What D etermines Dutch SME’ s Longevity in Doing Business in South Africa?

(1)

What Determines Dutch SME’s Longevity in Doing Business

in South Africa?

A look at international experience, non-traditional partnerships and CSR activities

by

Lotte Sophia Tenge

Supervisor: dr. B.J.W. Pennink Faculty of Economics and Business

(2)

Abstract

This research analyzed longevity of business in South Africa by the following main question: what determines Dutch SME’s longevity in doing business in South Africa? Led by literature review, three variables were identified presumed to be of the most influence on longevity of business. These variables were: international experience, non-traditional and traditional partnerships and CSR activities and they formed the basis of three sub questions. Experts in the field of Dutch SMEs in South Africa were approached in the form of a request for in-depth interviews and conversations, which they very kindly granted. Additionally, they provided illustrating papers and documents concerning the subject.

As for the research question of what determines a Dutch SME’s longevity in doing business in South Africa, the three sub questions shine a clear light on this and pave the way for practical and pragmatic advice to Dutch SMEs in the country. The research showed that partnerships with non-traditional partners and undertaking local Corporate Social Responsibility (CSR) activities lead to more longevity in South Africa. No viable indication was found concerning the effect of international experience on longevity of business. The author recommends further research into how international experience influences Dutch SME’s longevity of business in South Africa.

(3)

1. Introduction

As protectionist barriers previously in place in many developing countries start to fall, multinational corporations (MNCs) as well as small and medium-sized enterprises (SMEs) are flocking to potentially huge markets. These markets present SMEs from developed economies with new opportunities for growth, as the economic development that is taking place in these emerging markets raises disposable income levels. There is a growing middle class that is characterized as an “upscaling of lifestyle norms; the pervasiveness of conspicuous, status goods and of competition for acquiring them; and the growing disconnect between consumer desires and incomes” (Kharas, 2010).

As we observe shrinking economies in Western Europe and North America, accompanied by shrinking profit margins and an increase in competition all over, firms are faced with the reality of low growth rates. This has created the need to be on the lookout for markets that still present a high growth rate and the prospect of higher profit margins (DBIA, p.6). Countries like Brazil, India and China are typically hailed as some of the biggest and most promising emerging markets. Dutch firms, specifically, seem to hold these emerging markets in high regard, as “about 80% of the 36 Dutch multinationals listed on the Amsterdam Stock Exchange active in emerging markets regard China and Brazil as important growth markets. More than half are already active or hope to gain a foothold in India, and one-third are looking at Russia as a growth market” (Lem, Tulder, Geleynse, Bijl & Jones, 2013). However, it seems that it is high time to consider the “great African take-off”, as noted by Katherine Tweedie of the World Economic Forum (World Economic Forum, 2014). Renowned investor George Soros has described the continent as 'one of the few bright spots on the gloomy global economic horizon' (Uhy.com, 2014). If the past were any indication, firms would be wise to turn their attention to Africa. Over the period from 2005 to 2009, the GDP per capita of numerous African countries exceeded those of the BRIC countries Russia, Brazil, India and China (Lem, Tulder, Geleynse, Bijl & Jones, 2013).

(6)

distribution systems (Arnold & Quelch, 1998). SMEs therefore will have to adapt and change their ways of doing business there if they wish to be successful in these auspicious markets (Khanna, Palepu & Sinha, 2005). This necessitates more

knowledge as to what exactly determines and contributes to success in these markets. This study will focus on the Netherlands and South Africa and what determines Dutch SME’s longevity in doing business in South Africa.

1.1 Context

In addition to the previously mentioned BRIC countries, there are numerous other markets that are classified as emerging, such as Argentina, Egypt, Hungary, Malaysia and Peru (Rapoza, 2014). In this study, South Africa was chosen for several reasons. It is an interesting case because the country provides SMEs with ample opportunities, “remaining the highest rated economy on the African continent”, while Ernst & Young’s African business center leader Michael Lalor stated that South Africa’s “economic fundamentals are sound” (Led.co.za, 2014). It represents Africa’s largest economy, producing 30% of the total output of the whole of sub-Saharan Africa (Lem, Tulder, Geleynse, Bijl & Jones, 2013). South Africa also shares many similarities to other emerging markets, such as a lack of availability of work force and predominantly poorly educated workers (The Economist, 2014). Even though emerging markets are by no means identical, we can observe many similarities between emerging markets such as underdeveloped capital markets, limited enforcement of law and a scarcity of well-trained potential employees (Hoskisson, Eden & Wright, 2000). As South Africa shows numerous aspects, both positive and negative, similar to other emerging markets, lessons learned might also be translated to these other emerging markets.

(7)

when Dutch commander Jan van Riebeeck, together with his 90 men, settled at the Cape of Good Hope in 1652. Their goal was to establish a trading post for the Dutch East India Company, as South Africa was a significant strategic business location in view of its sea location (Dfa.gov.za, 2014). Ever since, there has been an ongoing business relationship between the Netherlands and South Africa. To this day, South Africa represents the most important African market for Dutch firms, and the Netherlands is the second biggest investor in South Africa, representing 11% of total foreign investment in South Africa; more than the USA, Germany or China (Zuidafrika.nlambassade.org, 2014). Additionally, it is South Africa’s 3rd biggest EU trading partner and 7th largest trading partner in terms of total volumes (SANEC Business Directory, 2014). A request to the Embassy of the Kingdom of the Netherlands in Pretoria, South Africa, for more information confirmed that a large amount of Dutch SMEs operate in South Africa when compared to SMEs from other countries, in large part due to the history that still connects the two countries to this day. Additionally, the Embassy presented an extensive list of Dutch firms active in a diverse range of industries and sectors in South Africa. Thus, the previously mentioned historic and ongoing business relationship between the Netherlands and South Africa presented us with a considerable number of relevant Dutch SMEs active in South Africa. This paved the way for an interesting and relevant study into Dutch SMEs in South Africa.

1.2 Research purpose and relevance

This study will provide SMEs with an inclination of what enables longevity of business in this emerging market, and they might also consider this when entering other emerging markets that have similar characteristics. The sub-questions will give room for a more detailed analysis of the main research question by separating and discussing in more detail some of the important aspects of entering and achieving this longevity in South Africa.

