Foreign Direct Investment: A Case Study of the Limitations …gsblibrary.uct.ac.za/ResearchReports/2012/Wales.pdf · · 2013-06-27Foreign Direct Investment: A Case Study of the

Copyright UCT

Foreign Direct Investment: A Case Study of the Limitations of the South African Government’s

Approach and Response to the Wal-Mart/ Massmart Merger.

A Research Report

presented to

The Graduate School of Business

University of Cape Town

In partial fulfilment

of the requirements for the

Masters of Business Administration Degree

By

Alexis Tamsen Wales

December 2012

Supervised by: Professor Mills Soko

Copyright UCT

1. [Type text] Page ii

Plagiarism Declaration

1. I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend

that it is one’s own.

2. I have used the APA convention for citation and referencing. Each significant

contribution and quotation from the works of other people has been attributed,

cited and referenced.

3. I certify that this submission is all my own work.

4. I have not allowed and will not allow anyone to copy this essay with the intention of

passing it off as his or her own work.

NAME: Alexis Tamsen Wales

EXAM NUMBER: 243

Signature: DATE: DEC 2012

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page iii

Abstract

This paper examines the events surrounding the proposed Massmart – Wal-Mart merger of 2011-

2012, exploring the diverse stakeholder groups and their often conflicting interests as well as the

legislative and policy environment affecting the merger. It is hypothesised that South Africa

suffers from some systemic problems, brought to light by this case, which may discourage future

FDI in South Africa. Secondly, it is hypothesised that a single, cohesive and above all

consistently applied policy towards mergers such as this one is needed urgently if South Africa is

to receive the FDI flows that it so desperately needs. These hypotheses are tested in a series of

lengthy guided interviews with members of the various stakeholder groups, which are then

synthesised into a cohesive theory on which a future policy solution might be constructed. The

practical output of this research is a potential FDI policy framework, drawn from the existing

international literature, along with some potential amendments for the local context.

Keywords: Wal-Mart/ Massmart Merger, Competition Policy, Industrial Policy, FDI, FDI

Ideologies, Wal-Mart, Massmart, FDI Policy

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page iv

Acknowledgements

This report is not confidential and may be used by the Graduate School of Cape Town for further

research.

Thank you to my supervisor, Professor Mills Soko, for his valuable insight and constant

guidance.

I would like to express my gratitude to all interviewees for taking the time to answer my

questions.

I would like to thank my family and friends for their continued support throughout this year.

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page v

Contents

Abstract ........................................................................................................................................................ iii

Acknowledgements ...................................................................................................................................... iv

Contents ........................................................................................................................................................ v

List of Figures ............................................................................................................................................ viii

List of Tables ............................................................................................................................................... ix

Abbreviations Used ....................................................................................................................................... x

1. CHAPTER 1: INTRODUCTION ......................................................................................................... 1

1.1 Purpose of Study ........................................................................................................................... 1

1.2 Research Area and Problem .......................................................................................................... 1

1.3 Central Hypothesis ........................................................................................................................ 2

1.4 Research Questions ....................................................................................................................... 2

1.5 Research Assumptions .................................................................................................................. 3

1.6 Research Ethics ............................................................................................................................. 3

2. CHAPTER 2: LITERATURE REVIEW .............................................................................................. 5

2.1 Definition of FDI .......................................................................................................................... 5

2.2 FDI Ideologies .............................................................................................................................. 6

2.3 South African FDI Policy ............................................................................................................. 7

2.4 Definition of Industrial Policy ...................................................................................................... 8

2.5 South African Industrial Policy ..................................................................................................... 9

2.6 South African Competition Law ................................................................................................... 9

2.7 The Importance of FDI to South Africa ...................................................................................... 10

2.8 Overview of the South African Retail Sector ............................................................................. 12

2.9 Overview of Wal-Mart ................................................................................................................ 12

2.10 Wal-Mart’s Entry into Other Countries ...................................................................................... 13

2.11 Wal-Mart’s Effect on Local Competitors ................................................................................... 14

2.12 Overview of Massmart ................................................................................................................ 15

2.13 Overview of Merger .................................................................................................................... 19

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page vi

2.14 Major Stakeholder Concerns ....................................................................................................... 21

3. CHAPTER 3: RESEARCH METHODOLOGY ................................................................................ 23

3.1 Research Approach & Strategy ................................................................................................... 23

3.2 Methodology ............................................................................................................................... 24

3.3 Data Collection Methodology ..................................................................................................... 25

3.4 Research Criteria ......................................................................................................................... 26

3.5 Data Analysis Methodology ........................................................................................................ 27

3.6 Limitations of Study ................................................................................................................... 27

3.7 Delimitations ............................................................................................................................... 28

3.8 Informed Consent and Research Ethics ...................................................................................... 29

4. CHAPTER 4: RESEARCH FINDINGS ............................................................................................. 30

4.1 Differing Ideologies .................................................................................................................... 30

4.2 Other Retailers Competitive Environment .................................................................................. 33

4.3. What Happened ........................................................................................................................... 34

4.3.1. Initial reactions to the proposed merger .............................................................................. 34

4.4. Controversial Conditions ............................................................................................................ 35

4.4.1. Competition Law, Industrial Policy and the Public Interest ............................................... 36

4.4.2. The Competition Tribunal ................................................................................................... 38

4.4.3. The Supply Chain Fund ...................................................................................................... 39

4.4.4. Reinstating the 503 Workers ............................................................................................... 40

4.4.5. Government Involvement ................................................................................................... 41

4.5. Post judgement ............................................................................................................................ 42

4.5.1. Unions ................................................................................................................................. 43

4.5.2. Retailers .............................................................................................................................. 43

4.5.3. Others .................................................................................................................................. 43

4.6. The Aftermath – FDI Implications .............................................................................................. 44

5. CHAPTER 5: CONCLUSION............................................................................................................ 46

6. CHAPTER 6: RECOMMENDATIONS ............................................................................................. 48

7. CHAPTER 7: SUGGESTIONS FOR FURTHER RESEARCH ........................................................ 49

Bibliography ............................................................................................................................................... 50

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page vii

Bibliography of Legal Documents .......................................................................................................... 53

Appendix 1: Research Plan ......................................................................................................................... 54

Appendix 2: Interview Questions ............................................................................................................... 55

Appendix 3: Core Principles for Investment Policymaking for Sustainable Development ........................ 59

Appendix 4: Structure of the National Policy Guidelines ........................................................................... 61

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page viii

List of Figures

Figure 1: Different Stakeholder Ideologies ................................................................................................. 30

Figure 2: Stakeholders’ Initial Reactions to Merger ................................................................................... 34

Figure 3: Stakeholder Reaction to Policy Implementation ......................................................................... 36

Figure 4: Stakeholder Reaction to Competition Tribunal ........................................................................... 38

Figure 5: Stakeholder Reaction to Supply Chain Fund ............................................................................... 39

Figure 6: Stakeholder Reaction to Reinstating the 503 Workers ................................................................ 40

Figure 7: Stakeholder Reaction to Government Involvement ..................................................................... 41

Figure 8: Stakeholder Reaction to Post Judgement..................................................................................... 42

Figure 9: Stakeholder Reaction to the Aftermath ....................................................................................... 44

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page ix

List of Tables

Table 1: Structure of Massmart ................................................................................................................... 17

Table 2: Timeline of Wal-Mart & Massmart Merger ................................................................................. 18

Table 3: Strengths and Weaknesses of Documentation and Interviews ...................................................... 28

Table 4: Table of Stakeholders ................................................................................................................... 31

Copyright UCT

1. FT2012- MBA Research Report- Alexis Wales Page x

Abbreviations Used

Aids Acquired Immune Defeciency Syndrome

AsgiSA Accelerated and Shared Growth Initiative for South Africa

BEE Black Economic Empowerment

Cifra Grupo Cifra

COSATU Congress of South Africa Trade Unions

DTI Department of Trade and Industry

EED Economic Development Department

FAWU Food and Allied Workers Union

FDI Foreign Direct Investment

FI Freedom of Investment Model

GEAR Growth, Employment and Redistribution

HIV Human Immunodeficiency

ISD Investment for Sustainable Development Model

LSM Living Standards Measure

Massmart Massmart Holdings Ltd.

MNC Multinational Corporation

NGP New Growth Plan

NUMSA The National Union of Metal Workers South Africa

OECD Organisation for Economic Co-operation and Development

RDP Reconstruction and Development Programme

SA South Africa

SACCAWU South African Commercial, Catering and Allied Workers Union

SACTWU South African Clothing and Textile Workers Union

SMME Small, Medium and Micro Enterprise

UFCW United Food and Commercial Workers

US United States of America

Wal-Mart Wal-Mart Stores Inc

Copyright UCT

2. FT2012- MBA Research Report- Alexis Wales Page 1

1. CHAPTER 1: INTRODUCTION

South Africa, like most developing economies, stands to benefit enormously from foreign direct

investment (FDI), however the process is rarely simple. Conflicting interests can quickly arise

where proposed FDI looks set to benefit one sector at the expense of another, or when some

stakeholder groups feel they will be marginalised. In the context of a young developing economy

and a sometimes brutally unequal society, FDI propositions are bound to stir up complex issues

and fierce debate.

These complexities were sharply highlighted during the 2011/2012 proposed Wal-Mart –

Massmart merger, the acquisition of a local low-cost retail giant (Massmart) by the world’s

largest retailer (Wal-Mart Stores Inc). The proposed merger was investigated by the Competition

Commission, brought to the Competition Tribunal for judgement, and then brought before the

Competition Appeals Court on appeal. All the while the process was dogged by allegations of

government interference, negligence on the part of the Commission and of serious threats to jobs

and job security in the retail sector.

This paper explores the different dynamics at play during the merger review by capturing the

views of the different stakeholder groups and then using their criticisms to construct a framework

for future FDI proposal negotiations. It is hoped that by exposing the conflicting interests and

airing these differences of opinion, this research might point towards a possible policy solution

that can reconcile these diverse needs.

1.1 Purpose of Study

The two primary purposes of this study are to examine the dynamics of Wal-Mart’s entry into the

South African market and to critically assess the responses of the South African government to

the situation as it evolved. This study will identify the problems experienced during this process

with a view to developing recommendations regarding how these problems might be addressed,

in the hope that it will assist South Africa in securing future FDI.

1.2 Research Area and Problem

In September 2010, Wal-Mart made an offer to purchase 51% of Massmart Holdings Ltd.

(Massmart), a South African retail company (Cronje, 2012). Almost two years later, this merger

Copyright UCT


was approved; however the process was tainted by protests from major South African unions and

some highly controversial actions by various government departments. In particular, the

Department of Economic Development behaved controversially, not only by trying to impose

protectionist measures, but also by entering into private negotiations with both Massmart and

Wal-Mart separately. According to Cronje (2012, par. 10), “the controversial merger generated

unnecessary and ill afforded investment uncertainty.”

Taking the above into consideration, it is clear that South African government responses and

policies need to be amended and structured to better maintain and attract FDI. Business Unity

South Africa (2012) has stressed the importance of finalising “the rules and regulations affecting

all forms of investment and acquisitions” to ensure that a predictable and reliable business

environment is created for foreign direct investment to take place (Cronje, 2012, par. 10).

1.3 Central Hypothesis

The central hypothesis of this paper is that the events surrounding the Massmart/ Wal-Mart

merger demonstrate some significant systemic problems that will discourage future FDI in South

Africa. These systemic problems arise from the sometimes confusing interrelations between

different stakeholders outside of the parties to the merger itself: several government departments,

competing firms and trade unions. The secondary hypothesis of this paper is that a single,

cohesive and above all consistently applied policy towards mergers of this nature is sorely

lacking, and this should be addressed if FDI flows into South Africa are to improve in the future.

1.4 Research Questions

The study will tackle nine core research questions:

1. What is the history of Wal-Mart’s entry into foreign countries?

2. What is the objective of Wal-Mart’s expansion into South Africa (and in Africa in

general)?

3. What is Wal-Mart’s entry strategy into South Africa?

4. What is the history of FDI in South Africa?

5. What are the current South African FDI policies?

Copyright UCT


6. What were the opinions/ responses/ reactions of the different stakeholders (government

departments, competing firms and trade unions) to the possible/ actual entry of Wal-Mart

into South African Market?

7. What mistakes were made in the government’s approach to Wal-Mart’s entry and in

response to other stakeholders?

