(4) 55. Where i (i=1....10) denotes the country and t (t=1993...2006) the year. The coefficients ... capture the response of automotive exports to the MIDP program in South Africa for each year of the reform. The year fixed-effects control for those events that affect automotive exports in all countries equally, as for example a downturn in the global business cycle. The country fixed effects capture those characteristics of each country that do not change over time but that differ between them, such as geographical differences. The vector contains country specific characteristics that vary over time and that we have to take into account when evaluating the impact of South Africa‟s policy change.

56. Table 2 presents the regression results of the first analysis _(South Africa compared to other African producers and exporters of vehicles and components)_ .

57. Table 3 presents the results of the second analysis _(South Africa compared to other African and non-African middle income automotive producers and exporters)_ .

58. In both tables the D-in-D estimates from the simple analysis are shown in columns (1), (2) and (3). In all of them, the impact of the MIDP on automotive exports is positive and highly significant at the 1% level. On average, the incentives provided raised automotive exports by approximately 70 to 90%, depending on the specification and controls used. The positive and significant impact persists after adding additional control variables, including the impact of trade liberalization and fixed effects. The responses for each year of the reform are given in column (4) and with country-level fixed effects in column (5). The coefficients become positive and significant with a slight delay after the adoption of the law in September 1995. As discussed in the last section, this could suggest that the largest bulk of investment and export volumes were not achieved until some years later.

59. Similarly to the results of the sectoral analysis within South Africa, we find that the positive impact of the MIDP program lasts four to six years. In particular, the coefficient turns insignificant from 2002 onwards. This result supports the common finding that tax incentives may affect some business decisions particularly in the short run, but in general they are not a primary consideration for investors in the long run. The fading out of the tax incentives may also be related to the challenges facing general economic activities in South Africa. As noted in a number of investment climate surveys, these challenges to investing in South Africa include: a volatile exchange rate, a remote location, crime, shortage of skilled labor, inadequate infrastructure and an increasing regulatory burden.

60. Economic density and the terms of trade are significant in explaining automotive export performance. In particular, one unit increase in the economic density coefficient (measured as US$/sq m) increases, on average, the volume of automotive exports by 0.8 to 1 percent. The coefficient of the terms of trade enters the regression negatively, suggesting that for every 1 unit decrease in the terms of trade index, automotive exporters increase the volume of their auto exports by approximately 0.3 percent. This result may at first seem counterintuitive, as 21