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Master of Science in International Business

IB42 International Business in Emerging Markets

The Rainbow Nation:

An emerging market study on South Africa

Professor:

Ari Kokko Michael Jakobsen

Students:

Sara Coppola 160786-3780 Simone Tiberi 240387-3341 Giulia Sergi 010387-3134 Franz Schleimer 070387-3529

ABSTRACT

“If there are dreams about a beautiful South Africa, there are also roads that lead to their goal. Two of these roads could be named Goodness and Forgiveness.” Nelson Mandela

The main purpose of this paper is to analyze the conduct of South Africa‟s economy through the years and to provide a reasonable assessment of its future challenges. The goals achieved by the country in the last decade arise from a strong commitment in the reduction of poverty and in the quest for freedom by its citizens. The post colonial heritage has left behind a mixture of cultures and different populations that have struggled through the years in trying to seek a common identity that is today more than ever expressed through the word Rainbow Nation. The first part gives an historical overview of the country and goes on to the analyses of the determinant factors contributing to its economic development, as well as giving some insights on fiscal and monetary policies. Through the second part the striking features of South Africa‟s success are discussed, with a special focus on the export side of the economy and the relevant policies that have brought South Africa to be the leading country of the Sub-Saharian Continent. The third part concentrates its attention over the inflow of investments that has characterized the country in the last years classifying its economy as the most attractive of the continent. Positive and negative aspects arising from the presence of MNC companies on the territory are also discussed in detail. The final part provides a general scenario of the risks to be considered from the perspective of an investor when engaging in a business in South Africa.

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Index

DEVELOPMENT AND GROWTH

Sara Coppola

Understanding South Africa present situation

pag.1

Economic growth

pag 3

GDP and balance of payment

pag 5

Monetary system

pag 10

Government policies

pag 12

Conclusions

pag 15

FIRMS FROM SOUTH AFRICA AS INTERNATIONAL ACTORS

Simone Tiberi

Exports and internationalization in South Africa

pag 16

Factors incrementing exports and key sectors in South Africa’s economy

pag 17

Multinationals Companies and their role in South Africa

pag 25

SOUTH AFRICA AS MARKET AND PRODUCTION LOCATION

FDI Landscape

RISK ANALYSIS

Giulia Sergi

pag 37

Franz Schleimer

Macroeconomic Environment

pag 40

Political Environment

pag 47

Bibliography

pag 53

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DEVELOPMENT AND GROWTH

Understanding South Africa present situation

Sara Coppola

Notwithstanding the achievement of status as a republic in 1961, South Africa has been dominated, especially by the British and the Dutch, for centuries. The abundance of its natural resources, in particular diamonds and gold, has make South Africa an attractive colony for European expansion. The Native Location Act of 1879 1 represents one of the numerous formal and informal act of racial segregation put forward by the Dutch and British governments to control movements and locations of native people. Subsequently it ended up in a institutionalized and legal segregation better known as apartheid. Under the hegemony of UK, in 1910, the Union of South Africa was created, and despite opposition and civil turmoil both within and outside the Union, new legislation kept being created in order to reduce „black‟ ownership of land and rights. The independence from Great Britain reached in 1931did not bring any improvement to the “black situation”, on the contrary:

in 1948 the National Party strengthen racial segregation, where the minority of whites controlled the larger black population and enjoyed a way higher standard of living. Inhabitants were divided in three categories: whites, coloured, and blacks, each with its own rights and restrictions. In 1961 finally South Africa left the Commonwealth and became a republic, but the apartheid era continued under vast controversy and violent conflicts which ended at the beginning of the 90s after the Convention for a Democratic South Africa negotiation process. The government lastly repealed the apartheid legislation and in 1994 South Africa held its first multi-racial election that saw the rise of the African National Congress (ANC) 2 as the single ruling party. The ANC has proven to be able to lead stability in government policies, while encouraging social harmony and economic growth.

South Africa history has had and still has main repercussion on its status as a lagging behind region. The growing international isolation, the costs related to maintain the apartheid system

1 Native Location Act of 1879 is an act of racial segregation in South Africa

2 The ANC promulgated the anti-apartheid movement, it is bucket of a variety of interests, ranging from leftist to moderate traditions. In spite of it‟s decreasing votes from the electorate it has been able to win successive rounds of elections, the last one of which was held in April 2009.

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during internal repression and external aggression, the government‟s industrial policies (investment in armaments and synthetic oil production which are economically non-viable activities) are viewed as intrinsic inefficiencies of the apartheid era and have resulted in poor economic performance of the country 3 . Although the 1970s has been marked by an annual growth rate of about 3-4%, the government continued to employ the apartheid system while conducting an import substituting development policy, increasing international isolation, and significant government funded investment in strategically important industries. Apartheid opposition degenerated in harsh repression and armed incursions culminating in oil and arms embargoes by the international community. During the 1980s, “the economy stagnated as a declining dollar price for gold rocked the mining sector and reduced demand for mineral exports”. 4 Boycotts and external pressure ended up in foreign disinvestment reducing the potential for export-led growth. In an effort to offsets this economic slowdown the government significantly altered its economic policies by eliminating numerous restrictions regarding the mobility and employment of black workers. It was basically an attempt to develop an export-oriented industrial development policy which relied substantially on export subsidies. The early 90s were characterized by tighter economic sanctions, declining exports fasten together with declining investment and decreasing mining exports given the further decline in the price of gold. Given the economic situation, the government finally recognized that the apartheid regime was no longer economically practical. Therefore it started to negotiate the t ransition to democracy that, as mentioned before, took place in 1994. The mid „90s thus, have been a period of transition where the economy continued to languish and the international community maintain pressure so as to ensure that the transition to democracy would in fact take place. In order to readdress the inequalities which characterized the apartheid era, in 1994 the government launched the Black Economic Empowerment (BEE) program, with the main aim of constructing an economy which could be the most representative of the demographics of the country. The BEE has proven quite successful in helping South Africa economic growth, addressing a variety of

3 Structural Change in Apartheid-era South Africa:1975-93, by Aying Liu and Davis S. Saal, December 2000, Economic Systems Research, Vol. 13, No. 3, 2001

4 Jones& Inggs, 1994

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measures: ownership, employment equity, management, skill development and socio-economic development.

Nowadays South Africa represents the largest economy in Africa and it is one of the founding members of the African Union. It is also a member of the Commonwealth of Nations, Antarctic Treaty System, Group of 77, South Atlantic Peace and Cooperation Zone, Southern African Customs Union, World Trade Organization, International Monetary Fund, G20 and G8+5. Moreover it is also a founding member of the United Nations and the NEPAD 5 .

Economic growth

During the colonization period, and prior to the gold mines discoveries, the encouragement of farming for commercial reasons made agriculture the dominant sector in the economy. As soon as diamond and gold mines were founded, South Africa became an important world economy, with high demand for exports and mining industry expansion, though not independent from its colonists. In 1902 the country experienced industrialization and the manufacturing sector started to lift up under stated owned institutions. In fact, the black population was largely discouraged through labor laws that restricted black workers rights, creating low cost of labor. In the years of WWII main cities and regional commercial centers started to grow while agriculture was consolidated into large farms with vast emphasis on commercial farming. Mine owners and shareholders of different sectors begun to diversify their investments into other areas; at the end of the war, local demand increased considerably. Thanks to governmental support and raising international competition, the local agriculture and the manufacturing sectors began to expand rapidly. During the 1950s and the 1960s, the government initiated large scale programs to promote the commercial farming of corn and wheat. Yet, South Africa‟s economy continued to remain weak to limitations such as recurrent droughts, dependence on gold exports and the use of cheap and diversified labor. In the late 60s and early 80‟s agricultural production fell due to major droughts. Gold continued to be the major export and revenue earner during the 1980s but, as gold prices fluctuated in the international

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market, South Africa‟s exchange rate and capability to import goods was greatly affected. Productivity has been slowed down by continue disputes with the black community and the isolation of their industries. During the 80s given the worldwide economic situation and the long term effects of apartheid, South Africa economy experienced recession. It recorded minor or negative economic growth in most quarters of the 1980s, with high inflation raising costs in most sectors. The economy remained dependent on the availability of foreign loans and international prices for gold, and even though some sectors started to recover by the end of 1993, violent turmoil and increasing political instability slowed economic growth in 1994. After the abolition of the apartheid, President Mandela displayed its commitment towards an open market, privatization and a positive investment climate. Trade liberalization has developed sustainably during the late 1990s: South Africa has reduced its import weighted average tariff rate of 13 percentage points from 1994 6 . Furthermore, the government has taken a number of measures in order to reduce the fiscal deficit and increase foreign exchange reserves. From 2005 it has moderately increased public spending in order to promote growth, lessen poverty and diminish the budget deficit. Since the 1990s South Africa‟s economy has been able to deliver stable growth rates thanks to the restructuring of monetary and fiscal policies. Nonetheless the country has experienced growth in unemployment (unemployment stands at 30% in 2007 7 , there is though a need to take into account that participation rate in the formal sector is pretty low) given to the substitution of capital for labor in most sectors. However the current financial disorder, together with high unemployment rates, inflation and crime levels have moved away foreign investors. Fortunately, the deteriorating rand has led to an increase in exports which has spurred stable economic growth. In order to reap its benefits South Africa should start engaging in trade liberalization with the EU, its African neighbors, and more recently, with Asian countries. South Africa‟s economy has been growing almost by 5% in the past couple of years, representing stability in economic growth for the fourth consecutive year. Given the current global financial crisis, demand and prices have been falling in the last year and the economy contracted by 0.3% in 2009 8 .

6 DATAMONITOR

7 Datamonitor

8 http://stats.oecd.org/index.aspx

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GDP and balance of payment 9

The country economy is dominated by the services sector ( 65.3% of total GDP in 2008) which among others, also comprehends tourism, hospitality and communication and it constitute the major employment generating sector in the country employing about 65% of the labor force. Services output growth rate has grown considerably, increasing from around 8% in 2007 to reach 10% in 2008. The industrial sector is the second largest contributor to the real GDP after the services sector (31.3% in 2008 GDP). It started in 1920 with light consumption industry followed by the expansion of heavy industry and the establishment of the Iron and Steel Corporation of South Africa (ISCOR) in 1928. The steel industry in South Africa substantially feeds its manufacturing base and in particular the automotive sector. Other main sectors are the metal products and engineering sectors, which are dominated by the ISCOR (recently privatized company). Furthermore South Africa is the world‟s largest producer of gold, platinum, alumino-sillicates and titanium. The mining and manufacturing base (which contribute for more than 50% of its total exports) has traditionally provided the main earnings in the industry sector, but the past decade has witnessed the booming of industries like textiles, automobiles and fertilizers. Moreover manufacturing in South Africa is still constrained by low productivity and capacity restrictions; in 2008 its output increased just by 1.2% compared to the 4.5% in 2007 and is expected to remain weak in 2009. Such outcome mirrors the scarcity of electricity and declining domestic demand. Especially the automotive sector has suffered from declining domestic demand since 2007 due to the global crisis in the auto industry, therefore, in order to guarantee sustained support through 2020, the government as allocated production subsidies of ZAR 870 million over 2009-11. Depreciation of the rand could also mitigate the adverse consequences of the deterioration of international economic conditions. The construction sector is booming thanks to infrastructure projects in transport and electricity, and other plans related to the hosting of the soccer 2010 World Cup (which comprehend a number of new stadiums and hotels). Nonetheless residential building has experienced higher mortgage interest rates and declining demand, but in general, construction grew by 14%in 2008 and is expected to remain active in the next years.