(8)

“posing a challenging array of long-term political, economic, financial and operational risks” (van Wyk, Dahmer & Custy, 2004). This poses the following problem: foreign firms doing business in South Africa face major complications including political risk, bad infrastructure and weak regulatory systems.

In this study, we set out to examine what determines whether Dutch SME’s that enter the South African are able to have longevity in South Africa; that is, whether they are able to do business in the long-term there. As we seek to minimize the effects that cultural aspects have on doing business in an international setting, we will focus specifically and solely on Dutch SMEs doing business in South Africa.

Although we specifically focus on Dutch firms in South Africa, the goal of this study extends further. We hope it provides SMEs with more insight into how to do business in such a manner that it enables longevity of business in emerging markets and countries similar to South Africa. This might enable SMEs to transfer certain lessons learned to future or present emerging markets they aim to be part of, or are already operating in (Luo & Tung, 2007).

2. Literature review

Some research into doing business in South Africa has previously been performed, however there are considerable gaps in the literature. Previous research has been mainly focused on the larger developing markets of countries such as Brazil, India and China. However, smaller markets that have not necessarily experienced the same surge of interest from SMEs have not been researched to the extent that it can provide SMEs with sound insights that can help them in assessing the viability of entering these markets.

(9)

fails to provide information on South Africa specifically. This is a prevalent issue in literature; Africa is often considered to be one area much the same as Brazil or China can be considered to be one. This portrait does not do justice to the world’s second-largest continent that contains more than 50 countries, 2000 spoken languages and considerable variations in social and economic development. Nevertheless, this adapted approach has resulted in a lack of research into South Africa in particular and created a lack of specific information for SMEs that can guide SMEs that are planning to do business or are already active in South Africa (Focac.org, 2015).

Additionally, as concerning research into South Africa, one can observe a strong tendency in the research into this subject to focus on MNCs rather than SMEs. Bhaumik and Gelb (2005) have identified several variables that influence longevity of business in South Africa and Egypt specifically. Studies concerning CSR in South Africa have stressed the importance of local CSR projects and conducting business in a manner that takes social responsibility into account (Eweje, 2006). However, these studies focused solely on MNCs and any lessons learned cannot necessarily be transferred to SMEs. As Shuman & Seeger (1986) state “small and medium-sized enterprises (SMEs) are not smaller versions of larger companies, but mainly due to their size they tend to interact differently with their environment” (Shuman & Seeger, 1986). Due to these considerable differences between MNCs and SMEs, previously mentioned research does not provide the necessary understanding as to how these factors relate to SMEs as opposed to MNCs. Additionally, many have focused specifically on a limited amount of sectors, rather than providing information that could aid firms in other sectors such as manufacturing.

(10)

Lastly, there is a gap in existing literature concerning SMEs from developed countries going into business in South Africa. There has been little research as to why certain firms are able to sustain in this market, while other are not able to do the same. This research will therefore shine light on what qualities, assets, competences, and such enable a firm to do well in the South African market. This will guide SMEs that are planning to do business or are already active in South Africa, by providing information concerning factors needed to achieve longevity in this market. For these reasons, there is particular relevance in researching South Africa, not only because it would be highly helpful for SMEs to be more informed as to what enables success in this emerging market, but also because this acquired knowledge could potentially be transferred to entry in other emerging markets that often present SMEs with the same challenges.

3. Conceptualization and hypotheses

The goal of this research is to find how certain factors have an influence on whether SMEs reach longevity in doing business in South Africa. In the bigger scheme of things, we aim to shine light on one following research question:

3.1 Research question

Research question: What determines a Dutch SME’s longevity in doing business in South Africa?

(11)

As ‘longevity’ is a widely used and sometimes misunderstood term, we will clarify its meaning in this context. By longevity, we refer to the amount of time a SME is able to do business in South Africa, say six months or ten years. It thus does not relate to longevity in the form of environmental longevity. The reason it is defined in this manner is that the aim here is to find out what determines a Dutch SME’s ‘success’ in doing business in South Africa. However, success is a very subjective term in the field of business, and is problematic in its definition. Success in business can relate to factors such as financial, human or social capital, and is dependent on the firm itself, its (long-term) goals, the vision and goals of its stakeholders, and so on. Especially in a reasonably volatile market, it is important to have a sound definition for success. In discussing success in Africa, many writers have taken the same approach:

“Success in sub-Saharan Africa is the ability to secure a long-term recognized competitive position in an African market” (Lem, Tulder, Geleynse, Bijl & Jones, 2013).

Altering success for longevity enables a clearer characterization of how SMEs have been able to have ‘longevity of business’ in South Africa; that is, be able to do business there in the long-term. This will give us an indication of how well these SMEs are performing in South Africa.

Based on an extensive literature scan and analysis, we expect several factors to have the most significant impact on a SME’s ability to have longevity of business in South Africa. Following, we will expand on these impact factors, discuss how they relate to the research question and illustrate in what manner they are expected to influence longevity of business in South Africa.

3.1.1. International experience

(12)

factors. Reuben and Fischer (1997) showed that international experience of a firm is highly correlated with delay costs, that is: internationally experienced firms tend to be more skilled in finding appropriate ways of partnering up and have less delay costs. It has been stated that previous international experience leads to more longevity because firms are more used to dealing with the environment of emerging markets (Khanna, Palepu & Sinha, 2005). Dalal-Clayton and Sadler (2005) suggest that international experience tends to lead to this longevity because a firm that has already developed an understanding of these, often challenging, markets, which in turn helps them develop skills and capabilities that serve them well when entering emerging markets. However, some research points out that this experience might also cause organizational inertia, thus having a negative influence on longevity (Khanna, Palepu & Sinha, 2005). Literature provides us with a clear indication that international experience has a considerable bearing on longevity of business and is in consequence presumed to be a vital impact factor. Thus, a sub question is proposed as follows.

Sub question 1: How does international experience influence Dutch SME’s longevity of business in South Africa?

3.1.2. Traditional vs. Non-Traditional Partners

Partnerships between businesses and these non-traditional partners have become more and more prevalent. As defined by London and Hart (2004), traditional partners include local partners that are already established in the country the SME is aiming to enter, while non-governmental organizations (NGOs), local communities, community chiefs and village level governments can be categorized as non-traditional partners.