8. What lessons can be drawn from these mistakes?

9. Is it possible for the government to construct a policy that will prevent these mistakes

from recurring and improve future FDI transactions?

1.5 Research Assumptions

During this research the following assumptions were made:

I. All interviewees would answer the questions truthfully without any ulterior motives.

II. Given the sensitivity of the case, interviewees would not be as forthcoming as they would

otherwise be.

III. The persons involved in the merger would be unaware of the impact of their choices i.e.

they were not operating with a hidden agenda.

IV. All sources of information were objective.

V. All interviewees had a fairly deep understanding of the facts of the case.

1.6 Research Ethics

According to Orb, Eisenhauer & Wynaden (2001, p.93), “difficulties inherent in qualitative

research can be alleviated by awareness and use of well-established ethical principles,

specifically autonomy, beneficence, and justice.” During this research assignment, these

principles were adopted in order to maintain an ethical stance in all situations.

The principle of autonomy was embraced by ensuring that the interviewees provided informed

consent – they fully understood the terms under which they shared information, and knew

exactly what was going to be done with that information. As consent should be constantly

negotiated, it was ensured that interviewees were often asked whether they still understood and

were comfortable with how the information that they gave will be used (Field & Morse, 1992

cited in Orb, Eisenhauer & Wynaden, 2000).

Copyright UCT


The second principle which was embraced was that of beneficence. This principle ensures that

throughout the research and in the conclusion thereof, it only did good and did not harm any

persons (Orb, Eisenhauer, & Wynaden, 2000). By adhering to this principle, it was ensured that

the people that selected for interviews were able and had agreed to be interviewed. It also

ensured that all interviewees particulars were kept confidential, unless they gave explicit

permission to use the information that they had shared.

The last principle adhered to was that of justice. The principle of justice acknowledges the

vulnerability of all participants involved in the study which the research should respect – it was

ensured that all participants were treated with respect and that their vulnerability was never

exploited (Orb, Eisenhauer, & Wynaden, 2000).

Copyright UCT


2. CHAPTER 2: LITERATURE REVIEW

2.1 Definition of FDI

Durlauf & Lawrence (2008) define foreign direct investment (FDI) as the physical investment

made by a company, based in one country, into another country. The country making the

investment is known as the resident country and the country receiving investment is known as

the host country. The Organisation for Economic Co-operation and Development (OECD)

furthers this definition, and describes FDI as:

“A category of cross-border investment made by a resident in one economy (the direct investor)

with the objective of establishing a lasting interest in an enterprise (the direct investment

enterprise) that is resident in an economy other than that of the direct investor. The motivation of

the direct investor is a strategic long term relationship with the direct investment enterprise to

ensure a significant degree of influence by the direct investor in the management of the direct

investment enterprise...Direct investment may also allow the direct investor to gain access to the

economy of the direct investment enterprise which it might otherwise be unable to do…Direct

investment includes the initial equity transaction…and all subsequent financial transactions and

positions between the direct investor and the direct investor and the direct investment” (OECD,

2008a, p. 19).

FDI can further be separated into four categories (OECD, 2008a):

I. Mergers and acquisition. This involves the purchase of an existing company (OECD,

2008a).

II. Greenfield investments. This type of investment is completely new and tends to result in

the building of new factories and other types of infrastructure (OECD, 2008a).

III. The extension of capital. This involves the expansion of existing companies through

additional investments (OECD, 2008a).

IV. Financial restructuring which is that type of investment that relates to debt repayment

or loss reduction (OECD, 2008a).

Of the four categories, the most popular form is mergers and acquisitions. This type of FDI

normally results in the creation of a multinational corporation (MNC), a single corporation that

operates in more than one country (Mwilima, 2003). According to the South African

Copyright UCT


Competition Act (1998), a merger occurs when one or more firms acquire direct or indirect

control over the whole or part of the business of another firm (Kruger, 2012). The lease or

purchase of shares can also result in the merger.

A MNC acquisition can be further classified as horizontal or vertical integration according to its

production output. Horizontal integration involves the acquisition of plants in a variety of

geographical areas producing the same product. Vertical integration involves different plants

producing different outputs and sometimes supplying these outputs as inputs to the other

factories (Helleiner, 1989). A third category was defined by Caves in 1996, which combines both

vertical and horizontal integration, known as international diversification. These different

categories are integral to understanding FDI as they indicate the strategic motives of the

acquiring companies. Horizontal integration can be an indication that the acquiring company is

trying to stifle competition (Gregoriou & Renneboog, 2007) while vertical integration is

attractive should two companies wish to utilize each others’ resources and products to increase

profits and decrease costs (Sormani, 2001).

2.2 FDI Ideologies

South African stakeholders are divided between two FDI ideologies namely the Freedom of

Investment Model (FI) and the Investment for Sustainable Development Model (ISD).

The FI model assumes that all “investment is good, and that all investment promotes

development” (Davies, 2012, p. 1). This essentially means that policy related to investment

should “liberalise their investment regimes, reduce or limit regulations and conditions on

investors, and in so doing, realise the benefits of FDI” (Davies, 2012, p. 1).

The ISD model is viewed as being slightly protectionist. According to Davies (2012, p. 1) “the

Investment for Sustainable Development Model (ISD) approach recognises that while FDI can

make a positive contribution to sustainable development, the benefits to host countries are not

automatic.” This makes it necessary for certain regulations to be put into place that not only

protect the interests of the investor, but also ensure that the entrance of the investor makes a

positive contribution to the host country (Davies, 2012). They believe that the benefits that come

with FDI should be included in the necessary policies and not taken for granted.

Copyright UCT


2.3 South African FDI Policy

South Africa has a relatively open economy and a fairly liberal FDI policy. However, this has not

always been the case. Economic reforms only happened after the 1994 elections, once the

Apartheid regime came to an end. At this point, South Africa was hungry for FDI to fund

economic growth and eventually address severe poverty and unemployment problems (National

Treasury, 2011). This realization resulted in the removal of exchange controls and the opening of

the capital account. South Africa also began engaging with the World Trade Organisation, the

European Union, Mercosur and the European Free Trade Association (Gonzalez-Nunez, 2010).

It was also at this time that the government began to implement the Reconstruction and

Development Programme (RDP) as a strategy to improve social imbalances and economic

problems (OECD, 2008b). However the RDP was soon replaced by the Growth, Employment

and Redistribution (GEAR) strategy in 1996. GEAR effectively managed to improve the

macroeconomic situation; however, the severe social problems in South Africa still remained. To

address these problems the Accelerated and Shared Growth Initiative for South Africa (AsgiSA)

was launched (OECD, 2008b). In 2006, the South African government began to focus on the

different sectors, such as the banking sector, through the Customer Sector Programmes (Fridge,

2006).

Although these programmes managed to improve South Africa’s situation slightly, there were

still huge structural problems ranging from poverty to unemployment. This resulted in the

introduction of the New Growth Plan (NGP) of 2010 (National Treasury, 2011). The NGP aims

to:

I. Create 5 million jobs over the next ten years,

II. Implement a number of micro-economic and macro-economic policies including a more

competitive exchange rate, a lower cost of capital and an African development fund,

III. Proposed wage controls and,

IV. Skills development (SA Government's New Growth Plan, 2010).

However, despite South Africa’s liberal approach to FDI and the many policies that it has

implemented to attract investment, the country does not have a specific FDI policy or legislation

Copyright UCT


(Coetzee, Daniel, & Woolfrey, 2012). According to the National Treasury (2011, p. 23) the

problems with the FDI policy include:

I. “The regulation of sensitive cross-border mergers and acquisitions is opaque and relies in

part on exchange control rules on the structure of transactions rather than a clear

statement of public interest objectives and process.

II. Approvals for the re-domiciling or cross-border restructuring of South African companies

have been considered on a case-by-case basis and the framework for assessing public

interest has lacked transparency.

III. Policy towards inward investments in strategic industries or companies is not well-

defined, with a need for greater harmonisation with sectoral regulations affecting both

domestic and foreign investors.”

Coetzee, Daniel & Woolfrey (2012, p. 29) believe that this has led to the “inconsistent

application of preconditions...which contributes to a perceived lack of clarity in the country’s

stance towards foreign investment”.

2.4 Definition of Industrial Policy

The definition of industrial policy is vague and open to interpretation. For this purpose, a good

working definition evolves from the World Bank (1993) that defines it as an attempt by the

government to change industrial structure in order to promote productivity based growth.

Industrial policy is divided into two sections namely horizontal policies and vertical policies.

Horizontal policies are formed to influence the whole of the economy and there tends to be a

strong relationship with macroeconomic agendas. Vertical policies are sector, industry or

company specific. This type of policy is often criticised as it can adversely affect competition

(Geradin & Girgenson, 2011).

Industrial policy instruments are divided between structural and monetary measures. Monetary

measures involve a transfer of funds and structural do not. Monetary include various forms of

subsidies and structural include regulatory measures, tariff and non-tariff barriers etc (Geradin &

Girgenson, 2011).

Copyright UCT


2.5 South African Industrial Policy

The South African National Industry Policy Framework (2007) has the following objectives:

I. “To facilitate diversification beyond our current reliance on traditional commodities and

non-tradable services. This requires the promotion of increased value-addition per capita

characterised particularly by movement into non-traditional tradable goods and services

that compete in expert markets as well as against imports.

II. The long term intensification of South Africa’s industrialisations process and movement

towards a knowledge economy.

III. The promotion of a more labour-absorbing industrialisation path with a particular

emphasis on tradable labour absorbing goods and services and economic linkages that

catalyse employment creation.

IV. The promotion of a broader based industrialisation path characterised by greater levels of

participation of historically disadvantaged people and marginalised regions in the

mainstream of the industrial economy.

V. Contributing to industrial development on the African continent with a strong emphasis

on building its productive capabilities” (Department of Trade and Industry, 2007, p. 2,3)

An important dynamic about this policy is that it is not a blueprint, but rather a framework.

Although this framework attempts to improve the growth and employment aspects of the South

African economy, its primary objective is to improve “the relatively low-skill intensity industry”

(Department of Trade and Industry, 2007, p. 3).

2.6 South African Competition Law

According to Smit (2005) the primary objective of competition law is to correct market failures

and regulate mergers through the provision of an appropriate framework. In the developing

countries, including South Africa, the competition authorities also seem to have a certain amount

of influence in developmental goals which includes public interest considerations (Hartzenberg,

2002). As South Africa has had a past that has encouraged a huge gap between those that are

wealthy and those that are not, the Competition Commission also aims to redress South Africa’s

history of economic inequality and support broad based growth (Roberts, 2004).

Copyright UCT


The primary objective of the legislation is thus to “promote and maintain competition”

(Competition Act, 1998, Section 2). Other objectives include:

1. Providing competitive prices and product choices for the consumer (Competition Act,

1998, Section 2a) and “markets in which consumers have access to, and can freely select,

the quality and variety of goods and services they desire” (Competition Act, 1998,

Preamble).

2. Preventing those trade practices that may undermine a particular economy (Competition

Act , 1998, Preamble).

3. Establishing independent institutions to monitor economic competition (Competition

Act, 1998, Preamble).

4. Adhering to international law obligations (Competition Act, 1998, Preamble).

The developmental objectives include:

1. Promotion of employment and the advancement of social and economic welfare of South

Africans (Competition Act, 1998, Section 2c).

2. Ensuring small and medium enterprises have an equitable opportunity to participate in the

economy (Competition Act, 1998, Section 2e).

3. Promotion of a greater spread of ownership in particular to increase the ownership stakes

of historically disadvantaged persons and to provide all South Africans with an equal

opportunity to participate in the economy (Competition Act, 1998, Section 2f).

4. Regulation of the transfer of economic ownership in keeping with the public interest

(Competition Act, 1998, Preamble).

These goals are diverse which ensures that all stakeholders are made provision for in the

competition law and process (OECD, 2003). Although this in many ways is beneficial, it also

increases the possibility of conflict and inconsistency of application as stakeholders often have

different interests (OECD, The Objectives of Competition Law and Policy, 2003).

