Improving the local business environment of Johannesburg

Abstract

Analysis of local business environments is an emerging theme in scholarship on local economic development (LED). South Africa's national LED framework urges local governments to foster conditions that stimulate and enable the general environment in which business is done. This article analyses findings from recent interviews conducted with 100 foreign investors and 10 business chambers on the topic of constraints to private investment in the business environment of Johannesburg. It concludes that city authorities must address a range of issues in order to enhance the local business environment. Key themes are crime and safety and security, infrastructure, the rising costs of doing business, skills shortages, and limited working relationships between city authorities and local investors.

Keywords:

• local economic development
• local business environment
• Johannesburg

1. Introduction

In recent years, governments in developing countries ‘have been paying growing attention to improving the environment for business as a means of promoting enterprise development and, through it, of growing their economies, increasing employment, improving welfare and reducing poverty’ (Hindson & Meyer-Stamer, 2007:1). The enhancement of business and investment climates ‘has become an important topic in the international discourse on private sector development’ (Kaufmann et al., 2007:2). Across the developing world, research into the business environment and country investment assessments ‘have invariably found that developing countries are challenged by poor public governance, weak infrastructure, and policy and legal frameworks that are inconsistent, unstable and unpredictable’ (DFID ICEE et al., 2004:10). On the national scale, improved state–business relations and the simplification of business registration procedures, coupled with reform of labour regulations and property titling, are core elements for creating an attractive business environment in sub-Saharan Africa (UNIDO & GTZ, 2008).

It is acknowledged, however, that changing rules and regulations at national level is not sufficient to energise local development (Hindson et al., 2009). In the context of globalisation, there is competition between localities for investment, necessitating upgrading of the environment for business activities (Meyer-Stamer, 2004:327). Improving the local business environment is thus a vital theme in local economic development (LED) scholarship (World Bank, 2003; Hindson & Meyer-Stamer, 2007). Internationally, improvement of this kind is a new focal point for LED activities. The aim is to provide the local private sector with more favourable conditions for doing business – an essential foundation for upgrading a locality and strengthening its competitiveness (Altenburg & Stamm, 2008). It is stressed that a local environment conducive to business ‘reduces the cost of doing business, unleashes economic potential and attracts investment’ (Ruecker & Trah, 2007:57). By contrast, enormous and unnecessary costs can be imposed for private sector investors if the local business environment is negatively affected by ‘problematic governance patterns, cumbersome political guidelines, laws and regulations and ineffective administration’ (Ruecker & Trah, 2007:58).

New research shows that the local business environment significantly influences business location choices across cities in the developing world (Dollar et al., 2005; Lall & Mengistae, 2005a; Sridhar & Wan, 2007). Variations in local business environments which link to agglomeration advantages and other factors are essential determinants of ‘productivity premiums’ that firms enjoy in larger centres and influence location decisions (Dollar et al., 2005; Lall & Chakravorty, 2005; Lall & Mengistae, 2005b). At local level, the growth potential from improving the investment climate can be substantial, as is shown by recent studies in China (Dollar et al., 2003) and Vietnam (Vietnam Competitiveness Initiative, 2006). Clark's (2006) benchmarking and diagnosis of the ingredients of city success and failure shows an attractive business climate to be of central significance. It is argued that cities in which urban managers and national governments encourage business activity and make efforts to encourage investment perform better economically (Clark, 2006). Minimising red tape is a further significant building block for improving local business environments since ‘it is at the local level that the public sector interacts with the private sector on a day-to-day basis’ (Hindson et al., 2009:1).

Investment climate assessments have been conducted on both national and local scales in South Africa. The national investment climate has been examined in detailed research undertaken for the World Bank (Clarke et al., 2007). The conclusions of the South Africa Investment Climate Assessment point to four factors that discourage investors: an unstable exchange rate, which is especially problematic for exporters; high labour costs, especially for skilled workers; burdensome labour regulation; and high costs of crime (Clarke et al., 2007). During 2005 a parallel investigation sponsored by the World Bank was carried out – the South Africa Microenterprise Investment Climate Assessment, whose objective was also to promote policies to strengthen the private sector (Clarke et al., 2006:4). The results from the Microenterprise Investment Climate Assessment study reveal differences between the views of micro-entrepreneurs and those of large firms or formal small and medium-sized firms – the obstacle the micro-enterprise managers were most concerned about was ‘access to and cost of financing’ (Clarke et al., 2006).

