import tariffs between 1995 and 2002. The MIDP is considered by some economists a major success of export and industrial policy, although it has also been challenged in world trade circles. The program was initially scheduled to run for five years but it has been extended three times and is now scheduled to end in 2020.The aim of this paper is to assess the effectiveness of the MIDP in improving South Africa‟s automotive (vehicles and components) export performance. To achieve this aim, we provide a first attempt at a quantitative analysis of the MIDP using the difference-indifference methodology and taking a two-tier approach. In a _first analysis_ , we perform a comparative analysis between different manufacturing sectors within South Africa before and after the MIDP came into effect. In a _second analysis_ , we apply the same methodology to another analysis between South Africa and a number of comparator countries that are automotive producers and exporters before and after the MIDP were implemented.

5. Our regression results cover the period 1996-2006 and suggest that the impact of the MIDP on automotive exports in South Africa is positive and significant. We find that the largest response to the MIDP in terms of improved manufacturing exports occurs with a delay after the adoption of the law as investments take time to materialize and become productive. Also, the results suggest that the effectiveness of the tax incentives fade in time. This finding supports the common belief that tax incentives may affect some business decisions particularly in the short run, but they may not be a primary consideration for investors in the long-run. In the particular case of South Africa, a number of investment climate surveys note that major challenges remain for foreign investors to invest in the country, including a volatile exchange rate, crime, shortage of skilled labor, inadequate infrastructure and a rising regulatory burden.

6. The paper is organized as follows. In _section two_ of the paper we review two streams of literature which form the basis for the study. _Section three_ provides background information about South Africa‟s economic performance, details on the MIDP program, and an analysis of the data. _Section four_ presents the methodology and results of our analysis. _Section five_ concludes.

# **II. LITERATURE**

7. Two streams of literature form the basis for this study: (i) the literature on the effectiveness of tax incentives in improving exports and attracting investment, particularly in a middle income country context; and (ii) the literature on the effectiveness of the Motor Industry Development Program (MIDP) in South Africa.

_Literature on export tax incentives and sectoral industrial policies in a middle income country context_ 8. The literature suggests that productive diversification, especially one extending to production and export of non-traditional manufactured exports, is needed for sustainable economic growth as it usually provides the goods with the most value added and provides opportunities for knowledge transfer and economies of scale. Exports also promote economic growth as they facilitate imports of goods, services, and capital, and thereby also transfer of new ideas and technology. In fact, Bernard and Jensen write that “...exporters are better than non-exporters. A growing body of empirical work has documented the superior characteristics of exporting plants and 3