TRADE & COMPETITIVENESS PRACTICE
AN ASSESSMENT OF THE INVESTMENT CLIMATE IN NIGERIA
The Challenges of Nigeria’s Private Sector
GTC07
AFRICA
WORLD BANK REPORT NO: ACS15736
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Table of Contents
Abbreviations and Acronyms
Acknowledgements
Executive Summary
1.Employment in Nigeria
2.Constraints of the Private Sector
3.Conclusions and Recommendations
Chapter 1: Introduction
1.Objective
2.Structure of the Report
3.Macroeconomic Context
4.Rationale for Report and Relevance to Government’s Priorities
5.Lessons Learned So Far
6.Scope, Methodology, and Data
Chapter 2: A Brief Overview of the Private Sector in Nigeria
1.Introduction
2.The Size of the Wage Work Sector in Nigeria
3.A Brief Description of the Nigerian Private Sector
Chapter 3: Non-Farm Enterprises and the Jobs Agenda
1.Introduction
2.The NFE Sector, a Dual Economy
3.Explaining Firm-Level Performance
4.Main Findings
Chapter 4: Performance of the Formal Sector and Investment Climate
1.Introduction
2.The Private Sector, Declining but Hiring
3.The Business Environment in Nigeria
4.A Focus on Light Manufacturing
5.Main Findings
Chapter 5: Understanding Firm-Level Innovation and Productivity in Nigeria
1.Introduction
2.How Innovative Are Firms in Nigeria?
3.The Determinants of Innovation Outcomes
4.The Impact of Innovations on Firm-Level Productivity
5.Conclusions and Policy Implications
Table of Maps
Map 1: Proxy for Economic Activity Growth, over the Period 2003‒2012
Map 2: Proxy for Economic Activity Growth, over the Period 2009‒2012
Map 3: Proportion of Poor Households by State, 2012‒2013
Map 4: Nighttime Lights in 2012
Map 5: Proxy for Economic Activity Growth, over the Period 2003‒2012
Map 6: Proxy for Economic Activity Growth, over the Period 2009‒2012
Table of Figures
Figure 1: Distribution of Employment in Nigeria in 2013
Figure 2: Percentage of Firms Reporting Shrinking, Unchanged, or Growing Workforce during the Last Financial Year (2014)
Figure 3: Number of Formal Firms in the Nigerian States—2014
Figure 4: Percentage of Firms Citing a Major Obstacle in the Investment Climate
Figure 5: Percentage of Firms Citing Obstacles in Different Regions
Figure 6: Percentage of Small, Medium, and Large Firms Citing Major Obstacles
Figure 7: TFP for a Median Manufacturing Firm in Nigeria and Comparator Countries
Figure 8: TFP for a Median Manufacturing Firm in Lagos and the Other Nigerian Regions
Figure 9: Unit Labor Costs in Manufacturing in 2014—Nigeria and its Comparator Countries
Figure 10: Unit Labor Costs in Manufacturing in 2014—Lagos and the Other Nigerian Regions
Figure 11: Firm-Level Innovation Outcomes in 2014
Figure 12: GDP Growth in Nigeria (Percent)
Figure 13: States and Geopolitical Zones in Nigeria
Figure 14: Distribution of Nigeria’s Working Population (Fifteen to Sixty-FourYears Old) in 2013
Figure 15: Distribution of the Labor Force, by Employer
Figure 16: Proportion of NFEs by Sector, 2012‒2013
Figure 17: Distribution of Microenterprises in 2012‒2013, by Zone
Figure 18: Proportion of Microenterprises by Sector, 2012‒2013
Figure 19: Distribution of Applicants to Round Three of YouWin, by Zone
Figure 20: Number of Formal Firms in the Nigerian States, 2014
Figure 21: Composition of the Formal Private Sector, 2010
Figure 22: Annual Employment and Sales Growth Observed by Zone, 2011–2013
Figure 23: Proportion of Firms Growing, Constant, or Shrinking, 2011‒2013
Figure 24: TFP and Labor Productivity in Nigerian Zones, Compared to a Median Firm in Lagos
Figure 25: Log of Real Sales per Paid Worker (US$)
Figure 26: Log of Total Factor Productivity
Figure 27: Log of Sales per Paid Worker, by Gender (US$) for Both GHS Rounds
Figure 28: Log of Total Factor Productivity, by Gender for Both GHS Rounds
Figure 29: Log of Sales per Paid Worker, by Type of NFE (US$) for Both GHS Rounds
Figure 30: Log of Total Factor Productivity, by Type of NFE for Both GHS Rounds
Figure 31: Biggest Obstacles Faced by NFEs
Figure 32: Top Three Obstacles by Zone
Figure 33: Access to Electricity and Generators
Figure 34: Sales Growth (in Real Terms) and Employment Growth between 2011 and 2014
Figure 35: Percentage of Firms Reporting Shrinking, Unchanged, or Growing Workforce during the Last Financial Year (2014)
