• Monday, July 15, 2024
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Revamping an ailing economy through FDI

Overcoming a depressed economy via Expansionary Monetary Policy ( EMP model)

The high prevalence of economic failures and distress around the world, particularly following the global economic meltdown and the subsequent COVID-19 pandemic, is deeply concerning. This period of unprecedented financial instability has left many nations grappling with severe economic challenges that threaten the well-being of their populations. High rates of poverty have surged, plunging millions into precarious living conditions. Widespread hunger has become a stark reality for countless families, as food prices continue to soar and supply chains remain disrupted.

Moreover, the financial landscape has been marred by elevated interest and exchange rates, making it difficult for businesses and individuals to access affordable credit or engage in international trade. Soaring inflation rates have further eroded purchasing power, leaving consumers struggling to afford basic necessities. Increased electricity tariffs and rising fuel prices have compounded the burden on households and businesses alike, exacerbating the cost of living and operational expenses.

The ripple effects of these economic hardships have led to massive job losses, leaving many without a means to support themselves or their families. This wave of unemployment has not only affected individual livelihoods but has also sparked broader social unrest. Civil disturbances and frequent protests have become commonplace, as frustrated citizens demand relief and accountability from their governments.

Amidst this turmoil, the critical issue of high unemployment stands out as a significant challenge. The lack of job opportunities has left a profound impact on societies, fostering a sense of hopelessness and despair among the unemployed. The youth, in particular, face an uncertain future as they struggle to find employment in a shrinking job market. This pervasive unemployment crisis threatens to undermine social cohesion and stability, making it imperative for governments to implement effective policies to revive their economies and provide sustainable employment opportunities.

The global economic landscape remains fraught with challenges, with poverty, hunger, inflation, and unemployment among the most pressing issues. Addressing these multifaceted problems requires a coordinated effort from governments, international organisations, and the private sector to foster economic resilience and ensure a more stable and prosperous future for all.

There is no doubt that these failed or ailing economies have witnessed great challenges in managing their macroeconomic policies, which by default have made them perceived as weak economies by the stable and developed economies of this world.

In all of these, one of the measures that we can employ to get out of this ailing system to which economies are subject is to wholeheartedly embrace the concept of “foreign direct investment” (FFDI), which simply connotes an investment exercise made by either an individual or company in one particular nation into its business interests that is sighted in another jurisdiction or nationality entirely.

FDI may also be looked at as a form of ownership structure in a foreign business or investment that is done by either the investor himself, the company, or the government of another nationality.

FDI can primarily take three (3) shapes, namely:

Greenfield strategy: a type of FDI where a company in a particular country builds entirely new operations or facilities in another country;

Brownfield strategy (acquisition strategy): a form of FDI whereby a company purchases or acquires an existing venture or project in a foreign land; and

Joint venture: an arrangement whereby a new enterprise is created by either two or more companies working together for a common goal.

Benefits:

Foreign Direct Investment (FDI) can significantly benefit host nations in myriad ways. By injecting much-needed capital into the economy, FDI creates new jobs, providing employment opportunities that help to reduce poverty and improve living standards. This influx of capital also encourages the transfer of knowledge and technology from the investing country to the host nation, boosting local production capabilities and fostering innovation. As businesses adopt advanced practices and technologies, they experience increased productivity and efficiency, which in turn drives economic growth.

Furthermore, FDI often leads to the development of new infrastructure, such as roads, ports, and telecommunications, which benefits the broader economy. Local businesses, too, reap the rewards as they see an increase in customer patronage and demand for their goods and services, spurred by the overall economic uplift. This creates a positive feedback loop where the growth of local enterprises further stimulates the economy, leading to even more job creation and wealth distribution.

In the long term, successful FDI projects contribute to higher government revenue through increased tax collection from thriving businesses and newly employed individuals. This additional revenue can be reinvested into the country’s development projects, such as education, healthcare, and social services, further enhancing the quality of life for its citizens. The boost in economic activity and productivity not only strengthens the national GDP but also positions the host nation as a more attractive destination for future investments. Thus, the ripple effects of FDI create a more robust, dynamic, and resilient economy, benefiting both the investor and the host nation in profound and lasting ways.

Conclusion:

Recognising that a nation’s economy is fundamentally built on the wealth generated by its businesses and industries, it is clear that any government seeking genuine and meaningful economic growth must embrace the concept of Foreign Direct Investment (FDI). More importantly, the government must create the necessary enabling environment and avenues for FDI to thrive.

I will conclude by saying that FDI is an economic growth stimulant or driver. In a nutshell, no nation grows in isolation with FDI.

Written by Sir Kingsley Ndubueze Ayozie FCTI, FCA- a Public Affairs Analyst cum Chartered Accountant by profession.