No one can – or should – be surprised by the remarkable decline of foreign capital investment in Nigeria’s economy in recent months and years. The divestment of about N300 billion worth of investment by Procter & Gamble, GlaxoSmithKline, PZ, Unilever and others is simply logical from the standpoint of the business operators. But, as someone who advises some of the world’s largest institutional investors in emerging markets for a living, I believe this phenomenon calls for a more nuanced understanding of the role of foreign investment in economic growth and transformation if such investments are to be truly helpful to our economic aspirations.
Outside of a role as part of a grand economic strategy, foreign investment may not serve the purpose of real economic transformation – which is a different thing from growth – whether it rises again or continues to fall. The GSM revolution in the early 2000s was a notable exception and game-changer.
Foreign investment is not just a quest for proﬁts for investors, which is ﬁrst and foremost what it seeks. It also is a barometer of external market conﬁdence in how a country which has investment potential is managed. We must understand that “the economy” is not some stand-alone item we can separate from every other aspect of how we manage our affairs as a people and as a country.
Issues of security, corruption, the courts and the rule of law, who we appoint to certain sensitive positions, all matter. So do how our public institutions are run – their strength, independence, and their effectiveness in achieving their mandates. It is the sum total of these things, together with real, knowledge-based economic management and purposeful political leadership, that determine both investor perception and how the economy performs.
Foreign direct investment (FDI) – “bricks and mortar” or equity investments in business enterprises in one country with capital from another – can create jobs. But this is more the case in some sectors such as agriculture and manufacturing, than in others such as the purely extractive plays in natural resources that have historically formed the bulk of FDI in African countries. Foreign portfolio investment (FPI) – passive investments in ﬁnancial asset classes such as bonds and equities in the stock market – can help maintain or improve foreign exchange supply for a country such as Nigeria with an undeveloped value-added export economy and a dependence on a natural resource for foreign exchange inﬂows. This has created a problem for the value of the Naira and is a major reason foreign multinationals are exiting.
“Outside of a role as part of a grand economic strategy, Foreign Investment may not serve the purpose of real economic transformation.”
Countries with serious economic management have varying attitudes to foreign investment, depending on their overall economic development and transformation strategy. India is a rising economic power, but it is highly suspicious of foreign investment and is less welcoming of it. India is more interested in outward FDI in which its companies invest abroad, than in inward foreign investment in which it is the host of FDI. China takes a similar approach of care in receiving FDI, but has generally been far more open to it than India.
In Nigeria, our political leaders have spent billions on foreign travel chasing increasingly elusive foreign investors. More work and valuable time at home creating the conditions that will attract such investors would have been a more productive investment. But the frequently misplaced efforts have been stymied by our macroeconomic distress, insecurity, and corruption.
Weak physical infrastructure, capricious legal systems, absence of skilled manpower (made even worse by the seemingly endless “japa” wave of emigration), policy inconsistency (investors seek predictability), are a major challenge. The absence of adequate electricity is a foundational disincentive. Rising poverty rates have also dulled the previous attraction of our 200 million population, as the middle class is under threat of extinction and people have less disposable incomes.
Beyond our present problems, and returning to the standpoint of economic strategy which ought to guide our future outlook, lies the question: How much does FDI/FPI really matter? Does FDI cause economic growth and development? Can investment inﬂows from abroad play a fundamental role in economic transformation? The answer is: “It depends”. There is a widely held belief that FDI is essential for development. It certainly can play an important role, but only if some conditions are met.
FDI facilitated the economic transformation of China and Singapore. But these two countries did not blithely assume that FDI would work a miracle for them, the way we tend to in Nigeria. They approached incoming FDI from the standpoint of strategy. They kept a ﬁrm grip on the evolution of their economies and calibrated their FDI strategies to shifts in their domestic conditions such as cheapness of labour and the availability of skilled labour.
