Wither Non-consumption

Why betting on the patience of big firms is not a development strategy

Last week we were treated to the now-familiar news of another Multinational Corporation (MNC) leaving Nigeria. Kimberly Clark, maker of the popular children's diaper Huggies, announced that it will shut down its production facility - two years after investing $100 million in a factory in Lagos. This continues the worrying trend of the rapid decline of Foreign Direct Investment in Nigeria.

My co-blogger Feyi Fawehinmi brilliantly captured the ‘debate' that often comes up whenever there is news of another MNC closing shop. It is an opportunity for some people to show their belief in Nigeria by blaming others, including MNCs, for not believing in Nigeria;

Anyone will be by now familiar with the way the ‘debates’ around these announced exits go. In general, most Nigerians are uneasy about it since it’s hard to put a positive spin on someone giving up on the country after spending millions of dollars just to get in. So the ‘debates’ take another turn which allows people to be split down the line on the matter. People you might call ‘Nigerian Nationalists’ insist that the exits tell you more about the exiting company’s failures than anything substantial about the Nigerian economy itself. In that sense, they can always point to competitors of the exiting company and how the upstarts have systemically eaten the exiting company’s market share over the years, forcing their inevitable departure.

Maybe their argument is the smoke pointing to the existence of a nearby fire. But it misses what I think is the wider picture which is that increasingly, manufacturing for the Nigerian market is ‘one person’s job’.

You should read the whole essay (if you haven't) to get a sense of the false dichotomy that this kind of debate creates - but Feyi drilled down to the essence in the final paragraph:

This is all to say that any manufacturing strategy that is predicated on manufacturing for the Nigerian market alone is likely to run into big trouble in short order. Yes, there are 200 million Nigerians in the country but the vast majority of them are unable to afford anything that is not food (and even that is a big struggle). Nigeria is now in a decade of practically zero growth which really means that Nigerians are getting poorer when you factor in population growth:

The Great Misdiagnosis - MNCs and the myth of market creation

I want to draw attention to a strain of the argument that is related to Feyi's point and equally problematic. That is, the argument that MNCs are doing African markets all wrong by expecting consumers to be handed to them on a platter rather than investing to create their markets. The nub of this argument is that MNCs have to acknowledge that poor countries are at an (arbitrary) stage in their history where nothing is easy, and that to succeed requires not just creating jobs but also providing the associated public goods.

This is nothing new. You can say that the market for iPod, iPhone, and iPad (technically) did not exist before Apple created those products. The company even created its stores to sell its products. You can extend this logic by having Apple open a credit line for consumers who cannot afford its products. The important thing to note is that Apple is not doing that in a shrinking economy. One of the main problems with the market creation argument is putting consumption and income in the same box. The choice architecture of consumption is different in an economy where the income of the population is declining and can hardly meet their basic needs, than in one with rising income, however slightly. This already puts any MNC that relies on activating non-consumption in a poor economy as a business model in long-term jeopardy.

Another version of this argument is to say that poor countries are not known for having fantastic business environments - hence MNCs fail in these markets because they fail to adjust their business models accordingly. For example, Efosa Ojomo, a bestselling author and senior fellow at Clayton Christensen Institute for Disruptive Innovation wrote the following;

Doing business in Africa is hard. And it should be. Not because there’s something particularly wrong with Africa, but simply because of the stage of Africa’s development. Most things in Africa – from education and healthcare to infrastructure and institutions – should be hard. One reason for this hardship is due to how much resources the continent has to spend on fixing itself. Take government expenditure per capita as an example. 

The average government expenditure per capita across Africa is approximately $500. These funds go toward servicing a country’s debt, building infrastructures, developing institutions, paying salaries, defense, security, education, healthcare, and social protection programs. In France, Norway, and the United States, government expenditure per capita is $24,000, $41,000, and $30,000 respectively. So, when a U.S. or European company commits to do business in Africa and expects the business environment to be similar to the environment in a much wealthier region, the company places an unrealistic burden on its employees and on Africa. It is incredibly expensive to build an enabling environment and many African-country-governments neither have the money nor the incentive to do so.

I am certainly not as smart as Mr Ojomo but simply 'controlling' for a factor as important as government seems like handwaving. You can always find a few firms that manage to stay in business despite bad government, but the point is that dozens more (mostly local) firms are failing for the same reason, and focusing on the former is a survivorship and selection bias. I am confident Mr Ojomo will struggle to find a single historical example where development happened without the government starting and sustaining the effort to fix the capability and incentive problems he pointed out.

A good example of this point is the Tolaram group, which was a shiny token of market creation in Mr Ojomo's book. The company, along with Chinese partners, took on the unprecedented challenge of building a port. In a profile of the company by the Financial Times, many of the familiar problems of policy instability and inconsistency reared their head. For the port to deliver on its economic promise, the government will have to deliver on its promise of building the surrounding infrastructure, as noted in the FT piece:

But Daniel Clemenson, analyst at IHS Markit, said the Lekki Port’s modernity will not matter if the government did not improve the surrounding infrastructure. At Apapa, Lagos’s main port, the roads are so shabby and processes so cumbersome that trucks can often wait a week before being allowed in to pick up goods. “Unless considerable development is undertaken in the surrounding areas I can only see this adding to the problem,” said Mr Clemenson.

Whether or not that will happen remains anybody's guess. But what stood out to me was this quote by the CEO of Tolaram:

Mr Aswani agreed that “roads are the main priority”, particularly the access road the project will share with its next door neighbour, billionaire Aliko Dangote’s massive new oil refinery. The government has promised to build three of the six roads needed for the project to work, Mr Aswani said, and he thinks that it will build the other three. He said working with the government had not been easy. There were quibbles over the shares for both the state and federal administrations, and more than three dozen permits, which took years to resolve. “I will never deal with government again,” he said. “Give me the permits and just let me run the business.”

I doubt anyone can fault Mr Aswani's sentiments. The fact remains that his business is perpetually stressed by the business environment, despite decades of market creation and resilience. If someday Tolaram decides it is no longer profitable to remain in such a market, then this is no proof that its business model is lazy or misunderstood history.

No matter where a country is in its history, development is not guaranteed. Only about half a dozen countries have gone from poverty to being rich in the last five decades. It may be impossible to distil their experience into a nugget of wisdom or a cool phrase. But what is certain is that their development process was kickstarted by serious and competent national governments. MNCs can be very useful partners in development - but they are certainly not drivers. It is time to stop making excuses for incompetent governance. It is time to take the politics of delivering economic transformation very seriously.