Opportunities for Kuwait Investment in South African Mining Industry - Research Paper Example

? Analytical Paper-Investment Memorandum Transmission Opportunities for Kuwait investment in South African Mining Industry The notion of internationalization has been recognized to be a growing opportunity for the global countries to expand their investment portfolio in the overseas nations and thereby ensure better sustainability though encouraged availability of resources within the national context. In world politics as well, significant concerns have been provided towards international investments often conducted between two or more countries and facilitated with treaties. Notably, investments in the international context can take place either through a direct approach or through an indirect approach wherein such allies have been apparently observed to facilitate distribution of resources and growth opportunities within the member economies. With this regard, the possession of adequate resources along with growing trade opportunities in the developing economic prospects of South Africa have been considered as a vital concern for the global companies to increase their investment portfolios. Additionally, the diplomatic association between Kuwait and South Africa signifies growth prospects for both the countries. One of the significant opportunities can be identified as the increasing importance attained by South African mining industry within the world economy. Stating precisely, Kuwait investing in South Africa shall be rewarded with significant opportunities facilitated with continuous development of the host nation. Fundamentally, steered by such developmental opportunities, the Gulf economies have been focused on creating a trade relation with Africa in the recent phenomenon which shall also benefit Kuwait when investing in South African mining industry. Table of Contents Memorandum Transmission 2 Executive Summary 5 Introduction 6 Direct Approach to International Investment 7 Major Motivational Factors for Investing in South Africa’s Mining Industry 8 Continuous Growth in the Mining Industry 9 Trade Regulations 11 Industrial Openness 12 Low Labor Cost 13 Conclusion and Recommendations 15 References 16 Executive Summary In the 21st century, countries seek to empower and energize their political and economic stability by building strong relationships with the overseas countries. Therefore, an increasing practice of Foreign Direct Investment (FDI) is often observed, which enables both the recipient and investor countries to efficiently practice their range of industrial activities. Correspondingly, the discussion of the paper has been emphasized on the emerging trend of FDI and its significance towards improving the present economic and political relation between Kuwait and South Africa. In order to clearly recognize the significance of FDI in the current phenomenon, the paper highlights the major advantages that can be availed by Kuwait through its investment in the South African mining industry. The paper also tends to elaborate on the major motivational factors in South Africa which can facilitate Kuwait to efficiently perform its varied range of trade activities along with support the credibility of both the nations in the present world economy. Focusing on this particular aspect, the paper also recommends few effective measures for Kuwaiti investors when building trade relations with South Africa through direct investment in the mining industry. Introduction The emergence of South African mining industry has been observed as a major resource for the country which enabled it to attract global investors such as Kuwait. The mineral development sector of the country is highly focused on increasing the efficiency of the mining and mineral industry which has enabled the country to experience a radical economic stabilization (South African Embassy, 2013). Although the trade relation between Kuwait and South Africa has recently come into the limelight, these two economies have been into a distinct global trade relation since past few decades. The political relation between Gulf Arab economies and African economies, particularly with South Africa, was established during the year 1994 wherein it was agreed to reform various growth prospects and likewise, take decisions for the economic and trade development of the allied countries which shall benefit Kuwait significantly (South African Government of Information, 2012). In relation to the investment portfolio of the Kuwaiti government, it is observed that the country, as a member of Gulf Arab has been practicing effective financial speculations with South Africa since the emergence of its diplomatic relation within the world economy (KPMG Services Proprietary Limited, 2013). Emphasizing upon the growing interests of investing into other countries, the main purpose of this discussion is to highlight the major opportunities for Kuwait while investing in South Africa by applying a direct approach to penetrate the mining industry. Direct Approach to International Investment The notion of globalization has been fiercely empowering global countries to perform Foreign Direct Investments (FDIs) as a direct approach to international investment which not only assists the developing countries to strengthen its capability in terms of both economic and political perspectives, but also rewards the investing economies with the benefits of developing market opportunities. In relation to the present globalised nature of the countries, it is widely observed that FDI has long been practiced by both developed (investors) and developing countries (targeted investing markets) with the intention of advancing their various micro and macroeconomic functions. Moreover, FDI has also been argued to play a vital role in enabling the developing countries in terms of improving trade relationships with the other developed and much stable countries, gaining adequate competencies through economic and industrial growth (Tiwari, 2011). In common, the current policies regarding FDI emphasizes on the practice of developing infrastructure and attracting industrial countries as well as strengthening trade relations. In relation to identify the major significance of FDI, various notions can be observed which are likely to reveal the benefits of investing into the foreign countries (OECD, 2002). It is worth mentioning in this context that FDI have potential