Political Sciene

Institutional Structures
Institutional Structure of Turkey
At a first glance, Turkey has a diversified economy, excellent infrastructure, and a legal and social structure of a developing nation. Proximity to Europe, integration with European markets, the external anchor of the European Union accession, and a lengthy track record of solid economic management and structural reform are the drivers of Turkey’s long-run prospects (World Bank, 2010). Turkey’s high degree of integration with the world economy, through both trade and financial channels, resulted in the country becoming vulnerable to the impact of the global recession, with the economy contracting by 4.7% in 2009. That being said, the economy has now recovered to pre-crisis levels with growth reaching 7% in 2010, shown to be a larger growth than almost all European counterparts. Despite the economic and political expansion in the last 10 years, Turkey’s battle with corruption, unemployment, income inequalities, and the Kurdish problem have been risk factors for any business that considers investing. According to corruption rankings, Turkey was ranked below South Africa, and tied for a spot with Cuba (Transparency International, 2010).
Sociopolitical Structure
Turkey is a parliamentary democracy with a free market economy. Since legal reforms instituted in 1926, Turkey 's judicial system has been based on the Swiss Civil Code, the Italian Penal Code, and the Neuchâtel (Swiss) Code of Civil Procedure. The 1982 Constitution guarantees judicial independence, and prohibits any government agency or individual from interfering with the operations of the courts and judges (Country Studies, 2010). The presence and the systematic implementation of these laws create an open path for Foreign Direct Investments; the intellectual property rights are also in favor of the proprietor. Despite a volatile past that included the Marmara earthquake and the 2001 financial crisis as the onset of the global economic slowdown in mid-2008, Turkey illustrated significant progress with regards to social and human development. Under-five mortality rates continued its striking, decade-long decline, dropping to 23.9 (per thousand live births) in 2008. Net enrolment rates in secondary school, often characterized as the “Achilles heel” of human development in the country, climbed steadily from 51% (2002) to 59% (2008). Similarly, poverty decreased from 27% in 2002 to 19% in 2007, and further decreases have likely materialized until mid-2008 (World Bank, 2010). Such poverty reduction was not merely achieved through the strong growth performance of the economy, but also due to a marked reduction in inequality in society; between 2003 and 2006, consumption inequality declined by more than 10% (OECD, 2010).
Despite these significant improvements and achievements, there are a numerous challenges that prevent Turkey from fully reaching its human development potential. Raising opportunities for its young people and women has always been an example of these challenges; Turkey’s female labor force participation rate is the lowest in the OECD member countries. Welfare disparities in the country remain large – between regions, between cities and the countryside, and for children from different socio-economic backgrounds.
Economic Structure
Turkey’s economy is still heavily dependent on agriculture and raw materials. Industries such as textiles, food processing, autos, electronics, mining (coal, chromate, copper, and boron), steel, petroleum, construction, lumber, and paper play a vital role in the economy. Since 2001, the Turkish government has displayed sound macroeconomic management with more or less comprehensive reforms of various aspects of the investment climate – including taxation, business registration, customs, FDI promotion, Research and Development, and labor legislation (World Bank, 2010). The depth and duration of the after-effects of the global turmoil are still uncertain; a number of investment climate areas emerge, which are crucial in making the Turkish business sector more resilient to future shocks, and more competitive, both domestically and internationally. Turkey’s GDP is $615.7 Billion, with GNI per capita of $8710, and its Inflation rate is down to a low 9%, where annually 75% Inflation rate was considered normal a few years prior. The recovery, which started in the second quarter of 2009, has remained strong during 2010. GDP growth is projected to exceed 8% this year, and remain above 5% in 2011 and 2012 as the post-crisis rebound of exports, consumption, and investment tapers off (CIA World Fact Book, 2010).
Despite the optimistic projections, access to finance - a negative development since 2005 believed to be the consequence of the credit squeeze in conjunction with the 2008-2009 global crises - is perceived as the most serious obstacle by Turkish firms. Tax rates and political instability are additional factors that are considered to be obstacles, not just for domestic firms, but more so for the foreign firms. Other important factors also include informal competition and an inadequately educated workforce. The unemployment rate that stands at 14% displays the lack of opportunities for the steadily growing Turkish population. Another notable detail is that Europe is the main destination of Turkish exports, which accounts for approximately 50% of the exports; however, the economic slowdown of European and global markets will continue to curb demand for Turkish exports. In addition, Turkey 's relatively high current account deficit, uncertainty related to policy-making, and fiscal balances leave the economy vulnerable to destabilizing shifts in investor confidence.
Institutional Structure of South Africa
Institutional Structure
South Africa is a case study in institutional contradiction. They have many of the traits of a legally, politically, and socially developed nation, yet they still must combat rampant crime, disease, and xenophobia. Their economy enjoys sustained GDP growth, along with considerable natural and demographic characteristics pointing to high growth potential, but it still faces vast income inequality, unemployment, currency instability and infrastructural underdevelopment, along with a host of other hallmark issues that developing economies must deal with. Essentially, especially due to its past of unequal development, South Africa is a developed-style economy stuck in the body of a developing nation (Background Note: South Africa, 2010).