Besides national-level investigations, local investment or business climate assessments have also been done to identify local-level constraints to private sector development and investment (e.g. Reichert, 2006; Business Middelburg, 2008). The findings of these studies identify intervention areas for reform of the local business environment as an element in LED planning. National government regards making a local environment conducive to doing business as ‘a key ingredient’ for the establishment of flourishing local economies (Department of Provincial and Local Government [DPLG], 2008:1). South Africa's National Framework for Local Economic Development urges local governments to foster conditions that stimulate and enable the general environment in which business is done (DPLG, 2006). Against this backdrop, this article analyses the findings of a recent local investigation of private investment issues and constraints in the business environment of Johannesburg, South Africa's most economically vibrant city.

Methodologically, the research involved two sets of interviews. First, structured interviews were conducted during September–November 2008 with a sample of 100 foreign investors from 18 different countries extracted from the City of Johannesburg's (2008) foreign investor database. Issues covered were, inter alia, the reasons for selecting Johannesburg as a site for investment, the perceived advantages and disadvantages of Johannesburg for existing investors, opportunities for Council to improve the local business environment, preferred location for further investment, and investor reaction to possible different forms of investment incentive. The second set of research material came from 10 focused interviews obtained from business chambers and trade organisations in the city. Among those interviewed were representatives of both local and foreign investors in the city, inter alia the American Chamber of Commerce, the British Chamber of Commerce in Southern Africa, the Chamber of Commerce and Industry (three interviews – Johannesburg, Randburg and Sandton), the South African–German Chamber of Commerce and Industry, the Italian–SA Chamber of Trade and Industry, the Japanese Chamber of Commerce, and UK Trade and Investment. It should be noted that the response from the American Chamber of Commerce was the product of discussions with 20 US businesses that regularly meet at the Chamber's offices in Johannesburg. Overall, 110 interviews were held, on the topics of the benefits and disadvantages of investment in Johannesburg, trends in investment, blockages in the local business environment, and opportunities and incentives for investment.

2. Findings from earlier research

During the period 1999–2001 a World Bank team in partnership with the City of Johannesburg investigated the constraints affecting the city's local business environment (Chandra et al., 2001a,b, 2002). Six primary surveys were done during this period, to provide the foundation of a comprehensive economic information base for the city's Economic Intelligence Unit, the main ones being concerned with identifying constraints to growth and employment in three areas: large manufacturing firms (Chandra et al., 2001a), the small, medium and micro enterprise economy across a range of different sectors (Chandra et al., 2001b), and the informal sector (Chandra et al., 2002).

The 325 large manufacturing firms surveyed covered eight subsectors of industry: food and beverages, electronics and electrical machinery, iron and steel, metal products, vehicles, chemicals, paper and furniture, and textiles. All firms had more than 50 full-time employees. Interviews were conducted with Chief Executive Officers (CEOs) or senior managers to elicit their perceptions of the investment climate in Johannesburg and of constraints on expansion and new investment. It was argued that CEO perceptions ‘play a critical role in investment decisions and in understanding what deters investors from South Africa’ (Chandra et al., 2001a:1–2).

The issues the CEOs saw as constraints to investment and growth in Johannesburg were ranked and examined using a weighted index calculated from the ratings they assigned to each constraint.1 The overall findings (Figure 1) show that they ‘unambiguously ranked crime and theft as the number one (assigned a value of 100) obstacle to firm growth’ (Chandra et al., 2001a:7). During 1998 it was disclosed that 83 per cent of firms were victims of several kinds of crime and 61 per cent of their employees were victimised on the way to or from work. On average, firms spent 1.6 per cent of their sales revenue on ‘unproductive investment’ in the form of security guards and security devices. After crime and safety and security, firms ranked equally the cost of capital or credit, the depreciation of the rand, and recent changes in labour regulations. Following those was corruption in government. Shortage of skilled labour was a further bottleneck on investment, with nearly 80 per cent of firms reporting moderate to extreme difficulty in securing staff with managerial and professional skills and 70 per cent reporting moderate to extreme difficulty in finding staff with service and craft skills. Of note is that infrastructure was not rated as a major obstacle to investment decisions.

