Expanding Fc Corporation In The Us Fast Food Industry To Nigeria Through Fdi Business Essay
This report will guide Fikunmi Corporation (FC) in its decision to embark on international business in Nigeria, as part of its business objective to acquire substantial world market share in the food service sector. The objective of this report is to propose a feasible best strategy for FC’s entry into the Fast Food Industry in Nigeria to management of FC.
Analysis of Nigeria’s national business system and cultural conditions will be provided, while assessing its effect in the fast food industry. An evaluation of trade patterns between U.S. and Nigeria with assessment of restrictions and trade protection measures affecting foreign investments/imports will be explored. The report expresses further U.S. and Nigeria’s exchange regimes and the risk involved. The Political risk in Nigeria and its effect will also be evaluated; mitigation measures would be proposed.
Insightful appraisals for FC’s mode of entry employing its company’s competitive advantage (OLI) were explored and inferred recommendation of FDI was selected as the best strategy for FC’s entry into the Fast Food Industry in Nigeria. In addition, adequate measures for mitigating against risk and investment protection were given.
I. Executive Summary 2
1.0 INTRODUCTION 5
1.1 Nigeria: An Overview 5
1.2 United States of America: An Overview 6
Table 1: Economy Analysis of Developed and Developing Country Selected 7
1.3 Overview of Nigerian Fast Food Industry 7
2.0 NATIONAL BUSINESS SYSTEM AND CULTURAL CONDITIONS 8
2.1 Overview of National Business System (NIGERIA) 8
2.1.1 Economic System 9
2.1.2 Political System 11
2.1.3 Legal systems 12
2.2 Business Culture 13
3.0 PATTERNS OF TRADE AND PROTECTION MEASURES BETWEEN NIGERIA AND UNITED STATES OF AMERICA 15
3.1 Pattern of Trade in Nigeria and U.S. 15
3.2 Patterns of Trade between Nigeria and United States of America 16
3.4 Trade in the Fast Food Industry between United States and Nigeria 17
3.6 Restriction and Trade protection in the Nigerian Fast Food Industry 20
4.0 EXCHANGE RATE REGIMES IN THE UNITED STATES AND NIGERIA 21
4.1.1 Exchange Rate Regimes in United States 21
4.1.2 Exchange Rate Regimes in Nigeria 21
4.2 Nigerian Exchange Rate Policy Implication on Trade Imports and Exports 21
4.3 Exchange Rate Risks Inherent to Nigeria and its Fast Food Industry 22
4.4 Measures for Mitigating Exchange Rate Risk 22
5.0 MODE OF ENTRY INTO NIGERIA 23
6.0 Political Risk in Nigeria 26
Diagram 3: Political Risk in Nigeria 26
Diagram 4: Nigeria Business Climate 28
7.0 RECOMMENDATION/CONCLUSION 29
8. REFERENCES 30
Fikunmi Corporation (FC) is a leading fast food service organization in the world and as the largest chain of hamburger fast food restaurants serving about 1% of World population of a whooping daily customer base of 58million through its 23,000 international restaurants. FC has its headquarter in Oak Brook, Illinois, United States of America and deals primarily with hamburgers, chicken products, French fries, desserts, shakes and soft. The management thrust for expanding FC’s market share through internationalization particularly to Sub-Sahara Africa urges their enquiry for the best international business strategy to employ in entering Nigeria, a developing country.
The report examines the feasibility of FC’s entry into Nigeria’s fast food Industry by exploring detailed international business strategy spanning from incorporating a new subsidiary, establishing an exporting trade or licensing its products to domestic investors. In accessing this pursuit, the report shall firstly survey Nigeria’s brief history and an overview of its fast food industry; while also assessing the business systems and cultural conditions that relate and can affect operations of FC in the fast food industry in Nigeria. Secondly, trade patterns between Nigeria and US will also been examined and trade protection measures in the fast food industry in Nigeria will also be observed. Exchange regimes governing both countries will be analyzed and summarized, while various risk involved in fast food industry will also evaluated. Recommendations for this study will be based on the productive potential and emerging market perceived in the fast food market in Nigeria.
1.1 Nigeria: An Overview
Nigeria is Africa's most populous country, and comprises more than 250 ethnic groups (Mbendi Information Services 2011 & Nigerian Embassy: Washington, DC. 2004). Nigeria comprises thirty-six states and its Federal Capital Territory, Abuja and land boundaries with small neighboring countries such as Benin, Cameroon, Chad and Niger. In terms of religion, Nigeria is has three main religion comprising; Muslims, Christians and indigenous beliefs (CIA World Fact Book). With a population of 154.7 million people, Nigeria is the biggest country in Africa and comprising 47% of West Africa’s population. Nigeria is the major oil exporter in Africa, with the biggest natural gas reserves in the continent. Nigeria has its official language has English. Nigeria is rich in natural resources; accordingly most industry activity is built around these. Agriculture is a significant industry involving a huge percentage of the country’s labour force. Oil is the country’s most significant natural resource and produce up to 95% of Nigeria’s revenues.