Sociopolitical Structure
Rising out of years of apartheid, South Africa has emerged as a relatively politically stable democracy within one of the most politically unstable regions in the world ("Ibrahim Top Ten Index," 2010). This is partially due to South Africa’s lengthy and varied history of a strong rule of law based in Dutch civil law, English common law, and traditional South African customary law. A strong constitution and bill of rights, along with an independent judiciary, reinforces the rule of law (Mireku, 2007). These laws create a favorable environment for FDI, with rigid intellectual property protections and newly established growth incentives that reduce regulation (IFC/World Bank, 2010).
South Africa’s political stability also stems from its newfound democratic system of government. The notion of democracy hit the ground running in 1994. Including that year’s election, there have been four national elections since the end of apartheid, and their success has helped define the great democratic spirit that exists in South Africa today ("South Africa country profile," 2010). The nearly 80% of the population that had no enfranchisement prior to 1994 knows what they were missing, and that knowledge serves as an incentive to maintain democratic rule.
Despite systematic stability, South Africa is plagued by a host of developing-world societal problems. As a result of years of uneven development, an enormous gulf between the haves and have-nots exists, leaving South Africa with an unusually high GINI coefficient of 65 (The World Factbook, 2010). This inequality has numerous implications for the texture and substance of the country’s consumer market. It also affects the labor market tremendously. Because of the developed nature of the economy, there aren’t enough jobs to fulfill the needs of underdeveloped and undereducated workforce, resulting in widespread unemployment ("South Africa country profile," 2010). This unemployment yields an extremely high crime rate, with violent crime rates amongst the highest in the world, especially in the areas with high population density and poverty rates (Murder in RSA for April to March 2003/2004 to 2009/2010, 2010).
Also presenting a large obstacle towards societal development is the AIDS epidemic. It is an enormous strain on the health care system, and poses an equal or greater threat to the workforce as the education gap amongst workers (Bollinger & Stover, 1999).
Economic Structure
South Africa faces the paradoxical challenge of maintaining a developed economy, rich in natural resources and sound in its financial institutions, while dealing with a dizzying amount of developing-world problems.
Strengths of the South African market lie in its favorable business policies, its aforementioned natural resources, and its overall size, especially relative to the rest of Africa. The government has programs in place to reduce tax burdens to businesses, and to make starting and running a business within the market significantly easier and cheaper (IFC/World Bank, 2010). They have also drastically reduced tariffs and subsidies that have previously hampered FDI and general economic growth (Background Note: South Africa, 2010). South Africa also has the largest stock exchange on the continent, the JSE.
Natural resources play a large role in South Africa’s economy. They are the world’s largest producer of gold, platinum, and chromium, and they also possess ample diamond reserves, along with reserves of non-precious metals and other goods, with exports constituting 35.4% of GDP ("South Africa at a glance," 2009). This abundance of resources provides South Africa with a steady source of revenue, further strengthening their institutions and infrastructure.
South Africa has emerged as a regional economic power mostly because of the general size, and therefore viability, of the market itself. Other than Egypt, which has a categorically unfree society and thus an arguably lower ceiling on economic development, South Africa is the largest stable country on the continent, with a population of over 48 million ("South Africa at a glance," 2009). It also has the highest GDP per capita of any African country with a population over ten million, and its overall GDP of $276.4 billion is the highest of any country the continent, despite the fact that many of them are oil-rich. These statistics stand to further emphasize South Africa’s dominant position in the region and the general strength of its economy, especially its level of consumer spending (Seria, 2010).
The economic problems facing South Africa mostly consist of spillover from the societal realm. Issues relating to health, inequality, and unemployment create friction that slows the South African economy from reaching its full potential. These factors have led to circumstances that have caused many skilled and educated workers to emigrate from South Africa (Bhorat, Meyer, & Mlatsheni, 2002).
South Africa’s most pressing purely economic problem is infrastructure, not only overall, but also more recently focused on the energy sector. Eskom, the country’s national supplier of electricity, has been having trouble keeping up with demand since 2007, resulting in rolling blackouts (Bearak & Dugger, 2008). As a whole, South Africa’s infrastructure development, while superior to most of the region’s infrastructure, is well behind its economic development (Background Note: South Africa, 2010). This trend, however, has faced considerable efforts to bring South Africa’s infrastructure up to speed, mostly in the lead-up to and in the wake of the 2010 FIFA World Cup (Berg, 2010).
Comparison of Turkey and South Africa’s Institutional Structures
While analyzing both countries’ institutional structures, investors can perceive quite a few similarities; both nations, however, face a completely different set of problems and issues in regards to their economic growth. Both countries show sustained GDP growth, as well as considerable natural and demographic characteristics pointing to high growth potential. Given that both nations have a considerable young population, it is logical to construe that the populations are bedrocks to both nations.
In addition, sociopolitical structures also indicate similarities; both are democratic nations with a free market structure. A strong constitution and a bill of rights, along with an independent judiciary, reinforce the rule of law. These laws create a favorable environment for FDI, with rigid intellectual property protections, and newly established growth incentives that reduce regulation as well as encourage specific industries to invest. Conversely, both countries face a high percentage of unemployment, and both countries have gaps between the “haves” and “have not’s.” The high unemployment rates and large gaps across the income spectrum result in high violence in South Africa, whereas immigrating to developed European markets has been the choice of action for the unemployed Turks. South Africa has a greater death rate compared to Turkey and face a significant dilemma; the insufficiencies, if not the complete lack of, of the health care system pose a considerable threat towards societal development, and as a result of such a feeble health system, they have to face fatal epidemics, such as AIDS.
