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University of Groningen
Faculty of Economics and Business
MSc Business Administration -
Organizational & Management Control
INVESTMENT DECISIONS AND RISK
MANAGEMENT IN NIGERIA
Challenges for Dutch companies operating in Nigeria
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ABSTRACT
This research focuses on the investment decisions and risk management strategies of Dutch companies that are operating in Nigeria. The main research question is: ‘What are the most relevant risks for
foreign investors in Nigeria and how should they cope with them in a practical manner?’. Both a
literature review and an empirical research (survey and interviews) are performed in order to be able to answer this question. The literature review indicated that the business environment in Nigeria is challenging compared to other countries in this region. The environment is regarded as very uncertain, which results in high risks. The political risks are considered to be the highest, and relate to
unexpected actions of the government. Previous researches demonstrate that political risk can be mitigated by engaging in proactive political strategies. The survey also indicates that political risk is considered to be the highest risk category in Nigeria. The respondents indicate that a long-term strategy to build relationship is an important strategy to cope with this type of risk.
Key words: Nigeria; foreign investments; investment decisions; risk management
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PREFACE
This thesis is the masterpiece of the five years I have studied Business Administration. I choose to specialize my studies in Organizational & Management Control, and searched for a subject in which I could perform my graduation research. This subject had to be in line with the master’s program, but I also wanted to perform a research that suits my personal interests. I have always been interested in the differences between countries, why are some countries rich and developed, and are other countries unable to utilize their potential? Besides that, I had a special interest for the development of African countries. Considering my studies, I found it interesting how companies made investment decisions, focusing on the risks involved in such an investment. These two subjects can perfectly be combined in a research regarding investment decisions and risk management of Dutch companies in one of Africa’s countries with a high potential: Nigeria.
This research could not have been performed with the help, support and guidance of other persons. I would like to thank Hans Slegtenhorst and Rien Strootman of Carnegie Consult for their extensive feedback on my writings, which helped me to stay focused. Furthermore, I would like to thank Joop van der Vinne, Oscar Boot and Mr. Duyverman for helping me to gain more understanding in the economic and business situation in Nigeria. The interviews I held with them were very helpful to continue my research and interpreting my results. I would also like to thank my colleagues at Orchard Finance Consultants and Carnegie Consult for their support and (gezelligheid) during my internship. Finally, I would like to thank my supervisor Jan-Willem de Kort, for assessing my writings, providing me with useful feedback and help me finalizing this thesis.
I enjoyed performing this research and writing this thesis. I hope you will enjoy reading it!
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TABLE OF CONTENTS
1. INTRODUCTION ……… 4 1.1 Background …..……….. 5 1.2 Thesis structure ……….……….. 7 2. RESEARCH DESIGN ……… 8 2.1 Problem statement ……….……… 8 2.2 Research objective ……….……… 8 2.3 Research questions ……….……… 9 2.4 Methodology ……….……….. 10 2.4.1 Literature review ……… 10 2.4.2 Survey ……….……….. 11 2.4.3 Interviews ………. 12 2.4.4 Restrictions ……….………. 122.4.5 Validity and reliability ……….……….………..……….. 13
2.5 Synthesis between theoretical framework and empirical research ……… 14
3. LITERATURE REVIEW ………. 16
3.1 Nigeria ……….. 16
3.1.1 Population and political situation ………..……….. 16
3.1.2 Economic situation ……….. 18
3.1.3 Business environment ……….……… 19
3.1.4 Expectations for the future ……… .………. 23
3.2 Investment decisions in emerging markets ………..…….…….. 23
3.2.1 Motives for internationalization ……….……….. 23
3.2.2 Risk identification in emerging markets ……….……… 25
3.2.3 Risk management and mitigation in emerging markets ………..………… 35
4. RESULTS ……….. 38
4.1 Results of survey ……… 38
4.1.1 Characteristics of participating companies ……….. 39
4.1.2 Motives for internationalization ……….……… 39
4.1.3 Experienced risks in Nigeria ……… 42
4.1.4 Risk management ……… 45
4.2 Results of interviews ……….…………. 46
4.2.1 Discussion of motives, risks and survey results ………….……….. 46
4.2.2 Governmental instruments ……… .…………. 48
5. CONCLUSION ……….. 52
5.1 Conclusions ……… 52
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LIST OF REFERENCES ……… 56
APPENDICES
Appendix A: Questionnaire Appendix B: List of interviewees
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1
INTRODUCTION
In December 2011, The Economist published an article about the emerging economies of African countries, in which they refer to Africa as ‘the hopeful continent’. The Economist states that over the last ten years, there were six African counties in the top-ten fastest growing countries in the world. The International Monetary Fund (IMF) expects that African economies will grow 6% in 2012 on average. Companies from Western countries, but also from Asian and Southern American countries, notice these rising economies and are expanding their businesses to Africa. Ernst & Young (2012) did a survey to the attractiveness of Africa. This survey demonstrated that the foreign direct investments in Africa are duplicated over the past decade. More specific, the number of foreign direct investments in Africa grew 27% from 2010 to 2011.
However, according to the Economist (2011) the economic growth is not without problems. At some points, Africa needs to be reformed. African countries still often suffer from corruption, political instability, bureaucracy, poverty and civil wars. Therefore, foreign companies should be careful when entering African markets. Doing business in Africa comes with different risks than operating in, for example, Europe. Foreign investors should be aware of these risks and should investigate how to cope with this. Ernst & Young (2012) considers the African economies as rising and with positive
prospects, but where corruption is still a major problem.
One of these fast-growing economies in Africa is Nigeria. Nigeria is an independent state for over 50 years, and is mainly negative in the news (Beddington, 2009). The reputation of the country was harmed due to violence, corruption and conflicts between religious groups. Nigeria has a history of political and economic mismanagement, but former president Obasanjo had a key objective in 1999: to recover the Nigerian economy (Beddington, 2009). The IMF sponsored a program that was aimed at establishing key economic reforms. This resulted in economic growth and from 2007, the growth became self sustaining (Beddington, 2009).
Currently, Nigeria is one of the fastest growing economies of Africa. The country is interesting for foreign companies, because the population of 170.1 million people results in a great potential market (Central Intelligence Agency, 2011). The IMF expects the GDP to grow with 7.1% in 2012 (World Economic Outlook, 2012). If this growth continues, these 170.1 million people will have more and more money to spend. Ernst & Young (2012) predicts that within a couple of years, Nigeria will grow to the largest economy in Africa. Despite these favorable expectations, Nigeria also has major
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This leads to the major topics of this research paper: investment decisions and risk management. This research will investigate how companies make investment decisions in uncertain environments, such as Nigeria. It will focus on two major underlying concepts of investment decisions, namely risk management and the forecasts of the economic climate. It must be emphasized that this study is directed to uncertain environments, and therefore, not all criteria in investment selection are included. The focus is on the distinction in risks in investment decisions in uncertain environments and in stable environments. The risks involved in investing in uncertain environments (such as developing
economies) vary greatly from the risks in a more stable environment (such as Western European economies). In other words, this research focuses on the risks and investment criteria that are
important in developing countries such as Nigeria, but are not or less relevant in developed countries, such as the Netherlands.
