WHY NIGERIA NO LONGER ATTRACTS FOREIGN DIRECT INVESTMENT
The National Bureau
of Statistics recently released its latest report on foreign direct investment
(FDI) into Nigeria. Besides foreign portfolio inflows (in equities, stocks, and
bonds), Nigeria recorded no direct capital investment inflow in the third
quarter of 2016. This is a dramatic fall from grace for a country that has been
a major recipient of FDI in Africa.
Over the last decade to 2014, Nigeria consistently ranked
among the top three destinations for FDI in Africa – surpassing South Africa,
according to the United Nations Conference on Trade and Development (UNCTAD).
Total FDI inflows ranged between $5 and $7 billion per year, as yield-hungry
investors targeted the oil and gas, real estate, communications, and consumer
goods sectors of Africa's largest economy.
So why has Nigeria's FDI inflows dwindled from its previous highs to a woeful state of zero inflow in Q3 2016? The most definitive reason would be the correlation of FDI to the commodity cycle. FDI to commodity-exporting countries oscillates between the peak and the trough of commodity prices, depending on the prices of crude oil and metals. Oil prices have fallen by over 60 percent from its peak of 2014 to about $45 per barrel currently. UNCTAD reports that Nigeria's FDI fell 34 percent from $4.7 billion in 2014 to $3.1 billion in 2015. Given that oil prices have remained depressed for much of 2016, the dismal FDI data for Q3 indicates another year of decline.
Many commodity-dependent economies around the world have witnessed a similar phenomenon. South Africa's FDI flows dropped by 69 percent from $5.8 billion in 2014 to $1.8 billion in 2015. For Australia, FDI flows declined by 44 percent from $39.6 billion in 2015 to $22.3 billion in 2015. In Canada, FDI flows have fallen by 17 percent from $58.5 billion in 2014 to $48.6 billion in 2015.
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The double-whammy of revenue and FDI declines was expected to foster macroeconomic instability, which can be very significant in the absence of the cushion of reserve savings. This has been the case in Nigeria, where a political transition in the middle of the oil price slump has slowed policy responses.
FDI often flows from multinational corporations in developed countries to less-developed, although investment flows between developed economies are usual, and flows from emerging markets have been increasing in recent years. However, political stability, positive growth outlook, low inflation, and buoyant government spending generally attract long-term investments. Owing to the slump in oil prices in the past 24 months, however, Nigeria has not been an ideal candidate for FDI flows. GDP growth – which averaged about 6 percent over the last decade to 2014 – declined to 2.82 percent in 2015. What is more, Nigeria is now in the throes of a recession as GDP growth contracted in the first three quarters of 2016.
Nigeria's inflation has also been on the upswing. Inflation, which had been in single digit since November 2014, rose to 18.3 percent this October. Given this, real yields on fixed income securities have been quite low or negative. The monetary strategy to keep interest rates high by the Central Bank of Nigeria (CBN), in order to bolster yields, improve dollar liquidity through foreign portfolio investment, and attract longer-term capital investment have proved largely unsuccessful.
Long-term investment commitment in Nigeria is also constrained by near-term concerns about declining disposable income. In the current recession, many Nigerians have lost their jobs and SMEs are facing more intense challenges including rising costs. The consequent weakening in effective demand is deterring foreign investors. We have seen this in the automobile sector and the retail segment, where, indeed, some foreign brands even closed shops and exited the market.
To be fair, the foregoing is a nightmare for monetary policymakers in the Nigerian market that lack adequate breadth and depth. The CBN has tried to respond to the headwinds, in part by imposing capital controls in order to maintain a safe reserve level that is needed to instil investor confidence. But the very same capital controls have been the most criticised policy of the CBN, and it has achieved the very opposite of stabilising the foreign exchange market. Inevitably, even investors willing to make long-term capital investment will nevertheless worry about the current policy which suggests they will face a hurdle when they need to repatriate their profit or capital or both in the future. Even the introduction of a putative floating exchange rate system by the CBN has failed to improve dollar inflow in any significant way.
