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1.1 The Country
Ethiopia is almost five times bigger in the size of the United Kingdom and 27 times in the size of the Netherlands, is geographically located in the east of Africa with border line Somalia(1626 km) from east , Eritrea(912km) on north ,Sudan(1606 km) from the west and Kenya(830 km from the south. Ethiopia has geographically importance due to easy access to reach the Middle East and Europe, increase its importance in international trade. Geographically having an area of approximately 1.12 million square kilometers (444,000 square miles) out of which land is on 1,119 million square kilometers and water is on 7444 square meters.
Ethiopia is high plateau with central mountain ranges almost over the country is divided by Great Rift Valley. The major rivers in Ethiopia are Blue Nile, Awash, Baro, Omo, Tekezie and Wabe Shebele. Ethiopia has also small amount of natural resources with small reserves of platinum, gold, potash, copper, hydropower and natural gas.
1.2 The People
Ethiopia is country with around 80 million people, and in comparison to other country it comes on 14th rank in world. Almost more than 80 percent of the population still lives in the rural areas. The age structure in Ethiopia is 0-14 years are (46.1%),15-64 years are (51.2%) and 65 years and over are (2.7%).Ethiopia has average birth rate of 2.7%.
In Ethiopia is total freedom of religious practice, and the Christianity and Islam are the two main religions in Ethiopia with other religions which are in very number most of them are located in south side.
Almost two-third of the population used the three main languages Amharic, Oromiffa and Tigrigna the official language of the Ethiopian government is Amharic. In schools, colleges and university teaching and medium of instruction are in English, also used mostly in the banking, insurance and business transactions, Arabic and Italian languages are also widely used in Ethiopia.
Almost the 42.7 % of over 15 years old people can read and write mean having basic literacy rate. The Ethiopian government is spending almost 5.5 percent of their GDP in education programs.
1.3 The Government
Ethiopia is conventional short form of name, and conventional long form of name is Federal Democratic Republic of Ethiopia. The first time election was held in 1995 and country adopted a new constitution and the government there is known as the federal republic government. The government involves in the foreign policy and relations, defense system and common interest & benefits.
The Federal State divisions are in nine ethnically based states vested with powers for self administration. The FDRE represent the common peoples interest and peoples of the states, the federal government is structured as a lines of bicameral parliament, with the Council of Peoples’ representatives being the highest authority of the Federal Government the representative of Councils Members are elected democratically for six year term.
1.4 Cities and Towns
Addis Ababa, the largest city and capital of the Ethiopia, also is the seat of the Federal Government of Ethiopia. The capital city was founded in 1887 and population of around about 3 million. Addis Ababa is the host city for Organization for African Unity and the United Nations Economic Commission for Africa; also there is more international organization with their headquarters and branch offices. Addis Ababa I also centre point for business, commerce and industries. In Addis can find different manufacturing plants located in and around the city.
There are lots of entertainment and sport facilities in the city, with national parks. The main centre of point are resort centers with hot springs and lake, all of them are easily accessible through road.
The other important and big cities in term of trade and industries having potential of expansion are Awassa, Dire Dawa, Gondar, Dessie, Nazareth, Jimma, Harar, Bahir Dar, Mekele, Debre Markos and Nekemte. All of them are interconnected with Addis through road,most of them have their historical importance with good infrastructure facilities.
1.5 THE ECONOMY
The Ethiopian economy is totally dependable on agriculture which has 45% of the Gross Domestic Product (GDP), 65 % of total exports and 85% of employment. Coffee is the main export product and its alone having a share of over 85 % of total agricultural exports. In Ethiopia different crops in different area of the country cultivated but the main crops are cereals, pulses, coffee, cotton, tobacco, fruits, sugarcane and oil seeds.
The industrial sector plays also big role in economy and having almost 11% of share in total GDP, which provides their product to local and global markets. The most important products in term of local market and export are textiles, foodstuffs, tiles, paper, beverages, cement, semi- processed leather, finished leather products and non-metallic products.
In Ethiopia even it is small reserve amount of natural resources and it contribute only 1% to the total GDP, but still there are lots of opportunities in mining to explore and contribute in Ethiopian economy.
There is total monopoly of Ethiopian Telecommunications corporations over the telephonic services open-wire, microwave radio relay; radio communication in the HF, VHF, and UHF frequencies; 2 domestic satellites provide the national trunk service.
Ethiopia has only 1 public TV broadcast station which broadcasting it nationally and only 1 public radio broadcaster with stations in each state, there are some commercial and dozens of community radio stations.
Till 2010 in Ethiopia there 61 airports, out of which 17 airports are with paved runways and 44 airports are unpaved. The railway is under joint control of Ethiopia and Djibouti, but most of it is inoperable and need lots of improvement and expansion to improve the transportation. The conditions of Ethiopian roads are also not in very good conditions out of 36469 km long road only 6980 k are in better conditions other are unpaved around about 29849 km. Ethiopia has 9 merchant marine 8 cargo and 1 roll on/ roll off, they are landlocked and uses the ports Djibouti in Djibouti and Berbera in Somalia. In Ethiopia transportation is a big problem and effects also in the business. Ethiopian government takes this problem very seriously and many projects are on progress for improvement and modernization of Ethiopian transportation system.
1 .6Banking Systems
In Ethiopia banking system was introduced in 1905 with the coordination of Bank of Egypt and the first name of bank was Bank of Abyssinia which is controlled by private company in Ethiopia. Later in 1931 it was replaced by the Bank of Ethiopia.
During the Italian invasion period and subsequent British occupation Ethiopia become one of the important places for East Africa Currency Board. Later again it is renamed as State bank of Ethiopia having two active departments involves in the process of separate function of issuing banks and commercial bank. In 1963 the bank is divided into two parts two new bank national Bank of Ethiopia involves in the process of centralizing and issuing bank and the second one the commercial bank of Ethiopia.
In 1974 there was merging of maximum of financial institutes available tat time including state owned also some of them are
- The Agricultural and Industrial Development Bank
- The Savings and Mortgage Corporation of Ethiopia
- The Imperial Savings and Home Ownership Public Association
- The Addis Ababa Bank
- The Banco di Napoli
- The Banco di Roma
In 1975 change in government policy and change into Marxist government bring again lots of changes in banking system like nationalization of private financial institutes and insurance companies. The big and important commercial bank of Ethiopia is now known as Addis Ababa bank and the total control of all banks and financial institutes are under supervision of National Bank of Ethiopia. The Ethiopian Insurances corporation take all power and control for the all insurance companies and for the home loan and renovation loan is provide by the new Housing and savings bank.
1.6.2 Current Conditions
The whole banking system condition is still undeveloped and need lots of improvement and development. In Ethiopia there is also no stock exchange and foreign bank as the banking system is still not globalized, while higher government authorities are afraid of losing control over the economy because of globalizing the banking system. That’s why they have full control over the banking system even they decide the interest rate as per the high inflation rate. Below provided table to have a look on the condition of ease of doing business in Ethiopia.
Table 1 Business Climate of Ethiopia
As National Bank of Ethiopia is Ethiopian central bank and the state owned Commercial Bank is one of the biggest and largest bank in Ethiopia having approx. control of more than 75% of total banking assets in Ethiopia, tables 2 tried to explain the banking system in Ethiopia.
Table 2 Value of Ethiopian Bank Assets
Insurance companies and other financial institutions
In Ethiopia the Ethiopia Insurance Corporation controls 10 insurance companies performing business in more than 200 branches all over the country Below in the table the number of branches and their capital are explained figures available are from 2007 and till then only nine insurance companies are in business the 10th company (Lion Insurance Company) comes in business after 2007 that’s why it is not mention in table.
Table 3: Branches and Capital of Insurance Companies in Ethiopia (Capital in Millions of Birr)
No stock exchange exists
Other Types of Finance/Financial Market
After the establishment of the government in 1994/1995. It started also and supporting for the development of microfinance industry, the purpose of Ethiopian government to developed the microfinance industry to help poor people in both rural and urban area. According to the 2005 microfinance industry report in Ethiopia that there are 23 microfinance industries and around about more than 1 million peoples are connected directly to the industry.
As from above it is cleared that government had totally prohibited any kind of foreign company involved in the process of financial or banking services in country. In Ethiopia microfinance industry can be opened by people having Ethiopian nationality and having full 100% share in company or by those organization which are totally settled and have their registration under the law and having their head office in Ethiopia. As in country most of the microfinance initial capital comes from the foreign investors and which leads to the not clear transparency of microfinance industry, normally person investing in the microfinance industry local or foreigner must enlist as a shareholder.
As government authorized high authorities decided interest rate according to the high inflation rate, and in microfinance industry there is no fixed interest rate on credit according to law minimum interest on credit is 3%, which is a loss for those people wants to open microfinance industry in rural areas because of added administrative cost in capital of investment.