Figure 1: Major findings concerning constraints to investment in Johannesburg as identified by large manufacturing firms

As an investment location, Johannesburg received a positive ranking for the quality of its infrastructure (such as access to main roads) and efficient service provision. Access to product inputs and final markets was another strength of Johannesburg as a business location. When asked where they would choose to locate if they were to expand production, firm managers were strongly in favour of Johannesburg – the survey found that 85 per cent of them would expand within the city. For those preferring locations outside Johannesburg the main push factors were high crime and violence, long distance to a seaport, and pollution (Chandra et al., 2001a:16). The eventual goal of the survey of large manufacturing firms was to provide an empirical base for identifying and ranking constraints affecting business development in Johannesburg. Its most significant finding was that crime and shortage of skills ‘are binding constraints to large manufacturing firm growth and that these areas need closer attention’ (Chandra et al., 2001a:iv).

The material from the World Bank studies constitutes a useful baseline with which to compare this study's findings about the perceptions of investors and business chambers in Johannesburg during 2008. However, it must be cautioned that to perform a longitudinal comparison of the findings of these various business climate surveys will be difficult because of specific considerations relating to the timing of the research.

3. Johannesburg as an investment location

The strengths of Johannesburg as an investment location typically relate to the cumulative impact of the ‘productivity enhancing capacities of cities and regions’ through agglomeration (Scott, 2002:140). Johannesburg is Africa's (aspirant) world-class city and the decision-making or command centre for much of Africa, with the largest cluster of headquarter offices in the region (Rogerson, 2005). The city is also the axis of the wider Gauteng city-region, South Africa's biggest and richest commercial and industrial market. It hosts the largest cluster of financial services and information technology enterprises in Africa, a thriving sector of knowledge-based activities, and an expanding tourism economy. An important benefit of the clustering of diverse and dynamic firms in Johannesburg is that it enables enterprises to respond to the uncertainty and challenges of a complex African business environment, not least by ‘allowing them greater levels of operational flexibility’ (Scott et al., 2001:14).

As their main reason for locating their businesses in Johannesburg, two-thirds of the foreign investors surveyed mentioned one of a group of issues to do with market access, supplier access and the city's role as the dominant economic and especially finance centre of the region (Rogerson, 2009a). Their reasons for choosing Johannesburg as an investment destination overwhelmingly reflect the advantages accruing from clustering and agglomeration. Similarly, businesses in South Africa and further afield in southern Africa choose Johannesburg for their operations because it is the economic hub, the financial and decision-making centre, and the core market for the entire region.

In the Chamber survey there was a large measure of agreement among interviewees about the major economic advantages of Johannesburg as an investment destination, particularly when compared to other South African cities, as can be seen from the following selection of their comments.

Johannesburg is the economic hub and companies need a presence here. It is the springboard to Africa even though many companies bemoan the fact that they cannot locate in much preferred Cape Town. The business environment is very well developed in Johannesburg. Everything you need is here – banking, financial and legal services as well as proximity to the politicians when they are in Pretoria. (USA)

When investors from the UK consider South Africa, they first consider Johannesburg. (UK)

Most business headquarters are in Johannesburg, financial services and work force – companies need exposure and have no choice but to be here. (Germany)

Johannesburg is the warehouse for southern Africa. It is central and well connected to the rest of South Africa and Africa. The market is strong. Johannesburg has a large population and a lot of buying power, more than Cape Town or Durban. It is centrally located for exports. (Italy)

Johannesburg is the only place to be in South Africa – there is no real competition from Cape Town or Durban. The advantages to business of locating in Johannesburg are well known in Britain. (UK)

Companies almost have to be in Johannesburg as the market is here and it is centrally located. Many would prefer Cape Town for its quality of life but that is not always possible. (Italy)

The prime reason for investment in Johannesburg is economic – 90 per cent of all funding decisions are Johannesburg based and the city is the source of 50 per cent of purchasing power in South Africa. (Chamber of Commerce and Industry, Sandton)

Conducting business from Johannesburg is more efficient than elsewhere in South Africa. The city offers easy access to other countries and continents. If companies were to locate in Cape Town rather than Johannesburg it can add six hours to an overseas trip and as most business trips are three days that is too much wasted time. (Germany)

And finally, with a touch of irony:

If you are alive at the end of the day there is a lot of opportunity in doing business in Johannesburg. (Italy)

4. Improving the business environment

This section discusses the challenges for maintaining Johannesburg's position as a preferred investment destination. The first part covers the findings from the 100 interviews conducted with foreign investors and the second the responses from the 10 Chamber interviews. Although quantitative data were collected in both surveys, the main purpose was to gather a set of qualitative material on investor ideas about how to improve the local business environment of Johannesburg.

