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Tuesday, August 12, 2014

Country Analysis- The Republic of South Africa


Country Analysis-  The Republic of South Africa
Daniel Stone
Ohio Dominican University
           Executive Summary.  The Republic of South Africa has the largest economy in the African continent with a Gross Domestic Product (GDP) of approximately US$364 billion in 2010.  This is in part due to its location which has an impact on business that distinguishes itself from the rest of Africa since South Africa and its neighboring countries have the main exports of natural resources.  The climate in South Africa also allows for a strong and robust economy and distinguishes itself from the rest of the African continent since the climate permits a flourishing wine and gardening industries in the southern part of South Africa. 

            Also, due to South Africa's expansive infrastructure, the natural resources that originally built the South African economy can be transported with little resistance.  It's infrastructure has an impact on business by allowing goods and services to be moved in a more streamlined fashion on the one hand, while allowing an increase in labor productivity on the other hand resulting in lower absenteeism due to the lessening resistance for commuters. 

            A possible risk in business development is the low involvement in the political process.  Nearly 50% of the population in South Africa is under the age of 24.  Known as the "Born Free" generation, this large demographic hasn't been very engaged in the political process and those that are politically involved are not satisfied with the established ruling parties. 

            However, the readiness or competitiveness of South Africa is strong and a good fit for foreign direct investments.  This is due to South Africans having the right to the various levels of public education.  As a result, there is a large pool of young and educated workers found in this country that will take to on-the-job training and retain the newly acquired knowledge. 

            Risks to business development is the South African government.  On the one hand, the South African political system, led by the African National Congress (ANC) has been the overwhelming majority for the past 20 years.  During this period, the South African governmental and legislative system has the trends toward legislation that may be favorable to business development of a manufacturing company due to a mixed economic system.  However, since Nelson Mandela left office in 1999, Mandela's successors have been sorely flawed.  Corruption within the ANC has become more flagrant.  With this being said, another possible risk in business development is the overall legislative and regulatory climate in South Africa since corruption is not regulated. 

                Location.  Found on the southern tip of the African continent, South Africa has the main exports of platinum, diamonds, gold, and uranium which have an impact on business of a manufacturing company (Central Intelligence Agency, 2013).  A possible risk in business development for a US-based manufacturing company is the distance between the North American and African continents.  However, the readiness of South Africa in global business is strong for establishing a local office and develop a local management team (Daniels, Radebaugh, and Sullivan, 2013).

            Climate.   The climate in South Africa is mostly semiarid and subtropical along the east coast.  The competitiveness of the country in global business is strong due to this climate since in the day it is normally sunny and in the night it is normally cool yielding ideal work conditions.  For example, South Africa's climate is as such that it has a positive impact on business by allowing a flourishing wine industry in the southwest part of South Africa (Central Intelligence Agency, 2013).  Along the southeast coast, there is enough rainfall which provides South Africa green landscape for another flourishing gardening industry (Central Intelligence Agency, 2013). 

            Infrastructure.  South Africa has a number of highways, airports, seaports, and other facilities for its infrastructure.  Accessibility to South Africa by sea is strong due to its eight commercial seaports in South Africa (Central Intelligence Agency, 2013).  Before the Panama Canal, South Africa was the home of one of the biggest shipbuilding and ship repair places due to the number of unsuccessful attempts transiting the Horn of Africa off of South Africa's southern tip.  A possible risk in business development is for ocean freight shipments to and from South Africa that are unable to transit the Panama Canal due to the long transit times (Central Intelligence Agency, 2013). 

            The competitiveness of South Africa is strong from an aviation standpoint due to the country's five international airports, two of which are in the nation's largest city, Johannesburg.  Furthermore, South Africa's readiness in global business is strong due to the country's extensive network of highways that connect ground transportation throughout the country.  Most of these highways were upgraded in preparation for the 2010 World Cup.  These upgrades created new bus lanes that have shorten commuting times.  Also, South Africa has its first high speed rail link as part of the build up for the World Cup (RSM International Limited, 2013).

            As a result of South Africa's expansive infrastructure, the natural resources that originally built their economy can be exported with little resistance.  It's infrastructure has an impact on business of a manufacturing company by allowing goods and services to be moved in a more streamlined fashion on the one hand and lower absenteeism and increased labor productive on the other hand (RSM International Limited, 2013).

