International Business Practices Assignment
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phase_4_ip.docxInternational Business Practices IP #4
Michelle Satten
Professor Asefaw Indrias
December 16, 2013
Introduction
Opening an office in Johannesburg would ensure a more efficient management of the bank’s assets in the African region. A local presence will allow the bank to extend its coverage of markets in Africa, and will facilitate its round the clock operations on the foreign exchange market for example, to enforce the minimum exchange rate. To reduce concentration risk, the bank should aim for a broad diversification of its investments, and it is important turn to new markets so as to facilitate this. Africa’s economic importance is growing considerably in modern years, similar to its bond and stock markets.
Challenges in the new environment
Macroeconomic Policy. Macroeconomic policy had direct relation to budget deficit and price rises rate, which auxiliary affect the economic constancy. Macroeconomic guiding principles of African countries are still going through reforms, and faces significant restraints like crime restrictive fiscal and monetary policies, low domestic savings, low skill levels, labor market rigidities and inadequate levels of FDI.
Labor Market. Though population in African countries is extremely high, the percentage of people in employment is rather very low. Squat employment and elevated unemployment rate, coupled with unfairly dispersed educational qualifications is a stern disadvantage for labor market. An additional problem companies face is absence of skilled manual labor and low litheness of labor market.
Economic Inequality and Poverty. Deficiency in Africa is characterized by ethnic and regional magnitudes, and as per studies, more than 75% of poor people live in countryside areas. Besides severe levels of poverty, lofty levels of disparity of wealth and income co-exist in the economies. South Africa is one of the most developed economies in Africa yet it is also the country with highest economic inequality.
Political Instability. Political instabilities are a sensitive issue for foreign investors and one of the biggest reasons to drive them away. Internal tensions, coups, border conflicts etc have been common in history of African economies. Occasionally, even though a country is politically firm, conflicts faced by neighboring countries have negative impact on their economy.
Political and legal systems in Johannesburg
South Africa's legal system, similar to the rest of the political system, was thoroughly transformed as the apartheid-based constitutional system was rationalized during the early 1990s. Nonetheless, many laws not related to apartheid unrelated to be rooted in the older legal system. Thus, the justice structure after 1994 reflected elements of both the apartheid-era system and fair reforms.
South Africa has an amalgam or 'mixed' legal system, fashioned by interweaving of a number of different legal traditions: a civil law system hereditary from the Dutch, a common law system hereditary from the British, and a customary law system hereditary from indigenous Africans. These traditions have had a multifaceted interrelationship, with the English pressure most apparent in routine aspects of the legal system and manner of adjudication, and the Roman-Dutch pressure most noticeable in its substantive classified law. As a universal rule, South Africa pursues English law in both illicit and civil procedure, constitutional law company law, and the law of evidence; whereas Roman-Dutch common law is pursued in the South African contract law, law of tort, law of persons, family law, etc. With the beginning in 1994 of the provisional Constitution, and in 1997 its substitute, the ultimate Constitution, an extra thread has been added to this intertwine.
South Africa's economic services sector, supported by a appropriate regulatory and lawful structure, is complex, blustering numerous home and alien institutions providing a complete variety of services; retail, commercial, and merchant banking, insurance, mortgage lending, and investment. Legislation prevailing the financial sector is chiefly the Banks Act 1990 and the Mutual Banks Act 1993, which provide the attainment of a sound, competent banking system in the concern of the depositors of banks and the financial system as a whole. An office lead by the Registrar of Banks, in service as part of the Reserve Bank, is in charge for registering institutions as banks or mutual banks as well as imposing all the requirements of the Acts.
The National Credit Regulator is responsible for regulating the South African credit industry, as well as the registration of credit donors or providers, credit bureaux and liability counsellors. It is accountable for enforcing conformity with the National Credit Act, and is alert on developing a reachable credit market to convene and promote the requirements of the people who are marginalized, especially economically. The Banking Association of South Africa is an industry body representing all registered banks in South Africa. It is the authorized agent of the sector, and embodies the industry through engagement with stakeholders, lobbying, and political influence.