Top ten reasons to do business in Ethiopia
- Political and social stability;
- Macro-economic stability and growing economy;
- Adequate guarantees and protections;
- Transparent laws and streamlined procedures;
- Ample investment opportunities;
- Abundant and trainable labor force;
- Wide domestic, regional and international market opportunity;
- Competitive investment incentive packages ;
- Welcoming attitude of the people to FDI; and
- Pleasant climate and fertile soils.
2. Foreign Market Entry Strategy
Strategy is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.
2.1.2 Strategic Decisions
- Strategic decisions are likely to be complex in nature. This complexity is a defining feature of strategy and strategic decisions and is especially so in organizations with wide geographical scope, such as multinational firms, or wide ranges of products or services.
- Strategic decisions may also have to be made in situations of uncertainty about the future.
- Strategic decisions are likely to affect operational decisions: for example, an increased emphasis on consumer electronics would trigger off a whole series of new operational activities, such as finding new suppliers and building strong new brands. This link between overall strategy and operational aspects of the organization is important for two other reasons. First, if the operational aspects of the organization are not in line with the strategy, then, no matter how well considered the strategy is, it will not succeed. Second, it is at the operational level that real strategic advantage can be achieved. Indeed, competence in particular operational activities might determine which strategic developments might make most sense.
- Strategic decisions are also likely to demand an integrated approach to managing the organization. Managers have to cross functional and operational boundaries to deal with strategic problems and come to agreements with other managers who, inevitably, have different interests and perhaps different priorities.
- Managers may also have to sustain relationships and networks outside the organization, for example with suppliers, distributors and customers.
- Strategic decisions usually involve change in organizations which may prove difficult because of the heritage of resources and because of culture. These cultural issues are heightened following mergers as two very different cultures need to be brought closer together – or at least learn how to tolerate each other. Indeed, this often proves difficult to achieve – a large percentage of mergers fail to deliver their ‘promise’ for these reasons.
2.1.3 Levels of Strategy
Corporate-level strategy: Itis concerned with the overall purpose and scope of an organization and how value will be added to the different parts (business units) of the organization.
Business-level strategy: It is about how to compete successfully in particular markets.
Operational strategies: These are concerned with how the component parts of an organization deliver effectively the corporate and business-level strategies in terms of resources, processes and people.
2.1.4 Strategic Management
Strategic management includes understanding the strategic position of an organization, strategic choices for the future and turning strategy into action.
- The strategic position is concerned with the impact on strategy of the external environment, an organization’s strategic capability (resources and competences) and the expectations and influence of stakeholders.
- Strategic choices involve understanding the underlying bases for future strategy at both the business unit and corporate levels and the options for developing strategy in terms of both the directions and methods of development.
- Strategy into action is concerned with ensuring that strategies are working in practice.
- Strategy development processes are the ways in which strategy develops in organizations.
The most general ‘layer’ of the environment is often referred to as the macro environment. This consists of broad environmental factors that impact to a greater or lesser extent on almost all organizations. It is important to build up an understanding of how changes in the macro-environment are likely to impact on individual organizations. A starting point can be provided by the PESTEL framework which can be used to identify how future trends in the political, economic, social, technological, environmental and legal environments might impinge on organizations. This provides the broad ‘data’ from which the key drivers of change can be identified. These will differ from sector to sector and from country to country. Therefore they will have a different impact on one organization from another. If the future environment is likely to be very different from the past it is helpful to construct scenarios of possible futures. This helps managers consider how strategies might need to change depending on the different ways in which the business environment might change.
Within this broad general environment the next ‘layer’ is called an industry or a sector. This is a group of organizations producing the same products or services. The five forces framework and the concept of cycles of competition can be useful in understanding how the competitive dynamics within and around an industry are changing.
The most immediate layer of the environment consists of competitors and markets. Within most industries or sectors there will be many different organizations with different characteristics and competing on different bases. The concept of strategic groups can help with the identification of both direct and indirect competitors. Similarly customers’ expectations are not all the same. They have a range of different requirements the importance of which can be understood through the concepts of market segments and critical success factors.
2.2.1 Key driver of change
Key drivers of change are forces likely to affect the structure of an industry, sector or market.
There is an increasing trend to market globalization for a variety of reasons. In some markets, customer needs and preferences are becoming more similar. For example, there is increasing homogeneity of consumer tastes in goods such as soft drinks, jeans, electrical items (e.g. audio equipment) and personal computers. The opening of McDonald’s outlets in most countries of the world signaled similar tendencies in fast food. As some markets globalize, those operating in such markets become global customers and may search for suppliers who can operate on a global basis. For example, the global clients of the major accountancy firms may expect the accountancy firms to provide global services. The development of global communication and distribution channels may drive globalization – the obvious example being the impact of the internet. In turn, this may provide opportunities for transference of marketing (e.g. global brands) across countries. Marketing policies, brand names and identities, and advertising may all be developed globally. This further generates global demand and expectations from customers, and may also provide marketing cost advantages for global operators. Nor is the public sector immune from such forces. Universities are subject to similar trends influenced by changing delivery technologies through the internet. This means, for example, that there is developing a genuinely global market for MBA students – particularly where the majority of ‘tuition’ is done online.
Cost globalization may give potential for competitive advantage since some organizations will have greater access to and/or be more aware of these advantages than others. This is especially the case in industries in which large volume; standardized production is required for optimum economies of scale, as in many components for the electronics industry. There might also be cost advantages from the experience built through wider-scale operations. Other cost advantages might be achieved by central sourcing efficiencies from lowest-cost suppliers across the world. Country-specific costs, such as labor or exchange rates, encourage businesses to search globally for low cost in these respects as ways of matching the costs of competitors that have such advantages because of their location. For example, given increased reliability of communication and cost differentials of labor, software companies and call centers are being located in India, where there is highly skilled but low-cost staff. Other businesses face high costs of product development and may see advantages in operating globally with fewer products rather than incurring the costs of wide ranges of products on a more limited geographical scale.
The activities and policies of governments have also tended to drive the globalization
of industry. Political changes in the 1990s meant that almost all trading nations function with market-based economies and their trade policies have tended to encourage free markets between nations. Globalization has been further encouraged by technical standardization between countries of many products, such as in the automobile, aerospace and computing industries. It may also be that particular host governments actively seek to encourage global operators to base themselves in their countries. However, it is worth noting that in many industries country-specific regulations still persists and reduces the extent to which global strategies are possible. Also, the early 2000s have seen a rise in citizen activism about the impact of globalization on developing countries – most notably at meetings of the World Trade Organization
Changes in the macro-environment are increasing global competition which, in turn, encourages further globalization. If the levels of exports and imports between countries are high, it increases interaction between competitors on a more global scale. If a business is competing globally, it also tends to place globalization pressures on competitors, especially if customers are also operating on a global basis. It may also be that the interdependence of a company’s operations across the world encourages the globalization of its competitors. For example, if a company has sought out low-cost production sites in different countries, these low costs may be used to subsidize competitive activity in high-cost areas against local competitors, thus encouraging them to follow similar strategies.
2.2.2 Industries and sectors
The macro-environment might influence the success or failure of an organization’s strategies. But the impact of these general factors tends to surface in the more immediate environment
through changes in the competitive forces on organizations. An important aspect of this for most organizations will be competition within their industry or sector. Economic theory defines an industry as ‘a group of firms producing the same principal product or, more broadly, ‘a group of firms producing products that are close substitutes for each other. This concept of an industry can be extended into the public services through the idea of a sector. Social services, health care or educations also have many producers of the same kinds of services. From a strategic management perspective it is useful for managers in any organization to understand the competitive forces acting on and between organizations in the
same industry or sector since this will determine the attractiveness of that industry and the way in which individual organizations might choose to compete. It may inform important decisions about product/market strategy and whether to leave or enter industries or sectors.
It is important to remember that the boundaries of an industry may be changing – for example, by convergence of previously separate ‘industries’ such as between computing, telecommunications and entertainment. Convergence is where previously separate industries begin to overlap in terms of activities, technologies, products and customers. There are two sets of ‘forces’ that might drive convergence. First, convergence might be supply-led – where organizations start to behave as though there are linkages between the separate industries or sectors.
This is very common in the public services where sectors seem to be constantly bundled and un-bundled into ministries with ever-changing names (‘Education’, ‘Education and Science’, ‘Education and Employment’, ‘Education and Skills’ etc.). This type of convergence may be driven by external factors in the business environment. For example, governments can help or hinder convergence through regulation or deregulation – a major factor in the financial services sector in many countries. The boundaries of an industry might also be destroyed
by other forces in the macro-environment. For example, e-commerce is destroying the boundary of traditional retailing by offering manufacturers new or complementary ways to trade – what are now being called new ‘business models’12 – such as websites or e-auctions. But the real test of these types of changes is the extent to which consumers see benefit to them in any of this supply-side convergence. So, secondly, convergence may also occur through demand-side (market) forces – where consumers start to behave as though industries have converged. For example, they start to substitute one product with another (e.g. TVs and PCs). Or they start to see links between complementary products that they want to have ‘bundled’. The package holiday is an example of bundling air travel, hotels and entertainment to form a new market segment in the travel industry.