Economically, both nations create favorable business policies where reduced taxes and customs regulations encourage FDI in the respective economies. Natural resources seem to play a major role in South Africa’s economy, whereas the Turkish economy primarily depends on agriculture, textiles, and finished jewelry. South Africa’s population is lower compared to Turkey’s population; perhaps due to this fact South Africa has a higher GDP per capita, while the larger population in Turkey provides a larger pool of educated and skilled employees available in the economy. Moreover, both countries are strategically significant to their respective geographies, and both fully take advantage of their global positioning. Nevertheless, South Africa is still struggling with the shortcomings of their infrastructure; as South Africa grows economically, numerous demands could not be met due to insufficiencies within the infrastructure. On the other hand, Turkey’s economy has been benefiting from the systematic improvements to their infrastructure as well as from early foreign investments; both factors have helped the nation meet an international standards infrastructure.
Strategic Approaches
Strategic Approaches for a Multinational Firm Operating in Turkey
Doing business in Turkey is not for the fainthearted; although the ruling party has brought stability for the past 5 years, frequent political problems may cause frustrating delays. The presence of the Kurdish Party (PKK) is a constant political risk associated with Turkey, and the high unemployment, especially in the east, is a factor in the country’s economic risk. Although erratic events are anticipated in Turkey, long-term projections expect overwhelming positivity due to the current stable and predictable environment.
Especially for many medium-sized companies, traditional markets become more and more saturated, which creates the desire to expand into new areas with growth potential. Emerging markets, however, tend to function after their own set-of rules, which are different from the ones commonly accepted in the mature G7 countries. With its growing economy and young population, Turkey and the Eurasian region promises significant opportunities for foreign multinationals of satellite, broadcast, and cable technologies. The Eurasian region is also regarded as one of the world 's leading growth markets for communication technologies. As cliché as it sounds, Turkey is considered to be a “bridge” between Europe and Asia, and with its close proximity to both continents, Turkey thus offers an ideal trading platform. Turkey’s economy has also undergone major changes in recent years, resulting in a more stable and predictable environment. As such, Turkey will greatly benefit from these changes, becoming a major importer, as well as a supplier, and cooperation partner.
Institutional voids are minimal and rarely affect the operations in Turkey; because of this reason, multinationals can choose the joint venture or to merge with local Turkish firms in order to avoid investing in infrastructure or distribution. For example, Turk Telekom was the government-owned monopolistic Telecommunication operator; numerous foreign companies were interested in entering the Turkey but did not want to fully invest in a telecommunications operation. The investment was made through a joint venture; Saudi Oger eventually entered the market with a fully functional infrastructure and operations, reducing the start-up costs by buying 55% of the shares of Turk Telekom (Turk Telekom, 2010).
Turkey’s Information Technology (IT) market size is estimated to have reached $6.0 billion in 2008, and it’s predicted to increase an average 20% (Global Trade, 2009). The total Information Communication Technologies industry, including telecommunications, is estimated at $33.80 billion for 2011. With over 7 million personal computers in Turkey, and 17.5 million Internet users, PC sales are still the main driver of gross IT sales (Global Trade, 2009). The multinationals can take advantage by exporting PCs, considering the successful means of distribution. The IT market, on the other hand, faces more challenges, as this area of the market lacks technical infrastructure in comparison to telecommunications. As such, multinationals could directly enter the market by investing in infrastructure as well as the service aspect. The investment into the IT market will pay off firms considering the fact that the market lacks competition. Although this is an advantage, international firms might face a predicament with marketing their products to a consumer base they are not familiar with. The investing firms could form mergers with the existing telecommunication companies so as to take advantage of their pre-existing knowledge of the market and the Turkish consumers.
Digital television is already available in Turkey via satellite, and certain channels have begun to broadcast in High Definition (HD). This simply means that consumers will also need new products to complement the latest technological developments. The trend is already catching on, as most electronics stores now only offer plasma or LCD television options. The electronics market is quite competitive in Turkey; local companies such as BEKO, Arcelik, and Vestel produce high-end products that are competitive with multinational brands. Firms looking to enter the Turkish electronics market need to export their high-end products and maintain strong premium status, instead of entering the market by lowering their standards and lowering their prices to compete with local firms. Multinationals can take advantage of the governmental incentives for R&D and build a center in Turkey to further their advantage in the market with products more advanced than their competition.
Despite any strategy or any mode of entry plausible for multinationals, the one tenet firms must adhere to is carefully selecting the right marketing and brand image to appeal to the Turkish consumers. Ethics and strong national identity association are the strong points that should be included in the marketing efforts of the investing firms. Quite often, the marketing efforts involve a family background, or product associating itself with the national values. The firms in many cases localize their products to accommodate the large population of Turkish consumers; however, merely marketing these images are not enough. Considering the availability of a well-functioning market, the foreign investors can use local advertising and marketing firms, local distributors, and local warehouses to conduct their businesses in Turkey. Factories can be built by the firms in order to specifically package and customize products specific to the Turkish market, or continue with a joint venture to use the facilities of a domestic company to accommodate the Turkish market.
Strategic Approaches for a Multinational Firm Doing Business in South Africa
South Africa is a unique business environment that presents both obstacles that must be strategically navigated around and advantages that must be efficiently utilized in order to succeed in the market. These circumstances can be institutional, market structure-related, or cultural.
