Making Nigeria destination of choice for foreign direct investments
African economies play on the fringes of the global economy whether measured in terms of gross domestic product (GDP), GDP per capita, trade, investment inflows, and even the ranking of universities across the world. The latest investment report by the United Nations Conference on Trade and Development (UNCTAD) will leave no one in doubt about the status of African economies relative to the global economy.
The size of the global FDIs that countries receive shows the amounts of confidence foreign investors have in such economies, stability in the recipient countries’ macroeconomic environment, political stability, business friendliness, amount of opportunities to explore, and easiness at the point of exit. If African countries are not getting the kinds of FDIs they so much crave for, they have to examine how they fare when measured against some of these metrics.
A country like Nigeria urgently needs to make itself more attractive to FDIs in order to boost productivity, create jobs, stabilize its foreign exchange market, and reduce the increasing number of Nigerians slipping into the poverty zone.
The 2022 investment report clearly shows that the African continent falls on the leeward side of the global investment inflows. Africa, a continent of 54 independent nations, with a combined GDP of $2.7 trillion, and 1.2 billion people could only attract just 5.2 percent of the global FDIs in 2021, and that was the highest in six years.
According to the UNCTAD, the global FDI inflows rose to $1.58 trillion in 2021, up from $963.14 billion in 2020, and slightly higher than $1.48 billion in 2019, and thatsignalled a return to the pre-pandemic level.
Developing countries in Asia, Latin America and Caribbean, and Africa got combined FDIs worth $837 billion in 2021, according to the UNCTAD data, representing 53 percent of the global FDIs.
Africa only attracted $82.99 billion in 2021representing 5.2 percent of the global FDIs.Compared with FDI inflows in 2020, when Africa attracted just $38.95 billion representing 4 percent of the global FDIs, the 2021 records were better than the previous year. Most of the FDIs went into projects executed mostly through project finance deals while greenfield projects remained depressed.
Regional distribution of FDIs in Africa reflected that amount of risk investors attached to each region. In 2021, investors found only southern Africa the most appealing as the region attracted 50.9 percent of Africa’s FDIs, translating to $42.2 billion. In 2020, that regional bloc attracted just 10.9 percent or $4.24 billion. Also in 2021, West Africa received 16.7 percent; Central Africa got 11.3 percent; North Africa received 11.2 percent while East Africa received 9.9 percent.
In 2020, North, Central and West African regions got 25.2 percent, 24.2 percent and 24 percent of Africa’s FDIs which amounted to $9.8 billion, $9.5 billion and $9.3 billion respectively.
Egypt dominated the FDIs space in Africa from 2016 to 2020. But the pattern changed in 2021 when South Africa became the largest recipient of FDIs on the entire continent.
Merger and acquisition deals as well as renewed interest in international finance transactions defined the FDIs landscape in 2021 in most of the developing countries, while in the developed countries which got the lion share of $746 billion, more than double the amount they received in 2020, mergers and acquisitions, and retained earnings among multinational enterprises (MNEs) in those countries shaped the FDIs landscape in those economies.
“FDI flows to developing economies increased by 30 per cent, to $837 billion, with 19 per cent growth in developing Asia (to a record $619 billion), a partial recovery in Latin America and the Caribbean (to $134 billion) and an uptick in Africa (to $83 billion)”, the report stated.
Q: In terms of FDIs, Africa was in the shadow of Asia in the last decade. This is quite visible in the amounts of FDIs each region attracted.
FDIs: Africa versus Asia
In terms of FDIs, Africa was in the shadow of Asia in the last decade. This is quite visible in the amounts of FDIs each region attracted. Asia, for instance, attracted $618.9 billion FDI flows, representing 39.1 percent of the global FDIs in 2021. Same year, Africa got just $82.9 billion or 5.2 percent of the global FDIs.
In Asia, 53.1 percent of the FDIs in 2021 had East Asia as their destinations; 28.3 percent to South East Asia; 8.9 percent to West Asia, and 8.5 percent to South Asia. The dominance of East Asia became pronounced from 2016 to 2021 when the region, on the average, attracted 51.5 percent of the FDI flows to Asia.
