The Current Political Scenario in South Africa and Whether It Is Viable for Business - Essay Example

International Business Management By Student’s Name: Mingdong Zao Code: Course Name: Professor’s Name: University Name: Deakin University Date: Executive summary Business networks throughout the globe by conducting transnational operations by offering specialists experience and knowledge to clients’ within the national boarders by business partners. Global specialists spread across numerous market sectors and industries are accessible for discussions. Our exhaustive report provides detailed information for prospective foreign investors who intend to venture into business operations in South Africa. Some of the significant business profile environments to research on before considering venturing into business in South Africa consist of the economic, political, Socio-cultural, Financial, Foreign Direct Investment (FDI), Legal, and Political environment. The paper outlines the current political scenario in South Africa and clarifies as to whether it is viable for business. South Africa will be going for general elections and as usual, so many organisations might either be anxious or optimistic because of the uncertainty of the elections outcomes. Political stability is one of the key pillars of business survival, and as such, private business investments decisions may sometimes be delayed by a country’s political issues if they may such arise. South Africa also has robust financial institutions despite the rise in market volatility alongside higher global risk aversions, with JSE exchange Limited being one of the best in the globe. The country also boasts of a divers and unique socio-cultural heritage. Its business environment calls attracts foreign investors despite several issues such as rampant corruption in the government, crime and insecurity. South Africa attracts close to a fifth of the African FDI that doubles that of Morocco which is the second biggest FDI destination. Table of contents Executive summary 2 Table of contents 3 1 Introduction 3 2 Economic Environment 4 3 Political 7 4 Legal 8 5 Foreign Direct Investment (FDI) 10 6 Financial environment 11 7 Socio-cultural 12 8 Conclusions and Recommendations 13 9 References 15 1 Introduction South Africa has a population of approximately 50 million people who are rich in diverse natural heritage and people, and cultures. It covers an area of 1.2 million square kilometres on top of being the world’s leading producer in manganese, platinum, chromium, and vanadium. It covers and estimated area of 122 000km2 and located at the southern part of the African continent. It boarders’ countries that comprise of: Mozambique, Namibia, Botswana, Swaziland Zimbabwe, and enclaves Lesotho. The country is a logical choice for various companies across the globe and it also enjoys a pro-business environment, and a outstanding macroeconomic stability (SA 2013). In the year 2010, the country hosted the FIFA world cup event, the single world’s sporting event with practically no single incidents involving logistics or security issues. This actually indicated that the country is capable of successfully completing and undertaking key projects on time. Conducting business highlights on how difficult or easy for both local or international entrepreneurs initiates and run business with the appropriate policies. Changes are measured and tracked in the affected 11 areas in the business life cycle namely: property registration, business start-up, electricity acquisition, getting credit, paying taxes, construction permit dealings, protecting investors, enforcing contracts, employing workers, trading across borders, registering properties, and resolving insolvency. An analysis of South African business environment will be presenting the modalities of conducting business in South Africa. South Africa is one of the most promising, sophisticated, and divers of the emerging markets in the world. The country is tactically placed at the tip of the African continent making it the major investment destination for the market prospects surrounding its boarders and also presenting business opportunities as an existing gateway for the rest of the world. It represents a market opportunity for approximately one billion people (SA 2013). South Africa proffers an exceptional combination of vastly industrial modern infrastructures with vibrant emerging business economy and hence making it a massive potential investment destination. The country also serves as one of the very productive, broad-based, and advanced economies in Africa. 2 Economic Environment South Africa managed to stay afloat because of its forethought on its monetary and fiscal policies even as the rest of the world continues to feel the effects of the global meltdown. The country boasts of a well developed regulatory system, established manufacturing base, abundant natural resources, political stability, well researched and developed develop capabilities, and a well capitalized banking system. South Africa is also the largest economy is Africa and was ranked by the World Bank as the “upper middle-income country (SA 2013). In the year 2011, it was included in the BRIC group of countries that comprise of Brazil, India, and China (BRICS) (SA 2013). South Africa has a strong labour and maritime issues, strong legislation governing commerce. Its laws on disputes and trademarks, copyrights, competition, patents and policies are strong. Additionally, the efficient distribution of goods throughout the entire region is well supported by its modern infrastructure. Its industrial and sophisticated financial economy has grown alongside the underdeveloped informal economy that has a marked duality. And so its status of “second economy” is responsible for both the developmental and potential challenge. 