UB 05014195

International Business Environment

Tutorial Group A3

Module Coordinator- Dr Anna Zueva

I have read the University Regulations relating to plagiarism and certify that the above piece of coursework is all my own work and do not contain any unacknowledged work from any other sources.

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Number of words: 3,694(excluding executive summary, references, tables, titles and diagrams)

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TABLE OF CONTENTS Page

Executive summary 3

1.0 Introduction 41.1- The Tobacco industry 41.2- The Countries 5

2.0 National Business Systems and Cultural Conditions 62.1- National Business Systems 6

2.1a- Political System 62.1b- Economic System 72.1c- Legal System 8

2.2- Cultural Conditions 8

3.0 Pattern and Trend of Trade between two Countries 93.1- Pattern of Trade in the United Kingdom 93.2- Pattern of Trade in Nigeria 93.3- Pattern of Trade between the United Kingdom and Nigeria 103.4- Trade in the Tobacco industry between United Kingdom and Nigeria 103.5- Restrictions and Protections on Trade in Nigeria 103.6- Restrictions in the Nigerian Tobacco Industry 11

4.0 Exchange Rate Regimes in the United Kingdom and Nigeria 124.1- Exchange Rate Regimes 12

4.1a- Exchange Rate Regime in the United Kingdom 124.1b- Exchange Rate Regime in Nigeria 12

4.2- Implication of the Nigerian Exchange Rate Policy on Trade- Import and Export 134.3- Exchange rate risks inherent to the Nigeria and its Tobacco Industry 14

5.0 Political Climate and Political Risk Analysis in Nigeria 155.1- Political Issues in Nigeria 155.2- Analysis Political Risks Inherent in engaging in International Business in Nigeria - Analysis and Mitigating Measures 15

6.0 Means of Investment 176.1- Need for Internationalisation of GBT Plc’s Operations 176.2- Implication of Trade Policies, Exchange Rate and Political Risks on entry strategy 176.3- Entry strategy to be adopted 176.4- The Type of FDI recommended 18

7.0 Conclusions 19

References 20

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EXECUTIVE SUMMARY

Major Multinational companies (MNC) grapple with increasing competition, thus the need to increase business frontiers across country and regional boundaries becomes inevitable. Forecasting foreign opportunities and risks correctly are not always possible; however, by envisioning different ways in which the future may evolve, companies avoid unpleasant surprises (Daniels and Radebaugh, 2001)

As a researcher in Great Britain Tobacco Plc (GBT) with operations based in the United Kingdom, the company has recently decided to embark on International Business as part of its strategy to grow and increase market by embarking on International Business in Nigeria. This report is intended to guide management in choosing the mode of investment in Nigeria.

The objective of this report is to advise the CEO as part of a decision making process on whether GBT should export or use foreign direct investment (FDI), as its mode of operation in Nigeria by outlining the following;

Providing insight into national business systems and cultural conditions affecting business decision in Nigeria with hindsight of the United Kingdom and focus on tobacco industry and related activities.

Assessing the pattern of trade in the United Kingdom, trade between UK and Nigeria especially in the Tobacco industry considering the types and level of protection measures against entry modes (Export, FDI or Licensing/Franchising) in Nigeria focusing on the Tobacco industry; and outlines competitive advantages available to GBT in considering either of the entry modes in Nigeria.

Outlining the exchange rate regimes that govern the UK and Nigeria with an evaluation of the risks inherent for GBT and measures to be adopted in mitigating its effects.

Following from the above and inferences drawn, it recommends the acquisition of an existing entity- a form of FDI as an entry strategy in Nigeria considering the level of political risk in Nigeria and recommends viable measures to be applied to protect GBT’s investment in Nigeria.

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1.0 INTRODUCTION

This is a feasibility report which follows the international business strategy of improving the GBT’s profitability. It is expected to assist the company’s management in deciding its policy having identified Nigeria as a country with sufficient market potentials to boost its business growth.

The purpose of this report is to demonstrate research in the area of International Business, analysing and considering the national business systems and cultural conditions in both the United Kingdom and Nigeria. It also considers the pattern and trends of trade between both countries; emphasizing the types and levels of protection measures against imports and/or foreign investments in Nigeria within the Tobacco Industry. It outlines the exchange regimes that govern the UK and Nigeria, while assessing the potent risk inherent herein for Great Britain Tobacco.

By the end of this feasibility report, the optimal strategy will have been identified for implementation given that the recommended strategic venture is considered viable, it explores issues bordering on exchange rate regimes and advises on the problems of political risk existing in Nigeria; offering guidelines and suggestions on how best to mitigate against them.