1.2 United States of America: An Overview
U.S. is the third largest country in the world in area following Russia and Canada. With a total area of 3,717,792 square miles (9,629,091 square kilometers) and a whooping population of roughly 310million with an estimated growth rate 0.97% in 2010, they are about one-half the size of Russia, and slightly larger than either Brazil or China. The United States of America (USA) is a federal constitutional republic made up of 50 states and one federal district (Washington, D.C.) the capital district. The country is situated in the central southern part of North America, bordering both the North Pacific Ocean and the North Atlantic Ocean, between Mexico and Canada. It’s a multicultural country with inhabitants from all over the world residing in U.S. as their home. The Ethnic Groups are: White, Black, Asian, American Indian and Alaska native, Native Hawaiian and Other; while the official language of U.S. is English, with other language such as Spanish, other Indo-European, Asian and Pacific Island. U.S. has various religions with a high percentage as Christians and others are Jewish, Buddhist, Muslim other or unspecified (Foreign & Common wealth office 2010).
Table 1: Economy Analysis of Developed and Developing Country Selected
UNITED STATES OF AMERICA
310,232,863 (July 2010 est.)
$369.8billion (2010 est.)
$14.72 trillion (2010 est.)
GDP growth (%)
6.8% (2010 est.)
2.8% (2010 est.)
13.9% (2010 est.)
1.4% (2010 est.)
Investment (gross fixed)
11.6% of GDP (2009 est.)
12.8% of GDP (2009 est.)
Foreign Direct Investment (stock)
$67.23billion (31 Dec. 2010 est.)
$2.581trillion (31 December 2010 est.)
4.9% (2007 est.)
9.7% (2010 est.)
Current Trade bal
$27.77billion (2010 est.)
$561billion (2010 est.)
$34.18billion (2010 est.)
$1.903trillion (2010 est.)
NGN 150.88 (2010)
US dollar 1 (2010)
Information above gives a fast insight to Nigeria and United state of America’s economy and economic analysis. All information’s are from CIA, the World Fact book accessed 16/01/2011.
1.3 Overview of Nigerian Fast Food Industry
The origin of fast food in Nigeria is traceable to the late 1970s and early 1980s. Today, however, there exist extended lists of brand names without an end in sight as high sales volumes encourage new entrants to spring up incessantly.
According to Mrs. Olayinka Adedayo, President, Association of Fast Food and Confectioners of Nigeria (AFFCON), the Nigerian fast food industry is presently worth about N190 billion with the prospective to grow bigger (Edukugho 2009). The fast food industry is dominated by roughly 60 small to medium-sized domestic/indigenous fast food brands with above 800 modern fast food outlets in the Nigeria and revenue of about $400 million.
Existing Fast Food Companies
Major fast foods in Nigeria includes Mr. Biggs, Tantalizers, Sweet Sensation, Tasty Fried Chicken, Big Treat, Kas Kitchen, Friends, Chiquita, Tetrazzini, Domino Dina, Trendy's and, more recently, Finicky (Olutayo and Akanle 2009).
Industry Growth &Driver
The fast food industry has developed rapidly in Nigeria over the past decade showing annual growth of 30% between years 1999 - 2009. Two input drivers have been, increased urbanization with roughly half of Nigerians residing in cities and the growth of the middle class. The middle class estimated between 5-10 million have clear preferences and discerning tastes for western-style fast food (Nnebe Business Service Ltd 2010). The growth in the industry has prompted major foreign western franchises like Nando's and Kentucky Fried Chicken to come into the Nigerian market in recent years.
The global financial menace of year 2007 – 2009 temporarily decreased the growth of the fast food industry by reducing short-term consumer expenditure at fast food restaurants. However, with the Nigerian economy increasing at about 5% despite these shocks, with a population of approximately 150 million and with informal fast food trade valued at around $700 million the fast food holds tremendous prospective in the years ahead(Nnebe Business Service Ltd 2010).
2.0 NATIONAL BUSINESS SYSTEM AND CULTURAL CONDITIONS
2.1 Overview of National Business System (NIGERIA)
The National business system gives a theoretical analysis of Nigeria’s present situation i.e. Economic, Political and Legal system. This is analyzed in relation to its business implication for FC’s entry from its country of origin “U.S”.
2.1.1 Economic System
The development of the fast food industry in Nigeria remained strong and steady over the years. This can be attributed to the large size of the Nigerian population estimated above 150million, which equates to huge and growing demand for fast food products. Other factors comprise improved product quality, growing style of Nigerian consumers, the growing marketing activities of companies and in general high disposable incomes. Fast food is a dynamic market in Nigeria, with new entrants and products each year (Euromonitor Int. 2010).
Economic Downturn &Monetary Effects
Presently, most banks reluctant to give credit and hampering business activities severely in Nigeria. This has lead to rise in cost of funds resulting in challenges for companies. Firms deal with escalating costs of production raw materials, which have their eroded profit margins. Corporations that produce domestically also typically have increased manufacturing costs resulting from poor infrastructure like electricity.
However, Nigerian economy is showing signs of recovery; even though it has but fully recovered from the downturn (Euromonitor 2010).
Infrastructure is a main obstacle to growth in Nigeria i.e. Electricity and Road amongst many others. However, in August 2010 President Jonathan unveiled a blueprint for power sector comprising privatization of the state-operating electricity generation and distribution amenities; Present government is also working to developing better public-private partnerships for roads(CIA World Fact book 2011).
