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South Africa is a developing country with a population of almost 56 million people. It is a newly industrialized nation rich in natural heritage and diverse cultures. Moreover, the country offers favorable business possibilities. South Africa covers 1.22 million square kilometers and has the largest amount of platinum, chromium, vanadium, and manganese in the world (Brand South Africa). South Africa is famous for its minerals, agricultural products and engineering technologies, moreover, it has a large and active stock exchange. The country has a well-developed infrastructure comparable to OECD standards. The service sector of South Africa is constantly growing and attracts a lot of tourists from all over the world, while the economic environment is developing and attractive for international companies to enter the market of South Africa.
South Africa is a member of the Southern African Development Community (SADC) as the country has the most developed business environment among all the countries of Southern Africa and well-established regional infrastructure. South Africa is a member of the Southern African Customs Union (SACU), the oldest customs union in the world, along with such developing and promising countries as Botswana, Swaziland, Lesotho and Namibia and a valuable member of such world associations as the WTO, the G20 and BRICS. To strengthen trade links between the United States and SACU the countries signed the Trade, Investment and Development Cooperation Agreement (TIDCA) in 2008. Moreover, the U.S. launched the “Doing Business in Africa” (DBIA) program, the purpose of which is to increase trade rate and investment opportunities for U.S. companies in Africa. Moreover, in 2012 South Africa and the United Stated signed a new Trade and Investment Framework Agreement (TIFA) for future successful cooperation and trade deals (Brand South Africa). Therefore, South Africa actively participates in the world economy and has a promising market.
The developing environment of South Africa attracts international interest and consists of competitive economic, socio-cultural, political, legal, governmental, labor, and financial environments, which present many investment opportunities. The country is of particular interest to entrepreneurs, corporate executives, and business intelligence as an emerging market of new business opportunities. The global financial world considers South Africa as a promising resource with a great potential of sustaining the development.
International Environmental Forces of South Africa
South Africa has the largest and most productive economy in whole Africa and has well-developed economic and reasonable tax infrastructures. The exchange rate of South Africa is low and, therefore, the country is attractive to international companies to do business there due to low costs, while stock exchange of South Africa is ranked among the top twelve in the world. Moreover, South Africa was ranked 69 among 189 countries in the ‘Ease of Doing Business’ global rate (The World Bank Data). The economy of South Africa can be categorized in three separated economic sectors due to its productivity and popularity: primary (agriculture, mining, and fishing), secondary (manufacturing, utilities, and construction), and tertiary (trade, services and transport). Therefore, major business opportunities in South Africa are related to mining, metalworking, machinery, automobile assembly, and chemicals sector.
A lot of South African students can’t attend any higher educational institution in the country due to lack of money to pay for fees. For most South African individuals, tertiary education requires too much investment. The government of South Africa transfers big amounts of money to its higher educational institutes but it is still not enough for everyone to have a free access to education. Nevertheless, the number of government grants significantly increased in 2016-2017. South Africa has 11 official languages, and diversity is one of the competitive advantages of the residents of South Africa.
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South Africa is a parliamentary representative democratic republic. The government is run by the African National Congress that dominates among others political parties in South Africa. Its political governance positively affects the transparency of business processes in South Africa and effectiveness of their handling. The government of South Africa actively supports open markets and acts towards the improvement of investment climate. One of the biggest political problems of South Africa is a high level of corruption.
The legal system in South Africa is a combination of different laws, mostly Roman-Dutch Law with some adopted English laws, which serve the needs of modern commercial law. The country has its own developed Constitution which is used by the Constitutional Court, the Supreme Court of Appeal (SCA) and different magistrates’ courts that follow the terms of an Act of Parliament and ensure legal policy. South Africa has a centralized and independent judicial system which deals mostly with crimes and abuses as the crime level in the country is high. The primary goal of the judicial system was to promote a spirit of national reconciliation and a new culture of human rights.
The population of South Africa shows continuous growth but the challenges related to obtaining a good job increase accordingly. The working population of 450 million new workers will attend a labor pool of South Africa until 2035, while the unemployment rate amongst graduates and young people is about 7,0 percent (George et al. 388). Today, South Africa ranks 107th in labor market efficiency, 50th in technological readiness, 38th in innovation, and 33rd in business sophistication (Brand South Africa). The government of South Africa is going to create additional six million work opportunities by 2019 but most of these jobs will be contractual, thus not fully solving the problem of high unemployment rate. The government should consider more strategic solutions for labor legislation, inequality and unemployment.