1.1 The Tobacco industry

The Tobacco Industry around the world despite its unpopularity with the UN, WTO, governments and medical societies remains one of the biggest consumer product industry in the world with 20% of the world population and over 1.3 billion consumers around the globe (Euromonitor, 2008). While the North American and Western Europe markets recorded a decline due to smoking bans, tax increases and non-supporting legislations, the size and level of participation in the sector has increased especially in the developing world (Euromonitor, 2008). An analysis of the Tobacco industry in the UK and Nigeria is discussed in Table 1a below.

Industry Issue Analysis United Kingdom NigeriaMarket Definition Market Segments

Chewing tobacco, cigarettes, cigars & cigarillos and loose tobacco.

Market Segments Chewing tobacco, cigarettes and

loose tobacco.

Market Analysis Market Size $21.7billion in 2007

Key Drivers Cigarette sales

Growth Rate 1% per Annum over the last 3years

Market Size Not Available

Key Drivers Cigarette sales

Growth Rate Not Available

Raw Materials and Inputs Source of Tobacco Local and international sources

Other materials- Wrappers and Filter Locally Produced

Source of Tobacco Local sources

Other materials- Wrappers and Filter Internationally sourced

Competition Market Type Highly competitive, huge number

of players

Market Type Relatively low, few players,

characterized mainly by import.

Others Leading Players Imperial Tobacco Group PLC Gallaher Group Plc Altria Group, Inc

Leading Players British American Tobacco Company Nigerian Tobacco Company

Table 1.1a- Tobacco Industry Analysis; United Kingdom and NigeriaSource: Table prepared with information sourced from Datamonitor, Euromonitor and Company profiles

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1.2 The Countries

Based on tougher legislations, increased pack warnings and tax hikes reducing the profit margin in the UK tobacco market and growth in the level of participation in the industry in developing world, the decision to do business within the developing market of Nigeria is welcomed. The business entry modes available and an overview of some key indices of the home country (United Kingdom) and the host country (Nigeria) are highlighted in Figure 1.2a and Table 1.2a respectively below.

Figure 1.2a- Business entry modes available to GBT

Features United Kingdom NigeriaGeographic Capital City

LondonLanded Area242,514 sq kmLanguageEnglish

Capital CityAbujaLanded Area923,768 sq km LanguageEnglish

Demographic Population60.7 millionMajor ReligionsChristianityLife Expectancy77years(men) and 82 years (women)

Population148 million Major ReligionsChristianity and IslamLife Expectancy46years(men) and 47 years (women)

Economic Main ExportManufactured goods, chemicals, foodstuffsGNI per capitaUS $42,740GDP growth rate1- 1.3% per annum

Main ExportPetroleum, petroleum products, cocoa, rubberGNI per capitaUS $930 GDP growth rate6.5% per annum

Political Ruling SystemMonarchyLeaderHead of State: Queen Elizabeth IIPrime Minister: Gordon Brown

Ruling SystemDemocracyLeaderHead of State: President Musa Yar’Dua

Table 1.2a- Country Analysis of the United Kingdom and NigeriaSource: Table prepared with information sourced from BBC website all figures correct as at end of 2007

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2.0 NATIONAL BUSINESS SYSTEMS AND CULTURAL CONDITIONS

2.1 NATIONAL BUSINESS SYSTEM

Cultural practices, political, economic and legal systems as well as education and skill level of its population are some of the basic fundamentals that have implications for international business practice (Hill, 2008), the disparity in culture and way of life between Nigerians and English affects the national business system of both countries.

In considering these fundamentals which ranges from Institutional frameworks (political, legal, economic, educational and health systems) within the formal and informal society to national culture and socio-economic disparities, emphasis was laid on their implication for international business with focus on tobacco and related businesses. Discussions on institutions and institutional frameworks are outlined in Tables 2.1a- 2.1c below covering the Political, Economic and Legal systems; it analyses national business systems in Nigeria with its implication for GBT seeking to do business in the country.

2.1a. The Political System

Framework for Discussion Political System

Political System Nigeria, an independent member of the Commonwealth, has been ruled by civilian administrations for only 18 of its 48years of independence. Parliament has two chambers; the House of Representatives has 360 members, elected for a four year term in single-seat constituencies and the Senate has 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. This is quite different from the Monarchy system that operates in the UK.

Source: Euromonitor, 2008- Country Fact file on Nigeria Pp1Implication for Business

Civil rights and political unrest

Corruption and Government practices

Business and government interference

Other Tobacco Industry Experiences

The existence and practice of a viable democratic system of government in Nigeria makes the terrain relatively predictable, although the country has had its share of instability, however, since the democratic elections in 1999, the political system has been stable.

Nigeria has experienced a number of ethnic and religious violence since the emergence of civilian rule and which have cost businesses especially those in the Oil and Gas sectors in the past few years. (Euromonitor, 2008.). There are no stable police and security forces in Nigeria like it exist in the UK. The Nigerian Police force and its security apparatus is also quite corrupt.

