Does Nigeria’s Huge FDI Benefit Nigerians?

With its natural resources, size and growth, Nigeria is Africa’s largest recipient of foreign investment. But are the huge FDI flows benefiting ordinary Nigerians?

Global FDI is no longer immune to the post-global recession challenges. Last year, it plunged by a whopping 18 percent.

Nonetheless, FDI inflows to African countries actually rose by five percent, to $50 billion, while Nigeria receives the largest amount of FDI in Africa – almost 15 percent of the total.

What about the Nigerians?

FDI success

Last June, Nigeria was ranked Africa’s number one destination for foreign direct investment (FDI), for the second time in two years. The country’s FDI inflows exceeded $7 billion.

In the post-global crisis years, FDI stock in Nigeria as a percentage of GDP has increased to 27.6 percent. In 2012, FDI flows in Nigeria as a percentage of gross fixed capital formation (GFCF) were almost 24 percent.

Under the 1995 Nigerian Investment Promotion Commission Act, 100 percent foreign ownership is allowed in all industries except for oil and gas. Typically, Nigeria’s most important sources of FDI have been the home countries of the oil majors: the United States (Chevron Texaco, Exxon Mobil), the UK (Shell), China, and South Africa.

Understandably, the government would like to bring in even more investment to meet its target of becoming one of the world’s top-20 economies by 2020.

The objective, however, is predicated on a sophisticated business environment, lower corruption and rising competitiveness.

Competitive challenges

Usually, investors rely on global indicators to review FDI opportunities, focusing on business environment, corruption, and competitiveness.

After some deterioration in the rankings over recent years, Nigeria moved up to 115th last year, thanks to improved macroeconomic conditions and a financial sector that is recovering from its 2009 crisis.

The negatives include the institutional environment, e.g., concerns about the protection of property rights, ethics and corruption, undue influence, and government inefficiencies, as well as security. The country also receives poor assessments for infrastructure, health and primary education levels, and the low rates of ICT penetration.

In the Doing Business indicators (World Bank), Nigeria is ranked 131st. This performance is relatively weakest in such areas as starting a business, getting electricity, registering property, paying taxes, trading across borders, or resolving insolvency.

Finally, Nigeria ranks 139th in the Corruption Perceptions (Transparency International); far behind South Africa, Tanzania, Ethiopia and Sierra Leone. In this regard, perceived corruption is similar to that in Pakistan (139) and Bangladesh (144).

In order to move higher in the value-added chain, Nigeria must improve its performance in these rankings. The country needs urgently to develop medium-term public-private partnerships to upgrade its business environment, fight corruption, and foster competitiveness.

Spreading prosperity

This is the paradox: unlike those nations that attract FDI because of their relatively strong performance in competitiveness, their business environment, or their minimal corruption, Nigeria garners FDI despite its vulnerabilities.

The bad news is that, in such a situation, the gains of natural resources are unlikely to benefit the nation as a whole. Rather, the status quo virtually ensures that small enclaves in the economy will grow richer, even as the real per capita income of the majority remains relatively low.  That’s a risky recipe to economic polarization and social division.

What Nigeria needs is to attract investors primarily with higher productivity. The goal should be to improve the quality of the location in ways that benefit many companies and industries, not just one or two companies. Third, the point should be to develop ‘sticky’ incentives that are tied to the location rather than the investor. Moreover, the focus should be on sustained investment rather than transient one-time deals.

From the standpoint of competitiveness, oil-driven FDI is a distraction because it steers attention away from the fundamentals of competitiveness.

FDI that benefits the nation

Recently, President Goodluck Jonathan said the economy could achieve a 7.2% growth rate before the year-end. In a grim international environment, such growth will attract investor interest worldwide. However, broader industrialization could achieve greater spread effects across the economy.

Global FDI is no longer unaffected by the gloomy and uncertain environment, including the potentially longer growth slowdown in several emerging economies – especially if the anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow reversals.

Since, however, Nigeria’s FDI relies on its natural resources, it is likely to remain relatively immune from the decline of overall global FDI.

Nigeria’s challenge is to translate a lucrative enclave of the economy into national gains, through increased competitiveness, enhanced business environment and lower corruption.

That’s a tall order but vital to avoid deepening economic polarization and rising social pressures over time.

Original version published as “Nigeria’s huge FDI flow: Is this benefiting Nigerians?” BusinessDay Nigeria (Aug 19, 2013)