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Sample Research Paper on the Competitiveness of the Mining Industry in South Africa in International Trade

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Sample Research Paper on the Competitiveness of the Mining Industry in South Africa in International Trade

The purchase of services and goods across the international boundaries constitutes the international trade (Wild & Han, 2006). In this case, there is importation and exportation process involved in the process. A country taking part in international trade has a number of benefits. In the first place, an exporting country can obtain a market for its surplus products, whereas the importing country can obtain goods and services it did not have. In addition, the exporting countries provide job opportunities to its subjects, and this ensures that the economy develops. In addition, foreign exchange is enhanced and thus a country participating in international trade can compete on the international scene. International trade is affected by various phenomena that can well be explained through some theories of international trade. Theories of international trade explain how a country is competitive in a given line of industry. This paper explores the mining industry of the republic of South Africa. The exploration involves the application of international trade theories to explain the competitiveness of the industry.  

The Mining Industry of South Africa

South Africa (SA) is arguably the biggest economy in Africa. The growth and development of its economy have been enhanced by the mining industry. Mining is among the oldest industry in SA, whereby it started in 1867 after the discovery of diamond along Orange River banks. In 1886, the industry took a giant leap after the discovery of gold. Although the current exploitation rate of gold is past its peak, SA is still among the largest gold producer in the world, whereby it is currently the fifth largest producer. At the same time, SA has a wealth of minerals and thus the mining industry remains the country’s largest source of economic growth (Kirk, Ruiz, Titley, & Spencer, 2003). According to Lohi (2013), the mining industry accounts for 76% of export revenue and has an annual revenue of R330 billion.

Currently, SA is the largest producer of manganese, chrome, vanadium, platinum, and vermiculite in the world. The country is also the second largest exporter and producer of palladium, zirconium, and limonite in the world. In addition, SA is ranked third in terms of production and exportation of coal. The republic of South Africa also has iron ore deposits, whereby it is the largest exporter of Iron ore to China. China is the main importer of Iron ore in the world (Deloitte, 2013).

The Republic of South Africa exports its minerals to various countries in Asia, Europe, and America. The industry has employed a very large number of people. According to South Africa Infor (2014), about one million people are employed in the SA’s mining industry. The industry boasts SA’s GDP, such that 20% of the GDP is contributed by the mining industry. From the 20%, half of it is contributed directly. The industry boasts annual income of R330 billion (South Africa Infor, 2014). 

How International Trade Theory Fits the Mining Industry in South Africa

There are a number of theories of international trade, which apply to the mining industry in South Africa as discussed in this section.

Mercantilism

This theory states that the country should strive to sell more to the strangers than it buys from them so as to increase its wealth (Samuelson, 2001). In this case, South Africa should strive to sell more than it imports. This theory partly applies to the mining industry, but it is not entirely applicable in the long term. SA is among the richest countries in the world in terms of mineral endowment and thus it can use this opportunity to export more minerals to its trading partners. In this case, it can revolutionize its mining industry to include more techniques of mining in an effort to increase the quantity of minerals. However, it can be argued that minerals are nonrenewable and thus it has a limit of production. As a result, SA cannot compete effectively because it will reach a time the minerals will be depleted entirely.

Absolute Advantage Theory

According to this theory, a country exhibits an absolute advantage if it is more efficient compared to another country in the production of a certain product. From its historical perspective, the mining industry of SA has evolved from nothing into a giant industry. Initially, the country discovered only diamond, and later gold. However, presence of technical expertise and equipments has led to the discovery of more minerals, and there is an indication that the country has other mineral deposits including oil. When contrasted with the Democratic Republic of Congo, South Africa has developed mainly as a result of expertise in the mining industry, and this indicate that the country has an absolute advantage. The absolute advantage can also be analyzed in terms of mineral endowment. South Africa is endowed with mineral resources than most of its trading partners and thus it has an absolute advantage over other countries (Kirk, Ruiz, Titley, & Spencer, 2003). Even if those countries have the best technology for extracting minerals, it cannot be of any use because they have no endowment.

Comparative Advantage theory

This theory assumes the existence of two countries producing two types of goods. In this case, even if a country has more expertise in the production of two products, it will be beneficial for it to trade with another country with less absolute advantage than doing without (Samuelson, 2001). In terms of the mining industry, South Africa can attain a comparative advantage if it trades with large coal producing countries, such as China. Although South Africa is well endowed with gold and coal, it can benefit by importing coal from China and exporting gold to china as well, even though it has sufficient coal for its people. Producing coal in SA is proving expensive because the process is depleting water resources (South Africa Infor, 2014).

Heckshcer_Ohlin Theory

This theory states that the absolute advantage comes, as a result, of the endowment rather than expertise (Wild & Han, 2006). This theory applies well to the mining industry in SA. Since SA is endowed with large quantities of gold, it has an advantage over other countries, such as Japan, which has a very high technology, but little mineral resource endowment.  