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After the apartheid South Africa has also seen the emergence of information technology and the electronic industries sectors. The country‟s industrial output grew at a pace of 30.3% in 2007,but it fell to around 12% in 2008 given to the global economic downturn. South Africa agricultural economy comprises a healthy developed commercial segment and a mostly subsistence-oriented sector, both of which cumulative accounted for 3.4% of GDP in 2008. According to the National Department of Agriculture, only about 13% of South Africa‟s total surface area is arable, in fact it employs only 9% of the total formal labor force. The agricultural output witnessed a huge increase in output by registering a year on year growth rate of 66% in 2008, from a previous growth rate of 7%. Nowadays, South Africa is a major food exporter, unfortunately the agricultural remains vulnerable to droughts, especially due to low average rainfall and a high degree of variability in rainfall within and between seasons.

Figure 1. GDP Composition by sector, 2008

3,40% 31,30% Services Industry 65,30% Agriculture
3,40%
31,30%
Services
Industry
65,30%
Agriculture

Source: Datamonitor

In 2001 economic growth was hit by a global slowdown and the consequences of economic recession manifested in all sectors. In the same year the rand depreciate by 26% with respect to the dollar, but subsequently stabilized thanks to new capital inflows and the restoration of investor confidence due to exporters‟ resilience. Subsequently, 2002-03, the rand appreciated significantly in response to improved investors confidence. Real GDP has been growing at an annual average rate of 4.7% over the period 20042008. The economy grew by 5.3% and 5%

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respectively in 2006 and 2007, but, given the international dimension of the current financial crisis, it slowed down to 3.1% in 2008, and it kept contracting throughout 2009 10 .

Figure 2. GDP and GDP growth in South Africa, 2001-13

0 . Figure 2. GDP and GDP growth in South Africa, 2001-13 The outcome of the

The outcome of the cautious fiscal policy introduced from the 1990s has lead to a sound revenue base and low levels of public debt, letting higher social spending and public investment in response to the current slow-down. Total revenue and grants have increased from 23.8% in 2000-01 to 27.1% of GDP in 2007-08 due to higher incomes, enhancements in tax collection and the widening of the tax base. In 2008- 09, decreasing incomes have caused a decline in revenues to around 26% of GDP. Projections for the year 2008-09 expected expenditure increases of 27.4% of GDP (with social grants, wages and recruitment growth of 17%); social spending, accounting for 53% of total expenditure, increases of 17%. Moreover investment spending, mainly led by state-owned enterprises, accounting for 8% of total expenditure, was also expected to increase by 37%. As a way to improve the effectiveness of public expenditure, a monitoring and evaluation system has been introduced in 2008. The government is also pursuing devolving expenditure management to municipalities and provinces.

10 Datamonitor

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For the period 2009-10, South Africa is expected to have a fiscal deficit of 3.7% of GDP given the constant increase in social spending, job creation and investment in infrastructure. Spending is supposed to slow down in 2010-11, slightly shortening the deficit to around 3 of GDP. The country‟s deficit is not a main concern, due the state of the economy and the modest level of public debt, which stood at around 23% of GDP in 2008, signifying no difficulty in the financing of the home markets 11 . The country‟s current account has been fluctuating since 2004. It dropped from -1.1% in 2004 to -4% in 2005 as a percentage of GDP. Later in 2006 it went up to -6.3% before severely falling to -7.1% in 2007 (such a level had not previously been seen since the early 80s). The increased net service and income payments to the rest of the world, which mirrors growing foreign liabilities and higher interest and dividend outflows, negatively affected the size of the deficit. In 2008 the current account deficit rose slightly to 6.6% of GDP.

Figure 3. Current Account in South Africa, 2002-08

deficit rose slightly to 6.6% of GDP. Figure 3. Current Account in South Africa, 2002-08 1

11 http://stats.oecd.org/

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Compared to the other African countries, South Africa has a relatively open economy; yet, it has been having a negative balance of payments since 2002. One of the main reasons is found in the county‟s heavy energy imports from Saudi Arabia and leading EU import market which amounts to almost 44% of South Africa‟s total imports. In 2007 the US was the primer South Africa‟s export market, accounting for 11.9% of total exports, followed by Japan (11.1%) and China (6.6%). Among European countries, Germany and UK are South Arica‟s leading export partners respectively representing 8% and 7.7% of its total exports. South Africa trade with the rest of sub-Saharan Africa represents less than 10%. Nevertheless, South Africa‟s export is 50% higher than its overall imports from the region. In fact South Africa has a main role in trade among the member countries of the Southern African Development Community (SADC). 12 In 2008, the county‟s total export amounted to $ 96.1 billion, compared to $83.0 billion in 2007. Its major export products are: gold, platinum, diamonds, minerals, and machineries and equipments. Saudi Arabia is the primary source market for energy in South Africa, which accounts for 4.2%. Other major source market are Germany, China, Spain and the US, accounting respectively for 10.9%, 10%, 8.2% and 7.2%. South Africa‟s total import was $99.5 billion in 2008. Its main imports are: machinery equipment, chemicals, petroleum products, foodstuffs and scientific instruments. Moreover, South Africa has been a member of WTO since 1995, and US products are eligible for South Africa‟s Most Favored Nation (MFN) tariff rates. South Africa also enjoys trade benefits under the African Growth and Opportunity Act (AGOA). 13 In 2008 the country experience a trade deficit in 2008 went down to $3.4 billion from $21.6 billion in 2007, while the trade balance went down to 1% from 7.4% as a percentage of GDP in the same period 14 .

12 The Southern African Development Community (SADC) was created in 1980 with the intent of coordinating the development plan in order to reduce economic reliance on the then existent apartheid South Africa.

13 The AGOA let most of South Africa‟s export products to enter the US market duty free

14 A resource allocation model to support quality management in South Africa, by Urishanie Govender and Jan Kruger y, 13 May 2009, Volume 25 (1), pp. 53{68, ORION and Datamonitor

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Public investment in 2008 increased by 15% and it has maintained a path of around 12.5% on average during 2009-10, taking into accounts the preparations for the 2010 World Cup and large infrastructure projects. Private in 2008 investment representing 72% of total investment, and it has been growing at a stable 4% in the same year, but more recently it has suffered from international liquidity restrictions.

Foreign direct investment (FDI) has played a central role in the development of the country‟s economy. South Africa has undertaken substantial economic reforms in order to attract more FDI since the end of the apartheid era. Yet, FDI has stayed at low levels compared to other emerging market economies. Regardless of an improvement in its overall macroeconomic environment and the country‟s intrinsic advantages such as the availability of natural resources and a vast market size, foreign investors have not shown much interest in purchasing, generating and/or developing domestic ventures. In the period 1994-02, the annual average inflow of FDI in South Africa was smaller than 1.5% of the GDP. UK has been regarded as the most important source of FDI in South Africa followed by Germany and the US according to the South Africa Reserve Bank (SARB) data. Finance, services, mining, and manufacturing sectors are the major addressees of these investments, which in 2008 amounted to roughly $32 billion 15 .

Monetary system 16

In the post-apartheid era a number of small and medium banks faced a liquidity crunch. This led many of them to exit the banking system. In 2007, small local banks constituted 3.1% of the total banking sector assets, in comparison to 21.7% during 1994. This phenomenon was well reflected in the consolidation of the broader banking sector rather than a failure in the small and medium banking sector. The South African Reserve Bank (SARB), the central bank of the Republic of South Africa, was created in 1921 with the main target of attaining and maintaining price stability. The SARB controls credit and the money in circulation mainly by credit rationing, increasing (lowering) the discount rate in times of excessive spending ( money shortage).

15 The Political Economy of Institutions, Stability and Investment: A Simultaneous Equation Approach in an Emerging Economy. The Case of South Africa, by J. W. Fedderke and J. M. Luiz, Journal of Development Studies, Vol. 44, No. 7, 10561079, August 2008

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Over the past ten years, South Africa has developed a fine established banking structure, which well compares with those in developed countries setting South Africa ahead of many other emerging market economies. The country‟s political transformation with the reduction of exchange controls and the liberalization of African economies, has transformed the country in an progressively more significant financial center. From 2000, South Africa‟s government has positioned monetary policy on the basis of inflation targeting, approaching interest rates in response to expected increases in inflation above or below the target range of 3% to 6%. As a consequence of unanimous anxiety over the currency‟s softness, inflation rate in 2002 was considerably high standing at 9.2%. Subsequently it was brought down in the period 2003-2005 by the cautious manipulation of interest rates. In 2007 high international oil prices and increased food prices contributed to a rise in inflation of almost 7%, and in 2008 it reached 11.5%. Later in 2009, headline inflation slowed from 8.0% y/y in May 2009 to 6.89% y/y in June 2009. Such a slowdown was due to a monthly decrease of 0.3% (m/m) in the food and non-alcoholic beverages component and a 10.2% y/y decrease of food inflation in June 2009 compared to 12.3% y/y in May 2009. Headline inflation also slowed slightly from December 2009 y/y, where it stood at 6.3% to 6.2% in January 2010 y/y.

Table 4. Inflation Seprtember 2008-March 2011 17

to 6.2% in January 2010 y/y. Table 4. Inflation Seprtember 2008-March 2011 1 7 1 7

17 Monthly Outlook: South Africa

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In 2008 household indebtedness remained at highs around 76% of disposable income.

The growth of credit to the private sector slowed to 17% in 2008, due to the decline in demand

for mortgages and stricter consumer-credit rules enacted by the National Credit Act in 2007.

Credit to the corporate sector has also contributed to the decline of private-credit growth in 2008.

The 12-month growth rate of broad money (M3) was halved to 15.5 per cent in September 2008

as a consequence of decreasing credit. The rand has been volatile in 2008. The sharp risk

aversion in global markets put downward stress on the rand, which depreciated by around 30%

against the dollar between July and December 2008.

South African government has launched a series of budgetary reforms such as the Medium Term Expenditure Framework and the Public Finances Management Act, which particularly focus on reporting, auditing and increased accountability. The programs is working at renovating the existing monetary policy structure, together with inflation targeting. All this had produced an increased transparency and predictability in the fiscal and monetary system. In response to the current financial crisis the government has proclaimed a stimulus package amounting to $69.4 million and it is pursuing a three-year public investment program by tapping all sources of possible funds ( counting also domestic and international development finance institutions and public-private partnerships). In addition, the government is committed to increase social spending, especially by gradually cutting the pension age for men to 60 years. To facilitate the private sector to manage the slowdown, the government has adapted industrial incentive schemes to offer support from local DFIs.

Government policies

According to the Wall Street Journal‟s index of economic freedom, South Africa was ranked as the 61st freest economy in 2009 and it ranked 3rd out of the 40 countries in the sub-Saharan region, with an overall score significantly higher than the regional average. South Africa is a largely free economy; however, slow judicial procedures, and race laws and obscure trade regulations impede foreign investments. Stringent employment regulation hinders overall

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productivity growth and employment opportunity. In addition, corruption at times acts as a deterrent to inward investments.