2.7 The Importance of FDI to South Africa

Foreign investment in South Africa is mostly comprised of foreign capital flows – this free-

flowing money can leave the country easily, and sudden capital flight can wreak havoc with the

economy, as could be easily observed during crisis in South East Asia in 1997/1998 and the 9/11

Copyright UCT


attacks where money fled South Africa almost overnight. FDI involves far greater commitment

and therefore should provide South Africa with stable foreign capital inflow. This creates a

surplus on the financial account on the balance of payments which makes up for the deficits in

the current account. Unfortunately, this has not been the case in South Africa where the

expansion of domestic businesses abroad have ensured the capital outflows remain higher than

inflows, hence causing a huge deficit in the current account (Jensen, 2002).

Host countries benefit from FDI in a multitude of ways. According to Lall (1980), MNE’s can

improve and help in the production of facilities, provided technical assistance and information,

increase innovation and provide training. FDI can also create links and connections between the

host company and the foreign companies’ affiliates (Lall, 1980).

Vickers further explains the benefits of FDI and believes that it supports:

I. “The transfer of knowledge, technology and management skills.

II. Moving an economy away from primary exports towards higher levels of beneficiation,

and thus supporting the integration of South African firms into global value chains.

III. Skills training and development.

IV. Black economic empowerment (BEE) in terms of real ownership and participation in the

economy.

V. Promotion of small, medium and micro enterprise (SMME) development, whether

through joint ventures or subcontracting and outsourcing of non-core activities.

VI. Reducing monopoly power in South Africa by creating more competition and

enforcement of current competition legislation.

VII. Corporate social responsibility through commitment to ethical investment, together with

sound labour and environmental practices.

VIII. Fostering HIV/ Aids awareness and treatment” (Vickers, 2003, p. 20).

Taking the above into consideration, it is clear that FDI is becoming increasingly important in

the economic growth of less developed countries like South Africa. It assists at both a

macroeconomic and microeconomic level, and brings new capital for investment and contributes

to the balance of payments. FDI also provides a source of savings that can be used to increase

investment and, in so doing, increase economic growth. (Asafo-Adjei, 2007).

Copyright UCT


2.8 Overview of the South African Retail Sector

South Africa has a growing population of approximately 50 million people which in turn

supports a burgeoning retail sector (Pickelsimer, 2010). In 2010, retail sales totalled R600

billion (Whitehouse & Assosciates, 2011), and as South African infrastructure is relatively

modern, it allows for the easy transportation and distribution of goods (Pickelsimer, 2010). The

retail market is dominated by a few major supermarkets including Woolworths, Shoprite, Pick ‘n

Pay and Massmart (Pickelsimer, 2010). South Africa has a unique consumer base where 4% of

the total population earns approximately 39% of the total personal income (Whitehouse &

Assosciates, 2011). The majority of personal income is earned in the Gauteng, KwaZulu-Natal

and the Western Cape provinces, and these three provinces together account for two thirds of the

total for the country.

The retail food sector has experienced excellent growth since the end of Apartheid in 1994. The

global recession of 2008 had almost no effect on the growth of the retail sector and in 2009, the

retail sales actually grew by 5%. Convenience stores drive South African retail sales and there

has also been an increase in sales in food court vendors and street kiosks. This climate of growth

has created many opportunities for foreign companies (Pickelsimer, 2010).

The food and beverage market in South Africa is sophisticated and supplied by both imported

and local products. The South African retail market is dominated by hypermarkets which sell a

large amount of consumer goods and are situated in shopping centres and malls (Pickelsimer,

2010). The major retail chains have an advantageous position and are able to control buying

negotiations with suppliers (Whitehouse & Assosciates, 2011). These retail chains provide

serious competition for local retailers as these big brands can procure at low cost and sell

products at lower margins and enjoy a far higher turnover (Pickelsimer, 2010). Smaller formal

retailers can access their products through agents and distributors, and informal retailers and

spaza shops get inventory from wholesalers such as Makro (Whitehouse & Assosciates, 2011).

2.9 Overview of Wal-Mart

Wal-Mart is the world’s largest retailer with annual net sales revenue of over US$400 billion

(Wal-Mart and Massmart Merger, 2012). Since 1985, Wal-Mart has been the leading retailer in

the United States of America and has four different types of stores: discount stores, supercentres,

warehouse clubs and deep discount warehouse outlets (Rocha & Dib, 2002). By 2005, Wal-Mart

Copyright UCT


had stores in the United States, Argentina, Brazil, Canada, China, Costa Rica, El Salvador,

Germany, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, South Korea and the

United Kingdom (Basker, 2007).

The company’s core business model is based on providing the lowest cost products to their

customers (Halpete & Park, 2008). According to their website, Wal-Mart realises the

significance of price to its customers irrespective of their geographical location. It aims to

provide the best quality products at the lowest prices (About Us, n.d.).

Wal-Mart’s 2011 Financial Reports state that the company had net sales of US$419 billion, an

operating income of US$25 billion and free cash flow of US$11 billion (Wal-Mart Annual

Report, 2011). Wal-Mart’s revenue exceeded South Africa’s gross domestic product which was

US$408 billion in 2011 (StatsSA, 2012).

2.10 Wal-Mart’s Entry into Other Countries

Wal-Mart began expanding outside the United States in 1991 with the opening of Sam’s Club in

Mexico City. This was as a result of a joint venture with the largest retailer in Mexico at the

time, Grupo Cifra (Cifra). The expansion was halted for a few years due to an economic crisis,

however, once the economy had recovered, Wal-Mart bought a controlling share of Cifra. In

1994, Wal-Mart had followed a similar strategy to enter the Canadian market by acquiring

Woolco, a large local retailer (Da Rocha & Dib, 2002).

Wal-Mart entered the Asian markets of Japan and South East Asia by first selling private-

labelled products through the Ito-Yokado group – this strategy eventually led to an involvement

in China. Wal-Mart also attempted to set up stores in Indonesia and Hong Kong, however these

ventures failed and the company was forced to exit. In 1999, they entered South Korea by

purchasing four stores from Makro (Da Rocha & Dib, 2002).

Wal-Mart entered Europe through Germany, by purchasing 21 stores from Wertkauf, in 1997. In

1998, it increased its investment in Germany by purchasing a further 74 stores from Spar

Handels. They first invested in the United Kingdom in 1999 when they bought Asda, the third

largest retailer in the UK (Da Rocha & Dib, 2002).

Copyright UCT


It is important to note that, Wal-Mart considered South America to be a much more attractive

market than Europe as it believed the emerging middle class in South America was more similar

to the American middle class. The emerging middle class would also have higher wages that they

could then use to buy a large amount of products (Da Rocha & Dib, 2002).

Wal-Mart has not always been efficient in its entrance to new countries. It has struggled in many

emerging countries, like China where inefficient supply chains resulted in problems. It faced

huge competitors in both Argentina and Brazil. Wal-Mart left Hong-Kong after two years having

failed to select the correct merchandise. In Indonesia, riots led to the looting of their stores.

However, Wal-Mart also learns from mistakes quickly and its ability to offer low prices and

reducing costs is becoming increasingly popular throughout the world (Majtaba & Maxwell,

2007).

2.11 Wal-Mart’s Effect on Local Competitors

The arrival of Wal-Mart in a country has huge effects on its competitors. In general, the

announcement that Wal-Mart plans to enter a country tends to decrease the share price of the

competitors immediately. The entry of Wal-Mart, whether through a greenfield investment or an

acquisition, always causes a strong reaction (Da Rocha & Dib, 2002).

There are a variety of reasons for this, namely:

I. Wal-Mart is the largest retailer in the world and makes approximately US$200 billion a

year.

II. Wal-Mart is dedicated to internationalization as it is the only way that their huge growth

rates can be maintained. The expansion of Wal-Mart overseas is viewed by many as

being part of a strategy to become the dominant retail force.

III. Wal-Mart only enters countries where there are favourable conditions.

IV. Wal-Mart is known for its aggressive retailing practices and is notorious for ruining

smaller businesses. Wal-Mart’s ability to cut prices so dramatically forces many local

retailers to drop their prices which results in them incurring losses.

V. Consumer excitement (Da Rocha & Dib, 2002).

However, despite the extreme size of Wal-Mart, competitors still try to counteract its entry into

the country with lower prices, product monopolies, and loss of market share. These actions are

Copyright UCT


mostly futile as Wal-Mart sells four times more than its next competitor and one of its winning

strategies is their awareness of competitors and how they are satisfying customer needs (Majtaba

& Maxwell, 2007).

2.12 Overview of Massmart

Massmart is one of the largest retailers in South Africa. It was first listed on the Johannesburg

Stock Exchange in 1990 and is a top 40 listed company, employing over 25 000 people. Major

product groups include food and liquor, home improvement and general merchandise. Its

business model is one of low margins and low cost distribution and primarily branded products

are sold. As presented in

Copyright UCT


Table 1, Massmart operates under four divisions: Massbuild, Massdiscounters, Masswarehouse

and Masscash. These four divisions can be further separated into nine brands: Dion Wired,

Game, Makro, Builders Warehouse, Builders Trade Depot, Builders Express, CBW and Jumbo

(Labour Research Service, 2010).

Copyright UCT


Table 1: Structure of Massmart

Division Sales Profile Brand Reach

Massdiscounters

General merchandise,

electrical appliances,

non-perishable groceries

Dion Wired South Africa only

Game Many African

countries

Massbuild Home building

equipment

Builders Warehouse

South Africa only Builders Trade Depot

Builders Express

Masswarehouse Retail goods Makro South Africa and

Zimbabwe

Masscash Groceries, cosmetics,

liquor, food.

CBW Many African

countries Shield

Jumbo Cash 'n Carry

Source: (Labour Research Service, 2010)

Massmart has also made an extensive African footprint. It has more than two hundred and eight

stores in South Africa, Botswana, Ghana, Malawi, Mauritius, Mozambique, Nigeria, Tanzania,

Uganda, Zambia, Lesotho, Zimbabwe and Namibia (Labour Research Service, 2010).

Massmart’s Massdiscounters division includes the Dion Wired and Game brands. They sell

general merchandise and make approximately R12 billion per year. Game is based in a number

of African countries; however, Dion Wired is only present in South Africa. These stores mainly

sell general merchandise, electrical appliances and non-perishable groceries (Labour Research

Service, 2010).

Masswarehouse has one brand: Makro. This brand has an extensive product range including

food, liquor, general merchandise, appliances, sports, home entertainment and much more. This

brand makes approximately R12 billion per year in sales. It is present in both South Africa and

Zimbabwe. Massbuild includes the brands of Builders Warehouse, Builders Express and

Builders Trade Depot and they sell home building equipment. It makes approximately R7 billion

in sales per year and they have geographic presence in South Africa only. The Masscash brands

provide an extensive range of groceries, cosmetics, liquor and food. They make sales of

approximately R18 billion per year. These stores have geographic presence throughout Africa

(Labour Research Service, 2010).

Copyright UCT


Table 2: Timeline of Wal-Mart & Massmart Merger

Source: (Wales, 2012)

27 September 2010

•Wal-Mart announces intention to acquire controlling interest of Massmart (Wal-mart Stores Inc v Massmart Holdings Ltd, 2011).

11 February 2011

•Competition Commission recommends that the Competition Tribunal approve the without conditions (Wal-mart Stores Inc v Massmart Holdings Ltd, 2011).

25 February 2011

•Government departments and Unions granted the right to intervene in proposed merger by the Competition Tribunal (Wal-Mart and Massmart Merger, 2012).

March 2011

•Hearing postponed (Wal-Mart and Massmart Merger, 2012).

9-16 May 2011

•Competition Tribunal hearing takes place (Wal-mart Stores Inc v Massmart Holdings Ltd, 2011).

31 May 2011

•Competition Tribunal conditionally approves merger (Wal-mart Stores Inc v Massmart Holdings Ltd, 2011).

27 June 2011

•Unions file notice with Competion Appeal Court to oppose the approval of merger (Wal-Mart and Massmart Merger, 2012).

29 June 2011

•Competition Commission gives reasons for approving merger (Wal-mart Stores Inc v Massmart Holdings Ltd, 2011).

20-21, 24 October 2011

•Competition Appeals Court hearings with Unions take place (Wal-Mart and Massmart Merger, 2012).

9 March 2012

•Competition Appeal Court hands down judgement and orders that a report be compiled by three experts (Wal-Mart and Massmart Merger, 2012).

9 October 2012

•Judgement handed down regarding size and management of supply chain (Wal-Mart and Massmart Merger, 2012).

