Implications of Multinational Companies in Nigeria
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Drawing on specific examples, discuss the possible motives for entry and critically evaluate the potential implications of a multinational company on the economy of Nigeria.
Assessment criteria:
- Demonstrate a critical understanding of a range of theories of international production
- An ability to apply a number of perspectives in your critical evaluation of implications
- Evidence of extensive reading
- An ability to structure a coherent, critical argument
- Accurate use of the Harvard Referencing system.
Solution
Analyzing Market Entry Motives and Potential Implications for Multinational Companies in Nigeria’s Economy
Introduction
There are many dynamics in the business world that necessitate the existence of international trade especially in the form of establishing business ventures and operations in foreign countries. Notably, most multinational companies in the modern world are in the pursuit of establishing and expanding their businesses in African countries (Koch, 2001). The entry of multinational companies in various foreign markets finds its basis upon various motives (Brouthers & Hennart, 2007). Additionally, it features many implications in the economy of the host countries as well. In light of the above, this paper features an analysis of the various factors motivating the entry of a multinational company from Europe in Nigeria. Various market entry theories, mostly PESTEL and SWOT analysis provide substantial insight on the implication of such business ventures upon the Nigerian economy.
Analyzing the Entry of Multinational Companies in Nigeria
For the purpose of establishing a sound and relevant information regarding the critical analysis of the market entry procedure for multinational companies in Nigeria, most of the information is general to all industries. However, specific examples and illustrations will revolve around Development Initiative Finland. Ideally, DIF is a legal entity that is registered and undertakes business operations according to the provisions of the laws of Finland since it commenced operations in the year 2013. The business operations of DIF are in the CRM/ERP industrial sector.
There are various motives upon which DIF finds the entry into the Nigerian market quite lucrative (Ekeledo & Sivakumar, 2004). First, they have a significantly unique product that could easily fit the Nigerian economy and push it to higher heights. As pointed out by Czinkota and Ronkinen (2007), the possibility of having a unique product that readily fits the demand by a given foreign economy stands out as a major motive behind the international market entry efforts by multinational companies. In its expertise in the CRM/ERP industrial sector, DIF features the Vesi Platform, which comprises of technological advantages that naturally fit into the market of Nigeria – the most populated country in Africa (World Economic Forum, 2009). The Vesi platform is a product that enables the maintenance as well as the updating of the database relating to core customer information in various businesses. It features strategic management tools for aspects such as sales, billing, inventory, as well as various other business management aspects necessary for business growth in the 21st Century business world. Most importantly, it supports business operations across various industries (VESI Value Platform – Sales Planning Material, 2014). Notably, there is poor ICT infrastructure in the Nigerian economy. That is the poor supply of electricity and other core ICT infrastructural program. However, the fact that DIF has been in the information technology business for quite a substantially notable time, it features the necessary experience to transform the Nigerian ICT industry in a major way. The uniqueness of the DIF Vesi product stands out as its aspects of modernity, compatibility as well as its simplicity in meeting the business operation needs of clients across various industrial sectors.
Other than the uniqueness of the Vesi platform in the Nigerian market, there is another motive that surfaces regarding the economies of scale and the subsequent profit-making potential in the Nigerian economy. According to Jeremy Waterman (2012), ICT products developed for ERP and CRM solutions feature more profits once developed with specific focus on large corporations. As a major developing economy in Africa, Nigeria provides an ideal market for such endeavors. Nigeria has in the past not had credible vendors for upper mid-market ERP and CRP products. In light of the above, the Vesi platform by DIF whose design is suited for meeting such needs at a global perspective is very ideal in Nigeria. Standing out as the largest target market location in Africa, Nigeria boasts of a population of 170 million people, which could increase to over 440 million by the year 2050 (UN Conference, 2012). Overall, Nigeria has 36 states and 8 major cities with over 2 million residents in each (Media-Reach, 2013). Consequently, it is a country that promises relatively huge potentials in the future of the ERP and the CRM business. According to insight from the Conference on Trade and Development by the United Nations, Nigeria is the leading country in Africa in terms of foreign domestic investment (UNCTAD Report, 2013). According to Finpro (2010), the investors from Finland are relatively reluctant to find new markets in foreign economies. However, he notes that Africa, and in this case in Nigeria, there is a clear opportunity to capitalize more in ICT products compared to Finland and other European countries where the competition in the above industrial sector is already tough. There are many new opportunities that open up in Africa primarily due to the tendency of the positive development of the economies of various African countries (Rundh, 2007). In light of the above, DIF has the opportunity to use the advantage of the economies of scale in making more profits by entering the Nigerian economy as opposed to focusing on the home competition in the already developed Finland ERP and CRP industry.
