Investing in China and South Africa - Case Study Example

INVESTING IN CHINA AND SOUTH AFRICA, A COMPARATIVE VIEW By Introduction Multinational companies seekto invest in profitable ventures in foreign markets so that their international is guaranteed success. Today, the world has been divided into different economic abilities with the least beneficiaries of these economics being the developing nations. The other category is that of the emerging markets and the most advanced is the developed world. Most companies have expressed concern and interest in investing in the emerging markets because of their efficiency and future prospects. However, it is necessary to discover the fact that there are countries in the developing world that suits have an economical advantage just like the emerging markets. As long as a product remains viable in a market, a company has to try and keep it as relevant and appealing as possible. International platforms in trade and investment are dictated by the Foreign Direct Investment (FDI) theories that would be discussed to ascertain the market continuity for a product (Ho, 2007, p. 20). This paper seeks to compare and contrast the trade attributes of China and South Africa as far as investment is concerned. In view of this, it will discuss the positive attributes of investing in South Africa and China as well as those of investing in China. Investing In China Positive Attributes China is one of the fastest growing emerging markets in the world. With the enormous population, economic pundits believe that this economy is set to keep progressing and in time, it is bound to overtake the USA. FDI in China is not even and is unevenly spread across the states. China has a largely manufacturing sector and therefore has attracted a high level of FDIs. In 2010, the economic statistics of China were found to be overwhelming. This is summarized below: Aspect Of Economy Value Gross Domestic Product (PPP) 10.08 trillion GDP (Real Growth Rate) 10.46% GDP Per Capita $7,518 Unemployment Rate 4.5% Inflation Rate (CPI) 4.9% Source: Mike, 2012 From the above data, it can be deduced that there are some advantages of investing in China. The first advantage is that the country has got; A Strong Economic Growth Over the past two decades, the country has recorded a very high single digit growth. This has made it the fastest growing economy in the world at the moment. The above statistics are for 2010 and that was one of the foundations upon which the development of the country was laid (Mike, 2012, p. 31). Apart from having FDI policies that support development of more industries, the country economy has all been self-driven and progressive. Rising Global Status The amount of US debt held by China is very significant. The country is poised to become the largest economy in the next few years because of this growing sway which is seen by investors as a positive show of development. Progressive Urbanization The country, for the first time in its history had the urban population becoming more than the rural population in 2011. It is worth noting that the urbanization of the country is one issue that singlehandedly led to the development of the country. A perceived increase in this statistic is therefore positive for the country. Changing Political System China is a communist state. However, most of the leaders that are coming to take over power and leadership positions are educated in the west. This means that there are significant changes from communism to democracy over the years and this may be good for the future investors. Negative Attributes China equally has negative attributes of investing in it. One of the dangers of investing in China is that most of the large companies are state owned and therefore entry into the market would mean playing second tier to these large well sponsored and state regulated companies. These, according to the monopolistic advantage theory are stronger than the private owned multinational companies. The second problem that is likely to be incurred in China is the changing demographics. The country has had a growing population and with the one child policy, there is likely to be a change in the demographics mix meaning that there might be no more young cheap labor as it was before. China does not have a strong social stability status between the different classes of people. There are rapid capital flaws where the rich earn more than 25 times more than the less rich. Moreover, the political demographics indicate that the west is feeling the effects of the post war baby boom (Yadong, 2011, p. 371). This has spurned unequal developments and FDI investments as can be seen from the statistics as presented in the China statistical year book. Region Share of FDI by % Northern 11.02 North Eastern 6.42 Coastal 71.28 Southern 4.54 Western 1.98 South Eastern 4.76 Share of FDI index by region Source: Chinese National Bureau of Statistics Investing In South Africa Just like any other country in the world, investment in South Africa would be highly dependent on availability of the economic statistics that support the day to day development of the different sectors of the economy. South Africa has a direct link with the emerging markets because it is the largest economy in Africa and its GDP has progressed to an all-time high of just over $400 billion. This is in spite of the country having gone through just two decades of democracy after high level restrictions from the international community due to apartheid. As of 2012, the GDP growth rate was standing at 2.6% and the GDP per capita at $8,078. The GDP per sector is diverse and the FDI wishing to invest in this economy can consider the viability of the specified sector of interest. Sector % of the economy Agriculture 2.5 Industry 31.6 Services 65.9 Source: South Africa Bureau of Statistics (2014) The consumer price index inflation rate at the moment also stands at 5%. As seen from the table above, the service industry is the most dominant meaning that it is the most developed. The industry is guided by the fact that there are minerals in the country but the contribution to the GDP has dropped from 21% in the earlier years to just 6% in 2011 (Cyndee, 1993, p. 54). This is an area that is undergoing