This research is focused on Dutch companies that are investing or operating in Nigeria. The focus on Nigeria has been chosen for its fast economic growth, combined with a large population (the country has the highest amount of inhabitants on the African continent). Nigeria has a developed oil sector, but the economic growth currently also occurs in the non-oil sectors, such as retailing,
telecommunications and business services. This provides business opportunities outside the oil-sector, which comes with other risks. Furthermore, the country is known for its safety issues and civil
disturbance, which may also affect foreign investors.
1.1 Background Nigeria has an estimated population of 170,123,740 people1 (Central Intelligence Agency, 2011). Nigeria is the largest country on the African continent in population and accounts to approximately 47% of West Africa’s total inhabitants. The population growth rate was 2.6% in 2011 (Central Intelligence Agency, 2012). The total GDP amounts to USD
235,922,915,395, which makes Nigeria a lower middle income country (World Bank, 2011). Despite the strong economic growth, the unemployment rate and income inequality are still high (World Bank, 2011).
The country is the biggest oil exporter in Africa, and has large
natural gas reserves. The distribution of commodities accounts for 95% of total export and 80% of the
1 The different institutions (e.g. Central Intelligence Agency, World Bank, International Monetary Fund) have different estimations of the size of the Nigerian population. It is difficult to determine the exact size of the population, since the registration of inhabitants is not completely up to date. The estimations of the population size vary roughly between 150 million and 175 million.
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federal government income. During the past decade, Nigeria also developed the non-oil sectors, such as retailing, telecommunications and financial services. The country’s GDP increased 7.6% on average since 2003, and was USD 2,600 per capita in 2011 (Central Intelligence Agency, 2011) .
Nigeria has a turbulent history. In 1863 the area of Lagos became a colony of Great Britain. Until 1903, Great Britain expanded their empire in the area, and appointed the Protectorate of Northern-Nigeria and the Protectorate of Southern-Northern-Nigeria. Both protectorates were combined in 1914 till the Colony and Protectorate of Nigeria. The northern part and the southern part of the colony were fused to one country, despite the significant differences in religion and culture. Several sub-populations resisted against the fusion, and demanded for self-governing states. This was the beginning of ongoing conflicts between different ethnic groups. On October 1, 1960, Nigeria became independent. Great Britain tried to solve the conflicts by appointing three autonomous federal states, and one central government, before leaving the country. The first elections of Nigeria were overshadowed by corruption and intimidation, and led to a serious conflict and massacre between ethnic groups. Especially one of the ethnic groups, the Igbo, were harmed during this violence. They desired an autonomous state and announced independence in their mother country in the eastern part of Nigeria: the Republic of Biafra. In 1967, ethnic groups from the western and northern part of Nigeria attacked Biafra, which was the start of the Nigerian-Biafran war. The war lasted for 30 months, until 1970, and it is estimated that between 1 and 3 million people died from warfare, disease, and starvation.
During the 1970s, Nigeria generated large revenues due to the oil boom. This made it possible to develop the economy, but the ruling military administration did not make any effort to improve the standard of living of the population. The Nigerian economy became totally dependent on the production and export of oil, but this did not build economic stability. Until 1999, Nigeria remained under military rule, where after Obasanjo became the first elected president. Since then Nigeria builds on a democratic republic. Nigeria’s current president is Goodluck Jonathan, who is chosen in the elections of 2011. He acted as deputy president since the illness of president Umaru Yar’Adua in February 2010. Jonathan is a Christian from the southern part of the country.
8 1.2 Thesis structure
This research paper continues with a description of the research methods in chapter 2. Thereafter, in chapter 3, in literature review will be done. The theory about investment decisions and risk
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2
RESEARCH DESIGN
2.1 Problem statement
In the previous chapter of this research paper, an introduction to foreign investments in Africa, and more specific in Nigeria, is made. Many researches demonstrated that African economies are growing and the continent is rising (Schiller, 2011; Serafin, 2010; Chironga et.al., 2011; Survey Ernst & Young, 2012; Survey McKinsey, 2010). One of the fastest growing economies in Africa is Nigeria, with a growth in GDP of 7.1% in 2012 (IMF, World Economic Outlook, 2012). Schiller (2011) and Beddington (2009) conclude that Nigeria has the potential to distance Canada, Italy and France in GDP in 2050. The constant growth of the economy in Nigeria and the large population of 158.2 million people attract foreign investors. However, a Canadian study indicated that foreign companies are often not prepared for the different circumstances in developing countries (Willson, 2008). The circumstances may differ in terms of the stability of financial institutions, the governmental regulations for foreign companies and the reliability of the government. Investing in a country as Nigeria brings different, and higher, risks than investing in a Western country. Historically, the major risk in developing countries was the possibility that the host government would seize the foreign company’s assets (Henisz & Zelner, 2010). But this risk has currently largely disappeared. However, the political risk2 in emerging countries is rising dramatically as seizure risk has decreased (Henisz & Zelner, 2010). The traditional methods that foreign investors applied in developing countries are now outdated, since the major risks have changed according to Henisz and Zelner (2010).
Nigeria is increasingly interesting amongst foreign investors, but they are not fully aware of the risks or do not know how to cope with them. This research will identify risks that are involved with investment decisions in Nigeria and searches for an optimal manner to cope with them.
For this study Nigeria is preferred over other African countries, though Nigeria is not the fastest growing economy in Africa. However, Nigeria’s economic growth in 2011 was still at rank eight of all African countries (Central Intelligence Agency, 2011). The reason that Nigeria is selected for this research, is the combination of the relatively large economic growth and the large population. The population is the largest of all African countries, which results in the largest potential market.
2.2 Research objective
Given the importance of effectively hedging the risks involved with investing in developing countries, companies should be aware of both the existence of the risks and how to cope with them. When
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investing in a current emerging economy, it is also important to know the legal procedures and the economical prospects. The necessity for this research is related to the current growth of Nigeria’s economy. To maximize the benefits of investing in Nigeria and to obtain a first-mover advantage in the non-oil sectors, companies should invest today. Despite the interests and opportunities for organizations to invest in Nigeria, there is a lack of literature about investment decisions and risk management with a focus on Nigeria.
The purpose of this research is to identify the major risks involved with foreign investments in Nigeria as well as how to cope with these risks. In order to achieve this purpose, the political and economical situation in Nigeria will also be outlined. Subsequently, empirical data will be obtained and compared with the theoretical data. This results in an in-depth theoretical understanding of the risks of investing in Nigeria, and aligns this with a practical perspective. From a practical perspective, it is important to understand the investment decisions that foreign companies make, and the challenges they face when operating in Nigeria, because only then policy can be made on how to cope with these risks.