Implication for Business:Electricity has been a major hindrance to both indigenous and foreign firms. FC should nevertheless consider alternative power supply to have a smooth business operation in Nigeria irrespective of government plans.
Central Bank of Nigeria regulates money supply and interest rate for the country. Interest rates has remained very high (ranging from 20% to 35%) despite efforts to lower them by Government. “Wholesale Dutch Auction System” for foreign exchange trading was launched in 2006, which has facilitated slow reserve losses while enhancing the exchange rate to be more market determined (Corporate Nigeria 2010/11 &U.S. Commercial Service 2008).
Foreign companies can own domiciliary accounts in Nigerian banks. Foreign firms have unlimited access to its funds, and investors are allowed free entry and exit of capital.
The NIPC assures investors unhampered transfer of dividends (net a 10% withholding tax). Firms must provide verification of income earned and tax payments before making remittances. Money transfers are obligatory by law to be made via banks i.e. only approved foreign exchange agents (U.S. Commercial Service 2008).
Implication of Business:FC would experience a well-developed banking and financial sector with easy access to operational capital and other credit facilities.
General Implication for business
The Nigeria operates a mixed economy and is referred to a developing country which permits all corners to invest in almost all range of economic activities with a current industrial policy thrust attached to guided economy deregulation and dis-engagement of government from activities through privatization of government establishments in recent past. Government interferes in regulating general business activities at minimum, thereby creating conducive environment for foreign investors to operate (Adun 2007 and Nigerian Embassy: Washington, DC. 2004).
2.1.2 Political System
Nigeria is a member of the Commonwealth, ruled by civilian administrations for only 9 of its 36 years of independence with two Parliament chambers comprising the House of Representatives (consist of 360 members that are elected for a four year term in single-seat constituencies) and the Senate (consisting 109 members, elected for a four year term in 36 3-seat constituencies, and 1 seat in a single-seat constituency representing the Federal Capital Territory (Euro Monitor 2010).
System of Governance
Nigeria’s culture for both business and social is influenced deeply by its politics. The country is currently experiencing the longest period of civilian rule and democracy in its history (Business-Travel-Nigeria.com). Nigeria’s political environments are entrenched with majorly governance challenges.
After the military regime came the democratic system of government. This system experienced the establishment of various political parties, with Peoples Democratic Party (PDP), Action Congress (AC) and All Nigeria Peoples Party (ANPP) forming the Major ruling party; while others are Accord Party, All Progressives Grand Alliance, Alliance for Democracy, Conference of Nigerian Political Parities, Democratic Peoples Party, Fresh Democratic Party, Labor Party, National Democratic Party and Peoples Progressive Alliance.
Nigeria's National Electoral Commission (INEC) witnessed significant troubles, including lack of independence and politicization; lack of transparency in its operations and decision-making (U.S. Department of State).
Religious &Ethnic Issue
Past and recent government struggle to control religious and ethnic pressures and has feeble control over some regions. (Schuster and Whelan 2010).
There exists regular frustration with the country’s widespread corruption and polarization amid the south and north, posing a threat and risk to stability. Corruption is rampant, although recent government efforts had made modest improvements (Schuster and Whelan 2010).
Implication for Business
Nigeria is operating a democratic system of government since the transfer from the military regime; this has created a fairly stable political system (WTO 2011 &NIPC 2011). Nigeria’s political system does not have major effects (direct influence) on FC’s business activities in the country but effective corporate governance should be instituted in order to avert the corruption nature the country is known for.
2.1.3 Legal systems
National Legal Framework
The Nigerian legal system as its foundation from the tradition of English common law but modified by statutes to meet local demands and conditions, some of which are The Constitution (1999), Legislation, Customary law, English law, Islamic law and judicial precedents (Dina et al 2005 and NIGERIA Investment Guide). Nigeria however operates a civil law system emphasizing its 1999 Constitution and is also acknowledges obligatory International Court of Justice (ICJ) jurisdiction but with reservations (CIA Fact book 2011).
Other National Legal Framework (General)
Nigerian laws affect both domestic and foreign investors. These comprise the Money Laundering Act of 2003, Securities and Exchange Act of 1999, the Banking and Other Financial Institutions Act of 1991, the Foreign Exchange Act of 1995 and the National Office of Technology Acquisition and Promotion Act of 1979 (U.S. Commercial Service, 2008).
Other National Legal Framework for Foreign Investors
Foreign investors are obligated to register with the NIPC following incorporation by law (i.e. Companies and Allied Matters Decree of 1990). The decree forbids the nationalization or expropriation of foreign companies but in cases of national interest.
Legal Framework for Food Industry
Noteworthy legal process amid others affecting food product industry in Nigeria is regulated by the National Agency for Food and Drug Administration and Control (NAFDAC) and the Standards Organization of Nigeria; established to regulate guideline and control of Food and Related Products, in order to protect and promote public health (David 2009).
General Company Legal Framework
All general company operation; including registration and practices are handled by the Federal government through the Corporate Affairs Commission and other notable parastatals.
