Towards an understanding of the economy of Johannesburg 19 December 2014 Prepared by: Mark Burke Lauralyn Kaziboni Ryan Hawthorne Pamela Mondliwa Lebogang Nleya Phumzile Ncube Genna Robb Simon Roberts Contents 1. Introduction ................................................................................................................... 3 2. Approach and methodology ........................................................................................... 4 3. Selected economic trends for Johannesburg ................................................................. 5 4. Key findings on Industry Nodes ................................................................................... 14 5. Development of the ICT Sector ................................................................................... 15 6. Next steps ................................................................................................................... 17 7. Developing the Information and Communication Technology sector in the City of Joburg 20 7.2 Experience internationally with the development of clusters ..................................... 30 7.3 Requirements of ICT businesses in Johannesburg ................................................... 38 7.4 Recommendations ................................................................................................... 44 7.5 Conclusion and summary ......................................................................................... 52 8. Industrial nodes report ................................................................................................. 54 8.1 Background .............................................................................................................. 54 8.2 Approach and methodology ...................................................................................... 56 8.3 Profiles of the nodes ................................................................................................. 61 8.4 Firm survey .............................................................................................................. 63 8.5 In-depth firm interviews ............................................................................................ 96 8.6 Recommendations and way forward ....................................................................... 112 References ....................................................................................................................... 118 Appendix A: Google fiber city checklist ............................................................................. 120 Appendix B: Making data open ......................................................................................... 121 Appendix C: Questionnaire for interviews with ICT businesses ......................................... 122 2 1. Introduction The City has appointed the Centre for Competition, Regulation and Economic Development (CCRED) to conduct research to provide a deeper understanding of the economy of Johannesburg and the ways in which the City can best use the tools at its disposal to ensure a more inclusive, job-intensive, resilient and competitive city economy. This report provides an overview of the work undertaken in the second half of 2014 related to overall trends, understanding industrial nodes and assessing ICT development, and summarises the proposals for next steps. In order to design evidence-based and effective policies to drive economic development in Johannesburg, the City requires a detailed understanding of the patterns of industrial activity. It needs to understand what economic activity is taking place, how firms are performing, what challenges firms are facing and what opportunities exist for firms to grow and capture new markets. Armed with this information, the City can then target interventions for maximum impact and coordinate its activities with other key branches of government. The purpose of this research is therefore to fill this knowledge gap and to provide the City with the information it needs for effective policy-making. The research proceeds from the starting point that the purpose of local economic development is to build up the economic capacity of an area. This is a process by which public, private sector and not for profit organisations work collectively to create better conditions for economic growth and employment generation. Cluster development is one of the channels that local economic development initiatives can use to encourage and support inter-firm collaboration, institutional development and provide support in targeted industrial sectors. Johannesburg already has a number of industrial nodes that offer economic development potential, however, there is much to be understood about what is required to improve economic development activity in these areas. A better understanding of these areas will allow the City to have a targeted approach to interventions and leverage resources in the direction of greatest potential return. The ultimate aim of any intervention by the City should be to encourage the formation and sustainability of vibrant, successful, growing industrial nodes and sector-based clusters around Johannesburg. There are a number of agglomeration economies which can be important at the node level, such as getting public transport right, and getting firms and the local authority to work together to solve infrastructure challenges, reduce crime and coordinate basic training activities. However, there are also substantial benefits to be gained from considering interventions at a sector-based cluster level. These relate to issues such as research and development, product testing, incentives and other government assistance and export promotion; all of which can be more efficiently provided in a coordinated fashion than if each firm makes individual efforts to solve the same problems. At both node and sector levels, there is an important coordination and catalysing role which can be played by the City to ensure that agglomeration economies are achieved. For example, the ‘learning’ of companies in developing production capabilities and research and development activities is an area in which collective action by government and companies has an important role to play. In this context, there were three key components of the research with the aim of helping the City to move towards playing such a coordinating role effectively in Johannesburg. First, a review of major trends affecting the Johannesburg economy was undertaken in order to assess the key opportunities which are available to firms in Johannesburg in terms of growth and expansion. This is intended to assist in the prioritisation of sectors and areas for 3 further analysis. Second, two industrial nodes were studied in detail in order to assess the factors impacting on firm performance and to understand the agglomeration economies in relation to location and to generate recommendations for the City in terms of how to best support and grow industrial activity in these nodes. Third, one sector, Information and Communication Technology (ICT), was researched in order to generate learnings on the importance of agglomeration economies from the sector-based cluster perspective. Together, these three areas of work suggest strong recommendations for the City in terms of how to move forward with this process and work towards supporting vibrant and successful industrial nodes and clusters. This report presents a short summary and synthesis of the key learnings from each component of the research. The in-depth standalone reports on the industrial nodes and on ICT sector accompany this report and should be consulted for full details of the methodology and results in these areas. This report should therefore only be considered a high level summary of the findings and conclusions from each component. This report is structured as follows. Section 2 briefly presents the approach and methodology for each component of the study. Section 3 highlights main trends by sector and considers the impact of the growth of countries in southern Africa on goods and services exports, illustrated by developments in capital equipment exports. Section 4 reviews the key findings from the industrial nodes study and section 5 summarises the ICT sector findings. Finally, section 6 presents over-arching conclusions and suggested ways forward for the City. 2. Approach and methodology In order to understand the opportunities for firms in Johannesburg, the first research component focussed on understanding the key trends in economic activity in the City. The research was carried out using desktop analysis of key economic trends in Johannesburg, particularly relating to sectoral contributions to Gross Value Added (GVA) and to employment in the City, an assessment of South Africa’s exports to the Southern African Development Community (SADC) and a focus on Johannesburg as an regional hub, particularly as it relates to the exports of capital equipment to the SADC region. It also looked at key changes in relative prices, especially of telecommunications and energy, which fed into other components. The second component of the research is the industrial nodes research. The aim of this area of work is to collect and analyse primary data on patterns of economic development and performance at the firm level, in order to understand constraints to entry, growth, and employment creation. The research was intended as a pilot study to investigate the potential insights which can be gained from