General commercial legal practices relating to transactions and the drafting of commercial agreements are generally globally applicable and in line with international norms and conventions. There is a world-class and modern Constitution (including a Bill of Rights) in place that regulates human rights and the entire legislation. It assures the autonomy of the judiciary.
Trade and industry is undertaken within the framework of a free enterprise economy.
The courts are open to foreigners on exactly the same terms and conditions as South African citizens, even though numerous commercial rows are resolved through arbitration by agreement between the parties.
Government intervention
The South African government intervenes in the private sector economy, through systems such as higher taxations, and existing labor legislation and the rules governing black economic empowerment, in the country. In times of crisis, like the global financial crisis that posed a serious danger to South Africa's economy which is strongly integrated into the world economy thus prompting more government intervention, the South African government comes to the rescue of private firms through industrial financing and incentive instruments.
However, despite all this, increased government intervention adds further intricacy to the division. The gloom of elevated taxes, restraining regulation and indigenization looms large over a sector already grappling with risks normally associated with lending and new market entry. This might affect the financial sector by exerting a lot of pressure on its compliance requirements. In particular financial expenditures that might not have been foreseen may became a reality placing the institution at a risk of making losses.
Type of economic system
South Africa uses a traditional economic system. Owing to the county's political constancy and well capitalized banking organization, the country has shun away from the worldwide financial meltdown. It has a regular mixed market capitalistic economy system and is the economic powerhouse of Africa, with a gross domestic product (GDP) four times that of its southern African neighbors and comprising around 25% of the whole continent's GDP. The country tops the continent in manufacturing output (40% of total output) and mineral production (45%) and generates most of Africa's electricity (over 50%). Its major strengths include its physical and economic infrastructure, metal resources and natural mineral, a rising manufacturing sector, and strong growth capability in the tourism, advanced value-added manufacturing and service industries. South African banking policies position with the finest in the world. The segment has extensively been rated within the top 10 globally. There are fifty five locally controlled banks and five mutual banks twelve foreign-controlled banks.
South Africa's economy has been in an upward phase of the business cycle since September 1999 - the longest period of economic expansion in the country's recorded history. During this upswing - from September 1999 through to June 2005 - the annual economic growth rate averaged 3.5%. In the decade prior to 1994, economic growth averaged below one percent a year. As by the South African Reserve Bank, there is no indication of this period of development coming to a conclusion.
History of the economic system
South Africa's economy had been shaped over several centuries by its abundant natural resources and by the attempts of immigrant populations to dominate and to exploit those who had got in prior to them. For the majority of the twentieth century, its mineral prosperity had exceeded that of nearly any other country in the world, apart from the Soviet Union. South Africa produced almost half of the world's gold and positioned among the top ten producers of a dozen other precious minerals, counting copper and diamonds. The mining industries offered the foundation for the strongest financial system on the continent, which, by the mid-twentieth century, incorporated a widespread transportation system, a far-reaching electric power network, and a large manufacturing sector.
By the mid-1980s, the economy was distorted by government policies designed to bolster the economic and political power of a small minority and to exclude many of South Africa's citizens, chosen by race, from noteworthy contribution to the nation's wealth. By the early 1990s, the weaknesses in the economy were increasingly evident despite the country's dazzling mineral wealth. The government cast off the constraints of apartheid in the 1990s, partly to tackle the grave economic tribulations caused by that system. The novel government in the mid-1990s faced the vast challenges of civilizing living standards and running the country's resources profitably.
South Africa’s involvement to international trade
South Africa's trade and industrial policy is moving away from an exceedingly protected, interior looking economy aiming an internationally competitive economy, capitalizing on its competitive and proportional advantages. For quite some time, South Africa's capability to trade with the exterior world was sternly limited by the sanctions imposed on the country by most urbanized countries as castigation for South Africa's dedication to apartheid. With the conclusion of apartheid in the 1990s, global trade has prolonged vividly so that in year 2000 international trade constituted 16 percent of the GDP. Europe is the biggest source of trade for South Africa. In actuality, 7 out of 10 of South Africa's peak trading associates are European countries.