(13)

provide the firm with local legitimacy and local expertise (London & Hart, 2004). Additionally, partnerships with non-traditional partners can create a larger pool of knowledge and capabilities and, as such, result in a greater corporate profitability and effectiveness (Rondinelli & London, 2003). On the other hand, it has also been argued that non-traditional partners cannot provide a SME with the advantages a traditional partner can, such as financial funds and market share. SMEs in particular have a need for these factors when the goal is to sustain business in the South African market (Lem, Tulder, Geleynse, Bijl & Jones, 2013).

It is established in literature that a link between partnerships and longevity can be observed. Thus, there is reason to believe that another factor that is expected to influence SME’s abilities to do long-term business in South Africa is whether they team up with traditional or non-traditional partners. As such, a sub question is proposed as follows.

Sub question 2: How do non-traditional partnerships and traditional partnerships influence Dutch SME’s longevity of business in South Africa?

3.1.3. CSR

As a reaction to corporate scandals and the perceived lack of social and economic value firms doing business in developing countries bring to these economies, firms have been faced with “mounting pressures on business to demonstrate its social accountability, especially those operating in politically and environmentally sensitive regions of the world” (Eweje, 2014). Adding pressures from shareholders and stockholders translate to a greater awareness of not only doing ‘well’, but also doing ‘good’ (Mckinsey.com, 2014).

(14)

goodwill to customers in the South African market. Being active in local CSR and setting out to make a positive contribution to the South African economy can result in local government support, higher customer satisfaction and enhanced shareholder value for that SME (Hamann, 2014). Nevertheless, CSR projects tend to demand huge investments that do not necessarily pay off, especially when not managed properly. Particularly in the context of SMEs compared to MNCs, the latter can allocate more funds towards CSR (Small Business - Chron.com, 2015). Thus, a sub question is proposed as follows.

Sub question 3: How do local CSR activities influence Dutch SME’s longevity of business in South Africa?

3.2. Concepts and conceptual model

Derived from a thorough review of the literature, we expect the three factors mentioned above to be of the most impact on longevity in South Africa. We focus on these three impact factors in our study because there is reason to believe they are most vital to longevity and therefore can be expected to provide the most meaningful insights. As previously discussed, while literature suggests these concepts are of influence on longevity, the manner in which they do so is heavily debated. This sets us on a path of discovery on how they actually impact longevity and what meaning we can assign to these roles.

(15)

These concepts do not present fixed concepts necessarily but rather serve the purpose that can be compared to sensitizing concepts. It is important to therefore not start the research with a preconceived notion of the meaning of these concepts, but rather to employ them in such a manner to discover, understand, and interpret what is actually happening in our research setting, and developing a deeper understanding of certain phenomena. The concepts in this research were used in a similar manner to Bowen’s technique and own previous research into antipoverty projects in Jamaica. That is, the concepts were used to lay the foundation for the analysis of research data, concepts in an analytic frame that reflected previous theoretical ideas derived from literature. They served as a “point of reference and a guide in the analysis of data with theory-producing potential” (Bowen, 2008). As such, the conceptual framework for the study included three concepts, which formed part of the analysis.

(16)

are taught how to recognize the numerous counterfeit products and thus protect the market from the inflow of misleading, low-quality products. Noting another example, Vlisco sells products that still have to be fitted to the customer’s wishes and preferences, and it actively supports local vendors and dress makers by providing employment, training and skills to locals. These are feats that we, commencing the research, would not necessarily define as CSR projects due to the fact that they do not present the visibility and easily detectable contributions that most CSR activities do. Nevertheless, in reality, most of the previously mentioned feats do certainly contribute to local communities. Thus, tbe concept of CSR was extended to include these vital and relevant means of CSR and its outcomes.

4. Research Design

In this chapter, the design of the research will be elaborated on. In doing so, the hope is to provide the reader with a clear depiction as to how the research was set up, and in this case, adapted, and how it was measured in the manner that we extracted findings from it.

4.1. Research Approach

While there is considerable research concerning the concepts we will discuss and the effect different variables have on the longevity of business in emerging countries, previous research and literature has provided us with several factors that are presumed to have either a negative or positive effect on this longevity.

(17)

have longevity in South Africa. They are important elements and relationships that can provide explanations to certain outcomes.

As the eventual goal of this study is to aid Dutch SMEs that decide to do business in South Africa, we aim to provide insight into how our selected variables influence the ability of SMEs to have longevity in South Africa. As previously noted, the goal is to gain insight into the meaning of the arrows in the conceptual model rather than the concepts as such. In order to do so, we must therefore focus on the “how” and “why” questions, rather than the “who” and “where” questions, or their derivatives “how many” or “how much” (Yin, 1994).

In order to obtain a grasp on how the factors we put forward influence longevity in doing business in South Africa, we will perform qualitative research. Regarding qualitative research, we refer to the definition of Straus and Corbin (1998), who outline qualitative research to include every type of research that presents findings not obtained by statistical procedures or quantifying empirical material. Other authors provide a more detailed description as follows:

“Unlike survey methodologies, in-depth interviewing typically is based on an inductive and flexible approach where the content and strategy can change as the research project evolves” (Marsiglio, 2004). In the course of this research, there has not been a noticeable change or shift in this manner, meaning: the sensitizing concepts did not see much development.

“Qualitative research involves an interpretive, naturalistic approach to the world. This means that qualitative researchers study things in their natural settings, attempting to make sense of, or to interpret, phenomena in terms of the meanings people bring to them” (Denzin and Lincoln, 2011).

(18)

events and a focus on contemporary events, a case study is the obvious choice (Yin, 2009). Adding to this is the fact that there are numerous interesting cases available for research, and we feel that this practical approach will be an interesting angle to the research. Case studies are most relevant concerning this particular research, because it enables us to gain more insight as to the relationships across the cases researched and a larger population of cases (Gerring, 2006). Because we are especially interested in the effect the three variables have on the dependent variable, we will study these aspects of the case and how they may relate to the dependent variable. Thus, we will not study the case as a whole, but rather focus on the aspects that are relevant to our research. As a single case will not produce results or inferences that are necessarily robust and do produce ‘ convincing empirical grounding’, we will perform research into multiple cases (Van Veen & Pennink, 2014). As mentioned in the course ‘Research Methodology for MSc IB&M’, “while there is no ideal number of cases, a number between 4 and 10 cases usually works well” (Eisenhardt, 1989).

