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South African companies aren't innovating enough: Why support during tough economic times matters

South Africa's innovation fund, announced by President Cyril Ramaphosa in the , was a response to the country's urgent need for inclusive and sustainable economic growth.

shows that public financial support for innovation influences the investment that businesses make in innovation.

The fund will focus on providing venture capital to tech start-ups from higher education institutions. In practice, its activities will complement several programs that offer different forms of investment for innovation. These include the long-standing ; the ; and the .

For these programs to be effective, it's important to understand the factors that either prohibit or enable innovation activity and innovation in businesses.

provides unique data on innovation activity and performance in the industry and services sectors. It's performed over a three-year cycle by the Human Sciences Research Council's for the Department of Science, Technology and Innovation.

Analysis of data from 2019–2021 provides important evidence for designing effective innovation policy support.

A key finding of the survey was that 62% of South African businesses carried out innovation activities between 2019 and 2021. This was noticeably lower than in the previous (2014–2016) survey round, when the rate was 70%. The reason might be the impact of the COVID-19 pandemic. Many businesses said that they had to make changes to their existing innovation activities between 2019 and 2021.

It is expected that the innovation-active rate may rise again in the next round. (Data for the 2022–2024 reference period will be collected in 2025.)

These results show that support for businesses is more pressing during times of economic crisis. It allows them to adapt and mitigate the negative impacts on their innovation projects.

South Africa's business innovation picture

Less than two-thirds of South African businesses were innovation-active during 2019–2021. In addition, a significant proportion had innovation activities that did not result in product or process innovations.

An innovation-active business is one that undertakes activities intended to result in an innovation. Examples include research and experimental development, training or acquiring new equipment or machinery.

An innovation can be a new or improved product (including goods or services), introduced to the market. Or it can be a new or improved business process, implemented by the business.

Businesses that are innovation-active make a greater contribution to the economy and society compared with businesses that don't innovate. The most recent Business Innovation Survey found that the computer sector had the highest proportion of businesses with innovation activities. It also found that innovation-active businesses had more skilled labor and greater access to external knowledge than other businesses.

Building human capabilities was an important component of innovation activity. Nearly half (47%) of innovation-active businesses reported training as an activity.

Businesses that did not carry out formal innovation activities (such as R&D or patenting), and did not collaborate with other institutions, were most likely to have abandoned or not completed their innovation activities.

Innovations tended to be incremental rather than radical. More businesses with product innovations reported improving existing goods and services rather than making new goods and services available to their customers. Only 10% of product innovators had "new to the world" innovations. Just over 50% had innovations that were new to their business only.

Innovation-active businesses were more likely to sell their goods and services in international markets. Businesses with novel product innovations that were attractive to international markets were likely to be from the technical sectors and acquired more intellectual property rights.

Over a third (36%) of innovative businesses considered the high costs of innovating to be highly important. Competition and the dominance of established businesses were also commonly cited barriers. Just over 40% of businesses that operated in domestic markets only, and innovated by modifying existing products from elsewhere, had more than 50 competitors. Businesses that introduced new-to-market (more novel) products faced less competition.

Innovation has two types of social effects. New goods or services can affect the lives of consumers and end users; and the innovation that happens within a business can have positive impacts on employees.

The survey revealed both effects. The most important outcomes of innovations were improved working conditions, improved quality of goods and services, and improved quality of life and well-being.

Growing South Africa's innovation economy

Encouraging innovation requires targeted incentives for business. But can the precision of the support be improved?

We make a number of recommendations:

• Support mechanisms, including funding, should be tailored for different targets. This can be done by grouping businesses according to the types of activities they undertake to innovate.
• Businesses should also be grouped according to their R&D and collaboration activities. That makes it possible to design more targeted support mechanisms.

For example, businesses that perform R&D and that collaborate with others require interventions to support those activities.

• Improve South Africa's R&D as a proportion of its GDP. At the moment it is too low. Countries that innovate with a healthy ratio of gross domestic expenditure on R&D have delivered robust economic growth. Government can promote business R&D through policy tools like .
• Policy instruments for businesses that do not perform R&D or collaborate should encourage knowledge-intensive innovation and building interactive capabilities.
• Group businesses based on their innovation outcomes to help design more tailored support. We suggest several examples of policy interventions based on the novelty of innovations, market reach, and the ability of businesses to develop innovations in-house.

Finally, policymakers should recognize that most businesses aren't able to produce radical innovations. Support should rather help them take smaller innovative steps.