The world may have seen tougher economic times before, however, our economy was not previously as connected and global in impact as now. South Africa is primarily a resource-driven economy and our growth is hugely impacted when our energy and natural resources (ENR) sector does not perform well. A prime example is the negative long-term outlook on gold mining reported in the media recently.
The constant force of reacting to the rise and fall of global demand polarised by a dominant Chinese economy, fluctuating commodity and currency prices and the dynamics of South African labour requires business leaders to be both vigilant and visionary – not an easy task. “May you live in interesting times” is a Chinese proverb that comes to mind.
How do business leaders respond in such circumstances? Whilst no single answer may be the ‘silver bullet’, a renewed focus on innovation in science and technology is required. The imbalanced state of research & development (“R&D”) investment in this bedrock of the South African economy is revealed in statistics from the Department of Science and Technology (DST): South Africa’s investment in R&D as a proportion of GDP (a key measurable component of economically relevant innovation) is about 0.92 percent (latest reported figures in 2008/9), with the mining sector contributing only 10 percent – this compared to Australia’s mining sector contributing 23 percent for the same period to their 1.4 percent R&D to GDP ratio for the same period (source: OECD).
As a country, we have much to catch up on. An example of mining innovation is the move towards investing R&D in remotely operated and autonomous/automated mining equipment, and in improved communications systems to reduce exposure to dangerous mining environments and to lower energy consumption.
Increasing R&D spend in our ENR sector will help drive our economy and this has not gone unrecognised by our government. An incentive in the form of a ‘super’ additional 50 percent tax deduction on eligible R&D spend can be claimed (based on a pre-approval system) and new legislation, effective 1 October 2012, has relaxed previous restrictions on claiming such incentives for ENR companies.
The benefit of extracting value (albeit in the form of a tax deduction) from current and future R&D spend is that this lowers costs, improves cash flow and returns to shareholders – and ultimately enables our country to compete on a value basis in this globally-coupled economy we live in. Investing in innovation ‒ sounds like a win-win proposition.