However, it is very doubtful that government has done enough in the areas where it should really not be constrained to act. Reforms to improve the business climate have yet to gain traction, in spite of stated government commitment. Nigeria has remained rooted in the lower strata of the World Bank's annual Doing Business ranking. The country currently ranks 169th out of 190 countries, reflecting the level of difficulty in performing basic business tasks such as starting a business, getting electricity, enforcing contracts, getting credit, registering property, paying taxes, etc. This has added further pressure to businesses who continue to grapple with acutely inadequate infrastructure and rising security concerns.
Unlike Nigeria, some other African countries including Rwanda, Botswana, Kenya and Namibia have climbed up the Doing Business ranking by significant notches over the past years. But the promise of the Minister of Trade and Investment, Okechukwu Enelamah, on raising Nigeria's ranking by 20 places delivered only one-notch rise in 2016. Also revealing, Nigeria did not sign a single International Investment Treaty (IIT) in the six months of May to October 2016, according to UNCTAD. IITs and Bilateral Investment Treaties (BITs) are key instruments in spurring inward investments. Such treaties offer tax incentives, faster approval processes, clear dispute resolution mechanism, assurance on capital repatriation and more, to lure foreign investors. Only after the UNCTAD report came out did news break on the investment treaty Nigeria signed with Singapore last month.
By contrast, the latest investment treaties UNCTAD documented include Kenya's adoption of a new Finance Act that repealed a 30 percent domestic-ownership requirement for foreign investors. Mauritius introduced various tax incentives, including an eight-year tax holiday, to businesses that purchase a “global headquarters administration licence.” Niger ended its national oil company's monopoly over the sales of petroleum products by approving a joint-venture oil refinery with a foreign corporation. In spite of Nigeria's position for decades as Africa's top oil producer, the country has for more than a decade been saddled with decrepit state-owned refineries.
For Nigeria to turn the tide against its declining FDI data, deliberate multi-agency efforts to bring about needed reforms are imperative. But the efforts must start with bringing credibility to both fiscal and monetary policies. The implementation of the 2016 budget was very inadequate, with capital disbursement below 50 percent of budgetary provision. Such a situation needs to be avoided in the 2017 budget. Government also needs to get its deficit financing strategies right.
On the monetary side, more transparency is required with managing the exchange rate. Allegation of favouritism, which has continued to dog the allocation of foreign exchange in the autonomous interbank market, has to be addressed by the CBN, assuming the apex bank can extricate itself from the problem.
2017 will be critical in forestalling a long-drawn economic decline in Nigeria, a scenario that could continue to see the country fade off the radar of foreign investors. Given the next election cycle, the Nigerian economic recovery needs to happen in 2017 through concerted and effective fiscal and monetary policies, otherwise it may be delayed until the second half of 2019. Oil price rally anticipated in 2017 will be insufficient to, on its own, spark the next round of FDI into Nigeria and push growth back to at least the 6 percent average we had been used to.
Socio-economic Impact of Foreign Direct Investment: Lessons for Nigeria
Foreign
Direct Investment (FDI), the process of acquiring ownership of assets for the
purpose of controlling the production, distribution and other activities of a
firm in another country, plays a significant role in many developing countries.2
Since the mid-1990s, FDI has become the main source of external finance, and on
average, is worth twice as much as official development aid.3 The
variance from low to high FDI reflects the confidence levels of foreign
investors in both the country‘s economy and its firms.4
FDI
offers several benefits to the host country. These often mani-fest in the form
of increased domestic investment, exports and economic growth.5
Consequently, various economies, especially the developing ones, have
instituted policies to further promote FDI. However, experiences have shown
that the development goals of many of these economies require more than mere
aggregate macroeconomic growth. Specifically, it has been argued that they need
to pay close attention to how FDI engenders growth and the impact of this on
other socio-economic factors. This is important for transiting from economic
growth to development.