The majority of the notable strategic approaches for operating in South Africa are related to the governmental and economic institutions of the country. The government offers foreign investment grants to MNCs looking to enter the market. These grants are designed to encourage relocation of operations, capital, and research and development to South Africa by providing cash incentives to companies that do so (TradeInvest, 2007). In addition to cash incentives, the government also provides intensive advising programs to foreign firms looking to enter South Africa. Any MNC that wishes to thrive in the market must seek to take advantage of these programs.
MNCs must also take advantage of the vast number of tax incentives that South Africa gives to foreign companies. In the same vein as the foreign investment grants, South Africa’s Strategic Investment Program promotes new capital investment through generous tax credits on the development of those investments (LowTax, 2010). This institutional climate fosters the growth of foreign firms within South Africa, rather than their expansion into the market through mergers and acquisitions of existing local companies.
Foreign companies also have to consider which sectors are emerging in the South African market. Sectors with extraordinary growth potential include the auto industry, chemicals and pharmaceuticals, textiles, and ICT. All of these sectors benefit from favorable governmental policy and exploding domestic demand. MNCs with interests in South African growth sectors should look to target those market segments to gain a foothold in the South African market.
South Africa’s market and institutions also require certain adjustments beyond simply utilizing foreign investment incentives and entering high growth sectors. While doing business in South Africa is generally easy for MNCs, distribution is one operational area where independence within the market is limited by circumstance. Being that the channels of distribution are so fragmented throughout the country, especially in the poorer, less developed regions, hiring local distributors is advised. These domestic distributors can help not only with reaching poor rural consumers, but also in doing business with the government itself, as they are a large client/consumer for many industries, and their acquisition of goods and services is done mostly through South African domestic firms.
The government’s Black Economic Empowerment initiative creates a situation where black investment and employment must be considered. Any company looking to enter the market must consider this and make arrangements ahead of time in order to avoid compliance issues.
Cultural factors of South Africa also play a role. Careful consideration must be given to the dual-nature of the consumer market. South Africa’s upper economic classes have more purchasing power, and the lower economic classes have more untapped consumer potential. This large jump between the characteristics of consumer bases makes strong, accurate segmentation of a firm’s target markets is a must, as there are in many cases two sets of target markets to consider.
Finally, language and social structure is also an issue. A company would wise to hire local experts to help them navigate the myriad nuanced tribal and linguistic divisions in South African society.
Comparison of Strategic Approaches in Turkey and South Africa
The strategic approaches involved in operating in both of these markets have similarities and differences along institutional, economic, and cultural lines.
Both countries have strong legal and financial institutions that make them amongst the safest for investment in the developing world. Both offer significant incentives for foreign R&D, though South Africa’s market is generally more tax-friendly, with significantly more foreign investment initiatives. In Turkey, a company is better off entering via a merger or acquisition, whereas in South Africa, due to government policy, direct entry by expansion or relocation is preferable.
Turkey and South Africa have similar expanding sectors within their markets. ICT, mining, automotive, and textiles are all strong sectors for entry firms to target. Turkey also benefits from the petroleum industry, but has a weaker overall infrastructure than South Africa, resulting in extra cost and difficulties.
Culturally, the two countries are vastly different, and their respective cultural climates each require different types of approaches. Besides expatriates and a small Kurdish minority, Turkey is a fairly homogenous society, with income inequality that is relatively low, especially in comparison to South Africa. They exhibit a strong national sense, and marketing efforts appealing to that sense are usually successful. South Africans tend to divide themselves more along tribal and familial lines, and, on a larger scale, regional and pan-African lines. Traditionalism is large part of both cultures, and marketing towards that sentiment is also successful in both markets. South Africa, however, does present additional challenges because of the economic inequality of the market. Both sides of the coin must be considered more closely than in Turkey.
Market Attractiveness
Attractiveness of the Turkish Market
An emerging market on Europe’s doorstep, Turkey is privileged through a customs union with its largest trading partner, Europe, and ties to both the modern secular West and traditional Muslim Middle East. There are plenty of opportunities for domestic and multinational companies, as well as international investors. During the financial crisis that lasted from 2002 until 2008, the economy grew at roughly a 6% compounded average, at times achieving growth rates as high as 9% (New York Society of Security Analysts, 2010). Following a 4% GDP contraction in 2009, Turkey’s economy has resumed growth in 2010 at a rate of 4.5% according to Economist Intelligence Unit estimates, and the local market index has just about recovered the losses suffered from the 2008 high. Although Legatum Prosperity Report ranked Turkey 80th for FDI, Turkey is on the verge of achieving an investment –grade rating for the first time. There are currently over 23,000 international firms that have invested in Turkey, totaling approximately $20 billion annually (The Economist, 2010). This impressive investment track record for Turkey lies primarily in its educated citizenry, relatively low-cost labor, diversified economy, and privileged access to European markets through its customs union with the European Union.
