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Nigeria and Foreign Direct Investments (FDI) (Posted 30th April, 2002) Tell your friends about this page! Email it to them.

Globally, economists tend to favour the free flow of capital across national borders because it allows capital to seek out the highest rate of return. Nigeria is reputed to be buoyantly blessed with enormous mineral and human resources but believed to be a high-risk market for investment. Also, decades of bad governance have almost crippled the national economy with corruption and misappropriation of funds becoming the norm rather than the exception. What is the way out of this delirium economic state? Many analysts and experts alike have given a thumbs up for Foreign Direct Investment (FDI) as a veritable booster to kick-start the Nigerian economy. With the enthronement of democratic governance in 1999, the government has taken a number of steps to woo foreign investors into Nigeria. It is thus necessary to assess the in-flow of FDI finance and its impact on the Nigerian economy.

Benefits of Foreign Direct Investment (FDI) 

Foreign Direct Investment is not only a transfer of ownership from domestic to foreign residents but also a mechanism that makes it possible for foreign investors to exercise management and control over host country firms - that is, it is a corporate governance mechanism. Nigeria has one of the highest rates of investment returns in the emerging markets, presently estimated to be 30 percent. What are the advantages of FDI to a host country economy? According to Feldstein (2000), first, international flows of capital reduce the risk faced by owners of capital by allowing them to diversify their lending and investment. Second, the global integration of capital markets can contribute to the spread of best practices in corporate governance, accounting rules, and legal traditions. Third, the global mobility of capital limits the ability of governments to pursue bad policies. Four, FDI allows for the transfer of technology - particularly in the form of new varieties of capital inputs - that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market. Five, recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human development in the host country. Lastly, profits generated by FDI contribute to corporate tax revenues in the host country.

FDI In-flow in Nigeria 

Positive developments have occurred in Nigeria since May 29, 1999 when democracy replaced the spate of military governments. This has resulted in a number of spirited moves to attract investors - local and foreign - into the country. The President, Olusegun Obasanjo in a bid to achieve this end embarked on a globe trotting mission that saw him interacting with other fellow Presidents and the business community of different countries. With a more relaxed taxing system, incentives and the creation of Nigerian Investment Promotion Commission (NIPC), the country was set to lure private sector finance. As a first step the Government took a bold move to privatise all the ailing public enterprises, Decree No. 25 of July 1996 backs this scheme. The Government set up the Bureau of Public Enterprise (BPE) to oversee this crucial venture and the National Council on Privatization (NCP) headed by the Vice-President to formulate pragmatic policies in this area. 

This privatisation drive led to the recent 51 per cent botched share sale of Nigerian Telecommunication Limited (NITEL) to Investors International Limited (IIL) for the sum of USD $1.317 billion. However, IIL was only able to come up with 10 per cent of this payment and as penalty for default lost this initial payment. A number of other enterprises have been earmarked for the same process in a bid for government to divest its investment in public service sector. Perhaps the most successful of the Governments bid to attract FDI finance is the license granted for Global System for Mobile Communication (GSM) to three GSM Service Providers - ECONET WIRELESS, MTN and NITEL - at a handsome sum of USD $285 million each. This has really boosted the tele-density of the country and their impact are felt in the employment market, in terms of massive job creation. There have been countless FDI in-roads into the country, which cut across all sectors - oil and gas industry, capital market, agriculture, solid minerals, information and communication technology - of the economy. 

The statistics below shows FDI activities in Nigeria since up till 2000. 