Foreign investments are treated basically as domestic investments and receive state treatment for different investment incentives like export initiative plans, tax allowances and trade regulations. Nonetheless, borrowing restrictions by exchange control authorities keep stimulating differences between domestic and foreign investors. Even though nearly all sectors have been made open for foreign investments, still in some sectors ceilings have been put forward on the authorized extent of foreign investment. South Africa for example bounds foreign investments in the banking, insurance and the broadcasting industry.

In the area of education, the post-apartheid government needs to make considerable attempts to stimulate the equitable distribution of education services (literacy rates among the black population are still low, and education facilities in the townships and rural areas need to be improved). The leading project, has brought in significant changes in the education system by upgrading the schooling and higher education system in semi-urban and rural areas. It has also proven effective in increasing school attendance and renovating hundreds of schools across the country, but work still needs to be done in order to win the challenge of generating an educational system that offers quality education to all citizens of South Africa.

During the years of apartheid, the quality of health services available to the entire population was foully unequal: health status diverged considerably among population groups. From 1994 onward substantial efforts have been made to restore the healthcare sector. The center of the healthcare system has shifted from a curative to a preventive approach. However, South Africa is characterized to have the world‟s largest number of HIV/AIDS infected population. even if the government has made striving efforts in order to improve the healthcare system, private healthcare spending control South Africa‟s total healthcare expenditure outlay. Additionally, the country‟s health performance still stands low if compared to other countries with similar economic development. Another key challenge that the healthcare sector is facing is represented by the inequalities in the quality of healthcare services offered by public and private sectors.

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The Social Welfare Policy in South Africa focuses in reducing racial inequalities in the allocation of state wealth towards older populace. State pensions during the apartheid era were discriminatory in which they allowed older whites to benefit from proportionately more state support than their counterparts in other racial groups. Later in 1997, a white paper was drafted which defined social welfare as an integrated and complete system of social services, facilities, programs, and social security devoted at promoting social development, social justice and the social functioning of people 18 .

Technological innovation in South Africa is sustained by noteworthy research and development (R&D) expenditure. Its expenditures on R&D have doubled from 1997 to 2005 posting at 0.92%, which is largely in line with the country‟s income level. South Africa share in R&D is similar to or higher than several OECD countries with higher R&D intensity, such as Italy, Spain and Canada. The country has also complied with the provisions of the WIPO and the IPR laws; both patents and trademarks are well recognized and employed to protect business interests. South African‟s telecommunications sector is one of the fastest growing in the economy and the country‟s mobile communication system is the fourth biggest in the world in terms of number of users. Still, bandwidth service stays limited and costly if compared to several other countries with similar economic development. In this regard, the government has stated its compliance to moderate bandwidth cost and enlarge its accessibility in the short-term.

South Africa has one of the world‟s richest biological heritages, and has been at the vanguard in drafting and implementing environmental legislations. South Africa has build up the National Environmental Policy throughout a comprehensive participatory method named the Consultative National Environment Process (CONNEPP). The CONNEPP environmental policies mainly focus on winwin solutions to encourage both economic and environmental gains. Although South Africa is an industrializing economy, its government complies with the norms of the Kyoto

18 DIRECTORATE FOR EMPLOYMENT, LABOUR AND SOCIAL AFFAIRS EMPLOYMENT, LABOUR AND SOCIAL AFFAIRS COMMITTEE, TRENDS IN SOUTH AFRICAN INCOME DISTRIBUTION AND POVERTY SINCE THE FALL OF APARTHEID, Murray Leibbrandt, Ingrid Woolard, Arden Finn and Jonathan Argent, Southern Africa Labour and Development Research Unit, School of Economics, University of Cape Town, 09-Mar-

2010

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Protocol to check greenhouse gas emissions. The South African government has further promoted procedures to guarantee future energy efficiency since it is one of the top per capita carbon emitters in the world (the country relies on coal for the production of 90% of its power). It is due to these and many other coordinated efforts South Africa has been able to stabilize carbon dioxide emissions.

Conclusions

South Africa has decided to allocate major resource to redistributive policies with the objective of both guaranteeing short-term income support to the poor and breaking the intergenerational diffusion of poverty by encouraging families to invest in better health, education and nutrition for their children. On the other hand HIV/AIDS still constitute an enduring negative factor. The slowing down of South African economy is mainly due to: record power shortages, the jump in global oil and food prices, the slow-down of private consumption; and the turn down in foreign investment and in exports caused by to the global financial crisis. Growth is expected to fall further to 1.1% in 2009 given constant narrowing of domestic demand. However real GDP growth is anticipated to average 3.3% a year in 2011-20, which is near to the sustainable level at current time that will not produce imbalances. Positive growth is due to tourism and investment spin-offs from the World Cup. Growth is expected to reach 4.6% a year in 2021-30 as a consequence of big investments undertook at present time. (in both physical and human capital) lead to a sustained improvement in economic efficiency and capacity, while regional integration will boost potential market size.

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FIRMS FROM SOUTH AFRICA AS INTERNATIONAL ACTORS

Exports and internationalization in South Africa

Simone Tiberi

What we want to do in this section of the whole paper is to analyze how internationalized are emerging markets firms in South Africa, see what are the main obstacles to its exports development and internationalization and what is the main role of the South African MNCs in the global economy. So first there will be a short presentation of South Africa, then we will pass to a description of SA‟s exports, key sectors, major partners and finally we are going to discuss the role of MNC in the emerging markets, both advantages and disadvantages. Let‟s start presenting

a bit SA situation.

After the South African leader F.W. de Klerk declared the end of the apartheid in his country, just

a few decades ago, the country has come over a long way since then, even hosting this summer‟s

soccer World Cup. Through the time, South Africa is opening itself to the world and this is exactly what is happening to its companies too. Indeed South Africa can be seen as an emerging market since in the last years it has increased its number of exports in lots of fields and, as a

consequence, its power in the African continent. Due to its increasing power over the last years, South Africa, with Mexico, Brazil, China and India has become a member of the G8 + 5 group. This group has been founded in 2005 when the Prime Minister of the United Kingdom, Tony Blair, has invited these leading emerging markets to the G8 summit that took place in Scotland. Furthermore, according to what the French President Nicolas Sarkozy said, "The G8 can't meet

for two days and the G13 for just two hours

five emerging countries." 19 The country‟s overall influence on Africa‟s economy gives South Africa a greater weight and makes it an attractive partner for the BRIC nations. For example, last year at the Copenhagen Climate Change Forum South Africa, Brazil, India and China played a really important and active role in climate change talks and joined together for the formation of a new group with the name of BASIC 20 . South African companies operating in consumer goods, telecommunications and financial services have expanded their business very successfully into other emerging markets and OECD

That doesn't seem fitting, given the power of these

19 http://en.wikipedia.org/wiki/G8%2B5

20 The BASIC countries (also Basic countries, BASIC or G4) are a bloc of four large developing countries Brazil, South Africa, India and China formed by an agreement on 28

November2009;http://en.wikipedia.org/wiki/BASIC_countries

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countries. First, in order to survive, apartheid forced businesses to become more creative, so we can easily state that there is a big difference between managers in South Africa and managers in Europe and USA: while south African business managers don‟t mind taking on risk, European or U.S.A ones do, because they miss a creative part due to a stable macro environment in their country. Furthermore the country‟s ethnic diversity and tumultuous recent history has made them more open to different cultures and less dogmatic about business methods21 . Companies there have become very expert at working intimately with local partners, creating a developed networking. Another positive aspect is that since the middle 1990s the ruling political party has pushed businesses to forge alliances within fellow emerging markets. South Africa companies have also gained valuable experience by selling their products to the country‟s own emerging middle-class and low-income groups. We can state that this can be considered as a workout to prepare them to operate in similar markets further afield. They also have relatively large, local capital markets compared to their economic output. Capitalization of the Johannesburg stock market is roughly twice the nation‟s GDP. In many other countries, stock market value simply can‟t measure up to the economy‟s yearly output. In addition to what has been said before, due to the relatively large size of South Africa, all companies there are allowed to get hold of funds more easily than some of their developing country competitors. In addition, the country has sophisticated debt markets that companies can use to raise long-term funds.

Factors incrementing exports and key sectors in South Africa’s economy

South Africa has increased its exports over the last years and its companies have become more internationalized. This happened due to several reasons. First, as it has been said by many people, SA can be easily considered the engine of all the sub- Arabian area due to its relationships worldwide. If we consider some data from a CIA study in 2008, SA main partners are important economies like Japan 11.1%, US 11.1%, Germany 8%, UK 6.8%, China 6%, Netherlands 5.2% 22 . Another reason we have to take into consideration in order to understand South Africa‟s development during the last decade is that the South African rand (ZAR) is the most actively traded emerging market currency in the world. It has joined an elite club of fifteen currencies,

21 Tony Daltorio, 25th March 2010, Investment U Research

22 https://www.cia.gov/library/publications/the-world-

factbook/fields/2050.html?countryName=&countryCode=&regionCode=:

19

the Continuous linked settlement (CLS), where forex transactions are settled immediately, lowering the risks of transacting across time zones23 . Thanks to its nature the South African currency has been considered ad the best-performing currency against the United States dollar (USD) between 2002 and 2005” according to the Bloomberg Currency Scorecard 24 . Furthermore another positive aspect of this country is that in comparison with all the other countries in Africa, it is surely the most developed one. We can infer that just considering its transportation infrastructures. We can say that its transportation infrastructures are among the best in Africa, since both domestic and regional needs are supported. The International Airports in Johannesburg and Cape Town serve as hubs for flights to Southern African and international countries. In addition to the main infrastructures like streets and Airports, in South Africa an important role is played by ports that make the country a central point for most trades in the Southern African region. This must not be undervalued since the development of a country strongly depends on its capacity to get in touch with other countries through an efficient logistic system. Moreover to all these aspects, an important variable we must take into account for understanding SA developed exports is the role of government. Through the years, indeed, the South African government has implemented incentives to firms exporting in international markets. The most important government structure that assists firms exporting worldwide is the Department of Trade and Industry (DTI). This specific Department‟s role is to identify and target South African‟s main sectors (sectors that have the highest growth levels) and to enjoy direct access to the highest growth levels in both South African business sectors and its trading partners. So we can state that the DTI is really important for South African firms since it can be considered as a trait d‟union between everyone involved in investments and trades in South Africa. Furthermore, the DTI also markets SA exports internationally, with teams operating from regional offices around the world providing market intelligence and identifying opportunities for SA companies, and sector specialists offering advice on export processes and procedures. 25 The export process is sector- specific, and sector strategies offer the framework within which exports are encouraged and operationalized. What DTI mainly does is to promote sectors of the local economy that have registered the most important and considerable growth potential and marketability. In this specific case the main sectors are:

23 http://en.wikipedia.org/wiki/South_Africa#Economy

24 Bloomber Scorecard currency

25 http://www.southafrica.info/business/trade/export/dti-export.htm

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Automotive and transport industries

Mining and metal-based industries

Chemicals, pharmaceuticals and biotechnology

Tourism

In addition to what has been said before, the DTI, with a special focus on some categories like small-medium-micro enterprises (SMMEs), black economic empowerment (BEE) exporters, and through the Export Marketing and Investment Assistance (EMIA) scheme, provides incentives to exporters. Another characteristic of the DTI is that it promotes the formation of sector-specific export councils in partnership with South African industry in order to support all exporters in achieving their main goals, and, more in detail, it enables small businesses in any sector to access DTI support structures. Moreover the Department of Trade and Industry supplies funds for the formation of export councils and certain of their initiatives, including trade missions and exhibitions. Various industry sectors have organized themselves into export councils to tackle the global marketplace as collective forces. These include the automotive, electrotechnics, wire, stainless steel, aluminium, flower, wine, cosmetics, crafts, ceramics and textiles sectors (Hulmes, 2006). Regarding the export council approach we can say that it is made in a specific way that gives access to DTI support structures by small, medium and micro enterprises (SMMEs) as well as larger companies. Executives appointed by participating firms serve on the export councils. The National Export Advisory Council (NEAC) meetings are finalized at the discussion of proposals and are addressed at the elimination of obstacles to export, in order for the councils to operate successfully. The DTI carries a full list of South Africa's export councils, industry associations and joint action groups.

