IS FOREIGN DIRECT INVESTMENT GOOD OR BAD FOR NIGERIA? THE NEED FOR A CLOSER LOOK
It is a popular economic phenomenon that no country exists in autarky. Therefore, countries are increasingly encouraged to embrace foreign partnerships to bolster international trade and investment which is believed to be a catalyst for economic growth and development. Over the years, we have witnessed previously closed economies that later opened up to foreign participation, grow at an increased and unprecedented pace; a perfect example is China. One of the ways of furthering international partnerships is through Foreign Direct Investment (FDI). Others include import and export trade, however, FDI is often preferred to exporting. By definition, FDI is an investment made to acquire a lasting management interest in a business enterprise operating in a country other than that of the investor (World Bank, 1996). A critical analysis of the impact of FDI in Nigeria reveals that Nigeria has not attained the level of development required to harness the positive economic impacts from its FDI inflows.
Various studies have concluded that there is a positive FDI-growth nexus. FDI is expected to enhance growth in host countries through capital accumulation, technology transfer as well as knowledge transfer. It is also expected to increase productivity in domestic economies through spill overs to local firms in the investment enterprises’ value chain. According to economists and other international bodies, foreign direct investors can transfer technology directly to their foreign owned enterprises or indirectly to firms owned and controlled in the host country. Also, it is believed that foreign investment could contribute to economic growth through a number of mechanisms, including: (a) Increasing investment in local physical and human capital; (b) Increasing the capacity to import capital goods or technology; (c) Having no negative impacts on investment and savings rates in the receiving country.
Looking inwardly, has Nigeria been able to effectively leverage FDI for its economic growth? This article will focus on the following aspects:
FDI vs GDP Growth: Although FDI inflows into Nigeria has grown consistently since 1990 till date, it’s contribution to GDP has been insignificant. In 1990, FDI net inflows stood at $587.9 million and increased to $3.5 billion in 2017, indicating a 495% growth rate. However, FDI to GDP ratio remained 1% in 1990 and 2018 respectively. Observably, FDI has not contributed considerably to the Nigeria GDP since 1990 till date.
FDI vs Employment: Despite the many benefits already described, a closer look at some economic indicators show that periods of increasing FDI have also seen increasing unemployment. For example while GDP increased by 495% between 1990 and 2017, unemployment rate for the same period increased from 3.5% in 1990 to 20.4% in 2017 (National Bureau of Statistics).
Sectorial Linkages: The effect of FDI can also be explained in terms of its forward and backward linkages. Laura Alfaro (2003), found out that FDI in primary sector has negative effect on growth, while FDI in manufacturing sector has a positive effect but a nebulous effect in the service sector. A survey by the Central Bank of Nigeria (CBN) reveals that large proportion of FDI inflows in Nigeria is directed towards the extractive (primary) sector. According to the survey, in 2011 the extractive (primary) sector ranked highest with 51.0%, followed by manufacturing with 24.3%. Also, in 2014, the manufacturing sector received 42.7%, followed closely by extractive industries which received 40.2%. Thus, the linkage effects of FDI in Nigeria has been low. The high linkage effect of the manufacturing sector has been truncated by high import content of the output of the existing industries.
Sharp Practices: Over the years, we have witnessed sharp practices by some Multinationals. Recently, the African telecommunication giant, MTN, was sanctioned by the CBN for illegal repatriation of profit totaling $8.13 billion (Premium times; 2018). Also, in 2018 the Nigerian government accused HSBC of money laundering (Quartz Africa; 2018). Although no further actions were taken to ascertain the validity of the accusation, it arouses the feeling and awareness that some foreign firms indulge in sharp practices. Generally, sharp practices by foreign investors can drastically reduce the positive effects of FDI on a country’s growth. Illegal repatriation of profits provide loopholes for avoidance of corporate taxes charged on repatriated funds. This in turn reduces revenue to the government and available funds for investment spending by the government thereby inhibiting growth.
Conclusively, while some countries have enjoyed the benefits of FDI, the case in Nigeria seems to be peculiar. Although, studies have shown a positive FDI-growth nexus, Blomstrom et al (1994) reveals that there is a threshold above which FDI exerts a positive influence and below which it does not. In other words, only countries that reach a particular income level can absorb new technologies, enjoy technological diffusion and reap the benefits of FDI. Additionally, UNCTAD 2019 report indicates that widespread corruption, political instability, lack of transparency and poor quality of infrastructure are limiting Nigeria’s FDI potential. Nigeria is still classified as a lower middle income country, therefore, a lot more needs to be done to achieve higher income levels and strengthen weak institutions to leverage FDI for its economic growth. This, I think is an area of major concern. While our Presidents and government officials are seeking ways to attract and increase FDIs in Nigeria, and her citizens applaud them for this believing it would increase economic prosperity in the region, there is need to ask and critically analyse the real impacts of FDIs in the region.