Corruption is very high among government officials and it is expected that to do business in Nigeria, the GBT may need to compromise on corporate governance standards. The Transparency international currently rates Nigeria 121 on the corruption perception index, although an improvement from the 147th position in 2007. (Transparency International, 2008).

Government interference in businesses is at its minimal level as there have been moves to privatise some governments’ establishments within the last 8years. We do not expect a difference in corporate governance principles as a number of international businesses from the UK operate in Nigeria.

In a bid to retain its position in the committee of nations especially in Africa, we do not expect an undue interference by the state in business activities. Notable Tobacco industries that do businesses in Nigeria include the British American Tobacco Company and Northern Nigerian Tobacco Plc

Table 2.1a- Political System in Nigeria

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2.1b The Economic System

Framework for Discussion Economic SystemNigeria Nigeria is Africa’s most populous country with close to 132 million people, approximately 55% live

on less than a dollar a day. The Nigerian economy depends heavily upon the oil sector, which contributes 95% of export revenues, 76% of government revenues and about a third of GDP. Before the establishment of democracy in 1999, the country was governed by military generals, under whose rule Nigeria's economic performance had taken a beating for 15 consecutive years.

Source: Datamonitor, 2007- Nigeria Country Profile Pp 13.Implication for Business

Inflation Rate

Infrastructure and Services

The Monetary and Control System

The Nigerian economy is classified as developing and under the emerging markets (World Bank, 2007). The government has tried to diversify the major income earner of the economy by encouraging investment and development in the real and manufacturing sectors of the economy.

Inflation has been brought down to single figures over the last three years, but not as low as what obtain in the UK. Figure 2.1b below shows a snapshot of the country’s major indicators and a 24 month review of Interest rate vs the inflation rate for Nigeria. Official reserves stood at $57.8 billion as of 24 November 2008. (UBA Capital, 2008)

The problem of infrastructure however continues to cripple the economy, the non existence of constant electricity supply has crippled several local industries in the Nigerian economy, It is important that GBT ensures the availability of electrical power generating plants to provide its own electricity if it intends to engage in business in Nigeria.

The Central Bank of Nigeria has been actively supporting the naira, although its style is to fill demand for foreign currency by supplying it in weekly auctions, rather than by intervening directly (UBA Capital, 2008). The CBN provides foreign exchange to foreign investors wishing to sell positions to meet redemption requests abroad, as well as normal seasonal demand for dollars. Although the auction amount sounds alarmingly high, it should be kept in perspective. (UBA Capital, 2008).

The implication of this on our UK operations is that there is dependent on the government for the supply of foreign exchange. Due to the fact that Tobacco is internationally traded. We may experience some bottlenecks in sourcing foreign exchange to support our operations or for remittance

Table 2.1b- Economic System in Nigeria

Figure 2.1b- Nigerian Economic Indicators Source: UBA Capital (Europe) Ltd. Nigeria Review, Issue 27

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2.1c The Legal System

Framework for Discussion Legal SystemNigeria In view of the fact that the country was colonized by the United Kingdom, the Nigerian legal system

is based on the English common law legal tradition through the process of legal transplant (Dina, 2005) Some of the various sources of guidance are; the 1999 Constitution, Legislation, English law, Customary law, Islamic law, and Judicial precedents.

Implication for BusinessLegal System

International Law Membership

Cases and litigations- Copyright and proprietary law.

Corruption and Government Intervention

The Nigerian legal system is the civil law system, the 1999 constitution contains a set of laws categorized into sections and sub-sections. However, the legal system in the local governments also includes customary courts and the Islamic judicial system that is practiced by some states within the federation. All matters related to company practices are handled by the federal government.

The Country is a signatory to the ICJ legal treaty and accepts compulsory ICJ Jurisdiction (CIA, 2007).Notable among legal cases that the company relied on the ICJ ruling is its contention with Cameroun over the Bakasi peninsula, which today has been ceded to Cameroun.

There are notable legal laws that affect doing business in Nigeria, the legal system is well abided to and also enforceable; furthermore, issues like copyright, Property rights and Company rights are quite grounded within the Nigerian Legal system.

Nigeria is noted for its high corrupt practices, the country has instituted such agencies like the EFCC and ICPC to prosecute corrupt officers, this has led to an improvement in the country’s TI rating since the return of civilian rule in 1999.

Considering the fact that the country is bounded under the ICJ ruling, we do not expect that there will be practices that are akin to international legal practices. There exists laws protecting private property rights and enforcement of contractual obligations.

Table 2.1c- The Legal System in Nigeria

2.2 CULTURAL CONDITIONS

Business success in a variety of countries requires cross cultural literacy (Hill, 2007); In his article ‘Cultural determinants of entrepreneurial emergence in a typical sub-Sahara African context’, Madichie et al, 2008 argued that the Nnewi cultural traits affects the entrepreneurial attitude of the people; the Nnewi cultural tribe is one of the 256 cultural societies in Nigeria. Using Hofstede’s framework that views culture as a system of values and norms shared among group of people, (Hill, 2008), the Nigerian cultural conditions can be said to be influenced by societal values.

