Walmart Massmart Acquisition

Topics: Macroeconomics, Supply and demand, Aggregate demand Pages: 5 (1762 words) Published: April 9, 2012
Wal-Mart’s acquisition of Massmart: will the effects be detrimental rather than beneficial? The recently approved acquisition of a 51% stake in Massmart by Wal-Mart has brought about a lot of speculation as to whether this deal will mainly positively impact South Africa’s GDP or not. By investing in the African market, Wal-Mart will to a greater extent impact South Africa’s labour market as well as lead to the growth of the retail industry at a faster rate, thus positively impacting growth in the South African economy. This essay will therefore show how this particular case of foreign direct investment will possibly lead to potential growth in South Africa’s GDP through examples of the AS-DS model, similar examples of such acquisitions and a demonstration of the expenditure method of GDP calculation, therefore showing the importance of such a big investment in a rapidly growing and attractive market such as South Africa. A four billion dollar offer to buy 51% of Massmart was made by Wal-Mart, which is currently the world’s biggest retailer and this offer was recently approved by the South African government. The deal will allow 51% of Massmart, the third largest retail distributor in Africa to be owned by Wal-Mart and the general terms of the deal involved a non-binding contractual agreement between the two companies which however requires certain conditions concerning labour and bargaining to still apply. On the surface, the deal looks extremely appealing, as it offers an investment of over four billion dollars into the economy, however it is necessary to unravel the whole issue and critically analyse the impacts of this investment on South Africa’s development and thus pose the question, will the acquisition, cause more harm than good? As according to Maylie (2011), in order for the deal to be finalised, Wal-Mart has to adhere to certain conditions which include, freezing job cuts for the next two years as well as honouring union bargaining agreements in order to secure newly created jobs. Through such guaranteed employment creation, the South African economy will benefit immensely from reduced unemployment and this in turn will lead to an increase in income within the country. This will mean that private individuals will have more income to spend, which will lead to an increase in private consumption spending and will thus result in a relative increase in the GDP level of South Africa. Wal-Mart pledges to create thousands of new jobs and proceeding with this deal would be the right opportunity needed to decrease South Africa’s currently increasing 25.7% unemployment rate. Through Wal-Mart’s intended plans to invest more in the building and opening of 500 to 100 new stores in the following three years and to open about 20 new Cambridge stalls per year (Watson, 2011), fixed capital formation in South Africa will greatly increase. This increase in investment spending will add to the increase in GDP levels in the country and positively impact the growth of the South African economy. An example of a similar case whereby foreign direct investment resulted in growth of fixed capital formation would be the investment of Wal-Mart in Mexico, which has brought about an increase in fixed capital formation in respect to foreign direct investment of over 14% for the entire period 1990-2005, a ratio significantly higher than the world average (Peters, 2008:5). This therefore shows how Wal-Mart’s investment could possibly lead to a significant rise in GDP levels in the next few years.

Another likely effect of this acquisition on South African GDP is a drastic change in the general price level of goods. There is a high chance that Wal-Mart will cause a reduction in prices so much, such that it will affect the national inflation rate as it has been known to do in America (Economist, 2011). Due to Wal-Mart’s highly efficient and technologically advanced logistics in its supply-chain management, productivity is bound to increase not...

References: Maylie, D. 2011. Wal-Mart, Massmart Deal Gets Nod in South Africa. (Online). Available: 76357132239525222.html [2011, June 01].
Makholwa, A. 2011. Trouble in store. (Online). Available: [2011, April 14].
Watson, L. 2011. Wal-Mart to focus on SA culture. (Online). Available: [2011, June 05].
Peters, D. E. 2008. The Impact of Foreign Direct Investment in Mexico. (Online). Available: [2008, April].
Lipsey, R. G. & Chrystal, K. A. 2007. Economics. Oxford: Oxford University press Inc.
Economist, 2011. The beast in the bush. The Economist. 398(8721): 72-74.
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