hoping to gain a foothold in the market.
Barriers to entry, their magnitude and how they can be reduced are significant and poorly understood, as not enough firm-level research on either the experiences of new entrants or failed entrants has been conducted, CCRED director Professor Simon Roberts says in a statement released by the CCRED last month.

Consequently, the CCRED aims to take the discussion further by looking at features of markets and firm behaviour that limit entry, even where entrants have innovative products.

Inclusive Economy

“Our studies – on individual firms and important economic sectors – underscore what South Africa needs to ensure a more inclusive economy, including greater performance-based competition, investment in capabilities and learning, and mechanisms for rewarding effort and creativity.”
Further, the research indicates that the obstacles to entry by rival entrants are a combination of the intrinsic features of markets, consumer behaviour and strategic exclusionary conduct by incumbents, as well as risk aversion regarding the financing of new entrants.
Specific constraints include the challenges of accessing markets and value chains, overcoming consumer inertia, switching costs, achieving scale and obtaining ‘patient’ capital.
While finance is often cited as the determining factor in new business success, Roberts says that, without addressing the other barriers to entry, funding alone is likely to be a waste of money.

Similarly, the implementation of procurement measures without building capabilities and addressing the power of dominant firms is unlikely to ensure sustainable businesses, he adds.

Study Focus
Roberts explains that the CCRED chose the focus areas on the basis of several criteria, noting that these include having a history of concentrated markets and anticompetitive behaviour, the sectors’ economywide impact and those sectors where competition policy, regulation and microeconomic policies overlapped.
The CCRED studies covered agroprocessing and the network industries of banking and telecommunications, as well as supermarkets, low-cost airlines, beer brewing, liquid fuels, renewable energy and mobile money. The firms which the centre studied include banking group Capitec, food supplier Fruit & Veg City, brewery Soweto Gold and airlines 1Time and FlySafair.

The studies highlighted the importance of new entrants and effective rivalry for consumers and the economy, as well as the implications of blocking new entrants.
The findings indicate that the entry and growth of Capitec have saved consumers close to R20-billion a year since 2010, while the reduction in mobile call termination rates, which enabled Cell C and Telkom Mobile to be more effective competitors, has saved consumers R47-billion from 2010 to 2015.

Further, competition from low-cost airlines has reduced airfares by as much as 38%, while Fruit & Veg City has opened routes to markets for suppliers and offered fresh produce at substantially lower prices.

All entrants have widened the choices available to consumers. “The consumer savings from competition set out in our studies are a good example of the importance of rivalry and what is at stake if entrants are blocked,” Roberts says.

Recommendations

The centre’s recommendations consequently include regulating for competitive rivalry, which include amendments to the Competition Act.

Other recommendations include providing funding for risk and rivalry, in the form of development finance, venture capital and patient capital, which gives new entrants the time to learn, build capabilities and build the scale and reach required to be competitive; opening routes to market and reorientating government support.

The system of incentives for investment by smaller businesses does not appear to be working well, the CCRED avers. Firms tend to access incentives for investments they would be making in any case. Firms also report that accessing the incentives, often using consultants, is time consuming, costly and cumbersome. The linkages between development finance and government incentives need to be strengthened.

“Ownership and control matter. Participation and the share of returns need to be much more inclusive in South Africa – and the region – to address poverty and foster a healthier, more competitive economy,” Roberts concludes.