• Sunday, February 25, 2024
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The capacity to absorb foreign direct investment may be more important than attracting it

Dollar trades at N416 at black market amid scarcity 

The urgency and importance of attracting investment capital to Nigeria was stressed at a recent colloquium. “Capital is very shy and does not like being harassed. You cannot harass private capital and expect to grow the economy. In fact, government should find a way of bringing in shy capital rather than chase and harass it away.” The speaker said. The original Petroleum Industry Bill (now broken into four separate Bills) was first presented in the year 2000. The 19 years of delay without passing the Bill created uncertainty in the minds of potential investors, who value clarity and predictability. One estimate is that more than $120 billion worth of investment was missed out on, because investment was either withheld or diverted due to the uncertainty surrounding the Bill.

The economist, Ayo Teriba has stressed the importance of foreign direct investment (FDI) into Nigeria. In a 2018 paper titled ‘Harmonization of Fiscal and Monetary Policies in Nigeria’, Teriba stated: “Nigeria must build foreign reserve buffers to insure and insulate the macroeconomy against adverse shocks… To build up reserves, Nigeria could attract large brownfield foreign direct investment (FDI) into all state-owned enterprises (SOEs) in energy, transportation, and social infrastructures. Saudi [Arabia] seeks US$200 billion from FDI inflows into 16 sectors that were lined up for privatization in May 2017. Nigeria could easily seek US$1 trillion or more because much larger infrastructure networks are required to serve Nigeria’s 200 million populace than Saudi Arabia’s 40 million populace.”

According to the United Nations Conference on Trade and Development’s ‘World Investment Report’, FDI into Nigeria 2018 was worth $2.2 billion (a 36 percent decline). Ghana was the most favoured West African destination for FDI in 2018 ($3.3 billion), previously Nigeria was favourite. Poor economic growth prospects in developed nations had made sub-Saharan Africa a promising destination of FDI. There was an increase of about 50 percent in FDI to Sub-Saharan Africa between 2005 and 2012. In 2012, the American bank J.P Morgan added Nigeria to its government-bond index for emerging markets; up until then, South Africa had been the only African country on that list. A large increase in the contribution of FDI to economic growth (GDP) in Nigeria occurred just after Nigeria’s transition in 1999 from military rule to democratic governance. By 2005, FDI inflow into Nigeria accelerated after Nigeria and the Paris Club reached an agreement for $18 billion debt relief package.

But the question some economists ask: how effective is FDI and what ensures that it benefits the host country? Researchers have provided evidence that suggests a bi-directional relationship between economic growth and FDI inflows to Nigeria. They explain that FDI encourages growth, more growth also encourages more FDI: a positive feedback relationship. However, the efficacy of FDI in generating economic growth is limited by the level of infrastructure and human capital development in Nigeria. The International Monetary Fund defines a foreign direct investment enterprise as: “an enterprise (institutional unit) in the financial or non-financial corporate sectors of the economy in which a non-resident investor owns 10 percent or more of the voting power of an incorporated enterprise or has the equivalent ownership in an enterprise operating under another legal structure.” FDI can also be thought of as a composite bundle of capital stock, know-how and technology that can (through labour training, skill acquisition/diffusion and the introduction of alternative management practice/organizational arrangement) augment the existing stock of knowledge in the recipient economy.

FDI can only be productive when the host country has a minimum threshold stock of human capital. A study showed that an increase in FDI leads to higher growth in countries with well-developed financial markets compared with countries with poorly-developed ones. Local conditions (absorptive capacities) are important factors contributing to the effect of FDI on economic growth. Host country absorptive capacities describe the domestic firms’ ability to respond successfully to new entrants, new technology and new competition. Research show that FDI can promote economic growth by itself (directly) but also indirectly via its interaction terms: a strong positive interaction effect of FDI with human capital and a strong negative interaction effect of FDI with the technology gap on economic growth in developing countries.The flow of FDI into a developing country is also affected by certain factors or conditions present or absent in the host country: the political system, economic system, public and private sector transparency.


Uyiosa Omoregie

Uyiosa Omoregie is a petroleum economist and management analyst.