Disincentives stifling investments

The National Bureau of Statistics (NBS) notes that Foreign Direct Investment (FDI) is an investment whereby the investor has some control or a significant degree of influence on the management of a domestic enterprise.

It is worth noting that in emerging nations, FDI is often carried out through the multinational firms that are subsidiaries of the foreign firms in the host nations.

To a large extent, FDI is an instrument of technology transfer by a foreign firm of the majority stock in the home country’s enterprise, remaining an important technology transfer instrument and a significant avenue for cross-border cooperation at the firm level.

There was a time in the history of Nigeria when the country was able to attract more multinational investment than any other nation in Africa, even more than India. For instance, according to Thomas J. Biersteker in the book titled Distortion or Development? Contending Perspectives on the Multinational Corporation, the estimated stock of foreign investment in 1972 was approximately $2.1 billion, which represented about 22 percent of all foreign investments in Africa for that year.

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Nigeria almost doubled its stock of foreign investments between 1967, when it accounted for about 17 percent of all foreign investments in Africa, and 1972, when it became the fifth most important foreign investment destination in the emerging economies after Brazil, Venezuela, Mexico, and Argentina.

In the early 1970s, the price of oil was increased in the international market, but the technological capability of Nigeria was scarcely enhanced. This was because the business environment was unable to influence the spread of scientific inventions to the innovation stage and also its rate of adoption by other firms within the country.

 “If policies of the government stifle the growth of the private sector, no FDI would be interested in such an environment.”

The economic environment refers to all the factors in contact with the operations of a business other than the availability of capital and the ability of the entrepreneur himself. These factors include problems of securing proper equipment in reasonable time and in good working order, problems of human resources, infrastructure, raw materials, and adequate markets.

These factors constitute challenges today generally in Nigeria, making success, particularly in the manufacturing sector, more difficult.

The top 30 economies in the ease of doing business ranking, for instance, are nations where governments quite well maintain a prominent presence in the economy through sound policies to regulate different dimensions of the private sector.

If policies of the government stifle the growth of the private sector, no FDI would be interested in such an environment.

Today, the Nigerian story is pitiful as insecurity in particular and policy somersaults in the last decade have been a major disincentive to investments. In the last decade, human and investment safety has been debased, as most Nigerians, particularly in the north and some few in the south, have to be protected against threats.

Situations abound in recent times where terrorists rule the nation by their agents, having the upper hand over the nation’s military. With all these, do we expect investments to rise at the state level? Investors do not pursue insecurity. Rather, investors pursue capital where they are sure of return on investment.

Globally, there is a cost to insecurity. The level of insecurity in many states of Nigeria is so high that it poses a financial disadvantage that discourages any investor.

Some time ago, the Manufacturers Association of Nigeria expressed their displeasure at the Nigerian government’s inability to address the rising insecurity in the nation. Also, the NBS recently released data that showed that in Q1 2024, total capital importation into Nigeria stood at $3,376.01 million, higher than $1,132.65 million recorded in Q1 2023, indicating an increase of 198.06 percent. In comparison to the preceding quarter, capital importation rose by 210.16 percent from $1,088.48 million in Q4 2023.

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Analysis of figures released by the NBS shows that FDIs have been fluctuating from 2012 to date.

Scarcity of foreign exchange is another major challenge that makes investments in Nigeria very risky.

Foreign investors do not want to invest in a business climate where the value of their returns would have depreciated in the future due to the devaluation of the naira. The high cost of electricity, inefficient ports, and rail systems are seriously undermining economic growth in Nigeria and its quest for FDIs. We need to remind those in authority that excessive taxation dampens business incentives and adversely affects the smooth functioning of an economy.

What does a country with a double-digit inflation rate, high fiscal deficit, and low growth do to increase the FDI inflows as well as bring the economy under control? Will the federal government be willing to implement an interest rate cut or deploy a subsidy framework to the manufacturing sector to ease its burden in order to reflect a positive growth in the industry? Investments would only thrive in an environment where there is peace and security.