Attractiveness for Foreign Firms and Investments
Although other Eastern European countries have similar advantages, and China’s low labor costs can’t be beat globally, Turkey’s large population and GDP make them a dominant competitor in the region, thus reinforcing the importance of the aforementioned advantages. Of the 73 million people that form Turkey’s population, 60% are under the age of 35, and approximately 450,000 students graduated from universities in 2009. Multinationals and investors are impressed by the fact that Turkey is the 16th largest economy of the world, and 6th largest among EU countries in 2009 (The Economist, 2010). Perhaps the combination of these factors played a role in UNCTAD’s World Investment Prospects Survey ranking Turkey as the 15th most attractive FDI destination for 2008-2010. By investing in Turkey, one obtains access to Europe, Central Asia, North Africa, the Middle East and the Caucasus. Doing Business data also presents a more positive image, with the number of days to import decreasing from 25 in 2005, to 15 in 2009. Doing Business indicators also reveal that Turkey compares more favorably relative to other emerging economies - the average for the region in 2009 was 18 days. Turkey has recently initiated numerous measures to simplify firms’ trading across borders, which is also quite noteworthy. Since October 2008, the e-transformation of customs offices has been implemented through the Computerized Customs Activity (BILGE) System, connecting 120 customs directorates and allowing over 95% of all trade transactions to be carried out electronically today (Invest.gov.tr, 2010). Additionally, build-operate-transfer agreements for renovation of border gates have been initiated with the private sector, as well as improved coordination between agencies and tasks involved in the customs clearing process (World Bank, 2010).
Access to land ownership is, in general, not perceived as a major problem by Turkish and international firms. Only 5 % of enterprises consider access to land to be a severe obstacle to operations. This is not only a significant development from the 20% response in 2005, but it also places Turkey in a positive international position. Turkey has also made improvements in the cost and time invested in constructions of business premises in order to encourage investment. According to the Doing Business‘ measure of the time involved in building a warehouse, Turkish firms have been able to shorten their site development time by 44 days between 2005 and 2009. Turkey is experiencing a growth in domestic credit to private enterprises, and a transition from a state-dominated financial system to one with more private sector involvement (World Bank, 2010). As mentioned in the Economic Structure section of the article, the financial system and the availability of credit is a topic of criticism in Turkey; however, in comparison to countries such as the Czech Republic, Romania, and Brazil, it is considerably less of an obstacle. Nevertheless, the financial sector in Turkey has yet to reach international development standards, regardless of its comparative advantage over the aforesaid countries. Despite being behind in financial standards, the Turkish banking sector has proven resilient to the effects of the global credit crisis.
Conversely, R&D spending has increased but is still lower than in competing countries. Overall investment in R&D has nearly doubled over the past ten years, reaching 0.73% of GDP in 2008 (World Bank, 2010). Realizing the deficiency in R&D investment, the government implemented new laws in March 2008, which provide an extensive incentive and fiscal policy program with the objective of reducing the R&D gap and encouraging economies of scale in the sector. The new R&D laws include features such as tax exemptions for R&D personnel, R&D and innovation expenditure discounts, social security payment deductions for R&D personnel, stamp tax exemption, and techno-entrepreneurship capital support for eligible recent university graduates (invest.gov.tr).
Firms in possession of quality standards tend to see a positive impact on productivity and competitiveness, thus attracting firms looking to invest. The number of applications for ISO 9001 in Turkey has remarkably increased since the 2001 crisis as well, with more than 13,200 certificates issued by the end of 2008, which grants Turkey superiority in this aspect in comparison to other countries (World Bank, 2010). The trends and data both indicate an increase in this number, with 30% of all Turkish firms in 2008 claiming to have an internationally recognized quality certification. This puts Turkey ahead of other middle-income countries, such as Brazil, Bulgaria, and Poland – 26%, 20%, and 17% respectively (World Bank, 2010).
In addition, use of external auditors by Turkish firms has increased notably since 2005; 55% of the firms currently have their financial accounts externally audited, compared to 42% in 2005 (World Bank). This has been interpreted as an improvement in access to bank finance for firms, and aided credit providers in their quest to assess firms’ abilities in meeting credit.
Attractiveness of the South African Market
At the forefront of a region whose domestic markets are rapidly expanding and whose levels of foreign direct investment (FDI) are constantly growing, South Africa’s market is at its most attractive level since the 1960s and 70s. This is true for both domestic firms and international companies and investors.
Doing Business in South Africa
From the perspective of both domestic and foreign firms, there are positive aspects and negative aspects that the South African market presents.
The Doing Business Project, a joint project between the International Finance Corporation and the World Bank that measures business regulation, ranks South Africa as 34th of 183 countries in ease of doing business. This makes it the second easiest country in Africa in which to do business, the first being the significantly smaller island nation of Mauritius. The ease-of-doing-business ranking measures factors such as starting a business, obtaining construction permits, property registration, credit availability, investor protection, tax-related factors, contract enforcement, international trading from within the market, and closing a business. Of these factors, South Africa scores strongest in its ease of obtaining credit and its excellent protection of investors through transparency and disclosure (IFC/World Bank, 2010).
This combination of a favorable business climate, a large domestic market, and strong economic and political institutions arguably makes South Africa the most attractive market on the continent, and potentially one of the most attractive throughout the world. Domestic entrepreneurs only need 22 days to start a business, with the cost being equally as low. While this ranking, 75th out of 183, is actually relatively low compared to most OECD countries, and in those markets would potentially drive domestic entrepreneurs abroad, in sub-Saharan Africa, this is well above average, and it ends up encouraging South Africans to start businesses.
Entering South Africa as a Foreign Firm or Investor
According to the CIA’s World Factbook, South Africa ranks 27th in the world in total FDI, with a total of $125 billion, almost twice that of the next highest-ranked African country, Nigeria at 42nd (The World Factbook, 2010). This high level of foreign investment activity is made possible by both inherent market structure conditions and favorable policies of the government towards business, and more specifically, FDI.
