Research and development in the services sector of an emerging economy: the case of South Africa

The South African government is seeking to shift the economy from being efficiency driven toward being more knowledge-intensive. Noting that the economy is dominated by services we examine research and development (R&D) and innovation in the sector using data from the national R&D and innovation surveys, and interviews with 18 local transnational firms. We establish the nature and size of R&D activities in the sector, and the extent to which practice is similar to that in industrialized countries. It is found that R&D in information and communications technologies (ICTs), especially software development dominates R&D in banking, insurance and retail firms. This competence results from prior investment in home-grown ICT solutions during the sanctions years. We identify three issues for policy: first, the need further to quantify R&D in the extended value chains around the commissioning firm; secondly, the new R&D tax incentive risks marginalizing the services sector; thirdly, the extent to which the better-paying services sector is attracting talent away from research careers in science, engineering and technology.