Pros of Ethiopia As An Investment Opportunity
The Ethiopian economy is essentially centered on agriculture, which actually account for more than 85% of Ethiopia’s total employment and 46% of its GDP. Similarly, the country has shown an impressive economic growth from the past few years. Ethiopia is one of the largest landlocked countries in sub-Saharan Africa and it is increasingly becoming a central point for the foreign investors seeking forthcoming investment opportunities in that particular region. According to IMF, Ethiopia is one of the firmest growing economies with approximately an average growth rate of 8.2%. The economy brightly expected to grow further. It grew 9.6% in the previous fiscal year 2015 and is expected to grow by double-digit i.e. 10.6% by the end of the fiscal year 2016 (Santander Trade, 2016). The inflation rate of Ethiopia is still in single digit and the growing economy is facilitating the purchasing power of Ethiopian consumers to grow as well. Currently, the labor cost in Ethiopia is very low, which can help investors to save cost.
As the economy is growing, the demand of Ethiopian consumers are also growing. This means that the foreign investors have a brighter perspective of having a substantial sales volume and consumer base. Additionally, considering the opportunities related to market and industrial policy, Ethiopia proposed a state-led model of development and all the groundwork areas such as power, financial services, shipping, transportation, telecommunication, and financial services fall under the monopolist administration of the state (Santander Trade, 2016). While comparing to the last 10 years, the poverty percentage has decreased by 9.1% i.e. from 38.7% to 29.6%, which indicates towards the better consumer power, increased consumption, and improved living style (Quelch et.al, 2015).
Industries like retail, media, and transportation are also emerging alongside in order to provide an improved business framework. Other important opportunities include the tax exception for the agro-processing, manufacturing and production, and agricultural related industries. The exemption of tax is also available for capital goods. Similarly, the country is improving and making attempts to protect local business organizations to substitute imports, which is also an opportunity for foreign investors. Apparently, opening a subsidiary or getting into a joint venture will enable them to harvest the fruitful returns by operating closely to the community (CNBC Africa, 2016).
Cons of Ethiopia As An Investment Opportunity
There are also some shortcomings for investing in Ehtiopia. It should be kept in mind while investing in Ethiopia that the country is swamped in a proliferating rate of inflation, which means that returns on the investment would be lower than that they should appear to be. On the off chance, if the business would not succeed then taking the assets back to home country would turn out to be bigger loss due to the difference in currencies. Secondly, the Ethiopian government has undemocratic nature and depicts a picture of instability, which lacks peaceful business settings. This means that investors tend to face political shakiness and uncertainty that may tend to affect the flow of operation, as well as, profitability. Moreover, the principal economic structure is controlled by EPRDF (Ethiopian People’s Democratic Revolutionary Front) and its representative called ‘Cadres’. The control by EPRDF results in investors faccing too much interference from Cadres in the business functioning that sometimes results in losses too. The system is also highly bureaucratic and inflexible (Setargie, 2015).
The country is completely landlocked and consequently, the investors are required to pay port fees. Moreover, most of the payments go through Djibouti, which is the principal import/export channel of Ethiopia. The ceding/forfeiting of ports and having easy access to sea has substantially increased the exporting and importing cost of capital for the business. The country also keeps facing regional conflict that may affect regularity of business operations. The country also lacks meaningful policy and decision-making regarding business processes and unfair/discriminated practices at workplaces (African Business Central, 2016). Similarly, developed infrastructure is still limited to a certain geographical area; whereas, roads, cesspit system, electric and water supply in the entire region are still in the developing phase, which means that the investments would take an additional cost to flourish. The country also lacks skilled workforce as approximately 2 -2.5 million young individuals are entering annually in the labor market; however, the employment rate is merely 7%. Therefore, availability of amateurish workforce is abundant (Santander Trade, 2016).
CareCo.
CareCo. is a UK-based personal care brand founded in 1961, which is interested in investing in Ethiopia. The strengths of CareCo, includes great brand awareness and a global brand recognition that may assist it getting an initial customer base easily. CareCo. has prospects to exploit the chances of increasing market growth, consumers’ purchasing power, low costs of labor and production, tax incentives, and higher profit margins (Quelch et.al, 2015). However, there are certain weaknesses and threats that are associated with its Ethiopian investment. For instance, it has to suffer from the high custom duties while dealing with the local distributors that will consequently post low-profit margins. Moreover, the competition in the industry is also building as the country is encouraging to substitute imports with local production.
The available market entry options for CareCo. includes contracting with local agents, licensing, joint venture, and subsidiary. However, each of them has some pros and cons associated with them. For instance, contracting a local agent will facilitate CareCo. with better local market knowledge and would decrease initial market risks and investment. Whereas, it would also require CareCo. to share its margin with the local agents having less amount of market share and paying high customs duties. Licensing would allow CareCo. to have lower investment and easy access to distribution channels via a local partner. However, this will also bring about the cons of having IP infringement, low-profit margin, and high risk of forgery.
Similarly, the option of subsidiary would help CareCo. to protect from IP infringement and tends to post positive income in upcoming years. However, it also tends to face the disadvantages of unfair treatment and will be compelled to operate within a poor infrastructure. Moreover, in personal care product industry, the competitors are already enjoying the first mover advantage. Lastly, the joint venture could offer the benefits of having low entry barriers, high acceptance of profit, and decrease risk exposure. The only drawback joint venturing has in case of CareCo. is the loss of operational control (Abiad et.al, 2015).
ShoeCo.
