Investing in South Africa - Term Paper Example

?Country Focus Introduction The country of South Africa is ranked 34th among the listed 183 countries around the economies in Doing business in the year 2011. The Oxford business Group claims that the country boasts an attractive environment for investment possibilities. A flow of major initiatives serves as the gateway for the drive of the country to cement its place among the rest of Africa. The report on 2012 which was launched in Johannesburg acts as the evidence to the wide ranging efforts of the government of the considered country to boost the industrial sectors particularly the manufacturing sector which could increase the employment opportunities of the country. The report includes extensive analysis of the automotive as well as the steel sectors. These sectors are the spearhead for further economic transformation (The International Bank for Reconstruction and Development, 5-6). The report also considered the extensive up gradation in transport facilities and secure modes of power supply. The country is now focused on handling the challenge of rising demand. The mining industry of the country is under the spotlight as new markets are emerging which posits the opportunity to trade. The emerging markets promises further growth in iron ore. The country recovered fairly well after e contraction in the year 2009 and such kind of recovery can be matched by very few economies. The focus now has diverted to the sectors that provide multiplier effects and initiatives have been taken to increase the output of the productivity sectors. Unemployment has been a subject of concern for the country but fails to posit serious impact on the economy. The country is following the policy of maintaining political stability and is on the way of providing good business environment along with rich natural resources (SAinfo reporter and BuaNews). Cultural Aspects The central unit of the society is formed by families. The nuclear families are paramount to the existence of individual. The family serves the purpose to support the community both financially and emotionally. The concept of time differs between the black and white Africans. The white Africans try to keep the pace according to time while the black Africans are usually believed to complete the work at slower pace. The cultural ancestry impacts on the differences in communication styles. The Africans who have the potential to speak English generally maintains a reserve and conservative mannerism with the objective to avoid conflict. The Africans from other backgrounds usually maintains a direct and explicit approach of communication. The objective of them is to be honest and forthright. This implicates that they will not hesitate to refuse anything in public. In order to initiate the business deals successfully, it is important to be aware of the styles of the different communities. The abundant availability of natural resources has paved the way for the country to become the largest developed economy among the countries of Africa (Willumsen, Moene and Hoyland, 1-2). The per capita GDP has made the country as one of the top 50 wealthiest nations of the world. The country has got immense potential from the investment point of view with one of the emerging market economies around the globe. The greeting styles generally tend to vary depending on the ethnic heritage of the country. The Africans who can speak English generally follows a formal and polite mannerism to address someone. The black Africans generally follow an informal approach to greet someone who is unknown to them. The initial gesture that is most common in this part of the world is a formal handshake. However for the female associates, the trend is to wait for the female to offer a shake of hands first. For long term business success it is important to build relationship and networking. The residents generally prefer a win-win situation where both the associated parties tend to gain something for the business negotiations. So it is advised to avoid confrontation and aggressive bartering over prices. The aim in the negotiation procedures is to reach a general consensus. The residents tend to do business with the ones they have met previously. Therefore, a formal letter from a third party may speed up the business process and reach the key decision makers (Kwintessential Ltd). Political Aspects The challenge that is currently faced by the South African government is to initiate enforceable rules, regulations as well as policies. The aim behind such initiations is to promote the national interest that takes into account the vibrancy of business enterprises. In spite of overregulation can still be counted as an issue, the trade deregulation has supported entrepreneurship. The judiciary system of the country is strong and the reliability on the system is important for entrepreneurial development. The judiciary system of the country offers some kind of protection to the businesses (Lowenberg and Kaempfer, 126-127). The country suffers from high level of bureaucracy. The costs of business can get increased because of bureaucratic corruption. The products can also become uncompetitive for this reason. In this country the cost of compliance with legislation is high. This can be seen as a threat to the small enterprises. The government follows the policy to support the SME in the form of knowledge. This would ensure growth prospects for the business. However lack of support from the public has some level of negative impact on the development of entrepreneurship. In order to encourage the foundation of new enterprises the country follows various incentive programs but many SME lack the knowledge of such programs. The business environment can also suffer from the political instability of the emerging markets (Prof. JJ van Vuuren, 32-37). Economic Aspects The success of a start up business depends heavily on the state of the national economy. The state of the economy can shed its impact on the success rate of the business from the time the business is launched. One economic aspect of starting a new venture is economic density. The enterprise density is defined as the number of firms operating within the given population taking a particular time period in consideration and refers to percentage of existing and possible entrepreneurs. The enterprise density for the country is as low as 2%. This indicates that there is ample room for expansion for the active enterprises. This rate of enterprise density also acts as the disincentive to firms to exit. Inflation also has the potential to effect on entrepreneurship. The inflation figure for the country was 11% in the middle of the year 2008. It indicates that the value of wealth is taking the declining curve and consumers are on their way to tighten their belts. Thus there are few opportunities for the entrepreneurs. The entrepreneurs prefer a low rate of interest which would facilitate access to capital as well as the other resources required for entrepreneurship. The rate of prime interest rate is 15% in mid 2008 which is very high and restricts the rate of consumption and the amount of raised capital. Another economic aspect that seems to impact upon the enterprises is unemployment. In an economy characterized by high unemployment a lot of people are short of options other than moving into entrepreneurship for survival purposes. The markets also get restricted at the same time due to high unemployment rate and limited earnings. As high unemployment rate prevails in the country