Copyright UCT


2.13 Overview of Merger

Wal-Mart Stores Inc. offered to buy 51 % of Massmart Holdings in September 2010 (Kruger,

2012). They offered R148 per share which was equivalent to R30 billion (Kruger, 2012). Wal-

Mart saw Massmart as a strategic regional acquisition as it had a significant footprint in the

African market as an extensive consumer goods distributor, with a presence in 14 countries in

Sub-Sahara (Kruger, 2012). Due to the enormous scale of the merger, anti-competitive approval

had to be sought in each of the affected countries (Kruger, 2012). South Africa was of paramount

importance as Massmart is based and listed in South Africa and generates 93% of its income in

the country. As this merger was considered to be a large merger, it had to be approved by the

Competition Commission and the Competition Tribunal (Kruger, 2012).

In February 2011, the Competition Commission recommended that the merger be approved

without conditions (Kruger, 2012). In spite of this ruling, four trade unions - the South African

Commercial, Catering and Allied Workers Union (SACCAWU), the Food and Allied Workers

Union (FAWU), the National Union of Metalworkers of SA (NUMSA) and the Congress of

South African Trade Unions (COSATU) - opposed this recommendation and filed submissions

to either cancel the merger or impose conditions to the merger that would secure employment

rights and protect suppliers. Their concerns were grounded in the public interest (Kruger, 2012).

The unions expressed concerns about the possibility of the reduction of employment and the

unions had also found that Wal-Mart was notorious for its poor treatment of workers in the retail

sector - this was supported by the many statements from other markets where Wal-Mart had been

sanctioned (Wal-Mart and Massmart Merger, 2012).

Aside from the unions, the South African Government also had the right to object in the merger

approval process on the grounds of public interest (Kruger, 2012). Various government

departments did object, however they missed the deadline to do so; apparently they had been

awaiting certain guarantees that they had thought would materialize during the discussions that

were being held between the government and Massmart (Kruger, 2012). The case had to then be

further postponed in order to allow the Economic Development Department, the Department of

Trade and Industry and the Department of Agriculture, Forestry and Fisheries to submit further

documents (Kruger, 2012).

Copyright UCT


The Competition Tribunal approved the merger on 31 May 2011 subject to a number of

conditions (Kruger, 2012). These conditions included a retrenchment moratorium, the

reinstatement of retrenched employees, a collective bargaining agreement and a preferential

procurement quota. The retrenchment moratorium ensured that Wal-Mart could not retrench any

workers for two years as the Competition Tribunal had concerns about the possibility of

Massmart expansion outside of Africa, the possibility of divisional employment within Massmart

and certain remarks that had implied that Massmart had too many employees on shop floors

(Kruger, 2012). The Tribunal accepted the preferential re-employment of 503 workers who had

been retrenched before the merger. Full reinstatement could not be enforced as there was no

proof that the retrenchments had been merger related. Wal-Mart was not allowed to challenge the

status of SACCAWU for three years and had to honour any existing labour agreements

(Competition Tribunal, 2011). Lastly, Wal-Mart was forced to acquire a precise amount of

products locally. Wal-Mart and Massmart also committed themselves to paying R100 million

over a three year period to establish a programme for the development of South African suppliers

(Wal-Mart and Massmart Merger, 2012)

These conditions were not considered satisfactory by either the unions or the government. This

led to both these parties appealing against the Judgement to the Competition Appeal Court. In

October 2011, the Competition Appeal Court heard the said parties argue that the Competition

Tribunal had not fully considered all the implications that the Massmart/ Wal-Mart merger might

have on the South African economy (Union Argues in Court Against R16.5bn Walmart Merger,

2011). However, the Competition Appeal Court dismissed their application to set aside the

decisions of the Competition Tribunal. It did however, order that the 503 workers be reinstated

as their retrenchment was considered to be linked to the merger. The court also found that the

development fund proposal had been dealt with insufficiently in that it was unknown how the

fund would be implemented or what consequences might arise during the implementation. This

resulted in the court commissioning a study that would be done by three economists representing

the unions, the government and the merging parties. These economists would determine how the

programme would be run and how the small and medium enterprises would get involved to

ensure that the programme was beneficial. The court also agreed that this may lead to a possible

increase of the fund. The economists would have to make a report in 3 months (Cronje, 2012).

Copyright UCT


On the 9th of October the CAC ruled that the fund be increased to R240 million. This judgement

included the specific purpose of the fund, the contributions that Massmart would make towards

the funds and the specifics on how the advisory board for the fund would be created

(SACCAWU and Massmart Holdings Ltd, 2012).

2.14 Major Stakeholder Concerns

Trade unions provided the most significant opposition to the Wal-Mart/ Massmart merger. These

unions consisted of SACCAWU, COSATU, FAWU and NUMSA (Wal-Mart and Massmart

Merger, 2012). These unions argued that Wal-Mart would have an adverse effect on

employment and suppliers (Kruger, 2011). The unions were of the opinion that the cost savings

that may be brought by the merger might only accrue because of the Massmart’s bargaining

power with suppliers and its alleged anti-unionisation labour practices (Wal-Mart and Massmart

Merger, 2012).

Unions were also concerned regarding their collective bargaining rights as Wal-Mart was known

for its labour relationship strategy that was anti-unionization (Wal-Mart and Massmart Merger,

2012). This strategy has lead to Wal-Mart paying workers less than other US retailers - the

unions were particularly worried about this practice spreading to the other retailers (Wal-Mart

and Massmart Merger, 2012). Wal-Mart has been known to tread a fine line with both labour and

employment laws and there are witness statements that claim that wage disputes, racial and

sexual discrimination and rights issues have become commonplace (Wal-Mart and Massmart

Merger, 2012). There were also pre-merger retrenchments in the US and certain unions believe

that this is proof that Massmart has now fully engaged with Wal-Mart’s anti-union labour

attitude (Wal-Mart and Massmart Merger, 2012).

The unions also argued that Wal-Mart’s business model may threaten supply chains (Wal-Mart

and Massmart Merger, 2012). The sheer size of Wal-Mart gives it many advantages over small to

medium size competitors (Wal-Mart and Massmart Merger, 2012). Wal-Mart has much more

bargaining power with suppliers and larger economies of scale in distribution systems (Wal-Mart

and Massmart Merger, 2012). Unions believed that the merger may create a “waterbed effect”

Copyright UCT


where suppliers charge other customers more to cover for the costs of doing business with Wal-

Mart (Wal-Mart and Massmart Merger, 2012).

Shoprite-Checkers, Pick ‘n Pay, Woolworths and Spar will be most directly affected by the

Massmart/Wal-Mart merger (Wal-Mart and Massmart Merger, 2012). Many believe that these

retailers will have to choose cheap imports over local goods just to match the prices that Wal-

Mart offers. A possible decrease in competitors’ annual turnovers may also lead to retrenchments

(Wal-Mart and Massmart Merger, 2012). The small and medium enterprises will also be hugely

under threat as they will be less able to source cheap imports and will be increasingly crowded

out of the market (Wal-Mart and Massmart Merger, 2012).

In short, South African unions and competing firms foresaw a cut-throat retail market that would

stifle local businesses and bleed jobs by dropping prices below sustainable levels and prioritizing

high-volume, commoditised imports.

Copyright UCT


3. CHAPTER 3: RESEARCH METHODOLOGY

3.1 Research Approach & Strategy

The qualitative case study approach was chosen as the topic is focused on a “bounded situation”

(Bryman & Bell, 2011, p.60) with the purpose of learning and of “revealing important features

about its nature” (Bryman & Bell, 2011, p.68). The topic takes the form of an instrumental case

study which according to Stake (1995) allows one to understand broader issues (Bryman & Bell,

2011).The case is both a representative and critical in that it has a “clearly specified hypothesis”

and explores and “exemplifies a situation” (Yin, 2003, in Bryman & Bell, 2011, p. 62).

Qualitative research was chosen for a number of reasons. Firstly, the core subject matter, the

merger, is in essence a negotiation, characterized by individual and group behaviour, as well as

conflicting policies. The inputs and outputs of these factors are not easy to measure which makes

a quantitative study unfeasible. Secondly, a qualitative approach allowed the understanding not

only of exactly what happened, but also to “understand how people think or feel about something

and why they think that way, what their perspectives and situations are and how those influence

what is happening” (Kaplan & Maxwell, n.d., p. 31). A qualitative study also allowed the

discovery of what the social, organizational and cultural influences on the situation were (Kaplan

& Maxwell, n.d.) and thus, to propose a policy framework to address these issues holistically.

Stake (1995) lays out five key requirements for a case study of this nature:

I. Issue choice – an identified purpose/ object of study,

II. Triangulation – a combination of knowledge obtained from different sources to identify

patterns,

III. Experiential knowledge – knowledge obtained through physical interactions with

environments or persons involved in the study,

IV. Contexts – distinct and interesting environments that can be assessed – and,

V. Activities – distinct and interesting actions that have had repercussions.

Within a research community, a case study analysis supports understanding by pursuing

scholarly research. Case studies are credible when they thoroughly triangulate all the

descriptions and interpretations at play in the situation, not once but continuously throughout the

Copyright UCT


period of study. The case study must pay attention to social, political and other contexts, and be

concentrated in experiential knowledge (Stake, 1995).

The inductive approach was used to analyse the data. This required the organisation of the

qualitative data (Elo & Kyngas, 2007). According to Elo & Kyngas (2007, p. 109) this would

require “open coding, creating categories and abstraction.” Open coding involved breaking down

my interviews and data into concepts which could then be grouped into categories (Strauss &

Corbin, 1990 cited in Brymann & Bell, 2011) for analysis.

According to Stake (1995) the major conceptual responsibilities of the qualitative case researcher

include the following:

I. “Bounding the case, conceptualizing the object of study;

II. Selecting phenomena, themes or issues (i.e. the research questions to emphasize);

III. Seeking patterns of data to develop the issues;

IV. Triangulating key observations and bases for interpretation;

V. Selecting alternative interpretations to pursue and;

VI. Developing assertions or generalisations about the case” (Stake, 1995, p. 459–460).

3.2 Methodology

An explanatory case study was chosen. According to Yin (2003), an explanatory case study is

used when researchers seek to answer questions and “explain presumed causal links in real life

interventions” (Baxter & Jack, 2008, p. 547). This approach was therefore appropriate as it

allowed the investigation of the problems involved in the Wal-Mart/ Massmart Merger using

literature and diverse interviews as my resources (Baxter & Jack, 2008).

A case study approach is particularly useful as Yin (2003) explains it focuses on how and why

questions; it is only possible when the behaviour of those involved cannot be manipulated;

contextual conditions have an impact on the phenomenon being studied and the boundaries

between the phenomenon and context are blurred (Baxter & Jack, 2008).

Copyright UCT


3.3 Data Collection Methodology

Two research sources were used to answer these questions: documentation and interviews. The

literature review documentation consisted of both primary and secondary resources. The primary

resources included policies and annual reports relating to FDI and the Competition Commission.

The secondary resources included books and journal articles that related to the core questions.

Documentation proved useful as it is:

I. “Stable and can be reviewed repeatedly.

II. Unobtrusive and not created as a result of the case study.

III. Exact and contains names, references and details of events.

IV. Provides broad coverage and long span of time, many events and many settings” (Yin,

2009, p. 102).

The second research method involved semi-structured qualitative interviews with between

twenty and twenty-five stakeholders involved in the Wal-Mart/ Massmart merger. Yin (2009, p.

102) believed that interviews are particularly useful as they are “targeted and focused directly on

case study topics” and because they are “insightful and provide perceived causal inferences and

explanations.” The semi-structured interviews were chosen as it was wished to explore each

person’s judgments and opinion on specific areas of the Wal-mart/Massmart merger (Mason,

2002). Semi-structured interviewing ensured that a “fairer and fuller representation of the

interviewees’ perspectives” (Mason, 2002, p.66) were received. This type of interviewing was

also preferred as it remained flexible and gave the interviewee a certain degree of power.

Although there was some structure, there was not constraint to particular questions and as such,

more interesting leads could be followed when they did arise (Brymann & Bell, 2011).

The interviewees included Judge Dennis Davis, the presiding judge on the case, as well as

government officials from the three departments involved and representatives of Shoprite and

Pick ‘n Pay. Retail analysts, labour representatives from COSATU, NGOs and the Competition

Commission were also interviewed. As these interviews combined the different levels of analysis

(societies, organisations, groups and individuals), it was ensured that the following was

completed: “to identify and make clear...the level of analysis that is being used and then to

switch to another level only after having made this clear” (Rosseau, 1985, in Brymann & Bell,

2011, p. 67).