Implication for Business
There are little or no legal barriers preventing foreign firm’s entry into business, excluding the minimum qualifications required by the regulations; which seem fair. However, some legislation and existing laws can force limits on foreign management and content in the fast food industry. FC should comply with all regulations of Nigeria, as these are paramount for a successful business operation.
2.2 Business Culture
Regardless of the fact that Nigeria as a country shares same currency and National Anthem etc; it is a country with different cultures that do not have similarity i.e. multicultural economy (Ogbonna 2010). Nigeria’s cultures are friendly and are very welcoming by nature (Business-Travel-Nigeria.com).
Cultural Description and Business Implication
Nigeria’s estimated population of over 152million comprise of variety of customs, languages, religions and traditions among Nigeria's 250 ethnic groups gives the country a rich diversity.
Implication for Business: The Nigerian market potential stretches into the rising West African sub-region with a high population offering a viable market for the fast food industry being a consumable industry.
Nigeria’s language is currently estimated as 521 with three major native languages namely; Yoruba, Ibo and Hausa. However, Nigeria’s official language is English, which stemmed in order to facilitate the cultural and linguistic unity of the country post-colonization by the British.
Implication for Business: Both U.S and Nigeria use English has its official language. This serves as an opportunity for FC in terms of entry. However, FC should promote the 3 major languages in its business strategy.
Nigeria’s population seems very religious encompassing Muslims (50%), Christians (40%), and indigenous religions (10%). The foremost ethnic group in the northern two-thirds of the country is the Hausa-Fulani, majority of who are Muslim. Other foremost ethnic groups of the north are the Tiv, Nupe and Kanuri. The Yoruba natives are predominant in the southwest (Bureau of African Affairs 2010). However, both the religion and ethnic group have faced major riots and discrepancies in different capacities leading to loss of life and property in the country.
Implication for Business:FC should try and avoid religious and ethnic business strategy because of the high cultural disparity in Country; this can be evidenced by the numerous religious and ethnic clashes in Nigeria over the past decade.
Nigeria practices collectivism social structure above individualism connoting that issues are viewed from the opinion and consideration of group e.g. social fabric from extended family during occasions and the norm of family dining at households. The implication of this to FC is that interest of individual is of higher importance in US and overrides group interest, while the opposite is the case in Nigeria culture, where most business deliberation are driven by groups i.e. community (Hofstede 2004 &Clearly Cultural 2009).
General Implication for Business
The cultural analysis above depicts an existence of a high cultural difference Nigeria’s business environment; adaptation, cultural and ethnicity difference should be perused to gain strategic thrust of the Nigerian national market. FC should be sensitive to cultural notions in designing its business strategy.
Source: Most details were gathered from http://www.state.gov/r/pa/ei/bgn/2836.htm apart from the social structure.
3.0 PATTERNS OF TRADE AND PROTECTION MEASURES BETWEEN NIGERIA AND UNITED STATES OF AMERICA
3.1 Pattern of Trade in Nigeria and U.S.
Nigeria's major trade relations evolve around the oil and natural gas industry. The government after the economic reforms of 2005 is however making frantic efforts to diversify its export profile ahead of the oil sector, such as agricultural and minerals products (EconomyWatch 2010)
U.S. has been described the most significant nation in the world in terms of international trade and has led world imports for decades while concurrently remaining top three exporters of the world (Trading Economics 2010).
Balance of Payment
Nigeria’s import trade is proficient to balance export revenue as a result of high international oil price. According to the Economy watch (2010), the country's imports in 2009 grossed over US$42.1 billion. Nigeria’s trade balance deteriorated in the 2ndquarter of 2010 following a little expansion in imports from merchandise in contrast with the development observed in the 1stquarter in 2010 (a rise from US$7,547.0 million in Q1, 2010 to US$8,750.0 million in the review period).
U.S. reported a balance of payment indices released by U.S. Census Bureau and the U.S. Bureau of Economic Analysis indicates trade deficit equivalent to $38.3 Billion in November 2010 (U.S. Census Bureau 2010).
Major Trading Partners
In terms of export, The US and UK are Nigeria’s largest trading partners and accounting for half of the Nigeria’s export. However, Major Nigeria’s import trade partners are EU, China, US and South Korea.
Major Trading partners are the European Union, Its other members in NAFTA (i.e. Canada and Mexico), China and Japan.
Major Exported products
Major exported products are oil and gas products, cocoa, timber amongst others.
Main exported products are: equipment and machinery, non-auto consumer goods, motor vehicles and parts, industrial supplies, aircraft and parts, food, feed and beverages.
Major Imported Products
Main imported products are heavy equipments, consumer goods, Machinery and food products.
However, U.S. imports include production machinery and equipment, non-auto consumer goods, fuels, non-fuel industrial supplies, motor vehicles and parts, food, feed and beverages (Trading Economics 2010).
3.2 Patterns of Trade between Nigeria and United States of America
Gambari I. (1984) observed various ties between Nigeria and United States such as speaking the same language and sharing democratic traditions and spirits alike. Trade between US and Nigeria is large and has fundamental importance that cannot be pushed aside.