As said before, South African government is working pretty good in order to increase its firms export. For the achievement of this goal, the government has provided several incentives to South African firms for exporting their products and services globally. The government structure taking care of exports in worldwide markets is the Export Marketing and Investment Assistance (EMIA) scheme which compensates exporters for costs involved in developing export markets for South African products. Administered by the Department of Trade and Industry (DTI), the EMIA offers

21

exporters financial assistance with market research, trade missions, and showcasing products and services at international exhibitions, among other things26 .

Specific schemes include:

Primary export market research - reimburses the costs of contact with potential clients in international markets (airfares, car rental, daily allowances).

Individual exhibitions - reimburses a percentage of the costs of participating in trade fairs.

Outward selling trade missions - helps exporters to make contact with foreign buyers.

Inward buying trade missions - puts prospective buyers in contact with South African exporters.

South African manufacturers of products can apply for assistance, as can export trading houses, commission agents and export councils. Financial benefits work on a reimbursement basis, with the applicant bearing initial costs and then submitting a claim afterwards (some upfront assistance is available under the National Pavilions scheme). Applications must be submitted at least one month before the event. Other forms of incentives given by the South African government to firms exporting internationally are:

Export credit incentives: the Industrial Development Corporation (IDC) makes financing available at reduced rates for selected expansion schemes that are expected to result in increased foreign exchange earnings. Financing of credit for exporters of capital goods is also available through the IDC or private sector merchant banks at reduced rates. Export credit insurance: under the Export Credit Finance Guarantee Scheme, the Credit Guarantee Insurance Corporation provides substantial export credit insurance to small, medium and micro enterprises (SMMEs). Export credit insurance provides an exporter with insurance protection against financial loss owing to non-receipt of payment of a legally enforceable debt due and payable by a non-South African importer to the exporter for goods and services delivered. The guarantees are reinsured by the Department of Trade and Industry. To qualify, the export transaction must include substantial South African content of goods and/or services. Credit facilities are also made

26 http://www.southafrica.info/business/trade/export/incentives.htm

22

available to exporters of capital projects under the Export Finance Scheme for Capital Projects to allow them to complete internationally by offering buyers competitive rates denominated in US dollars.

Customs and Excise duty refunds: provision is made in the Customs and Excise Act for general refunds, as well as a large number of specific drawbacks and refunds of customs and excise duties, to exporters. These concessions are available to manufacturers as well as to merchants who import goods for re-export27 .

Now, going more deeply into the data available on the CIA World Fact Book, South Africa key sectors are: mining and minerals, chemicals, ITC, automotive industry and of course tourism 28 (let‟s think about the Soccer World Cup this summer, for example). In the chart below is possible to see SA‟s exports over the last year in order to have a clear idea of how fast the country is developing.

to have a clear idea of how fast the country is developing. Source: statistics from WTO

Source: statistics from WTO 29

Even thought imports exceed exports, from 2001 to 2008 SA has registered a sharp increase in exports passing from less than 33,000 units to more than 77,000. Talking about specific sectors, South Africa's automotive industry is a global, turbo-charged engine for the manufacture and export of vehicles and components. According to the Automotive Industry Development Centre, the automotive industry contributes 5,7% of GDP and is the third largest sector in the South

African economy, accounting for 28,5% of the country‟s manufacturing output 30 . The

sector

accounts for about 10% of South Africa's manufacturing exports, making it a crucial cog in the economy. With annual production of 535 000 vehicles in 2007, expected to rise to 630 000 in

27 http://www.southafrica.info/business/trade/export/incentives.htm

28 https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html

29 http://www.thedti.gov.za/econdb/raportt/South%20Africawto.html

30 http://www.amts.co.za/automotive.pdf

23

2008, South Africa can be regarded as a minor contributor to global vehicle production, which reached 73-million units in 2007.But, locally, the automotive sector is a giant, contributing about 7.5% to the country's gross domestic product (GDP) and employing around 36 000 people31 . Vehicle exports were around 170 000 units in 2007, and the National Automobile Association of South Africa (Naamsa) expects this to jump to 285 000 in 2008. This is extraordinary growth, especially when compared to 1997, when the number of units exported was below 20 000. South Africa currently exports vehicles to over 70 countries, mainly Japan (around 29% of the value of total exports), Australia (20%), the UK (12%) and the US (11%). African export destinations include Algeria, Zimbabwe and Nigeria.

export destinations include Algeria, Zimbabwe and Nigeria. Graph 1: Data Source (NAAMSA) The government has identified

Graph 1: Data Source (NAAMSA)

The government has identified the automotive industry as a key growth sector, with the aim of increasing vehicle production to 1.2-million units by 2020, while significantly increasing local content at the same time. During the last years South Africa has been one of the best performing automobile markets in the world. As we can see from the chart above, new vehicle sales figures soared to record-breaking levels for three years in succession, from 2004 to 2006. In 2006, sales increased by 14.4% to just under 650 000 units, generating revenue of R118.4-billion. Sales dropped by 5.4% in 2007, and were expected to drop further in 2008 as higher interest rates and rising prices curb spending.

Regarding the other key sectors in SA, deeply speaking about the mining and minerals one, we can see that South Africa's wealth has been built on the country's vast resources - nearly 90% of the platinum metals on Earth, 80% of the manganese, 73% of the chrome, 45% of the vanadium

31 http://www.southafrica.info/business/economy

24

and 41% of the gold. Only crude oil and bauxite are not found here32 . South Africa is considered to be one of the largest producer of precious metals such as gold and platinum, as well as of base metals and coal. It is also considered the world's fourth-largest producer of diamonds (let‟s think about the DeBeers Company that accounts for the 40% of the total markets of diamonds worldwide). Furthermore experts believe there is still considerable potential for the discovery of other world-class deposits in areas that have yet to be fully exploited. Two of the world's biggest mining companies originated in South Africa. BHP Billiton, the world's largest mining company, came after a merger between South African company Billiton and Australian firm BHP. Anglo American Plc, which has its primary listing in London and its secondary listing in Johannesburg, owns many major subsidiaries, such as Anglo Platinum, Anglo Coal, Impala Platinum and Kumba Iron Ore. Diamond miner De Beers, also a South African company, is owned by Anglo American and a consortium led by the Botswana government. The world's top diamond producer churned out about 51.1-million carats in 2007. In South Africa, the diamond industry plays a relatively modest role; indeed, it contributes about 1% of GDP and employs around 14,500 people. This has significant impacts on the economy in terms of export earnings, revenues and employment.

SA's share of world reserves & production

SA's share of world reserves & production (Data source: Department of Minerals and Energy) The

The tourism sector strongly contributes to South Africa‟s economic growth and export. After the end of the apartheid and the first democratic election in 1994, South Africa registered more than seven million foreign tourist arrivals in 2005 which corresponds to a 10% increase on the

32 http://www.southafrica.info/business/economy/sectors/mining.htm

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previous year. The growth in the past 11 years was exceptional with tourism increasing by more than 100% since 1994. Tourism grew rapidly between 1994 and 1998 at a rate of 11.8%. The country consolidated its performance between 1998 and 2001; in this period of time the growth was quite stabilized since as shown in the figure we cannot see significant increases in number of arrivals. By the way after 2001 the growth rate increased again 33 . It has also created new jobs and to add value to the country's many natural and cultural resources. This makes the outlook for the industry extremely positive, particularly with the exposure the country will receive in the lead-up to the world's biggest sporting event, the Fifa World Cup, taking place in South Africa in 2010 - and the accompanying massive upgrades to transport and accommodation infrastructure. we can see that.

Foreign Tourists Arrivals to South Africa (1994 - 2005)

g n Tourists Arrivals to South Africa ( 1994 - 2005 ) Source: South African Tourism

Source: South African Tourism 2005 Annual Tourism Report

Arrivals from Africa currently account for 72% of all foreign tourists to South Africa, enhancing the view that SA serves as a gateway to the continent. Strong growth rates can also be seen from

major non-African markets. Tourism is also one of the fastest growing sectors of South Africa's

economy, its contribution to the country's gross domestic product (GDP) increasing from 4.6% back in 1993 to 8.3% in 2006. Directly and indirectly, tourism constitutes approximately 7% of employment in South Africa.

Even thought South Africa is doing really good in exporting, some people may state that doing business in Africa is extremely risky since this continent is famed for its political instability (as we all know from the analysis of the macro-environment of a country, firms are more willing to open or set their companies in

33 http://www.dti.gov.za/sectors/Tourismsector.htm

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countries characterized from a stable political system), its poor infrastructure (it‟s not the specific case of South Africa that has a working infrastructure system), and the underdeveloped markets (let‟s think about all the other countries that are not developed ad South Africa is. By the way, after having reading lots of papers, books, slides and so on, I think that Africa offers lots of opportunities to companies and firms that are able to struggle with such challenges.

Multinationals Companies and their role in South Africa

As we have said at the beginning of this part of the paper, before the democratic elections that took place in 1994, South African companies‟ operations were for the most part confined to their national base. Sanctions, political isolation and legislative constraints made anything beyond normal trade relations nearly impossible. After 1994, South African multinational started to grow fast and they decided to move into the rest of Africa and beyond. Mining houses were the first to start going outside SA‟s borderlines and they have been followed by manufacturers first and financial institutions later. Trade mushroomed, mostly in favour of South Africa. Once the exchange controls were established, companies has started investing offshore and listing on foreign stock exchanges. Companies operating in several nations and across cultures face many difficult decision making problems when it comes to business ethics. Business ethics deals with the evaluation of decision-making by businesses according to moral concepts and judgments. The expansion of South African and other multinational companies into and outside South Africa‟s borderlines comes with the hope of meaningful and sustainable development on the continent. However most often local communities in host countries do not benefit from multinational investment and business practices further contribute to unequal development. This report is a follow-up to that database and presents

a

list of 20 multinational corporations operating in the following key sectors:

Financial Services

Oil and Gas

Mining

Information Technology (Telecommunications)

Retail

In

order to understand which is the main goal and role of multinational corporations in emerging

markets and, in our case, what do they bring to South Africa‟s economy, we first have to consider

some components. These components must be aligned with the MNE‟s inter-national strategy

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which influences its host country environment and with its home country environment. Here is a graphical representation of the variables we have to take into account for seeing if emerging markets multinational are creating a global operating model for the future.

are creating a global operating model for the future. Source: Accenture research report 2009  Leadership:

Source: Accenture research report 2009

Leadership: the senior team of people and associated governance that substantially influence and serve as an example for how an organization should operate” 34 ;

People: the individuals in an organization in terms of their skills, capabilities, experience, and individual competencies. It refers to how talent is managed internationally, how engaged employees are and how networked they are across geographic boundaries.