The market characteristics that encourage FDI have mostly been touched on already. South Africa has strong financial and governmental institutions that promote confidence amongst investors. These investors have much to gain from the market, especially considering the low level of investment risk. This has much to do with the country’s large population, and in turn its large consumer base. Also previously mentioned were South Africa’s vast natural resources and relatively developed infrastructure, both of which in conjunction provide for a much more attractive investment opportunity than any other market in the region.
Much of South Africa’s market attractiveness comes from pro-business governmental initiatives and policies. As previously stated, credit flows easily within the country, second in rank worldwide only to Malaysia, and considered on par with industrialized markets such as Hong Kong, the United Kingdom, and New Zealand (IFC/World Bank, 2010). Foreign firms in South Africa face few restrictions on which market sectors they can enter, and no caps on the amount of foreign nationals they can employ within the country. They also enjoy various tax and tariff incentives, such as exemptions from value added taxes on exports and from duty on capital good imports. Multinationals are also aided through expedited license and permit procedures, and government-provided advising on how to succeed in the South African market (Oti-Prempeh, 2003). South Africa is also placing a heavy emphasis on using public money to achieve development that will promote private business, such as infrastructure investment and industrial development (Ajayi, 2008).
Securities investment is also fairly attractive in South Africa because of policies and institutions. Foreign investors pay no capital gains taxes (Oti-Prempeh, 2003), and the JSE Limited, South Africa’s stock exchange, is the 16th largest in the world (City of Johannesburg, 2010).
Negatives
Negative factors of investing and doing business in South Africa can be broken down along sociopolitical and economic lines. Sociopolitical issues that face foreign and domestic investors in South Africa include high crime rates, low levels of post-secondary education, huge inequality between the rich and poor, and overall low workforce health driven by the AIDS epidemic (Philp, 2008).
The poor education and health situation in South Africa is the most pressing sociopolitical issue. Poor education puts a relatively low ceiling on the overall level of skill that can be attained by the workforce. The workforce’s poor health, especially of those in their prime working years, further cripples an already underperforming labor market. A close second in concern is the inherent underdevelopment of South Africa’s consumer due to income inequality.
Despite the South African economy’s relative regional strength, there also exist various problems associated with their economic structure. The rand, their national currency, is fairly weak and highly volatile. There is more outbound FDI coming from the country than inbound FDI coming into the country, raising doubts about domestic commitment to the market (Oti-Prempeh, 2003). Additionally, while trade out of and into South Africa is easier and cheaper than for most other countries in the region, if considering South Africa as an international hub or headquarters for a multinational firm, there should be considerable concern over the cost and process associated with trade across the country’s borders (IFC/World Bank, 2010).
Overall Level of Attractiveness
In summation, South Africa is one of the more attractive markets in the world, possessing many of the creature comforts of doing business in the developed world, with much of the room for growth that is pushing multinational firms to invest in developing countries.
Coca-Cola in Turkey and South Africa
Localization of Coca-Cola in Turkey
The Turkish Soft drink/beverage sector is one of the leading industries in Turkey, constituting an imperative portion of the country’s GDP. Turkey’s young population, dynamic private sector economy, substantial tourism income, and favorable climate are among the strengths of the industry. In absolute volume terms, Turkey was the third strongest growing soft drinks market in the world in 2009, generating 1.6 billion liters of new business, according to data from Euromonitor International.
Given Turkey’s infrastructural and economic advantages in Eastern Europe and Eurasia, Coca-Cola decided to invest in Turkey in 1965. Eventually, Coca Cola became the market leader, and a well-recognized brand within the country, due to the vast localization and brand development efforts by the company. Furthermore, Coca-Cola has undertaken considerable measures to localize production, distribution, marketing, hiring, and overall operations within Turkey, and to expand its Turkish operations across Eurasian geography in the future.