The preeminent economies in East Asia are China and Hong Kong (China). Regardless, there are still other successful countries in Asia with significant FDIs flows that Africa and Nigeria can learn from.
Singapore attracted $99.09 billion FDI flows in 2021, representing 56.5 percent of the total FDI flows to South East Asia. According to data from UNCTAD, Singapore has maintained this level of strong FDI flows since 2016.
The strong FDI flows were underpinned by significant investments in manufacturing, digital economy, and infrastructure. In particular, US-based Altimeter Growth Corp sealed a deal worth $34 billion with Grab, a Singapore-based software publisher. Invariably, software and IT services topped the sectors that attracted the most FDIs in that country. It was followed by communications, business services, financial services, food and beverages, and biotechnology, according to Select USA.
In 2020, Investor Group acquired Aviva for $1.489 billion to control 51 percent stake in the company. Both companies are from Singapore. Also, Thai Beverage from Thailand acquired Frasers Commercial Trust of Singapore for $1.12 billion to control 100 percent stake in the company, and Netfin Acquisition from the United States acquired Triterras Fintech of Singapore for $995 million. In another deal, Thai Beverages acquired Asia Retail Fund of Singapore for $776.1 million for 100 percent stake in the company, among others.
Indonesia shares some socio-economic characteristic with Nigeria, from the size of its population, agricultural, and religious point of view. Therefore, if Indonesia could successfully attract FDIs, nothing stops Nigeria from doing the same.
From 2017 to 2021, Indonesia attracted an average of $20 billion as FDIs annually. According to the Indonesian Investment Authority, “base metal processing without machinery and equipment”, mining, electricity, food processing, and gas topped the list of the destinations for FDIs. In 2022, Indonesia aims to attract $83.4 billion FDIs according to Reuters.
One of the strategies it will employ to attain the target above includes using a dedicated team to pick up foreign investors right in their own countries.
Malaysia received $11.62 billion worth of FDIs in 2021, a significant jump over $3.16 billion received in 2020 during the peak of the lockdown. In 2019, FDI flows worth $7.81 billion. The deals that were carried out in Malaysia were done by global brands. For instance, Investor Group from Thailand acquired 100 percent stake in Tesco Stores in Malaysia worth $700 million.
Market sentiments suggest that the country will get more FDIs in 2022, partly due to its relatively investor-friendly institutional framework and deep financial sector, being Asia’s third largest bond market. The country topped the ranking of the Global Opportunity Index 2022 in Southeast Asia, according to the Milken Institute.
“The best-performing country among the region’s largest economies is Malaysia. It uniformly scores above the average rating for EMDE countries in all 14 of the subcategories”, Milken Institute said in its 2022 report.
What Africa and Nigeria can learn from Asia
Attracting foreign direct investment is a major responsibility of government as they help to create jobs, boost transfer of skills, and ensure exchange rate stability.
“When accompanied by sound domestic policies, foreign investment can help create jobs, trigger human capital formation, and bring new technologies and managerial practices. It can also contribute to international trade integration, foster innovation among local firms, and encourage a more competitive business environment”, the Milken Institute, said in its Global Opportunity Index 2022 report, while focusing on Emerging Southeast Asia.
Create attractive industrial hubs
Through the Nigeria’s fintech hub, huge amount of foreign funding has come into Nigeria. The same can be replicated in areas where foreign investors are willing to invest. The ones that have been created in Nigeria that are not yet optimally performing should be rejigged. This is necessary because other countries are attracting huge investments into their industrial and electronic hubs, signifying that it is Nigeria’s peculiarities that are driving investors away.
Malaysia has performed wonders with its Kulim Hi-Tech Park, which attracted two major foreign hardware manufacturing projects worth $12.1 billion in 2021, from China’s Risen Energy, and Austria-based AT&S.
Improve business environment
Lagos State hosts Nigeria’s major ports, and the state is responsible for about 60 percent of the country’s commercial activities, Most of Nigeria’s private sector players live in the metropolis. Meanwhile, Lagos State was recently ranked as the second worst city to live in the world. Improving the status of Lagos on this global index will go a long way to attract FDIs.