Menu

Nigeria should focus more on Local Direct Investment 10 Mar 2016

Over the past decade, Nigerian government officials have acquired great admiration for foreign direct investment, also known as FDI. There has been a lot of junketing abroad, supposedly to attract FDIs into the country.
    
Actually, FDI has been rising in developing countries. Foreign Direct Investment is a company's investment in a production plant in another country, an acquisition of a foreign firm or investment in a joint venture or strategic alliance with a foreign company. This makes it different from portfolio investment, which is an indirect investment into a foreign country via equities and bonds. Foreign direct investors are more stable contributors to a country's economy than portfolio investors.

According to the 2015 fDi intelligence report, key recent FDI trends show that Africa witnessed the largest increase in inward investment with $87 billion of FDIs announced in 2014. Africa has some of the fastest-growing economies in the world. These high-growth economies and the continent's emerging middle class attracted FDI in consumer-oriented industries, including food, IT, tourism, finance and retail. Globally, capital investment in greenfield FDI increased 1% from $642 billion in 2013 to $649 billion in 2014. India, Vietnam, Japan and Malaysia were four of the fastest growing destination countries for FDI in 2014, while Asia-Pacific region remained the leading destination for FDI in 2014 with 4,153 announced FDI projects at an estimated value of $250 billion. The region attracted 38% of all capital investment globally in 2014.

The increase in FDI flows to Africa is driven by international and regional markets seeking access to natural resources. The expectation for a sustained growth of an emerging middle class attracted FDI in consumer-oriented industries, including food, IT, tourism, finance and retail.

Intra-African investment is increasing, led by South Africa, Kenyan and Nigerian TNCs. According to World investment report, between 2009 and 2013, the share of announced cross-border Greenfield investments projects origination from within Africa increased to 18% from less than 10% in the preceding periods.

In Africa; Egypt, Angola, Morocco, Ghana and Zambia all moved into the top 10 destinations in the region by capital investment. While Egypt recorded the greatest increase in FDI with $18 billion of investment and a 42% increase in number of FDI project, Angola attracted $16 billion more FDI in 2014 than in 2013.

There has been considerable increase in the amount of FDI flowing into Nigeria over the years. In 2014, the fDi report says Nigeria attracted $11 billion in FDIs, the third largest recipient in Africa after Egypt and Angola. However, the increase in FDI has not had quantifiable impact in new jobs created. For most countries, job creation is the most important objective of investment incentives given to foreign firms.

It is, therefore, essential that federal and state officials give account to the vast majority of their unemployed citizens on the public resources that have been spent in efforts to attract FDIs. What has been the value of the foreign trips, tax breaks, tax holidays and other incentives employed to attract FDI?

There is no doubt that there are positive effects associated with FDI. With FDI comes improved productivity, technology and knowledge transfer and overall economic growth. There is also the ripple effect of competition that forces the local firms to increase their productivity so as to enable them stay in business. Suppliers and service providers have also known to benefit immensely from FDI.

I believe FDI is a necessary building-block in the development of a vibrant economy, particularly an emerging economy like ours. Nevertheless, there is a need to gear up efforts toward local direct investment (LDI), a more measurable and more impactful investment from a country's own investors and entrepreneurs.

To grow our economy, we have to look inwards. Charity they say, begins at home. In some situations, LDI creates the environment for inflow of FDI. In this case, government officials would not need to crisscross the world to attract investment. But if domestic investment is not vibrant, foreign direct investors will overlook such market. Perhaps this is the reason we have not seen much results from the FDI-driven development model of the last decade.

Government policies should provide greater incentives to develop the local private sector and encourage small businesses to grow. The more small businesses grow, they would become the conglomerates of the future and increase the pool of LDI in the country. For government to accelerate the achievement of its development objective, there has to be a deliberate policy to grow the local economy from within.

In outlining his vision 2020, former Prime Minister of Malaysia, Mahathir Mohamad, established two programmes in 1991, the Government Transformation Programme and the Economic Transformation Programme. These programmes were meant to turn Malaysia into a high-income economy by year 2020 as well as address key areas that will boost local direct investments. These programmes have contributed immensely to the success of the modern Malaysian economy.

LDI leads to innovation in industry, foreign exchange savings; it also encourages a Research and Development (R&D) culture. Other benefits of encouraging locally-owned businesses include higher multipliers; because of their local orientation, they spend much of their revenues locally and reinvest within the country. This sustains the local economy and attracts more investment. Their relative immobility also means they are more accountable to local regulation. Foreign-owned business often challenge local regulations and threaten to leave if their objections or concerns are not met. Local businesses instead tend to adapt rather than flee.

The flux of foreign business creates enormous stress on the local economy. Over the years, our governments have offered lots of money in form of incentives to attract or retain FDI and these deals have been huge losses. These investors take the incentives, stay for a couple of years and then relocate. But stability is another benefit of LDI, as they would rarely move and the local investors are not inclined to move to South Africa or United Kingdom to get a higher rate of return for their investments.

To evolve the culture of sustainable LDI, governments at all levels must support small- and medium-sized enterprises, ensure that the local investment climate is conducive for local businesses, and there has to be concerted efforts to invest in soft and hard infrastructure. The local economy will benefit from every naira spent locally and the current pressure on our external reserves would not exist. A campaign to encourage LDI is tantamount to a campaign for made-in-Nigeria and it is the key to our economic transformation.