           Social Environment.  South Africa has a total of 11 official languages including English, Afrikaans, Sesotho, Setswana, Xhosa and Zulu (Adam, 1997) .  On the one hand, the readiness of the country in global business is strong due to the majority of South Africans able to communicate in English.  However, on the other hand, a possible risk in business development is a lack of continuity from a historical standpoint between these different languages (Adam, 1997) .        Another example of the readiness of South Africa is the country's demographics.  For example, South Africa's Caucasian settlers demographic, known as Afrikaners, come from industrialized nations to a greater extent from the Netherlands, Germany, France and to a lesser extent from England, Scotland, and Ireland.  As a result, a foundation conducive for business was established in the 19th and 20th century.  However, in the middle of the 20th century that the Afrikaners instituted apartheid, which alienated the rest of the demographics because of their race (Adam, 1997) .

            A direct correlation to the end of apartheid that shows the readiness of South Africa as a country in global business are the growth of the black middle class.  As a result,  South African has alleviated pressures of welfare spending (BBC News, 2013).  Considering that Xhosa and Zulu are the local African groups that comprise of the majority of the South African population, having a growing black middle class is an indicator of the readiness of South Africa in global business in the 20 years since the end of apartheid.  While this is a much needed economic improvement, barely 40% of working age in South Africa have jobs.  Yet, while South Africa is a country considered rich in resources, 33% in South Africa live on less than $2 a day (The Economist, 2013).  Many in South Africa consider race that was the biggest division in South Africa's past, however, the economic disparity among much of South Africa is what will keep the country divided in the future (Bourdain & Freeman, 2013).

            One other example that shows the competitiveness of South Africa in global business is their desire to obtain the finer things in life.  As South Africans continue to acquire more and more wealth, they will desire better smart phones, faster high speed internet, and other technological advances that established developing countries have for example (Bourdain & Freeman, 2013).

            While the Afrikaners were the ruling class until the mid-1990s and the blacks were the majority in South Africa, there is also a mixed culture comprising of ancestry of Europeans and other indigenous African and Asian people are known as Cape Coloreds.  Those receiving this classification aren't necessarily black, just not Caucasian.  Much of this consists of a sizeable Muslim community in South Africa's metropolitan areas such as Johannesburg (Bourdain & Freeman, 2013).

            Another possible risk in business development is South Africa's trends in population  since it has excess mortality due to AIDS.  Life expectancy is lowered (65 years and over equate to 6.1%).  Another risk is South Africa's youthful demographic.  Nearly 50% of the population in South Africa is under the age of 24 meaning that involvement in the political process is low.  Many of the younger South Africans do not support the current politicians.  This demographic does not have the passion as their parents once did for the political process due to the oldest of this age group being born after apartheid was abolished (Central Intelligence Agency, 2013). 

            Known as the "Born Free" generation (Bourdain & Freeman, 2013), this bottom-heavy age structure has a good fit for foreign direct investments such as those from fast-foods giant, McDonalds.  McDonalds has 177 restaurants in South Africa and with this youthful age group, this trend is attracting other foreign direct investment from Burger King in who plans to enter the South African market in 2014 (Joy, 2013).  Not only do companies from the U.S. see the readiness of South Africa in global business, but also does the rest of the African continent.  South Africans see their country as a beacon of hope for the rest of the African continent due to people from other African nations going to South Africa in the past 20 years when apartheid was finally abolished (Bourdain & Freeman, 2013).

            Along with its natural resources, one of the brightest signals that shows the readiness of South African in global business is their high literacy rate.  This is due all South Africans having the right to basic education, adult basic education, and further education.  South Africa has one of the highest rates of public investment in education in the world.  These education levels combined with South Africa's population trends impact business positively for a manufacturing company to conduct a foreign direct investment.  South Africa is globally competitive since not only will local staff be young and impressionable to take to training, but also educated enough to retain the knowledge and provide solid workmanship (BBC News, 2013).  

            A possible risk in business development in South Africa's cultural environment that has the impact on the business of a manufacturing company is limited amounts of skilled capacity in engineering, technology, and economic disciplines.  While the South African public sector provides funding for educational programs and the pathway to education by South Africans has little to no resistance; skilled engineers, technology, and economic professionals are few in numbers (Heinrich Boll Stiftung, 2013). 