Copyright UCT


3.4 Research Criteria

Lincoln and Guba (1994) state that there are two criteria that should be used to assess qualitative

research: trustworthiness and authenticity. Trustworthiness can further be divided into four

dimensions namely credibility, transferability, dependability and confirmability (Lincoln & Guba

(1985), as cited in Finlay, n.d.).

Research findings need to make sense in order to have credibility (Finlay, n.d.). Once the

necessary information was obtained from the interviewees, the findings were then be presented

to the interviewees to ensure that the statements made were correctly understood by the

interviewer. Only persons that were directly involved with and understand the Wal-Mart/

Massmart merger were interviewed. This ensured that the information gathered came from

persons whose views were founded on some degree of factual information and that their view of

the situation was worthy of serious consideration.

Transferability is the idea that findings should be applicable to all settings and situations (Finlay,

n.d.). In order to be useful, these findings need to be transferrable across sectors, which is why

members of the wider retail sector and the Competition Commission were interviewed. The high

degree of understanding that these parties have of the case and the far-reaching implications of

the merger meant that the information was highly relevant and easily transferred.

Dependability is the characteristic of findings that means that should other researchers undertake

the same research they would find similar data (Yin, Case Study Research and Design Methods.,

2003). Interviewees were chosen from a variety of sectors and amongst all stakeholders involved

in the Wal-Mart/ Massmart merger. Although, a certain degree of bias will always exist amongst

the interviewees, unfortunately this is unavoidable. To prevent lying and falsehoods,

confidentiality agreements were signed – this ensured that interviewees did not feel as if they

will be victimized should others read the report – they remained anonymous, and thus ertr more

inclined to be truthful.

Confirmability refers to the objectivity of the research and whether the results will be agreed

with by others (Finlay, n.d.). It was ensured that objectivity was observed at all times and no

personal opinions or feelings were allowed to direct or influence the findings. The research

Copyright UCT


supervisor advised when he noticed any bias in the research. All records were kept and managed

should proof of findings be needed.

The authenticity of the research was ensured through the careful selection of interviewees. Senior

management and high-level representatives involved in the Wal-Mart/ Massmart merger were

interviewed. Academics, such as Professor Mike Morris (the economics expert hired by Wal-

Mart/ Massmart), was also interviewed.

3.5 Data Analysis Methodology

A grounded theory method was used to analyse the findings. Primary data from the interviews

and secondary data from books, business magazines, journals and articles were collected and

analysed. Analysis in this way was beneficial as it suggested further avenues for data collection

in order to develop a theory and conclusions. Grounded theory was appropriate as there is little

academic theory available that relates to the problems that arose during the merger. According to

Cresswell (1998), grounded theory is most helpful when there is a lack of current theories about

the phenomenon being researched (Cresswell, 2008).

All interviews were transcribed and this information was then, together with the secondary data

from academic and business literature, sorted into key topics as they emerge. The triangulation of

the secondary data ensured that the primary data findings were validated. It was then necessary

to determine and analyse the relationships between the data and findings.

3.6 Limitations of Study

The first limitations that need to be considered are those attached to the types of resources used.

Yin (2009, p. 102) describes the weaknesses of documentation and interviews in the table below:

Copyright UCT


Table 3: Strengths and Weaknesses of Documentation and Interviews

Source Weaknesses

Documentation “1. Poor retrievability and was difficult to find.

2. Biased selectivity if collection is incomplete.

3. Reporting bias and reflects bias of author.

4. Access to documentation may be deliberately withheld.

Interviews 1. Bias due to poorly articulated questions.

2. Response bias.

3. Inaccuracies due to poor recall.

4. Reflexivity in that interviewee gives what interviewer wants to hear.”

Source: (Yin, 2009, p.102)

The second major problem was the subjectivity that is attached to qualitative research. Both the

interviewees and the researcher, were navigating their different understandings of the case as

well as their views and opinions. However, according to Flyvbjerg (2006, p. 219) “the case study

contains no greater bias toward verification of the researcher’s preconceived notions than other

methods of inquiry. On the contrary, experience indicates that the case study contains a greater

bias toward falsification of preconceived notions than toward verification.” A conscious effort to

remain objective, as well as an impartial supervisor, worked well to mitigate the impact of this.

The last limitation refers to the case study methodology itself. According to Flyvbjerg (2006, p.

241), “The problems in summarizing case studies … are due more often to the properties of the

reality studied than to the case study as a research method. Often it is not desirable to summarize

and generalize case studies. Good studies should be read as narratives in their entirety.”

Fortunately, this is not a teaching case study, and as such it is more open to a coherent, narrative

approach respected the complexity and the many facets of this complex and subjective topic.

3.7 Delimitations

This case study does not aim to produce a comprehensive policy for structuring FDI initiatives; it

rather proposes a structural form that such a policy might take. This case study does not intend to

draw any conclusions of rights or wrongs on the part of any of the parties involved, nor does it

seek to revisit or reinterpret the findings of the Competition Commission’s investigation. Any

Copyright UCT


differences in opinion or interpretation between the different stakeholders were only noted as a

means of informing a new policy framework that hopefully cater to these diverse and complex

needs.

3.8 Informed Consent and Research Ethics

In all interviews, the interviewee and the stakeholder group were kept confidential. This ensured

that the interviewees felt comfortable and did not feel threatened should the paper be made

public. Each interviewee was fully and unambiguously briefed on the nature and scope of the

confidentiality agreement.

Each interviewee was asked to sign a participation form and an ethical clearance document, as an

undertaking that the research would uphold the standards of the University of Cape Town

Graduate School of Business Ethics Policy.

Copyright UCT


4. CHAPTER 4: RESEARCH FINDINGS

4.1 Differing Ideologies

During the research process, it became clear that all reactions were founded on one of two

essential FDI ideologies: the Freedom of Investment (FI) model and the Investment for

Sustainable Development Model.

Figure 1: Different Stakeholder Ideologies

Those stakeholders who were particularly in favour of free market competition were more

inclined towards the FI model, and emerged primarily from the private sector. In interviews,

these groups asserted that increased competition will lead to better technologies and better

management techniques. Other large retailers will also have to become more efficient and

effective if they were to maintain their market share and keep up with a multinational entrant.

The consumers will also benefit from much lower prices and increased product variety.

Stakeholders of this view also believed that Wal-Mart will procure from the local producers and

boost the South African economy, and that a new retail giant would in fact help to create a

healthier and more competitive retail sector.

The views most supportive of the ISD model arose predominantly amongst members of the

unions and government departments. Whilst neither of these groups were explicitly against Wal-

Mart’s entry into South Africa, they did perceive the retail giant as having certain negative

business practices that may have posed a threat to the local labour and the supply chains.

Copyright UCT


According to Mosia (2012) the unions understood that South Africa desperately needs to

increase industrialisation, and that the local retail sector depends heavily on the local industrial

infrastructure. Wal-Mart’s relative preference for imported goods over local production was

therefore a cause for concern – if imported goods were to become a serious competitive

advantage, the local supply chain would suffer.

Table 4: Table of Stakeholders

Stakeholder Group Description Key Interests

Wal-Mart World’s largest retailer, US-

based, acquiring party.

Tapping into the South

African retail market and,

obtaining an entry point into

the African market.

Massmart The South African mass

retailer and target of the

acquisition.

Wal-Mart will increase

prospects of Massmart and

expose it to winning

practices that have allowed

Wal-Mart to be so successful.

Competition Commission “is responsible for

investigating and evaluating

mergers, prohibited practices

and exemptions, has the

power to allow or disallow

small and intermediate

mergers, and makes

recommendations to the

Competition Tribunal in

relation to large mergers”

(Coetzee, 2012, p. 34).

Promotion of a healthy,

competitive and growing

business environment.

Competition Tribunal “is responsible for approving

large mergers, adjudicating



Copyright UCT


on prohibited practices,

imposing penalties under the

Competition Act, and dealing

with appeals and reviews

referred by the Commission”

(Coetzee, 2012, p. 35).


Competition Appeal Court “shares exclusive appellate

jurisdiction with the Tribunal

over matters relating to the

Competition Act. Parties to

competition proceedings also

have the right of appeal to

the Supreme Court of Appeal

or the Constitutional Court”

(Coetzee, 2012, p. 36).




Unions SACCAWU, SACTWU,

COSATU, FAWU and

NUMSA.

Growth of employment

opportunities, job security,

labour relations.

Government The Economic Development

Department, the Department

of Trade and Industry and the

Department of Agriculture,

Forestry and Fisheries.

Growth of employment

opportunities, economic

growth.

Other Competing Retailers Shoprite, Pick ‘n Pay, Spar

Group.

Profitability and industry

growth.

Commentators Economists, business

journalists, the South African

institute of Foreign investors.

Critical assessment of

government’s economic

policy and the impact on

FDI.

Copyright UCT


4.2 Other Retailers Competitive Environment

The stakeholders from retail stores such as Shoprite

Checkers and Pick ‘n Pay, would have preferred that

Wal-Mart not enter the country, however, they knew

that competition would enter at some stage. They also

recognised that Wal-Mart had a particularly strong

import positions in that it could source from many

countries. However, South African retailers stated that

they definitely had the upper hand in terms of

perishable goods. Wal-Mart’s great financial positions

will also help them expand into Africa relatively easily.

These retailers also identified that although they did

not necessarily completely understand Wal-Mart’s

strategy, it did appear that they were not in a rush to do

it. They found that Wal-Mart’s aggressive rollout

seems to have ended with the opening of a number of

Food Co. Stores.

Other retailers were also not as threatened by the entry of Wal-Mart for two reasons. Firstly, the

giant was appealing to the LSM 5-7 market. This market was only one of the markets that the

other retailers were aiming at. Secondly, Wal-Mart had a problem in that it did not own any of its

own sites. This will possibly remain the same for a number of years as the Competition

Commission will prevent them from buying any property other than those already owned by

Massmart. This is problematic for the retail giant as Wal-Mart uses the big box concept.

According to Daykin (2001), these types of facilities resemble large industrial buildings with a

floor area ranging from twenty thousand to over two hundred thousand square feet. The interior

of these “boxes” are characterised by their high ceilings, huge merchandise quantities and large

entrances (Daykin, 2001). The huge amount of space that this model requires also prevents the

retail giant from setting up stores in lucrative areas where sites of this magnitude are not readily

available.

Wal-Mart’s Interest in Massmart

All the stakeholders interviewed recognised that

the South African retail market is attractive as it is

still fairly untapped. They also believed that the

opportunities for growth far outweigh those that

exist in established markets, especially as there is

little competition from foreign retailers.

This merger, as one retailer mentioned, would

allow Wal-Mart to use South Africa as a

springboard into sub-Saharan Africa.

Green field operations in Africa are particularly

risky and have been known to fail. Wal-Mart has

also learnt from past mistakes that companies

with local experience are needed to enter a

country successfully.

Copyright UCT


4.3. What Happened

4.3.1. Initial reactions to the proposed merger

Figure 2: Stakeholders’ Initial Reactions to Merger

The government and unions were particularly suspicious of the Wal-Mart – Massmart merger.

They believed that the retail giant and Massmart’s merger would be negative for the following

reasons:

I. The lower prices that Wal-Mart may offer may undercut local retailers which may lead to

anti-competitive conduct.

II. The sheer size of Wal-Mart may result in the forceful influence for suppliers to lower

costs which may lead to unemployment.

III. The entrance of Wal-Mart may make it particularly difficult for small to medium

enterprises to enter and exist in such a market.

IV. Local procurement should be emphasised as it is present in the Industrial Action Plan and

New Growth Path.

V. The supplier market may shrink due to increased imports.

VI. Wal-Mart has a history of being anti-union and workers have a right to fair practices

(COSATU, 2011).

In their initial reactions, the Unions and the government reacted to the image of Wal-Mart as a

large, powerful and dominant multinational corporation. This perception was supported by an

American Trade Union, United Food and Commercial Workers (UFCW) and they quickly

Negative NEUTRAL Positive

Copyright UCT


became involved and had a significant effect on the Unions’ decisions during this time. The

Unions emphasised that Wal-Mart’s entry would lead to unemployment. Wal-Mart has a poor

history with unions – to the point that it is often considered anti-union – and this convinced

union members that even if Wal-Mart’s entry led to job creation, the type of employment created

may not be decent work and that workers may face precarious work situations.

