Nigeria is no doubt an attractive investment destination for multinational corporations seeking to do business in Africa. Yet, it remains a difficult market to do business in. My conversations with senior business executives, particularly those from big multinationals, often focused on the high cost and difficulty of doing business in Nigeria as one of the biggest disincentives for them to invest in the country.
In one illustration of these difficulties, consider that Nigeria currently ranks 131 out of 190 countries in the 2020 World Bank’s Ease of Doing Business rankings, 100 places behind China, 93 places behind Rwanda, and just 1 place above the Niger Republic. The country’s ranking in paying taxes (159) and registering a property (183) is particularly bad.
The main reason for the poor performance is a complex and unpredictable regulatory landscape. Inconsistent policymaking and subjective interpretations of legislation on the ground are major obstacles to business. Moreover, regulations can change from state to state, just as they do in other large nations.
If entrepreneurs or multinational corporations want to succeed in Nigeria, they need to understand the country’s individual states and their business environments in a lot more detail. Most of them approach Nigeria as one market when they should be thinking of the different states as individual markets. After all, what works in Anambra or Kaduna state will not necessarily work in say Sokoto or Lagos state.
Nigeria is a large, fragmented, and heterogeneous market. Within the country, there are large – and often underestimated – regional differences in language, culture, talent, infrastructure, and wealth, all of which lead to wide variations in business landscapes.
Nigerian states can be compared to individual countries. For instance, Nigeria’s most populous state, Kano, has a population equal to that of Senegal or that of Liberia and Tunisia combined, while Nigeria’s most prosperous state, Lagos, has the 7th largest economy in Africa which is significantly bigger than that of the whole of Kenya, East Africa’s most dynamic country, with a nominal per capita income of more than $5,000, more than double the Nigerian average.
Cultural variations are important. Other than the well-documented differences in language and development, demographic differences are also significant. For instance, Southern Nigeria is older, with higher spending capabilities and a more skilled population, while Northern Nigeria is younger and relatively poor. North Nigerians prefer speaking Hausa, while South Nigerians prefer communicating in English or their respective native language. These cultural differences have a significant impact on multinationals’ talent and organizational decisions.
Nigeria’s federal structure also leaves certain key policy decisions to the states. Policies relating to infrastructure development, land and labour, healthcare, and transport fall under the purview of the states – as do most licensing and permitting.
This decentralized policymaking, as well as differing priorities among state governments – from city/urban management and rural development to improving infrastructure or attracting investment – have resulted in wide variations in the business landscape across the 36 states of Nigeria.
For instance, the 2018 World Bank Doing Business in Nigeria Survey compares business regulations and measures progress in four regulatory areas: starting a business, dealing with construction permits, registering property, and enforcing contracts. which map business environment conditions across the 36 states of the federation and the Federal Capital Territory, reports that it takes an average of 44 days and 8 procedures in Kaduna to register a property thus making it the number one in Nigeria as against the likes of Lagos state with an average of 105 and 12 procedures or Sokoto state with an average of 85 days and 12 procedures, thus ranking them as number 16 and 30 respectively in Nigeria.
Similarly, the time it takes to enforce contracts varies. For instance, while it takes 307 days and a 25.2% claim value as cost in Kaduna state, In Sokoto state it takes 568 days with a 27.1% claim value as cost, while in Lagos state, it takes 447 days with a 42.0% claim value as the cost
I expect state(s) policy to become even more prominent in determining the overall investment potential of the country. This can be made possible if the country’s federal government encourages competitive federalism – an approach that will enable the 36 states to compete for investments based on their individual economic policies and ease of procedures. Similarly, the federal government should consider devolving power to state governments, thus, encouraging them to make their own economic policies.
Aside from understanding how Nigeria’s states differ, companies or investors must also create a well-thought-out plan for allocating resources across states. Most firms find it difficult to effectively compare markets and develop a structured prioritization process. Based on my experience of working with entrepreneurs or business executives doing in or seeking to start a business in Nigeria across different industries, I find that a simple yet powerful four-step framework can help them effectively prioritize markets in the country
Measure risk-adjusted opportunity
I recommend that entrepreneurs, senior business executives, or institutional investors first measure the risk-adjusted opportunity in each of Nigeria’s 36 states by analyzing leading indicators of the market’s size, growth, industry clusters, and stability. (Industry cluster metrics measure the size of the pool of potential customers for B2B or B2C companies, and market stability metrics measure institutional, business, and social stability.) Example indicators include size (population, for instance, or state gross domestic product), expected growth, industry clusters, and market stability (including factors from workplace injury rates to crime).
This first step would allow prospective investors or entrepreneurs to measure not only the potential in a market (size, growth, and industry clusters) but also the associated risk (market stability). This is important to get an assessment of the realistic potential of each state.
Measure operating environment
Entrepreneurs and investors should then measure the operating environment of each of the 36 states by analyzing indicators related to infrastructure, talent, finance, and the business and tax environment. The data for this exercise are publicly available on most state’s websites or the Nigerian Bureau of Statistics reports among several others. Example indicators include infrastructure (such as the number of major seaports or airports), access to talent (the number of people enrolled in higher education), access to finance, and the business and tax environment, and the ease of doing business.
The business and operating environment vary remarkably across states. Focusing on those that have a strong operating environment — for instance, high ease of doing business score (Kaduna) or well-developed infrastructure (FCT) — can help entrepreneurs or business executives lower the cost of doing business in the country.
If we plot the risk-adjusted opportunity and operating environment of the different states on a graph, we would clearly see which states offer the highest return on investment and represent the greatest opportunity for business. It is advisable that business executives or investors focus on a state with the largest opportunity and the strongest operating environment so that they are able to increase the return on their investment.
Entrepreneurs, business executives, or investors must also align their Nigerian focus and strategy to the outcome. They can do this by categorizing the states into four groups in order of priority.
The first group of states – those with high opportunity and a strong operating environment – are category 1 states where entrepreneurs or business executives should focus on enhancing performance. Most big businesses or multinationals already have a presence in these states and executives should undertake a strategic approach to improving operations and capturing opportunities in these high-performing states. I recommend examining areas of geographical expansion within the states and conducting internal reviews to identify areas of operational inefficiencies.
The second category of states – those with moderate opportunity and a good regulatory environment – are states in which entrepreneurs or business executives should consider expanding their presence. There are benefits in expanding to states that are geographically close to category 1 states, so I suggest a ‘hubbing strategy for expansion, i.e. executives should prioritize expanding to category 2 states that are relatively close to the high performing states to capitalize on cultural similarities and capture economies of scale.
The third category of states – those with moderate opportunity but a weak regulatory environment – are those where executives should monitor growth rates and explore potential as the state governments continue to improve the regulatory environment by implementing reform. Examining details of various policy initiatives aimed at attracting investment is critical for companies to determine the right time to enter these markets. Several central and eastern states fall into this category.
And finally, the fourth category – those with small risk-adjusted opportunities and a weak operating environment – are likely to be costly investment destinations for multinationals with low returns. Executives should de-prioritize these states.
Often considered a country of countries, Nigeria can be a difficult yet rewarding market for entrepreneurs, business executives, and institutional investors. Those that have a structured approach to prioritize Nigeria’s states can navigate the complex market effectively and make strategic decisions backed by quantitative insights. The approach presented here can enable entrepreneurs and business executives to prioritize those states that are business-friendly, thereby lowering their operating costs and helping them get the highest return on their investment. Adopting a state-wise approach is key to getting it right in Nigeria.