Figure 36: Percentage of Firms Citing a Major Obstacle in the Investment Climate
Figure 37: Percentage of Firms Citing Obstacles in Different Regions
Figure 38: Percentage of Small, Medium, and Large Firms Citing Major Obstacles
Figure 39: Losses Due to Power Outages, Nigeria and Comparator Countries
Figure 40: Losses Due to Power Outages, by Region
Figure 41: Electricity and Fuel Costs, Nigeria and Comparator Countries
Figure 42: Firms Saying That Bribes Are Needed
Figure 43: Firms Identifying Corruption as a Problem and Firms Believing They Need to Pay Bribes
Figure 44: Percentage of Firms with Credit and Firms Credit Constrained
Figure 45: Percentage of Firms with Credit, by Firm Size
Figure 46: Total Tax Rate—Percentage of Profits
Figure 47: Hours per Year Spent on Tax Administration
Figure 48: Breakdown of Export Costs
Figure 49: Breakdown of Import Costs
Figure 50: TFP for a Median Manufacturing Firm in Nigeria and Comparator Countries
Figure 51: TFP for a Median Manufacturing Firm in Lagos and the Other Nigerian Regions
Figure 52: Unit Labor Costs in Manufacturing—Nigeria and Its Comparator Countries
Figure 53: Unit Labor Costs in Manufacturing—Lagos and the Other Nigerian Regions
Figure 54: Capital Productivity is High Compared to the Comparator Countries
Figure 55: Biggest Problems in Filling Positions and Average Number of Days
Figure 56: Percentage of Production and Nonproduction Full-Time Permanent Employees Trained
Figure 57: Firm-Level Innovation Outcomes
Figure 58: Level of Product Innovativeness in Nigeria (Percentage of All Firms)
Figure 59: Types of Process Innovation in Nigeria (Percentage of All Firms)
Figure 60: How Were Product Innovations Developed?
Table of Tables
Table 1: Innovation Rates in Nigeria and Comparator Countries
Table 2: Investment in Research and Development (R&D)
Table 3: Key Statistics on Non-Farm Enterprises in Nigeria, 2012‒2013
Table 4: Household and Firm Characteristics for Household Enterprises and Microenterprises
Table 5: Transitioning from a Household Enterprise to a Microenterprise
Table 6: Sales and Employment Growth across Nigeria.
Table 7: Comparison of Investment Climate Variables, 2007 and 2014
Table 8: Increase in TFP if Nigeria Improved Various Aspects of Its Investment Climate
Table 9: Drivers of Labor Turnover in Nigeria
Table 10: Investment in Research and Development (R&D)
Table 11: Investment in Equipment, Training and Intellectual Property
Table 12: Innovation Rates in Nigeria and Comparator Countries
Table 13: Innovation Rates by Sector and Type of Firms
Abbreviations and Acronyms
BMGF / Bill and Melinda Gates FoundationCAC / Corporate Affairs Commission
CBN / Central Bank of Nigeria
CPI / Consumer Price Index
DB / Doing Business
DFID / Department of International Development
ECA / Excess Crude Account
FCT / Federal Capital Territory
FMA&RD / Federal Ministry of Agriculture and Rural Development
GDP / Gross Domestic Product
GHS / General Household Survey
GON / Government of Nigeria
HH / Household
HHI / Herfindahl-Hirschman Index
ICA / Investment Climate Assessment
IMF / International Monetary Fund
IP / Intellectual Property
LSMS / Living Standard Measurement Study
MFI / Micro Finance Institution
MSME / Micro, Small and Medium Enterprises
NBS / National Bureau of Statistics
NECO / National Examinations Council
NFRA / National Food Reserve Agency
NFE / Non-Farm Enterprises
PIB / Petroleum Industry Bill
R&D / Research and Development
SD / Standard Deviation
SME / Small and Medium Enterprises
SMEDAN / Small Enterprise Development Agency Nigeria
TFP / Total Factor Productivity
Acknowledgements
This report was prepared by a World Bank team led by Johanne Buba, under the overall guidance of John Speakman, practice manager; Marie Francoise Marie-Nelly, Nigeria country director; and Indira Konjhodvic, Nigeria country program coordinator. In alphabetical order, the coauthors are Johanne Buba, Xavier Cirera (chapter 5 on the impact of firm-level innovation on productivity), George Clarke (chapter 4 on the productivity of the formal sector), and Michael Wong.Other contributors include Moustapha Doukoure, Irene Nnomo Ayinda-Mah, and John Litwack. The team would like to acknowledge the collaboration with Elliot Rasmuson, Keith Garett, Eleonora Bertoni, Paul Corral,and Vasco Molini.