Coca-Cola Entry and Localization efforts
Coca Cola entered the Turkish beverages market in 1964 by investing in İstanbul Meşrubat Sanayi A.Ş (İMSA); its first plant was built in Istanbul in order to supply its bottling and production. At that time, Coca Cola used local distributors, but the infrastructure was limited, thus the distribution was only limited to Istanbul and the Marmara region. Large and centralized sales points were nonexistent; small convenience stores called “bakkal” served as the neighborhood markets. The local distributors knew the locations of these “bakkals” in the city, and Coca Cola fully utilized these local means of distribution to get to the local consumers. Nevertheless, the introduction of the product was a brilliant marketing attempt; “Coca Cola Caravans” had a parade consisting of 19 trucks and marching bands through the major urban neighborhoods attracting by-passers, and most importantly, the young crowd. Two weeks after the parades, Coca Cola thanked the public for their interest via every newspaper, by publishing a full-page length note, in Istanbul, stating that they will “do everything in their power to keep them refreshed and satisfied.” With regards to promotions, Coca Cola was a market forerunner at the time; it introduced the “look under the cap” concept into the contemporary Turkish culture, giving cash and prizes. In 1965, in attempts to advertise their product, Coca Cola regularly got advertisement spots on television and radio with the slogan of “the best refresher.” Promotions were heavily used in the beginning years of the investment to get the public to associate “refreshment” with Coca Cola, as the soft drink market lacked any type of brand-competition at the time. During the factory’s first year anniversary, 6 Volkswagen Beetles were given to the public through different promotions. (Coca Cola Turkiye, 2010)
Coca Cola’s first stab at localization of the product occurred in 1966 when they introduced the 1 Liter “Family Size” bottle. Aware that most families ate dinners together and that a regular household generally consisted of 4 family members, it was a terrific decision. In 1968, Coca Cola built a plant in Izmir, the second largest city in Turkey at the time, and formed a joint venture with a local bottling company to start up IMBAT, which served the Aegean. In addition, the same promotional paths were followed as the initial promotions in Istanbul. Coca Cola further localized in Turkey by means of advertisement; local major orchestras were asked to compose a jingle for Coca Cola, and unsurprisingly, the winner was awarded with cash rewards. In 1969, Coca Cola launched their third plant in Adana, the third largest city in Turkey at the time. Once again local bottlers and distributors were utilized, this time to service the Mediterranean and the Southwest region of Turkey. The 1970s, however, were difficult times for the Turkish economy, and the purchasing power of the consumers were drastically reduced. Despite the conditions, Coca Cola did not increase prices, and continued promoting prizes that included trips abroad and cash prizes. By the late 1970s, plants and local distributors were able to serve all the major cities and regions in Turkey. In the 1980s, Coca Cola introduced different products to the public, which included the introduction of Fanta, Schwepps, and Diet Coke. Three more plants were opened in the strategic locations in the country to expand production and distribution - the major plants were capable of producing one million bottles a day. The massive production line led to the exporting of the bottles to Saudi Arabia and Kuwait; in 1989, the profits from exports were $10 million. By late 1990s, Coca Cola had 10 plants in Turkey, with 3000 local employees; these plants were the largest Coca Cola plants in Eastern Europe, and since 1989 Coca Cola invested $247 million for improving and advancing their plants. (Coca Cola Turkiye, 2010)
Also, Coca Cola merged with the local Anadolu Holding in order to further develop its distribution channels and production line. This was the biggest merger to date for Coca Cola in Turkey, with Anadolu Holding owning 40% of the shares. Furthermore, Coca Cola ventured into purchasing bottled water brands Turkuaz and Bonaqua (Coca Cola Turkiye, 2010). Instead of introducing a new brand, they adhered to the existing brand names to take advantage of the brand loyalty. In addition, localizations continued when Coca Cola entered the tea and tea-beverages market, as Turkey ranked 4th in annual per capita tea consumption, 5th in dry tea production, and 7th in tea cultivation by area in the world (Corporate Information, 2009). Coca Cola considered this a momentous opportunity given the vast consumption as well as the market potential.
For 30 years, Coca Cola planted the seeds of localized operations throughout Turkey; however, the turning point came in 2002, as Coca Cola combined all of its bottling and production operations in Turkey into one wholly-owned subsidiary called Coca Cola İçecek AS (CCI). CCI’s core business is to produce, sell, and distribute sparkling and still beverages of The Coca-Cola Company (Coca Cola İçecek AS, 2010). CCI bottles and distributes a number of The Coca-Cola Company brands of soft drinks and beverages, including Coca-Cola, Coca-Cola Zero, Coca-Cola Light, Fanta, Sprite, Sen Sun, Schweppes, Canada Dry, Cappy, Piko, BonAqua, Turkuaz, Powerade, Nestea, and Burn.
Coca-Cola İçecek (CCI) turned into the 6th largest bottler in the Coca-Cola System in terms of sales volume. CCI currently employs approximately 9,000 people, almost all local, and has operations in Turkey, Pakistan, Kazakhstan, Azerbaijan, Kyrgyzstan, Turkmenistan, Jordan, Iraq, and Syria, as well as exports to Tajikistan. Coca Cola successfully transferred its knowhow regarding localization and entry strategies to CCI; it currently has a total of 20 plants, and offers a wide range of beverages to a consumer base of approximately 350 million people. CCI’s shares are traded at the Istanbul Stock Exchange under the CCOLA.IS ticker, and its depository receipts are traded at the London Stock Exchange under the CICE.LI ticker. (Coca Cola İçecek AS, 2010)
Localization of Coca-Cola in South Africa
Coca-Cola has been active in South Africa since 1928, and today they stand as one of the most dominant and recognizable brands in the country. The South African market represents about 40% of the African market as a whole, with a per capita average of 235 beverages consumed a year, significantly higher than the world average of 77 ("Coca-Cola moves Africa HQ to Jozi," 2006).
Given South Africa’s various infrastructural and economic advantages over the rest of the continent, it’s no wonder that Coca-Cola has built such a large, well-recognized brand inside the country, especially considering the vast localization and brand development efforts on the company’s part. Ever since building their first plant in Johannesburg upon their entry into the market, Coca-Cola has undertaken considerable measures to localize production, distribution, marketing, hiring, and overall operations within South Africa.
Operations
Basically every aspect of Coca-Cola’s operations in South Africa is localized, at least to some extent (Moore School of Business Division of Research, 2005). As previously mentioned, they built their first bottling plant in 1928 in Johannesburg. Seventy-eight years later, their African headquarters followed them to Johannesburg from Windsor, UK, with Alex Cummings, President of Coca-Cola South Africa, saying, “now is the right time for us to move our base to Africa, and Johannesburg is the location of choice.” With the move of the corporate headquarters to Africa come another 60,000 employees to facilitate the company’s operations in the region.