4.1 The foreign investor survey

The challenges of Johannesburg as a business location are disclosed by investor responses to questions about the negative aspects of the city or its disadvantages for investors. The survey generated a large range of responses. These are summarised in Table 1.

Table 1: Johannesburg investment survey: Disadvantages of the city as a business location

Issue	Number of responses
Crime, safety and security	46
Condition of roads	31
Traffic congestion	28
High transport costs for goods	17
None	13
Costly city	11
Electricity supplies	7
Poor rail system	6
Local bureaucracy	6
Unpleasant environment of the city	5
Corruption	4
Stressful city	4
Lack of/cost of warehousing space	4
Closed living communities	3
Poor public transport	3
City is run on money	2
Dirty	2
Lack of manufacturing space	2
Others	10
Source: Authors' survey.
Note: Some interviewees gave more than one response.

Table 1 shows that the disadvantages of Johannesburg as an investment location are headed by crime and safety and security, which were highlighted by 46 of the 100 interviewees, confirming the importance of these issues when it comes to improving the local business environment. One American investor observed that ‘security is the only disadvantage that is worse in Johannesburg than in the rest of the country’. Other interviewees were more forceful in their assertions that crime was a negative disincentive for investors; an Indian investor commented on the ‘crime shock for foreigners’. The level of business crime was bemoaned by an American computer company especially as ‘computers are constantly going missing in the workplace’. For one British investor, ‘security is the biggest problem but we have learned to deal with it’. A Swedish investor added that the security risk was not only in the working environment – ‘just living in Johannesburg is a risk’. Although questions of personal security and business crime top the list of disadvantages for investment in Johannesburg, of almost equal concern to investors were matters to do with the poor condition of the city's infrastructure. The particular attention given to infrastructural shortcomings reflects, in part, the timing of the survey – just after a period of electricity power cuts and when major work was being done in the city in the build-up to hosting the 2010 FIFA World Cup.

The degraded condition of the city's road network and infrastructure was highlighted by nearly one-third of the investors (n = 31). Often this issue was linked to complaints about rising levels of traffic congestion, mentioned by 28 of them. Other infrastructural shortcomings mentioned were unstable electricity supplies and power cuts (n = 7), poor rail networks (n = 6) and inadequate public transport (n = 3). A potentially worrying set of issues was raised about the rising costs of doing business in Johannesburg. The city's inland location means that transport costs for goods are high to coastal ports, an issue that was confirmed by 17 of the investors. Others were concerned about the general high cost of living (the city's hotel prices were mentioned) and of operating businesses in the city – they highlighted the cost of manufacturing space and in particular the increasing cost of warehousing

Further issues were environmental factors and the problems of Johannesburg as a living environment. The city was seen by some investors as ‘stressful’ and ‘unpleasant’ to live in. One French investor observed that ‘crime wears people down – stressed people and rushed city’. A British investor considered ‘Sandton is a false sense of the First World’. For some investors Johannesburg has the negative problems of dirt (especially in the Central Business District and townships), of pollution in general and in the industrial areas in particular. For others, the problems were unfriendly living environments and being locked up at night in closed communities. Finally, looking at Johannesburg as a working environment, a few investors raised issues of bureaucracy and corruption. With respect to the local authority, a matter of particular concern was its seeming inability to deal adequately with the vital issue of safety and security on the one hand or the bad roads and worsening traffic congestion on the other.

Notwithstanding Johannesburg's challenging work and living environment, 82 of the 100 investors said they had no intention of relocating their business from the city. Although some investors expressed a desire to move out of Johannesburg, they mentioned compelling reasons why they were unable to do so, such as ‘we need direct access to the airport’ (Japan) or ‘there are many barriers to business but none that would cause us to move as we have to be near our clients’ (Sweden). In some cases, the desire to be elsewhere was thwarted by the fact that there was ‘not enough business in Durban or Cape Town’ (UK). A Finnish investor who had relocated to Johannesburg from Cape Town explained that ‘there was not enough business there’. The agglomeration and market advantages of Johannesburg as a business destination are thus the prime reasons for enterprises not to contemplate relocating their business despite the manifold problems they face in operating from Johannesburg. Eighteen investors said they might consider relocating, mainly because of Johannesburg's crime and security problems and rising transport costs to ports. One Swedish investor elaborated that ‘Johannesburg is not critical, just the Johannesburg market’. The most common localities mentioned for potential relocation were Cape Town, Pretoria, Durban or ‘any major centre with an airport’.