2.1 Positive outlook: South Africa’s economy is rankes75th freest in the year 2014 index with a freedom score of 62.5 making it 0.7 point higher than the previous year (SA 2012). This is due to its improvements on investments freedom, and corruption offset freedom that decreased in six sectors that comprises of labour freedom, monetary freedom and the fiscal freedom. In Africa and the Sub-Saharan region, the country’s economy is ranked 6th out of 46 with its overall score surpassing the regional and the world averages. Moreover, the World Economic Forum also ranked the country in the second position in the world in its accountability of its private institutions, and in the third position for its financial market development in its 2012-13 Global Competitiveness report. This helped the country by regaining confidence in its financial markets at a time when its trust waned across the world. Likewise, in terms of size, its JSE, and security exchange were ranked among the top 20 (World Bank 2014). The country also experienced advancement on its economic freedom score by 1.8 points in its 20 years history of the index. Economist (2014) explains that that the gains achieve on market openness and measured through the financial freedoms, the management of public finance, and the trade freedoms have been putrefied by declines in freedom from investment freedom, corruption, investment freedom, and business freedom that helps to keep the economy ‘moderately free’. The country has since failed to show further progress since its highest economic freedom score in the year 2003 (Leke, Lund, Roxburgh & Wamelen A 2010). The failure of its structural reforms to diversify the economic base has also undermined its transition to a more open economic system pegged on its relatively competitive trade regime (United Nations University 2014). 2.2 Growth and Diversity Between the years 1993 to 2007, the country’s GDP figures reflected an unprecedented economic growth of 62 quarters (World Bank 2014), when the GDP rose by 5.1%. And as a result of the 2008-09 global economic crises, South Africa contracted a GDP of 3.1% in its integration in the global market (SouthAfrica.info 2012). Its economic growth is largely driven by domestic consumption that is facing threat of slower growth as compared to the previous forecast. USAID (2014), projects that the country will achieve a 3.7% growth by the end of 2014 and a 6.0% growth in the year 2018. The National Treasury indicated that that the South African government is putting measures in place that would root out corruption and see the strengthening of efficiency of public spending so as to ensure service delivery outcomes (World Bank 2014). The implementation of inflation-targeting policy by the South African Reserve Bank (SARB) did stabilise the prices. Its annual consumer inflation rate in December 2012 was 5.7% and with an improvement of 5.4% in January 2013. The South African economy is diverse with major sectors’ GDP contribution having the below indicators: Manufacturing – 12.3% Personal services – 5.9% Electricity and water – 2.6% Government services – 16.7% Construction – 3.9% Business, real estate, and finance services – 21.2% Agriculture - 2.2% Communication, storage, and transport =9% Mining – 10% Wholesale, motor trade, and retail – 16.2% Source: the percentages are based on the 2013 GDP Statistics SA Data 2.3 Challenges According to the National Treasury, development is all about equitable future creation and development pursuit. Due to its previously disadvantaged majority, the government is determined to deal with its major issues through the economic integration (Economist 2014). South Africa is also grappling with the 25% unemployment rate that comprise of the top most priority of its economic policies and government priorities. The government is also struggling to ensure a more sustainable and inclusive growth by restructuring the economy, setting a target of five million in job creation by the year 2020, and building on its other plans with the help of the New Growth Plan that was launched in the year 2010 (SouthAfrica.info 2012). The roadmap of providing substantial employment is provided for by the Industrial Policy Action Plan that proposes multispectral involvement across, mining, tourism, agriculture, and manufacturing among other service levels. The National Development Plan 2030 that was launched on august 2012 drew on the peoples’ energies by promising the country with a dream of growing an inclusive economy (USAID 2014). The interventions proposed with an intention of reducing inequality and eradicating poverty by the year 2030 through expansion of economic opportunity to everyone comprise of: Encouraging innovation and entrepreneurship. Diversifying exports Lower the costs of conducting business by enacting relevant reforms Supporting industries such as agriculture and mining while also improving and investing in infrastructure. Moving more climate-friendly and efficient production systems Strengthening links to faster-growing economies 2.4 Investors South Africa being a G20 country is also perceived