4.2. Adaption of the research plan

Commencing this research, the original intention was to set out to conduct case study research in a different manner than we finally arrived at. Inspired by literature and previous case study research, the intention was to interview numerous Dutch firms active in South Africa. However, in the process of orientation for out research, the opportunity arose to actually speak to experts that had acquired extensive experience in this particular field. This has led to a deliberate and conscious decision to adapt the research plan.

(19)

Dutch SMEs established. Therefore, they are able to indicate with expert knowledge and guidelines, “what works” in this emerging market, and what does not.

Fact is that in emerging, and ever-changing markets such as South Africa, it is difficult to deduct what SMEs are successful at the moment yet will not sustain in the market, and what SMEs have actually built longevity of firms that will last the test of time. Therefore, another consideration has been objectivity: when speaking to business owners, managers or employees of Dutch SMEs in South Africa, one can never be quite sure of their objectivity. There is a tendency to ‘paint a prettier picture’ of business. This could be for personal gain or simply because there tends to be a lack of objectivity when assessing your own work and business. Experts are less personally involved and invested in these SMEs, and can be expected to give a more realistic and fair representation of their experiences.

Whereas a more direct analysis of Dutch firms in South Africa might be the more obvious choice, the decision to take a different route was a carefully considered one. There is sufficient reason to presume this will aid objectivity to this research and present a more realistic view. Moreover, we feel this method provides a more in-depth research and makes for a more interesting read. Additionally, the extensive knowledge these experts have acquired will help in our goal to aid Dutch SMEs wishing to have longevity in the South African market, and perhaps in comparable markets. A description of the manner there was contact with these experts will follow.

(20)

Following interviews with the SANEC representative, the question emerged of what would be worthwhile to research following.

As described by Maruster and Gijsenberg (2013), theoretical sampling “may be considered based on potential capacities to offer intriguing and important variation in comparisons”. In this light, an interesting comparison was presumed with the potential inclusion of Vlisco. Vlisco is very much active in the most countries in Africa, yet has not established long-term business in South Africa. Vlisco was chosen due to the fact that it has an extensive history in Africa in general, yet has made quite a conscious decision not to be as active in South Africa as it would ideally like to be, as opposed to SANEC. It does not operate long-term in South Africa to the extent that SANEC does. This presented the opportunity for an interesting and relevant comparison between the two. In comparing the two, we gained more insight into how the impact concepts influence longevity in South Africa.

4.2.1. SANEC

SANEC (The Southern African - Netherlands Chamber of Commerce) characterizes itself as “the key intermediary for companies, organizations and entrepreneurs doing business or seeking to do business in and between the Netherlands, South Africa, the Benelux and the southern African region” (Sanec.org, 2015). The organization has also launched the “Port & Corridor Cooperation”, a collective of Dutch companies exploring the possibilities in South Africa. With more than 450 members, the organization has obtained extensive knowledge of the business climate in South Africa and specifically business between the Netherlands and South Africa (Portandcorridor.org, 2015). Additionally, they have practical experience and have seen first-hand what “works” when Dutch firms decide to do business in South Africa.

(21)

ample experience in guiding Dutch firms that enter South Africa. He has bestowed us with vital and extensive information, examples and insight as to how the factors we discussed influence whether Dutch SMEs are able to have longevity of business in South Africa.

4.2.2. Vlisco

In addition to conversations with Mr. Reyneker, Mr. Roble Elmi, Business Development & Strategy Manager at Vlisco, has provided considerable knowledge on the subject. Vlisco is headquartered in Helmond, the Netherlands, and produces high-quality fabrics and textiles that are specifically designed and tailored to several African countries. The fabrics produced are henceforth sold to African customers, who then employ a tailor to transform it to the desired style of dress.

Where the firm has experienced steady growth since its foundation with current revenues of more than 270 million Euros annually, it might not appear to be the obvious choice when the aim is to gain insight into Dutch SMEs. However, Vlisco is a shining example of a Dutch firm that has indisputably achieved longevity. Having been active in Africa since its foundation in 1846, it has since grown to be a strong firm. With its extensive history, it has grown into a firm that does not merely “do business” in Africa, but has created a strong foundation of local presence and knowledge. With humble beginnings in the Netherlands, the Dutch firm has immersed itself in the market in a way that is unprecedented.

Contact with Mr. Elmi was established through the guidance of Mr. Fokko Keun, HR Director at Vlisco Netherlands. After relaying to him the aim of this study, he referred to Mr. Elmi, Business Development & Strategy Manager at Vlisco, as he felt he would be the most knowledgeable and appropriate person on the subject of the study. Subsequently, he has extended stories about the company’s history, activities and experiences, especially relating to partnerships, international experience and CSR projects.

(22)

4.3. In-depth interviews

“An interview is a directed conversation; an intensive interview permits an in-depth exploration of a particular topic with a person who has had the relevant experiences”. (Charmaz, 2006)

We will adhere to in-depth interviews in the manner as described as ‘traveler metaphor’ by Kvale (1996), where he argues that instead of knowledge simply being given from one person to another, the interviewer is regarded as a traveler who journeys with the interviewee, that is: “the traveler asks questions that lead the subjects to tell their own stories of their world”. The reason and benefit of this approach to in-depth interviews is that it enables the interviewer when the goal is to not merely attain data or knowledge, but to actually get to the bottom of the research question proposed. While there was a guiding set of questions as referring to the factors identified in this research, nothing was set-in-stone, and there were no strict borders concerning the conversation. The goal here was to gain knowledge in relation to the main research question and variables, yet to enable the conversations to flow in the most organic way possible.

Nevertheless, this is not opposite the drive of this research and the goal to gain insight and discover what might be new in relation to existing theoretical knowledge, not merely what is new purely in the light of the conversations. A balance therefore must be stricken between a clear direction of the interview and allowing for new insights and experiences to come to light.

(23)

regarding what is new in relation to existing theoretical knowledge and what is new in the (previous) conversations.

To come to not only new insights, but also to focus on what is new in relation to existing theoretical knowledge, the in-depth interviews were conducted in a manner that allowed this. For example, a factual question relating to CSR would ask, “What CSR activities were conducted in South Africa?” where the question allowing more insight would ask, “In what manner have these CSR activities influenced the firm’s business in South Africa?“ Probing questions were added when they were presumed to deepen knowledge or insight. These included “Could you elaborate on what you just said?” and “Could you provide an example of this?”