Corporate Nigeria (2010) refers U.S. as the largest trading partner in sub-Saharan Africa and trade relation between the two countries are experiencing various developments. In 2009, trade between the U.S. and Nigeria was stated USD22.8billion; a downturn from its USD42billion in previous years. However, U.S. remains Nigeria’s single most significant export destination. Nigeria’s export to US is worth USD19.1billion (mainly consisting oil); first quarter exports to the U.S. in 2010 were more than three times greater than 2009 first quarter rising from USD2.6billion to USD7.1billion. U.S. imports to Nigeria in 2009 moved to USD3.7billion in goods (Corporate Nigeria 2010).
U.S. is Nigeria’s largest foreign investor. US stock of foreign direct investment (FDI) in Nigeria was $3.4 billion in 2008, moving up from $1.4 billion in 2007. U.S. Foreign direct investment (FDI) in Nigeria is concentrated mainly in mining/petroleum and wholesale trade sectors (Bureau of African Affairs 2010).
The US employs the Office of the United States Trade Representative to negotiate trade agreements, resolve disputes and gather input on trade issues explaining president’s position on trade in the Nigerian Market. Nigeria’s bilateral relationship with United States has experienced growth and this can be attributed to the dramatic boost in 1999 with the restitution of Nigeria’s democracy. Taking into consideration the participation of US and Nigeria in the World Trade Organization, both countries have also signed an agreement to address issues of exporting mono-product and exploitation of existing bilateral trade relations named “TIFA” - Trade and Investment Framework Agreement (Owonibi 2010 & Corporate Nigeria 2010/11).
Business Implication: In view of recent developments, trade between USA and Nigeria is expected to grow i.e. TIFA and other trade agreements. The exploration of numerous non-oil economy sectors in Nigeria should be harnessed by potential investors such as FC’s interest in the Fast Food Industry (U.S. Dept. of State 2008).
3.4 Trade in the Fast Food Industry between United States and Nigeria
Industry sources indicated about $70 million worth of U.S. consumer-oriented foods was exported to Nigeria in 2008. However, about half of the products reportedly enter the market through cross border smuggling or other informal means (Office of the U.S. Trade Rep, 2010).
The Nigeria's food service sector; comprising of restaurants (i.e. fast food), hotels and institutional contracts (HRI) was valued at USD3.1 billion in 2008. The largest and fastest growing segment is the fast food eatery (Quick restaurant eatery). The U.S. products observed to be the best market prospects include potato chips, sauces, pastry mixes, seafood, seasonings, canned food, wine and ice cream. But for wines and poultry meat, import duties on these products range from 5% to 20 %. Major food service operators are searching for franchise opportunity to represent major U.S. corporations in Nigeria, particularly in the fast food industry (Office of the U.S. Trade Rep, 2010).
Diagram 1: Nigeria’s Food Exports
Diagram 2: Nigeria’s Food Imports
3.5 Restrictions and Trade Protections in Nigeria
Nigeria’s main trade policy instruments moved away from tariffs to quantitative import restrictions from mid 1970s, mainly to import prohibition and import licensing. Moreover, the customs legislation empowers the government to revise these lists at its discretion (Oyejide, 2007).
Table 1: General Restrictions and Trade Protections Instrument in Nigeria
Import Tariffs Policy
Nigeria’s average applied tariff rate in 2008 ranged high from12% to 50% on specific tariff lines. In September 2008, Nigerian Government issued a new tariff policy commencing in 2008 to 2012, harmonizing its tariff with its neighbors under the Economic Community of West African States (ECOWAS) Common External Tariff (CET). The new tariff regime puts imports into one of five tariff bands, including, zero duty on special medicines not produced domestically, industrial equipment and machinery (industrial equipment and machineries only attracts zero duty, if imported in the first year of company's operation); 5% duty on other capital goods and raw materials; 10% duty on intermediate goods; 20% duty on finished goods; and 35% duty protecting luxury goods and finished goods in growing industries aimed by government.
Implication for business: Nigeria’s adoption of the CET is component of ongoing economic reforms designed at improving trade and investment environment and unionization of economic policies in the sub-region. There is some resistance within the government of Nigeria and the private sector to deepening trade reforms.
Nigeria continues to ban some imports, emphasizing the need to protect local industries. The Common External Tariff (CET) book has reduced the number of items on the import prohibition record from 44 to 26.
Customs Procedures &Regulation
Nigeria Customs and Excise Tariff employ the Customs Cooperation Council Nomenclature. Duties are each specific or ad valorem, depending on the article of trade, and are to be paid in Naira upon entrance. Import tariffs are non-preferential and apply similarly to all countries outside the Economic Community of West African States (ECOWAS). Furthermore, an indigenous insurance company must cover all imported goods. A special duty might be imposed on imported goods if the government believes that such goods are being discarded or unfairly subsidized, thus intimidating established or prospective domestic industries.
Nigerian government oversee numerous export incentive programs such as capital asset depreciation allowances tax holidays and concessions, export development funds, export Processing Zones and foreign currency retention programs in addition to operating Free Trade Zones. According to the CET Book, most waivers, concessions or exemptions on imports have been ended. However, Nigerian Export Promotion Council will continue to execute the Export Expansion Grant scheme to develop non-oil export performance.
