Wal Mart S Foreign Direct Investment Into South Africa Essay

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Foreign Direct Investment Project in South Africa

South Africa is a largely free-market economy that encourages foreign investment in private and public sectors. The country is an attractive option for foreign direct investment since it has a transparent regulatory framework, political stability, easy access to raw materials, and a large population. Foreign direct investment (FDI) can be defined as investment made by a business organization or company based in one country into another company or business organization that is based in another country. As a result, the company making direct investments usually has significant control and influence over the one into which the investment is made. An example of a foreign direct investment project is Wal-Mart's merger with Massmart, which enabled Wal-Mart to establish a foothold in a huge consumer market in Africa.

Wal-Mart's Merger with Massmart

As previously mentioned, a good case of a foreign direct investment project is Wal-Mart's merger with Massmart, which was approved in 2011 (Maylie, 2012). Wal-Mart, which is an American-based company decided to acquire a majority stake in Massmart Holdings Ltd., which is one of the most successful companies in the retail and consumer products industry in South Africa. As the largest single company worldwide, Wal-Mart's decision to merge with Massmart was regarded as a vote of confidence in South Africa's future.

The origin of Wal-Mart's merger with Massmart can be traced back to September 2010 when the American-based firm offered to buy Massmart group. This initial offer was soon rejected and a 51% stake in the South African company was then offered for R16.5 billion. The second offer would permit the South African firm to remain listed on the Johannesburg Stock Exchange (Alexander, 2012). The Competition Commission initially approved the acquisition unconditionally in February 2011. However, following appeals by the several trade unions in the country, a lawsuit was filed against this merger. This lawsuit was fueled by belief that the Competition Tribunal did not critically consider some important issues like Wal-Mart's effect on labor prior to the unconditional approval of the acquisition. Moreover, the legal proceedings were also fueled by increased controversies and debates regarding public interest when considering Wal-Mart's proposed acquisition of Massmart.

Following numerous legal proceedings, the deal was ultimately approved though some conditions were imposed on the two companies. Actually, the competition authorities signed off this merger with several caveats for the two entities. Wal-Mart and Massmart agreed to freeze jobs cuts for the first two years and invest $13.37 million in supply-chain training initiatives to enhance the local industry's competitiveness (Maylie, 2012). In addition, the two companies agreed to comply with collective bargaining agreements with trade unions for three years. These conditions were geared towards ensuring Wal-Mart's smooth entry into South Africa as well as promoting the public interest of South Africans (Maylie, 2011). This implies that the conditions were deemed necessary and sufficient to ease the concerns of the potential impact of Wal-Mart's acquisition of Massmart.

Despite the numerous hurdles and issues that emerged in the acquisition process, the American-based company was pleased that competition authorities in South Africa recognized the potential benefits of the merger. This merger also presented significant opportunities for Wal-Mart to expand its operations given that Massmart operates in more than 10 sub-Saharan countries though most of its stores are located in South Africa. The merger provides a good case of foreign direct investment with regards to challenges encountered and opportunities offered by such business initiatives with regards to expansion into foreign markets and industries.

South Africa's Attractiveness

Wal-Mart's decision to acquire Massmart was considered as a vote of confidence in South Africa, which has emerged as an attractive option for foreign direct investment in the continent. South Africa is quickly developing as an attractive place for foreign investments because of several factors including political stability, huge population, transparent regulatory framework, and enhanced access to raw materials (Santander Trade Portal, 2016). Given these factors, the country has the potential to remain attractive to foreign investors as compared to other countries across the globe, especially those in the African continent. While South Africa has had a relatively poor historical record in attracting foreign direct investments, recent trends have indicated improved conditions and attractiveness because of new infrastructural investments.

One of the factors that have played a major role in increased attractiveness of South Africa to foreign investors is the recent introduction of policies that encourage foreign direct investment by South African policymakers.

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These efforts have contributed to increased foreign direct investments in mergers and acquisitions such as the deal between Wal-Mart and Massmart. During the 2008-2009 global financial crisis, the country's foreign direct investment declined but has since recovered to exceed R60 billion as shown in Figure 1 below. Together with Nigeria, South Africa has accounted for a huge portion of foreign direct investments in Africa with investments of more than $10.3 billion.

Figure 1: Flow of Foreign Direct Investment

Foreign Direct Investment

2012

2013

2014

FDI Inward Flow (million USD)

4,559

8,300

5,712

FDI Stock (million USD)

163,510

152,123

145,384

Number of Greenfield Investments

FDI Inwards (in percentage)

6.1

11.3

8.1

FDI Stock (in percentage of GDP)

41.1

41.5

41.5

Source: UNCTAD

Foreign investors consider South Africa as an ideal investment location because of its huge market potential, improved infrastructure, and a fair competitive local economy. The recent economic reforms have enhanced the attractiveness of South African as an investment destination through creating macroeconomic stability and reducing taxes and custom charges. However, the profitability of business entities that make direct investments into South Africa is threatened by various weaknesses including high regulation of the labor market, complex import-export procedures, and increased crimes and corruption. Furthermore, the perceived mismanagement of the economy by the ruling party has contributed to some decline in the flow of foreign direct investments into South Africa (Mosia, 2012).

Critical Examination of the Currency

Even though South Africa has a large and active stock exchange that makes it attractive to foreign investors, it has relatively weaker currency as compared to the American dollar. In the past decade, South African Rand has experienced several issues that have impacted it exchange rate to the dollar. The rand/dollar exchange rate has specifically been affected by various issues within the last 10 years i.e. since the beginning of 2007. During this period, rand has been in a weakened position due a series of local events that have had significant economic impact. Some of these local events include increasing debt, energy issues, and socio-political unrest (Bronkhorst, 2012). The 2007 power crisis by Eskom generated major issues in telecommunications and mining industries and eventually resulted in huge production cuts as well as closures of mines. The South African rand was affected by Eskom's power crisis as its value increased from slightly above R6 to the American dollar in 2006 to more than R7 to the American dollar in 2007 as shown in Figure 2 (Bronkhorst, 2012).

Figure 2: Rand to $1-2003 -2012

Source: Business Tech

South African currency has also been affected by international events such as the recent European sovereign debt crisis that also affected the global economy. This event was an extension of the 2008-2009 global financial crisis or recession that generated financial problems to global markets including South Africa. Therefore, the currency has always been under extreme pressure from both local and international events, especially those with direct economic or financial impact.

In the past few years, the rand/dollar exchange rate has slightly increased despite the various economic issues facing the country. The South African rand is currently exchanging at the rate of 0.065 to the American dollar, which represents a 0.14% increase as compared to the previous trading sessions. This exchange rate plays a crucial role in foreign direct investments because it's an indicator of the country's economic status and growth. As evident in this merger, one of the most important factors that influenced Wal-Mart's decision to acquire Massmart is the exchange of the South African currency to the American dollar. Actually, despite trade liberalization initiatives and fluctuations in exchange rates, the percentage of Massmart's direct imports has remained extremely stable and constant overtime (RBB Economics, 2011).

Generally, foreign direct investments are affected by several factors including the real exchange rate, stability of the exchange rate, and inflation rates (Kariga, Ngobeni & Ngobese, 2012). Despite numerous economic challenges in the recent past, South Africa has seemingly had stable exchange rates and inflation rates, which influenced Wal-Mart's foreign direct investment decision into the country. These stable exchange and inflation rates have been brought by robust fiscal policies by the government, which have helped strengthen South Africa's economy and enhance its attractiveness to foreign investors.

In addition to fiscal policies by the government, South Africa's exchange rates have been determined by local and international events with direct impact on global ad/or local economy......

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