Especially, as earlier this year the Netherland’s had blacklisted Wal-Mart for their non-

compliance with the UN’s Global Compact principles. It must also be noted that certain

stakeholders were also of the opinion that had the American Union not been involved that the

South African unions would not have pursued the matter. This is because they believed that the

Massmart workers were actually not opposed to the merger.

This reaction was not necessarily justified as Wal-Mart stated that it would use the existing work

force. While it is true that Wal-Mart has had a history of unfair practices, 13 of those countries

that it has invested in outside of America have not been able to provide any evidence of abuse.

Although, it is believed that a certain amount of products will have to be imported to decrease

prices, perishable items will not fall into this category. This perishable sector is one of the sectors

where the both Massmart and Wal-Mart wanted to encourage growth post merger (Walmart

Stores Inc v Massmart Holdings Limited, 2011).

The DTI, while recognising that Wal-Mart’s entry may lead to the lowering of prices in the short

term to consumers, it may also lead to potentially significant deleterious effects for domestic

manufacturers in critical supply chains.

4.4.Controversial Conditions

During the course of the merger negotiations and the judgement of the Competition Commission,

several controversial conditions arose. These are elaborated upon in detail below.

Copyright UCT


4.4.1. Competition Law, Industrial Policy and the Public Interest

Figure 3: Stakeholder Reaction to Policy Implementation

In South Africa, competition policy implementation is often made more complex by internal

contradictions. Unlike developed economies, South Africa’s economic inheritance post-

Apartheid means that a robust competition policy must accommodate public interest imperatives

that are not always strictly related to competitive considerations. In recent years, competition

policy has been used to achieve far wider goals than it was originally designed to do, attempting

to accommodate employment, local supply chain procurement and other industrial and economic

development goals. Recent judgements by the Competition Authorities demonstrate this as they

attempt to take into account the need for skills transfer and protecting local manufacturing.

“President Jacob Zuma, meanwhile, has stated that the Government is looking to “competition

policy to improve job creation” and “protect local jobs and industries” (Coetzee, 2012, p. 1).

Retailers and commentators believed that the Competition Commission should not have been

involved in aspects of this case which was based on industrial policy. While it was quickly found

that the merger would in no way affect the competitive environment in the retail sector, the

merger was still thought to affect public interest. According to the Competition Act, 1998 (Act

No. 89 of 1998, as amended) a merger can be halted or be approved subject to conditions if the

public interest is at risk despite there being no reason to prevent the merger on grounds of

competition (Walmart Stores Inc v Massmart Holdings Limited, 2011).


Copyright UCT


Section 12 A of this Act states that although competition may not be at risk, the Tribunal is

responsible for determining whether the merger should be allowed to take place on the grounds

of public interest. The public interest consideration is confined to the effect the merger may have

on four factors as can be seen in subsection 3 of this act namely:

I. A particular industrial sector or industry,

II. Employment,

III. The ability of small businesses, or firms controlled or owned by historically

disadvantaged persons, to become competitive and,

IV. The ability of national industries to compete in international markets.

As this merger involves (I), (II) and (III) (Walmart Stores Inc v Massmart Holdings Limited,

2011), it was in the scope of the Competition Authorities to become involved.

The Wal-Mart – Massmart merger was the first merger where the public interest inquiry took

place, despite there being no competition concerns. During this merger the competition

authorities broadened their traditional narrow approach and the conditions imposed seemed to be

heavily linked to the third party interveners in the process (Wal-Mart and Massmart Merger,

2012). This raised concerns of whether the commission was able to balance the competition and

public interest considerations and whether the independence of the competition commission was

being compromised by the third party interveners.

David Lewis (ex-chairman of the Competition Tribunal) believes that public interest concerns

have a heavier weight in developing countries than developed countries. This is simply because

industrial policy is more important in a developing country, especially to provide targeted

support for strategic sectors and interest groups which may be vulnerable. Added to this, the

competition authorities in these developing countries are still struggling to achieve the credibility

and legitimacy they need in their own countries (Lewis, 2002). That being said, the purpose of

the Competition authorities in the Wal-Mart – Massmart merger, was to ensure that risks

resulting from the merger were minimised and not to replace the government’s need to develop

the necessary policies (Wal-Mart and Massmart Merger, 2012).

Copyright UCT


4.4.2. The Competition Tribunal

Figure 4: Stakeholder Reaction to Competition Tribunal

It is a widely held view amongst the private sector that the Competition Commission did a

relatively good job of investigating the case, given the challenging circumstances (specifically

political pressure) and that is was simply unfortunate that they did not consider the public

interest clause in their initial investigation.

Amongst the Unions, the assessment is quite different – they feel that the Tribunal was a failure

for not interrogating Wal-Mart’s offer of a R100 million supply chain fund. While it soon

became clear that the general proposition was a good idea, the Tribunal should never have given

blanket approval to the merger. In addition, they feel that Minister Patel was unfairly blamed for

the failure of the proceedings when in fact it was his intervention that brought the inadequacies

of the Commission’s investigation as well as the questionable initial judgement of the Tribunal to

light.

In addition, Union members are quick to point out that Minister Patel was perfectly entitled to

intervene in these proceedings in his capacity as a government minister under South African

competition law. Given the lack of an industrial policy, Union members feel that it is perfectly

logical for government and union representatives to approach the Tribunal if the Competition

Commission appears to be ignoring important issues. They suggest that the Competition

Authorities as a whole are focused on consumer welfare, sometimes at the expense of total


Copyright UCT


welfare, and that, in the absence of a robust industrial policy, this kind of intervention is the only

way of managing a balance between the two.

4.4.3. The Supply Chain Fund

Figure 5: Stakeholder Reaction to Supply Chain Fund

The first condition of approval set by the Competition Tribunal, and later the Competition

Appeal Court was that Wal-Mart must invest in creating a programme that would empower and

develop South African suppliers. This particular condition could be related to the Economic

Development Department (EED). The EED conducted research concerning the impacts of the

merger after Wal-Mart’s announcement of the merger. The EED had at first had discussions

with the merging parties however, as they had not made any concrete commitments, the EED

decided to intervene in the Tribunal proceedings. The submissions made to the Tribunal from the

EED included concerns relating to increased imports and the impacts this would have on local

manufacturers, small business and employment. The Minister of DTI, Agriculture, Forestry and

Fisheries also intervened in the proceedings (Wal-Mart and Massmart Merger, 2012).

This condition was controversial because the tribunal had previously stated that should a

competition authority “impose its own framework and substantive provisions on a firm that came

before it”, this would be “an intolerable level of policy intervention” (Daun et Cie AG v Kolusus

Holdings Ltd, 2003, supra note). Thus, the Competition Commission seems to have overstepped

its jurisdiction. This condition has raised the concern that the EDD pressured the CAC to make

such a condition.


Copyright UCT


4.4.4. Reinstating the 503 Workers

Figure 6: Stakeholder Reaction to Reinstating the 503 Workers

The second condition of approval set by the Competition Appeal Court was that Wal-Mart

should re-instate the 503 workers that were previously dismissed from Massmart in 2010. This

condition came about after the intervention of five trade unions: SACCAWU, COSATU,

FAWU, NUMSA and SACTWU. As the tribunal previously indicated that its role in

employment was limited to balancing the impact of competition of the impact on employment, it

has been argued that this was not the correct forum for such a ruling. The Labour Relations Act

66 of 1995 or private collective bargaining agreements would be better channels to deal with

such matters. This condition would have been dealt with more appropriately in a specialist labour

court and therefore the competition authorities were seen as overstepping their authority once

again – this time reflecting the interests raised by the unions.

The union’s belief that Massmart retrenched 503 workers due to the merger was not based on

facts but rather on assumptions as the workers had been retrenched around the same time as the

merger was underway (Walmart Stores Inc v Massmart Holdings Limited, 2011). It should also

be noted that although Wal-Mart has had a particularly bad history with regards to workers

rights, it would also appear that they tend to change their approach depending on their

environment. In Argentina for example, it was found that Wal-Mart complied with all union

practices and employee rights (Walmart Stores Inc v Massmart Holdings Limited, 2011).


Copyright UCT


4.4.5. Government Involvement

Figure 7: Stakeholder Reaction to Government Involvement

Although retailers understood the government’s view in protecting workers and the supply chain,

they, with the commentators, also believed that this was one of the risks facing an open

economy. The government behaved as if FDI was not a prerogative and they did not consider the

possible impact of that their actions may have had on the South African economy.

All stakeholders that believed in the open economy being a good thing also believed that one of

the biggest problems was the way in which the government handled the situation. The

government reaction was seen by the private sector stakeholders as being ideological as opposed

to being based on actual facts. The government struggled to find the appropriate policy tools to

amend those parts of the merger agreement that they viewed as being problematic – ultimately,

in the absence of a retail-sector-specific industrial policy, they used the Competition policy as

the next “best-fit” option.

Commentators believe that the government’s rather clumsy involvement has given the

impression that FDI is only welcome in South Africa under certain conditions. These conditions

were questionable as they did not fall under defined laws but rather by what government

ministers think and who will intervene as they see fit. Ebrahim Patel was a stakeholder that was

particularly damaging to the merger. Many believe that he had a personal agenda in that he

wanted to broker the deal between the unions and Wal-Mart – Massmart in order to get the credit

for a good job. Certain stakeholders’ believed that as Patel essentially went behind the backs of


Copyright UCT


the Competition Authorities and got involved in the report that he essentially undermined the

independence and authority of the competition policies.

One commentator mentioned that the government “shot itself in the foot” in that it appeared that

they did not want Wal-Mart’s investment as they took it to court. Taking this into consideration,

and the fact that South Africa has an extremely high unemployment level, it is obvious that this

was not the best way to handle the situation. Essentially, Wal-Mart was treated unfairly in an

economy that the government wishes other stakeholders to view as open.

Many private sector parties believed that the government departments did not follow all the

necessary processes and did not have the right to get involved in the merger. However, according

to section 18 of the Competition Law Act, a Minister is allowed to participate in any proceedings

before the Competition Authorities in order to represent public interest grounds.

By contrast, the unions believed that the government reactions were completely correct - in fact

they thought that it would actually have appeared odd if the government departments had acted

otherwise. However, this merger has brought to light the crucial role of the retail sector in

transformation. There is an urgent need for the government to craft and implement a

comprehensive retail sector policy that both promotes and defends the socio-economic needs of

workers (COSATU, 2011).

4.5.Post judgement

Figure 8: Stakeholder Reaction to Post Judgement


Copyright UCT


4.5.1. Unions

In an interview with a union member it was apparent that the conclusions reached in the final

judgment were not satisfactory and that a number of factors require reviewing. Mosia (2012)

believed that other conditions should have been included in the final judgement including:

I. Ensuring 70% of products must come from local manufacturers,

II. Ensuring worker rights and,

III. Paying a living wage.

Mosia (2012) also believed that both the DTI and the Department of Economic Development

behaved in the correct way.

4.5.2. Retailers

The retailers believed that controversy surrounding merger was based on the government

appearing as if the Wal-Mart deal was unwelcome, the Appeals Court failing to properly define

the public interest clause and the uncertainty of the Government’s position with regard to FDI.

This set of stakeholders believes that although the competition authorities did manage to curb the

government’s interference, the final Judgement of Judge Davis may have been compromised, as

although he managed to attempt to please all parties, he struggled to define the public interest

clause. In fact, Massmart had no plans to retrench, import mainly or go against union principles,

making the entire judgment was partially unnecessary. This position was supported by other

retailers who were of the opinion that the R240 million in the supply chain fund would also not

balance any negative effects and was thus irrelevant.

4.5.3. Others

The remaining stakeholders including commentators from Business Unity South Africa and

certain newspaper reporters considered the judgement fair taking the circumstances into

consideration. Although, some argued that the judgment was less than mediocre as it did not

manage to make all stakeholders happy especially the unions. Many viewed the R 240 million to

be “a bit of a thumb-suck” and there were doubts that it would improve supply chains. Possibly,

Copyright UCT


the broadest concern was how far certain ministers were prepared to go make institutions support

their views.