            Cultural Environment.  With literacy being one of the brightest signals in South Africa, corruption throughout the  African continent one of the biggest signals for concern since these African countries rank as the most corrupt region in the world with 90% of the countries scoring as very corrupt (Dell, & Heimann, 2012).  On the other hand there is a traditional African concept known as Ubuntu.  This is widely respected in South Africa that emphasizes people's allegiances and relations with each other.  Qualities associated with this is interdependence, unity, collective work and responsibility (Ubuntu Africa, 2013). 

            While corruption in a threat to business development in South Africa, the South African's attitudes towards social institutions such as family, church, labor, and other organizations are similar to those found in other Western countries that were established and grew to prominence in the 20th century.  From a religious standpoint; Protestants, Catholics, and other Christians comprise of nearly 80% of the religions found in South Africa.  From a public sector stand point, the South African government is a republic meaning that it is a sovereign state where politicians are elected.  These show South Africa's readiness in global business due to the degree of sophistication necessary to operate a government where politicians are elected has a direct correlation to a government where the economy is strong (Central Intelligence Agency, 2013). 

            The readiness on business of a manufacturing company in South Africa in global business is strong because English is one of South Africa's official languages.  As a result, English-speaking nations are able to communicate and make few alterations to packaging of imported and exported products due to this main common value.  Trade barriers have been minimized in some cases for products coming from those countries of Botswana, Lesotho, Namibia, and Swaziland to South Africa known as the Southern African Customs Union (SACU) (Charalambous, 2012).

            The cultural factors found in South Africa have constituted informal trade barriers in the past due to apartheid. For example, Israel offered to provide aid to South African blacks which bothered the ruling white South Africans.  In 1962, the United Nations passed a resolution condemning South Africa and their apartheid policies.  As a result, there was a voluntary arms embargo and in the 1970s, South Africa received a number of economic sanctions (Coutsoukis, 2004).  This may be a possible risk in business development since historically South Africa was viewed in a negative light at the global level. 

            Economic Situation.  The readiness of South Africa in global business in terms of its economic situation for global business is strong.  This is due to the fact that South Africa has the largest economy in the African continent with a Gross Domestic Product (GDP) of approximately US$364 billion in 2010 (Central Intelligence Agency, 2013).  South Africa's current economic situation is a middle-income, emerging market with an abundant supply of natural resources; well-developed financial, legal, communications, energy, and transport sectors and a stock exchange that is the 15th largest in the world. 

            Despite these findings, there are possible risks in business development due to South Africa's economic situation.  In 2007, their economy began to slow in terms of growth due to a electricity crisis.  South Africa's economic growth further slowed due to the global financial crisis which reduced the prices of commodities, South Africa's main export.  This combined by a global demand for commodities falling off caused South Africa's GDP to fall by 2% which hasn't recovered since then.  South Africa has budget deficits which is 40% of their GDP that has prevented them on dealing with pressing economic problems such as controlling inflation and unemployment of nearly 25%.  In 2012, South Africa's real growth GDP rate was at 2.5% and the inflation rate is 5.7%.  Inflation rates have risen due to the commodities boom which went into effect prior to the global financial crisis.  In 2007, South Africa implemented the National Credit Act to curb reckless lending practices.  While there have been bank defaults on loans due to the fallout of the global financial crisis, nothing that was too alarming for South Africa because of the National Credit Act.  Rising food and fuel prices are no different in South Africa than the rest of the world but are worse due to high interest rates (Heinrich Boll Stiftung, 2013). 

            New developments and trends for South Africa's economic situation are the global financial crisis has reduced prices and world demand of commodities.  While South Africa has survived the collapse of the commodities markets, credit crunch, and bursting of assets bubbles, analysis debate if South Africa is insulated from world financial markets.  This is due to foreign investors now being able to send back to their home country funds which was the problem that came from the apartheid era to prevent capital flight.  The ratio of capital to risk-weighted assets of the average South African bank's capital adequacy is above 12%, a benchmark that European banks are expected to clear.  While there have been large numbers of panicked withdrawal of funds in the U.S. and Europe on the global level, there are no signs of a loss of confidence taking place in South Africa.  South Africa's exports are approximately 50% to the U.S. and the Euro Zone, and the other 50% to China.  While the price of precious metals such as coal have plunged along with demand in the U.S. and the Euro Zone, the demand and price has not been hit so hard in China (Heinrich Boll Stiftung, 2013). 