to be a low-risk country as an investment destination for investors seeking for foothold in Africa and hence making its overall investment environment encouraging (SA 2012; SA 2013). The country distributes more than 26% of its products across the globe taking advantage of being the major African investor. The government is attracting foreign capital and encouraging commercial activities through the industrial financing interventions and investment incentives. The country earned approximately R43 billion in FDI in 2011 making it four times the amount it earned in the year 2010. The country’s chief exports are minerals and materials. Transportation and machinery consists of a one-third of its exports import value. Among other imports comprise of chemicals, automobiles, manufactured goods, and petroleum. The South Africa’s major international trading partners apart from African countries consist of the United Kingdom, Germany, China, the Unite State, and Japan. 3 Political The South African political environment is a stronghold of societal and political progress and comprise of its public institutions such as non-public institutions, government owned businesses and agencies. Even though it has a low regional stability, its political systems consists of interest aggregation and articulation, political process functions which integrates diverse viewpoints such as policy making, adjudication and implementations The turmoil that negatively affected investor confidence in emerging economies in the entire world such as Russia, and Asia did not affect South Africa. The country aggressively cut down its interest rates and increased its fiscal spending so as to manage the economic shutdown. The inherent economic strength of South Africa is also positively reflected on the country being able to survive the economic crisis storm on its political stability, and the soundness of its fiscal and economic policies. One of the key global recognition achievements of this country in the 20th century is the achievement of a stable and peaceful transition to democracy and not a mere short-term success or coincidence (Economist 2014). The main guarantee for future stability and what made the transition a success are still present and the country’s major political stability is the major factor of investor confidence more so in the present business environment the world over. The country has previously experienced labour disputes that erupted as a result of poor working conditions and low pay more so in the mining industry. A debate on nationalism of mines and land reforms is still alive within the ruling party and is most likely going to be the subject of political debate in the forthcoming 2014 general elections. Numerous businesses are also optimistic that this year’s general election will bring with it clarity and stability on the future direction of South African economy (Callrica 2014). Its unemployment rate also continues to hang at about 23% making it persistently higher, an issue that the current government has been grapple with. The prospects of investments and growth have also been affected by the global serious societal problems such as the high HIV/AIDS, high poverty rates, poor education, high crime rates, and weak infrastructure (Globaltimes 2014). Additionally, there are still some serious challenges faced by the current government at the national, provincial, and the municipal levels in terms of deliver fundamental services to the rural communities and informal settlements. 3.1 International dimension To ensure a continued foreign involvement in South Africa, the country has ensured a thriving foreign interests platforms in numerous sectors in the country in large-scale. These comprise of: a) A high premium has been placed on South Africa’s political stability by the international community because of its geo-political and significance in the regional and global market. The international community has more than a passing or passive interest in the future stability of South Africa due to its positive global impact on the democratic miracle and its stabilising and leading role in the regional context (Economist 2014). b) There is a persistent guarantee of involvement and interests in South African developments by the international community especially from the USA and leading European companies with longstanding and large investments (Globaltimes 2014). A good example is the German company (BMW) that has been so much been involved for a long period of time with South Africa and are in the economic forefront and well versed with economic realities of the country. Moreover, European countries such as the United Kingdom, Greece, Germany, and Portugal, represents a continued guaranteed international involvement and continued interest in the country. 3.2 Regional stability The government of South Africa is aware that the economic and political stability of the region is directly linked to its own economic and political stability since it is impossible to survive as an island of prosperity. The South African economic and political integration with its regional framework with that of South African Development Community (SADC) has experienced significant achievements (Callrica 2014). The common items on the South Africa and its neighbours that are based on its development agenda include their participation in the global trade tourism, greater co-operation and political stability, and economic policy reforms. 