Considering the role still played by much of the country’s cultural heritage and ceremonies in everyday businesses, making an in-route into the Nigerian Tobacco industry will require cooperation with societal groups and informal institutions.Further analysis of the cultural conditions is considered in table 2.2a considering social structure, social stratification, religious and ethical systems and language.

Framework for Discussion Key attributes and indicesSocial Structure The Nigerian social structure is largely driven by group ideals, with exceptions been noticed in some

urban centres. Negotiations for business decision are largely group driven mostly community oriented.

Social Stratification In Nigeria, most business negotiations are done at the societal level, Shell has approached its business in the Niger-Delta region by ensuring that its decision making and business dealings are done with community elders (Shell, 2006)

Religious and Ethical System The major religion groups in Nigeria are Christianity and Islam, neither of these has strong implication on the tobacco industry as there are no religious advices against smoking or taking tobacco.

Language There are three ethnic languages- Hausa, Yoruba and Igbo spoken in the country, while English is the official language, the ‘Pidgin-English’ is also widely spoken across the country and the in the West-African sub region.

Table 2.2a- Major Cultural Condition Indices in Nigeria

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3.0 PATTERN OF TRADE BETWEEN TWO COUNTRIES

3.1 PATTERN OF TRADE IN THE UNITED KINGDOM

The United Kingdom is a member state of the European Union (EU), all EU members are WTO members, as is the EU (WTO, 2008). The EU makes most trading decisions on behalf of the 27 member states. It has a single customs union with single trade policy and tariffs (WTO, 2008).

The Balance of Payment (BoP) indices released by the UK National Statistics office indicates a deficit of £3.9billion for the month of October 2008, a further decrease of £300million from the £3.6Billion recorded in September 2008, these figures is part of a series of negative BoP recorded in the UK over the last 6years; which implies that the UK imports more than it exports, it however still remains a key exporter on the WTO export list with over £34.6Billion total goods and services exported in October 2008 (UK Office of National Statistics, 2008).

Major trading partners with the UK outside of the EU in terms of exports are the US, China, Dubai among others. Its main exports are manufactured goods, chemicals and foodstuffs. Considering imports, the US, Saudi Arabia and Russia are prominent trading partners; the only notable African country that featured in a 3-month trade in goods geographical analysis released by National Statistics in August 2005 is South Africa.

3.2 PATTERN OF TRADE IN NIGERIA

Nigeria has continued to enjoy a better integration into the world economy since its transition to civilian rule, external trade has improved over the years peaking at 79% of GDP in 2004 (Datamonitor, 2007). Its key exports remain crude oil and natural gas which accounted for over 99% of its total export in 2004.

In terms of export, The US is Nigeria’s biggest trading partner and accounts for around half of the country’s exports, followed by Spain and Brazil contributing 8% and 7.3% respectively to the country’s total export earnings. Nigeria’s largest import trading partner is China and accounts for 10.7% of the country's total imports, followed by the US and Netherlands that accounts for 8.4% and 6.2% respectively. Others major import statistics are 6.2% for the UK and 6% for France while Germany accounts for 4.5% of Nigeria's import volume (Datamonitor, 2007).

The country has also recently improved its trading relationships with emerging markets particularly those in Asia, with China and Korea notable in this relationship. Figure 3.2 below shows statistical highlights of Nigeria’s trading relationships for 2007.

Figure 3.2- Nigerian Major Export and Import Destination for 2007Source: Euromonitor, 2008- Global Market Information Database

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3.3 PATTERN OF TRADE BETWEEN THE UNITED KINGDOM AND NIGERIA

Being one of the colonies of the UK and having gained its independence in 1960; relationship between the two countries have been cordial especially in terms of trade, before the discovery of oil, when cocoa and groundnuts were the major export commodities in Nigeria, the United Kingdom remained one of the country’s major trading partners and trade relations between both countries have improved over the years. The UK maintains a department for Trade and Investment; UKTI- an arm of the Foreign and Commonwealth Office in Nigeria that supports British companies seeking to do business in the Nigerian Market.

In 2008 alone, over 79 UK companies entered the Nigerian market, several of whom have established JVs or formed alliances with local companies; British exports to Nigeria exceeded over $1billion dollars in 2008 and this growth is expected to rise (UKTI, 2008). Investments opportunities in Nigeria currently involving British companies are in several sectors of the economy with major players including Standard Chartered Bank, British American Tobacco Company other players are in the Oil and Gas, Aviation Services, Communications and Power sectors of the Nigerian economy.

Considering recent developments, trade between both countries is expected to grow as Nigeria continues to feature prominently amongst emerging economies in Sub-Saharan Africa.