Organizational Architecture: It includes the mechanisms of differentiation and integration a MNE uses to connect geographic business units and the corporate center, including the organizational structure, the degree of centralization and formalization, and the control mechanisms utilized35 .

34 Kelly, K., D. Peters, and M. Peterson, Organizing for high performance: The role of the operating model in the multi-polar world. Outlook, 200

35 Martinez, J.I. and J.C. Jarillo, The evolution of research on coordination mechanisms in multinational corporations. Journal of International Business Studies, 1989. 20(3):p. 489-514. Westney, E., Geography as a

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Processes and technologies: are considered as all the processes that necessary to coordinate the input-output activities like allocation of the resources, strategic planning 36 .

Metrics: it refers to all the indicators that are used in order to understand how the multinational is performing.

An example of South African multinational company is DeBeers, one of the most internationalized companies in South Africa; indeed this company is listed on a stock exchange, is characterized by a size and has operations both in Africa and outside. De Beers and the various companies within the De Beers Family of Companies engage in exploration for diamonds, diamond mining, diamond trading and industrial diamond manufacture. Cecil Rhodes founded De Beers Mining Company in April 1880 by during the South African diamond rush of the early 1880s. De Beers is active in every category of industrial diamond mining:

open-pit, underground, large-scale alluvial, coastal and deep sea. The countries in which DeBeers has its mining activity are Botswana, Namibia, South Africa, Tanzania and Canada and the rough diamonds are traded by the Diamond Trading Company through wholly-owned and joint venture operations in South Africa (DTCSA), Botswana (DTCB), Namibia (NDTC) and the United Kingdom (DTC). The various DTCs within the Family of Companies sort, value and sell approximately 40% of the world‟s rough diamonds by value. The Family of Companies employs about 20,000 people around the world on five continents, with 17,000 employees in Africa. Over 7000 people are employed in Botswana, over 7100 in South Africa, 3800 in Namibia, 700 in Canada and over 800 in Group Exploration. Founded by the Oppenheimer family, De Beers is the world's largest producer of gem and industrial diamonds. Through its London-based Central Selling Organisation (CSO), De Beers controls almost 65% of the world's diamond trade37 . Here are some detailed information about DeBeers Consolidated. Head Quarters: Johannesburg, South Africa Number of employees: 20,000 (17,000 employees in Africa) Net income: US $554 million (2005) African host countries: Botswana, Namibia, Tanzania, South Africa Formed: 1880

36 Design Variable, in The Future of the Multinational Company, J.M. Birkinshaw, et al., Editors. 2003, John Wiley:

Chichester, UK. p. Chapter 10 37 Case study: Multinational Corporations in South Africa

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As we can see from this example of multinational company based in South Africa we can state that DeBeers is competing worldwide and that is a great opportunity for South Africa because in this way it has the possibilities to show to the rest of the world, especially to developed markets, how fast it is growing and expanding and further it can show its potential to become a convenient market to trade with.

If we consider the conventional neo-classical theories about emerging markets, they state that Less Developed Countries suffer from four “gaps” that keep these countries trapped in a low- growth scenario. According to Streeten (1974) has been saying in “Economic analysis and The Multinational Enterprises”, we can we identify four gaps in SA as a LDC:

The resource gap, that arises from the shortfall between the level of locally mobilized savings and the desired level of investment;

The foreign exchange or trade gap, which is the result of a difference between the level of foreign exchange earned by the LDC from export and the level of foreign exchange required to finance (capital equipment) imports necessary for development;

The skills and technology gaps, which refers to the difference between the level of domestic (labor and management) skill and technology as opposed to the level of skills and technology extant in more developed countries;

The budgetary gap or budget deficit, which arises out of government expenditure exceeding revenues. By the way, thanks to example of DeBeers company we can state that South African multinational companies play a fundamental role for the whole continent. Additionally the role of multinational is really important because South Africa can take advantages from countries in which their firm are located. So, for example, a firm located in Johannesburg with a division in another country in Africa or in the world will have benefits due to the mixture with another culture, so the corporate governance of the firm located in Johannesburg will increase its knowledge and will develop a more international corporate governance system thus expanding further in the world and so increasing the volume of exports both locally and globally. Moreover a south African multinational company based abroad will strongly contribute to improve exports through a strong brand image campaign.

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SOUTH AFRICA AS MARKET AND PRODUCTION LOCATION

Giulia Sergi

In September 2000 the UN General Assembly adopted the Millennium Development Goals: a series of objectives aimed at reducing poverty rates by 50% within 2015 38 . South Africa agreed on the terms strong of the fact of being one of the richest Sub-Saharian countries. In SSA, in fact, almost 50% of the total population live under the poverty line and the alleviation of poverty has been of central focus, especially in the last 40 years, for the international community. Nevertheless, SA still lacks the right determinants for decreasing its wealth inequalities and rising the general standard of living of its population. According to the Statistical Institute ( StatsSA ), the average African household has lost 19% of its real income since 1995 with the richest earning 65% of all household income. The Gini index reported by the World Bank is attested to be at 57 in 2000 against a 38 of Egypt. This fact shows evidence of the high level of inequality in the country, further characterized by different levels of wealth across population groups. Africans 39 are those affected the worst presenting a Gini Coefficient of 0.72 in 2001 40 against a 0.60 of white Africans. They represent the 79% of the total population and despite the ANC policies aimed at their empowerment after the isolation caused by the apartheid 41 , they have faced a soaring coefficient through the years 42 . From 1990 the UN has published a “ Human Development Index”, a responsive measure to short term policy changes. It accounts for three dimensions that go beyond the mere GNP per capita indicator. HDI looks at living a long and healthy life, being educated and having a decent standard of living 43 . SA has increased its index by 0.14% annually from 1980: a positive result

38 There are several discussions around the assessment of a common poverty line indication (*). Here the UN agreed on the 1$ a day threshold as the main indicator of the poverty level.

39 Black Africans, data SARPN.

40 Poor and developing countries tend to possess greater Gini indices; the range generally varies between 40 and 65. Extremes are calculated at 25 and 71. Gini coefficient refers to the variance in poverty and wealth in any given country. On a scale of 0 to 1, the lower the Gini coefficient, the more evenly distributed the wealth

(Economypedia,2010).

41 The government intends by 2015 to redistribute 30% of agricultural land to colored Africans to address the imbalances in ownership inequality that are hampering agricultural production and increasing poverty.

42 From 0.52 of 1991. Data: Southern African Regional Poverty Network.

43 Measured respectively by life expectancy, adult literacy and gross enrolment in education and PPP, income.

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that

indeed

does

not

compare

to

other

emerging

economies

such

as

China.

does not compare to other emerging economies such as China. These data are particularly important in

These data are particularly important in attracting investments from abroad. Foreign Direct Investment 44 as an instrument for eradicating poverty is a concept envisaged in the New Partnership for Africa‟s Development declaration 45 and, with the low domestic savings of the country, the only way to finance its economy. Nevertheless, SSA countries still lag far behind in the quest for private capital flows.

still lag far behind in the quest for private capital flows. source: UNCTAD, 2008 4 4

source: UNCTAD, 2008

44 FDI in South aFrica is defined as investment by foreigner/South African residents in undertaking in SA/Abroad in which they have individually or collectively, at least 10% of the voting rights (UNCTAD, Bank of SA).

45 NEPAD is a development plan stipulated by African leaders aimed at the alleviation of poverty.

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However, South Africa dominates the scene with the largest share of FDI Inward Stocks of the continent generating 77 billions of dollars in 2006 and a share of 24% of total FDI in the

continent. Portfolio investment is another possible source for offsetting the deficit in the BOP but

it does not provide stable numbers nor it enhances the economic environment of the country.

Although, portfolio equity results for SA have survived the economic crisis and still outperforms FDI incomings. The business confidence level of the country has dropped in the last couple of years but is expected to increase in 2010 also thanks to the celebrations for the soccer World Cup:

the government‟s attempt to reinvigorate the economy will pass through the infrastructure, telecommunications, transportations and mining sectors. A $69.4 million package diluted in 3 years . Investors will positively see these improvements, being the environmental setting one of the major determinants for attracting funds. The leading literature focuses also on the size of the market and the resource endowments as main drivers of incoming FDI. Resource-rich countries like SA, for instance in the mining sector, tend however not to experience relevant positive spillovers 46 from FDI like an increase in the

rate of employment, technological transfer and worker productivity (Asiedu, 2004).

A large market of almost 50 million people, the fifth biggest of the continent, that enjo ys regional

cooperation with other SSA countries works instead as a binding agent for the multinational companies (Asiedu, 2006). The Southern African Custom Union between SA, Botswana, Lesotho, Namibia and Swaziland is the oldest CU in the world. There are two Free Trade Areas between the EU and the Southern African Development Corporation by which the country abides. SA is also eligible within the African Growth and Opportunity Act for the United States‟ market access for African countries. Large tariffs decrease have accrued on consumables within the agreement of the 1994 GATT/WTO although the envisaged cut level has not yet been reached 47 . SA has also boosted its economic bilateral cooperation with China, the latter becoming one of the largest trading partner 48 . Furthermore SA is generally classified as a lower-middle income country in comparison to the other SSA countries thus it should theoretically encourage investments from the commodity market despite the latest soars on price of final goods. For the majority of MNC however the

46 Spillover: A side effect arising from or as if from an unpredicted source ( The Free Dictionary,2010).

47 The number of ad valorem tariffs still stands at 38, higher than the 6 offered by the1994 GATT/WTO (Mabugu, Chitiga, 2009).

48 ICBC bought a 20% stake in Standard Bank, a $5.5 billion transaction, the largest single instance of FDI in SA history (Ford, 2008).

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Developing Country‟s investment represent a small fraction of the company‟s total revenues. This fact constraints the companies towards the production of goods nearing the end of their product cycle or coming from downstream segments characterized by low-technology features ( Estrin and Meyer, 2004 ). The latter decision is also taken in relation to the poorly skilled labor force that characterize among all SSA also SA, as evidenced above by the HDI. A niche seeking market is more consistent with long-term positive revenues and let companies avoid internal competition (Kokko, 1994). The small portion of revenues experiencing MNCs is further strengthen by the low portion of private consumption of the country demand, a pattern strictly related to the poor income of its population. Private consumption in 2008 was at 59.9% of GDP against a 74.7% of Egypt. This gap is basically filled by a higher portion of public consumption amounting for a 20% of GDP in the same year. Foreign investment should therefore be more attracted by the installment of production for public commodities than for low quality-poorly profitable goods destined at the majority of the population. On this regard, the positive spillovers generated by the settlement of the company are constrained to mere jobs gained while no transfer of specific knowledge is envisaged. However it has been observed that in developing countries where the human resource capabilities are negligible and the products developed by MNCs are low-technology intensive many companies prefer to adopt a softer entry to the market through alliances and joint ventures rather than through Greenfield operations. Sometimes the JV alliance is more finalized at the knowledge of the local market for the MNC while the local partner may experience positive spillovers in relation to the transfer of know-how and governance mechanisms. In the meanwhile local competitors experience a rather softer competition. In the presence of a liberalized economic environment where red tape obstacles are abolished in favor of easier investments the MNC still opts for either a M&A or a Greenfield project. A study conducted by Thurlow in 2006 has highlighted the incidence of trade liberalization since the „90s on growth and reduction of poverty in SA. From the main findings it can be observed a slight reduction in poverty through an increase in per capita expenditure but also an increase in inequality is observable, in line with the Gini Index raise. The causes of such a negative spillover are a low sectoral protection and low factor mobility across sectors. On the other hand, more liberalization and less red tape improve the business climate of an economy for FDI. The 2004 Business Competitiveness Index of the World Economic Forum ranks SA at the 25 th place out of 103 countries in the world. Conversely we can see that among

34

the other SSA nations, administrative regulations regarding entry, exit and business operations become so cumbersome that they outbalance the benefits of entering in the market. The panel below shows the improvement achieved by SA in the rank on the easiness of doing business among 183 countries, developed and developing included.

among 183 countries, developed and developing included. Source: Doing Business in South Africa. Then, if for

Source: Doing Business in South Africa.