South Africa is a member of the World Trade Organization (WTO). U.S. products qualify for South Africa's most-favored-nation tariff charges. South Africa as well is a qualified country for the benefits under the African Growth and Opportunity Act (AGOA), and most of its products can enter the United States free of market duty. South Africa has discarded most import permits except on used products and products regulated by international treaties. It also remains committed to the simplification and continued reduction of tariffs within the WTO framework and maintains active discussions with that body and its major trading partners.
As a result of a November 1993 mutual agreement, the Overseas Private Investment Corporation (OPIC) can help U.S. investors in the South African market with services such as political threat insurance, loans as well as loan guarantees. In July the year 1996, the United States and South Africa agreed on an investment finance protocol for a $120 million OPIC fund to build equity investments in South Africa and Southern Africa at large. OPIC is creating an extra fund--the Sub-Saharan Africa Infrastructure Fund, capitalized at $350 million--for investment in communications projects. The Trade and Development Agency as well has been enthusiastically involved in financing feasibility studies and discovering investment opportunities in South Africa for U.S. business
The Department of Trade and Industry(DTI) is the department of the South African government with responsibility for commercial policy and industrial policy. The DTI and its subsidiary agencies are involved in promoting economic progression, Empowerment of the black economy, executing commercial law, promoting and regulating international trade, and consumer protection. Through the regulation of international trade, this means that the financial institution will be exposed to a fair competition which is healthy for the bank. The government of South Africa also encourages foreign investors to come into the countries by providing incentives to them as a way of promoting the local economy. The Government attempts to attract investment in economic activity by creating a steady macro-economic atmosphere. Triumph has been attained considering issues such as fiscal stability, low inflation, and a commitment to privatization and the development of free enterprise. The majority incentives for investment are in non-tax incentives form.
Being one of the best developed countries ahead of other countries in Africa, South African is definitely the best place to start off in a journey to enter other developing countries. It would serve as an avenue for us to study, learn and get well acquitted with the local systems and emerging trends in developing countries for informed decision making
Involvement in regional integration efforts
There is a sizeable difference between the role that South Africa - the undisputed economic powerhouse of the Southern African Development Community (SADC) - can play in the process of regional cooperation and the far more self-interested role that it actually plays. South Africa dominates the region in economic terms, accounting for sixty percent of SADC's sum trade and about 70 percent of SADC's GDP - so clearly it has a critical role to play in regional integration.
Moreover, South Africa is the lone country in Southern Africa that has the essential economic capability and levels of diversification that are required to drive economic integration in a manner that is mutually beneficial.
And regional economic integration can be extremely beneficial - helping to encourage economic growth, foster social development, reduce poverty, and encourage collective protection of the environment, mostly in relation to shared trans-boundary natural resources. South Africa has also played a critical role in terms of being a launching pad for foreign investment into the larger African continent, thus its reception into the BRICS (Brazil, Russia, India, China and South Africa). This function is verified by the exponential growth in the number of Trans National Corporations (TNCs) that operate out of South Africa between. In the 1990s, South Africa had an estimated 900 TNCs - a figure that had swelled to 2044 by 2002. Most of these companies and their subsidiaries have/had a Sub-Saharan outlook.
Reason for choosing Johannesburg
As one of the largest financial market places in Africa, and with its geographical proximity to a number of emerging economies, Johannesburg is an ideal location for the bank to launch a new area office. A proper infrastructure and a steady legal environment also provide good conditions for smooth operations. Johannesburg is poised to be the financial hub of a continent which represents more than 900 million consumers and one of the world's fastest growing markets. The South African city has the most developed business infrastructure south of the Sahara and South Africa generally gets strong marks for its financial sophistication.
Overall Assessment
In any language, risk is risk. The commerce world is in the middle of a fresh and vibrant phase of globalization. Upcoming markets, formerly desired chiefly for their cost-saving potential, are now a critical destination – the new growth frontier. There are risks associated with investing in any fresh market, but the rate of growth in these high-growth economies has lead to rapidly changing and highly complex and diverse risk environments. Despite these challenges South Africa has tremendous opportunity for organizations that approach its market with a clearly defined risk strategy. Therefore, the financial risks associated with entry into the South African market are worth it.
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