2.2.3 Competitors and market
An industry or sector may be a too-general level to provide for a detailed understanding
of competition. For example, Ford and Morgan Cars are in the same industry (automobiles) but are they competitors? The former is a publicly quoted multinational business; the latter is owned by a British family, produces about 500 cars a year and concentrates on a specialist market niche where customers want hand-built cars and are prepared to wait up to four years for one. In a given industry there may be many companies each of which has different capabilities and which compete on different bases. This is the concept of strategic groups. But
competition occurs in markets which are not confined to the boundaries of an industry and there will almost certainly be important differences in the expectations of different customer groups. This is the concept of market segments. What links these two issues is an understanding of what customer’s value.
Strategic groups are organizations within an industry or sector with similar strategic
characteristics, following similar strategies or competing on similar bases. These characteristics are different from those in other strategic groups in the same industry or sector. For example, in grocery retailing, supermarkets, convenience stores and corner shops are three of the strategic groups. There may be many different characteristics that distinguish between strategic groups but these can be grouped into two major categories .First, the scope of an organization’s activities (such as product range, geographical coverage and range
of distribution channels used). Second, the resource commitment (such as brands, marketing spend and extent of vertical integration). Which of these characteristics are especially relevant in terms of a given industry needs to be understood in terms of the history and development of that industry and the forces at work in the environment. 2.
The concept of strategic groups discussed above helps with understanding the similarities and differences in the characteristics of ‘producers’ – those organizations that are actual or potential competitors. However, the success or failure of organizations is also concerned with how well they understand customer needs and are able to meet those needs. So an understanding of markets is crucial. In most markets there is a wide diversity of customers’ needs, so the concept of market segments can be useful in identifying similarities and differences between groups of customers or users. A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the
2.2.4 Opportunities and threat
The critical issue is the implications that are drawn from this understanding in guiding strategic decisions and choices. There is usually a need to understand in a more detailed way how this collection of environmental factors might influence strategic success or failure. This can be done in more than one way. This identification of opportunities and threats can be extremely valuable when thinking about strategic choices for the future.
A strategic gap is an opportunity in the competitive environment that is not being fully exploited by competitors. By using some of the frameworks described in this chapter, managers can begin to identify opportunities to gain competitive advantage in this way:
Opportunities in substitute industries
Organizations face competition from industries that are producing substitutes. But substitution also provides opportunities. In order to identify gaps a realistic assessment has to be made of the relative merits of the products/technologies (incumbent and potential substitutes) in the eyes of the customer. An example would be software companies substituting electronic versions of reference books and atlases for the traditional paper versions. The paper versions have more advantages than meet the eye: no hardware requirement (hence greater portability) and the ability to browse are two important benefits. This means that software producers need to design features to counter the strengths of the paper versions; for example, the search features in the software. Of course, as computer hardware develops into a new generation of portable handheld devices, this particular shortcoming of electronic versions might be rectified.
Opportunities in other strategic groups or strategic spaces
It is also possible to identify opportunities by looking across strategic groups – particularly if changes in the macro-environment make new market spaces economically viable. For example, deregulation of markets (say in electricity generation and distribution) and advances in IT (say with educational study programs) could both create new market gaps. In the first case, the locally based smaller-scale generation of electricity becomes viable – possibly linked to waste incineration plants. In the latter case, geography can be ‘shrunk’ and educational
programs delivered across continents through the internet and teleconferencing (together with local tutorial support). New strategic groups emerge in these industries/sectors.
Opportunities in the chain of buyers
It was noted that this can be confusing, as there may be several people involved in the overall purchase decision. The user is one party but they may not buy the product themselves. There may be other influencers on the purchase decision too. Importantly, each of these parties may
value different aspects of the product or service. These distinctions are often quite marked in business-to-business transactions, say with the purchase of capital equipment. The purchasing department may be looking for low prices and financial stability of suppliers. The user department (production) may place emphasis on special product features. Others – such as the marketing department – may be concerned with whether the equipment will speed throughput and reduce delivery times. By considering who is the ‘most profitable buyer’ an organization
may shift its view of the market and aim its promotion and selling at those ‘buyers’ with the intention of creating new strategic customers.
Opportunities for complementary products and services
This involves a consideration of the potential value of complementary products and services. For example, in book retailing the overall ‘book-buying experience’ is much more than just stocking the right books. It also includes an ambience conducive to browsing (such as reading areas or coffee bars) and opening hours to suit busy customers. Crucially it could also be concerned with employing staff who are themselves ‘book oriented’ and can provide a book recommendation service.
Opportunities in new market segments
Looking for new market segments may provide opportunities but product/service features may need to change. If the emphasis is on selling emotional appeal, the alternative may be to provide a no-frills model that costs less and would appeal to another potential market. For example, the Body Shop, operating in the highly emotional cosmetics industry, challenged the accepted viewpoint. This was achieved by the production of purely functional products, noted for their lack of elaborate packaging or heavy advertising. This created new market space by
attracting the consumer who wanted quality skin-care products without the added frills. In contrast, the Starbucks coffee-shop chain created new market space by transforming drinking coffee into an emotional experience rather than merely functional. A special atmosphere was created within the coffee bars.
Opportunities over time
When predicting the impact of changes in the macro- or competitive environments
it is important to consider how they are going to affect the consumer. Organizations can gain first-mover advantages that way. Cisco Systems realized that the future was going to create a significant need for high-speed data exchange and was at the forefront of producing equipment to address this future need. It identified new market space because no one else had assessed the likely implications of the internet boom. This meant that it could offer specially designed products well ahead of its rivals, giving it an important competitive edge.
2.2.5 International Diversity and International Strategy
Reasons for International diversity
There are many reasons for organizations to follow a strategy of internationalization. First, there may be market-based reasons:
- The globalization of markets and competition can be seen as both cause and consequence of the internationalization of individual organizations. There is evidence of homogenization in some markets; for example, the international success of consumer products such as the Sony PlayStation and the worldwide reach of sports-clothing manufacturers such as Nike and Adidas-Solomon. Globalization thereby relates not only to contextual factors such as worldwide homogenization of consumer demand but also to the adoption of global strategies in which activities are tightly integrated and coordinated on a cross national basis and the whole world is seen as a potential area of operation . Companies such as Boeing not only offer their products on a global basis but are ready and able to exploit the unique advantages associated with particular countries and locations on a worldwide basis.
- Firms acting as suppliers to industrial companies may follow their customers when these internationalize their operations. When BMW set up a manufacturing site in Spartanburg, South Carolina, USA, for example, it continued purchasing transmission systems from its established German suppliers. Similarly, it may be necessary for organizations to have a presence in the home market of global customers (i.e. organizations with a global reach such as Boeing) to gain access to, or credibility with, their global divisions or subsidiaries.
- By expanding its markets internationally a firm can bypass limitations in its home market. An example of such market seeking international expansion is the French Bank BNP Paribas that accelerated the search for possible acquisitions in the USA after considering the French banking sector close to consolidation. Often it is those organizations with small home markets which lead internationalization (as can be seen in the chapter-end case example in Chapter 3 about the European brewing industry – where Heineken (The Netherlands), Carlsberg (Denmark) and Guinness (Ireland) are the most internationalized companies.
Strategies of internationalization
It may also be pursued to build on and take advantage of strategic capabilities:
- By internationalizing companies are able to broaden the size of the market so as to exploit strategic capabilities. For example, the American online retailer Amazon.com and coffee retailer Starbucks were able rapidly to gain strong competitive positions in countries such as the United Kingdom by leveraging their existing strategic capabilities in this new market.
- The internationalization of value-adding activities allows an organization to access and develop resources and capabilities in ways not possible in its ‘home’ country thereby enhancing its competitive advantage and competitive position. In order to improve its cost efficiency General Electric, for example, employs a workforce of more than 11,000 in India who conduct back-office activities such as analyzing credit risks and analyzing insurance claims, for services provided in other countries around the globe.
- Companies may also seek to enhance their knowledge base by entering markets that are strategically important as a source of industry innovation – for example, the USA for computer software, Germany for industrial control equipment, or the UK for popular music.
There may also be economic benefits in strategies of internationalization:
- International diversification allows firms to reap economies of scale by expanding the size of the market they serve. The opportunity for exploiting economies of scale is likely to be highest in markets characterized by cross-nationally homogenous consumer tastes and needs. In such markets products can be developed and produced in centralized manufacturing operations without need for substantial adaptation to local demand.