Then, if for trade liberalization we also take into account the government provisions for increasing the inflow of money then SA has striven the scene of the continent. Some of the policies enacted by the SA government for attracting FDI:

No approval for investment by the Government Authority.

Non-resident investors are bound by law on the same terms of locals.

The 1973 Company Act permits the establishment of a private or public limited-liability company.

In 2008 the government published a new draft version of the new companies act addressed at reducing the time and costs of forming and maintaining a new company.

In 2010 a new plan of incentives for big projects of more than R5 billion has been outlined.

SME incentives in the form of financial grants have been announced for the manufacturing and tourism sectors if companies decide to settle outside the metropolitan areas, 2008. Another method used by the government is the adoption of fiscal incentives for entrepreneurs coming to SA. In 2004 in the all continent 70% of countries adopted tax holiday as a main instrument of attractiveness of FDI compared to only 10% of all OECD countries. SA has opted

35

for double taxation treaty agreements with several countries whereby foreign residents undertaking will be taxable only if the business conduct comes from permanent establishment 49 . The table below indicates the number of required tax practices, time spending and total tax rate of SA in comparison to SSA and OECD countries.

tax rate of SA in comparison to SSA and OECD countries. source: Doing Business in South

source: Doing Business in South Africa.

The results show a lower total tax rate for SA businesses. Also, in comparison to countries that have attracted higher FDI investments in the last 10 years, namely China, the tax burden on profit is very low 50 . This finding may appear contradicting with respect to the main perspective of scholars arguing that fiscal incentives do contribute to the improvement of the economic and social situation of a developing country ( Bora, 2002; Blomstorm and Kokko, 2003). Actually this evidence does not interfere with the latter view if we consider all other determinants of funds inflow into China. For instance, if we put an eye on the cost of productions like costs of wage in the textile sector, the UNCTAD prospective of 2008 suggests a price of $1.38 of SA against a $0.88 of China. Moreover, the high costs of production have been for SA a major obstacle for years in one of the dominant sectors of the economy: the mining sector.

However, within the context of the WTO, SA still commits itself in the protection of international investors. The country has agreed on the term of the TRIPS, the IP protection rights. The institutional environment appears quite secure for entrepreneurs although the competition on entry remains an obstacle for both MNC and local enterprises. The market is in fact characterized by a series of oligopolistic and collusive structures emerged during the apartheid period and not totally dismantled by the attempt of the government to increase privatization and competition.

49 Taxation Laws Amendments Act [ No. 20 of 1994 ]

50 Again The World Bank Group suggest a 63.8% for China.

36

Nevertheless, a new Statute took effect in 1999 for “curb restrictive practices and more closely regulated mergers” 51 and Competition Act 89 of 1998 states that parties must notify within 7 days of a proposed merger that qualifies as a larger merger, whether or not it is carried out by foreign or local investors.

Among the other factors influencing the choice of MNC of whether or not entering SA not marginal is the perception of macroeconomic stability. Albuquerque at al. found that macroeconomic stability increases FDI and decreases the risk of investment. The respective leading indicators are usually the inflation rate and fiscal and monetary policies. For SA, working within a framework of regional integration positively impacts the coordination of monetary and fiscal policies thus contributing to the creation of a more stable environment.

Government expenditure has been expected to increase to 27.4% of GDP in the last couple of years and even though a large share of spending will be destined to increasing the social grants, wages and recruitment, a raise by 37% with respect to the previous years will be grant to public investments. The purpose is to fodder investments in the infrastructure sector, undeniable prerequisite for the installment of sound MNCs. Foreign investors welcome the improvements in the sector which aims at the establishment of a more competitive market and that could bring to the creation of more positive spillovers for the African community. Better infrastructures are in fact essential for increasing trade thus per capita income.

A lot has been said on the effectiveness of MNC in the formation of job opportunities that are long lasting and the ability of them to decrease unemployment. Despite the growth in GDP scored in the last years and the boom in FDI, an increase in the level of unemployment has been observed. At first glance a undisputable blame on government policies can be attributed, responsible of having created the so called “job-less growth”. However, we can also infer that this tendency comes from a different mismatch: the rise in the labor force is faster than the growth in employment (Hodge, 2009 data and chart).

51 UNCTAD,2008.

37

Source: Hodge 2009 Regarding the composition of FDI and the mostly affected sectors, the UNCTAD

Source: Hodge 2009

Regarding the composition of FDI and the mostly affected sectors, the UNCTAD 2008 has provided a list of the largest MNC in SA, their country of provenience and industry of belongingness. The United States and the United Kingdom are the most frequent granters of FDI and, more generally, they are all OECD-based companies. They comprise the industrial(mainly chemicals), tertiary (computer, i.e. IBM, wholesale and public administration)and finance industries. However, if we compare them to the biggest host TNC companies we still see that, in terms of sales, South African companies outperforms their foreign rivals. Broadly speaking, between 2005 and 2006 the most relevant raise in stocks deterred by foreign investors has been observed in the primary sector. The mining industry has grown more than its counters. Profits from the exploitation of natural resources are very likely the first determinant for starting a business or moving a M&A in SA.

for starting a business or moving a M&A in SA. Although this trend has probably slumped

Although this trend has probably slumped in the last couple of years in response to the economic downturn, mineral resources remain the most abundant factor of the country. Poor positive

38

spillovers, a strong labor union force and the acknowledge by local institutions of the high potential profits of the sector (a very scarce resource endowment in the rest of the world!) are fomenting voices for a new reform in the mining segment. The possible outcome could turn out to be a nationalization of the local mining companies. Another aspect worth of noting is to see whether or not these foreign companies reinvest the utilies of their sales back in their home countries or if they are to be used in SA as to produce

possible positive spillovers in terms of technology and research investments or increases in wage salaries. The chart on the side presents the FDI stocks to SA in dollars from 1980 to

side presents the FDI stocks to SA in dollars from 1980 to 2006 with each respective

2006 with each respective reinvested

earnings. Data reveal that an increasing portion of earnings has been reinvested through the years, more specifically in

2006 this amount has overcome portion

retained in equity.

Source: UNCTAD 2008

Poor data are available for determining the composition of this reinvestment. Wage and salaries have also grown but probably more in response to changes in the inflation rates of the country 52 .

FDI Landscape The only IBM affiliate in the world has been settled in South Africa more than 20 years ago. Nowadays IBM is the largest FDI company in the tertiary sector in SA 53 . Through the years IBM has been able to establish a close network relation with the government and its African consumers. For IBM, South Africa acts as a gateway for the whole African continent and its commitment and anchorage in the local economy is witnessed by the several CSR 54 projects undertaken.

52 Inflation rates computed as consumer price in SA have grown from 5.5% of 2000 to 9.9% of 2008 (The World Bank).

53 Who Owns Who database through UNCTAD, 2008.

54 Corporate Social Responsability. Data http://www-05.ibm.com/za/Africa/pdf/IBM_Mag_issue_21.pdf.

39

IBM is in fact aware of the shortage of skilled workers in Africa and it is trying to rectify this trend especially for what concerns IT. The flagship plan is called KidSmart and works directly in schools all around the provinces where children can get familiar with the new technologies. The World Community Grid offers a wide network of computers across the country commissioned to run researches on HIV related issues. The current goal is to enlarge the community also to comprise schools, universities and local institutions. IBM has also praised the government to adopt a digitalized open source system for data setting with the intent of getting the whole public apparatus on the edge of the new technologies. In 2008 a $120 million grant was agreed upon by the IBM technology enhancement for SSA countries. The new Gene supercomputer will be able to run complicated data processing on water supply and at the same time it will work as a cloud computing: an OS system for resource-sharing data. The entire project is inserted within the context of a new innovation centre in Johannesburg where technology training is another core function. The attempt of IBM is therefore the creation of positive spillovers that can be sustained over time: first a better skilled labor force through training and familiarity of IT for kids then a more consistent and technological resource base that results to be useful also for companies of all Africa.

Another foreign company has instead decided for an enlargement of production volumes in SA after the positive sale results of the last 5 years. On the 18 th of May 2010 Tata Motors announced the establishment of a new plant in the country, 13 years after its first entry in the South African market. Tata is an Indian-based vehicle producer which became popular few years ago for its commitment to the production of the cheapest car in the world 55 . Since 2005 Tata has sold over 39,000 cars in SA targeting at the low-middle income customer segment. Although being a signatory company of the UN Global Compact and it is “engaged in community and social initiatives on labor and environment standards” 56 , Tata still remains a vehicle producers with high carbon emissions. The spreading diffusion of its cars may therefore result in a bad quality of air that could hamper the quality of life and the natural resources which SA is full of. Negative spillovers may arise also on the detriments of other industrial sectors such as the

55 The TATA Nano, priced $2200. Data www.tata.com.

56 http://www.tatasa.co.za/about_tata.html.

40

tourism. The diffusion of motor vehicles does grow in relation to the increase of per capita income, as it is observable from the case of India.

Source: Vodacom.com
Source: Vodacom.com
it is observable from the case of India. Source: Vodacom.com In 2008 Britain‟s telecommunication company Vodafone

In 2008 Britain‟s telecommunication company Vodafone together with the South African Telkom, the biggest telecommunication company of SA, took over the Johannesburg‟s settled Vodacom becoming the first telecom provider of SSA. The new Vodacom Business launched a series of products such a converged business network and it also enlarged its IT

service offering. In 2009 it has claimed to provide access to telecommunication services to the 22% of the total populations of South Africa, Mozambique, Lesotho, Tanzania and the DRC. This success has also been achieved thanks to the acquisition of Gateway Communication in 2008 which helped in the diffusion of a broadband internet access service. A New data centre at the headquarters in Midrand has followed, accompanied with the development of a soft switch and a client service operations centre. The company follows a reporting process based on the Global Reporting Initiative‟s G3 Sustainability Reporting Guidelines 57 . Vodacom is also participating in the government‟s Joint Economic Development Programme for a strong commitment in socio-economic change in SA. Part of this project is aimed at the Black Empowerment (BEE) “a commitment to redress the imbalances of the past” 58 . The black workforce at stake is attested to be at 70% of total employees. Continuous initiatives to attract black women and disabled applicants are at the centre of their CSR conduct. The company presents an atypical example of positive spillovers arising from employment addressed at a particular gender and population group.