Furthermore, only by knowing the experiences of foreign companies in Nigeria, consultancy firms will be able to advice on investing in Nigeria.
2.3 Research questions
According to Flick (2006), the first and central step in research is to determine the research questions. The research question provides guidance to the direction of the study and helps to conceptualize the research (Flick, 2006). In other words, research questions and sub questions are aimed at reducing variety, hence to structure the field under study (Flick, 2006).
The central purpose of this study is translated into a research question:
What are the most relevant risks for foreign investors in Nigeria and how should they cope with them in a practical manner?
In order to satisfactorily answer the research question, the research question has been divided in several sub questions. The sub questions are segmented over two parts: a theoretical and an empirical part. The theoretical part is about the scientific perspective of investing in emerging countries and risk management within that regard. It also investigates the current political and economical climate in Nigeria and the expectations for the future. This results in a theoretical model that reflects the expectations for the empirical research.
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companies that are currently operating in Nigeria, or are planning to do so in the nearby future, are applying to hedge the risks they face. After collecting the empirical data, the theoretical part and the empirical part will be compared in order to find possible gaps or similarities.
Theoretical questions
1. What are the criteria on which investment decisions in emerging countries are based?
2. What are, according to the literature, the most significant challenges or risks the foreign companies face in emerging countries?
3. How do the population, the political situation and the economic situations influence the business environment in Nigeria?
Empirical questions
1.For which reasons did companies select Nigeria as a country to invest? 2. Which challenges and risks did the companies regard as most significant? 3. How did companies cope with these risks?
The theoretical questions are qualitative of nature. Therefore, mainly qualitative data needs to be obtained to find answers for these questions (Baarda, de Goede & Teunissen, 2001). The empirical questions will be made measurable in a survey, which results in quantitative data.
2.4 Methodology
2.4.1 Literature review
The theoretical framework is the result of a literature review. Only scientific articles and books have been used for this purpose. The literature has been selected on the criterion that it focuses on
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2.4.2 Survey
The theoretical framework will be tested through a survey. This means that this part of the research is based on quantitative data. Quantitative information refers to the size or the degree of occurrence of a phenomenon, and are important in this research to determine the significance of a motive or challenge (Baarda, de Goede & Teunissen, 2001).
The survey consists of a digital questionnaire which will be emailed to a selected group of companies. The companies are all Dutch of origin and are all operating in Nigeria, or planning to do so in the near future. The aim is to gain an overview of the reasons that companies chose Nigeria as a country to invest in (motives for the investment decision) and the challenges they face in the country (experienced
risks). The content of the questions is derived from the theory. The respondents can grade their
perception of a challenge on scale from 1 to 5 (Likert scale). According to Wakita et.al. (2012), the number of options on a Likert-scale should be between four and seven, since these resulted in the best test-retest reliability. An odd number of options is used when researchers want to include a neutral answer (Wakita et.al., 2012). They conclude that a 5-point scale is adequate for most researches, and therefore the 5-point scale is applied to this research. The obtained answers will be analyzed through an average grade, which gives an indication of the importance of a specific phenomenon. Furthermore, the respondents are also asked how they cope with these risks. Regarding the motives for investing and hedging the risks, their answers can be represented in a ranking of occurrence. The most frequently mentioned issue gets the highest rating, and will therefore be considered as most significant. The questionnaire consists entirely of closed questions, due to the length of the
questionnaire and the required time to fill it in. The length of the survey (measured in time to answer the questionnaire) affects the response rate (Sheehan, 2001). A time-consuming questionnaire is likely to decrease the response rate.
The significance of the survey would be enhanced if a control group was introduced. This group should consist of Dutch companies that considered to invest in Nigeria, but decided not to do so. The motives for not expanding to Nigeria, and the decisive risks in this decision, would be of added value for this research as a control group. The companies that are now participating in the survey, all decided to invest in Nigeria, and will consider the involved risks different than companies who decided to avoid Nigeria. Unfortunately, it was not possible to add a control group, since these companies are unknown. Therefore there is one research group, consisting of Dutch companies that are all operating in Nigeria.
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Business Council (NABC) is used. The NABC has 344 members, but not all companies are
established in the Netherlands or operating in Nigeria. Therefore, all members are reviewed on their activities and locations. Hence, a list of 60 companies that are (at first sight) relevant for this research remained. The list consists of companies operating in different business sectors.
Regarding this research, it is difficult to determine the response rate for a statistically representative sample, since the size of the total population is unknown. Baruch and Holtom (2008) determined that the average response rate in organizational research is 35.7% with a standard deviation of 18.8. In this research is aimed at a response rate of 30%.
2.4.3 Interviews
In order to be able to interpret the data, and approach the results with the right perspective, practical information is obtained. This consists of interviews with experts with practical experience. It must be emphasized that the main objective of the practical information is to help interpreting the theoretical and empirical data. Therefore the interviews are not considered as a stand-alone part of the results, but are included in processing the results. However, the interviewees do have knowledge of and
experience with the instruments of the Dutch government. The information about this subject is gathered from these interviews.
In a semi-structured interview, the questions are not predetermined, only the subjects are fixed (Baarda, de Goede & Teunissen, 2001). Their definition of a semi-structured interview is in line with that of Flick (2006), who describes it as an approach for studying subjective theory. Since a semi-structured interview gives the interviewee more freedom in his answers, hence results in more information. Flick (2006) mentions the expert interview as a specific form of semi-structured interviews. In the expert interview, the capacities, knowledge and experience of the interviewee are more important than the emotional feelings of that person (Flick, 2006). Therefore, the expert interview will be applicable within this research.
2.4.4 Restrictions
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The other restrictions are composed in order to guide and narrow this research.
1. The study is focused on risks and economic climate as influencing factors in investment decisions in Nigeria.
2. The study focuses on foreign direct investments (FDIs).
3. The cases used in this research are from Dutch companies investing in Nigeria.
2.4.5 Validity and reliability
Flick (2006) describes validity as ‘the question whether the researchers see what they think they see’. Regarding validity, three major errors may occur: find a relation where it is not correct; reject a relation where it were correct; and asking the wrong questions (Flick, 2006). Hammersley (1992) concludes that the validity of knowledge cannot be assessed with certainty and that assumptions should be judged on plausibility and credibility. In this research, both theoretical and practical data have been used, which increases the validity of the study.
In order to insure the reliability of a research, Brewerton and Millward (2006) state that a researcher must be confident that the obtained data are both internally and externally consistent. Internally consistent means that the measurement is performed within the area of interest, and externally consistent refers to the degree in which the results will remain the same when the measurement is executed again. Yin (2003) defines reliability as ‘the demonstration that the operations of a study can be repeated, with the same results’. The reliability of this research will be secured through a selection of firms in different business sectors, in order to avoid a one-sided view. Furthermore, the respondents will be selected on their knowledge and experience within the research topic, in order to obtain the most relevant and valuable data. Also objective information will be reviewed within this study. This information will be gathered from experts who are not involved in a multinational company, for example employees of the Dutch government.