- Stabilization of earnings across markets: for example, in the automobile industry, the presence of Toyota in all three of the major ‘arenas’ (North America, Europe and Asia Pacific) allows it to balance reduced sales in one arena due to stagnating economic conditions by sales in an arena with more positive economic growth rates. And the recovery in the Asian markets in the early years of this century allowed firms such as Canon, Sony and Matsushita Electric to expand production of mobile phones, digital cameras and flat-screen televisions despite continued stagnation in Europe.
2.3Foreign market selection and entry mode
The process of market entry requires an organization to select attractive and profitable national markets and to identify the appropriate entry mode. The selection of national markets involves considerations at the macro level and in terms of competitive and market conditions.
Some factors that require particular attention in comparing the attractiveness of international markets are these:
- Macro-economic conditions reflected in indicators such as the GDP and levels of disposable income which help in the estimation of the potential size of the market. Companies must also be aware of the stability of a country’s currency which may affect its income stream.
- Thepolitical environment may create significant opportunities for organizations. It is common for regional development agencies in the United Kingdom to provide investment incentives to foreign investors. For example, Scottish Enterprise provided a subsidy in order to attract the 2003 MTV music awards to the Scottish capital Edinburgh, while political and regulatory changes can create opportunities for international expansion as with Deutsche Post.
- The infrastructure of international markets will also be an important factor in assessing the attractiveness of national markets for entry, in particular:
- – Existing transport and communication infrastructure;
- – Availability of necessary local resources such as appropriately skilled labor;
2.1 Market analysis of industry level
Market development is often affected by Industrial growth. Concept of industry life cycle, the characteristic of an industry can be concluded. These are some factors very important for the company who wants to enter into a new market. Industry life cycle concept is discussed in the following paragraphs,
2.1.1 Industry life cycle
Different market conditions and strategic options can be expected at different stages. Every industry varies differently in terms of strategies, objectives, functions, and value-creating activities.
Firms depend on their research and development (R&D) activities in the introduction stage of life cycle. Later, during the mature stage, the function of product managers plays a greater emphasis on production efficiencies and processes in order to lower manufacturing
Costs. As the industry life cycle pass from one stage to another, the historical competitive strategies normally become ineffective. There are many key factors change as industry cycle moves into new stage. For example the success is related with innovation timing and low cost. When growth begins to decrease, the differentiated product, market and anticipation of needs often affect the success. Just like human-being products and services also has their life cycle. i.e.Introduction, Growth, Maturity, Decline.Maturity stages of an industry can be ‘Transformed’ or followed by a stage of rapid growth if consumer tastes change, technologic innovations take place, or new development occur in the general environment. Take China’s dairy industry as an example. While the improving of people’s living condition, the tastes of Chinese people had been influenced, and the demand of different dairy
Products have increased.
When a new product is introduced in the market it is unfamiliar to the customers. During this stage operating losses would be high, sales will be low,rapid changes in technology would required. It also important to have large chunk of cash to finance the operations. Due to few market players and much growth, competition tends to be limited. There are some challenges during introduction stage:
- Creating a user friendly product and introducing it in the market in such a way that it directly appeals to the customers.
- Generating enough exposure so the product emerges as the ‘standard’ by which all other competitors’ products are evaluated.
However, some of the firms entering during early stages of the industry life cycle may not succeed in producing the dominant design and therefore might have to exit already before the industry mature.
Growth as the second stage of industry life cycle is characterized by strong increase in sales.
During growth stage it is important to build brand image by achieving consumer preferences. This requires strong brand recognition, differentiated product, and the financial resource to support a variety of value?chain activities such as marketing and sales, customer service, and research and development.
Revenues in growth stage moves at an accelerating rate because:
- New consumers are trying the product.
- A growing proportion of satisfied consumers are marking repeat purchases.
In general, as a product moves through its life cycle, the proportion of repeat buyers to new purchasers increases. The emergence of a dominant model is very important to industry evolution because these models generate opportunities to achieve economies of scope.
At maturity stage market becomes saturated and there are few opportunities to find new buyers. It’s no longer possible to ‘grow around’ the competition, so direct competition becomes predominate. With few attractive prospects, marginal competitors begin to exit the market. At the same time, rivalry among existing competitors intensifies because there is often close price competition & at the same time that expenses associated with attracting new buyers will also rise. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customer become more price sensitive. Companies must strive to emphasize the key functional areas during of the fourth stage and to attain a level of parity in all functional areas and value creating activities. Therefore, even though controlling production cost may be a primary concern during the maturity stage, managers should not totally ignore other functions such as marketing and R&D. Otherwise, the company become so focused on lowering cost that could lose market trend.
The decline stage occurs when industry sales and profits begin to fall. In this stage, customers become more and more sensitive to price, and the price decreases over time. During the later stage of the industry life cycle the major type of competition is price competition. As competition becomes a zero?sum game rivalry may heat up considerably.
The presence of economies of scale tends to result in larger firms, higher capital intensity, and a more concentrated industry structure. Inefficient firms may diversify out of the industry and may seek to consolidate through mergers with former rivals. In a summary, a firm’s strategic options in decline stage become dependent on the actions of rivals. The basic strategies that are available in the decline phase are:
Industrial life cycle concept gives comprehensive overview of a given industry by separating the life cycle into different stages. The characteristics of each stage namely introduction, growth, maturity, and decline often have different effects for market entry strategy.
2.2 Market analysis of market level
The market analysis of industry level has provided general information of external environment. An overview at market level is also essential for the market development.
The two analysis of Market level from different perspectives are as follows:
- The concept of strategic group analysis, which is from researcher point of view, explains the understanding of similarities and differences in the characteristics of ‘producers’? those organizations that are potential or actual competitors.
- And the concept of market segmentation, which is from manager point of view, is used in understanding similarities and differences between groups of customer. In following paragraphs, these two concepts are discussed in detail.
2.2.1 Strategic group
Strategic group refer to meaningful collections of firms or substructures within an industry. This concept is often used to examine different aspects of competitive strategy. The concept of strategic group analysis allows firms to make more sense of competition in analyzing complex industries, in defining firms’ competitors, in illustrating the competitive positions available within an industry. In this part, the reason to apply strategic group and the approach to indentify the strategic group are reviewed.
Reasons to apply strategic group analysis
First, strategic grouping assists a firm identify barriers to mobility that protects a group from attacks by others. Mobility barriers are factors that deter the movement firms from one strategic position to another. For example, in dairy industry, the major barriers protecting the quality oriented group are technology, brand image, and established distribution channels.
The second value of strategic grouping is that it assists a firm to identify groups whose competitive position many be marginal or tenuous. The firm may anticipate that these competitors may try to move into another group or to quit the industry.
Third, strategic groupings assists chart the future directions of firms’ strategies. If all strategic groups are moving in a similar direction, this could indicate a high degree of intensity of competition. For example, the competition in functional milk segments has intensified in recent years as many firms have entered those product segments.
Fourth, strategic group are useful in thinking through the implication of each industry trend for strategic group as a whole. Is the trend increasing or decreasing entry barriers in a given group? Will the trend decreasing the viability of a group? If so, in what direction should the strategic group move? Such analysis can help in making predication about industry evolution.
Identifying strategic groups
The natural way to assign firms to strategic group is by reference to the characteristics of their strategies with group members displaying similar strategies. However, firms within a group resemble one another closely and recognize their mutual dependence most sensitively.
Combined with different characteristics that distinguish between strategic groups two major categories can be concluded.
The first category is the scope of organization’s activities, such as product range, area covered and channels of distribution
Second category is the commitment to resources, such as amount spent on brands, marketing and extent of vertical integration.
2.2.2 Market segments
Market segmentation refers to segmentation of market based on similar needs ,tastes and preferences. An understanding of how consumers differ by market segment would be extremely valuable to participants in the food marketing system. Food producers, processors, and retailers require a deeper and more detailed understanding of consumer preferences with regards to their socioeconomic characteristics in order to develop products and marketing strategies that effectively target individual consumer needs. The approach assists dairy companies to develop differentiated products that better meet the needs of the consumers. It also enables consumers to make purchase decisions which result in a greater degree of consumer satisfaction.
There may be variety of reasons for varied customers needs. Theoretically, any of these reasons could be used to identify market segments. For example, in a particular market segmentation can be based on in terms of age group. Particular product can be served for particular age group. This helps in understanding the dynamics of market.
Globalization involves selling of products and services across the countries which affects consumers’ behavior and attitude. Globalization helps in creating the greater acceptance of product in the global market among consumers specially in case of as consumer electronics, cars, fashion, home appliances, food products, and beverages.