4.4. Analysis

The concepts will be vital in being able to answer our research question. However, as previously mentioned, they are not set-in-stone, since we cannot entirely predict which factors and concepts will be of the biggest importance in answering these questions. As we search for the possible answers to our research question, we will perform the research in the form of qualitative research. The research question poses an interesting question that cannot necessarily be defined or measured by working with readily quantifiable variables. The three sub questions provided guidance and structure in the interviews, however in light of the research design focused on qualitative research, it is vital to remain receptive to additional themes and concepts that emerge naturally. As Hammersley & Atkinson (2007) note, it is additionally “not helpful to go into data collection burdened with preconceived theories and ideas”.

(24)

with a question that would steer towards this preconceived notion, for example “How has international experience aided or helped SMEs in entering South Africa?” The awareness of the existence of this preconceived notion or theory meant that we were conscious and wary of not being “burdened” with this and reflecting this on the research. This enabled questions that were more impartial and fair in nature, eventually delivering answers, themes and concepts less biased by the researcher.

5. Findings: Issues and challenges for Dutch SMEs

In the process of in-depth interviews, there were various issues pertaining to Dutch SMEs in South Africa that presented themselves. In this chapter, these issues and problems will be discussed in more detail. In particular, how these issues relate to and influence the businesses of Dutch SMEs in South Africa.

5.1. International experience

It is often presumed that with international experience comes a level of knowledge and competence when firms decide to enter a new, unknown market. When discussing international experience, there is often a tendency to merely focus on MNCs with ample experience while SMEs are believed to have less means and opportunities, and perhaps lack the ambition to gain international experience. However, there are numerous Dutch SMEs that have taken the plunge and have done very well in the environment of these countries. The smaller size of these firms as compared to MNCs enables innovation and flexibility that fares well when firms go abroad and must adapt their business, especially in a country like South Africa. Nevertheless, these Dutch SMEs also face issues concerning international experience that possibly hamper longevity in South Africa. Subsequently, we will discuss some of these issues as relating to international experience.

5.1.1. Practice does not make perfect

(25)

remarkable economic growth, especially when compared to other countries on the continent. Nevertheless, South Africa also presents serious issues for businesses, as previously mentioned. Thus, Dutch SMEs face a mix of rewarding and challenging circumstances (Embassy of the Kingdom of the Netherlands, 2014). As Mr. Reyneker explained, South Africa is in a difficult stage of development in the present time, in the sense that it ranks somewhere in between a developing country and a developed country. SANEC has experienced that the country is a relatively young democracy and as such is still going through the accompanying “growing pains”.

A challenge for SMEs with international experience is noted in the issue that these SMEs often tend to perceive their experience with other developing countries as being directly transferrable to other developing countries. As is noted in this research, there are certain factors that many developing markets have in common, including political risk and bad infrastructure. However, what is observed in practice is that Dutch SMEs that are indeed in possession of international experience in these countries make the mistake of thinking all knowledge and lessons learned can be seamlessly transferred to South Africa. As mentioned often in the course of this study, South Africa is a very interesting case in the sense that is not quite a developing market anymore, yet it does not qualify as a developed market in the usual sense. This presents a challenge for SMEs: they often find themselves somewhere “in the middle”.

5.1.2. Blind enthusiasm

For a Dutch SME, setting up business or expanding to South Africa necessitates investing financial, human and knowledge funds. These funds might well reap a better outcome for the business, were these funds invested in present activities in, for instance, the Netherlands. Entering South Africa presents unique opportunities to a business, however this is not a certainty. A new environment presents risks and uncertainties.

(26)

approached in a completely different manner. Dutch SMEs considering business in these countries are notably more prepared for the accompanying risks than they are in the case of South Africa.

Conversations in the course of this study have led to the insight that this awareness of risks is often not present in Dutch firms considering doing business in South Africa. As Mr. Reyneker suggests, there are numerous historical, linguistic and business relationships between South Africa and the Netherlands. This has led to a possible optimism and, he suggests, even naivety amongst Dutch SMEs. The enthusiasm in the Dutch business community, media and literature has inflamed Dutch excitement for South Africa. However, due to the strong bonds between the two countries, these businesses do not give enough thought to the following: why not simply deter from doing business in South Africa? One explanation is that SMEs with international experience under their belt and looking for a new potential market feel that South Africa is a next logical step; SANEC observes that these Dutch SMEs are very enthusiastic when entering the market, and soon become disillusioned. A blind focus on continuing on the same path of international experience can be detrimental on the long run.

5.2. Traditional vs. Non-Traditional Partners

South Africa presents a challenging market to Dutch SMEs operating, or wishing to operate, in the country. Traditional or non-traditional partners can go a long way in minimizing the risks that accompany doing business in the country, as these partners are presumed to have gained the necessary experience and understanding of the market. Notwithstanding this, partnerships present their own particular issues and problems as well. Next, these issues and problems will be discussed in further detail.

5.2.1. A false sense of security

(27)

to have a clear understanding of exposures” (SANEC Business Directory, 2014). This gives way to the logical sense of security that partnering up with local firms might provide for SMEs entering a market that is unpredictable and unknown. It may indeed be argued that these traditional partnerships with larger partners supply financial support, insurance, market share or similar feats. Nevertheless, this has not always been a recipe for success for Dutch SMEs in the South African market.

Mr. Reyneker indicated that teaming up with a local partner that is not considered “a big foreign firm” supplies the Dutch SMEs with goodwill with locals, and credit with the important people in the market. That is; many SMEs fall into the trap of teaming up with larger firms that are already established in South Africa, often as a precaution or to protect itself from the risks associated with the South African market. This all is not to say that partnering with large multinationals, as a part of business strategy is necessarily a bad idea for Dutch SMEs. There have been instances where this strategy has successfully been employed, usually in order to obtain capital. However, selecting these traditional partners appears to be the way to go to when longevity of the firm in South Africa is the ultimate goal. As will be discussed in more detail later, this is not necessarily the preferred strategy for Dutch SMEs.