a drop and needs to be fixed meaning that the country is still attracting more investment in the sector whereby the government owned mining companies are seeking support from the private sector. Positive Attributes South Africa has an easing employment rate. The implication of this sis that there will be low labor cost pressure and a competitive sophistication just required for any FDI company planning a re-investment. By global standards, the unemployment rate in the country has been 25% which is fairly high. However, the last ten years have seen a relative reduction in the rate of unemployment and a furtherance of this to extended investment is that the pent up economic activity unleashed bodes well for the future of the economy of the nation and the investors. A Healthy Banking System As indicated in the above table, the country has a powerful banking sector which sees to it that financial aspects are control. This is in contrast to the political apartheid period that was quite unpredictable. The financial risk controls, the foreign exchange systems and the settlement systems which have aided the international investment banking have become quite pivotal I the latest economic development contribution. Strong Growth Rate The country is still targeting an economic growth rate of 3.5% which, to a greater significance is higher than some developed markets. This has been enhanced by a transition period by the political system of the market. From the apartheid system, the country has made it possible to integrate into the international system through providing support for the international companies. The strong growth rate has been related to the strong political and economic policies. One such policy is where the mines in the country have been left to the private sector as opposed to the nationalization of these companies (Lin & Rosenblatt, 2012, p. 14). Negative Attributes South Africa, as far as economic attributes are concerned is ever on the rise. However, there are several negative attributes of investing or re-investing in South Africa. The first drawback is that the country has very many inequality issues arising causing a political risk. From a statistical perspective, blacks only earn an average of 9% of what the whites earn. Moreover, there have been so many immigrants who move to the country looking for better opportunities in life. The latest and most volatile situation was the xenophobic attacks that rocked the whole country when the natives became insecure about their chances of landing jobs due to an extreme upsurge of foreigners in the country. Another political situation is that the country has not fully recovered from the apartheid issues and there are still greater levels of resentment for foreigners. This would practically interfere with the FDI objectives. Other reasons why it may not be an attribute re-investing in South Africa are: There is a high sensitivity to the European economic climate which is an issue that does not favor European and possibly American companies. Most of the current focus is on Asia and especially china. There is a high vulnerability in production due to the aspect of there being lack of investment by the locals and the foreigners may in the long run be seen as dominating the investment market. This would still lead to aspects of inequality issues. High levels of unemployment( currently at 25%) which leads to frequent demonstrations, criminal climate and the general effect is whereby the prices have become very vulnerable. Similarities and Differences South Africa has a strong comparison with the other markets, especially with the emerging markets and in some objective situations, with the developed markets. To specifically compare to the Chinese situation, these two countries could both be considered emerging markets. These two countries have a high access to affordable and accessible capital, the sophistication of the financial markets, the business tax rates and the infrastructure. Moreover, these two countries also fair very poorly on labor availability cost and education (Yadong, 2011, p. 374). Due to the extreme demographic situations in both countries, there are high levels of technological hiccups and development. However, the levels of invention are at greater levels. In 2010, South Africa was found to have the second most sophisticated financial market and the second lowest effective tax rate. Other aspects of the infrastructure at that time were relatively considered to be better than china. The FDI as a percentage of the GDP ranked South Africa at the seventh position, just close to the Chinese statistics. In absolute contrast, South Africa has one of the worst manual labor forces in the world. This manual labor is also more expensive than that of china in spite of it being such ineffective. In terms of education, which supplies labor force in the market, where South Africa spends just more than 4% of its GDP, the matriculation level is very poor. This is way behind the Chinese aspect. Compared to china, South Africa has; A low domestic market Low rates of savings and investment due to political uncertainties Severe infrastructural bottlenecks such as power blackouts in spite of its service industry being considered developed. References Africa, S. S. (2014, February 25). Economic Growth. Retrieved March 09, 2014, from Statistics South Africa : http://beta2.statssa.gov.za/?page_id=735&id=1 Cyndee, M. (1993). Marketers waiting for South Africa to stabilize before investing there. American Marketing Association, 27(23), 34-77. Ho, A. (2007). Importing, Exporting and Investing in China. World Trade, 20(3), 20. Lin, J. Y., & Rosenblatt, D. (2012). Shifting Patterns of Economic Growth and Rethinking Development. Washington: Office of the Chief Economist, The World Bank. Mike, C. (2012). Facts about China: ECONOMY & GDP 2011-2012. Retrieved March 8, 2014, from China Mike: http://www.china-mike.com/facts-about-china/economy-investment-business-statistics/ Statistics, N. B. (2012). China Statistical Yearbook 2012. Hong Kong: China Statistics Press. Yadong, L. (2011). Strategic responses to perceived corruption in an emerging market: lessons from MNEs investing in China. Business and society, 50(2), 350-387. Read More