Relative market share
The share in relation to that of competitors within a market segment is an important consideration. Companies that have built up most experience in servicing a particular market segment should not only have lower costs in so doing, but also have built relationships which may be difficult for others to break down. For example, a small local dairy company competing against the big company on the basis of its low prices underpinned by low costs of distribution and marketing is confined to that segment of the local market that values low price.
How to identify and serve the market segments
Improving of living conditions in developing countries and the consumer ability of pursuing diverse and innovative products combined with increased productivity of dairy industry allow segmentation to be indentified differently. There are many approaches to study market segments. The means?end chain model consists of three levels:
Attributes stand for the relatively concrete and tangible characteristics of the food product. Based on the attributes of the product consumers can satisfy their end needs. One of the key advantages of this approach is that it links explicitly physical attributes of food products to the needs of consumers. This increases the ability of results for successful product development as well as for effective and targeted communication strategies.
Opportunities in new market segments
Looking for new market segments may provide opportunities, but product or service features may need to change. Furthermore, indentifying the strategic customer is crucial in new market segments. Therefore, for the dairy products the retailer is one of the strategic customers as the way it displays, promotes and supports the dairy products in store is hugely influential on the final consumer preferences.
The market analysis of market level gives specific background of one market by providing the concepts of strategic group analysis and market segmentations. Strategic group are used to understand the competition in one given industry. It can be accessed on the basis of two categories:
- The scope of organization’s activities
- The resource commitment
According to the research objective, there are two statements critical for this research. The one is the strategic groupings assist to chart future directions of firms’ strategies and the other is strategic group are useful in thinking through the implication of industry trend for the strategic group as a whole.
According to research background, the dynamic of consumer demand and emerging of younger generation are considered as a major trend of dairy market.
2.4 Ethiopian Government Policy for Foreign Investor
ETHIOPIAN INVESTMENT AGENCY
The Ethiopian Investment Agency (EIA) is a government agency established in 1992 to promote private investment, primarily foreign direct investment. The overall activities of the Agency is supervised and followed up by an Investment Board, which is chaired by the Minister of Industry. The EIA is headed by a director general who is also a member of the Board.
‘To be a strong institution, which will make Ethiopia one of the leading investment destinations in Africa’
‘To enhance investment, both foreign and local, in the country by promoting its resource potentials and investment opportunities, initiating policy and implementation measures to create conducive investment climate and providing efficient services to investors so as to bring fast and sustainable economic development in the country’
- Promoting the country’s investment opportunities and conditions to foreign and domestic investors;
- Issuing investment permits, work permits, trade registration certificates and business licenses;
- Registering technology transfer agreements and export-oriented non-equity-based foreign enterprise collaborations with domestic investors;
- Negotiating and, upon government approval, signing bilateral investment promotion and protection treaties with other countries;
- Advising the government on policy measures needed to create an attractive investment climate for investors; and
- Assisting investors in the acquisition of land, utilities, etc., and providing other pre- and post-approval services to investors.
Areas of Investment
All areas of investment are open for foreign investors other than the following:
a. Areas reserved exclusively for the government:
- Postal services with the exception of courier services;
- Transmission and supply of electrical energy through the integrated national grid system; and
- Passenger air transport services using aircraft with seating capacity of more than 20 passengers.
b. Areas reserved for Ethiopian nationals:
- Banking, insurance and micro credit and saving services;
- Travel and shipping agency services;
- Broadcasting services; and
- Air transport services using aircraft with a seating capacity of up to 20 passengers
c. Areas reserved for domestic investors:
- Retail trade and brokerage;
- Wholesale trade (excluding supply of petroleum and its by-products as well as wholesale by foreign investors of their products locally produced);
- Import trade (excluding LPG, bitumen and up on the approval from the Council of Ministers, material inputs for export products);
- Export trade of raw coffee, chat, oil seeds, pulses, hides and skins bought from the market and live sheep, goats and cattle not raised or fattened by the investor;
- Construction companies excluding those designated as grade 1;
- Tanning of hides and skins up to crust level;
- Hotels(excluding star-designated hotels), motels, pensions, tea rooms, coffee shops, bars, night clubs and restaurants excluding international and specialized restaurants;
- Travel agency, trade auxiliary and ticket selling services;
- Car-hire and taxi-cabs transport services;
- Commercial road transport and inland water transport services;
- Bakery products and pastries for the domestic market;
- Grinding mills;
- Barber shops, beauty salons, and provision of smith workshops and tailoring services except by garment factories;
- Building maintenance and repair and maintenance of vehicles;
- Saw milling and timber making;
- Customs clearance services;
- Museums, theaters and cinema hall operations;
- Printing industries.
Under the Investment Proclamation No.280/2002 (as amended), a foreign investor, who invests on his own, except in consultancy services and publishing, is required to invest not less than US$ 100,000 in cash and/or in kind for a single project. However, if he invests in partnership with domestic investor(s), the minimum capital required of him is US$ 60,000. The minimum capital required of a wholly foreign investor investing in consultancy services or publishing is US$ 50,000, which may be in cash and/or in kind. But this capital amount is lowered to US$ 25,000 if he invests in partnership with domestic investor(s). A foreign investor reinvesting his profit or dividends, or exporting at least 75% of his outputs, however, is not required to allocate a minimum capital.
A conducive tax environment
- Corporate income tax is 30%;
- Excise tax is levied (minimum 10%) on selected local or imported products;
- Income taxes range from 0-35% on monthly income of $16.50 and above;
- Capital gains tax – share of companies 30%; business 15%;
- Rental income tax (on annual rental income) is 0 -35%, dependent upon the level of rental income;
- Stamp duty-leasing is 0.5% of value;
- Export duty is zero; and tax treaties to avoid double tax payment are signed with several countries, along with bilateral treaties for the protection and promotion of investments.
Investment guarantee and protection
a) Guarantee against expropriation
The Constitution of the Federal Democratic Republic of Ethiopia protects private property. The Investment Proclamation also provides investment guarantee against measures of expropriation and nationalization that may only occur for public interest and in compliance with the requirement of the law. Where such expropriations are made, the Government provides adequate compensation corresponding to the prevailing market value of property and such payment is effected in advance.
Ethiopia is a member of the World Bank-affiliatedMultilateral Investment Guarantee Agencywhich issues guarantees against non-commercial risks to enterprises that invest in signatory countries. The country has also concluded bilateral investment promotion and protection agreements with a number of developed and developing countries.
b) Remittance of funds
Foreign investors are guaranteed to make the following remittances out of Ethiopia in convertible foreign currency at the prevailing exchange rate on the time of remittance:
- Profits and dividends accruing from investment;
- Principal and interest payments of external loans;
- Payments related to technology transfer agreements;
- Proceeds from the sale or liquidation of an enterprise;
- Proceeds from the transfer of shares or of partial ownership of an enterprise to a domestic investor;
Expatriates employed in an enterprise may remit, in convertible foreign currency, salaries and other payments accruing from their employment in accordance with the foreign exchange regulations or directives of the country.
Legal and Judicial System
Ethiopia has a hybrid legal system consisting of features from the Anglo-Saxon Common Law system and the Roman-based Civil Law system. Despite this feature, the majority of its laws are codified like most Civil Law jurisdictions. Among others, the codified laws include the Civil Code, the Civil Procedure Code, the Criminal Code, the Criminal Procedure Code, the Commercial Code, and the Maritime Code. There are also other legislations promulgated from time to time by the Parliament. These laws codified or otherwise have to be published in the official and authoritative government gazette, namely, the Negarit Gazeta. The codes which had been promulgated during the second-half of the twentieth century and other legislation have undergone amendments or revisions throughout the past years.
Ethiopia has a dual system of courts – a Federal Judiciary with the Supreme Court at the top along with a separate and parallel judicial system in each Regional State. The Federal Supreme Court, the Federal High Court and the Federal First Instance Court constitute a single Federal Judiciary, having jurisdiction over all cases pertaining to federal matters. Likewise, there is a similar court structure in each Regional State that has jurisdiction over all regional matters. The Judiciary has to dispense justice not only between individuals, but also between the state and the citizens. In administering justice, the Federal courts are directed by internationally accepted principles of justice as well as the laws (include ratified international agreements) of Ethiopia. The practice of law is reserved for Ethiopians.
The Federal Constitution is the supreme law of the land, overriding all other legislations in the country. Second in the hierarchy are Proclamation, which are legislations enacted by the House of Peoples’ Representatives (Parliament), the highest authority of the Federal Government. Third, Regulations (Council of Ministers Regulations) are executive enactments. The lowest enactments are Directives, issued by Government Departments to execute Proclamations and Regulations.