4 Legal South African legal system is made up of case law, common law, customary law, and statute laws. Its local provincial and national government are the three tiers that form its federal government system with each government tire having an executive and legislative authority in its own sphere and defined with its constitution as being interrelated, interdependent, and distinctive (IFC 2014). Before starting a business in South Africa, several legal factors must be put into consideration (LED Network 2014). The first consideration should be the method meant for the venture. The following factors should be put into consideration (AngloInfo 2014): Income tax considerations Participants limited liabilities Number of participants in the company Requirements for perpetual succession Control and management policies to be put into place Investment vehicles for the business will then come next as follows: The sole proprietorship A close corporation A company: either an external company, public or local private company A business trust A close corporation 4.1 Legal requirements A comprehensive requirements and regulations are set-out in the South Africa’s Company Act for the entire entities that operates in that country. Diverse entities are subjected to different legal requirements for investors as shown below (The South African 2014): 1. Penalties and registration requirement: - Companies that don’t register with the Companies and intellectual Commission (CIPIC) risks being penalised, and so to avoid such penalties, investors are advised to comply with necessary registration prerequisites within the allocated time frames. 2. Annual returns: - Annual returns are presented to the CICP depending on the entity type with annual fees that varies depending on the entities types. 3. Financial alternative: - It presents a big impact on the total expenses and funding of the entity (i.e. interest expense). Various entity types are permitted with diverse finance forms (equity or debt, or debt only). 4. Limited liability and legal status: - The levels of the associated and liability risks of the entity are determined by the legal status of the entity. 5. Audit requirements: - There might be a need to audit the entity in a yearly basis depending on the entity type 4.2 Black economic empowerment (BEE) This is a major government strategy requirement that caters for the past inequalities and strives to achieve a far-reaching change in the South African society (The South African 2014). Its main function in the business context is to boost the black majority participation in the economy of South Africa. The recent cooperate activity key driver of BEE include the mergers and acquisitions. 4.3 Registration for taxation Apart from partnerships, the entire business entities are supposed to register normal taxes with the relevant tax authorities. The profit proceeds from partnerships are individually taxed. 4.4 Non residents A work permit is a necessity for any non resident who intends to work in South Africa. 4.5 Occupational Health and Safety Act It is mandatory to comply with the Occupational Health and Safety Act 85 of 1993 that demands that all employees are safely guarded in their environmental working conditions. 4.6 Employment legislation The fair treatment of employees that is designed for that purpose is contained in the comprehensive employment legislation by the South African government. This is contained in the labour relations Act 66 of 1995 and the basic Act of 1997 (IFC 2014). 4.7 External Company The registrar of companies in South Africa must be contacted within 21 days by any foreign company seeking to do business in South Africa with its own name through a branch (AngloInfo 2014). Moreover, there are some specific requirements that an external company might be required to apply to in case it needs to convert to local a local private company (The South African 2014). Eternal companies are not subjected in paying the STC, but pay a flat rate of 33% of tax. 50% of the capital gain is further considered a taxable income (effective capital gains tax rate or 16.5%) (SA 2014). 4.8 Public company The number of people permitted to form a public company amounts to seven and the company name must end with ‘LTD’ or “Limited. The public company shares or the number of members can be used as a vehicle for raising capital from the public and also not limited. Public companies are the only ones that qualify to be listed at the JSE Limited. 4.9 Private companies The person’s name and the company name that ends with (Pty) Ltd’ or Limited (Proprietary) is what is needed for the establishment of a private company. Among its requirements are: Restricts the rights of share transfer It must have share capital Disallows public subscription offer of any debentures or shares Should have articles of the company The number of members should be limited to 50 with o minimum requirements 5 Foreign Direct Investment (FDI) The FDI magazine crowned South Africa as the African country of the future 2013/2014 (Walls 2013). And in 2013, Johannesburg became the top FDI destination in the first five months of 2013 out of five African cities that attracted more investments compared to the 2012 at the same period. The country as well accounted for 9.25 of FDI in projects in 2012 ranking third behind USA as a top source market for the African continent (Walls 2013). The magazine also states that South Africa attracts close to a fifth of the African FDI