            South Africa's currency, the Rand, has collapse in line with global equity markets, however, since mining production comprises of over half of the nation’s exports, and mining in South Africa is struggling, the strength of the South African Rand will improve as the mining situation improves.  (Future Currency Forecast, 2014). 

            Political Environment.  South Africa's current political environment is led by Jacob Zuma, of the African National Congress (ANC).  The ANC's governmental and legislative system has the trends toward legislation that may be favorable to business development of a manufacturing company due to a mixed economic system  of command and market that the ANC influences (Daniels et al., 2013).

            A risk to business development is the current political scene which has a lot of bitter fighting.  Mandela served as president from 1994-99.  His successors have been considered sorely flawed.  For example ,corruption within the ANC has become more flagrant (The Economist, 2013).  As a result, the political party that fired South Africans from white rule, the ANC,  is not universally admired in recent years.  The ANC is being criticized for corruption, political cronyism resulting in opposition parties gaining strength. In short, the political party that led the country after apartheid is now considered to proceed awkwardly and uncertainly at present.  In the 20 years since the abolishment of apartheid, South Africa's political environment has been considered a demographic experiment and like most things, in need of a tune up (Bourdain & Freeman, 2013).  This of course is a risk to business development. 

            Another threat to business development are formal trade barriers like tariffs, import and export regulation has restricted business to and from South Africa.  There is a lack of coordination across government ministries and regulatory authorities has caused delays in authorizing trade for new products.  For example, one South African retailer spent three years getting permission to export processed beef and pork from South Africa to Zambia (South Africa'.info. 2013).  One of the country's biggest assets, iron ore mining, had a bitter dispute between a foreign direct investor and a local investor.  While the country's constitutional court upheld the foreign direct investor's forfeited stake for a local investor's stake in the iron ore mining company, another public agency, the South Africa Department of Mineral Resources, granted that same forfeited stake to a different local investor with political connections as the reason (Charalambous, 2012). 

            The signs of a convoluted public sector interfering with business development is obviously a risk, however there are signs that the ethical climate for business of a manufacturing company in South Africa is improving.  In May 2011, The Ministry of Finance announced that South Africa had established a Multi-Agency Work Group (MAWG) to coordinate and investigate corruption-related supply chain management practices in an effort to emphasize openness, effective competition and fair dealings in the public sector (South Africa'.info. 2013).

           The public sector in South Africa's attitude towards corruption and unethical business practices are improving.  The 9th and 10th least corrupt country in 2012, Canada and Netherlands, had a score of 84.  South Africa's scored 42 out of 100 in 2013.  By no means is South Africa setting the standard for a public sector in terms of a lack of corruption, however in comparison to some of the other counties in Africa, two countries from the Sub Saharan African region that made the top 10 list of the most corrupt countries in the world, which are Sudan with a score of 13 and Somalia with a score of 8 (Standard Bank Group, 2012).

            Legal Environment.  Intellectual Property in South Africa is a newer concept that is being enforced by following the model carried out by the U.S.  This fact combined with the high level of corruption in the country's public sector is a risk to business development.  However, in South Africa, intellectual property protection is granted and facilitated by the Companies and Intellectual Property Registration Office (CIPRO).  This organization is responsible for the registration of patents, trademarks, designs, and copyright.  Also, this organization also keeps track of patents, trademarks, designs, and copyrights in South Africa (Heinrich Boll Stiftung, 2013). 

            Another threat to business development is the overall legislative and regulatory climate in South Africa is one of which corruption is not regulated.  There are four classifications of enforcement, which are active enforcement mainly found in developed countries, moderate enforcement and little enforcement found in newly developed countries and developing countries.  There are eight countries in the world that have no enforcement.  Active enforcement is considered an adequate deterrent to foreign bribery whereas moderate and little enforcement indicates stages of progress in enforcement, but are still inadequate and lastly, no enforcement which is no deterrent for foreign bribery.  (Dell, & Heimann,, 2012).