3. Opportunities in Ethiopia
As there are lot of business opportunities in Ethiopia in different sectors, as it is not possible to address all of them. But try to concentrate and search opportunities on some of basic and important business sectors for foreign investors
3.1 Business Opportunities in Manufacturing Sector
The manufacturing sector plays an important role in economy of Ethiopia it has almost a share of 5% of GDP and 37.8% to the annual output value of industrial production in 2008/09 (Central Statistical Agency Statistical Abstract 2009). The important manufacturing sectors in Ethiopia areproduction of food, beverages, tobacco, textiles and garments, leather goods, paper, metallic and non-metallic mineral products, cement and chemicals.The production of textile, leather products and food and beverages are one of the most important industries for investment, because of its geographical advantage of easy and fast access to Middle-East and Europe.
In manufacturing section we discussed on business opportunities in textile and garment industry and leather product.
3.1.1 Textile and garment
In 1939 under the Italian government supervision and technology, the first textile factory was opened. Presently the current textiles industry involves in the process of spinning, weaving and processing. Ethiopia presently having 5 public and indefinite number of privately own small and big factories involves in producing various kind of garments like shirts, kids wear, uniforms etc. for the domestic and international markets.
Presently in Ethiopia textiles industry is major changes are under process regarding development and modernization of technology, with the advantage of very cheap, skilled and work-oriented motivated manpower. This under process development in textile industry improves dramatically and helped also in the country’s impressive economic growth in last few years. In Ethiopia the big and successful export potential with lot of possibilities of expansion is only possible because of easily availability of raw material like raw cotton and other natural fibers.
The whole cycle of fast growth and excellent opportunity in Textile industry is depend on the availability main raw material (raw cotton).Ethiopian government is supporting and promoting local production of cotton In the Awash valley the whole production process is carried out, which has approximately around fifty thousand hectares land is under production of cotton. The contribution by the small farmers who produces also a very good quality of raw cotton in total around forty-five thousand hectares . There is lot of opportunities available for the expansion of production in Ethiopia mainly in the areas of Omo-Gibe, Wabi Shebelle, Baro Akobo, Blue Nile and Tekeze River basins. The whole textile industries output is depend on production and timely supply of raw material(raw cotton).
The Ethiopia has all those things which are essential and important for a competitive textile industry for foreign investors to attract like easily availability of raw materials, cheap manpower and energy which make more interest in investment that other African countries, not only this the government also actively supporting the textile industries in term of modernization and producing best skilled manpower and management in keeping mind to attract new investors in textile industry.
Output and Products
Ethiopia’s textile industries having all kind of small, medium and large government owned and privately owned enterprises, involves actively in the operations like spinning, fabric formulation, dyeing, finishing and sewing.
In the manufacturing sector the Ethiopian textile industry is one of the most important industry and it is the third largest manufacturing industry, only second to the food, beverages and leather industry. In the financial year 2000-01, textile industry having the total output value of 81.38 million USD (1 USD=8.6 birr) approximately, the total contribution of textile industry towards in the economy was 1.35% in GDP and the total contribution to the manufacturing industry was 8.31%.
The Ethiopian textile industries involves in the action of producing mostly in 100% cotton textiles. Almost all of them involves in the same kind of products manufacturing, such as cotton yarn, cotton fabrics, bed sheets, blanket, knitwear etc. Most of the manufactured the cotton yarn in the Ethiopian textile industry is supplied to the local market. It is approximately estimated that the annual hand-loomed fabric is around 95 million square meters.
Supply of raw material and accessories
Most of the raw material used in textile industry like chemical fiber, wool, dyestuffs, and chemical are depends on the import, the main material cotton is widely produces in Ethiopia and it is easily available in local market.
Ethiopian Export Promotion Agency publish that in the financial year 2000-01 it was observes that there was apparent increase against the last year in textile industries in both in the varieties and quantities of textile export. In the category of variety it was increased from 6 kinds, mostly cotton yarn and bleach cloth manufactured from pure cotton, to over 20 kinds including gray cloth pure cotton, bleach cloth, knitwear, bedding products etc. From these mentioned varieties the gray cloth manufactured from pure cotton is the one of the major export item, almost contributing to 75% of the total export quantity.
Ethiopia’s textile industries in export targeted mainly at European and African markets. In Europe, the export markets for Ethiopian textiles are Italy, Sweden, and Belgium etc. African major export markets are Djibouti, Kenya, and Swaziland etc.
Ownership and geographical distribution of textile enterprises
Because of new investment and foreign policy by the Ethiopian government in recent years, the lots of changes in textile industries take place such as privatization and the favorable opportunities for the investment of foreign and local private investment in textile industries, ownership of the industry is having totally different kinds of option to invest/run. The types of ownership are mostly in Ethiopian textile industries are privately owned enterprises, public enterprises, partnership enterprise, shareholding Corporation and individual enterprises etc.
The Ethiopian textile industries is classified in two sectors public and private, there are currently 19 public and 16 private industries. Most of the public industries having capacity of producing in very large scale, the play a very important leading roles in textile industry, as counted by the number of public industries it gives a lot of opportunities for employment, total output values, income from sales etc.
Most of the textile industries are situated inhighly populated large and medium cities. Out of the total 35 textile industries in Ethiopia, 18 are in Addis Ababa. Rest of the textile industries are located in Amhara and Southern (S.N.N.P) regions.
Marketing System of textile products
Most of the products such as yarn, fabric and blanket manufactured by Ethiopian textile enterprises are usually distributed by private trading companies to the local market. The rest of the product for export is mostly handled by the industries self.
Imported textiles having a maximum market share in Ethiopian local market and almost nearly one thousand small-scale/family-owned trading companies and also a small number of large trading companies are involved in the import business of textiles.
Favorable Conditions for the Development of the Textile Sector inEthiopia
Abundant Cotton Resources
Ethiopia covering an area of 1.1036 million square kilometers and best conditions for the agriculture such as fertile land, rich geographical and weather conditions, and abundant water resources. Locally cotton production is already developed, and it has made maximum contribution to providing the basic requirement of raw material by the textile sub-industries. Ethiopia has a large area of irrigated land which is very suitable for producing cotton. There is also great possibility and potential for further expansion of the production and increasing the current yield.
Abundant cheap labor resource
Ethiopia having a population of more than 70 million and with having a cheap cost of manpower, Ethiopia has potential of providing sufficient cheap labor force with cost-competitiveness for the development of labor intensive textile sub-industry. The cost of the manpower in the Ethiopian textile industry is cheaper than some Asian countries with developed textile industries, such as China, India, Pakistan and Bangladesh but also than some African countries such as Tunisia, Mauritius, Kenya, etc.
Support through policy and incentives
Ethiopia government defines textile industry as the key industry for the development of industrialization as well as the exploring of local resources to promote export in accordance with the policy of “Agriculture Development led Industrialization (ADLI)”. Ethiopian government long term strategy is not only to develop the textile and garment industry and expand market shares in local market, but also to develop a competitive, profitable industry in the export market.
The Ethiopian government strategy in textile industries has been steadily pushing towards market-oriented reform by means of developing more private sectors and making it easier and attractive for foreign investors. As it is clear export promotion is of paramount importance, the government has issued a series of export incentives. The Ethiopian government has developed an friendly environment for the development and modernization of textile industries.
Investment policy and incentives
According to the Ethiopia government newly revised investment policy, the minimum amount of capital required for foreign investors is yet minimized, to create a easy conducive investment environment.
-The minimum capital amount required for foreign investors on a single investment project has been minimized to 100, 000 USD from 500, 000 USD for totally owned invested projects and for joint venture it has been minimized to 60, 000USD from 300,000USD.
In addition, Ethiopian government provides a series of incentives for foreign investors, such as:
-Remittance of foreign currency of profit and dividends from investment
-Exemption from income tax from 1-5 years etc.
In order to promote and increase export, also there are various flexible taxation encouragement measures have been undertaken such as export tax refund, tax coupon and bonded warehouse.
The Ethiopian Ministry of Trade and Industry also provided nowadays textiles and garment export forum to attract local textile and garment exporters to discussed current issues and future development for textile and garment industries in order to promote the export of textiles and garments.
Increased Domestic Demand
Ethiopia is a highly populated and has a large territory. The average growth rate of the population is 2.7%.
According to the current country economic development program, it is estimated that the average growth rate of GDP in the next coming years will reach the mark of around 7%. Which is possible just because of government right strategy for the development of economy and the progress in reduction of poverty as well as the improvement of people’s living standards, it is assumed that not only the present market demand would increase, but also a new market demand will arise in future. Currently the Ethiopian per capita fiber consumption is around about 1kg, which is far below the world’s average level of 8.7kg and also Africa average level of 3.2 kg. It is also assumed that domestic fiber demand will increase in future at rate of 5% annually and the large and continuously increasing domestic market will help in the development of the textile sector.