For a country
like Nigeria, that is keen on FDI inflow it is important to develop a robust
framework for measuring and analysing the developmental impact of FDI on its
economy and citizens. This is particularly relevant given the huge gap between
the country‘s high economic growth and low performance in the areas of
employment, poverty reduction, and human development, among others. What
follows is a review of ways by which Nigeria can benefit from FDI in the areas
of poverty, inequality and unemployment reduction as well as enhance its
favourable impact on gender, education, skill and technological transfer, and
environment and tax revenue.
Socio-economic
Impacts of FDI
Employment: FDI
has the potential to generate employment both directly, those employed by the
FDI Company, and indirect-ly, those working in its servicing companies.6 It has
also been found that when citizens of the host country are found in management
positions, there is greater diffusion of skills which improves the quality of
labour.7 In addition, local workers gain from in-creased employment
if the adopted technology is labour-intensive as opposed to capital-intensive
technology that requires fewer workers.
Labor
compensation: Multinational corporations (MNCs) may
use higher pay to attract highly-skilled local workers and ensure quality and
productivity, given the higher cost of monitoring from abroad. Better
incentives may also be used to reduce staff turnover and minimize the risk of
their productivity advantage spilling over to competing firms. Therefore, FDI
has the potential to in-crease the average wage in the recipient firm and
thereby reduce poverty.9 Conversely, evidence exists that in some
countries where FDI generates employment, it may be to the benefit of the more
educated, wealthy elites and urban citizens. There are also accusations that
MNCs employ unfair competition when taking ad-vantage of low wages and labor
standards in the host country and sometimes violate human and labor rights,
especially in developing countries where governments fail to enforce such rights
effectively.
Gender: FDI
has been found to improve the socio-economic status of women. This affects the
general society as women‘s earnings are mostly expended on improving the health
and nutritional well-beings of their children.11 However, some studies
have shown that FDI has led to the socio and political exclusion of women in
Hungary,12 Mexico and Asia.
Environment: It is possible
for FDI to reduce environmental problems, thereby contributing to sustainable
development in the host country. This often results from the accessibility of
MNCs to modern and environmental-friendly technology. The immediate host
community of FDI projects can also benefit from some corporate social
responsibility activities of the MNCs.14 However, sizeable FDI is
found in extractive industries and this has significant environmental impact.
It has therefore been shown that there is the likelihood for MNCs to relocate
to countries where environ-mental regulations are lax or non-existent.
Backward linkage with
local firms: Domestic firms may benefit immensely from FDI inflows.
This often arises from their collaboration in the supply chain and through
engagement in subcontracting arrangements with foreign-owned firms. They can
also have access to knowledge transfer when they recruit workers with
experience in foreign firms and through competition. Joint ownership is another
avenue by which local firms benefit from FDI.16 However, FDI may also crowd out
local firms.17 Therefore, the ex-tent to which local firms may
benefit from FDI has been shown to be determined by their ability to enjoy a
responsible business environments with technical and credit assistance.
Government revenue: It
is expected that FDI will lead to an in-crease in tax revenue with which the
government can improve on the socio-economic status of its citizens. For this
to be possible, it is however important that the tax system in the host country
be attractive. There must also be policies in place which ensure that the tax
revenue is really collected and that such revenue is used to finance poverty
alleviation programs.