Import Requirement &Documentation
Nigerian government started the execution of a "Destination Inspection"plan 1stof January, 2006. In the destination inspection scheme, goods designated for Nigeria's ports would be examined at the point of entrance rather than the point of shipment, which was up till now the practice. Three companies, including; SGS, Cotecna and Global Scan, have been granted a seven-year contract to operate as inspection agents at border posts, seaports and airports in Nigeria.
In order to avoid multiple examinations and minimise delays during inspections, all the relevant agencies (e.g. Nigeria Customs Service, National Agency for Food and Drugs Administration and Control, Standards Organisation of Nigeria, Nigerian Drug Law Enforcement Agency, Department of Petroleum Resources, Weights and Measures Department of Federal Ministry of Commerce, etc) are encouraged to simultaneously work with the Inspection Agent in order to ensure that the quantity, quality and prices of Nigerian exports conform to the International standard.
Source: 2008 Country Commercial Guide for U.S. Companies by the U.S. Department of Commerce
3.6 Restriction and Trade protection in the Nigerian Fast Food Industry
Based on the provisions of law such as GON Act No 19 of 1993 (Amended) and the Food and Related Products (registration) Act No. 20 of 1999 and other accompanying guidelines; no food item or product can be manufactured, imported, exported, advertised, distributed or sold in Nigeria unless it is registered by the National Agency for food and Drugs Administration and Control (NAFDAC). They serve as protection measures for promoting public health and restriction to foreign organizations as a result of their compliance. (David 2009).
Firms would also need to register its trademark to grant exclusive rights to the use of registered mark for a specific or class of products i.e. fast foods, this regulated by the Trade Marks Registry of the Federal Ministry of Commerce in Nigeria. The 1988 copyright decree, based on WIPO standards and U.S. copyright law helps restricts exportation, counterfeiting, importing, reproducing and exhibiting a firm’s product without copyright permission from owner (David 2009).
As proposed to FC in the infrastructural section of economic system regarding alternative power supply means, incentives are granted to industries that provide amenities that normally, should be provided by government. Such amenities include electricity, access roads, and pipe borne water. Only 20% of the amenities cost, is tax deductible, where they do not exist (NIPC 2011).Other restrictions and protection measures can be borrowed from the above highlighted in Table 3.5, as these pertains to all business in Nigeria especially foreign related. Government grant tax holidays of 5 to 7 years to foreign organizations and even exempt all taxes from company operating in the Nigeria’s export processing zones including imports and export duties (Nigerian High Commission London 2011).
In order words, the fast food industry is really not faced with much ado if it products are of good quality and standards. There are little or no major restrictions to the food sector directly, as Nigerians feed as their income and taste rises; which can be perceived in the growth of the sector. However, there exists various incentive amenities put in place by government for foreign investors.
4.0 EXCHANGE RATE REGIMES IN THE UNITED STATES AND NIGERIA
4.1.1 Exchange Rate Regimes in United States
The last 30 years have experienced two distinct exchange rate regimes in the U.S. i.e. the fixed exchange rates system by bretton woods (1958-1973) and managed floating exchange regime (1973-date). The United States currently operates a floating exchange rate system for major currencies such as the Euro and the Japanese Yen, allowing them to respond to market forces (IMF Staff 2000).
4.1.2 Exchange Rate Regimes in Nigeria
Since independence, Nigeria has experienced various transformation of exchange regime ranging from its fixed regime in 1960’s, the pegging agreement in 1970’s and middle 1980’s to its present floating exchange regime starting in 1986 following the approval of the structural adjustment programme (SAP) (Sanusi 2004). Nigeria is operating a managed floating regime since 1986 till date (Sanusi 2004); even though different exchange rate regime from dual in 1988, the interbank foreign exchange market (IFEM) in 1989 and the re-introduction of dual exchange regime in 1995 where introduced afterwards (Elumelu 2002). Between 1986 and 1992, Nigeria experienced about 25% mean rise in the annual change in real exchange rate. However, the exchange rate in recent times is less volatile with a reduction of 4.5% in the annual real exchange rate between 2000 and 2006 resulting from the Central Bank’s well managed nominal exchange rate policy. This results in favorable terms of trade, less fiscal dominance and effective monetary policy (Ogunleye 2009).
Foreign exchange risk occurred due to change in currency exchange rate, which adversely affects the fair value of investment or currency deposit at the end of year 2010. The CBN reacted by hoarding some bids. However, FSDH Research discovered developments in the international oil market showing a minimized foreign exchange risk to a large extent and expecting a relative stability in year 2011 (Onu 2010).
4.2 Nigerian Exchange Rate Policy Implication on Trade Imports and Exports
Elumelu (2002) revealed that the inadequate supply of foreign exchange keeps on mounting demands on Nigeria’s foreign exchange. The stringent documentation of forex demand has promoted parallel market; thereby increasing profitable and in turn discouraging domestic production, while also worsening Nigeria’s balance of payment position. In addition, Nigeria’s dependence on the oil sector results in high revenue generation in recent past meaning the instability of the Naira can be likened to that of Oil prices in the World market.
However, the government tries to manage the value of its currency in order to promote business opportunity and balancing imports and exports by controlling and managing supply of foreign exchange into the economy, resulting in high demand for foreign exchange in market (Elumelu 2002).