Localized production has obviously seen tremendous expansion in South Africa since 1928. Overall, Coca-Cola works with four main local bottling companies in the country. Not only do these four companies serve all the needs of the South African market, which Coca-Cola has regionally and culturally segmented, dividing the segments amongst the bottlers, but from South Africa they also export to markets throughout Southern and East Africa, along with select markets in Asia (Coca-Cola, 2010). In October 2009, Coca-Cola announced that they were going to open a $54 million plant for the Valpre water brand in Heidelberg. This plant is a great example of localization in South Africa because it is a joint venture with bottler Coca-Cola Shanduka, a company with 70% black ownership (Erasmus, 2009).
The best example, however, of the massive scale of Coca-Cola’s production localization is their partnership with Amalgamated Beverage Industries, whose production accounts for about 60% of Coca-Cola’s sales in South Africa. These sales reach approximately 40,000 customers per week, serviced by five highly advanced manufacturing plants.
Coca-Cola’s distribution also takes an extremely localized profile in South Africa. Distributors themselves often start off as local, independent enterprises, sometimes even beginning as home businesses that become integrated into Coca-Cola’s business operations (Moore School of Business Division of Research, 2005). This includes both wholesalers and retailers.
The localization of retail distribution presents itself in a particularly South African flavor. Small shops called ‘spazas,’ along with numerous other small, rural retailers, are fully supported by and integrated into Coca-Cola’s system of production and distribution (Moore School of Business Division of Research, 2005). Coca-Cola has found a way into facets of the South African market that no other large MNC has been able to penetrate, and as a result, they’ve established a dominant level of brand recognition within the market, amongst all South African consumers, urban and rural, and rich and poor alike (Irwin, 2001).
Coca-Cola’s commitment to localized distribution is characterized by their efforts to improve infrastructure throughout South Africa (though improved distribution isn’t their only motivation behind this, as will be discussed further ahead). This has further engrained the company into the culture of South Africa (Moore School of Business Division of Research, 2005). Beyond the development of production and distribution infrastructure, though, is Coca-Cola’s commitment to human development, which, for the most part, especially recently, has focused on combating HIV/AIDS, educational development, and improving water sources for rural areas (WASH news Africa, 2010).
Marketing
On the surface, while certainly commendable, Coca-Cola’s aforementioned human development investment doesn’t seem to speak to localization efforts. It leads us, however, to the next area where Coca-Cola localizes its South African business model: marketing. Their various acts of good corporate citizenship are one of the main reasons that Coca-Cola has such strong brand recognition, and in turn such a stranglehold on the South African market (Buckley, 2009-2010). Corporate social investment, or CSI, works as a form of “soft marketing,” humanizing the company in the eyes of the consumer market (Buckley, 2009-2010).
Coca-Cola’s CSI strategy doesn’t only fall into the category of human development. Investment in South African entrepreneurial development is a large part of their CSI platform, along with considerable athletic investment (Irwin, 2001). They run a nationwide soccer league to help development young talent, further entrenching their brand amongst South African youth (Coca-Cola South Africa 2010).
The sport of soccer is a huge part of Coca-Cola South Africa’s marketing plan. Further highlighting their localization strategy, since the late 1990s, Coca-Cola has employed South African advertising agency Sonnenberg Murphy Leo Burnett. SMLB developed the plan of linking the Coca-Cola brand to soccer, which is one of South Africa’s national pastimes (Irwin, 2001). Coca-Cola even went so far as to become a major sponsor of the 2010 FIFA World Cup in South Africa. This included everything from massive amounts of advertising, both for their own products and for the games themselves, to sponsorship of concerts and documentary films (Coca-Cola, 2009).
Coca-Cola’s localization of advertising in South Africa is generally extensive. Utilizing soccer in advertising is just one element. CCSA invokes wholly South African concepts in their ad campaigns, such as seriti, or community respect, on which a series of commercials were based (Irwin, 2001).
Overall, marketing efforts within South Africa are mostly homegrown and localized, in all four phases of the marketing mix. Place has already been discussed in Coca-Cola’s development of spazas and other South African traditional vending establishments. The price is significantly low enough in South Africa to make it popular even amongst the poorest citizens. Their promotion strategy was outlined above. Products within the South African market are also localized, with brands developed exclusively for South Africa such as Schweppes Twist, Stoney Ginger Beer, Sparletta, and Iron Brew, along with bottled water brands like Bonaqua, Pump, and Valpre (Coca-Cola, 2010).
Hiring
Coca-Cola’s hiring practices within South Africa are highly localized. With a workforce that is over 63% black, CCSA is renowned for their utilization and development of local talent from all social classes. Nearly 80% of CCSA’s management staff has been previously considered ‘disadvantaged’ at some point. Through their management-development program Kusile, they aggressively seek young South African talent to develop for management roles, not only for employment at CCSA but for positions throughout Coca-Cola’s worldwide corporate structure (Best Employers, 2010).
An inherent parameter set forth when doing business in South Africa that makes Coca-Cola localize is the government’s Black Economic Empowerment initiative. This initiative presents a series of codes and scoring criteria for a company’s levels of equal opportunity employment and business ownership, with set compliance targets. CCSA routinely posts high marks on these scorecards, branding them as one of the best companies to work for in South Africa (Best Employers, 2010).
In summation, Coca-Cola South Africa’s hiring practices are localized both through mandated necessity and a desire to best harness the local talent pool.
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