that doubles that of Morocco which is the second biggest FDI destination. This was due to the fact that it performed well in most categories such as achieving the top three positions in business friendliness, infrastructure and economic potentials (Arvantis 2013). The recent report by United Nations indicates that South Africa came top on FDI by last year. It stated that almost a fifth of investment went to South Africa, as clarified by Jan 28 (Reuters) that the South African FDI flow propelled to 7% with an approximated $56 billion in 2013. In the same year, a total of $759 to help drive FDI inflows for the developing economies was necessitated by the Caribbean, Latin America and Africa (United Nations). According to the United Nations, that surpassed the more than half of the universal FDI. The IMF expects to increase the Sub-Saharan African growth to 6.1% in 2014 from its previous last year of 5.1%. Besides, the sub-Saharan Africa has become an attractive investor’s destination due to its robust economic growth. The IMF forecasts an increase of 1.% of forecasting growth in the 2013 to 2.8% in south African economy this year, making the country ahead to the rest of the region (World Bank 2014). Despite the recurrent unrest labour unrest such as the striking platinum miners that affected the precious metal outputs, investors never appeared scared. While other African countries such as Ghana and Nigeria recorded declines in investments, South Africa’s FDI doubled to almost $10.3 billion by last year (IndexMundi 2014). The head of the UNCTAD’s investment trends and issues branch also further explains that most of the FDI flow rise in the country was because of the new investment or Greenfield especially the consumer goods sector. 6 Financial environment The financial service sector of South Africa is supported by a sophisticated and sound legal and regulatory framework just like its emerging markets counterparts, with numerous foreign and domestic institutions providing a wide array of services such as investment and insurance, retail, merchant, and commercial banking, and mortgage lending. Its government is endeavouring to meet the world’s best practises. With the help of the limited risk assets exposure, the country’s banking systems were not severely impacted on by the global financial crisis. The country also boasts of a well-developed capital markets. The country is a sub-Saharan Africa’s economic hub and its insurance industry is regulated by the Financial Services Board (FSB). 6.1 The banking system: The country’s banking systems are well regulated, and effectively developed and comprise of a central – the South African Reserve Bank – beside other financial institutions, financially established and numerous other small banks (World Bank 2014). Numerous investment institutions and banks operates in south Africa, with the country’s big banks such as Nedbank, Capitec, FNB, Absa, and Standard Bank controlling the retail market, while the Merchant and investment banking remaining the most completive front in the industry. The enforcements of the entire banking Acts requirements, registering of institutions as mutuals or banks is conducted at the registrar of Banks office that operates as part of the Reserve banks. An independent body known as the financial service Board (FSB) is responsible for the institutions and financial markets regulations comprising of broking operations, fund managers and insurance (Abdi 2002). Moreover, all the registered banks in South Africa are represented by an industry body called the Banking Association of South Africa. It is tasked with representing the industry and sector through lobbying and engaging with the political influence and stakeholders. The South African credit industry comprising of the debt collectors and credit bureaux, and the credit industry is regulated by the National Credit regulator. It is also focused on developing accessible credit market to promote and meet the economical needs of marginalised people and also enforcing compliance with the National Credit Act (World Business Culture 2014). On the other hand, the South African JSE Limited worth more than R6 trillion is the largest exchange in the globe by market capitalisation. It surpasses Singapore’s and Moscow in size making it the Africa’s largest exchange and boasts of 907 securities and 400 listed companies (Spierenburg, M & Wels, H 2006). The south African JSE was ranked position one for the first time in terms of regulations and securities by the world economic forum in 2012 and it also permitted to offer settlement and surveillance on a T+5, and leading technology by the World-class systems (World Bank 2014). 7 Socio-cultural The populations’ multicultural diversity presence in South Africa has resulted in the name known as rainbow nation. South Africa is emerging from a troubled past of apartheid and hence one is expected to be able to understand its culture for the sake of successfully running a business there. 7.1 Languages The official languages in South Africa add up to 11 and English the being the administration language spoken throughout the country. Apart from English, we also have some official languages such as Zulu and Xhosa, Swazi, Ndebele, Africans, Southern Sotho, Tswana, Venda, Northern Sotho, and Tsongo. 