South Africa has several key competitive strengths and advantages of business opportunities, technology development, infrastructure and innovation potential but the current rates of the country have decreased. Last year, the Global Competitiveness Index (GCI) of South Africa has fallen from 47th to 61st position out of 137 countries because of low GDP growth forecasts, corruption, crime and theft in the country. The leaders and public officials of South Africa have considered the results and recommendations and focused their efforts on the actions against corruption and wastefulness in the financial sector and the drop in the country`s overall competitiveness.
South Africa imports petroleum products, machinery and equipment, chemicals and food products from all over the world, especially China, Germany, the U.S., Saudi Arabia, India and Nigeria. The biggest trade partners of the country are China and the U.S. but South Africa also has well-established trade links with European countries and Japan. South Africa actively competes with such countries as Mauritius, Rwanda, and Botswana and holds the second position among the developing African countries that are attractive to international investors.
Despite the existing problems of high levels of crime and theft, corruption and government instability, South Africa remains one of the most competitive and innovative countries in Sub-Saharan Africa. The country has well-established trade links with the U.S. and many European and Asian countries. Increased internal competitiveness is caused by the gap between population growth and an insufficient number of jobs.
South Africa is attractive to investors because of its advanced developing economy, transparent legal system, smart human resources and diversity of the official languages of the country. However, a big number of strikes and demonstrations for the better living conditions and free education, high level of corruption and issues with electricity supply lower the popularity and attractiveness of South Africa on the investment market. South Africa promoted the Protection of Investment Act in December 2015, which supported foreign investors and encouraged building of international business relationships but the investment potential of South Africa hasn’t increased a lot since that time.
Despite the fact that South Africa faces problems with low exchange and employment rates, electricity and transport infrastructure, the country seizes the opportunities to improve its economy and level of attractiveness for foreign direct investments. The renewed improvements and further development of South’s Africa infrastructure, land law and accessibility in education should attract more investment and financing in the future.
Main Features of Selection Process of the Country for Investment
Selection of an outsourcing target is a long-term process that demands evaluation of many different aspects. Before choosing South Africa as your target for investment, you should evaluate strong and weak sides and perspectives of your business in the country. To pick an appropriate and beneficial outsourcing target, you need to check whether it suits several criteria such as human resources, policies and procedures of a country, and its financial potential and political stability.
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The economic forecast for South Africa is positive due to its high market potential. It also has stable macroeconomic climate, customs and tax system. South Africa switched its business approach from traditional industries to financial and production services. Talking about the downsides of the economy of South Africa, we need to mention high activity of labor strikes during the last years, corruption and unstable access to electricity. The economic policy is still under construction, so the credit rate of the country cannot be specified.
While approximately all sectors of business are open for investment, the government of South Africa has only a few restrictions on investment for foreign companies. To attract international partners, the government provides simple tax rules and investment incentives and policies. There are also grants provided to support and encourage international entities, such as the Foreign Investment Grant and the Industrial Policy Project that help to get tax allowance incentives. Moreover, South Africa is a country with a high unemployment rate, therefore, there is a great chance for an entrepreneur to reduce the cost of employment by working locally and compete internationally.
Access to electricity can be a real struggle for entrepreneurs in South Africa. The procedure can take up to 226 days to provide access to this public utility and complete external connection works (Santander Trade Portal). This prospect, coupled with general fear of failure, has a harmful effect on the level of entrepreneurship. It, however, means that the gaps and market opportunities for those who are ready to dive in are bigger than in most business countries.
The facts mentioned above create a unique possibility for investment into private companies in South Africa. The number of issues to be solved on the continent is pretty high. The emergence of new technologies and connections allows one to create new types of business and business models. Despite the facts that GDP grows and the general market has a significant impact, emerging private companies can earn profits far beyond the traditional asset classes. However, there is still a possibility of increased internal risk and a risk of instability of currencies, etc. But given the fact that investing in a company with a similar team, technique, connectivity and scalability can be one-tenth of the cost related to investing in a company in Silicon Valley; moreover, the growth potential is irresistible.
