South Africa’s R&D spending falls short without human capital investment

A new study analyzing three decades of South African industry data has found that while research and development (R&D) spending does lead to productivity gains, its impact remains modest unless paired with a skilled workforce. The study, titled “Linking R&D and Productivity in South Africa: The Moderating Role of Human Skills”, was published in Economies, and offers crucial insight into how human capital determines the effectiveness of innovation investments across sectors.

The analysis uses industry-level data from 66 South African sectors between 1993 and 2023 to examine how R&D affects both labor and capital productivity. The results reveal that R&D has a statistically significant but weak impact on labor productivity and an even lower effect on capital productivity. These outcomes vary drastically across sectors, with human skill levels emerging as a decisive factor in amplifying the benefits of innovation.

How does R&D impact productivity across South African sectors?

The study reports that a 1% increase in R&D investment yields only a 0.01–0.02% rise in labor productivity over a five-year horizon. Capital productivity gains are even lower, ranging from 0.003–0.005%, suggesting that R&D investments are more effective at enhancing the performance of workers than machinery or physical assets. Sectoral analysis shows that R&D has no significant impact on labor productivity in the mining sector but produces strong effects in manufacturing and services, with service sectors experiencing nearly double the productivity gains of manufacturing.

Interestingly, mining does benefit from R&D in terms of capital productivity. This finding aligns with the capital-intensive nature of mining, where technological improvements often target equipment efficiency and process automation rather than labor inputs. Meanwhile, service industries, driven by human capital and customer interaction, realize greater labor productivity benefits from R&D, underscoring the value of innovation in improving delivery methods and digital tools.

Technology intensity further explains this divide. The study finds that R&D significantly boosts labor productivity in technology-intensive sectors, where the effect is more than triple that observed in less tech-driven industries. In contrast, R&D has a negative effect on capital productivity in those same high-tech sectors, possibly due to the obsolescence of existing equipment caused by rapid technological change.

What role do skilled workers play in boosting R&D effectiveness?

A central theme of the study is the critical role of “absorptive capacity” - the ability of an industry to internalize and apply new knowledge. This capacity is largely determined by the level of skilled labor in a given sector. The study confirms that the positive impact of R&D on productivity increases significantly in sectors where skilled workers make up a higher share of the workforce.

Regression models that include an interaction term between R&D and skilled labor show a clear pattern: industries with more skilled workers are better positioned to convert R&D investments into tangible productivity gains. In fact, the synergy between skilled labor and R&D contributes more to productivity than either factor alone. The services sector, which employs the largest share of skilled workers in South Africa (around 38% according to the data), captures the most value from innovation. Manufacturing follows, while mining, employing only 9% skilled workers on average, lags behind.

The study also notes that R&D may have a counterproductive effect on capital productivity in high-skill industries. This might be because innovation in these sectors prioritizes labor-enhancing technologies, making some forms of capital less relevant or underutilized. Conversely, in lower-skill sectors, R&D improves capital productivity slightly, likely due to modernization from a lower baseline.

What policy implications arise from the sectoral and skill-based findings?

The implications of the research are far-reaching for policymakers aiming to improve South Africa’s economic competitiveness. The authors argue that increasing R&D budgets alone will not yield significant productivity gains unless they are paired with investments in human capital. Specifically, the following policy interventions are proposed:

• Targeted Skill Development: The study recommends industry-specific training, particularly in STEM fields, to ensure that the workforce can absorb and implement technological advances. This approach would strengthen the absorptive capacity that has been proven crucial for R&D success.

• Technology Adoption Incentives: Fiscal instruments like tax credits and public procurement policies should support the diffusion of productivity-enhancing technologies, especially in manufacturing and services. SMEs, in particular, could benefit from incentives that lower the cost of digital tools and automation.

• Improved Access to Finance: Limited financial resources often prevent firms from undertaking R&D activities. The authors call for public-backed innovation funds, low-interest loans, and credit guarantees to encourage broader participation in innovation across firm sizes and sectors.

• Sector-Specific Innovation Policy: Recognizing the distinct innovation needs of each sector, the study urges differentiated policy design. High-tech sectors may need stronger IP protections and R&D infrastructure, while traditional sectors might benefit more from subsidies for process upgrades and incremental innovation.

Importantly, the research highlights a critical gap in South Africa’s innovation strategy: the disconnect between R&D investment and workforce readiness. Even with relatively high R&D expenditure, productivity outcomes have remained limited due to skill mismatches and uneven educational attainment. Addressing this bottleneck is critical for translating innovation inputs into measurable economic outcomes.