3.4 TRADE IN THE TOBACCO INDUSTRY BETWEEN UNITED KINGDOM AND NIGERIA

The trade in Tobacco and related products between Nigeria and the UK dates backs over decades; Nigeria remains one of the suppliers of raw tobacco to UK cigarette manufacturers. Since the privatization of the state owned Tobacco Company; Nigerian Tobacco Company (NTC) in the late seventies, the industry has witnessed a stunted growth especially during the military regimes. However, following the return to civil rule, one of UK’s leading tobacco companies British American Tobacco made a foray into the Nigeria, it initially started with the importation of various brands of finished cigarette, and has since started production of various brands since 2003 (BAT, 2008)

Other notable trade in Tobacco between Nigeria and UK are mainly in the importation of cigarette filters and wrappers that are supplied through Nigeria to the West African market.

3.5 RESTRICTIONS AND PROTECTIONS ON TRADE IN NIGERIA

The current trade regime in Nigeria is guided by the WTO trade convention the country has been a part of since January 1995, however, prior to that, especially from the mid 70’s, its trade policy digressed remarkable away from tariffs to quantitative import restrictions, particularly prohibition and licensing (Oyejide, 2007). Several products were covered by import prohibitions covering about 29% of agricultural products and 20% of industrial products in terms of tariff lines (GATT, 1991; cited in Oyejide, 2007).These prohibitions and tariffs were largely driven by the government’s claims to protect local and infant industries and have since been faulted by various stakeholders within the Nigerian trade circle.

Various negotiations and discussions during WTO and GATT meetings have led to the relaxation of the prohibition list to only about 20 groups; they consists largely anti-dumping and second hand goods which are considered harmful to domestic production and development (Nigerian Customs Service, 2008). The relaxation of trade prohibition included the removal of import prohibition on finished cigarette and other tobacco related product.

Although no legal restriction on the importation of tobacco related products into the country, there are various administrative bottlenecks that characterize the importation of products into the country; part of which include undue government bureaucratic activities. Apart from the pre-shipment inspection procedures, importers are made to undergo sets of guidelines, processes and documentation checklist before their products are allowed in. Standard import duty tariff in the country ranges from between 20% on healthcare and petroleum products to 70% on luxury goods (Nigerian Customs Services, 2008).

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There is however some government incentives such as tax holidays and other inducements meant to encourage foreign investment especially since the advent of democratic rule. These are discussed in the course of this report.

3.6 RESTRICTIONS IN THE NIGERIAN TOBACCO INDUSTRY

Based on the country’s drive to influence foreign investment, various institutional frameworks to implement the international Tobacco Control Legislation; the WHO’s framework convention on tobacco legislation (Euromonitor, 2008) have not been fully implemented. Although there are legislations that standardize health warning on cigarette packs on the dangers on tobacco consumption, the public advertisement of Tobacco through both the media and print electronics are not controlled, but there are legislations against the sale of cigarettes and tobacco products to under aged, its enforcement is however in question.

A certain company operating within the sector was even granted tax holidays for them to reap full benefits of its investment in the reasonable volatile environment. There are no smoking bans in public places, restaurants and clubs. It is expected that laxity in the smoking legislations in Nigeria will make it an investment friendly environment for the tobacco industry.

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4.0 EXCHANGE RATE REGIMES IN THE UNITED KINGDOM AND NIGERIA

4.1- EXCHANGE RATE REGIMES

Enterprises that operate in a multi-national environment like ours needs to be in sync with intricacies of the foreign exchange market for two main functions; to convert the currency of one country to another as well as provide insurance against foreign exchange risk (Hill, 2007). Considering the uniqueness of each operating environment (UK and Nigeria) to various market structures and external economic influences as well as the fact that each country has its currency priced in £ (Pounds) for the UK and N (Naira) for Nigeria, the knowledge of the exchange regime helps us proffer mitigating strategies against its risks to our business.

4.1a- Exchange Rate Regime in the United Kingdom

The United Kingdom currently operates the floating exchange rate system, the government through the Bank of England has not intervened in the currency market and the Sterling has been market determined in the last nine years (Bank of England, 2008). Overall, changes in market demand and supply have been responsible for changes in the value of the Sterling. The British economy experienced a boom in the last 5years preceding the fall in property market and failures in the financial system in mid 2009. This made the Sterling stronger against major international currencies; a graphic review of the Sterling exchange rate with the US dollars is shown in figure 4.1a below.

However, following the financial crises and the onset of recession affecting major economies around the world, the shift in positions away from the Sterling by investors as interest rates have been on the decline has led to a drop in the value of the Sterling since September 2008.