In order to be able to place the results in the correct context, several explorative interviews will be executed. These interviews will be used to help interpreting the results. This check-up will increase the validity and reliability of this research.
2.5 Synthesis between theoretical framework and empirical research
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3
LITERATURE REVIEW
As outlined in the introduction of this research paper, Nigeria is one of the fastest growing economies in Africa. Several publications conclude that Nigeria is next in line after the BRIC countries (Schiller, 2011; Serafin, 2010). This economic growth, combined with the large population, makes Nigeria attractive to foreign investors. In this chapter, the theoretical literature about foreign investment decisions in Nigeria will be reviewed. In order to structure the theory, it is divided in two paragraphs. The economical climate, cultural situation and business environment in Nigeria will first be outlined, to get insight into the threats involved in investing in Nigeria. In the second paragraph, the theory about investment decisions and the risks involved will be reviewed. This literature is focused on investment decisions in emerging economies.
3.1 Nigeria
3.1.1 Population and political situation
In May 1999, Nigeria became a democratic republic after 16 years of consecutive military rule (PRS Group; Nigeria Country Report, 2011). Before this, Nigeria has been a colony of the United Kingdom. The country became independent in 1960. Nigeria faced many problems in its history, including civil and religious conflicts and terrorism, but also suffered from corruption, poverty, a weak infrastructure and an unstable political environment (PRS Group, 2011).
Nigeria’s population consists of several ethnic groups. The three main ethnic groups are the Hausa-Fulani, the Yoruba and the Igbo, which are also divided by geography and religion. The country can roughly be divided in the north, where the Islam is the major religion, and the south, where
Christianity predominates (PRS Group, 2011). This granulation results in tension between the different groups and religions. In the first decade of the 20th century, Nigeria suffered from many terrorist incidents and violent clashes between Muslims and Christians. The main group who is held responsible for the terrorism, is Boko Haram. This is a fundamental Islamic organization, which refuses any western influence, including elections and a democratic formed government (PRS Group, 2011).
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Moreover, Nigeria cannot be regarded as a democracy according to Western standards. There are shortcomings in the execution of elections, the political institutions cannot be considered fully democratic, and corruption in public institutions is a major problem in Nigeria (Bertelsmann Stiftung, 2012).
As mentioned before, Boko Haram is a major threat for the safety in the country. The organization commits terroristic attacks, mainly in the northern part of Nigeria. Due to this heavy violence, the northern part of the country cannot benefit from the economic growth in Nigeria. The poverty and high unemployment rate reinforces the power of Boko Haram. The government could decrease Boko Haram’s power in the northern region by improving the economic situation, and hence Jonathan should stimulate investments in the northern part of Nigeria (PRS Group, 2011). Jonathan also created a committee in order to negotiate with Boko Haram or influential Muslim leaders. However, Boko Haram is a ‘faceless’ organization and hence, very difficult to cope with (PRS Group, 2011). The unrest caused by Boko Haram is not the governments only threat. The inhabitants of the Niger Delta are dissatisfied about the role of foreign oil companies in their region. This led to agitation and violent incidents. Hence, the Nigerian government cannot solely focus on Boko Haram as a threat (PRS Group, 2011).
Another major issue in the political situation is corruption. Many authors (Wanasika et.al.,2011; Smith, 2008; Serafin, 2010;Schiller 2011; Kolk and Lenfant, 2009; Business in Development Survey, 2004) recognize corruption as a high risk factor in developing countries. This problem also applies to Nigeria. Corruption is common in the public sector, including bribery and extortion of public
functionaries (PRS Group, 2011). This is still very challenging for Western companies operating in Nigeria, since there exist a lack of confidence in the Nigerian government. Domestic and foreign observers see corruption as an obstruction for foreign investments, as well as an obstacle to economic growth and poverty reduction (PRS Group, 2011).
Nigeria was ranked 143 out of 182 countries on the Corruption Perception Index of Transparency International (2011). Nigeria had a score of 2.4 on scale of 0 to 10, where 0 means that a country is perceived as highly corrupt and 10 as very clean. However, it must be mentioned that a score of 2.4 is average compared to other African countries. Most developing countries, even the BRIC’s, scored an insufficient grade for corruption (Transparency International, 2011).
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concerning to punish individuals, public officials, and businesses accused for corruption (PRS Group, 2011). Despite the ICPC investigations, only fifteen condemnations have been pronounced since 2001.
The education standards in Nigeria are considered to be low. As a result the skilled labor pool has declined over the past decade (PRS Group, 2011). The quality of secondary and tertiary education has decreased, mainly due to poor funding. Governmental expenditures on education amounted for only 0.9% of GDP (Bertelsmann Stiftung, 2012). Although going to school is officially compulsory for children, only 53% is enrolled. As a consequence of the poor educational standards of public
institutions, private education on primary, secondary, and tertiary level is on the increase (Bertelsmann Stiftung, 2012). The increase in private education does not solve the problems in educations. Due to high income inequality, only a small and rich group of society can afford this type of education.
3.1.2 Economic situation
Nigeria suffers from major weaknesses in her economic situation. Though, two hopeful aspects are recognized: the economic growth over the last years due to crude oil and other resources exports, and the large and rapidly growing market for telecommunications (Bertelsmann Stiftung, 2012).
The current economic crisis in the Western countries did also affect the African economies. Nigeria is more exposed to the financial crisis than other countries on the continent, since Nigeria is vulnerable to oil price volatility. However, due to constraints in the Middle-Eastern oil supplies, the demand and price for oil in Nigeria remained high, and therefore the financial crisis did not affect Nigeria
dramatically (PRS Group, 2011). The non-oil sectors are currently also growing rapidly, which makes Nigeria less dependent of the export of oil and gas. This over-dependency was exposed by a large decrease in oil prices in 2009, which had a strong impact on Nigeria’s economic situation
(Bertelsmann Stiftung, 2012).
Nigeria is one of the major oil suppliers in the world, hence the production of oil is the primary reason for the economical growth in the country. However, the current growth in GDP is also resulting from a strong performance in the non-oil sector, such as services, retailing and telecommunications. This leads to opportunities for foreign investors in these sectors (PRS Group, 2011).
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The Nigerian government formed more ambitious economic objectives. These goals can be pursued in 2012, since the expected economic growth will then be 7.1%. However, from 2013 until 2016, the average economic growth is expected to be 6.5%. This is still relatively high compared to other countries on the African continent, but it is not high enough to realize the government’s long-term objectives (PRS Group, 2011).
