(By Bryan Mezue)

Aliko Dangote, Africa’s wealthiest man, recently signed a multi-billion dollar contract to build Nigeria’s largest oil refinery, and turn the oil-rich country into a petroleum exporter. The promise of job creation — the refinery project is expected to employ 8,000 engineers and create jobs for 85,000 Nigerians — has excited many commentators. But there are further reasons for optimism, and lessons for companies looking to understand the power of indigenous entrepreneurs in emerging markets.

First, Dangote’s deal is likely to happen. This is not the first time a multi-billion dollar refinery project has been announced in Nigeria. Chinese investors have negotiated several infrastructure-for-resources deals in Nigeria over the past decade. But, despite their history of success in such deals in other African countries, nothing of substance has materialized in Nigeria. The latest set of contracts, penned in 2010, have run aground due to haggling over Chinese access to oil blocks and the threat of unfavorable regulation.

It is not surprising that China’s success in countries like Angola and Sudan did not translate to Nigeria. In their research on “Winning in Emerging Markets“, Harvard professors Tarun Khanna and Krishna Palepu theorize that emerging economies have unique combinations of institutional voids (e.g. the absence of market intermediaries or inefficient contract enforcement mechanisms). Tarun and Palepu suggest that what works in one country does not necessarily translate to another, and companies have to repeatedly assess their capabilities and decide whether to:

  • Replicate or adapt a business model from a different situation

  • Collaborate with domestic partners or go it alone

  • Navigate the market’s voids or try to fill them/

For Chinese companies, the institutional voids in the Nigeria deal include the complex web of entrenched political interests, and their inability to navigate it. Lobbyist groups with opposing interests like the Nigerian fuel importers and the European exporters with which they are aligned have had more influence on political decisions than Chinese companies. While countries like Angola also have related issues, Nigeria’s size and complexity probably would have led the institutional voids theory to prescribe a different strategy of adaptation and collaboration. China instead had to deal what economist Raymond Vernon calls the obsolescing bargain, in the form of post-agreement power grabs by government agencies.

On the contrary, Khanna’s and Palepu’s theory would suggest that Dangote, as an insider with political connections at the highest level, is better positioned to directly fill the market’s voids and deal with the political risks.

Another reason for optimism is that Dangote’s move might signal a shift to a conglomerate-led growth phase in Africa. Clay Christensen’s research explores interdependent versus modular approaches to customer problems (pdf). Interdependent systems are well suited to situations where “the job-to-be-done” is not well understood, or the current solution is not “good enough”. Modular systems tend to arise after the solution has become “good enough”, and help the industry participants achieve greater efficiency. Underdeveloped emerging markets, with their weak institutions, can be seen as being in the “not good enough” stage. At this stage, the theory would predict the dominance of interdependent business groups with strong links to institutions and government. Thus, transforming the fate of the country’s economy would necessitate pushing these groups to progressively more complex “jobs”.

This is exactly what we have seen in fast-growing East Asian economies, where national business groups like the Korean chaebol or the Japanese keiretsu have been instrumental in the shift from commodities to higher-value manufacturing. Samsung started off as a trading company, evolved to textiles and food processing, and then on to high-value add manufacturing. Today their business spans electronics, shipbuilding, construction and aerospace, among many other industries. Samsung’s story is a microcosm of the Korean growth miracle.

Similarly Dangote’s business, which has already transformed from a trading company to a manufacturer of cement and flour, could now be moving into a new phase of higher value-added products. This step into more complex “jobs” may also draw other African conglomerates into the mix, and create a platform for rapid industrialization.

Of course, it can be argued that Dangote’s move is risky for Nigeria because his success would concentrate too much power in one man’s hand. This is a valid concern — the conglomerates of East Asia have had disproportionate power throughout its growth, and retained significant influence even as the economies move into modular phases. Samsung alone is still responsible for a mind-boggling proportion of Korea’s economy. African governments can mitigate this by diversifying contract awards to various national players, but ultimately it may be a worthy risk for the promise of growth led by indigenous companies.

(Source: HBR)

“Opinion pieces of this sort published on RISE Networks are those of the original authors and do not in anyway represent the thoughts, beliefs and ideas of RISE Networks.”