However, despite considering alternative locations, most of the investors surveyed said they would not move. One said that his company ‘could not leave competitors to take the Johannesburg market’ (Israeli investor) and another that, notwithstanding its problems, there are ‘too many benefits of the Johannesburg market’ (Indian investor). Taken as a whole, the survey presented a picture of Johannesburg as an investment destination chosen out of necessity and business logic rather than from personal preference. Indeed, the findings suggest that if the local business environment was to deteriorate in terms of costs, congestion or a worsening crime situation relative to other South African cities then the potential for businesses to relocate would rise.

Table 2 shows the suggestions the investors made to Council for improving the business environment in Johannesburg. As the interviews were conducted at a time of considerable road construction upgrading linked to hosting the 2010 FIFA World Cup, their number one priority was that Council should sort out and improve the road infrastructure in the city and deal with traffic congestion. More than one-third of the interviewees (n = 35) mentioned problems directly concerned with the city's existing road infrastructure. They complained about a wide range of traffic problems, such as road infrastructure that needed upgrading, poor maintenance of street lights, unregulated road works, badly timed traffic lights, and, in the view of one German investor, ‘ridiculous traffic cameras in stupid places’. On the same level of importance as improvement in transport flow in the city was the endemic issue of improving safety and security for individuals and businesses in the city. Thirty-two of the interviewees highlighted the issue of crime as a priority for Council intervention, and five specifically mentioned the need to improve the efficiency and integrity of the police force. A number of specific observations were made about safety and security issues for Council's consideration, in order to ‘make Johannesburg a more desirable place to live and work’ (US investor). It was pointed out that ‘law enforcement is lacking’ (France) and that ‘Council should reduce crime and take the public's view of the police force seriously – the Metro police force are counterproductive’ (USA).

Table 2: Johannesburg investment survey: Suggested ways the municipality could improve the business environment

Suggested action	Number of responses
Improve road infrastructure/reduce congestion	35
Improve safety and security	32
Improve infrastructure as a whole	13
Improve public transport	9
Improve inter-city transport/reduce costs	9
Improve cleanliness	8
Improve rail system	8
Incentives	7
Address power uncertainties	5
Improve police force	5
Improve labour skills	5
Improve staff in local government	4
Reduce poverty	2
Reduce corruption	2
Improve conditions for importing (freight)	2
Get rid of BEE conditions	2
Just do your job properly	2
Stabilise political situation	1
Improve telecommunications	1
Speed up environmental impact assessments	1
Improve regulation	1
Increase space for warehousing	1
Improve data access and availability	1
Improve work ethic of labour	1
Fast-track customs clearance	1
Source: Authors' survey.
Note: Some interviewees gave more than one response.

Besides road infrastructure and safety and security, the survey highlighted several other issues that investors consider significant and that affect the business environment of Johannesburg. Thirteen interviewees said improving infrastructure as a whole was imperative, and stressed a need for across-the-board service delivery improvement. The need for reliable power supplies was specifically identified by five of them and a need to improve rail networks by eight. More of them, however, were concerned with a need to improve the city's public transport system for their employees. In the view of one British investor, Council needs to ‘make public transport a safe option and not just cheap’. Transport improvements were deemed essential for not only intra-city but also inter-city movement. Many investors, especially from Japan and Italy, expressed concerns about difficulties with inter-city transport for goods and about specific problems they had with freight clearance.

Another cluster of issues for improving the business environment had to do with the cleanliness of the city. Investors stressed that the city's image would be greatly enhanced by more attention to cleaning up, and they highlighted the industrial areas as being in need of special attention. Some mentioned ‘disgusting pavements’ and said ‘taxi ranks are dirty as well as unsafe’ (USA). The issue of image enhancement is best captured in the suggestion made by one American investor that Council should ‘clean up Johannesburg and make it look “First World” and then people will want to invest’. The need to improve human resources in the city as a whole and in Council in particular was a further area for potential action and intervention. A German investor voiced the need ‘for more qualified people in government making decisions that affect business’ and a Korean investor asked for increased ‘competency of public officials’. A highly critical view came from a Dutch investor who said that Council should not be given any more to do ‘as they can't do their jobs now’. From a different perspective, an American investor asserted that Council should seek to ‘create a work ethic where people understand they have to work for what they want’ and added that ‘foreign companies don't owe their employees because of apartheid’. In a similar vein, a Korean investor complained about the practice of black economic empowerment (BEE), arguing that government should ‘remove the need for sharing your company with individuals who don't contribute as much as they should for what they are paid’. Likewise, a Dutch investor was of the opinion that BEE was ‘too narrow minded’ and wider support was needed for skills development in the city. Further, a British respondent mentioned the need to encourage skills in the workplace and not just on a race or gender basis; in addition, attention should be directed to preventing the continual draining of skills out of the country.