There is also the aspect of domestic market saturation that stands out as another motive behind foreign market entry ventures. Notably, domestic saturation leads to the decline in domestic sales (Hollenstien, 2005). In light of the above, it is worth noting that the ICT industry is in its maturity stage in Finland and other European countries while that of Nigeria and other African countries is still at its birth stage. The most definite strategy to prolong the product lifecycle of a the Vesi platform by DIF is through the introduction of the product in African economies like Nigeria – where the ICT industry is still relatively young and way far away from market saturation (Czinkota, 2004).
Last but not least, there is the aspect of government incentives as a key motive behind the entry in foreign markets by multinational companies like DIF (Czinkota, 2004). The reason for most FDI ventures by multinationals is the pursuits of opportunities that result from such ventures as well as the direct impact such ventures bring on the balance of trade in various foreign economies (the host countries) –such as Nigeria in this case. Notably, Finland has a reputable authority in the world in the field of developing information technology products suitable for all kinds of economies – even developing ones like Nigeria. Finland comes 11th in the entire world concerning the development of information technology infrastructure (Global Competitiveness Report, 2013). In light of the above, bilateral relations between an ICT multinational from Finland and the government of any African country would be highly beneficial to the host country. Notably, the foreign venture of DIF in the Nigerian market is well timed. The rationale for the above finds its basis in the following findings. First, the president of the Republic of Nigeria visited Finland in the pursuit of holding bilateral business and trade talks with the president of Finland in the year 2004. Later, the year 2009 and 2010 saw several visits and meetings between the Foreign Trade and Development Ministry of Finland and that of Nigeria both in Finland as well as in Nigeria. In the presence of such business meetings, it is quite evident that DIF knows that by venturing into the Nigerian ICT market, it will most definitely enjoy several government incentives such as subsidies and tax exemptions since its business venture in Nigeria not only earns income for DIF but also helps in the development of the ICT industry in Nigeria. The Nigerian market features notable challenges. However, the right bilateral strategies and critically structured entry techniques could end up lucrative for multinationals in looking forward to tapping the readily available huge market (Embassy of Finland in Nigeria, 2013). Both from the perspective of individuals as well as companies, Nigerians are ready to welcome and work together with foreign companies from Finland, amongst other European countries. As a result, DIF should use the above as a means to motivate its operations in Nigeria, which are evidently in line with the goal to improve the local economy of Nigeria as well as improving its international trade relations with Finland.
On their own, the above-mentioned motives are not enough to support the agenda of DIF entering the Nigerian market. Importantly, the provisions of various models for determining the essence of entering foreign markets are important aspects worth considering (Mason, 2002). Namely, the provisions of the PESTEL and the SWOT analysis are the most relevant in this case (Kotler & Keller, 2006). The motives indicate what driving forces promote multinationals like DIF to enter foreign markets. On the other hand, PESTEL and SWOT provide informative insight that helps to identify the advantages as well as the disadvantages of entering foreign markets (Doole & Lowe, 2007).
The PESTEL analysis of Nigeria provides a vivid view of the target country, providing insightful, in-depth analysis relating to the past, present and foreseeable future aspects of trade the ICT industry as well as the entire economic development in Nigeria (Baah & Jauch, 2009). From the political perspective, Nigeria is a significantly politically stable in comparison to other African countries of its size such as Egypt, Niger, Sudan or the Republic of Central Africa. There have been troubled political environments in the recent past resulting from the activities of Islamic Fundamentalism in the north. However, that only affects a small portion of the country, and more so, it does not tamper a lot with the private business sector (Ibrahim, 2013). Therefore, the political environment in Nigeria is not a problem for foreign multinationals seeking to enter its market – such as DIF.