5.2.2. Historic complications and current tensions

A complicated issue presents itself for Dutch SMEs doing business in South Africa. South Africa's policy of black economic empowerment (BEE) is a direct result of the country’s history. BEE represents the goal to use “legislation, regulation, the restructuring of state-owned enterprises, preferential procurement, partnerships, financial assistance and skills development programs” in order to improve and promote black empowerment in business (Sanchez, 2006). The level of success achieved by firms as far as BEE is concerned is measured by way of a BEE scorecard. An example of this BEE scoreboard can be found in Appendix 2.

(28)

White ownership is more prevalent in SMEs when compared to MNCs that are active in South Africa, and SANEC has noticed that for this reason the South African government has been biased towards these SMEs.

A firm that is in possession of low rating will find itself at a serious disadvantage. Previous research by Ferreira and de Villiers (2011) has indicated that a lower BEE rate leads to a lower performance, due to a worsening of public image and possible punitive measures undertaken by the South African government. When firms form partnerships, whether these are long-term or temporary, the BEE rating of a partner is extremely relevant. When a foreign firm that has entered the South African market wishes to contract a supplier or partner that is already active there, will find little enthusiasm BEE ratings are below par. The reason for this is that suppliers and partners will see their own BEE ratings fall when they decide to do business with business with lower ratings.

5.3. CSR

(29)

The issue that has presented itself in literature and in-depth interviews, is the fact that while SMEs may well be concerned with CSR and wish to make a positive contribution on a social or economic level in the country they conduct business in, there are several problems that present serious barriers for these SMEs. These aspects will be laid out subsequently.

5.3.1. Detached from locality

One issue for SMEs is that it has been assumed that due to their smaller size, SMEs have the ability to form a closer bond with local people, needs and initiatives compared to MNCs. In practice, the size of SMEs actually complicates this matter. As these firms are often less well known than their larger and more connected counterparts, they tend to be “detached from the locality and from local economic initiatives” (Curran, 2000).

Additionally, we can observe a difference in those SMEs that often lack the resources and knowledge that provide the opportunity to actually become active in CSR. As Mr. Reyneker explained: larger companies can often spare the financial resources and time commitment to actually really commit to CSR projects, whereas MNCs or even merely larger firms are better equipped to invest the necessary resources. In practice, many larger companies or MNCs simply outsource their CSR activities, or set up a specific unit or department dedicated to CSR.

5.3.2. Profitability and idealism

(30)

has often observed the problem this causes for Dutch SMEs going to South Africa. SMEs that are idealistic in the sense that they do not align their CSR goals with profit goals suffer not only financially in the long term, but also see their CSR projects have less impact.

6. Findings: Advice to Dutch SMEs

These findings as relating to Dutch SMEs in South Africa have presented mostly issues and problems. Nevertheless, these issues are not insurmountable. In the course of the research, experts with extensive experience in the country have presented many ways of diverting, decreasing or eliminating these problems. In this chapter, this advice will be presented and discussed in a comprehensible manner that enables application in the real world.

6.1. International experience

As mentioned, Dutch SMEs that have obtained international experience have the tendency to blindly enter markets and not seriously consider the numerous factors to be considered when doing business in South Africa. Subsequently, the focus on issues and problems presented by international experience will be shifted to how businesses might forge ahead.

6.1.1. Do not count on international experience

(31)

“It is true that international experience has an influence on success, but South Africa is a very unique country with unique challenges and opportunities, and therefore it does not necessarily negate success if companies have international experience”.

Yet, many Dutch SMEs do make the mistake of viewing international experience as the holy grail of doing business in South Africa. In order to sustain business in South Africa, SMEs are advised to consider the uniqueness of South Africa as compared to other developing and developed countries, as the country is still somewhere in the middle in this regard. Not every lesson learned in international experience can be repeated in South Africa.

In the course of this research, it has become clear that international experience does not dictate longevity in South Africa. Vlisco is an example of a firm that has lived by this understanding. The business has been operating in Africa for more than 170 years, yet until recently has not extended operations and sales offices to South Africa. The awareness of the different environment, market and preferences has lead the firm to hold off on business in the South African market, yet it has recently undertaken steps to build a longevity of business in the country. By aligning with South African Fashion brand ‘KLûK CGDT’ and launching a store in Cape Town, it has ensured a foot in the door. The South African consumer has a distinctive style and culture that differs from clients in other African countries. Mr. Elmi noted that Vlisco is incredibly intertwined with West Africa, becoming a part of the heritage: “mothers gave the fabrics to their daughters, who subsequently pass it to their daughters”. Recognizing the extensive experience the firm had in West Africa, it also recognized that the drastically different environment and culture in South Africa would not allow for similar strategies. Being realistic has led to the firm adopting a strategy for longevity of business in Africa based on solid preparation and partnering up with the right businesses. It thus not solely rely on previous experience, recognizing it is not transferrable in every case.

(32)

business in South Africa, Dutch SMEs should thoroughly understand the challenges associated with this market. Depending heavily on international experience has a blinding effect, as it tends to isolate from sound research into the market and preparation. The main activities of Dutch firms in South Africa consist out of South Marketing & Sales (18%), technical support centers (8%) and service centers (4,6%) (Ministry of Foreign Affairs of the Netherlands, 2013). It is especially in these industries that market research and knowledge is essential to the viability of the firm. The issue at hand is that Dutch SMEs that do fall into the trap of overestimating this advantage of experience face the fact that reality of business in South Africa is very different and generally do not see their business gain substance and longevity in the market.

6.1.2. Why not stay home?

As previously illustrated, a problem of blind optimism can be observed in firms with extensive international experience. South Africa presents an exciting new market that is viewed as the guide way to the rest of Africa. Yet, one thing that must be noted is that just because SMEs have international experience does not mean South Africa is necessarily the right path to continue on. Realization of the challenges the country presents along with an analysis of what the actual yield would be the first step for any Dutch SME wishing to enter this market.

SANEC suggests that Dutch SMEs honestly ponder the question: why not stay home? The most recent data available shows that for one third of Dutch firms active in South Africa, the activities in South Africa contributed to the overall financial performance in 2012. Nevertheless, 5% of the total suffered a considerable loss in the first few years, most of which were SMEs (Ministry of Foreign Affairs of the Netherlands, 2013). It would be wise to keep in mind that the investments required to undertake the South African adventure are not compulsory to a firm already conducting business in the Netherlands, and should only be performed in the case the firm has an indication of a value adding effect on the business as a whole.