Finally, it must be observed that in terms of improving the business environment for investors, only seven of the 100 sample respondents drew specific attention to the need for incentives for investors as a priority issue. The core priority issues they identified are reflected in the following responses, which show common trends across all investors, as well as certain more country-specific issues that reflect the variety of foreign investors in Johannesburg.

Crime is the largest worry for investors – sort that out first. (USA)

Increase the skills capacity of authorities and take away requirements that are forcing people to hire unskilled people. (Japan)

The city needs more training facilities and skills. (China)

Stabilise the electricity supply – the fluctuating levels of electricity damage our [computer] networks. (USA)

The process of rezoning land is too long – two years is ridiculous and it is slowing development. (UK)

The need is for improved public services. (Denmark)

Get rid of BEE – it is doing nothing good. (Germany)

First, we need a constant power supply not reduction of costs. (Germany)

The only thing needed is electricity stabilisation. (Denmark)

Safety, cleanliness, training. (France)

Make Johannesburg safe for investors – investors would expand if staff were safer. (UK)

Rental costs are very high and increased security is needed. (USA)

Affirmative action is a problem to doing business. (Japan)

Taken together, these investor perceptions underline that financial incentives for investors to locate in Johannesburg cannot substitute for improving the business climate in the city (Rogerson, 2009b). The introduction of incentives by themselves will probably not be effective unless Council also deals with the fundamental problems of infrastructure, service delivery, skills and, above all, safety and security.

4.2 The views of business chambers

Although each of the various business chambers saw the challenges Johannesburg faces for improving the business environment somewhat differently, there were several common threads in the interviewee responses. They identified five major threats to Johannesburg's continued role as the leading investment destination in southern Africa: crime and perceptions thereof, poor infrastructure, skills shortages and BEE, the rising costs of doing business, and uneven access to information.

First, the question of crime, safety issues and especially the perception of crime in Johannesburg was a recurrent priority theme in the interviews with key stakeholders. In a typical example, the American Chamber expressed the view that ‘crime and perception of crime is the biggest problem’ and stated that the top 20 American businesses in Johannesburg considered that ‘whilst crime is bad, the perception is that it is a lot worse and this needs to be urgently addressed by Council and the media’ (USA). Likewise, representatives of both British and German investors agreed that there is a perception that crime in Johannesburg is worse than in other parts of South Africa. The German Chamber went further to argue that ‘crime is the major reason why companies will move from Johannesburg’. The Italian Chamber considered that business crime was a big problem as ‘most companies experience robberies with or without guns once a month on average’ and that ‘the freight industry loses a lot of goods and warehouses are frequently broken into’. Overall, the American Chamber reflected that:

perception of crime needs to be managed better. The impression in Washington is that crime in South Africa is worse than it actually is and that they all think as soon as they get off the plane they will be shot. The American Overseas Advisory Council gets the message that people are too scared to come to South Africa from the States. (USA)

Critical infrastructure shortcomings were seen as the second threat to Johannesburg as an investment destination. Infrastructural deficiencies profiled in the interviews were bad roads, inadequate public transport and especially the unreliability of electricity supplies, as can be seen from the following comments:

Basic infrastructure cannot be emphasised enough – huge amounts of money were lost during the power cuts. (Italy)

Electricity supply and continued random power outages are still ongoing in Johannesburg and a huge negative to companies already here as well as those looking to invest. Electricity is so crucial and businesses cannot be run without it. (USA)

The city must start to make things work – make the roads driveable and get the traffic lights coordinated to help with the increasingly bad traffic congestion. As well as roads in and around Johannesburg, those linking particularly to Durban are also a mess. Johannesburg is not an island and we need the connectivity of places to be efficient in order for imports and exports and the movement of goods and services to be efficient. (Johannesburg Chamber of Commerce and Industry)

Improving the general infrastructure and traffic control is a key to improve the business environment. (Germany)

Together, crime and infrastructure have a negative effect on Johannesburg's image as a competitive investment destination. In comments such as the following, interviewees stressed the necessity for Johannesburg city authorities to address negative perceptions of the city.

