Saturday, 3 January 2009

Doing Business in Nigeria

The framework for most business blogs and reports is a structured attempt to distill a complicated and varied topic into a set of easily digestible bullet points. Unfortunately in most instances this attractive and simple approach ends up giving the reader nothing more than a list of vague, obvious and unusable information. To support my point with a piece of anecdotal evidence, I'll refer to a Knowledge@Wharton's post To Be a Successful Entrepreneur in Africa, 'Wake up Every Day Ready for Change' which essentially made the point that to be successful in Africa you need to be very flexible.....yes, that is very true.....but do you need a Wharton professor to teach you that?

Luckily, for those of us out there who feel they should be getting more value from our time, the World Bank has actually created a semi-useful document for entrepreneurs looking to start a business in Nigeria. Doing Business in Nigeria 2008 is the first subnational report
on Sub-Saharan Africa in the Doing Business series. While there are obvious and admitted problems in quantifying their methodology, the Doing Business series does directly addresses topics and hazards that entrepreneurs and investors need to be aware of when doing business in an emerging market.

Anywhere in the world an entrepreneur operates, he or she will always have to consider market factors like demographic size, make-up, spending power, spending habits, trends and traits - these considerations don't change when operating in an emerging market. What needs to be considered and well understood before operating in an emerging market are the factors that are taken for granted in OECD countries, mainly the country's infrastructure, human capital capability, legal structure and labor requirements.

The last factor, the nation's legal structure and requirements, is why the Doing Business series is a valuable tool. The ranking system is a nice reference and interesting for comparisons, but the World Bank itself will be the first to admit that the ranking system isn't perfect. The real value comes from the numbers behind the numbers. Compiling this report, the Bank focused on four critical areas that affect a business environment:
  1. Starting a business
  2. Dealing with licenses
  3. Registering property
  4. Enforcing contracts
While not all encompassing (the report is not all encompassing), these topics are some of the difference makers when doing business in emerging markets. They represent factors that make countries like Nigeria an emerging market in the first place and thus need to be understood.

Doing Business in Nigeria 2008 starts to help potential investors or entrepreneurs understand these factors. For example, according to this report, Abuja is the easiest and cheapest Nigerian state within which to start a business. In Abuja, a business can become incorporated in nine days and cost on average $425, compared to Lagos where incorporation can take 21 days and post incorporation fees can drive up the costs of starting a business by 35%.

Another example is the report's focus on registering property and identifying Nigeria as one of the most difficult places to register property in the world. Due to an arcane law requiring the state governor to approve every property transfer, purchasing property in Nigeria can be a frustrating and corrupt experience. This type of information is important because it could drive an entrepreneur or investor to change his or her business plan from purchasing property to renting....of course, then he or she would need to research the state's renter protection laws and contract enforcement.

Bottom line, the Doing Business Report is a good introduction to the business environment in Nigeria. It identifies the differences between states and gives analysis as to why certain practices are easier in some states vice others. For example, the Northern states may seem more efficient in contract enforcement and property registry because they have fewer cases to process compared to overburdened Southern states like Lagos.

Finally, anyone planning to start a business in an emerging market from a single entrepreneur to a large corporation expanding overseas needs to understand these regulations, how they effect local behavior, and if the political climate will induce change so they can adjust their business plan accordingly. Additionally, nuances need to be fully understood depending on the type of business. A manufacturing business with large land needs will likely want to stay out of Southern states - they have the longest and most expensive property registration and construction procedures. While an e-business that is more human capital intensive would be better situated located in a metropolitan area like Lagos.

Understanding these differences allows the new business to plan their working capital and start-up time-lines accordingly, thus avoiding situations where unexpected delays or costs could jeopardize the business and where government officials have the leverage over the start-up with which they can solicit bribes.

Therefore a good grasp of the local regulations are the building blocks that allow the entrepreneur to be flexible and thus successful. Proving that an emerging market entrepreneur needs to be 50% Steve Jobs and 50% Hernando de Soto!

Abraham Kamarck

The Oloja Blog Fan Box