Analysis of Strategic Risks in South Africa - Essay Example

? Analysis of Strategic Risks in South Africa of This paper examines the risk of doing business in South Africa and how a corporation will handle those risks. It touches on the Political, Economic, Financial and Social Risks that are inherent in South Africa. It goes on to recommend solutions to these problems. Keywords: South Africa, Risk, Business. Introduction This paper examines the various risks that faces a business entity that seeks to operate in South Africa. It critically looks at the Political, Economic, Financial and Social Risks and gives insights into how a corporation should position itself in order to gain the best of results in South Africa. Political Risk General Politics Political risk refers to risks relating to the governance and control of the various peoples in a given nation. The inherent political risks in South Africa have to do with the nature of social exclusion practiced in the country for a long time. However, power is in the hand of a popular the Black African majority government. Although there is little evidence of political instability, there are problems with the South African legal system and how it affects governance. Legal System The legal system of the country has elements of over and under exclusion (Wille & Du Bois Francois & Bradfield, 2007). This is because the government seeks to use the principles of positive discrimination to bridge the gap that existed under Apartheid. This poses a risk in a sense that the nation sometimes uses nationalistic trends that promotes inefficiency and corruption. The constitution also gives a lot of room for strikes, trade unionism and demonstrations, which reignites the strategy used by the popular African National Congress and the people power that comes with the current government (Heinz, 2010). This means that a corporation entering the market needs to understand its microcosmic position and make adjustments to meet these elements of favoritism, nationalism, mass action and corruption that exists in the political structure. Economic Risks General Economy South Africa’s economy received a major boom after it hosted the Soccer World Cup in 2010 and this makes it relatively expensive to do business in South Africa until the economy subsides (Padayachee, 2010). The World Cup brought South Africa surpluses in its balance of trade in the past year and increased its GDP its previous years’ data. With the weakening US Dollar, a business that seeks to operate in South Africa will find it relatively more expensive to trade in South Africa that it would in other parts of the world. Unemployment Unemployment rates in South Africa currently stand at 25.3% and this is blamed on the people’s demands for high wages and better working conditions than other parts of the world (SouthAfrica.Info, 2011). This therefore presents a labor risk to the nation. This is because these conditions show that clearly, labor is expensive in the country. This therefore means that any business that seeks to open up a branch in this country needs to be willing to pay more for labor. International Trade International trade in South Africa is increasingly becoming skewed in favor of the Brazil, India, China and Russia and nations like China in particular has a lot of control in the affairs of South Africa (SouthAfrica.Info, 2011). This therefore means that any company from a country not in this category risks losing out to the competition posed by these nations that are favoured by international treaty in South Africa. This therefore makes it more prudent for a corporation to consider other international expansion options that makes good use of outsourcing to remain competitive and acquire a favorable image in the South African market. Financial Risks General Financial Risks The World Bank gives South Africa 68% for credit worthiness indicating that although it is a low risk country to do business in there is still some risk to do business there (Adar, 2008) The Currency Risks South Africa’s Rand is quite stable after the World Cup and stands strong against the US Dollar, however this has not always been the case, especially, before 2010 and there is a chance that the Rand can start falling again (Gouws, 2011). This therefore means that a corporation that is entering the country needs to take time to hedge its foreign exchange transaction as Gouws reports that there are many hedging opportunities with the financial intermediaries of South Africa. The Credit Crunch There is increased credit risks, especially with the housing sector and the elements of the global recision is felt here (International Monetary Fund, 2008). The IMF goes on to state that the South African Reserve Bank has come up with several supervisory and cushioning measures that have kept the economy running. This goes to suggest that the economy has some austerity measures that makes it quite difficult for some sectors to get along quite peacefully. Money Transfer South Africa has some good offshore connections (International Monetary Fund, 2008). however, the anti-money laundering laws, have made it quite difficult for money to