7.2 Culture and society The country’s urban areas are made-up of diverse ethnic groups that constitute its population making it the most multi-cultural nation in the globe (Comminicaid 2014). The South African immigration and colonisation brought together the Chinese, Indian, White Europeans, and Indo-Malays alongside the indigenous blacks. Hence, the country’s diversity makes it tricky to generalise their etiquettes. 7.3 Family Family is a basic unit that includes either the nuclear and extended family or tribe in South Africa. The tribe is regarded as equivalent to the nation making it significant community. It provides financial and emotional security just like the nuclear family functions in the coloured and nuclear families to South Africans. English speaking white community puts more emphasis on the nuclear family while the traditional Afrikaans and the coloured cultures gives the same importance to both nuclear and extended families (Comminicaid 2014). 7.4 The rural/urban Dichotomy The Afrikaner farmers who descended from the Calvinists are the white majority that lives in the rural areas. Urban and rural dwellers have vast value differences. The outlook of city dwellers is affected by their fast lane kind of life. The urban black community merges their roots with the international influences with the urban environment that surrounds them while the majority of rural communities are still rooted in the traditions of their heritage. Cape Town dwellers appears to be very proud of their city while people from Johannesburg are regarded as materialistic and more interested in what they posses than who they are. Their Cape Town counterparts appear to have superior attitude about their city against the rest of the country. 7.5 Business protocol and Etiquette 7.5.1 Communication and Relationships Most of the South African businessmen are transactional and prefer long-term business relationships and they do not necessarily need long-standing personal relationships before doing business (Netherland Embassy in Pretoria 2014). A more formal introduction may help and individual in gaining access to decision-makers if their companies are not popular in South Africa. Networking and relationships are mainly natured in office and are essential for the success of long-term business. Businesspeople respect senior managers despite the country leaning towards egalitarianism. South Africans mostly avoid confrontations and prefer harmonious working conditions and also differ in communication styles depending on the individual’s cultural heritage. Most of the natives also prefer face-to-face meetings more than the uncongenial communication mediums such as telephone, letters and emails regardless of their ethnicity and mostly uses sports equivalence and metaphors in demonstrating their points (World Business Culture 2014). 8 Conclusions and Recommendations Developing and enabling business environment is the major challenge for Africa in the 21st century. The vast Africa’s economic impetus can be unlocked by business if it is permitted o successfully engage with its numerous development challenges. Moreover, there is still inadequate qualitative available information on the structural challenges facing South African business despite the loads of economic data. The mode of investment and business in South Africa on the continent is diversifying and growing from the conventional business of vehicle components, mining, construction contracts, steal and timber to other business varieties. The US and European markets are being replaced by south Africa in health care, education, telecommunications among others. The business modalities are also changing as a result of wide business environment because of the liberation and ten years reforms that successfully corresponded with the South African political openness. South Africa has just managed to be one of the trading partners and top 10 investor destinations and hence displacing numerous companies that had previously retained their economic links in Africa from US and Europe. Conclusively, South Arica is a desirable destination to conduct business, and as its opportunities continue to become more attractive, Endless Wave Company should devise creative ways of gathering marketing insight that it requires to compel the consumer offers that should satisfy the African consumers and generate stout profits and revenue. Experience has proved that flourishing organisations use structured methodology to understand the business environment of a foreign country before making an entry, and thus Endless wave should devise those approaches on how it will enter the south African market in the next four years. Endless Wave can achieve this by focusing on the consumer segments preferences, behaviours, distinctive needs, and applying the systematic approach on ongoing success and market entry endless Wave can capture the South African market opportunity on its own terms and ensuring a long-term profitable growth in the process. 9 References Communicaid 2014, Negotiating South Africa’s Many Languages and Customs, View on Global Working, Retrieved 26th April 2014,< http://www.communicaid.com/cross-cultural-training/blog/negotiating-south-africas-many-languages-customs/> Netherland Embassy in Pretoria 2014, Practical Tips on Doing Business in South Africa, Retrieved 28th April 2014, < http://southafrica.nlembassy.org/doing-business/guide-to-doing-business-in-south-africa/practical-tips-on-doing-business-in-south-africa.html>. World Business Culture, 2014, Doing Business in South Africa, Retrieved 27th April 2014, . 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