            The political and legal environment analysis would not be complete without mentioning what Nelson Mandela contributed to South Africa in these areas.  In Mandela's passing, South Africans feel as though they currently have the correct foundation to move forward.  This foundation was overseen by Mandela who is given credit for engineering the transformation of South Africa's political and legal environment that saw the country become a multiracial free-market democracy with little bloodshed (The Economist, 2013).  In comparison to the rest of the African continent, South Africa has the readiness in global business from a legal standpoint due to the current foundation put in place 20 years ago Dell & Heimann, 2012). 

                Summary.  Based on the above analysis, the attractiveness of South Africa for new business development by a U.S. manufacturing is strong.  South Africa is located where natural resources are abundant, the climate is favorable for business, and the infrastructure is robust.  English is the main language, a foundation conducive for business has been in place since European settlers began migrating to South Africa in the 1800s.  Also, South Africa has a youthful workforce that has adequate education.  A political system that is socialist capitalism, and a legal system that is on the verge of developing a intellectual property protection system are other indicators that South Africa is an attractive country for new business development. 

            Johannesburg is the largest city in South Africa and referred to as the economic powerhouse of the country (Bourdain, & Freeman, 2013).  This place would be ideal for setting up a multinational corporation as it has two of the five international airports found in South Africa making air freight and air travel easily accessible.  Also, this place has a very diverse population meaning that a multinational corporation will have a wide variety of candidates for the various positions needed for the local workforce.  While there are a ample number of possible risks in business development, with all things considered, South Africa's readiness and competitiveness is good for global business.


References 

Adam, H. (1997) . Countries and Their Cultures:  South Africa.  Retrieved from:    http://www.everyculture.com/Sa-Th/South-Africa.html

BBC News, (2013).  South Africa profile.  Retrieved from:  http://www.bbc.co.uk/news/world-     africa-14094835

Bourdain, A. & Freeman, S., (December 26th, 2013). Anthony Bourdain, Parts Unknown:             South Africa.  Atlanta, GA: Turner Broadcasting Systems, Inc..

Central Intelligence Agency, (2013).  The World Fact Book:  South Africa.  Retrieved from:              https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html

Charalambous, L. (2012).  Tax-News.com.  Trade Barriers Hindering African Growth.      Retrieved from:  http://www.tax-news.com/news/Trade_Barriers_Hindering_African_       Growth____53899.html

Daniels, J., Radebaugh, L. and Sullivan, D. (2013).  International Business:  Environments &        Operations.  14th ed.

Dell, G. & Heimann, F. (2012).  Transparency International.  Exporting corruption?  Country        Enforcement of the OECD Anti-Bribery Convention Progress Report 2012.  2nd edition.

Future Currency Forecast, (2014).  Pound to South African Rand (GBP/ZAR) Exchange Rate      Consolidates Gains before UK Sales DataRetrieved from:           http://www.futurecurrencyforecast.com/pound-to-south-african-rand-gbpzar-exchange-        rate-consolidates-gains-before-uk-sales-data/23710

Heinrich Boll Stiftung. (2013).  The Global Financial Crisis and Emerging Economies: Role Model             South Africa. Retrieved from:  http://www.za.boell.org/web/publications-258.html

Joy, O. (2013).  Fast-food giants want pizza the action in Africa.  CNN International.  Retrieved   from:  http://www.cnn.com/2013/10/04/business/fast-food-giants-africa/

RSM International Limited.  (2013).  Economic impact of the World Cup   http://www.rsmi.com/en/global-challenges/economic-impact-of-the-world-cup---gc.aspx

South Africa'.info. (2013).  Regulations for importers.  Retrieved from:              http://www.southafrica.info/business/trade/import/922450.htm#.UtbwRZV3vIV

Standard Bank Group, (2012).  South Africa ranked 69th most corrupt country in the world -         2012 International Corruption Perception Index.  Retrieved from:  http://www.stanlib.

Transparency International.  (2013).  Corruption by Country/Territory:  South Africa.  Retrieved   from:  http://www.transparency.org/country#ZAF

The Economist, (2013).  Nelson Mandela-  A giant passes?  Retrieved from:              http://www.economist.com/blogs/baobab/2013/12/nelson-mandela-0

Ubuntu Africa, (2013).  Who We Are.  Mission Statement.  Retrieved from:             http://ubafrica.org/about-us/

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