The council should look after the image of Johannesburg and not let the perception that it is a city riddled with crime, bad roads and traffic gridlock take over. It is important that the Council get the message out as to what is being done to improve the city. Potholes are everywhere, roads are being dug up, traffic lights do not work and congestion is getting worse. We know there are a lot of road works but get the message out via print and radio media exactly what is being done to improve the city and how long this is expected to take. (USA)

On crime the City Council and media needs to be involved in setting the record straight. They need to be honest about the crime that is actually going on and the crime statistics need to be printed, available and believable. The daily newspaper headlines that scream out sensational crime stories on a regular basis need to be managed better in order for investors to understand the reality of what is going on. (USA)

The third threat that the Chamber interviews strongly flagged was the critical skills shortages currently hampering investors in Johannesburg. One interviewee stated that ‘a critical issue for British investors is skills and the retention of skills in Johannesburg’ and asked ‘Are the relevant skills available for potential investors in the city?’ (UK). Problems relating to skills shortages were also of concern to German investors, one of whom said that ‘technical skills need promoting as foreign companies find that these are lacking. German companies feel that incentives should be given for training and providing much needed skills’. Significantly, questions of human capital and skills shortage are often thought to be linked to brain drain and the implementation of measures for BEE. Several different Chamber interviews made this connection quite forcefully, as the following remarks show.

The lack of skills is a major issue which is brought up repeatedly by US companies. The US companies have meetings with the Black Management Forum who say that ‘there is no skills shortage’. The US companies are finding that they are short of specific skills and they want to bring their own people in. BEE is the barrier that is stopping necessary skills coming into South Africa. The heads of US companies are unanimous that a form of BEE is necessary to upgrade South Africa – however, the way that it is implemented is damaging to companies. (USA)

There is a large problem with skills. We understand the need to transform South African society – however, it is very difficult and very expensive to find a skilled black South African in their late 20s or early 30s. (Japan)

The growing brain drain and resultant skills shortage is a big negative for Johannesburg. BEE is problematic and all of the JCCI members agree on this. (JCCI)

Italian companies complain about the quality of people that they have to employ – it is generally not good. With BEE they have to employ people who are expensive but do not give good service. (Italy)

BEE is an issue for smaller [German] companies which are often scared by the legislation. (Germany)

A fourth threat to investment according to interviewees was the rising cost of doing business in Johannesburg, such as costs for security, property costs and rates, the city's inland location and the added costs imposed on foreign companies by BEE requirements.

The cost of doing business in South Africa is becoming too high. The Chamber is finding that US companies are coming to South Africa as they need an African presence but they are doing only what they need to and will not be investing more in the future. The new BEE legislation is a huge barrier to international companies. The American Chamber does not believe that the South African Government is knowingly creating legislation to deter foreign companies from investing or expanding but they feel that it is the unforeseen consequence of legislation. American companies realise that Johannesburg is a springboard to an African market and that they can make money. But they are only here to stay in their current form and they are not growing. (USA)

Cost of employees is one of the major disadvantages of Johannesburg. (Japan)

Tax in South Africa is very high. Labour is expensive for what you get. These are countrywide issues. When you add the extra security that is also needed for business to operate then Johannesburg is a very expensive location. Property to buy or rent is expensive, especially industrial space. (Italy)

All senior American businessmen who come to South Africa want paid protection and houses that are secure. This is a large added cost to most contracts. A substantial percentage of annual company income is dedicated to security for personnel. (USA)

One of the most critical findings from the Chamber interviews was the matter of stakeholder access to information and the need to establish a partnership between Council and the investor community. The main point made by interviewees was that business chambers do not have access to information about developments taking place and planned in Johannesburg. The major reason for this is that the Chambers do not know who to speak to, since there is no partnership between Council and the investor community. Although this issue was not raised in the foreign investor survey, it was forcefully articulated in the business chamber and trade interviewees in remarks like the following.