effects on the economic growth for both recipient and investor countries. Economic stabilization is the key benefit of FDI which ensures to earn a considerable return from the recipient countries. Owing to this fact, the notion of FDI significantly refers as a practice of investing capitals on foreign resources and enterprises of another country (Bernard, Jensen, Redding & Schott, 2007). Moreover, the process also tends to allow a huge amount of monetary support to the member countries in relation to efficiently perform their industrial activities and determine the prospect of economic growth over a long run. In the similar context, it also offers competitive positioning to the member countries through liberalizing trade facilities and strengthening export and import activities between the countries (United Nations, 2009). In this context, the process involves strong agreement between the investor and the host country concerning freely trading their goods and/or services, labor and capital among others. The integration of FDI process also empowers the efficiency of labor division and strengthens the competitiveness of both the countries in terms of increasing the employment opportunity of the host nation. An effective FDI process has further been observed as a crucial element in terms of fostering political, social as well as economic cohesion between the member countries (United Nations, 2009). Major Motivational Factors for Investing in South Africa’s Mining Industry South Africa has always been able to draw the attention of the global countries by its extensive economic resources. The openness and the rapidly growing importance of the Foreign Direct Investment (FDI) policies in the country represent a clear picture regarding its instinctive and huge amount of natural resources. In this context, the mining industry of South Africa is one of the major economic resources, which enables the country to acquire an outsized FDI flow from different global countries. In relation to the present condition of mining industry in South Africa, it has been precisely observed that in the country R929 billion was witnessed as a market capitalization figure in the year 2011 with an increase rate of 6% as compared to the year of 2010 (PriceWaterhouseCoopers, 2012). Continuous Growth in the Mining Industry In relation to the recent statistical view of the major sectors in the mining industry, it has been identified that the platinum, gold and other diversified mining sectors have been generating continuous growth since the last few years. The following graphical representation depicts the performance of platinum, gold and other sectors during the year 2011. Fig: Market Capitalization of 39 Mining Companies in South Africa in 2011 Source: (PriceWaterhouseCoopers, 2012) Additionally, the contribution of the mining commodities has been playing an imperative role for the country to increase its economic performance since the last few years. In relation to the present performance of the mining industry, it is widely observed that Platinum Group Metals (PGMs), gold, coal as well as iron ore commodities are the major contributors in the overall financial growth of the South African mining industry. The following graphical illustration depicts the contribution of each mining commodity of South Africa in the year 2011. Fig: Revenue Contribution of Each Mining Commodity in 2011 Source: (PriceWaterhouseCoopers, 2012) Contextually, the mining commodities of South Africa have been observed to be attaining considerable growth from the year 2009 which has further encouraged the global nations to increase their investment portfolio in different mining sectors. In relation to the annual revenue of the mining commodities, the country has ascertained continuous growth from the year 2009 to 2011. In this regard, the following statistical figure depicts the performance of each commodity segment from the year 2009 to 2011. Fig: Annual Revenue of Each Commodity from the year 2009 to 2011 Source: (PriceWaterhouseCoopers, 2012) In relation to the aforesaid discussion of the major mining commodities and their performances, it can be firmly stated that making an investment in South African mining industry will be a major decision for the Kuwaiti government which can bring adequate opportunities for the country to strengthen its economic position. Moreover, the direct investment initiatives towards the mining industry of South Africa can also provide adequate support for the Kuwaiti economy to attain a competitive global position. Trade Regulations The trade regulations of South Africa can also be considered as one of the major motivational factors which can enable Kuwait to independently conduct its investment practices. In relation to the present business environment in South Africa, the country possesses adequate flexibility in terms of building trade relationship with the other global countries. The International Trade Administration Commission (ITAC) tends to regulate the overall trade remedies, policy amendments along with tariffs investigation activities of South Africa. Additionally, the country has also incorporated a special department i. e. Trade and Investment South Africa (TISA) which is authorized to promote the operations associated with FDI within the different industrial segments of the country. The policies entailed in the TISA ensure adequate opportunities for maintaining significant extent of flexibility for the foreign countries which can in turn predominantly support the investment activities of Kuwait in the South African mining industry (Centre for WTO Studies, 2012). Furthermore, the continuous deregulation of various trade barriers for the foreign countries is also a considerable factor which significantly motivates the foreign countries to successfully perform their FDI activities. The regulatory process in the South African mining industry plays a crucial role as well for encouraging global countries to indulge in making profitable investments. In this regard, the well-built regulatory structure of mining also tends to reduce potential obstacles and risks concerning the investment portfolio executed by the foreign countries within South Africa. Therefore, it can be considered as a major opportunity for Kuwait to build a strong relationship with South Africa (KPMG Services Proprietary Limited, 2013). Industrial Openness The well-built governmental regulations along