Figure 4.1a- The US Dollar – Sterling Exchange rateSource: Reuters- EcoWin

4.1b- Exchange Rate Regime in NigeriaThe exchange rate regime in Nigeria has experienced various transformations since the country gained independence in 1960, ranging from a fixed regime in the 1960s to a pegged arrangement between the 1970s and the mid-1980s, and finally, to the various types of the floating regime since 1986 (Sanusi, 2004). The adoption of a fiscal policy instrument- the Structural Adjustment Programme (SAP) signalled the transition to a regime of managed float and this has been the predominant characteristics since then.

Nigeria’s exchange rate policy is aimed at aimed at preserving the external value of the currency and maintaining a healthy balance of payment position (Sanusi, 2004); these issues have influenced the

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provision of the law and policies as regards foreign exchange in Nigeria. To date the country’s exchange rate mechanism has been managed floating; with the Naira allowed a permitted band of fluctuations against the dollar and the Central Bank having to intervene to maintain the value of the currency within set targets.

The peculiarity of the market needs to be highlighted as the country’s foreign exchange earnings are largely dependent on payments received from Crude Oil sales, thus the Volatility in the world oil market affects supply of foreign exchange and affects the value of the currency (CBN, 2008), thus the value of the nation’s currency has a direct relationship with international Oil prices since the shift to floating exchange rate regime. Figure 4.1b below is a graph showing the Naira to US Dollar average exchange rate between 1995 and 2006. A certain school of thought however beliefs that the country’s currency is over-valued and there has been consistent call for the devaluation of the Naira.

Figure 4.1b- The Naira- US Dollar Exchange rateSource: Datamonitor, CIA: The World Fact book

In considering the relationship between the Sterling and Naira over the last decade, there has been a high degree of volatility with Naira- Pounds Exchange rate going for N250 to £1 in January 2008 and reaching N190 to £1 in December of the same year (GTBank, 2009). To date the country runs the Dutch Auction Sales (DAS) for its foreign exchange market and the market is regulated by the Central Bank of Nigeria (CBN).

4.2- IMPLICATION OF THE NIGERIAN EXCHANGE RATE POLICY ON TRADE- IMPORT AND EXPORT

The dependence of the country’s foreign earnings on crude oil sales means the volatility of the Naira can likened to that of Oil prices; in the years prior to 1986, the Naira had been over-valued creating a high propensity to import and promoting the balance of payments deficit. The government tries to manage the value of the currency by controlling the supply of foreign exchange into the market; these results in high demand for FX in the market.

The demand pressure has led to speculation on the currency. Social and political unrest, expectations of further depreciation of the currency by the government and depletion of foreign reserves have implication for our global business strategy and will need to be managed to ensure that income is not lost in the volatile FX market.

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4.3- EXCHANGE RATE RISKS INHERENT TO NIGERIA AND ITS TOBACCO INDUSTRY

Considering the volatility of Nigeria’s FX market and the level of trade in international goods and services expected in the tobacco industry, one may argue that there are no significant risk that are inherent to our business except that of Transaction exposure which can affect the value of both forward and spot rates when engaging in international business, this can however be mitigated by engaging a lead strategy (Hill, 2007)- which involves attempting to collect foreign currency receivables before they are due in anticipation of depreciating Naira value.

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5.0 POLITICAL CLIMATE AND POLITICAL RISK ANALYSIS IN NIGERIA

5.1- Political Issues in Nigeria

Political instability has proven to be a thorny issue in Sub Sahara Africa- Nigeria Inclusive, according to a KMPG survey quoted in Frynas, 1998, three-quarters of British firms would not do business in Nigeria because of its reputation for fraud. Yet Shell expanded its investments despite increasing political risks in the country and despite many alternative investment opportunities in other countries (Frynas, 1998). It is apparent that the political risk in Nigeria can be mitigated given the right business strategy. Table 5.1 below indicates the various Nigerian Governments between 1960 and 2008. Since the emergence of civilian rule in 1999, the country has experienced a lull in political unrest; however incidents of kidnap, civil and religious unrest are still rife especially in the Oil rich Niger-Delta regions and northern states.

Table 5.1- The Nigerian Government 1960-2008Source: Updated from the Library.

5.2- Analysis Political Risks Inherent in engaging in International Business in Nigeria - Analysis and Mitigating Measures

MNEs like ours must be prepared for and respond to host country intervention; identifying, analysing and forecasting have become major growth areas for international business consultants (Rugman et al, 1986). Strategic, Structural and International perspectives are three motives of key importance when considering political risks to business as posited by Frynas, 1998 in his article- Political Instability and Business: Focus on Shell in Nigeria. Various political risks that are inherent in engaging in business in Nigeria, its attributes and implication for business as well as the risk mitigating measures are outlined in Table 5.2a below.

It is also essential to say that our business activity which is in the Tobacco Industry does not generate much of political influence as most businesses that encounter political risks within Nigeria operate mainly in the oil and gas sectors or other natural resources / mining business segments.

