Foreign direct investment in South Africa is steadily increasing as the government encourages more international companies to set up shop. The economy, along with related exchange traded funds (ETFs), may have seen some growth in the second quarter, but the country is still tackling some basic problems.

Simon Venables, partner at PricwaterhouseCoopers, on FinancierWorldWide talks about doing business in South Africa.

  • South Africa has emerging market and developed market characteristics. The government encourages foreign investments and has also committed spending to maintain and upgrade the country’s infrastructure. [Africa ETFs: Dogged by the Past?]
  • Manufacturing is a major component of the economy. The country’s leading business cycle indicator increased by 25% between March 2009 and May 2010. South Africa’s sovereign debt rating has also steadily risen to investment grade status.
  • The mining sector will likely be the top performer since South Africa enjoys a large reserve of natural resources.
  • South Africa’s financial sector was not crippled like many developed economies, and access to finance is improving corporate and retail markets.
  • Volatility in the global markets, low employment levels and weak GDP growth are affecting the country’s IPO market. However, a couple of new IPOs have surfaced.
  • The Companies Act enacted in 2008, along with its regulations, will become effective within the next 12 months. This new act will change the legal and regulatory environment of corporations in South Africa.
  • Foreign companies are obligated to allow certain rights to South African employees, including the three key statutes: the Labour Relations Act (LRA), the Basic Conditions of Employment Act (BCEA) and the Employment Equity Act (EEA).
  • The South African business environment is seen as entrepreneurial, with an emphasis on growth and broad participation by the country’s citizens.
  • Recent government policies have been focused on fiscal and monetary discipline, which is seen in lower inflation, low budget deficit and stable and strong currency. The Industrial Policy Action Plan has also provided incentives to industries.
  • A proposed headquarter company regime will allow foreign companies to set up shop in South Africa without significant tax exposure, encouraging long-term investments.

Drawn out strikes, corruption in trade deals, rifts in the African National Congress concerning media reforms and continued electricity blackouts are things to watch out for in South Africa, reports Jon Herskovitz for Reuters. Other structural problems may be remedied by government spending, but that route runs the risk of higher inflation and higher deficits. [South Africa ETFs: World Cup Afterglow?]

South Africa’s purchasing managers’ index (PMI) crossed 50 for the first time in three months in August, writes Nasreen Seria for BusinessWeek. Manufacturing accounts for 15% of the economy. Output dropped as the European economy slowed and reduced its demand for South African exports. The South African economy grew 3.2% in the second quarter. The employment sub-index rose to 48.3 from 47.6 in July, but joblessness is still hovering at a very high 25.3%.

For more information on South Africa, visit our South Africa category.

  • iShares MSCI South Africa Index (NYSEArca: EZA): up 12.4% in the last three months

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.