be transferred out of the country without strict scrutiny (Masciandaro, 2004). This presents risks that affect privacy and other aspects of business which makes it quite difficult to do business in the country. It is therefore best for businesses to assess the various options for offshoring options to transfer funds back home. Social Risks South Africa has a major social risk in the area of the HIV/AIDS scare. Figures show that 9% of businesses in 2003 were hit by the loss of their staff members to HIV/AIDS and there are signs that up to 43% of business will be hit ten years after that (International Monetary Fund, 2004). This therefore shows another labor risk which a business is prone to, because if you train your workers, there is a chance that they will die of AIDS and you will have to train new people. South Africa’s population stands at 47.4 million and out of this, about 79% are Black Africans, 9.2% are Whites, 8.9% are Coloreds and 2% Asians (Oxford Business Group, 2009). The history of social exclusion and other things gives rise to social tensions and bitterness amongst the people. This inequalities have been major cause of crime, xenophobic violence and other forms of social unrest. Also, the popluation of the nation is not fairly distributed. 20.5% of the people live in Kwazulu Natal, 19.4% in Gauteng and about 14.9% in the Cape region of the south (Oxford Business Report, 2009). This therefore means that most of the wealth of South Africa is locked up in Johannesburg, Pretoria, Durban and Cape Town. The implication is that there are few options for a business that seeks to grow in this part of the world as growth is only limited to these three areas. This makes it difficult to make long-term investments in South Africa. It is therefore necessary for a business to enter cautiously the country cautious by investigating and finding the safer parts of the country to operate in. If it is appropriate, the business can move in, if not, it can maintain the minimal presence in South Africa. Cultural Risk Managing across culures is quite difficult. However, the cultural risk in South Africa is increased by the fact that the cultural diversity is too huge. Amongst Whites, you find Afrikaaners (of a Dutch origin), English, Eastern Europeans, Jews, and Portuguese. Amongst Asians, you find Indians, Arabs, Chinese and Pakistanis. The Black Africans are of Zulu, Xhosa, Sotho and other native Southern African origins. There is also a thriving community of other African migrants in South Africa, most of them from Nigeria, Zimbabwe, Mozambique and other parts of the continent. This makes the country a melting point for many cultures. There is therefore a challenge in managing people from all these backgrounds and this creates a major managerial risk. To go around this, a business needs to get its managers to build a deep conception of cross cultural management. This can be done by training and the study of cross-cultural management to understand and learn how to work efficiently in a multicultural setting. Conclusion South Africa has some inherent risks that can make it difficult to do business there. There is the political risks that come with the legal system and structures of governance that promote popular action ahead of the reality. There is also economic risks that are connected with the high cost of doing business in South Africa and other factors like the entry of Chinese businesses who have control of affairs. There are also financial risks relating to credit risk and money transfer issues. Finally the HIV scare and the residue of social exclusion from Apartheid breeds crime, violence and xenophobia amongst the people. There is also a wide range of people from all backgrounds in South Africa which presents a serious cultural risk for international businesses planning to operate here. Works Cited Adar, K. &. (2008). Towards African-Oriented Risk Analysis Models: A Contextual & Methodological Approach. Pretoria: African Institute of South Africa. Gouws, A. (2011). Export Issues for Enterprises. Cape Town: Juta & Co Ltd. Heinz, K. (2010). The Constitution of South Africa: A Contextual Analysis. Johannesburg: Hart Publications. Info, S. A. (2011, April 12). Unemployment in South Africa. Retrieved May 25, 2011, from South Africa Info: http://www.southafrica.info/about/government/statenation2011a.htm International Monetary Fund. (2008). South Africa: Financial System Stability Assessment. Washington DC: International Monetary Fund. International Monetary Fund. (2004). South Africa: Selected Issues. Washington DC: IMF. Masciandaro, D. (2004). Global Financial Line: Terrorism, Money Laundering & Offshore Countries . Hants, England: Ashgate Publishing Ltd. Oxford Business Group. (2009). The Report: South Africa 2008. Oxford: Oxford Business Group. Padayachee, V. (2010). The Political Economy of Africa. Abingdon, Oxon: Routledge. SouthAfrica.Info. (2011, April 18). International Trade. Retrieved May 25, 2011, from SouthAfrica.Info: http://www.southafrica.info/business/trade/ Wille, G., & Du Bois Francois & Bradfield, G. (2007). Wille's Principle of South African Law. Cape Town: Juta & Co. Read More