4.6.The Aftermath – FDI Implications

Figure 9: Stakeholder Reaction to the Aftermath

There were a number of opinions regarding the events of this merger’s effect on FDI. Some

interviewees believed that the merger had adverse effects as it made investing in Africa seem

particularly difficult due to the resultant uncertainty around competition approval in light of the

competition authorities approach to the public interest conditions. Investors wanting to procure a

listed company would have to deal with a number of different stakeholders including

shareholders, management, departments and regulators. A number of interviewees believe that

Patel’s influence has also scared away investors and made a number of people ask whether or not

South Africa is actually open for business. Of course, the government’s involvement did not

improve the situation as the tension that existed between the different government departments

made it appear as if South Africa had a clear and consistent approach to FDI. The lack of policy

also did not help matters.

On the other hand, certain stakeholders believed that this transaction has actually increased

confidence in the South African economy. They were of the opinion that the government

reactions to the merger were valid as they were an attempt to protect the interests of the South

African economy. This was a complex and challenging task and although the process may not

have run smoothly, the outcome was important. In this case, many people were happy with

certain decisions.


Copyright UCT


At the same time there are those who believe that the Wal-Mart – Massmart merger cannot be

viewed in isolation. There are other developments inside South Africa that are contributing to

negative impacts on FDI, such as the horrific events at the Marikana mine.

Lastly there are those that believe that one cannot tell if damage or good has been done to FDI,

saying that there is no actual proof and because of this one cannot make any assumptions. This is

possibly the safest opinion upon which to rely, however, it cannot be denied that the vast

majority of interviewees believed that FDI had been adversely affected.

Copyright UCT


5. CHAPTER 5: CONCLUSION

The purpose of this research was to explore the deeper reasons behind what went wrong in this

heavily criticised process, how much of an effect this has had on South Africa’s FDI prospects,

and what could be done to best serve South Africa’s interests in this sort of situation going

forward. This research has revealed a deep divide – perhaps irreconcilable – with private sector

stakeholders and free market proponents in one camp, and Government and Unions firmly in the

other. These two groups are diametrically opposed on every point, only coming closer to

agreement where one side or the other is entirely indifferent to an issue.

It is clear that the free-market-oriented stakeholders – mostly within the private sector – are

strongly in favour of FDI in any form and are very concerned and sceptical of the Government

and Unions’ involvement in this merger. These private sector stakeholders were not overly

concerned with the proposed supply chain fund, but were very much opposed to the

reinstatement of the 503 workers. From their point of view, this constituted the Competition

Authorities overreaching their ambit and tackling an issue that should be referred to the Labour

Courts. They also feel quite strongly that the case for reinstatement of these workers is entirely

without merit as it happened long before the merger came to prominence. These stakeholders are

by far the most pessimistic on the subject of future FDI flows – they feel that this debacle has

done long term damage to South Africa’s standing in global commerce.

Perhaps the most startling conclusion may be that, contrary to media reports, the South African

government was right to intervene in the proceedings of the Competition Authorities. While they

did so with noble intention, it is clear to many observers that the intervention came across as

clumsy and heavy-handed due to the glaring absence of proper FDI policies. The private sector

interviewees in particular took a dim view of this intervention and felt that it was damaging to

South Africa’s credibility in global commerce, and would put a damper on future FDI income

that South Africa so badly needs.

It is important to note the shortcomings on the Competition Commission in this process – many

interviewees made it clear that a more thorough initial investigation and rigorous scrutiny of the

supply chain fund would have quickly revealed serious shortcomings in the deal. Had such

findings been shared earlier in the process, it is very unlikely that the merger would have been

Copyright UCT


approved without qualification, and both government and the unions might not have felt the need

to intervene.

The evidence overwhelmingly shows that South Africa needs a robust and specific FDI policy to

govern proposals of this nature. The economists’ views and the stark disapproval from the

private sector clearly show that it is not feasible to continue using the wrong policy instrument –

competition law – to address nationwide economic development and job security needs. Until

such a policy is put in place, it is likely that future FDI proposals will be mired in similar

complications.

These findings are, for the most part, consistent with our current grasp of FDI theory – all

stakeholders fit into either the ISD or FI ideologies, and their priorities were largely consistent

with what was initially expected of these stakeholder groups. The existing FDI literature does

acknowledge these sorts of issues in developing countries where certain groups and industries

are vulnerable. It is somewhat less certain, however, that this incident has diminished South

Africa’s long term FDI prospects – existing theory suggests that such inconsistency and

ambiguous policies should have a dampening effect on FDI, however there is no evidence at

present to support this - it remains to be seen in the years to come.

Copyright UCT


6. CHAPTER 6: RECOMMENDATIONS

As evidenced time and again in this merger, South Africa's policy is severely lacking; none of

the parties involved were quite sure how to approach a case of such unprecedented magnitude

and complexity, and especially not the vagaries of the public interest clause.

The World Investment Report has a number of recommendations in Appendix 3 and 4 of this

paper - this may serve as a guideline for future policy and should give all parties a clear map of

what to expect in similar situations in the future, and what the appropriate channels are to

address differing concerns such as job security and supply chain threats. This is essential as this

merger has demonstrated the impact of wildly differing expectations between stakeholder groups

and seemingly erratic behaviour from the Competition Authorities.

One particularly important recommendation is the structured approach to Investor Obligations, a

subsection of Investment Regulation and Promotion. This section will describe the responsible

investment standards (which would be applicable to Wal-Mart in this case) including:

I. “The Investor's first and foremost obligation is to comply with the host country’s laws

and regulations. This obligation should apply and be enforced indiscriminately to national

and foreign investors, as should sanctions for non-compliance.

II. Governments should encourage adherence to international standards of responsible

investment and codes of conduct by foreign investors” (World Investment Report, 2012,

p. 125).

Apart from establishing the necessary FDI framework, the Competition Authorities should also

clarify the role that the public interest grounds will play in merger regulation, through an

advisory opinion. These enforcement clauses, in conjunction with a coherent and comprehensive

FDI policy should go a long way towards simplifying this kind of process in the future,

protecting South Africa from predatory practices in global commerce while still being quite

attractive for FDI.

Copyright UCT


7. CHAPTER 7: SUGGESTIONS FOR FURTHER RESEARCH

There is a clear need in the existing literature for some kind of quantitative longitudinal study on

the impact on South Africa’s FDI flows before and after the Wal-Mart – Massmart merger. At

present the FDI impact is only a matter of conjecture, and hard data could help stakeholders

understand the consequences (or lack thereof) of this debacle for future reference. It may also be

of interest to carry out a comparative study similar developing and unequal economies where

such a merger has been proposed successfully. This would allow stakeholders to weigh up the

benefits of future FDI, while also critically assessing the structure of the deal. Finally, it would

be valuable to structure a study that might enjoy more input from Government stakeholders –

these stakeholders were extremely difficult to contact, and very reticent on the topic, probably

because of the controversy associated with it. Perhaps the passage of time will assist with this, as

officials may be more willing to talk once they have left office and may speak freely.

Copyright UCT


Bibliography

About Us. (n.d.). Retrieved from Walmart: http://walmartstores.com/AboutUs/8123.aspx.

Asafo-Adjei, A. (2007). Foreign Direct Investment and Its Importance to the Economy of South Africa.

Pretoria: University of South Africa.

Basker, E. (2007). The Causes and Consequences of Walmart's Growth. The Journal of Economic

Perspectives, 21(3), 177-198.

Baxter, P., & Jack, S. (2008). Qualitative Case Study Methodology: Study Design and Implementation for

Novice Researchers. The Qualitative Report, 13(4), 544-559.

Bryman, A., & Bell, E. (2011). Business Research Methods (3rd ed.). New York: Oxford University

Press.

Coetzee, K., Daniel, R., & Woolfrey, S. (2012). An Overview of the Political Economy of South Africa.

Grenoble Ecole de Management, Grenoble.

Competition Tribunal. (2011). Tribunal Statement on the Conditional Approval of the Merger between

Walmart Stores Inc. and Massmart Holdings Ltd. South Africa.

COSATU. (2011, May 13). Section 77 Notice on Wal-Mart-Massmart Merger.

Cresswell, J. (2008). Research Design: Qualitative, Quantitative, and Mixed Methods Approaches.

Thousand Oaks, CA: Sage.

Cronje, J. (2012, March 14). Massmart - Wal-Mart Merger (Finally) Approved. Retrieved July 26, 2012,

from Tralac - Trade Law Centre: http://www.tralac.org/2012/03/14/massmart-wal-mart-merger-

finally-approved/

Da Rocha, A., & Dib, L. (2002). The Entry of Wal-Mart in Brazil and the Competitive Responses of

Multinational and Domestic Firms. International Journal of Retail & Distribution Management,

30(1), 61-73.

Daun et Cie AG v Kolusus Holdings Ltd, 2 CPLR 329 (CT) (2003).

Davies, R. (2012, September 25). Rob Davies: UNCTAD's Investment Policy Framework for Sustainable

Development. Retrieved November 10, 2012, from TradeMark Southern Africa:

http://unctad.org/meetings/en/Presentation/tdb59staDavies_en.pdf.

Daykin, T. (2001, June 15). Communities force Big Box retailers to rethink designs. Milwaukee Journal

Sentinel.

Department of Trade and Industry. (2007). A National Industry Policy Frameowrk. Pretoria: South

Africa. Retrieved from http://www.thedti.gov.za/industrial_development/docs/niPF-3aug.pdf

Durlauf, S., & Lawrence, B. (2008). The New Palgrave Dictionary of Economics (2nd ed.). London,

United Kingdom.

Copyright UCT


Elo, S., & Kyngas, H. (2007). The Qualitative Content Analysis Process. Journal of Advanced Nursing,

62(1), 107-115.

Finlay. (n.d.). 'Rigour', 'Ethical Integrity' or 'Austerity'? Reflexively Reviewing Criteria for Evaluating

Qualitative Research. Retrieved from

www.lindafinlay.co.uk/BJOT_evaluating_research_new.doc.

Flyvbjerg, B. (2006). Five Misunderstandings about Case Study Research. Qualitative Inquiry, 12(2),

219-245.

Fridge. (2006). Study to Prepare Various South African Manufacturing Sectors for Effective Negotiations

for the Proposed SACU-China and SACU-India Trade Negotiations. Nedlac. Report no. 6.

Geradin, D., & Girgenson, I. (2011). Industrial Policy and European Merger Control - A Reassessment.

International Anti-Trust Law and Policy. Retrieved from http://dx.doi.org/10.2139/ssrn.1937586.

Gonzalez-Nunez, X. (2010). 15 year review: Trade Policy in South Africa. Trade and Industry Policy

Strategies.

Gregoriou, G., & Renneboog, L. (2007). International Mergers and Acquisitions Activity Since 1990:

Recent Research and Quantitative Analysis. Oxford: Elsevier.

Halpete, J., & Park, S. (2008). Walmart in India: A Success or Failure. International Journal of of Retail

and Distribution Management, 36(9), 701-713.

Hartzenberg, T. (2002). Competition Policy in SADC. Trade and Industrial Policy Strategies 2002

Annual Forum.

Helleiner, G. (1989). Transnational Corporations and Direct Foreign Investment. Toronto: Elsevier

Science Publishers B.V.

Jensen, O. (2002). Foreign Direct Investment in India and South Africa: A Comparison of Performance

and Policy. Briefing Paper 3.

Kaplan, B., & Maxwell, J. (n.d.). Qualitative Research Methods for Evaluating Computer Information

Systems. 30-55. Retrieved from

http://www.libreriafarmaceutica.com/cover_note/books/4/8/5/9780387245584/9780387245584-

c1.pdf.

Kruger, P. (2011). The Reasons given by the Competition Tribunal in the Walmart and Massmart Meger.

Tralac. Retrieved from http://www.comptrib.co.za/announcements/wal-mart-and-massmart-

merger-reasons for decision/.

Kruger, P. (2012). The Impact of WTO Law on Foreign Investment: The Walmart/ Massmart Merger.

Working paper, Trade Law Centre, Stellenbosch.

Labour Research Service. (2010). Massmart/ Walmart Meger. Retrieved from

http://www.lrs.org.za/docs/LRS%20submission%20to%20CT%20on%20Massmart%202011.pdf.

Copyright UCT


Lall, S. (1980). Vertical Interfirm Linkages in LDCs: An Empirical Study. Oxford Bulletin of Economics

and Statictics, 42, 203-226.