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5.2. Political Risk AnalysisPolitical Risk Issue Attributes and Indices Risk Mitigating MeasuresGovernment Intervention in Business.

Incidents of business nationalisation

This is the probability that the government may meddle in private business affairs. Incidents of this have become very low since the transition to civilian rule. Although corruption levels are still high, the state has actually encouraged the participation of the private sector, as various state run business have since been privatised.

The state has ceased to nationalise any institution, the Nigerian government is not known to have nationalised any private establishment in the last decade, thus we

Ensure strict compliance to government regulations and prompt payment of taxes, duties and tariffs

Involve the private sector of the country in the business for proper integration of local communities.

Business regulations

Tobacco industry control mechanism

The Nigerian government is a signatory to the WHO and other international Tobacco Control Legislation. Standardize health warning on cigarette packs on the dangers on tobacco consumption, the public advertisement of Tobacco through both the media and print electronics are controlled.

There are legislations against the sale of cigarettes and tobacco products to under aged.

Ensure strict compliance with all laid down tobacco and related products control mechanism.

Evolve our best corporate governance practice involving the sale of products and necessary health warnings.

Non-Governmental Organisations

The activities of anti-smoking bodies and non-governmental organisations are quite insignificant. However, it must be noted that our operations will still be guided by the International practices and tobacco control legislations set by the WHO and other organisations.

Involve all the necessary stakeholders in the decision making process and ensure that the company does not flaunt international standards with regards to tobacco legislations

Host Community relationship

Business Communities and Cartels

Nigeria is noted for hostile community activities, especially businesses that operate in the Niger-Delta oil sectors, although most Tobacco company operating the country do enjoy a relatively calm operating environment.

The Business environment and community are quite involving, they are not known for unwholesome competitive practices that may hinder business growth and development. There are no known cartels within the Nigerian business environment.

Evolve a community development and enhancement project that will endear GBT to the hearts of the host community.

It is also important to play actively in the business community, chambers of commerce and industries and necessary business organisations.

Religious unrest Nigeria has seen a fair share of religious and civil unrest in the last 5years, these are mainly between the Christian and Muslim populace. Some states in the northern areas have also implemented the Sharia legal system (Islamic Codes).

Locate our business factory in an area with little or no history of civil and religious unrests. It is also important to maintain a neutral stand with respect to religious activities in the country.

Table 5.2a- The Political Risk Analysis of Nigeria

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6.0 MEANS OF INVESTMENT

6.1- Need for Internationalisation of GBT Plc’s Operations

In considering the determinants of international operations, Rugman et al, 1986 (Pp 24) argued that the expansion of trade is essential to the growth of a firm and that trade provides new opportunities for firms workers and consumers. International trade is usually the first phase of international operations of a firm; this then leads to other modes of international operations which include franchising, exporting, joint ventures (JVs) and Foreign Direct Investment (FDI).

Having concluded to embark on International Business as part of a strategy to grow and increase market share and adopting the market seeking approach as the basis of trade; embarking on Internationalisation requires us to consider the national business system, cultural conditions and risks inherent in doing business in Nigeria with focus on the tobacco industry as contained herein this report and further summarized below.

6.2- Implication of Trade policies, Exchange rate and Political risks on entry strategy

Considering the level of trade barriers, volatility in exchange rate market and reasonable level of political risk identified and analysed above, we are open to various forms of entry strategy ranging from export, franchising or licensing and FDI. There are various indicators that do not encourage export as there exist a high level of tariffs bureaucratic and administrative restrictions. Furthermore, government incentives such as tax holidays encourage investments by way of FDI.

6.3- Entry strategy to be adopted

Evolving the best strategy to enter a foreign market, I have considered the relevant issues highlighted above and trade theories with focus on the internalization theory to explain the choice of establishing operations abroad through FDI over other alternatives (export and franchising) available. The Internationalisation theory also known as the theory of market Imperfections (Hill, 2007), harps on the disadvantages of other options of international trade available to us when considering operations in Nigeria.

Exporting requires us engaging in business in or serving the Nigerian market with goods produced domestically (in the UK) or in another market, the viability of this strategy is however constrained by the transportation and trade barriers that currently exist in Nigeria; with duty rates on importing finished cigarettes and tobacco related products hovering between 20-70% (NCS, 2007) and the volatility of the exchange regime; the cost of exporting relative to that of FDI will thus be too high.

Franchising or Licensing involves GBT engaging in tobacco business in Nigeria by granting concession or privilege to an identified local companies or entities to serve that market and pay dues or dividends to us by way of royalties. This options is however not viable to us as it may result in giving away valuable technological knowhow to potential foreign competitor, this negates our company strategy and its long term implication for business has far-reaching implications. Furthermore, licensing does not give us firm control over manufacturing hence we may be unable to ensure that cigarette and product standards meet our global brands.