According to the PRS Group (2011), the Nigerian government has implemented a program to attract foreign investors. For firms in sectors outside the petroleum sector, a total foreign ownership is allowed. For firms within the petroleum sector only joint ventures are allowed. The Nigerian laws apply equally to domestic and foreign investors (PRS Group, 2011). Therefore, the economy is to a reasonable degree open to foreign investments. The law for foreign trade has been deregulated, and the government does not intervene free trade (Bertelsmann Stiftung, 2012). Tax laws do not impede investments, but the imposition of taxes is unequal and not transparent (PRS Group, 2011). Tax evasion is a common phenomenon, and companies often collaborate with public officers to avoid paying taxes.
Foreign companies are allowed to hold non-naira-denominated accounts in domestic banks. There are no restrictions for the use of these accounts. With the right documentation, a money transfer will be completed within 48 hours (PRS Group, 2011).
The inflation rate and exchange policy rate have been consistent over the last three years (Bertelsmann Stiftung, 2012). In 2009, Nigeria suffered from a banking and financial crisis, which led to tighter control and more supervision of the Central Bank. The government was able to keep the inflation rate among 12% and 14% over the last three years, and the exchange rate to the US dollar was reasonably stable (Bertelsmann Stiftung, 2012). Nigeria is able to maintain an amount of foreign currency reserves of $32 billion since 2009, which is reasonable. However, in 2008 the amount of foreign currency reserves was $60 billion, but this decreased due to reduced world market prices and by intervening in the domestic banking and financial crisis (Bertelsmann Stiftung, 2012). Nigeria is able to hold acceptable amounts of foreign currency reserves, since the crude oil and gas prices recovered in 2010.
3.1.3 Business environment
As outlined in the previous paragraph, the Nigerian market is open to foreign investors. The Nigerian law applies equally to domestic and foreign investors. The legal, accounting, and regulatory systems in Nigeria are according to the standards of international norms, but enforcement is uneven (PRS Group, 2011). Corruption and tax fraud are common problems in the country, and the government has
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institution, the Economic and Financial Crimes Commission. However, as mentioned before, Nigeria is still low ranked on the Corruption Perception Index (2011). Foreign investors should be aware of the threats of corruption and bribery when expanding to Nigeria.
The rights on private property are to the utmost extent adequately defined (Bertelsmann Stiftung, 2012). All Nigerian land belongs to the federal state or the federal government (coastal strip and riverbanks). It is therefore not possible to possess property, but land is always granted as a hereditary lease (Bertelsmann Stiftung, 2012). The rights of the user are limited when natural resources or raw materials are found, since these materials tend to belong to the federal state. Besides, the change of ownership of the hereditary lease can lead to complications. The determination of ownership is often difficult, since local chiefs regularly sell land that has an undefined status. This also impedes
investments of private companies (Bertelsmann Stiftung, 2012).
Another part of private property is intellectual property. Nigeria is member of the World Intellectual Property Organization (WIPO), which governs the registration of patents and trademarks. A patent gives the owner the exclusive right to make, import or sell a product or apply a process (PRS Group, 2011). Besides, according to the WIPO standards, it is a crime to export, reproduce or sell work without the permission of the copyright owner (PRS Group, 2011). However, the enforcement of the laws of WIPO relating patents, trademarks and copyrights remains weak. Both the legal procedures and the enforcement are considered to be inert, ineffective and prone to corruption (PRS Group, 2011). Another difficulty in the Nigerian business environment for foreign companies, is the poor state of the infrastructure. The most roads are in bad conditions, which makes efficient road transport a challenge. Air transport is limited to the main cities, and rail transport is not a serious option. Furthermore, the power supply in the country is capricious (PRS Group, 2011). Meanwhile, the telecommunications sector has been privatized and improved.
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Indicator Rank Description
Starting a business 116 Requires 8 procedures, which cost 34 days in total. The foundation of a business costs 70.6% of income per capita and requires paid-in minimum capital of 0.0% of income per capita.
Dealing with
construction permits
84 Requires 15 procedures, which cost 85 days in total. The construction permits cost 504.8% of income per capita, which is a considerable difference with 2011 (564.2% of income per capita).
Getting electricity 176 Requires 8 procedures, which cost 260 days in total. Getting electricity costs 1056% of income per capita.
Registering property 180 Requires 13 procedures, which cost 82 days in total. Registering property costs 20.8% of income per capita.
Getting credit 78 The strength of legal rights index is 9 on scale 0 to 10. The depth of credit information index is 0 on scale 0 to 6.
The percentage of public registry coverage is 0.1% of adults and of private bureau coverage 0.0%.
Protecting investors 65 The score on the extent of disclosure index is 5 on scale 1 to 10. The extent of director liability index is 7 on scale 1 to 10. The ease of shareholder suits index is 5 on scale 1 to 10. The strength of investor protection index is 5.7 on scale 1 to 10.
Paying taxes 138 There are 35 of tax payments per year. The time spent on preparing taxes is 938 hours a year. The total tax rate for companies amounts to 32.7% of profit (22.3% profit tax; 9.7% labor tax and contributions; 0.7% other taxes).
Trading across borders
149 There are 10 documents needed to export a product. It costs 24 days to organize an export. The costs to export are USD 1263 per container and the costs to import are USD 1440 per container. There are 9 documents needed to import and an import costs 39 days.
Enforcing contracts 97 The process takes 457 days and consists of 40 procedures. It costs 32% of the claim.
Resolving insolvency 99 It costs 2 years on average to resolve insolvency. The costs are 22% of estate and the recovery rate is 28.2 cents on the dollar.
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The amount of procedures is the number of different steps in the entire process. Every procedure requires a certain time to complete it (e.g. 4 days). This results in the total amount of days of the process. The total time does not include time spent on gathering information. The costs of a total process are measured in as a percentage of income per capita, since absolute costs are not comparable. The costs only include official costs (no bribery). For trading across borders, the required time includes obtaining all documents, inland transportation, customs inspections, and port
and terminal handling, but does not include ocean transport time.
It can be useful to determine how the business environment ranks compared with other economies and compared with the regional average. With this benchmark investors and policy makers can determine the strengths and weaknesses of Nigeria’s business environment and get insights from other economies. Nigeria is situated in the Sub-Saharan Africa region.
Doing Business (2012) made a selection of comparator economies in this region.
Nigeria scores slightly above the regional average. Compared with these economies, Nigeria scores especially good on the factors ‘dealing with construction permits’, ‘protecting investors’, and
‘enforcing contracts’. However, the benchmark also describes that Nigeria scores weak on the factors ‘getting electricity’ and ‘registering property’.
When considering the entire Sub-Saharan Africa region, instead of only the selected comparator countries, Nigeria ranks 15 out of 46 economies.
Nigeria is a lower-middle income country and can therefore also be compared to other countries of the same income level. On that ranking, Nigeria scores 34 out of 54 economies. In each comparison, Nigeria scores good on ‘getting credit’ and ‘protecting investors’, and weak on ‘getting electricity’.