4.3 Exchange Rate Risks Inherent to Nigeria and its Fast Food Industry
In Ogunleye (2009)’s PhD dissertation, he discovered that Nigeria has a statistically important relationship amid variables with exchange rate volatility hindering FDI inflows and FDI inflows enhancing exchange rate volatility. In considering Nigeria’s foreign exchange market volatility and trade level in the fast food industry, we may assert a medium risk level inherent to business in this sector. In summary, Sanusi (2004) simplified the risk posed by the floating exchange rate to persistent exchange rate volatility, transaction cost and high inflation.
4.4 Measures for Mitigating Exchange Rate Risk
Business can be exposed to transaction risk (minimal gain or loss from business transactions; such as purchases and sales), translation risk (Aligning U.S and Nigeria financial statements) and economic exposure. However, FC can hedge its cash flows to condense the likelihood of financial distress and also select low cost production sites and labour, while also attempting to collect its receivables based on increase in exchange rate. FC should consider Nigeria’s volatility and constantly carry out Research and development to forecast increase or decrease in exchange rate, in order carry out decisions that will lower cost, increase and hedge profits.
5.0 MODE OF ENTRY INTO NIGERIA
This report shall employ the use of Foreign Direct Investment (FDI) as our core strategy, based on various above analyses of Nigeria trade patterns using a focus international theory as a basis for entry.
Other supposed but not employed strategies consist of Franchising and Exporting. Franchising involves FC granting domestic investors the right to run a fast food outlet, selling its products under its business format and trade mark or brand. This however, can result in loss of business strategy, technical knowhow and in negative terms; loss of international product reputation and integrity. Exporting would require FC producing its products in U.S and serving it in the Nigerian market. However, the kind of products (Fast Food – Consumable goods) FC intends to introduce would be more realistic if production is situated at country sites (Nigeria) apart from the huge cost of transportation and trade/import barriers/restrictions which it might be prone to.
U.S. Department of commerce refers FDI as the investment made to gain a lasting management interest (generally 10% of voting stock) in FC’s fast food business operating in Nigeria other than in U.S. (U.S. Census Bureau 2010). We shall employ the John Dunning (1979)’s trade theory (Eclectic -OLI- Model), in accessing our global competitive strategy. The Eclectic Model employed for FC would be tabulated below, giving detailed analysis of the Ownership factor, Locational Factor and Internationalization advantage in employing the FDI (Investments & Income.com 2011).
Table 1: Ownership Factor – Eclectic Model. (Analysis of FC Specific Advantages)
FC’s Present Attributes’ and Position
Financial and Operational Capability
FC is a world leading fast food organization in the World with the largest chain of hamburger fast food restaurants that retains earnings from its operations on a yearly basis to increase its market share and for internationalization purpose. FC has a large strong financial potentials and stock of readily available funds.
The technical knowhow of FC cannot be under-emphasized due to its long existence and acquisition of customer loyalty on a global scale. FC produces with the experienced manpower and latest technological inputs in order to keep food service relatively cheap and affordable, while retaining its quality.
FC has an established experience and global customer loyalty. Its trade mark and patent right are privileged monopolistic advantage to its existence. FC’s entry would be a smooth and active passage as a result of its international affiliations of large suppliers for production inputs.
Table 2: Locational Factor – Eclectic Model. (Analysis of Nigeria Specific Advantages)
Nigeria’s Present Attributes’ and Position
Endowment:Nigeria Location is endowed with three environmental agricultural features: Tropical forest, savanna and coastal wetlands suitable for food and cash crops cultivation offering; FC unique competitive advantage for its other production process.
Boundaries:Nigeria has land boundaries with small neighboring countries such as Benin, Cameroon, Chad and Niger; resulting in prospective advantage for local extension after stronghold of the Nigerian food industry.
Labour: There exist a favourable availability of both skilled and unskilled workforceat a relative lower cost than its origin (U.S.) and this shows a good level for FDI entry by FC.
Economy:There is a rising middle class of high earners in the country. However, FC fast foods would be affordable for all class of income earners.
Trade Barriers and Restrictions: Existing trade and import barriers /restrictions by government are minimal for the food service industry, as far as FC complies with regulatory standards for health and business purpose.
Tax Incentives: Nigerian government grants tax holidays of 5 to 7 years to foreign organizations and even exempt all taxes from company operating in the Nigeria’s export processing zones including imports and export duties, which seem attractive to FC entry through FDI.
However, governments have a fair intervention in the fast food industry in Nigeria. Nigeria is an emerging mixed economy.
Social, Cultural Advantages
Language:Nigeria has diverse languages but with English as its national language, which is in correlation with FC’s origin (U.S.).
Religion:Nigeria a favourable mix of religion, mainly consisting the Christians, Muslims and Indigenous beliefs. This is fairly the same in the U.S too.
Table 3: Internationalization Factor – Eclectic Model. (Analysis of Nigeria Specific Advantages)
Internationalization Factor Present Attributes’ and Position
Current government under President Goodluck Jonathan Nigeria is set to diversify long time dependent on oil sector to building a continuous investment-friendly environment for the real sector, in order to attract foreign investors to opportunities available in the country. FDI is clearly enjoying steady growth in Nigeria through the reduction of investment barriers, tax holidays and the enactment of suitable laws (TIFA).