But there is evidence that FDI does not automatically trigger productivity. It can complement, but not substitute, LOCAL factors that are essential for development. We need to understand three important things about foreign investment. The ﬁrst is that the real importance of foreign investment depends on the receiving country’s prior level of development. The economic growth impact of FDI is more in high-income developing countries than in low-income ones. In the latter, investments in secondary school education would matter more than FDI. Second, well-performing economies attract more investment than weak economies, which often experience capital ﬂight.. Growth therefore drives FDI, rather than FDI driving growth. Third, the assumed technology-transfer beneﬁts of foreign investment only happen when the investment is made in countries in which research and development (R & D) is a practical priority. We cannot honestly argue that this is the case in Nigeria. But it is in South Africa. In China, investment in R & D increased by 20% annually between 1999 and 2011, to more than $100 billion.
Foreign direct investment can concretely help lift a country’s economy if it is targeted at the real economy. But two most important factors must be present. These are (a) the presence of a skilled labour force and (b) infrastructure, in particular electric power, efficient seaports, and rail infrastructure. Nigeria is clearly deﬁcient in the former, which brings back the conundrum of an education system that does not position the country for real productivity. A focus on the latter without the former cannot be transformational because there isn’t the required level of human capital to take advantage of the infrastructure projects for real wealth creation. This has been a fundamental error of economic thinking in Nigeria. The ﬁrst and most fundamental condition of economic transformation is human capital. HCI (Human Capital Index) measures the contributions of health and education to worker productivity. Nigeria has one of the lowest human capital indexes in the world, ranked at 164 out of 169 countries by the World Bank in 2020. Singapore ranked at number one. Borrowing to build roads and rail in a country with nearly 20 million school-age children out of school is to put the cart before the horse. China’s ﬁrst massive investments in the 1950s, 60s and 70s were in building skilled human capital. In order words, Singapore and China built the essential foundation before FDI could be of any real help.
Seen from this perspective, we need to return to the drawing board. Rather than a misplaced belief in the transformative power of FDI on its own, we should focus predominantly on two things – our own local investments, combined with types of FDI, that can help address our problems of weak human capital (e.g. technical/vocational, technological, and health-services education, and building adequate energy infrastructure). This is why you will see companies like Boeing in Egypt, but not in Nigeria.
We must have a real national strategy for FDI, as well as sub-national strategies that key into national priorities in a well coordinated manner. One of the most important priorities we must pursue is the diversiﬁcation of Nigeria’s seaports. Nigeria’s Southeast region, which is a major trading and industrial hub, needs at least one major seaport. This will massively boost Nigeria’s economy. We need to align FDI with a transformational paradigm shift towards competitive advantage – the ability to source raw materials from anywhere, manufacture value-added products for domestic and export markets at competitive costs, as well as information and communication technologies and a diversiﬁcation from extractive industries. Investors must be offered strong protections, and we must prioritise governance and institutions.
I know from personal experience that investor conﬁdence in the independence and strength of the Central Bank of Nigeria between 2009 and mid-2014 drove high levels of FDI and FPI towards Nigeria at the time.
Finally, we must adopt a national interest stance in engaging with FDI. Nigerian leaders often pursue foreign investment as if investors are doing us a favour. This is a sure recipe for a weak negotiating hand and a failure to identify, and protect, our own national interest. Capital seeks to expand and grow. Providing investors the opportunity to pursue that fundamental interest must be on the condition that it advances another – the national interest of the FDI host country. Local populations must beneﬁt from job creation, rather than investments serving the rent-seeking interests of political cabals. And investment, domestic or foreign, must be environmentally sustainable. Just ask the impoverished people in Niger Delta’s toxic wastelands of oil spills how much they have beneﬁtted from the “foreign investment” in the region by the oil majors.
In this context, the extraction of solid minerals in Nigeria is the next frontier. The Federal Government’s new policy stance that investments in solid mineral extraction must have – value-addition components is a step in the right direction. But we must ﬁrst see that happen in real life in a country in which its security apparatus appears unable to stop illegal mining of minerals in various places. To that policy should also be added a requirement for investors to establish technical training institutes for local youth who should eventually be employed in such industries.
Moghalu, a former deputy governor of the Central Bank of Nigeria, is the CEO of the consulting ﬁrm Sogato Strategies LLC and Chairman of the Africa Private Sector Summit