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3.1.4 Expectations for the future
According to Goldman Sachs, Nigeria is one of the countries in the ‘Next 11’3
(Schiller, 2011; Beddington, 2009). This is a group of countries that are identified to be the next in line after the BRIC countries. This ranking is based on different criteria. One of the most important criteria is de size of the emerging middle class. This consists of the group of consumers that are capable of purchasing certain goods and services (Schiller, 2011). Nigeria’s large, and still increasing, population induces that the country scores high on this criterion. Schiller estimates that by the year 2050 Nigeria’s population will be increased to 326 million. As a consequence, a rapid growth of the middle class is also expected, together with an exponential growth in disposable income. Schiller (2011) and
Beddington (2009) both conclude that Nigeria has the scale and potential to become one of the eleven largest economies in 2050, and even take over Canada, Italy and France on GDP. However, according to the planning manager of PepsiCo, Nigeria’s long-term development is constrained by a high level of lawlessness, corruption and a high degree of bribery. The major conclusion of Schiller (2011) is that the demographic profile of a country is a key factor in predicting its economical growth. When a country has relatively large and young population, there are opportunities to build the economy on high amounts of workers and consumers.
3.2 Investment decisions in emerging markets
Investment decisions in developed, well-known markets are regularly based on the expected financial outcomes. However, when a company considers to invest in a developing and unknown market, also other factors become relevant. The first decision in this process is to select an emerging economy, and after that, to cope with the uncertain environment. This paragraph will review the existing literature about investment decisions in emerging markets and uncertain environments.
3.2.1 Motives for internationalization
As mentioned earlier in this research paper, investing in developing countries provides new opportunities for companies. According to the Business in Development Survey (2004) the main reasons for Dutch companies to expand to developing companies, are turnover growth, the size of the foreign market, and the growth of the foreign market. Other reasons that emerged from the survey, were the presence of natural resources in the host country, the expansion of distribution channels and the use of a springboard to other markets in the region. Furthermore, some motives of less importance were mentioned, namely the establishment of the brand image and the costs of labor and production (Business in Development Survey, 2004).
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A company should first determine their objective of investing abroad, before being able to select a country. According to Bartels et.al. (2009), there are three major reasons for internationalization. First, a company could aim at improving efficiency through lower production costs and lower labor costs in the host country. Secondly, the firm could search for market expansion. In this case, the size of the population and the size of the potential market in the host country are important. Finally, a company could invest for their need of specific strategic assets. Kolk and Lenfant (2009) add another motive for internationalization, namely the presence of natural resources in the host country. These four
categories of motives provide a basis for the first step in the investment decision process.
The study of Kolk and Lenfant (2009) indicates that the presence of natural resources is the major reason for foreign companies to expand to Africa. In 2005, 48% of the FDIs into Africa took place in the oil, mining and gas sector (UNCTAD, 2006).
UNIDO (2003) performed a research about foreign direct investment flows to developing countries. They investigated which factors had to be present in a country in order to attract foreign investors. This resulted in a list of fourteen factors, as represented in table 3, which companies assess to select a country for their foreign investments. Depending on the sector in which the company operates, different factors will be regarded as most important (UNIDO, 2003).
Factors attracting Foreign Direct Investments
Political stability Service-oriented government attitude Macro- and micro economic stability Local business infrastructure
International outlook Quality of life
Clarity in government regulation Transparency of investment climate Internationally and domestically
oriented infrastructure
Low labor costs
Labor skills Availability of skilled labor Banking and financial intermediation Presence of key clients
Table 3: Factors attracting FDIs. Source: UNIDO, 2003
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penetrating new emerging markets. Furthermore, companies mentioned the following motives: consolidating their presence; being closer to customers; the quality of mining products; the opportunity to extract at low cost; high margins on investments; strategic advantage by extracting untapped rich resources; and spread risks across countries and sectors.
The factors mentioned in table 3, and the motives found by Kolk and Lenfant (2009), demonstrate that there exist a predominance of natural resource-seeking and efficiency-seeking motives.
Bartels et.al. (2009) state that the motivation and decision for a FDI into an emerging market is largely shaped by perceptions and reality of country and sovereign risk. However, after the entry to an
emerging market and the establishment of the FDI, it is increasingly shaped by market and competitive risk (Bartels et.al., 2009). The next paragraph will discuss the risks involved with investing in
emerging markets.
3.2.2 Risk identification in emerging markets
Several definitions for the term ‘risk’ can be found in the literature. Wroblewski and Wolff (2010) describe risk as ‘the potential negative impact to assets, investments or profitability that may arise from present processes or future events’. According to Holton (2004), risk entails two essential components: exposure and uncertainty. In other words, risk is the exposure to an uncertain outcome. The term uncertainty is often related to risk (Mao and Helliwell, 1969; Zhang et.al., 2007; Holton, 2004; Ghoshal, 1987; Bhardwaj et.al., 2007; Sharfman and Shaft, 2011).
According to Mao and Helliwell (1969), investment decisions, uncertainty and risks are highly interrelated. They state that the risk attributable to an investment should be measured by its contribution to the total risk of a firm viewed in a market context. However, at this point the
uncertainty enters the story. The current risk management methods are data intensive and designed for well-developed financial markets, but the problem in emerging markets is the lack of data (Nerouppos et.al., 2006). The lack of data increases the uncertainty, since theoretical risk management models are often data intensive. According to Nerouppos et.al. (2006), it is too difficult to build a theoretical risk management model for emerging markets, so the models should be based on common sense and practical relevance and experience. The missing data required for the risk management models could be replaced by data of other emerging countries, which are in a similar region of similar degree of development (Nerouppos et.al., 2006). They assume that the data from emerging markets is common for others, hence can be exchanged among countries. Zhang et.al. (2007) also say that uncertainty arises from a lack of market knowledge, which is mainly caused by an unstable environment.
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it is a bundle of expectations concerning potential future instability that has a market value and determine future earnings; and a subjective perception of how instability may affect the firm.’
The uncertain outcomes that companies face in emerging countries, appear as risks. Zhang et.al. (2007) state that uncertainties in emerging markets come from three factors, which result in additional risks. They believe that political hazards, an imperfect industrial structure and an unique business culture lead to uncertainties and risks for foreign companies. These uncertainties may arise at three levels: (1) culture-specific; (2) country-specific; (3) market-specific (Zhang et.al., 2007).
Several researchers determined five categories of risks in emerging markets: (1) political and country risks; (2) social risks; (3) financial risks; (4) (macro-)economic risks; (5) environmental risks
(Wroblewski and Wolff, 2010; Baydoun, 2010; Ghoshal, 1987). Many researches have a major focus on political or country risk (Wroblewski and Wolff, 2010; Baydoun, 2010; Frynas, 1998; Feinberg and Gupta, 2009; Citron and Nickelsburg, 1987; Vijayakumar et.al., 2009). Within the context of this research, a sixth risk category will be added, namely cultural risk or risk caused by distance. This type of risk in the context of foreign investment is investigated by several researchers (Holburn and Zelner, 2006; Ghoshal, 1987; Bhardwaj et.al., 2007; Slangen and Van Tulder, 2009; Ghemawat, 2001; Smith, 2008). It must be emphasized that the risk categories and indicators are highly interrelated. The economic risk in a country is affected by the political stability, and the political risk can be influenced by social and cultural issues. In the remainder of this paragraph each risk category will be discussed.