There needs to be a process in place where all Chambers can be uplifted and facilitated. The role of Council is to facilitate business. Chambers should have access to some of the key meetings, particularly those linked to local economic development, so that new developments can be passed on to members and potential investors. In Council we need to know where to go and who to speak to. (UK)

UK Trade and Investment deals with GEDA [Gauteng Economic Development Agency] and the cities of Durban and Cape Town. We have a good relationship with GEDA but do not know who to partner with in the City of Johannesburg. As compared to Durban or Cape Town, the City of Johannesburg is difficult to deal with in terms of investment promotion. (UK)

If there is a large visiting German delegation then representatives from various government departments and Council are invited to attend. In most cases the invite is never responded to and if it is then it is rare that the promised representative arrives at the meeting. (Germany)

There is a need to build a channel of communication between UK Trade and Investment, which promotes investment into South Africa by British companies, the City of Johannesburg and other trade or investment organisations in the city. (UK)

The Italian Chamber does not know who to talk to at the Council. The Chamber urgently requires quick answers to business questions from Italian investors who do not know who to speak to. (Italy)

The plea from the German Chamber is to communicate – government agencies should have regular discussions with the international communities. Communication must be improved with existing investors. (Germany)

British investors often need clarity in terms of the division of powers between Gauteng province and the City of Johannesburg – who do they contact to know which authority they should be dealing with? (UK)

The common points raised above must be understood as signalling a vital and neglected policy issue for improving the business environment of Johannesburg, namely improved state–business relations, which are ‘assumed to contribute to a better understanding of private sector needs by government’ (UNIDO & GTZ, 2008:43). Importantly, all foreign chambers emphasise the potential for further investment if ‘Johannesburg should put the effort in’ and become more accommodating to the needs of the investor community (Japan). A critical dimension of that accommodation is greater access to information and expanded interaction between Council and investors, including the management of information about the city, which can affect economic development and investor perceptions.

Lastly, the Chamber interviews spotlighted additional issues that should be recognised as further challenges for investment expansion and improvement of the local business environment. For Johannesburg the most significant were simplification of the regulatory environment, costs of telecommunications (especially broadband) and slow speed of the Internet, slow speed and unreliability of local government decision-making (e.g. about land), managing perceptions of bias in the award of tenders (some countries feel that they are not treated fairly), corruption (especially in the police force), and often unacceptable treatment (harassment) of senior foreign businessmen at the OR Tambo airport.

5. Conclusion

Improving the local business environment is part of what elsewhere is termed ‘locational policy’, which is the effort made by local stakeholders, from government and non-government, to create a favourable environment for business activities (Meyer-Stamer, 2004:336). As competition between localities for investment becomes more intense, it is essential that locational quality be upgraded, not only so that local entrepreneurs might find a particular locality attractive but also so that external investors will prioritise it when making location decisions (Ruecker & Trah, 2007). In South Africa, national government has identified the challenge of improving local business environments as one of the central tasks for LED practitioners (DPLG, 2008).

This article sought to contribute to an emerging scholarship that evaluates local business environments in the developing world, using Johannesburg as example. The results of two surveys conducted with individual foreign investors and representative business chambers point to some shortcomings of the local business environment. Our findings show certain similarities with those of earlier World Bank research, as well as some different emphases. Questions of crime levels and perceptions of security are continuing themes of concern for Johannesburg city managers. Other recurrent considerations are skills shortages, exacerbated by BEE policy implementation. The escalating cost of doing business in Johannesburg is a matter of more recent concern for policy makers. As noted earlier, the interviewees' special emphasis on infrastructure problems in 2008 in part reflects that research was undertaken at a time of major infrastructural works in Johannesburg during the build-up to the 2010 FIFA World Cup. An important new finding is their request for greater dialogue, communication and partnership between the city authorities and the investor community. Indeed, an improvement in trust and information flows between the state and local investors would be a critical step forward and a ‘quick win’ for enhancing the local business environment of Johannesburg.

In the light of its acknowledged importance by national government in South Africa (DPLG, 2006, 2008), further research is required on issues to do with local business environments and LED, including identifying the initiatives and instruments that practitioners can use to make improvements. Other possible research questions are how to unpack the problems of the local business environment for investors of different sizes and from different sectors, and what differences there are between problems experienced by domestic investors and by foreign investors and by investors from different countries.

Acknowledgements

Thanks are due to Byron Wilson for research assistance.

Notes

¹If a firm said a constraint was a major problem, the answer was weighted by two; if moderate, by one. Constraints that were not a problem or not applicable were weighted with a score of zero (Chandra et al., 2001a:6).