(33)

researching the differences the possibility of entering South Africa with considerable resources, the firm recognized that “South Africa is an economic precursor and a more Western-oriented market compared to other African countries. That is also reflected in our business”. Where final consumers in West Africa buy more clothes in open markets (often fabrics to make their own clothing). South African consumers buy more ready-to-wear products in shopping malls. As illustrated by Mr. Elmi: “In the end, we chose to strengthen our presence in West Africa instead of owning our own stores in South Africa. This is nevertheless still in our future plans.” Where Vlisco possesse more than 170 years of international experience in most of Africa, the firm has made a conscious decision to not enter the South African market with large investments, specifically due to large differences in the industry and sector. This goes to show that there is indeed value in seriously the pondering the question of ”why not stay home?” rather than blindly entering the market on the premise of having previous international experience.

6.2. Traditional vs. Non-Traditional Partners

“It doesn’t make sense to want to try and keep all of the gains for yourself. You have a much more viable business system when you have partners along the value chain who have a vested interest in the long-term survival of your business because they derive a living from your business system. That is the ultimate formula for longevity on the continent.” – Bill Egbe, President, The Coca-Cola Company South Africa (Harding, 2015)

(34)

6.2.1. Partner with strategic non-traditional partners

In-depth interviews conducted in the course of this study have yielded the same observation. That is, in the South African market, the significance and value of forming partnerships cannot and should not be underestimated by SMEs aspiring to attain longevity.

(35)

6.2.2. Experience and credibility

As one African saying goes: “If you want to go fast, go alone. If you want to go far, go together” (Lem, Tulder, Geleynse, Bijl & Jones, 2013). This very much expresses the South African attitude towards business. This is one of the reasons why Dutch SMEs would be wise to seriously consider teaming up with non-traditional partners. These partnerships go further than merely business; they provide the SME with more than financial gains or a smoother market entry.

As mentioned previously, Dutch SMEs face serious issues in South Africa with regards to BEE certification and rates. In the instance that a foreign firm cannot present acceptable SME rates, it will suffer consequences such decreased government support, a lack of support from partners and a loss of reputation. A partnership has shown to be a successful remedy to this issue, especially with regards to gaining a positive reputation in the community. Choosing a non-traditional partner can pave the way to acceptance in South Africa. While the South African business culture is used to dealing with foreigners, SANEC’s experience has been that it is essential for Dutch SMEs to not only partner up with non-traditional partners, but to choose them wisely. The goal of any partnership in South Africa should be to gain local acceptance and credibility. In any case, these Dutch enterprises would be advised to pick and choose a partner that provides extensive experience and local credibility.

Referring to the problems mentioned earlier, a selectively chosen partner can provide Dutch enterprises, seen as ‘foreign’ with local validity. Especially a firm that is experienced and respected in the field of black empowerment would be an excellent choice for Dutch SMEs. Dutch firms often make the mistake of ‘knowing better’ when entering South Africa In some cases, these SMEs may indeed ‘know better’, while in some cases they certainly do not. Nevertheless, as Mr. Reyneker remarked, you don’t want to be the “white man that knows it all”.

6.3. CSR

(36)

So what can we infer about from our research on this matter? And as a result, what can Dutch SMEs wishing to enter the South African market learn from this?

Our research suggests that SMEs going to South Africa are indeed wise to actively be involved in CSR activities. As a matter of fact, based on literature and interviews with experts in this field, we argue that it is the only way to truly obtain longevity in business in the South African market. However, in order to have successful CSR activities and additionally reap the benefits this presents, Dutch SMEs must be aware of certain issues and opportunities CSR presents in this market. This research has shown that SMEs are expected to be (most) successful when they incorporate a few vital factors into their CSR practices and activities. Subsequently, we will expand on these factors and elucidate why firms are wise to consider these factors and how they might incorporate them into business practices.

6.3.1. Stay close to home

When firms are actively engaged in CSR activities, “employees feel pride in working for a responsible company and more closely identify with that company” (Pohl & Tolhurst, 2010). Mr. Reyneker adds that these projects provide employees with a “feeling of loyalty and a sense of belonging, where they feel proud and company morale is boosted”. This CSR involvement has shown to have positive influence on employee motivation, loyalty and a reduced turnover rate. One tactic in handling CSR has proven to be very successful in the past: invest in CSR projects that relate to the business and affect your employees. SANEC has guided and advised many Dutch firms going into South Africa on this matter, and many firms that have adopted this plan have built very successful CSR projects and activities.

(37)

projects undertaken by Dutch construction company Reinbouwgroep as a shining example. When it entered the South African construction market, it set out to have a CSR presence in the country that would benefit both the South African people and their own business. It has set up a subsidiary, EXAR Development and Construction, which focuses solely on “the construction of houses, schools and shopping and sports centers for the South African society” (EXAR Development & Construction, 2015). Additionally, it is deeply involved in social housing for its employees, that by large live in the areas close to the business. For these areas, the firm has provided parks for children to play in and street lightening in an attempt to decrease the prevalent crime and rape in these areas. This has created enormous goodwill with not only the firm’s employees and their families, but also the communities as a whole. This has, in turn, increased employee satisfaction, loyalty and motivation.

For Dutch firms in South Africa, it is hard, if not impossible to establish this by way of conventional approaches such as creating a better work environment or even supplying a higher pay. Earlier research by Tang (1992) and a more current look at the effect of pay on motivation (Chamorro-Premuzic, 2013) supports this observation. As one of the most pressing issues for Dutch firms in South Africa is the lack of skilled, motivated and loyal workforce, experience dictates that by involving employees in the manner described, loyalty is created. In a business environment where that is considered a rarity, firms that do achieve it have experienced a higher likelihood of longevity in South Africa.

6.3.2. Align CSR with firm goals and profitability

Literature draws our attention to the financial gain for the SME that adapts this focus. While customer reaction to CSR varies with aspects such as product category, personal values and the perceived sincerity of CSR efforts, past experiences and literature has shown us that customers are more likely to buy products from those firms that they perceive to contribute positively to their society or economy (Sen & Bhattacharya, 2001).

(38)

a positive thing and can create certain opportunities for a SME, but companies must consistently ask themselves following question: what’s in it for the us? What has been observed in the course of the research is that when companies do not align CSR with the firm, they often face problems in the long run.

