Profitability without Investment

Abstract

Sustained investment in productive capabilities and fixed-capital formation is a key driver of inclusive and sustainable structural transformation. Both historically and compared to other middle-income countries, South Africa has performed poorly in terms of sustaining domestic-productive investments. This failing has coexisted with the development of a stock market with the second-highest level of capitalization over gross domestic product (GDP) in the world, and high levels of profitability across several economic sectors. This chapter provides new evidence on the specific ways in which financialization of non-financial corporations in South Africa has resulted in low investment performances, focusing on two large, publicly listed corporations operating across different economic sectors between 2000 and 2019. The analysis shows that, despite sector heterogeneities: (1) corporations have increasingly financed operations, capital expenditure, and distributions to shareholders with debt; (2) the US dollar-denominated share of this debt has grown rapidly, exposing corporations to increased exchange and interest rate risk; and (3) distributions to shareholders, driven by dividends rather than share repurchases, have risen markedly. These financialization dynamics are attributed to the distribution of power in the domestic political economy and the subordinate nature of South Africa’s integration with global finance. Driving financialization, these two mutually reinforcing factors have undermined the translation of profits into domestic investment, reducing its capacity to drive structural transformation.

Dividends Policy and Payouts: Evidence from South Africa

“…Recent work has reprised this argument from a South African perspective (Andreoni, Robb and Van Huellen 2021).…”

“…These investors may demand stable returns as asymmetric information distorts their understanding of earnings variation. In this context, smoothed dividends become essential even if that entails higher debt or lower investment (Balli et al 2022;Andreoni, Robb and Van Huellen 2021).…”

Economic and political determinants of the South African labour share, 1971–2019

“…This transformation led to two key structural changes within the non-financial sectors of the economy. First, since the 1990s, non-financial corporations (NFCs) started investing heavily in risky financial assets rather than innovation and productive activities (Andreoni et al, 2021). Second, since the mid-1990s, South Africa experienced a massive credit-fuelled residential housing bubble, which remains dramatically larger compared to most emerging economies and very close to the trend of the Anglo-Saxon economies (Griffith-Jones and Karwowski, 2015; Karwowski and Stockhammer, 2017).…”