The team would like to thank the Enterprise Survey unit and, in particular, JoshuaSeth Wimpey (DECEA) and Jorge Luis Rodriguez Meza (DECEA) for conducting the Enterprise Survey in Nigeria. The team would also like to acknowledge the invaluable participation of DFID in this survey.
Executive Summary
The Nigerian economy has experienced significant economic growth over the last decade.According to the latest national statistics,GDP growth averaged 5.3 percent from 2011 to 2014, and in 2014, when GDP grew at 6.2 percent, most of the growth was attributed to manufacturing, construction, trade, and service sectors.However, the economy remains highly exposed to fluctuations in the international oil market.Oil prices in international markets have fallen from approximately US$115 per barrel in June 2014 to approximately US$40per barrel today.[1] The impacts on the macro economy can already be observed.[2] There is an urgency to diversify the Nigerian economy.
Economic opportunities seem to vary widely across the country. Economic activity in Nigeria is significantly more concentrated in the southern part of the country, with the exception of Kano in the north.Using night lights data as a proxy for economic activity, the data reveal a progressive convergence of the less economically vibrant central and northern regions toward the south during the last decade (map 1). The same data, however, indicate that this trend has slowed in recent years (map 2). As a result, most economic activities are still located in southern Nigeria, with the exception of several growth concentrations in Abuja, Kano, Kaduna, Jos, and Sokoto.
Map 1: Proxy for Economic Activity Growth,over the Period 2003‒2012
Average nighttime light intensity growth / Map 2: Proxy for Economic Activity Growth, over the Period 2009‒2012
Average nighttime light intensity growth
Source: Authors’ calculations based on Defense Meteorological Satellite Program (DMSP) data
Note: Nighttime lights are used as a proxy for economic activity, following the work done by Henderson et al. (2012) and Michalopoulos and Papaioannou (2013). These data are collected by satellite images every night and averaged over the course of the year. Each geographic cell constitutes a pixel of roughly one square kilometer. The intensity of each pixel is reported as a number ranging from zero to sixty-three, where every observation above sixty-three is capped at sixty-three. Intensity for each state is the average intensity of all cells that constitute a state.
With a median age of fourteen years old, Nigeria’s population of 180 million people will require an estimated fortymillion new jobs by 2030 to absorb new labor market entrants.Nigeria’s population pyramid remains dominated by children and youth, and with 3percent annual growthof the population, the working-age population in Nigeria is growing disproportionately.[3] While explicit unemployment in Nigeria—by the ILO definition—appears to be well under 10percent, low-productivity jobs in agriculture and services currently account for the majority of employment.Only ninemillion out of eighty-sevenmillion working-age adults are indeed wage workers in either the private or the public sector, while the rest of the population works in agriculture or is self-employed. The government, therefore, considers the shortage of productive jobs to be the most important current challenge in the country.
This report presents employment in Nigeria from a worker perspective as well as from a firm perspective. Using recent household data,the report complements the report“More, and More Productive, Jobs for Nigeria:aProfile of Work and Workers” (World Bank 2015) andprovides an overview of employment opportunities in Nigeria from a labor force perspective. This report also intends to investigate the job agendafrom a firm perspective and represents a first attempt to better understand the drivers of economic diversification, firm growth, and employment in Nigeria.