Firms that are idealistic in the sense that they take on CSR projects with the sole goal of “doing good” and do not align their CSR goals with firm goals suffer not only financially in the long term, but also observe that their CSR projects are less successful on the long run. Even when CSR activities are successful in the sense that they improve life or society, when they do not lead to a higher perceived reputation of the firm, consumers are less likely to buy products from these firms. This, in turn, leads to a state of affairs where the firm cannot see long-term financial or reputational benefits to CSR. What SANEC has observed countless times is that these activities might then be successful on a human and idealistic level, yet they do not add value to the firm. On the long run, when firms run into troubling times, the “first thing to go, is obviously CSR”, as firms will see little (monetary) value in continuing CSR practices. This is a situation where good intentions and a disregard for financial gain actually work against the SME, as it will be forced to seize the activities when they cannot be shown to have a positive financial influence on the firm itself. The history of several Dutch SMEs has taught us that this eventually leads to the downfall of CSR in South Africa. When referring to statements made by Dutch minister Ploumen, Creative Director for Vlisco, Roger Gerards stated: “The vision of Minister Ploumen that you must connect everything with business, that is what we have been doing for more than one hundred and seventy years” (De Volkskrant, 2013).

(39)

the market, this combined has resulted in a long-term and financially profitable presence in the country (Company.info, Annual Financial Report 2013).

This once again expressed that Dutch firms that plan on doing longevity of business in South Africa must be aware that while CSR presents many opportunities, it is a business decision that must be considered, analyzed and research just as other decisions would be. Those that do align CSR activities with firm goals and financials have seen these projects flourish. In a market where CSR certainly, to some level, dictates the level of longevity, these businesses have been observed to obtain higher levels than those who do not.

7. Connecting theoretical premises to research outcome

In this chapter, the propositions formulated on the basis of theoretical findings will be investigated based on the data of this research. As the goal of this study was to gain a better understanding of these propositions and subsequently provide Dutch SMEs with sound advice, we will analyze the findings in this manner.

This research focuses on Dutch SMEs achieving longevity in business in in South Africa. The main reason for undertaking this research was to aid Dutch SMEs perhaps active, or considering becoming active, in South Africa. The main research question was formulated as follows:

Research question: What determines a Dutch SME’s longevity in doing business in South Africa?

(40)

7.1. Sub questions

Sub question 1: How does international experience influence Dutch SME’s longevity of business in South Africa?

This study’s findings cannot describe exactly how international experience influences longevity. Previous research into international experience has been shown to have a positive impact on longevity of business in the country, yet in-depth interviews have not affirmed this to any degree. Nevertheless, the research has shown that Dutch SMEs are often not fully aware of the potential risks that South Africa presents, due to the belief that previous international experience can be seamlessly transferred. SMEs are advised to seriously consider not going to South Africa, and in the case these firms do, to keep in mind that South Africa presents a unique market that they must adapt to in order to sustain business.

Sub question 2: How do non-traditional partnerships and traditional partnerships influence Dutch SME’s longevity of business in South Africa?

In-depth interviews have all pointed to the same direction: Dutch SMEs that decide to team up with non-traditional partners tend to have more longevity in South Africa as compared to traditional partners. These partners provide the SME with benefits that enable longevity in a manner that traditional partners are not necessarily capable of. SMEs are advised to choose these non-traditional partners wisely on the basis of the credibility and experience it can provide in South Africa.

Sub question 3: How do local CSR activities influence Dutch SME’s longevity of business in South Africa?

(41)

will experience more longevity of business than those who not. Dutch SMEs are advised to focus on business first and foremost, by prioritizing financial goals and investing in CSR in a manner that will bear fruit for the SME.

8. Conclusion and discussion

This research focused on Dutch SMEs achieving longevity in business in in South Africa. The main reasons for undertaking this research were to aid Dutch SMEs active, or considering becoming active, in South Africa. In order to answer the research question, three sub questions were identified. The research showed that partnerships with non-traditional partners and undertaking local CSR activities lead to more longevity in South Africa. No viable indication was found concerning the effect of international experience on longevity of business. As for the research question of what determines a Dutch SME’s longevity in doing business in South Africa, these three sub questions shine a clear light on this: partnerships and CSR activities influence longevity, while there is no evidence that international experience does.

8.1 Aim, relevance and applicability

(42)

We are well aware that every case, business and industry is different. However, since we did not specifically focus on factors that would hugely differ in that aspect and did not merely focus on one sector, we do believe the findings and results are applicable on a wide range of Dutch SMEs in South Africa. As mentioned, we believe Dutch SMEs can use the findings and advice in this study on a broader scale than just South Africa. That is not to say everything is directly transferrable, however in reading and considering the study, SMEs might come to new insights, realizations and ideas.

8.2 Validity, limitations and future research

Naturally, there is limitation to the data collected. This study was conducted by way of combining literature and previous research with in-depth interviews. When working with this type of qualitative research, it is nearly impossible to replicate, thus making the issue of reliability a difficult one. Many researchers have touched upon this issue and the difficulties it presents. Some go even further: Holstein and Gubrium (1997) argue that since qualitative research is dynamic and is only truly effective when conducted in a responsive manner. Thus, these studies cannot, and should not, be repeated. As a response, it has been argued that the validity of evidence presented in qualitative research of this kind should be assessed by way of ‘trustworthiness’ (Glaser, Strauss & Strutzel, 1968). We feel we can argue trustworthiness, as much of the information and documents used, as well as the people who have provided input can corroborate our research results, leading to our findings.

(43)

(44)

Appendices

Appendix 1: Contact information

Mr. Mark Reyneker Project Manager, SANEC T: +31 (0)703470781 E: mark.reyneker@sanec.nl Visiting address WTC The Hague 2595 BM, The Hague The Netherlands Mr. Roble Elmi

(45)

Ms. Teresa Bascerano

Trade Information and Marketing Officer, Embassy of the Kingdom of the Netherlands

T: +27 (0)12 425 4530

E: teresa.bascerano@minbuza.nl

Visiting address

210 Queen Wilhelmina Avenue P.O. Box 117, Pretoria

South Africa

What D etermines Dutch SME’ s Longevity in Doing Business in South Africa?