more people are inclined towards self employment but the power to spend is limited. The exchange rate can also play its part in the entrepreneurship. The rand is weak for the country and it paves more opportunities in the export market. But there is still a problem prevailing as there is lack of capital to be invested in the local SMEs. The opportunities bring a level of uncertainty along with it. The potential to deal with the ever changing environment is important for the success of the SMEs. The changes which are associated with the opportunities include technological change and ever changing forces of the market. The floodgates of changes opened when the country entered into the global arena after decades of sanctions in international trade. It is sad to witness that most SMEs operating in the country do not have the potential to deal with the changes and are moving towards extinction. The bank and the financial institutions prevailing in the country are risk averse and thus act as the barrier towards access to finance. The banks do not have any dependable track records and tries to avoid the SME that are deemed to be risky. So the SMEs which are able to collect the funds required to initiate the start up process have to face high cost of capital. The organizations operating or willing to operate in the country can also suffer from limited access to technology. In order to gain competitive advantage it is important for the organization to have easy access to the technological up gradations. But as the society of the country is disadvantaged, it is difficult for the SMEs to access technological sophistication. The financial constraints can also act upon the access of other economic resources like bankers, training, suppliers and all other intermediaries responsible in the chain management. Legal Aspects A number of legal factors can influence the foreign investors on doing business on the country which are common to almost all the nations. To name a few some of the legal factors include structures of the company, taxation system and law of competition, aspects of employment. Some of the recent developments that have taken place in the considered country are corporate governance, money laundering and laws related to environmental issues. One of the major deal drivers that have taken place in the country is empowerment of black Africans. The black economic empowerment has placed substantial empowerment requirements on local business. Some of the requirements of the empowerment include equity or asset ownership, procurement as well as employment requirements along with targets that are linked to certain timeframes. The companies which are incorporated locally do not have to face any restrictions on non SA citizen or the resident shareholders. The directors can also save a few consequences that relates to powers of local borrowing, flexible rules of capitalization as well as provisions of anti transfer pricing. However companies which are not incorporated locally are required to file the financial statements with the Registrar of Companies (PHIMAKGOE, 2). The Companies act is currently under the review procedure which aims to facilitate foreign investment. The other aims of the Companies act include steps to bring more transparency and accountability, steps to acknowledge the objectives or the interests of the stakeholders. The exchange control mechanisms also exist in the country. The recent periods have witnessed significant relaxation of the exchange control regimes. The goal of the government is to provide equal treatment for the residents and the non residents of the country in terms of inflow and outflows of capital as well as abolition of the measures of exchange control. The financial Intelligence centre is now responsible for controlling the activities of money laundering. The legislation under the act aims to curb down the use of proceeds relating to crime and money laundering. “Accountable institutions” are under the imposition of obligations of rigorous compliance. These types of institutions are forced to follow the procedure named as “know your client”. They are obliged to identify as well as verify the existing along with the new clients, maintain a detailed record of the various transactions taking place with the clients, report a certain part of the transaction records to the concerned authorities and to develop the skills of the employees. The economic system of the country is based upon the free market principles. The prevailing common law and the Competition act regulate the nature of competition (Deneys Reitz Attorneys, 33-39). The aim of the legislation is also to control the behavior of anti-competitiveness. The effective tax rate of the companies is 15%. Capital gains tax is applied within the economy. The external organizations are levied a flat tax of 35% on income while the closed corporations have to bear flat rate of 30% on income. The local organizations also have to pay a secondary tax of 12.5% while the external companies are exempted from its base (Campbell, I/29). Conclusion The government of the country is making provisions which will set up easier access for entrepreneurs. The setting up of a national one stop shop for the business approvals is on the process which will simplify the red tape that is required for the small businesses. The setting up of such shops will speed up the review process and will bolster the capacity of trade as well as investment. The Trade and Industry minister also announced that the new Companies Act will also impose lesser restrictions on the small companies in the country (BuaNews). The new Consumer Protection Act is also believed to stimulate the economy. The minister is of the opinion that such Act will also protect the industries from unfair competition from the products that are low in quality. Some of the areas of improvement for the country in order to attract more organization include reduction of the number of documents required from the entrepreneurs willing to initiate a business in the country, speed up the review process of the documents, relaxation of the terms of the regional trade agreements, sophisticated techniques of risk management, reduction of congestion in ports and bands of tariff and establish a set of indicators to reveal the performances of the businesses (Business Unity South Africa, 15-17). Works Cited SAinfo reporter and BuaNews. “Investing in South Africa”. 12 June 2012. Web. 19 June 2012. Kwintessential Ltd. “Doing Business in South Africa”. Web. 19 June 2012. Prof. JJ van Vuuren. “Factors affecting SME success”. Web. 19 June 2012. Lowenberg A. and Kaempfer W. “ The origin and the Demise of South African Apartheid”. Web. 19 June 2012. The International Bank for Reconstruction and Development. 2012.“Economy Profile: South Africa”. Web. 19 June 2012. The International Bank for Reconstruction and Development / The World Bank (2009). “Doing Business 2010: South Africa” Web. 19 June 2012. Campbell, C., 2006. “Legal aspects of doing business in South Africa”. Web. 19 June 2012. Deneys Reitz Attorneys., 2006. “Doing Business in South Africa”. Cornell university ILR School. Web. 19 June 2012. BuaNews.,2011. “Regulations”. Web. 19 June 2012. Business Unity South Africa (BUSA). 2008. “AN ASSESSMENT OF THE “DOING BUSINESS REPORT” ON COSTS OF CROSSBORDER TRADE”. Web. 19 June 2012. Willumsen,F., Moene, K. and Hoyland B. “Be careful when Doing Business”. PHIMAKGOE, P. “Government procurement policy and SMME development ­ successes and challenges”. Web. 19 June 2012. Read More