with adequate flexibility in the trade policies in South Africa signify a greater extent of industrial openness for the overseas countries in terms of investments. The continuous economic reformation along with rapidly increasing investment and trade liberalization performance create adequate support for South Africa which can further improve its trade relation with Kuwait. In relation to the present industrial environment observable within South Africa, the country has often been identified as one of the sophisticated and favorable places for the developed countries to invest through FDI. In addition, the availability of adequate resources as well as efficient trade regulations of South Africa can also play major roles for Kuwait to ascertain sustainable business operations and strengthen its economic stability. The gradual process of minimizing various trade barriers, initiating adequate measures on international trade regulations and developing infrastructures can also be regarded as a few of the major industrial openness opportunities for the Kuwaiti nation to strengthen its trade relation with South Africa. Therefore, it can be stated that the aspect of industrial openness in the South African business environment can be regarded as one of the major aspects which can further enable Kuwait to increase its competitiveness in the present era of globalization (Deloitte Development LLC, 2009). Low Labor Cost The availability of low cost labor is also a remarkable opportunity for Kuwait in order to strengthen its economic position and increase the nation’s credibility in among the competitive global countries. The higher labor-intensive potentials along with the availability of workers at a feasible cost in the South African business environment can also offer vital opportunities for Kuwait in order to efficiently perform its range of trade activities. In relation to the major trading partners of South Africa, developed countries such as European Union (EU27), the United States and China have been identified as to be playing the leading roles as investors through FDIs in terms of export and import activities with South Africa. Contextually, the following statistical representation depicts the major trading partners of South Africa as listed during the year 2011 (United Nations Development Programme, 2011). Fig: Major Global Trading Partners of South Africa in 2011 Source: (European Union, 2013) In addition, legal aspects, exchange control statutory commitment of the industrial employers along with taxation policies and Value Added Tax (VAT) guidelines can also be taken into consideration as vital opportunities that are offered by the South African mining industry and can be availed by Kuwait through direct investment (KPMG Services Proprietary Limited, 2013). Conclusion and Recommendations In relation to the growing opportunity for investing in the foreign countries, it has been observed that the practice of FDI considerably supports both investor and recipient nations to improve their political and economic conditions which can also be observed with regard to Kuwait and South Africa. In this context, it will be highly beneficial for Kuwait to enhance the credibility of the country through investing in South African mining industry. The FDI initiatives to the mining industry of South African can facilitate a number of benefits to Kuwait in terms of strengthening its economic and political competitiveness. However, the government of Kuwait should also need to focus on various potential risks due to the extensive practice of FDI activities in varied industrial sectors of South Africa. In this regard, the government should highly prioritize the mining industry of South Africa which is strategically important to attain a significant return from the investments. In accordance with the FDI process, however, the practice can bring different challenges for Kuwait due to the changes in the South African political system. Moreover, the government should also ascertain adequate measures for strengthening the political relationship with South Africa in order to mitigate different future challenges. Moreover, an effective investigation regarding the exchange control mechanism, trade policies and taxation frameworks of South Africa can also provide adequate awareness to the Kuwaiti government before conducting its FDI processes. References Bernard, A. B., Jensen, J. B., Redding, S. J. & Schott, P. K. (2007). Firms in international trade. NBER Working Paper Series, pp. 1-29. Centre for WTO Studies. (2012). Trade policies & institutions, South Africa. Retrieved from http://wtocentre.iift.ac.in/FA/SOUTH%20AFRICA.pdf Deloitte Development LLC. (2009). Investing in South Africa. Retrieved from http://www.deloitte.com/assets/Dcom-SouthAfrica/Local%20Assets/Documents/za_tax_InvestinginSA_260509.pdf European Union. (2013). EU bilateral trade and trade with the world. Retrieved from http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113447.pdf KPMG Services Proprietary Limited. (2013). Investing in South Africa and Africa. Retrieved from http://www.kpmg.com/Africa/en/IssuesAndInsights/Articles-Publications/Press-Releases/Documents/China%20desk%20brochure_English2.pdf OECD. (2002). Foreign direct investment for development. Retrieved from http://www.oecd.org/investment/investmentfordevelopment/1959815.pdf PriceWaterhouseCoopers. (2012). SA Mine Review of trends in the South African mining industry. Retrieved from http://www.pwc.co.za/en_ZA/za/assets/pdf/sa-mining-2012.pdf South African Government of Information. (2012). South Africa and Saudi Arabia target R60 billion bilateral trade. Retrieved from http://www.info.gov.za/speech/DynamicAction?pageid=461&tid=66127 South African Embassy. (2013). What is the nature of the bilateral relations between SA and Kuwait in the political field? Retrieved from http://www.dirco.gov.za/kuwait/bilateral.html Tiwari, A. K. (2011). Economic growth and FDI in Asia: A panel-data approach. Economic Analysis & Policy, 41(2), pp. 173-187. United Nations Development Programme. (2011). Managing natural resources for human development in low-income countries. Retrieved from http://web.undp.org/africa/knowledge/working-natural.pdf United Nations. (2009). The role of international investment agreements in attracting foreign direct investment to developing countries. UNCTAD Series on International Investment Policies for Development, pp. 1-112. Read More