  FDI INFLOWS, BY HOST REGION AND ECONOMY, 1989-2000  
      (MILLION OF DOLLARS)    
               
Host Region/ 1989-1994 1995 1996 1997 1998 1999 2000
economy (annual average)            
               
NIGERIA 1231   1079 1593 1539 1051 1005 1000(a)
               
               
source: UNCTAD, FDI/TNC database  
(a) estimates            
               
  FDI OUTFLOWS, BY HOME REGION AND ECONOMY, 1989-2000
      (MILLIONS OF DOLLAR)    
               
Host Region/ 1989-1994 1995 1996 1997 1998 1999 2000
economy (annual average)            
               
NIGERIA 538   104 42 58 107 92 86(a)
               
source: UNCTAD, FDI/TNC database          
               

 

  FDI INWARD STOCK, BY HOST REGION AND ECONOMY  
      (MILLION OF DOLLARS)    
               
Host Region/ 1980 1985 1990 1995 1999 2000  
economy                
               
NIGERIA (h) 2405 4417 8072 14065 19254 20254  
               
               
source: UNCTAD, FDI/TNC database          
(h)estimated by accumulating flows since1970    
               
      (MILLION OF DOLLARS)    
               
Host Region/ 1980 1985 1990 1995 1999 2000  
economy              
               
NIGERIA (v) 5 5193 9653 10957 11256 11341  
               
               
source: UNCTAD, FDI/TNC database          
(v) estimated by accumulating flows since 1978
               

 

INWARD AND OUTWARD FDI FLOWS AS A PERCENTAGE OF GROSS
  FIXED CAPITAL FORMATION, BY REGION AND ECONOMY, 1989-1999
  (PERCENTAGE)
 
  1989-1994 1995 1996 1997 1998 1999
  (annual average)
 
NIGERIA
inward 37.3 23.9 35.4 25.2 12.7 16
outward 15.8 2.3 0.9 1 1.3 1.5
 
 
source: UNCTAD, FDI/TNC database          
 

 

  INWARD AND OUTWARD FDI STOCKS AS A PERCENTAGE OF GROSS
  DOMESTIC PRODUCT, BY REGION AND ECONOMY, 1980-1999
        (PERCENTAGE)    
               
  1980 1985 1990 1995 1999    
               
NIGERIA                
inward   2.6 5.5 28.3 50 44.5    
outward     6.4 33.9 39 26    
               
source: UNCTAD, FDI/TNC database  
               

 

  THE INWARD FDI INDEX, BY HOST ECONOMY, 1988-1990 AND 1998-2000
                 
    FDI INFLOW SHARE OVER  
ECONOMY GDP SHARE(a) EMPLOYMENT SHARE(b) EXPORTS© RATIO  
                 
NIGERIA                  
1988-1990 3.7   0.4     1.5   1.9  
1998-2000 0.8   0.1     0.6   0.5  
                 
source: UNCTAD, FDI/TNC database
(a) the ratio of the economy's share of world FDI inflows to the economy's share of world GDP
(b) the ratio of the economy's share of world FDI inflows to the economy's share of world employment
(c) the ratio of the economy's share of world FDI inflows to the economy's share of world export

Conclusion

One striking feature of FDI flows is that their share in total inflows is higher in riskier countries, with risk measured either by countries' credit ratings for sovereign (government) debt or by other indicators of country risk. There is also some evidence that its share is higher in countries where the quality of institutions is lower. Presently, Nigeria is enjoying reasonable level of foreign investment, but caution must be the watchword because the domestic investment undertaken by FDI establishments is heavily leveraged owing to borrowing in the domestic credit market. As a result, the fraction of domestic investment actually financed by foreign savings through FDI flows may not be as a large as it seems (because foreign investors can repatriate funds borrowed in the domestic market), and the size of the gains from FDI may be reduced by the domestic borrowing done by foreign-owned firms. 

It is important that the Government concentrate on providing the basic infrastructures to support the local organised private sector (OPS) that are ready to invest domestic funds into the economy. The response to private initiatives by the Government is quite commendable, but there is need for more favourable policies targeting specifically the locals as opposed to the foreigners. The recent creation of the Bank of Industry and the Small and Medium Industries Equity Investment Scheme (SMIEIS) is a pointer to better things to come in the future.

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