The report draws on two different data sources: the General Household Survey (GHS) and the Enterprise Survey. The GHS provides data on the contribution of wage work to the Nigerian economy and its share of total employment. The GHS module on non-farm household enterpriseprovides information on the dynamics of micro and small enterprises, as well as the constraints they face. The Enterprise Survey,conducted in Nigeria from April 2014 to February 2015, was used to analyze the dynamics and constraints of the formal sector in Nigeria. The survey sample, which was limited to formally established companies with five or more employees, was composed of firms across nineteen states engaged in manufacturing, construction, or retail and wholesale trade. The results are presented in four regional groups: Lagos; Kano and Kaduna states; other southern states (Abia, Abuja, Anambra, Cross River, Enugu, Ogun, and Oyo); and other northern states (Gombe, Jigawa, Katsina, Kebbi, Kwara, Nasarawa, Niger, Sokoto, and Zamfara). A module on innovation was also administered to a portion of the surveysample. Details on the Enterprise Survey are provided in Annex 2.
Two background papers underpin the analysis presented in this report:Firm Performance in Nigeria(Clarke2015)looks at firm-level productivity using the Enterprise Survey, and The Impact of Firm-Level Innovation on Productivity in Nigeria(Cirera2015)looks at firm-level innovation and the link with productivity.
1.Employment in Nigeria
What constitutesemployment in Nigeria? The Nigerian population was estimated at 158 million in 2011. Some eighty-seven million are between fifteen and sixty-four years old and constitute the working-age population. Within this group, there is additional distinction between the inactive population—those not looking for a job—and the active population(also calledthelabor force)—employed or looking for a job. In Nigeria, approximately thirty-three million people make up the inactive population. The remaining fifty-four million people constitute the labor force, of which a very small fraction (about 5.5 percent) is unemployed.
Most people work for themselves.Analysis of the GHSresults suggeststhat more than 70 percent of the Nigerian labor force is self-employed or in agriculture: approximately 35percent worksin agriculture—self-employed or for private and/or public farms—and more than 40 percent is engaged in a non-farm household enterprise (NFE). Only 15 percent of the labor force is employed in a wage work occupation (as their main occupation). This is strikingly different from labor force distributionsobserved in lower-middle income countries in East Asia (Indonesia, Philippines, or Vietnam), where wage work typically comprises30‒60 percentof overall employment.A regional analysis demonstrates that the share of wage work in Nigeria’s South South and South West zones is more in line with the East Asian distribution, while in the North East and North West, only 8percent of the employed labor force works in the wage sector (and primarily in the public sector).
Figure 1: Distribution of Employment in Nigeria in 2013
Source: Estimates based on GHS 2012‒13
Note: Population-weighted proportion. Questions used: “In your main activity/employment, what is the employer in this job?” combined with “Have you received wages, salary, or other payments either in cash or in other forms from this employment for this work?” and “In what sector is this main activity?”
Private sector and job creation
What is the size of the private sector in Nigeria?This report defines the private sector as the population of firms that employ individuals through remuneration in the form of a salary, a daily wage, or a per-task payment.This definition is broad, and as a result, includes both formal and informal firms. As shown in figure 1 above, the private sector accounts for a very small—but growing—proportion of employment.Whilethe predominance of public sector employment has been slowly declining across all geopolitical zones in Nigeria, the growth of the private sector varies widely across the country. For example, private sector wage work is a significant contributor in the South South and South West zones (12 percent of labor force), while almost nonexistent in the North East and North West zones (1 percent of labor force).
Nigeria has approximatelythirty-sevenmillion enterprises, of which a significant proportion are characterized as Non-Farm Household Enterprises (NFEs). Approximately 40 percent of Nigerian enterprises are farm enterprises, while the rest are mainly informal,non-farm enterprises (NFEs). According to the Small Enterprise Development Agency Nigeria (2014), there are approximately sixty-eight thousand small firms (10‒49 employees) and forty-seven hundred medium firms (50‒200 employees). In 2013, 63 percent of all households were operatinganNFE. This rate wasparticularly high in the South West (74 percent) and North West (67 percent) zones, and with relatively high population densities, these two regions account for more than half the NFEs in the country. Almost all NFEs operate without a registration, and about 50 percent are operated from inside the household. In 2013, the average size of an NFE was 1.5 employees, including the owner.