Political risk and country risk
Political risk is related to actions of the government of the host country. This may manifest itself through the extent of contract enforcement, the definition and protection of property rights, and the implementing capacity within ministries and public agencies (Wroblewski and Wolff, 2010). They define political risk as ‘related to political instability, which harms the investment climate by contributing to the capital flight and creating uncertainty about the future of the economic policy’. Baydoun (2010) has a similar description of political risk, to which he refers as ‘the risk that political changes can have a negative impact on the investment through, for example, taxes or custom
regulations’.
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Here he refers to political instability as threats resulting from potential or actual changes in the political systems, such as war, revolution or a coupe, in accordance with the previous definition. Policy instability results from government policies that affect the business environment, such as fiscal and monetary reforms, price controls, expropriation, and barriers to earning repatriation (Frynas, 1998).
According to Henisz and Zelner (2010), the main concern in political and policy risk was historically the risk of expropriation, the possibility that host governments would seize foreign-owned assets. This risk has currently largely disappeared. The major concern in political and policy risk has now shifted to the possibility that the government will discriminatorily change the laws, regulations and contracts governing an investment, and thereby harming the foreign investor (Henisz and Zelner, 2010). A survey by the Multilateral Investment Guarantee Agency and the Economics Intelligence Unit (2009) demonstrated that multinational companies regarded breach of contract, restrictions on the transfer and convertibility of profits, civil disturbance, government failure to honor guarantees and regulatory restrictions as being their major concerns. Since all these factors relate to political and policy risks, it emphasizes the importance of this risk group.
Chironga et.al. (2011) argue that there exist two major risks on the African continent. The first is political instability, which leads to additional risks. Secondly, many African governments take adverse actions, such as reneging on contracts, import tariffs or quotas, and passing legislation that impedes operations. O’Regan (2010) also emphasizes the legal and regulatory risks in international business activities in his research paper. He states that unfamiliarity with a specific legal system may cause serious impact. Legal cultures around the world can vary, and therefore lead to risks, in the fields of freedom of contract, insolvency laws, enforcement of property rights, the treatment of creditors, anti-corruption laws, and data privacy laws (O’Regan, 2010). The findings of Chironga et.al. (2011) and O’Regan (2010) are in line with the conclusion of Serafin (2010), who determined that foreign investors in Nigeria regard political risk, corruption, security concerns and a poor regulatory environment as most critical in Nigeria.
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Country risk relates to the international nature of the investment, since foreign investment represent additional dimensions of risk that do not apply to investments in a purely domestic context
(Vijayakumar et.al., 2009). The same investment may be riskier in one country than in another
country, due to country risk. In accordance with Feinberg and Gupta (2009), Vijayakumar et.al. (2009) state that country risk involves many interrelated factors, and therefore most investors are unable to develop an independent assessment of country risk. Financial institutions, such as Standard & Poor’s, Moody’s, Fitch and the World Bank, provide comprehensive country risk ratings which companies can apply. Although the assessment of country risk is highly subjective and hard to make measurable, companies do need an in-depth understanding of country risk, in order to develop an appropriate risk mitigation strategy (Vijayakumar et.al., 2009).
The terms ‘political risk’ and ‘country risk’ are often used interchangeably in research (Vijayakumar et.al., 2009). However, as can be derived from the descriptions above, country risk is a comprehensive term, in which political risk is included. Country risk also involves other indicators, such as economic performance and financial risk. Since both terms are used interchangeably in many research papers, they are discussed in one subparagraph. However, the difference between them is emphasized.
One specific factor in political and policy risk is corruption by both the government and the private sector. Corruption pervades many aspects of the socioeconomic life in Sub-Saharan Africa. In this region, corruption is a way of doing business, sealing deals, securing contracts, and obtaining assets (Wanasika et.al., 2011). Hierarchy is generally an important aspect in Sub-Saharan countries,
including Nigeria. This can increase the hazard to power abuse and corruption (Wanasika et.al., 2011). Despite the integration of corruption in daily operations, Smith (2008) argues that companies that enfold in corruption will be in constant crises, which can destroy the organization. Involving in corruption practices may be fruitful in the short-term, but with a long-term horizon, embracing transparency and rejecting corruption is the interest of every company (Smith, 2008).
The definitions and descriptions of political, policy and country risk indicate that the factors in this risk category lead to risks in the other categories. According to Serafin (2010), governance is the major issue in Nigeria that leads to an uncertain environment, and therefore to risks in all categories. The risk management of most foreign investors is hence centered at poor governance and political instability (Serafin, 2010).
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difference in political risk in both countries. There are ten indicators included on which the Political Risk Index is based, namely (1) degree of political stability; (2) political representation; (3) democratic accountability; (4) freedom of expression; (5) security and crime; (6) risk of conflict; (7) human development; (8) jurisprudence and regulatory transparency; (9) economic conditions; and (10) corruption.
Social risks
Baydoun (2010) makes a separation between social risks and political risks. He describes social risks as a ‘lack of acceptance of the investment of the local community’. However, in this study, social risks are related to population of a country. Chironga et.al. (2011) state that the poor educational system in Africa, especially in secondary and tertiary education, results in a lack of midlevel managers. Serafin (2010 also recognizes the insufficient pool of professionals in Nigeria, due to the poor educational system.
Moreover, many African countries suffer from poverty, famine and disease, and have an insufficient health system (Chironga et.al., 2011). This results in, for example, higher degrees of absenteeism due to illness than in other countries.
Financial risks
Financial risk relates to the cost and availability of capital, which can be negatively influenced by the lack of financial institutions, and weak links to capital markets and global financial systems
(Wroblewski and Wolff, 2010). This may lead to unpredictable cash flows and uncertainty of investment returns. Financial risks often arise from political, social and environmental risks, since these create uncertainty.
O’Regan mentions the risk arising from capital controls. These are limitations on the free
international flow of money and assets. Capital controls do broadly correlate with the extent to which a country encourages or discourages international trade (O’Regan, 2010). Capital controls lead to problems for organizations due to restrictions on cross-border payments, limitations of the free exchange of currencies, and the repatriation of profits.
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In Sub-Saharan Africa, there is a high degree of risk due to macro-economic instability, volatility of returns, unstable financial institutions, and an inconsistent government policy (Wroblewski and Wolff, 2010). Macro-economic instability is reflected in, for example, the inflation rate of a country. This agrees with the description of Baydoun (2010), who states that economic risks relate to the changes in economic indicators that might have a negative impact on the investment.