Regulation protecting counterfeiting and imitation of products are in place to safeguard FC on entry. This is regulated by the Trade Marks Registry of the Federal Ministry of Commerce in Nigeria
Economics of scale
Market: Nigeria has a large market stemming from its estimated 150million citizens in year 2010.
Scale and size of economies: The huge availability of human and financial resources in Nigeria and the endowed fertile savannah would see FC explore Agricultural products within and outside the region, reducing the cost of importing raw materials and giving rise to economies of scale.
6.0 Political Risk in Nigeria
Nigeria’s prospective is unrealized as inadequate physical and bureaucratic infrastructures, corruption, social instability and an inefficient legal system interfere with commercial and private investment. Ethnic and religious violence has exacerbated since the country inception of democracy. Inter-religious fights and numerous of Nigeria's 250 tribes clash over land with the widespread corruption in Nigeria has aggregated the political risk in the country. State and local governments manage 50% of government revenue but are woefully incompetent in offering services. Nigerian militants have instigated repetitive attacks against the country's oil industry but unexpectedly good results have been borne by the government's latest amnesty programme as up to 15,000 militants have surrendered (Official estimate). An anticipated 40% of today's Nigerian populace is under 15 years and lack Education. A predictable 57% of Nigerian households live in poverty (Euro Monitor 2011).
Diagram 3: Political Risk in Nigeria
Source: AMB Country Risk Report 2010.
Implication for Business and Advice for reducing Risk: This depicts a high level of political risk in Nigeria with unstable business condition (Most especially in the Niger Delta Region), poor environmental conditions and waves of ethnic and religious violence. FC should avoid business strategy that would take sides in ethnic and religion of Nigerians and also seek adequate security from Host government before entry. However, it should be noteworthy that the fast food industry in the country is less affected with this risk considering its nature of products and the middle stances it takes in both ethnic, religious issues and non-oil industry involvement (see table 8 ease of doing business below).
Ways of Reducing Political Risk:
FC should employ various measures in reducing the High Political risk posed in Nigeria environment. FC should secure some negotiating points for its entry, some of which are;
Location of Facilities
FC should ensure its facilities are situated at non-violence or less-risky locations in order to minimize risk and also safeguard its investments. However, for efficient and effective productivity, resource oriented activities are recommended to be by resources, while market oriented and footloose activities can be move to other places to reduce risk.
FC should ensure purchase of raw materials and components from local sources in order to increase Host Country’s commitment while also reducing political risk. However, this might spring up commercial and financial risk, if not properly managed.
FC should ensure secured control and management of its technological inputs and assets i.e. FC should manage its patents rights, brand name and trademark etc.
FC can increase its bargaining power by controlling the fast food market, where its products are being sold; thereby reducing Political risk and increasing government commitment.
Thin Equity Base
FC can borrow for local bank rather than financing its FDI externally. This would protect their investment and increase government’s intervention in case of political unrest.
FC should manage its cross-border supply chain by working closely with domestic suppliers, keeping large inventory (which can also have negative effects), and evaluate air transport over land to reduce attacks and political unrest
Diagram 4: Nigeria Business Climate
Nigeria is a food-deficit country that on occasions has been dangerously dependent on food imports for the welfare of its people (NIPC 2011). The report shows a mixed emerging market with abundant natural resources and recent government intervention for a shift of focused oil economy to the promotion of investment in the real sector industry. Fair regulations and incentives are been used by Nigerian government to create an opportunities for foreign investments in the economy.
A positive performance has been forecasted for the packaged food (i.e. fast food) market in Nigeria over the predicted period. A major factor responsible is the country’s current economic recovery and political stability, which is anticipated to continue in future. Increasing company advertising and higher disposable incomes are also expected to drive growth in the future and result in an average Nigerian spending more on packaged food. Food items that are fast and convenient will continue to experience dynamic development in Nigeria (Euro Monitor 2011).
Drawing conclusion based on prospective inferences drawn from the above highlighted analysis of national business system, patterns of trade, trade restriction and barriers, foreign exchange rate regimes in Nigeria, a prospective rewarding core investment strategy for FC is to engage in Foreign Direct Investment by incorporation of a wholly owned subsidiary or establishing a subsidiary in Nigeria.
Major inferences amongst other employing in engaging a decision are:
Recent Nigerian government move to diversify its oil concentrated economy to real sector industry and the recent TIFA agreement between the U.S. and Nigeria; apart from its trade protection and tax incentive programmes for FDI in Nigeria.
The constant growth in the fast food industry and the less competitive nature of the business sector.
Advantage of economies of scale involved in extending production, distribution and consumption to Sub-Sahara Africa i.e. Nigeria. Nigeria’s location of a fertile savannah can serve FC’s need for production materials purpose and its shared boundaries with or West African countries can lead to easy access for more Internationalization in other African countries.
FC should employ its strengths and opportunities (i.e. minimal trade restriction, recent government intention and the demography) in gaining entry and competitive advantage into the fast food industry in Nigeria.
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