Easy access to international market
The consumption of fiber products all over the world has been almost increased five times, while the world population has increased only 1.4 times in the later 20th century.The better and improved living standards quality of peoples has increase 75% in fiber production. In recent years, the economic growth of U.S.A, Europe and Japan, the market demand has increased.
Africa Growth Opportunity Act (AGOA)
In May 2000, the United States of America approved Africa Growth Opportunity Act (AGOA) to give sub-Sahara region of Africa, specifically 48 countries, special preferential trade policy. In August 2001, Ethiopia was entitled AGOA qualifications and is one of the 18 beneficiary countries which can export textiles and garments to the United States free of duty and without quota restrictions.
“Everything but Arms” of the European Union
The European Union (EU) has given preferential trade policy to the Lesser Developed Beneficiary Countries (LDBC) including Ethiopia. Accordingly, Ethiopia is a beneficiary of Everything but Arms initiative of the EU in which all Ethiopian export products except arms can enter the EU market free of duty and without quota restrictions.
Common Market for Eastern and Southern Africa (COMESA)
Ethiopia is a member of the Common Market for Eastern and Southern Africa (COMESA) agreement embracing 20 countries in Eastern and Southern Africa with a population of approximately 353 million. Exports and imports with member countries enjoy preferential tariff rates.
Ethiopia has signed bilateral trade agreements with 16 nations such as Russia, Turkey, Yemen etc which provide legal framework for enjoying most-favoured-nation treatment and removing tariff barriers. According to Generalized System of Preference (GSP), most of the products made in Ethiopia enjoy tariff treatment in the United States, Canada, Switzerland, Norway, Sweden, Finland, Austria, Japan and the majority of EU member nations.
Ethiopia leather exports involve in the processed and semi-processed skins and hides to the global market. Ethiopian leather product like sheepskin has highly international demand for making gloves because of its natural characteristics and quality. Ethiopian leather export of skin and hides involves the export of pickled sheep skin, wet blue sheep skin, crust sheep skin, wet blue goat skin, crust goat skin, crust cow hides, finished garment leather, finished glove leather, lining/upper leather, suede leather, full grain leather, embossed leather and patent leather.
Due to lots of investment opportunities and cheap manpower the manufacturing and export potential of finished leather and leather products is really a very attractive option.
Ethiopia has a very large livestock population, stands first in Africa and 10th position in world for having largest livestock production. It is estimated that currently approximately having 35 million cattle’s, 21 million sheep and 16.8 million goats, which contributed in production of 8.1 million sheepskin, 7.5 million goatskin and 2.7 million hides, there was a advantage of exporting of raw skins and hides, while it cost only 50-60% of the production of semi-processed leather.
Ethiopia Leather industry is involved in the process from semi-processed in different form to fully processed leathers including leather garments, backpacks, shoe uppers, leather purse, gloves and finished leather.
Most of the product is export and the main markets are in Europe, America, Canada, China and eastern countries.
Leather mnufaturing categories
The leather industries, the CSA distinguishes into the two broad categories. One of them is concerned for the manufacturing of footwear, footwear industries is highly attractive and promising in terms of investment, but not too good in term of employment. The anther category is concerned in the tanning and dressing of leather involves in the process of manufacturing of luggage and handbags.
In leather industry the main role played by the raw sheepskin and goatskin which is also having a highly international demand because of its natural characteristics, thickness, flexibility, strength and quality which are used in various products like sports equipment, gloves and garments.
During the last two decades in leather industry in Ethiopia the finished leather and semi-processed hides and skins plays as the second major export product of the country after export of coffee
The maximum contribution in export comes from the sheepskin and it also assumed that almost all of the sheepskin is produced is export, the other product like wet-blue goatskins hides and other skins have also their contribution in export. The Ethiopian exports in comparison in relative to other African countries in terms of share Ethiopia owning total African skin exports of around 51% for sheepskin and 30% for goatskin. Exported leather products go mainly in UK and Italy.
Development needed In leather sector
The leather industries in Ethiopia have really great potential and opportunities for foreign investors to invest but there are some sectors in this industry which seriously needed development. Below we tried to discuss the condition and development need in leather industries.
A major problem in Ethiopia is regular supply of skin and hides, as goat, cattle’s and sheep are used mainly for the purpose of meat. Therefore the raw material for leather industry is available when there is continuous demand for meat is there, which was not in regular term while due to religiously induced fasting seasons. And in fasting period the meat consumption is very less and more in normal days.
The quality of raw material is very big problem in Ethiopia due to which they are facing lot of loss in export. The serious problems which effect badly in quality of raw leather product are flay cuts, putrefaction, dirt , dung , poor pattern.
Because of this problem the exporters are not getting the cost which is required and result is loss in export. The reason for following problem is improper care, knowledge and proper equipment. The Ethiopian government is very serious and some of the projects are under process to overcome from this problem with the active participation of ESALIA, CFC, UNIDO, FAO, UNIC and others.
Berhanu and Kibre (2002) have made an interesting study of competitiveness in the Ethiopian leather sector. For the tanning sector, they have concluded that the main factors affectingcompetitiveness are:
- low capacity utilization;
- the poor economic infrastructure: inefficient infrastructure and inefficient bureaucratic structures combined significantly raises the transaction costs of firms, making it difficult to compete nationally or internationally;
- the technology employed is not updated (regularly), in particular the lack of learning in production management;
- the lack of hard currency to purchase spare parts and inputs;
- the relative lack of export support and/or promotion services
For the leather footwear industry, the main factors which make having affection the competitiveness are poor quality, and the high cost of (imported) inputs.
They conclude that the available resources are not enough for competitiveness, and similarly, the availability of cheap manpower also not work sufficiently to compete internationally.
3.1.3 Recommended Modes of Entry in Manufacturing Sector
Recommend mode for Textile and Garment Industry & Leather products
As we discussed above that the Ethiopian government provides lots of incentives and other options for local and foreign investors in Ethiopia as they believed not only foreign investors are getting benefit the country also get knowledge and skill from them, which help them in further development and modernization.
The foreign investors willing to invest in Ethiopia in textile/leather industries can invest in the following three options:
- whole- self owned enterprises by themselves.
- Setting up enterprises in joint venture with local companies.
- Cooperation with public industries which are on their process of. Listed below are the options available for the cooperation with public industries in manufacturing industry
- Joint venture
- Wholesale ownership
- Contract Management
- Direct investment
3.1.4 SWOT Analysis
- Availability of excellent resources/huge domestic raw material base
- Abundant and inexpensive labour force
- Attractive investment incentive packages and tax structure
- Substantial growth industries: average of circa 10-30% per sector.
- Lack of trained management and skilled worker
- Quality of finished product
- Lower Productivity in various segments.
- Industry is highly dependent on Cotton and raw leather.
- Lack of Technological Development that affect the productivity and other activities in whole value chain
- Large, Potential Domestic and International Market.
- Product development and Diversification to cater global needs.
- Scope for move toward garment infrastructure and value added production
- Scope for effectively exploiting markets with phase out quota regime effectively
- Scope for Technology up gradation on equipment front
- Continuous Quality Improvement is need of the hour as there are different demand patterns all over the world.
- International labor and Environmental Laws.
- To balance the demand and supply.
To make balance between price and quality.
3.2 Business opportunities in Agriculture Sector
Agriculture is the backbone of the Ethiopian economy. The sector contributes about 43% of the GDP and 86% of exports. The export of Ethiopia is dominated by coffee and oil seeds, which together accounted to 50.6% in 2008/09. Other principal export commodities are ‘chat’, flowers, pulses, and live animals.
Ethiopia with 18 major agro-ecological zones and various agro-ecological sub-zones has a suitable climate for growing over 146 types of crops.
3.2.1 Food and beverage crops
Maize is an important crop in Ethiopia. It is grown in the mid highland areas of the country. There are huge tracts of land in all regions suitable for maize farming. Maize is mainly produced in SNNPR and Oromia regions where there are about 1.77 million hectares under cultivation.
Wheat and Barley Farming
Wheat and barley are mostly grown in the highlands and mid highland areas of the country mainly in Oromia (Bale and Arsi Zones) and some parts of Amhara (North Gondar and North Shewa) Regions.
Wheat and barley are the main cereal crops in the country with about 1,095,436 and 1,398,215 hectares under cultivation, respectively. The potential for the private sector in agro-processing and out growers’ scheme of development is significant. It offers excellent opportunities for production of wheat under irrigation in the Afar, Gambella, SNNPR and Somali Regions.