57 All data and chart from Vodacom.com

58 Vodacom Sustainability Report 2009.

41

RISK ANALYSIS

Franz Schleimer

When Evaluating South Africa‟s risk environment as an emerging market in terms of foreign

investments, there are 3 main influencing factors to consider. We are looking at the

Macroeconomic environment, the Business Environment from the microeconomic perspective

and lastly its Political environment with social and societal considerations for the marketplace

South Africa.

Macroeconomic Environment

South Africa can be described as one of Africa‟s few middle income economies influenced strongly by its historic pre-Apartheid roots. The supporting construct is its well-developed formal sector, formed around a solid sector in mining, manufacturing, financial services and agriculture, contrasted on the other hand by a much larger informal sector in which many black South Africans are forced to simple agriculture, unemployment or life below poverty line. Per capita income is US$5700 (see chart), yet according to the World Bank almost half the population endure „developing country‟ conditions, while only 13% enjoy „First World‟ amenities 59 . The fact that this gap has remained largely unchanged despite above average growth rates ever since the end of apartheid remains to be the most alarming feature of South Africa‟s economy.

to be the most alarming feature of South Africa‟s economy. drawing a comparison to the average

drawing

a

comparison

to

the

average

Source: EFIC Australia 1

Nevertheless

African

42

country gives South Africa a substantially good rating in creditworthiness and above-average per capita income.

As most significant source of concern economists usually point to its very large current account deficit This current account deficit in the balance of payments now running at 7% of GDP is caused for the most part from a particularly low level of private sector saving given a high level of opportunities for investments. It will be important to realize that even countries with a high degree of foreign capital inflow for productive private investments are exposed to illiquidity issues once these capital flows get reduced. For South Africa this risk is amplified by the fact that its deficit is largely financed through volatile portfolio inflows. Recognizing these issues it also has to be said that with the domestic banking sector relatively stable and foreign debt levels as a percentage of GDP remaining low (between 25-27%), the threat of a major economic crisis will remain limited. The key variable will be time since a longer than expected global downturn (especially in the event of a double-dip recession) could prevent a stable recovery in the country‟s export markets. Furthermore, with domestic growth under greater strain, the South African banking sector could see a significantly larger rise in non-performing loans than currently anticipated, which could lead to a destabilization of the financial system over the medium to- longer term.

For 2009 the IMF expected South Africa‟s Economy to contract by 2%. Key reasons for this collapse are mainly found in decreasing domestic private consumption and a sharp contraction of its growing export sector. Exports have suffered heavily from a drop in world-demand for manufactured goods, and through the fall in commodity prices in the second half of 2008 60 . In addition household consumption has also weakened significantly, partly as a result of high debt servicing levels and a decreasing real-estate market. Latest growth figures published by Statistics South Africa show South Africa‟s real exposure to the downturn in domestic and global demand. With a Quarter 1 2009 seasonally-adjusted real GDP growth contracting by 6.4% quarter on quarter to Quarter 1 2008, remaining to be the lowest value in 20 years , there was no doubt that the South African economy would see its first full-year recession in decades. With private consumption accounting for around two-thirds of real GDP, the reduction in

60 Chapter 2 “Economic Outlook”, Business Monitor International, 2009

43

consumer spending will remain one of the main drivers of South Africa‟s continuing recession. The Q109 real GDP data clearly showed that the wholesale and retail trade sector contracted by 2.6% further indicating that the slump in consumer spending has not found a definite bottom yet and could experience further downside effects over the following months. Contrary it has to be mentioned that the South African Reserve Bank (SARB) reacted through aggressive interventions step-wise lowering lead interest rates to 7.00% down from 11.50% at end-08 and in particular due to the holding of the FIFA World Cup, it is believed private consumption growth is likely to become positive by the last two quarters of 2010. Nevertheless low values in private consumption growth respectively 1.2% and 3.5% predicted for the end of 2010 and 2011 are remarkably low in the light of a significant event like the FIFA World Cup 61 . Responsible here for is the stickiness of consumer confidence which is unlikely to recover significantly and South Africa‟s banks that are expected to experience a significant decline in profitability due to bad debt that is likely to limit credit growth over the medium term. In particular food-prices and rates on utility services are contributing to this rise in the average consumption basket. Conflicting potential lies within the rising political pressure coming from South Africa‟s trade unions demanding further deviation from inflation targeting and a significant further reduction in borrowing costs to foster economic development. Most outside observers are aware of the fact that the South African Reserve Bank is one of the most independent and credible monetary institutions on the African continent eventhough there remains the danger of Tito Mboweni‟s replacement by the end of his term leaving doubts about the future of South Africa‟s stable monetary policy.

Recent reforms on foreign-exchange transactions have abolished many restrictions that have their origin back in the apartheid era. Remaining ones are mostly targeted at domestic companies and residents. While substantial transactions are set to be reported to the central bank, it has been made much more attractive for foreign investors being free to remit income and repatriate capital. Generally it should be said that the ultimate determinant in international financial markets and in particular currency markets is the risk-sentiment attached to an investment posing possible troubles to the South African Rand in the medium-run. 62 Against this reasoning in mid-2009 the rand appreciated by 18% to the Us dollar in the midst of one of its biggest crisis pointing to a

61 Chapter 2 “Economic Outlook”, Business Monitor International, 2009

62 Süd-Afrika Status Bericht, Österreichischer Außenhandel, 2009

44

general upswing in global risk appetite, making it the biggest appreciation worldwide in 2009. It is argued that the acquittal of president Zuma has majorly contributed to political stability of the country and triggered a global rally leading to a surge in demand for South African assets. Equities have been performing particularly well, with the Johannesburg All-Share Index increasing by almost 15% since March 10th. The near future still bares potential risk in such that resource and utility prices worldwide could rise significantly and steer inflationary tendencies then causing the sale of assets due to reduced confidence and higher perceived risk. Taking a look at South Africa‟s Economy as a whole it becomes apparent that trade with 71% plays a significant role to GDP contribution and leaving it in a very leveraged position in a period like this. In terms of its domestic economy a commonly cited feature represents a lack of product competition in the domestic economy not at last due to the country‟s history of international isolation under the apartheid system. OECD described the measure of market concentration in South Africa well above the OECD average, with many industries having large and dominant incumbent firms. 63 As a stability factor in the South African economy one can consider the banking sector. The rating Agency Fitch rates the four major banks that account for more than 80% market share at AA and above. While it is considered one of the most liberal Sub-Saharan banking systems, most of the big institutions seem stable and able to absorb potential waves of bad-credit write- offs. In particular its system of conservative exchange controls and restricted lending practices prevented them from extensive involvement in the US subprime crisis. Furthermore commercial bank‟s foreign debt exposure is set at less than 10% of the GDP. A far bigger obstacle will be the high level of domestic population indebtedness that could lead as mentioned before to higher write-offs of non-performing loans as the recession persists. Similar emerging market economies such as Brazil experience far lower deposit to GDP ratios with 36.6% compared with private sector deposits and credits amounting to 91% of GDP in South Africa. Large public spending plans by the government plus the 2010 football World Cup will possibly offset big parts of the loss in revenue caused by the decreased foreign demand. Spending on non-infrastructure programs are planned to rise by 10% per year , while infrastructure investments will be as high as 10% of GDP including the preparations for the World Cup as an

63 Ibid, Süd-Afrika Status Bericht, Österreichischer Außenhandel, 2009

45

important economic stimulus. Visible in particular through the construction industry‟s latest performance measure indicating a growth of 12% by Q3 2009 making it one of the only markets subject to output growth. Further, in order to counter rising unemployment as a consequence of the recession further fiscal expenditure will be likely to increase the government‟s fiscal deficit being forecasted to be around 5% of GDP in 2010.

Business (Microeconomic Environment)

Realizing that South Africa is a Sub-Saharan country it is even more so impressive to see what an advanced, regulated and investor friendly business environment can be found. There is little discrimination towards foreign investors and all markets are open to foreigners. The banking system is well-developed, infrastructure including major traffic networks have been developed over the past decades and the legal framework is sophisticated and vast. South Africa gives the impression to offer emerging market growth in an OECD environment. The World Bank ranks South Africa in the second-best quartile on four counts in its Worldwide Governance indicator report. (see figure 2) This report is a joint effort to assess and compare the six key dimensions of governance (Voice & Accountability, Political Stability and Lack of

(Voice & Accountability, Political Stability and Lack of Source: http://info.worldbank.org/governance/wgi 46

Source: http://info.worldbank.org/governance/wgi

46

Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption). It can be found in the top group for government effectiveness, which underlines the level of public services, the capacity of the civil service and its autonomy from political influences and its effectiveness in policy-making.

According to the “Doing Business in South Africa” report, published jointly by the World Bank and the International Finance Corporation, South Africa ranks 34 th among 183 economies placing it in front of such nations as Spain, Italy or Poland in terms of objective measures of business facilitation. 64

terms of objective measures of business facilitation. 6 4 Source: Doing Business in South Africa, World

Source: Doing Business in South Africa, World Bank

Particular attention has to be laid on two outliers here. In terms of Trading across Borders South Africa‟s performance is particularly weak due to a relatively high level of bureaucracy and cost for transport and tariffs leading the whole procedure to be tedious and costly. In addition the facilitation of employment is below average. Reasons for that can be found in a complicated and

64 Doing Business in South Africa, World Bank and IFC, 2009

47

bureaucratic employment regulation and ongoing human-capital flight which is becoming a

bigger problem in recent years. In terms of Measures on credit information sharing and the legal

rights of borrowers and lenders South Africa‟s sophisticated system has put it in the second

position worldwide concerning the acquisition of credits and finacing to facilitate business

undertakings.

For a more complete and detailed assessment of Factors that influence “Doing Business in South

Africa” please consult the complete Report 2010 issued by the World Bank.

Another infrastructure related issue posing strains on the business environment is the countries underdeveloped energy supply. Recent years have experienced power shortages up to complete power-outs during the hot summer months. As main cause can be seen mismanagement on a government level connected to underinvestment by state power producer Eskom, which is responsible for 95% of the country‟s electricity supply and has resulted in the reserve margin dropping to 8%, only half the acceptable level. The recession and „demand management strategies‟ (including mines and smelters being directed to scale back production) have relieved the strains on capacity to some extent. It is expected for the near future Eskom implements a US$44 billion five year investment program that should finally meet the country‟s energy needs. Concerns about its financing abilities, particularly with its investment-grade credit rating being under pressure, have been to some extent aided by financial support from multilateral development banks and the Government Development Agency. Further increases in electricity tariffs, additionally to the nearly 30% increases they already rose last year are predicted. Over the longer term, electricity demand is projected to double by 2020 with the potential investment necessity of 1 Trillion Dollars.