The other aspect of PESTEL analysis is the economic factor. It is essential to consider the aspects of interest rates, business cycles, GNP trends, disposable income and money supply among other key economic factors that affect the economic development in various countries, especially developing countries like Nigeria (CIA, 2010). The Nigerian economy has registered a reputable growth in GDP since the year 2007 with a closing figure of over 500 billion dollars by the end of year 2013 (Nigeria Communication Commission, 2014). Thus, the economic growth is an incentive for DIF and other multinationals to venture into the Nigerian market across various industries (Nigeria Investment Promotion Commission, 2014).
Social and cultural factors also determine the level of foreign market entry by multinational companies (Johnson & Scholes, 2002). Notably, Nigeria exhibits a quick urban nation development trend. The ratio of urban vs. rural population is almost 50-50. The city population is very high with a city like Lagos registering nearly 20 million residents. The huge urban population in Nigeria is a good indication that there is a huge potential for the thriving of all kinds of investments, including ventures by multinationals like DIF specializing in the development of ICT. More so, the multi-ethnicity of the urban population in Nigeria means that even foreign investors can co-exist and work with local investors towards improving the economic development of Nigeria (Carpenter et al., 2001).
From the fact that Nigeria is a developing economy, it means that it is in the heights of requiring more technological advancements. Therefore, for a company like DIF, the technological environment is quite a ready market (Nigerian Communication Commission, 2014). Nigeria still depends on Western countries for its suppliers of ICT product thus; having a foreign multinational work from within its borders would be most favorable. The regulations for multinationals entering the market in Nigeria are not so complex meaning that the legal environment is favorable as well – according to the international community (U.S. State Department, 2013).
While the PESTEL analysis features the aspects of market analysis in Nigeria from the perspective of the host country, it is also rational to analyze the SWOT model since it provides informative insight from the perspective of the specific multinational that is entering the host country’s market (Chen & Messner, 2006). Throughout the paper, the adv advantage of less competition has surfaced for DIF entering the Nigerian market (Start and Hovland, 2004). The developing economies, as well as the favorable government policies towards FDI in Africa (specifically Nigeria in this case), have featured as opportunities. However, it is important to reflect on some disadvantages that surface from foreign market entry. They feature as weakness and threats according to the provisions of the SWOT model. Notably, there is a high likelihood that a multinational like DIF might stay way long before capturing its required target customer base. More so, the unforeseeable circumstances such as the entry into the same market by other multinationals may bring more competition in the foreign market than anticipated (Ghauri & Gronhaug, 2005). There is also the threat foreign exchange rate which is very common in international trade. More so, political changes, especially in a country like Nigeria where they alternate between Muslim and Christian presidents, may threaten the stability of the multinational establishments. Outbreaks of disease like Ebola are also a fact worth considering in the case of Nigeria (World Health Organization, 2014).
Conclusion
Notably, there are various reasons that multinational companies
operating in various companies find the basis of their motivation to expand
their markets in various foreign countries. Majorly, international market
expansion ventures find their basis upon the uniqueness of the products in
various foreign markets, the potential of mega profits as well as economies of
scale, the saturation of domestic markets in their home countries, and the
presence of various government incentives in the host countries. Importantly,
though, the principle of profit maximization must hold true as is expected in
every business venture – domestic or foreign. Therefore, irrespective of the
extent of the motives towards the foreign market entry for multinationals, it
is important for them to use various international business models to establish
the efficiency of such ventures, that is, models such as SWOT and PESTEL
analysis. The analysis and evaluation of motives towards foreign market entry
in comparison to the observations resulting from the SWOT and the PESTEL models
help in providing the best insight relating to the advantages and the
disadvantages of such ventures; in the process justifying the existence of the
foreign market entry for multinational companies.
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