Ghoshal (1987) refers to macro-economic risks as the risks that are outside the control of the
company. He mentions movements in interest rates, exchange rates or commodity prices as examples of macro-economic risks.
The volatility of taxes can also be grouped under macro-economic risks. In fact, the tax rates in a country are fixed, and will then not be considered as a risk, since the outcome is acquainted. However, when the government is not transparent, this may lead to 33% in increase in taxation (Henisz and Zelner, 2010).
O’Regan (2010) states that foreign currency risks are introduced when starting international business activities. Especially in countries where a high volatility in exchange rates exists, such as most emerging countries, this results in uncertainty, and hence in a risk.
Environmental risks
Environmental risks refer to the possible negative impact of the natural environment on the operations of a company (Baydoun, 2010). This risks can occur from the weather or from extreme events, such as a flood, an earthquake or a hurricane.
Wroblewski and Wolff (2010) relate the environmental risks to the agribusiness sector. In this sector, climate factors and the lack of infrastructure to cope with weather related risks (e.g. access to
irrigation) are regarded as environmental risks.
Some researchers also consider an underdeveloped infrastructure as an environmental risk (Smith, 2008; Chironga et.al., 2011; Serafin, 2010). In Sub-Saharan Africa, problems with the availability of electric power are common, hence equipment does not always work. Furthermore, the roads for transport may not exist or be in poor condition, and ports may be underdeveloped or inefficient (Smith, 2008; Chironga et.al, 2011; Serafin, 2010). Due to weak infrastructure, the distribution costs tend to be high. Despite the challenges in distribution, Smith (2008) argues that distribution is very important. In order to increase the visibility of a brand, the product must be widely available and easily affordable.
Cultural risks and risks related to distance
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barriers created by distance. These barriers can occur at four dimensions, namely cultural distance, administrative distance, geographical distance, and economic distance, which together form the CAGE-model (table 9). Ghemawat (2001) argues that companies underestimate the costs of doing business internationally, since traditional methods to assess foreign investments ignore the costs and risks of doing business in a new market.
Cultural Distance Administrative Distance Geographic Distance Economic Distance
Different languages Absence of colonial ties Physical remoteness Differences in consumer incomes
Different ethnicities; lack of connective work ethic of social networks
Absence of shared monetary or political association
Lack of a common border Differences in cost and quality of: - natural resources - financial resources - human resources - infrastructure - intermediate inputs - information or knowledge Different religions Political hostility Lack of sea or river
access
Different social norms Government policies Size of country Institutional weakness Weak transportation or
communication links Differences in climates
Cultural distance affects the consumers’ product preferences, which are influential on the marketing mix (Ghemawat, 2001). For example, color tastes are closely related to cultural prejudices. According to Ghemawat (2001), cultural attributes can be invisible and are therefore hard to understand.
Administrative and political distance often relates to historical relations between countries. Countries that have a common currency or language will experience a smaller administrative distance than countries with different currencies and languages. Former colony relations also decrease the administrative distance between countries (Ghemawat, 2001). Geographic distance is the physic distance between countries, and influences the costs of transportation and communications. It also includes the physical size of the host country, the within-country distances to borders and access to waterways and the ocean (Ghemawat, 2001). Economic distance relates to differences in income of
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consumers of different countries. The wealth level of a country affects the costs and quality of financial, human, and other resources (Ghemawat, 2001).
Smith (2008) had an interview with Mr. Ohiwerei, former chairman of Nigerian Breweries and Unilever Nigeria, about doing business in Nigeria. He states that foreign companies who come to Nigeria need to acquire deep knowledge of consumer attitudes and habits in Africa, since those are significantly different than in Europe. When Mr. Ohiwerei worked for Nigerian Breweries, he experienced that Africans prefer to drink beer at home, instead of drinking beer in pubs as Europeans do. This requires a different customer approach and marketing mix (Smith, 2008). The marketing strategy is especially important in the business-to-consumer segment. Mr. Ohiwerei explains that in Nigeria, advertisement through radio and billboards is more effective than through television or Internet, as companies use in Europe (Smith, 2008).
Zhang et.al. (2007) summarize culture-specific risk as ‘a lack of understanding of the norms and values of a nation’.
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When this model is applied to the cultures of Nigeria and the Netherlands, the differences between both can be determined.
Nigeria Dimension The
Netherlands
80 Power Distance (PDI) 38
30 Individualism (IDV) 80
60 Masculinity (MAS) 14
55 Uncertainty avoidance (UAI) 53
16 Long-term orientation (LTO) 44
Figure 3: Hofstede’s cultural dimensions (1983)
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The table above represents the differences between the Nigerian and the Dutch national culture according to Hofstede (2003). The national cultures vary to a large extent, namely in four out of five dimensions. Nigeria scores high on power distance, where the Netherlands score low on this
dimensions. This means that Nigerians accept a hierarchical order and centralization, while the communications lines between managers and other employees are short in the Netherlands. Secondly, Nigeria scores high on collectivism, and the Netherlands score high on individualism. Nigerians are loyal to groups and relationships are very important. The Netherlands score high on individualism, which means that people tend to care for themselves and their direct family only. Besides, Nigeria scores also high on masculinity, which means that the society is driven by competition, achievement and success. The Netherlands score low on this dimension, which means that there exist a feminine culture. In a feminine culture, the main values are quality of life and caring for others. Nigeria and the Netherlands score equally on uncertainty avoidance, they both prefer to avoid or minimize uncertainty. Finally, Nigeria and the Netherlands both score low on long-term orientation, although their scores are far apart. Both cultures are short-term oriented.
Innovation and business models
Besides the risks resulting from the categories discussed above, several researchers state that foreign companies should be innovative and adjust their business models when expanding to an emerging country (Chironga et.al., 2011; Eyring et.al., 2011; Karamchandani et.al., 2011; Prahalad, 2004).
When a multinational company from a Western country expands its business to an emerging country, it often faces a different environment. Therefore, it should adjust its business models to environments that are very different than the core market (Karamchandani et.al., 2011). A large part of the
population of emerging countries still lives at very low income levels. Therefore, most large companies assume that the poor cannot afford their products (Prahalad, 2004). This is mainly applicable to companies that operate in the business-to-consumer segment. Several researchers state that this assumed problem can be solved by adjusting business models to the new environment (Chironga et.al., 2011; Karamchandani et.al., 2011; Prahalad, 2004; Eyring et.al., 2011). According to Eyring et.al. (2011), many multinational companies simply import their domestic business models into emerging markets. They adjust their business models at the edges (e.g. lowering prices), but the fundamental profit formulas and operating model remain unchanged. As a result they mainly sell to high-income consumers, but this group is too small to earn sustainable returns (Eyring et.al., 2011). Hence it is important to invest in market intelligence in order to understand the