Future Business Opportunities in South Africa
The prospect of future development of South Africa as a target for investment and business is somewhat optimistic. The research shows that there are many African countries, including South Africa, that offer attractive FDI opportunities in the next five years. In the future, South Africa hopes to become a more networked, educated and urban country.
South Africa is a powerful mechanism and a potent force for the expansion, as it has the most developed, large-scale economy in Africa with infrastructure that matches any country in the world. The economic growth in Sub-Saharan Africa should significantly exceed the world average in the next three years, as an increase in investment can lead to a continental growth of more than 5% and the black middle class in South Africa nearly doubled over the past 8 years (The World Bank Data). The multifaceted culture and history of the nation present many challenges for business development, although recent evidence suggests that the consolidation period has created the modern market. Estimated population growth of South Africa tends to show the world’s highest rates, so the risk of sharpening of issues connected to gender disparity and population growth will strain health care, education and public capacities. Urbanization and rising incomes bring more people to financial institutions and, thus, give a formal identity to youth and aspirations of the continent. Meanwhile, technology and innovative business strategies enable the financial sector to achieve unprecedented levels.
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Moreover, the growing level of education and increased number of urban youth increase the possibility of conflicts due to religious affiliation and protests because of dissatisfaction with corruption and rising inflation. South Africans stand for their rights and future opportunities. In such circumstances, complex security problems arise, ethnic tensions are exacerbated and religious extremism, especially radical Islam and Christian fundamentalism, extends even further.
Unfortunately, nowadays the government has not fully developed a policy of “demographic dividends”, so the region has the risk of suffering from weak and insignificant economic development and the need to increase the education level of the workforce. China in recent years has expressed a strong demand for African goods, which was unexpected for the exporters. China’s previous high interest in downturns and demand will be more moderate in the coming years, which will lead to cooling of Chinese economy and a flow of assistance. The development of a favorable atmosphere for investment and business growth in the country is possible under such conditions as the development of telecommunications and transport, possibility of creating a good labor force and increased qualifications of the workforce. The establishment of industrial development zones in South Africa in 2001 offered flexible conditions for duty-free import of production-related materials, low taxes on materials exported from South Africa, and the right to import finished products to South Africa after paying customs duties.
Due to South Africa’s dependence on fluctuations in world raw material prices and demand for Chinese goods, South African exporters are reducing the prices of non-food products. Although South Africa is well known for its dominant share in some essential commodities such as platinum, chromium and cobalt, which are in high demand, agriculture will also be a critical factor in the process of the continent’s revival. South Africa’s statistics on agriculture are ready for significant changes. In the next decade, agricultural production can double in South Africa.
South African business market becomes more competitive and attractive for both local and foreign investors, and, as a result, the overall investment environment as well as the amount of private investment funds will continue to grow. In the next five years South Africa will probably face serious financial and labor challenges but the government takes initiatives to overcome these looming challenges. South Africa can be considered as a competitive and investment-worthy country.
The business environment is in a constant search for new sources of real possibilities of sustainable development. In regard to logistics infrastructure, English-speaking labor force and a legal process of localization of international companies make South Africa a country with a low entry threshold. South Africa has a great potential and can be observed by new-to-market local entrepreneurs, as well as potential international investors.
There are a number of points to be considered in means of political and economic struggles of South Africa that are far from being stable. However, the prospects of Africa’s economic development are optimistic. Nowadays South Africa is an area where most of new-to-market ideas are implemented as new business schemes find low resistance and are easier accepted in Africa.
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Finding a good partner to work with in third markets and opening a business in South Africa is a low-risk business strategy. These tactics will increase the level of improvement of a company’s financial health and competitiveness. The U.S. and many European and Asian countries show increased interest in South Africa, as the most innovative and developed country of Sub-Saharan Africa, and the chances of strengthening trade links with these countries are high.
However, South Africa still needs to improve a variety of spheres. Without being able to deal with the existing issues of corruption, government instability, insufficient number of job positions and high unemployment rate, the country can’t be regarded as a reliable partner in the international market. Without that, country will be highly dependent on the demand of other countries. Sustaining a robust macroeconomic and pro-business environment will enable the country to attract international entrepreneurs. Despite many financial and labor problems, South Africa deserves more attention from international investors as it is a highly promising country.