Dancing with dragons: Chinese import penetration and manufacturing firms' performances in South Africa

by Antonio Andreoni & Sofia Torreggiani

Abstract: In 2009 China became the first commercial partner of South Africa: its largest exports' destination and imports' supplier. Since then, Chinese import penetration has impressed an increasing competitive pressure in medium-high tech sectors, in comparison to relatively more capital-intensive resource-based industries and traditional low-tech and labour-intensive ones. Using firm-level tax administrative data from 2009 to 2014, we study the impact of Chinese import penetration on manufacturing firms' performances in South Africa, and how these firms responded to the new competitive pressure impressed by Chinese imports. Specifically, by instrumenting Chinese import penetration with China's share in other low- and middle- income countries' imports, we first explore whether China's imports have been associated with firms' downsizing in terms of decreasing employment growth and higher probability of exiting the market. Secondly, we examine weather these firms have strategically reacted to Chinese new competition through capital deepening or increased exports and R&D expenditures. Our preliminary findings suggest that imports from China have negatively affected employment growth of surviving firms while no clear impact is detected on the probability of firm shutdown. Consistently with previous results for other emerging countries, we do not find evidence that manufacturing firms have strategically adjusted by producing more capital intensive goods or by shifting toward export markets, but, interestingly enough, some estimates suggest that South African companies have tried to escape Chinese competition through R&D investments.