Rugman et al (1986), considers the eclectic theory and specifies a set of three conditions required if a firm is to engage in International Trade, these issues are considered relative to GBT and its market seeking strategy in the Nigerian tobacco sector. Using John Dunnings eclectic model, table 6.3a-c gives the analysis these various conditions (Firms Specific, Internalisation and Country Specific Advantages) relative to GBT’s tobacco operations.

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6.3a - Firm Specific AdvantagesFramework for Discussion Key attributes and indicesProprietary Technology The know-how available to GBT has ensured that our cigarette brands remain the best

quality within the UK and all the market we operate in. The ability to process raw tobacco into finished products within a reasonably short time beats our competitors to the market

Skills and core competency GBT boasts of some of the best hands in the tobacco industry, our R&D team has been able to design new brands of cigarettes and related products with low cost to the market.

Brand name, product differentiation and trademarks

The brand names which include Benson and Calboro are world renowned names and our products remains one of the best in the market.

Size and scale of economies The production units have devised measures of cutting cost to produce quality cigarettes at minimum efficiency scale.

Capital requirements and scale of operations

GBT has been one of the most successful companies within the tobacco industry; year on year, we have set aside part of our profit to embark on market seeking ventures, thus funds and capital are readily available.

Table 6.3a- Analysis of Firm Specific Advantages to GBT

6.3b- Internalization AdvantagesFramework for Discussion Key attributes and indicesContracts and enforcement The Nigerian government currently seeks the development of the real sector of the

economy, thus its willingness to ensure that it creates a suitable atmosphere to encourage FDI which includes enactment of laws and reducing investment barriers.

Market Availability The Nigerian population is currently a fifth of the entire African continent.

Control of Product Sale The problem of counterfeiting and imitation of products does not arise as processes required to produce finished products are quite cumbersome.

Size and scale of economies The production units have devised measures of cutting cost to produce quality cigarettes at minimum efficiency scale.

Table 6.3b- Analysis of Internalization Advantages to GBT

6.3c - Country Specific AdvantagesFramework for Discussion Key attributes and indicesNatural resources Nigeria is one of the exporters of tobacco which is a key raw material in the

manufacturing of cigarette; the nearness to the source of raw material also conveys competitive advantage to GBT to embark on FDI.

Efficient and Skill labour force Availability of both skilled and unskilled labour at a relatively low cost also makes FDI a viable proposition to enter into the Nigerian Tobacco Market.

Trade Barriers and tariff restrictions

Existing trade and import barriers by the Nigerian government on cigarette increases the cost of servicing the market by export, there are also tax incentives available to investors to ensure that they make an appreciable level of profit.

Table 6.3c- Analysis of Country Specific Advantages to GBT

6.4- The Type of FDI recommended

Given the alternatives available and the choice of FDI as a mode of operation in Nigeria; onus is now on the form of FDI to consider, one of our major competitors; British American Tobacco (BAT) already operates in the market and it controls over 20% of the market. The form of FDI must ultimately reduce the market gestation period if we are to compete favorably with BAT in the long run.

The global market seems to favor mergers and acquisitions as over 70% of all FDI inflows have been in the form of mergers and acquisition (ACG, 2008). The best form of FDI to adopt by GBT in operating in Nigeria is the acquisition of an already existing entity that is involved in the Nigerian Tobacco sector.

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7.0 CONCLUSIONS

The dearth of smoking in the developing world with Western Europe, North America and Australia records a decline in smoking consumption for 2007 due to increased grip of tobacco control on world consumption; (Euromonitor, 2007). The role being played by emerging markets and developing countries in the world economies comes to foray.

This report considers intricate issues, giving an insight into the vast subject of International Business strategy outlining relevant discusses on culture and national business systems, pattern and trends of trade, exchange regimes and political risks with hindsight that our company seeks to embark on investment in Nigeria from our UK based operation.

Nigeria has become one of the key directions of FDI in emerging markets, while the country may have significant risks, a number of developments have reduced risk in the market, the country has seen improvements in corporate governance, corporate regulations and the political arena has seen structural changes over the years making the country an investor haven.

Finally, it is apparent that the issues outlined in the course of this report and inferences drawn, the best investment entry strategy would be to embark on Foreign Direct Investment by acquiring an existing firm in Nigeria’s tobacco or manufacturing sector owing to reasons stated below.

Take advantage of the recent liberalization and deregulation initiative of the Nigerian government will make it much easier to enter the market.

Establish a sizeable presence in the industry and compete favorably within a relatively short period.

Reduce the risk that may become inherent in entering the market through Greenfield investment by purchasing the assets of a company with known revenue stream.

It is envisaged that measures outline above will indeed integrate into Great Britain Tobacco Plc’s long term market seeking growth strategy. The due diligence and modalities for selecting our target firm will be given consideration in other management reports.

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