Oil seeds and pulses
A variety of oil seeds (e.g. sesame, rapeseed, linseed, groundnut, sunflower, Niger seed, cotton seed, etc.) are grown in Ethiopia. The demand for sesame has been increasing in the global market making sesame an increasingly important export commodity in Ethiopia. In 2008/09, Ethiopia exported 287,000 tons of sesame valued at 356.1 million USD, accounting for 24.6% of the total export earnings. Rapeseed, linseed, groundnut, sunflower, Niger seed and cotton seed also serve as raw materials for the domestic edible oil industry.
Cultivation of pulses like beans, peas, chickpeas, lentils, soybeans, etc. is also common in Ethiopia. Cultivation is carried out in both the highland and lowland areas of the country mainly by peasant farmers. Currently, the country exports a large quantity of pulses to the international market. There are also a number of factories that process pulses in the country.
Rice could suitably grow in many parts of the country. The predominant potential areas are:-
- West central highlands of Amhara Region (Fogera, Gonder Zuria,Dembia, Takusa and Achefer);
- North West lowland areas of Amhara and Benshangul Regions (Jawi, Pawi, Metema and Dangur);
- Gameblla regional state (Abobo and Etang Woredas)
- South and South West Lowlands of SNNPR (Beralee, Weyito, Omorate, Gura Ferda and Menit);
- Somali Region (Gode);
- South Western Highlands of Oromia Region (Illuababora, East and West Wellega and Jimma Zones).
The major spices cultivated in Ethiopia are ginger, hot pepper, fenugreek, turmeric, cummins, cardamoms, corianders and black pepper. Currently, there are nearly 122,700 ha under spice farming. Spice production reached 244,000 tonnes per year. The potential areas for the cultivation of spice are Amhara and Oromiya, SNNP and Gambella regions. The potential for low land spice farming is estimated to be 200,000ha.
Ethiopia is one of Africa’s leading exporters of coffee generating most of its export earnings. Coffee is grown over 600,000 hectares, the largest of these areas lie in the south and south western highlands of the country. More than 60% of Ethiopian coffee is produced as forest or semi-forest coffee. The four main coffee growing regions in Ethiopia are: Harrar, Ghimbi, Sidama /Yirgacheffe, and Jimma/Keffa.
The country has more genetic diversity among its coffee varieties than any other county. Nine different varieties are cultivated in the four major growing areas.
Ethiopian tea is some of the best quality tea in the world. Ethiopia’s current annual tea production from three private estates is approximately 7000 tons of black tea per annum. The total area covered by tea plantation is 2700 ha and the country only produces black tea but has potential to grow all types of tea. Investment potential exists in large-scale commercial tea production and modern tea blending and packing industries. The tea industry in Ethiopia has been lacking investment. The Government has been proactive to increase private investment in tea plantations. As part of its privatization program for state owned enterprises, in 2000, two estates covering 2,109ha for $27milliom USD were sold to private investors. Moreover, an Indian company that owns and runs the Tata Tea Estate has signed an agreement with a domestic owned private company to manage the tea estate. The company will transfer the latest technology of tea planting, growing, harvesting and manufacturing of black tea, assist in planting tea in 5,000 hectares of land and also have the option of investing in the equity of the company at a future date.
3.2.2 Horticultural crops
Due to Ethiopia’s good agro-climatic circumstances it is able to produce fruits and vegetables throughout the year. Both the low- and highland areas offer good opportunities. The major fruits and vegetables growing areas of the country are summarized as follows
- East Hararghe (eastern part of the country) with vegetables dominating,
- East Shewa (Central Ethiopia in Oromia Regional State) produces both fruits and vegetables including tomato, green beans, orange, mandarin, papaya
- West Shewa (central Ethiopia in Oromia Regional State) which is good for producing tomato and mango fruits
- Arsi (central Ethiopia in Oromia Regional State), particularly in the Awash River basin which is known for its various types of fruits and vegetables,
- Gamo Goffa (Southern Nations, Nationalities and Peoples Regional State), particularly Wolaita and Sidama zones, are good producers of banana, avocado, pineapple, papaya in various districts
- Dire Dawa and Harari (eastern Ethiopia) are also well known production and supply areas of both fruits and vegetables.
- South Tigray and West Gojam regions of Amhara.
The Ethiopian government has selected four priority areas for further development of the horticultural sector. These four areas are Tana Beles, Rift Valley, Dedessa valley and Dire Dawa. In addition, the regional governments have made land available for horticulture purposes close to the regional capitals of Bahir Dar (Amhara), Makelle (Tigray) and Awassa (SNNPR), with good irrigation possibilities. Additional incentive packages are provided by these regional governments for first movers.
The number of small-scale producers involved in horticulture is estimated at 5.7 million farmers. Few smallholder farmers are engaged in out growers’ arrangements and some farmer’s cooperative unions have been established.
The past five years have seen a major change in government policies towards the horticulture sector, reflecting efforts to redirect the economy away from centralized planning to a more liberalized economy. The Government of Ethiopia increasingly considers the private sector as the engine for economic growth and the catalyst for employment creation and export expansion. As a result private companies were allowed and facilitated with an array of incentives to engage in the sector. In the fruit and vegetable sector current production is dominated by two state farms, namely the Upper Awash Agro-Industry Enterprise (UAAIE) and the Horticulture Development Enterprise (HDE), both are currently in the process of being privatized. Alongside the state companies a number of private sector companies are involved in production, processing and export of vegetable products.
Small-scale farmers produce 2.1 million tonnes of vegetables from 260 thousand ha while the State Farms produce 18 thousand tonnes from 880 ha. The supply of vegetables for the European market comprises predominantly green “bobby” beans.
There are two private exporters cultivating around 225 ha of green beans each with outgrowing arrangements with a limited number of farmers in their vicinity. The current production of green beans relies on surface or furrow irrigation. A joint venture near Koka was the first to make the considerable investment in drip irrigation. Van Oers Import and Ethio-Flora have been granted PSOM contribution in 2004 to set up the production, processing and packing of green beans for export to the Netherlands. The state farms have reduced their produce range significantly over the past years and big chunks of its land near Ziway have been leased out for floriculture or are for sale.
Increasing number of investments and experiments are undertaken by private companies to produce peas, mangetouts, cherry tomatoes and asparagus for export to the EU market. Growers in Southern Ethiopia have also successfully started herb production, partly in greenhouses. Also a Dutch grower has already two years experience growing a wide range of vegetables of excellent quality in greenhouses.
Total fruit production is almost 500 thousand tonnes, of which the State Farms account for approximately 10% of production. The main fruits produced and exported are bananas, citrus, grapefruit, mangoes, papaya and avocadoes. The main export markets for these Ethiopian fruits are Djibouti, Saudi Arabia, Yemen and Sudan. The majority of citrus production is still largely confined to state farms, but the productivity of their orchards is on the decline. The production of mangoes is to a large extent scattered and unprofessional; the varieties and quality tend to be not as good in quality as those produced in competing countries and are usually unfit for further processing. Upper Awash has a plantation of mangos, mainly for export and produces mango seedlings for sale. The company Green Focus allocated 270 hectares for mango production in Wollega and plans to cultivate 2,000 hectares more of it in the coming three years and also plans to build an agro-processing plant. However 500 farmers from seven kebeles resettled on the same farmland, halting Green Focus’ plans. A national committee was established to look into the case and come up with a possible solution.
In the Chencha highlands apples have been grown for decades by small farmers. Apple production is expected to go up as the State of Oromia ordered 70,000 apple tree seedlings from Spain. Pineapple production is scattered and has been unstable over the past years, which causes a pineapple drying plant near Nazareth to function below its production capacity.
In addition to the export of relatively low value fruits, recently a number of trials are undertaken to produce more high value crops for export and to access new or more attractive fruits markets (i.e. grapes, avocado, passion fruit). A foreign strawberry grower ventured into the drip irrigated production of this fruit in Ethiopia mainly for the fresh export to the EU market. The Netherlands is now successfully importing strawberries from Ethiopia. The fruits have a high brix level and are harvested 7 days a week. Table grape production has started around Mojo and plans exist to expand to areas in the North of the country. Foreign investors have also come to Ethiopia to start with avocado and passion fruit production and processing, mainly on former state owned plantations.
3.2.3 Livestock and Fishery
Ethiopia is first in Africa and tenth in the world for its livestock population. According to Central Statistics Agency (2008-2009), the country has 49 million heads of cattle, 17 million heads of sheep, 22 million heads of goats and 38 million chickens.
Ethiopia’s potential for fishery development is in its freshwater lakes, reservoirs and rivers. The total fish catch potential from these waters is estimated at 40,000 tons per year. There is also an opportunity for investment in the construction of aquaculture to produce fresh water fish for local and international markets.
This sector offers great investment opportunities. The potential for livestock and fisheries have not been fully exploited.
The investment opportunities in livestock and fishery are in:
- Meat processing;
- Dairy farming and milk processing;
- Raising and fattening of sheep, goat, cattle and camel; and
- Fish farming and processing.
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