Lessons for
Nigeria
The foregoing
suggests that FDI inflow is desirable, thereby justifying Nigeria‘s efforts at
attracting foreign capital. A major argument is that in addition to the mere
quantitative macroeconomic impact, Nigeria needs to evaluate other
developmental contributions of the type of FDI it is attracting. Evidence
abounds that FDI has the potential to do this. However, preferences should be
accorded to FDI inflows that:
·
Generate employment: the more labour-intensive the better
·
Create an enabling environment for skill acquisition
·
Do not take advantage of poor, local labour law and enforcement to pay low
wages and violate labour rights
·
Allow for the inclusion and growth of women and groups with special needs
·
Adopt environmentally-friendly technology
·
Contribute to community development
·
Invest in non-extractive sectors; since a sector like oil has a significant
environmental impact
·
Do not take undue advantage of poor, local environmental regulations
·
Are willing to employ local firms in the supply chain and joint ventures
·
Do not stifle local competition
·
Foster responsible business environment with technical and credit assistance to
local firms
·
Do not evade tax through transfer pricing and other illicit financial flow
activities
The above
recommendations should be included in the criteria for gauging the desirability
of the existing and potential FDI in Nigeria. This will be a major step towards
enhancing the developmental impact of the country‘s growth experience.
Conclusion
Investing into another country’s economy, buying into a foreign company or otherwise expanding your business abroad can be extremely financially rewarding and might provide you with the boost needed to jump to a new level of success. However, foreign direct investment also carries risks, and it is highly important for you to evaluate the economic climate thoroughly before doing it. Also, it is essential to hire a financial expert who is accustomed to working internationally, as he can give you a clear view of the prevailing economic landscape in your target country. He can even help you monitor market stability and predict future growth.
Remember that we live in an increasingly
globalized economy, so foreign direct investment will become a more accessible
option for you when it comes to business. However, you should weigh down its
advantages and disadvantages first to know if it is the best road to take.
List of Disadvantages of Foreign Direct Investment
1.
Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.
As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.
2.
Risk from Political Changes.
Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.
Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.
3.
Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.
Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.
4.
Higher Costs.
If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.
If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.
5.
Economic Non-Viability.
Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
6. Expropriation.
Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets.
Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets.
7.
Negative Impact on the Country’s Investment.
The rules that govern foreign exchange rates and direct investments might negatively have an impact on the investing country. Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opportunity.
The rules that govern foreign exchange rates and direct investments might negatively have an impact on the investing country. Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opportunity.
8.
Modern-Day Economic Colonialism.
Many third-world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of modern day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitation.
Many third-world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of modern day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitation.
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17 Big Advantages and Disadvantages of Foreign Direct Investment
17 Big Advantages and Disadvantages of Foreign Direct Investment
Economy: Foreign direct investment (FDI) is made into a
business or a sector by an individual or a company from another country. It is
different from portfolio investment, which is made more indirectly into another
country’s economy by using financial instruments, such as bonds and stocks.
There are various levels and forms of foreign
direct investment, depending on the type of companies involved and the reasons
for investment. A foreign direct investor might purchase a company in the
target country by means of a merger or acquisition, setting up a new venture or
expanding the operations of an existing one. Other forms of FDI include the
acquisition of shares in an associated enterprise, the incorporation of a
wholly owned company or subsidiary and participation in an equity joint venture
across international boundaries.
If you are planning to engage in this kind of
venture, you should determine first if it provides you and the society with
maximum benefits. One good way to do this is evaluating its advantages and
disadvantages.
List of Advantages of Foreign Direct Investment
1.
Economic Development Stimulation.
Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.
Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.
2.
Easy International Trade.
Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.
Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.
3.
Employment and Economic Boost.
Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.
Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.
4.
Development of Human Capital Resources.
One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.
One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.
5.
Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.
Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.
6.
Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.
Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.
7.
Reduced Disparity Between Revenues and Costs.
Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily.
Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily.
8.
Increased Productivity.
The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.
The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.
9.
Increment in Income.
Another big advantage of foreign direct investment is the increase of the target country’s income. With more jobs and higher wages, the national income normally increases. As a result, economic growth is spurred. Take note that larger corporations would usually offer higher salary levels than what you would normally find in the target country, which can lead to increment in income.
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Another big advantage of foreign direct investment is the increase of the target country’s income. With more jobs and higher wages, the national income normally increases. As a result, economic growth is spurred. Take note that larger corporations would usually offer higher salary levels than what you would normally find in the target country, which can lead to increment in income.
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