Given that this risk analysis is based on the perspective of an investor the most common form of

investment should not remain unmentioned. Portfolio Investments and a fast growing venture

capital market leading many investors mainly to invest in start-up and development capital and

typically holding their stake for a period of up to 6 years. Most newly found undertakings in

South Africa are based on a mixed capital structure containing on average around 55% of the

funds to be invested, obtained from a combination of various sources rather than relying on a

single investor. Also, the two most common exit routes in South Africa are secondary buyouts,

where another venture capitalist buys the shares of the current investor, and merging with another

firm. As venture capitalists are putting their capital at risk they may perceive agency problems as

an important risk factor when investing in portfolio enterprises. Investors can limit the scope of

48

these risks by specifying the form of financing that they provide to portfolio enterprises and by inserting particular covenants in their financial contracts. 65 It is advised to seek consultancy on the issue either from a chamber of commerce engaged in South Africa or from one of the many Law Consultancies that have specialized this issue.

Political Environment

The Republic of South Africa is considered a Constitutional Democracy. The party ruling South Africa since the end of apartheid, the African National Congress (ANC), and was recently re- elected during the 2009 election with a new party-leader named Jacob Zuma. Simultaneously the party lost its long held two-thirds legislative majority that enabled it to change the constitution unopposed. The Democratic Alliance increased its share of the vote by 4% to reach 16.5% and won the Western Cape province. The former ANC split-off party, the Congress of the People (COPE) will be one of the main opposition parties after having scored below expectations with about 7.4% of the votes. Political uncertainty has been reduced ever since the split in the party as a result of former President Thabo Mbeki‟s defeat in a 2007 ANC leadership competition. South Africa‟s political landscape has also gained in diversity after this redistribution of voter confidence.

Risks associated with this change in direction are closely connected to economic policy making, that over the past years has been very promotive to economic development while keeping the state‟s fiscal expenditures under control. It is to be expected that the political direction is going to get a left-spin since support from the ANC‟s left-wing (the trade unions, the communist party and the youth league) have been vital to President Zuma‟s rise within the ANC. Currently first discussions favor for nationalization of the mining industry plus an end to the rigid inflation targeting of the central bank. These ideas are particularly unpopular among foreign investors as plans to create a state-owned companies in whatever field tend to create unfair competition for assets. 66 Nevertheless Zuma himself has been signaling policy continuity and has showed willingness to cooperate within his coalition by appointing a broadly staffed cabinet. By

65 Rationale of Securities and Convenants in Contracts: AN APPLICATION TO SOUTH AFRICA, Huyghebaert, FJMostert, 2008

66 Chapter 2 “Economic Outlook”, Business Monitor International, 2009

49

appointing former finance minister Trevor Manuel as head of the new National Planning

Commission and putting Pravin Gordhan, former commissioner of the South African Revenue

Service in place as finance minister he gave a faithful demonstration of above mentioned.

Fundamentally the ANC will need to keep foreign investors interested in order to sustain capital

inflows needed to finance the current account deficit. This discipline should hopefully prevent

most unorthodox capital-repelling policy initiatives.

Apart from the external perspective that will have to be considered the following months will also bring many considerations on a domestic level. Undoubtedly there are signs of increasing public frustration over the existence of income and service inequalities. Expectations during the elections have been raised high as to how fast the inequality gap could be approximated but many observers argue that it will require more time to implement it in an economically and politically feasible way. The consequent disappointment has led to some major waves of unrest. During the summer of 2009, demonstrators protesting over the state of housing, water, electricity and sanitation clashed with police in several poor townships. Another issue is the rising hostility against foreign immigrants as a source of tension. Comparable economic strength and high social welfare attract increasing immigration from troubled neighboring countries. Many of them illegally, they cross the borders in particular from neighboring Zimbabwe being poorly educated or unskilled and facing a life without perspective. The Job market cannot accommodate them, housing capacity is saturated and their presence repeatedly leads to waves of attacks on migrants ,often Zimbabweans, already leaving 60 dead and thousands homeless this year. At present, Zimbabwe is also at the top of South Africa‟s foreign policy agenda. For years the former President Mbeki South Africa pursued a so-called „quiet diplomacy‟ despite international pressures asking for a more rigid policy towards the government in Harare. Yet it is not obvious what president Zuma‟s Zimbabwe policy will be, but the recent formation of a unity government in Zimbabwe has lowered the threat of military intervention.

Another important factor often creating an obstacle to investment is the high crime rate. Many

studies underline the fact that South Africa has one of the highest crime rates in the world. While

crime prevention programs and task-forces have been put in place on several occasions, results

have been scarce. A badly organized executive authority represented by a badly trained and often

corrupt police force creates most problems in this regard. Reduction targets for urban crime are

being reduced constantly and as to now, no efficient strategy was implemented. In terms of the

World Cup in summer 2010 these are not optimal preconditions. As a response the South African

government has announced a dedicated force of 41,000 police officers, following a huge

50

recruitment drive to increase the numbers of officers by 55,000 to over 190,000 by the end of 2009. 67 Close cooperation with organizations such as BaySecur the security consultancy of the Germany 2006 World Cup as well as other international intelligence agencies are trying to raise the South African Security situation with pressure in very little time. It will have to be seen if this reinforced effort can be sustained over the post-World Cup period.

Today South Africa‟s Society remains nevertheless characterized by the former Apartheid- system. Social and economic inequality are features of everyday life incl. limited job opportunities, lack of social mobility and poor service delivery to black townships. The unemployment rate is 24% not considering discouraged and young workers though. Of all industrialized countries in the world, South Africa has the most skewed income distribution 68 , with the bottom 20% of the population earning only 3.5% of national income. Concerning income inequality South Africa surpasses even Brazil, usually the country pointed out as the worst case. The before mentioned formal economy has failed to incorporate the wave of black labour force participation after the end of apartheid. In order to increase economic participation of non-whites „Black economic empowerment‟ (BEE) rules are in place. BEE sets voluntary goals for companies on ownership, employment, skilled personnel and skill development. (see figure on next page) According to accounting firm Ernst & Young, BEE has achieved the transfer of 500 billion rand of assets to non-whites since 1990. It is not a mandatory requirement to consider BEE criteria, but it benefits companies abiding to it when it comes to government procurement. The program is still being criticized by some as it is not targeting the right population segment and often supports group of already privileged black South Africans while incentivizing corruption and hindering the creation of new innovative black-owned businesses. The government has a goal of reducing unemployment to 14% of the workforce by 2014, but it remains to be seen as in how far this goal can be achieved in the light of the recession.

67 http://www.telegraph.co.uk/sport/football/world-cup-2010/6700199/South-Africa-unveils-World-Cup-2010-

security-measures.html

68 Income distribution in South Africa: A social Accounting Matrix, Department for Social Development SA, 2009

51

BEE SCORECARD

Core component of BEE

Indicators

Conversion

Raw Score

Weighting

Total Score

Factor

Direct empowerment score

 

Equity Ownership

% share of economic benefits

2

 

20%

 

Management

% black persons in executive

2

 

10%

 

management and/ or executive

board and board committees

Human resource development and employment equity score

 

Employment equity

Weighted employment equity analysis

2

 

10%

 

Skills development

Skills development expenditure as a proportion of total payroll

2

 

20%

 

Indirect empowerment score

 

Preferential

Procurement from black-owned and empowered enterprises as a proportion of total procurement

20

 

20%

 

procurement

Enterprise

Investment in black-owned and empowered enterprises as a proportion of total assets

20

 

10%

 

development

Residual 10%

To be determined by sector/ enterprise

     

10%

 

Total Score out of 100%

 

Total score of 91% and above excellent contributor to broad-based BEE

Total score of 65% to 90.9% - good contributor to broad-based BEE

Total score of 40% to 64.9% - satisfactory contributor to broad-based BEE

Total score of below 40% - limited contributor to broad-based BEE

Another typical feature observed by outside investors is the labor organization oftentimes creating enduring unrest as a persistent problem. Slightly below 30% of the formal workforce is unionized with a strongly increasing trend. Historically most unions have had good public representation via the Congress of South African Trade Unions (COSATU) forming an integral part of the ANC and giving trade unions in South Africa a strong political voice. COSATU‟s support was fundamental for President‟s Zuma‟s rise to power so its influence may further increase in the new administration. In line with before mentioned there have been tendencies of rising labor discontent, with the number of strikes in the first half of 2009 doubling compared to same period in 2008. 69

69 Labour force survey, Statistics South Africa, 2006

52

Further there is consent within the ANC to reinforce its commitment for land redistribution, aimed at placing 28% of land in the hands of the poor by 2014. Connected to this on few occasions the government has engaged in legal expropriation paying landowners the fair market value in any case. Investors will be pleased to hear therefore that frequent expropriations as well as naked land grabs as they occur in Zimbabwe are not common in South Africa.

Another important social consideration to be aware of in South Africa is that the country is dealing with an HIV/AIDS pandemic. Another relic from the countries times under the apartheid rule has left an estimated 11% of the population infected of which 20% are between 15-49 of age. Apart from significant social costs, estimates suggest the pandemic costs the country more than 1 percentage point of its annual GDP growth resulting from increased medical costs and lower productivity. Now that a new administration has taken over hopes have increased of greater emphasis on tackling the issue.

The new government plans to increase anti-retroviral drug coverage from 30% to 80% by 2011. 70

anti-retroviral drug coverage from 30% to 80% by 2011. 7 0 Source: /country_za Corrupt conduct within

Source:

/country_za

Corrupt conduct within a country is generally viewed and proven by several studies to bean additional cost of doing business or a tax on profits. As a result, corruption can be expected to decrease the expected profitability of investment projects. Investors will therefore take the level of corruption in a host country into account when making decisions to invest

abroad 71 . South Africa has a network of agencies to fight corruption, but Global Integrity data suggests that this decentralized approach opens the door for political influence. Political parties, the executive branch, and intelligence agencies have all been accused of political interference in their attempts to influence the separate

70 South African National HIV Prevalence, Incidence, Behaviour and CommunicationSurvey, 2008

71 The Effects of Corruption on FDI Inflows, Ali Al-Sadi,

53

court cases of former National Police Commissioner Jackie Selebi and African National Congress leader Jacob Zuma. Weaknesses also exist in political financing, where there is no requirement for the disclosure of private donations to political parties, parties only disclose information related to their public funding. South Africa's media ranked high and its trade unions continue to be very influential, carrying on their advocacy role from the apartheid era and adding to an already active civil society. 72 The country ranks 55 out of 180 countries on Transparency International‟s corruption perceptions index, behind Slovakia (52) but above Italy (63). This index attempts to measure the abuse of public office for private gain.

In Conclusion it can be said that South Africa offers emerging market conditions with an environment that comes close or even surpasses OECD countries at times. The state has rich mineral resources in addition to its position as the continent‟s financial hub and for years the government has followed a prudent fiscal policy approach leaving it now in a position to increase public expenditure at a time of economic downturn. The Investment climate has been very favorable and 2 years ago this risk assessment would have turned out quite differently. Nevertheless the situation is a different one today and it will have to be seen how the country will react to the challenges ahead. A mislead investment policy in education under apartheid has left a generation with high structural unemployment and poverty. HIV has created enormous social costs for the country and the security situation connected to street-crime is a significant threat not at last to the World Cup in which so many people have put their hopes. Concerns are growing that in the after-math of the 2009 elections, the government would turn towards more populist measures, significantly increasing fiscal spending, abolishing inflation targeting and nationalizing key industries. In the eye of weak global demand expectations are created in connection to the relatively weak rand that should increase opportunities for exporters and also enable firms within South Africa to compete more effectively against imports in the domestic market.

72 Global Integrity Report: South Africa 2008, Brett Horner, 2009

54

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