New Trade Theory

This theory suggests that a country that permits specialization in a certain line of products enables their industries to attain low cost and economies of large scale production. This allows the country to obtain goods it does not produce at a low cost (Samuelson, 2001).  When applied to the mining industry, this theory does not support it effectively. Minerals, although very essential to the economy of SA, do not present a healthy future in terms of sustainability and thus a country cannot rely on it alone for its international trade.   

Porter Diamond Theory

Porter diamond theory explains the competitive advantage of a nation using four factors, and this can be used to examine the competitiveness of the mining industry of South Africa. The four factors, which make up a diamond structure, are discussed below:

Factor Endowments

Factor endowment refers to the position of the country in terms of factors of production. These factors are required for the country to compete on a global scale. South Africa is well endowed with mineral resources, and this sets it apart in terms of competitiveness in the mining industry. The country has very large deposits of gold, coal, oil, manganese, chrome, vanadium, platinum, vermiculite palladium, zirconium, and limonite (South Africa Infor, 2014). These deposits make South Africa a hub of minerals in the world, and arguably among the richest countries in terms of mineral deposits. In this case, other countries with small deposits cannot stand the competition. In addition, South Africa has a ready and cheap labor. Mining of minerals such as gold is labor intensive, and thus the country with a large supply of labor can stand the competition.

Demand Conditions

Demand conditions in the home country are essential because it drives the industry to be innovative. If the local population is conscious of creativity and innovativeness, the local industry may be driven into being innovative and more productive, and this enables it to be more competitive on the international scene (Samuelson, 2001). In South Africa, the mining industry has stiff demand, mainly from the government. The government has been setting up laws and policies to ensure production is up to the required standards. However, the locals do not have pressure in terms of demand for minerals in South Africa. Minerals are foreign exchange earner and thus they are mainly meant for export.

Supporting and Related Industries

Supporting industries ensures that the main industry is well supported and thus able to compete on the global scene. If the supporting industry is competitive on the international scale, it will make the main industry competitive on the international scale. The mining industry in South Africa is affected by a number of supporting industries. In 2006, legislation was passed allowing for the formation of the junior mining sector (South Africa Infor, 2014). This sector provides the condition that companies engaged in mining must use it or lose it. In this case, firms were allowed to increase their competitiveness to ensure their survival (Baloyi, 2014). As a result, there has been the formation of associations of small-scale miners, who have consolidated supporting infrastructures to ensure they remain competitive (Deloitte, 2013). At the same time, most of the mining companies are international companies and thus they operate on international standards making the industry competitive.

Firm’s Strategy Structure and Rivalry

Every industry operates based on the management ideologies within its country of operation. In this case, if the management ideology is effective, it will make the industry more competitive. At the same time, if the domestic rivalry exists in a given industry, then there will be an element of competitiveness within that industry, and this will translate into international competitiveness (Akaka, Vargo, & Lusch, 2013). The current state of the mining sector in South Africa is not healthy in terms of international competitiveness. According to Marebane (2014), South Africa is tending towards nationalization of its mining industry. If the plans go head, it means private ownership and industries will be turned to the public ownership. Since foreign companies dominate the industry, this is likely to create uncertainties in their operations. At the same time, the industry has adopted weak stance in labor management. There is little effort to reform the labor industry, whereby salaries are low despite the fact that there is an upcoming educated segment of the labor force (Deloitte, 2013). This has seen the industry face a number of labor unrest, thereby affecting its industry. 

Conclusion

South Africa is among the leaders in terms of mineral resource endowment. This paper has explored its competitiveness using Porter Diamond theory. From the analysis, it has been discovered that SA is competitive when explored in terms of resource endowment facet of the diamond. The endowment is in terms of large minerals in situ and labor. However, the country is less competitive when evaluated in terms of demand conditions. When evaluated in terms of supporting industry, the country is moderately competitive, but when evaluated in terms of strategy and structure, SA is not competitive.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


References

Akaka, M., Vargo, S. L., & Lusch, R. F. (2013). The Complexity of Context: A Service Ecosystems Approach for International Marketing. Journal Of International Marketing, 21(4), 1-20.

Baloyi, P. (2014). Foreign demand makes local mineral sands project ‘extremely attractive.’

Kirk, J., Ruiz, J., Titley, J., & Spencer, C. (2003). The Origin of Gold in South Africa. American Scientist, 91, 534-531.

Lohi, J. (2013). The Implications of HO and IRS Theories in Bilateral Trade Flows within Sub-Saharan Africa. Global Economy Journal, 13(2), 175-202. doi:10.1515/gej-2012-0020

Marebane, T. (2014). Mine Nationalisation – Should South Africa Nationalise its Mining Industry?

Samuelson, P. (2001). A Ricardo-Sraffa Paradigm Comparing the Gains from Trade in Inputs and Finished Goods. Journal of Economic Literature , 39 (4), 1204–1214.

South Africa Infor. (2014). Mining and minerals in South Africa.

Wild, W., & Han, L. (2006). Wild, Wild & Han (2006). International business: the challenges of globalization. Upper Saddle River, New Jersey. Prentice Hall. Upper Saddle River, New Jersey: Prentice Hall.

 

 

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