ShoeCo. is a footwear manufacturer that was founded in 1991 and offers an extensive range of formal and casual leather footwear. In Ethiopia, ShoeCo. imports through a local Ethiopian distributor. ShoeCo. has shown a proven track record in the local market and has encountered the similar sociological mentality as it may come across in Ethiopia. ShoeCo. has prospects to exploit the chances of increasing market growth, consumers’ purchasing power, low costs of labor and production, tax incentives, and higher profit margins (Setargie, 2015).
One of the major weaknesses attached to the investment related decision of ShoeCo. is that its projected financial statistics demonstrates negative revenues. Apart from that, ShoeCo. may also encounter stringent government labor regulations, taxation policies, and unfair competition. ShoeCo. has different market entry options such as licensing, joint venture, subsidiary, and local agent. While entering through licensing would facilitate ShoeCo. to have lower investment cost and access to local distribution networks; whereas, it would also increase the risks of imitation, low-profit margins, and IP infringement. Simialrly, having a joint venture would allow ShoeCo. to have lower investment and greater access to local distribution channels; however, it would also reduce the profit margin and IP infringement (Quelch et.al, 2015).
Apparently, having a subsidiary would facilitate ShoeCo. to relish high control over its operation and protection of its intellectual property infringement; nonetheless, it posts disadvantages of having unfair treatment, the poor groundwork for business activities, and unbeneficial financial model (CNBC Africa, 2016). Another option of local agent can have benefits of established presence in the local market, decreasing the risk exposure, and will also not require new resources to be allocated. On the other side, ShoeCo. will have to endure with low-profit margins and loss of operational control (Setargie, 2015).
MedCo.
MedCo. is a UAE-based pharmaceutical firm founded in 1983. It excels in manufacturing over-the-counter medicines and pharmaceuticals, and offers a wide range of its generic brand. It also manufactures for other private labels along with localized packaging. Major customers of MedCo. include health clinics, private pharmacies, and ministry of health. The major strengths of MedCo. include its agile and lean manufacturing line, and upholding great operational efficiency and knowledge. MedCo. can also exploit the probabilities of increasing market growth in Ethiopia, rising purchasing power of the consumers, low costs of labor and production, tax incentives, and higher profit margins. Some of the major weaknesses for MedCo. include the cultural difference in management and its resistance to organizational change. It may also face production delays, IP theft, intense market competition, and fragmented distribution channels .
MedCo. may also consider the option of entering the market with a local agent, which will help it to reduce initial investment and will provide greater access to local distribution channels. Whereas, choosing this entry mode will also increase its risk of being counterfeited, having low-profit margins, and IP theft. Similarly, having a subsidiary will not only allow high control but will also provide knowledge protection. The joint venture would offer low entry barriers, low investment, improved position among the competitors, and benefits of local distribution channels. However, through the joint venture, MedCo. may lose its expertise, skills, and knowledge in the market (African Business Central, 2016).
Most Likely To Succeed
Each of the business has a number of market entry options, as well as, a number of associated strengths and weaknesses. I believe that each one of them can be successful if they undertake adequate action plan for their investments in Ethiopia. For instance, in the case of CareCo., it should find a local business partner that should have an extensive distribution and market channel access. CareCo. should also engage in hedging techniques so that it can overcome the risks of currency exchange in order to have substantial profit margins. It should also undertake measures to secure its credit lines with international and local banks. In the case of ShoeCo., it should keep continuing with the local agent and should research more into exporting opportunities and revise its financial estimations. ShoeCo. may also consider the option of re-venturing. MedCo. should focus on building a strong relationship with authoritative bodies, government, and health ministry. It should also make sure that government supports its business as silent partners. Another alternative for MedCo. is to form a joint venture with a local partner. However, considering the pros and cons, as well as, strengths and weaknesses of every business, I find that ShoeCo. is most likely to succeed as it has a proven track record in the local market and has encountered the similar sociological mentality as it may come across in Ethiopia. Apparently, it can manage its profitability issue by reconsidering the option of a joint venture for improved returns.
References
Abiad, A., Bluedorn, J., Guajardo, J., & Topalova, P. (2015). The rising resilience of emerging market and developing economies. World Development, 72, 1-26. Retrieved From http://www.isid.ac.in/~pu/conference/dec_12_conf/Papers/AbduldeGuiaAbaid.pdf on June 20, 2016
African Business Central. Official Website. (2016). Retrieved From http://www.africanbusinesscentral.com/2015/05/23/ethiopias-economy-to-grow-10-5-in-2016-says-world-bank/ on June 20, 2016
CNBC Africa. Official Website. (2016). Retrieved From http://www.cnbcafrica.com/news/east-africa/2014/08/20/ethiopia-emerging-market/ on June 20, 2016
Government UK. Official Website. (2016). Retrieved From https://www.gov.uk/government/publications/overseas-business-risk-ethiopia/overseas-business-risk-ethiopia on June 20, 2016
Quelch, John A., and Sunru Yong. “Ethiopia: An Emerging Market Opportunity?” Harvard Business School Brief Case 915-501, June 2015. Retrieved On June 20, 2016
Santander Trade. Official Website. (2016). Retrieved From https://en.portal.santandertrade.com/establish-overseas/ethiopia/investing-3 on June 20, 2016
Setargie Ejigu, F. (2015). Foreign Aid vis–a-vis Foreign Exchange Gap under the Ethiopian Economy. Global Journal of Management and Business Research, 15(4). Retrieved From http://journalofbusiness.org/index.php/GJMBR/article/download/1650/1553 on June 20, 2016