Lewis, D. (2002). The Role of Public Interest in Merger Evaluation. Merger Working Group.

International Competition Network.

Mabuse, N. (2011, August 16). South Africa Wary of Walmart's 'Muscle'. Retrieved June 8, 2012, from

CNN:

http://www.edition.cnn.com/2011/BUSINESS/08/16/walmart.massmart.south.africa/index.html.

Majtaba, B., & Maxwell, S. (2007). Wal-Mart in the Global Retail Market: Its Growth and Challenges.

Journal of Business Case Studies, 3(2), 1-10.

Mason, J. (2002). Qualitative Researching (2nd ed.). London: Sage Publications.

Mwilima, N. (2003). Foreign Direct Investment in Africa. Labour Resource and Research Institute. Final

Draft Report.

National Treasury. (2011, February). A Review Framework for Cross-Border Direct Investment in South

Africa. Retrieved from National Treasury Department of South Africa:

http://www.treasury.gov.za/documents/

Ngowi, P. (2001). Can Africa Increase Its Global Share of Foreign Direct Investment. West Africa

Review.

OECD. (2003). Peer Review Competition Law and Policy in South Africa.

OECD. (2003). The Objectives of Competition Law and Policy. Global Forum on Competition.

OECD. (2008a). OECD Benchmark Definition of Foreign Direct Investment: Fourth Edition. Paris:

OECD.

OECD. (2008b). OECD Economic Surveys:South Africa 2008. Paris: OECD.

Orb, A., Eisenhauer, L., & Wynaden, D. (2000). Ethics in Qualitative Research. Journal of Nursing

Scholarship, 33(1), 93-96.

Pickelsimer, C. (2010). 2010 Annual Retail Food Sector Report. Pretoria: Office of Agricultural Affairs.

Retrieved from

http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Retail%20Foods_Pretoria_South%20

Africa%20-%20Republic%20of_1-5-2011.pdf.

Roberts, S. (2004). The Role for Competition Policy in Economic Development: The South African

Experience. TIPS Working Paper 8, 1.

Rocha, A., & Dib, L. (2002). The Entry Of Wal-Mart into Brazil and the Competitive Responses of

Multinational and Domestic Firms. International Journal of Retail and Distribution Management,

30(1), 61-73.

Copyright UCT


SA Government's New Growth Plan. (2010). Retrieved December 1, 2012, from Stanlib:

http://www.stanlib.com/EconomicFocus/Pages/SAGovernmentsNewGrowthPlan.aspx.

SACCAWU and Massmart Holdings Ltd, 110/CAC/Jul11 (Competition Appeal Court of South Africa

October 9, 2012).

Smit, C. (2005). The Rationale for Competition Policy: A South African perspective. ESSA Conference.

Sormani, A. (2001). Telecoms Deregulation: Nearing the End of the Beginning. European Venture

Capital Journal.

Stake, R. (1995). Qualitative Case Studies. In N. Denzin, & Y. Lincoln, The Sage Handbook of

Qualitative Research (pp. 443-466). Thousand Oaks: Sage.

Statistics South Africa. (2012). Retrieved August 2nd, 2012, from http://www.statssa.gov.za.

Union Argues in Court Against R16.5bn Walmart Merger. (2011, October 24). Retrieved from Tralac:

http://www.tralac.org/2011/10/24/union-argues-in-court-against-r16-5bn-walmart-merger/.

United Nations. (2012). World Investment Report. Switzerland.

Vickers, B. (2003). Investment Policy, Performance and Perceptions in South Africa: Final Report of the

Investment for Development Project in South Africa. Johannesburg: Institute for Global Dialogue.

Wal-Mart Annual Report. (2011). Wal-Mart Stores Inc. Retrieved from

www.walmartstores.com/sites/AnnualReport/2011/financials.aspx.

Whitehouse & Assosciates. (2011). Retail Trade Report. Johannesburg. Retrieved from

www.brasilglobalnet.gov.br/arquivos/publicacoes/estudos/retailtradereport.pdf.

World Bank. (1992). The East Asian Miracle: Economic Growth and Public Policy. Washington, D.C.:

World Bank.

World Bank. (1993). The East Miracle: Economic Growth and Public Policy. New York: Oxford

University Press.

Yin, R. (2003). Case Study Research and Design Methods. Thousand Oaks: Sage Publications Inc.

Yin, R. (2009). Case Study Research: Design and Methods (4th ed.). United States of America: Sage

Publications Inc.

Bibliography of Legal Documents

The Competition Act, no. 89 of 1998.

Daun et Cie AG v Kolusus Holdings Ltd, 2 CPLR 329 (2003).

Wal-Mart Stores Inc v Massmart Holdings LTD, 73/LM/Dec10 (29 June 2011).

Wal-Mart and Massmart Merger, 110/CAC/Jul11 & 111/CAC/Jun11 (9 October 2012).

Copyright UCT


Appendix 1: Research Plan

Buy SmartDraw!- purchased copies print this document without a watermark .

Visit www.smartdraw.com or call 1-800-768-3729.

Copyright UCT


Appendix 2: Interview Questions

Retail Companies

What in your opinion is Wal-Mart’s objective of expanding into Africa?

What impact do you think Wal-Mart’s entry into South Africa will have on the domestic

retail sector and wider business environment?

How does your company intend to counter the competitive threat arising from Wal-

Mart’s entry into the South African/ Africa Market? Is there a possibility that you will

begin importing more? Is there a scope for collaborative possibilities between your

company and Wal-Mart/ Massmart?

Do you think that the response of the South African unions’ reaction was justified with

regards to the entry of Wal-Mart?

What implications do you think Judge Davis’s judgment on the Wal-Mart/ Massmart case

will have on South Africa’s efforts to attract foreign investment?

What lessons can government, the business sector (especially the retail industry) and

organised labour draw from the Wal-Mart/ Massmart saga?

What measures do you think that companies considering mergers should take to ensure

the smooth running of the merger?

Regulators/ Government Departments

What is the government’s policy of FDI? Is the government’s stance on the Wal-Mart/

Massmart merger not contrary to its stated policy on FDI?

What, in your opinion, is Wal-Mart’s objective of expanding into Africa?



In hindsight, do you think the SA government’s decision to approve the Wal-Mart/

Massmart merger was a wise one? Do you believe that the low costs that Wal-Mart may

be able to offer could be undermined by the possible displacement of local jobs?

(COSATU & SACCAWU& NUMSA & FAWU)

Copyright UCT


It has been suggested that the government departments did not follow the necessary

statutory and administrative processes when appealing the merger. Do you share this

view?

Do you agree with the assertion made by, among others, the former head of the

competition David Lewis that in the absence of a clear FDI policy the government

inappropriately used the Competition Commission to pursue its policy objectives?

Despite the fact that the government’s opposition to the entry of Wal-Mart was based on

public interest, do you believe that investors may have become more wary of investing in

South Africa?

What policy frameworks could the government implement to prevent a repeat of the Wal-

Mart/ Massmart scenario?

DTI

Do you believe that DTI acted in the best interest of the South African economy?

Did you take the WTO principles into consideration when suggesting preferential

procurement quota?

Do you believe that the DTI’s reaction to this merger may have adversely affected the

trade position of South Africa in the WTO?

Do you believe that foreign investors may have been adversely influenced by the DTI’s

response to the merger?

In hindsight, would the DTI choose to alter some of its reactions to the Wal-Mart/

Massmart merger?

Competition Commission

Due to the competitive state of the South African retail market, do you believe that

competition issues were at stake in this merger?

What criteria did the Competition Commission initially use to recommend that the

merger be approved unconditionally? Did the Commission not consider public interest at

first? In retrospect, do you believe that the commission should have done a more

thorough investigation of the merger? Would this have possibly led to a less controversial

reaction by other stakeholders?

Copyright UCT


How can the tribunal improve its investigative procedures?

Do you believe that the government parties involved understood the possible impacts of

procurement related conditions?

Do you believe that certain departments have used the merger to attain policy goals?

Does this compromise the authority of the competition commission?

Do you believe that the reports written by Morris, Steiglitz & Hodge, were valuable

considering the subjectivity and bias of the experts?

Do you believe that the judgment has managed to balance competition benefits and the

best interests of the public?

Taking this scenario into consideration, what does the Commission plan to do to ensure

the smooth running of future mergers?

What policy frameworks do you think the government could implement to prevent a

repeat of the Wal-Mart/ Massmart scenario?

Do you believe that foreign investors may have been discouraged by this merger?

Retail Analysts/ Commentators

What in your opinion is Wal-Mart’s objective of expanding into Africa?



Do you think that Wal-Mart’s business model may violate union practices? Considering

Wal-Mart’s history regarding employee practices, do you believe that the reaction of the

unions was justified?

What impact will the entry of Wal-Mart have on the South African economy? Do you

think there are high costs to Wal-Mart’s low prices?

Do you believe that the R100 million contributed by Wal-Mart will balance all possible

negative supply chain impacts that follow the retail giant?

What measures do you think that companies considering mergers should take to decrease

problems?

This merger had the possibility of increasing the confidence in the South African

economy. Considering the many problems and controversial reactions, do you think this

was the case?

Copyright UCT


What were the major problems in this merger? How should the different stakeholders

remedy policies, reactions etc to prevent a repeat of the Wal-Mart/ Massmart scenario?

Judge Dennis Davis

What were the main factors that contributed to your belief that the benefits would

outweigh the detrimental effects?

What were your major concerns regarding the merger?

Do you believe that the R100 million contributed by Wal-Mart will balance all possible

negative supply chain impacts that follow the retail giant considering the reports of

Steiglitz & Hodge?

How do you feel that the Competition Commission can improve its investigative

procedures?

What do you believe were the biggest errors committed by the different stakeholders’

through-out the duration of the merger?

What frameworks can be implemented to ensure that this scenario is not repeated?

Copyright UCT


Appendix 3: Core Principles for Investment Policymaking for Sustainable Development

Area Core Principles

Investment for sustainable development The overarching objective of investment

policy making is to promote investment for

inclusive growth and sustainable

development.

Policy coherence Investment policies should be grounded in a

country’s overall development strategy. All

policies that impact on investment should be

coherent and synergetic at both national and

international levels.

Public governance and institutions Investment policies should be developed

involving all stakeholders, and embedded in

an institutional framework based on the rule

of law that adheres to high standards of

public governance and ensures predictable,

efficient and transparent procedures for

investors.

Dynamic policymaking Investment policies should be regularly

reviewed for effectiveness and relevance and

adapted to changing development dynamics.

Balanced rights and obligations Investment policies should be balanced in

setting out rights and obligations of States

and investors in the interest of development

for all.

Right to regulate Each country has the sovereign right to

establish entry and operational conditions for

foreign investment, subject to international

commitments, in the interest of the public

good and to minimise potential negative

effects.

Copyright UCT


Openness to investment In line with each country’s development

strategy, investment policy should establish

open, stable and predictable entry conditions

for investment.

Investment protection and treatment Investment policies should provide adequate

protection to established investors. The

treatment of established investors should be

non-discriminatory.

Investment promotion and facilitation Policies for investment promotion and

facilitation should be aligned with

sustainable development goals and designed

to minimise the risk of harmful competition

for investment.

Corporate governance and responsibility Investment policies should promote and

facilitate the adoption of and compliance

with best international practices of corporate

and social responsibility and good corporate

governance.

International cooperation The international community should co-

operate to address shared investment for

development policy challenges, particularly

in least developed countries. Collective

efforts should also be made to avoid

investment protectionism.

Source: (World Investment Report, 2012, p. 107)

Copyright UCT


Appendix 4: Structure of the National Policy Guidelines

Investment and sustainable development

strategy

-Integrating investment policy in sustainable

development strategy

-maximizing the contribution of investment

to productive capacity building and

international competitiveness

Investment regulation and promotion -Designing investment specific policies

regarding:

1. Establishment and operations

2. Treatment and protection of investments

3. Investor responsibilities

4. Investment promotion and facilitation

Investment related policy areas Ensuring coherence with other policy areas,

including trade, taxation, intellectual

property, competition, labour market

regulation, access to land, corporate

responsibility and governance, environmental

protection, and infrastructure and public –

private partnerships

Investment policy effectiveness -Building effective public institutions to

implement investment policy

-measuring investment policy effectiveness

and feeding back lessons learned into new

rounds of policymaking

Source: (World Investment Report, 2012, p. 121)