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| Source: toptenzilla.com |
According to International Monetary Fund (IMF), Foreign direct investment (FDI) occurs when foreign investors own up to 10% equity of a company. When the foreign investors equity is less than 10%, IMF regards such investment as part of stock portfolio (portfolio investment).
Graham, 1995 defined foreign direct investment as “an increase in the book value of the networth of investment in one country held by investors from another country where the investments are under the managerial control of the investors.”
In essence, most FDIs are subsidiaries of Multinational Corporations (MNCs) where the investors are the parent organizations of companies. So FDI inflows indicate expansion of activities of MNCs.
Advantages of Foreign Direct Investment in Nigeria
Human capital development
Foreign direct investment most times comes in form of knowledge sharing and transfer. Human capital involves the knowledge and competence of a workforce. Skills that employees gain through training and experience can boost the education and human capital of Nigera. Through a ripple effect, it can train human resources in other sectors and companies.
Technology
Foreign direct investors usually come with the latest financing tools, technologies, and operational practices from all across the world. The introduction of newer and enhanced technologies results in company’s distribution into the local economy, resulting in enhanced efficiency and effectiveness of the industry.
Economic growth
Foreign direct investment, FDI boosts the manufacturing and services sectors which results in the creation of jobs and helps to reduce unemployment rates in the country, and improve overall economy of a country
Job Creation
The creation of jobs is the most obvious advantage of FDI, one of the most important reasons Nigeria needs to attract foreign direct investment. Joblessness, underemployment is ravaging Nigeria at the moment. According to National Bureau of Statistics, Nigeria’s unemployment and under employment rate are 37 % and 17 respective. These are very alarming rates. Therefore, FDI will help bolster job creation in Nigeria. Increased employment translates to higher incomes and equips the population with more purchasing powers, boosting the overall economy of the country.
Increase in exports
Presently, Nigeria’s imports bills are way higher than export earnings, low volume of local production, which are even below international standards to meet export market specifications. Many goods produced by FDI have global markets, not solely for domestic consumption. The creation of 100% export oriented units will help FDI investors in boosting exports from Nigeria.
Exchange rate stability
The flow of FDI into Nigeria will translate into a continuous flow of foreign exchange, helping Central Bank of Nigeria maintain a prosperous reserve of foreign exchange which results in stable exchange rates. CBN has been grappling with the challenge of maintaining the country’s foreign exchange in the face of depleted foreign reserve due to low foreign earning.
Capital Flow
Inflow of capital is particularly beneficial for Nigeria with limited domestic resources. It will as well reduce foreign borrowing to finance critical infrastructures. Nigeria’s foreign debt burden is very high with debt servicing rate of about 75% of foreign revenue. FDI would reduce the need for foreign borrowing.
Creation of competitive market
By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products.
Climate
The United Nations has also promoted the use of FDI around the globe to help combat climate change. Nigeria currently needs investments in climate smart energy, agriculture
Disadvantages of Foreign Direct Investment in Nigeria
Displacement of domestic business
FDI encourages competition, and as such small local businesses which may not be able to face the competition may go out of business.
Hindrance of domestic investment
Sometimes FDI can hinder domestic investment. Because of FDI, local companies start to lose interest in investing in Nigeria’s domestic products.
Negative exchange rates
Foreign direct investments can sometimes affect exchange rates to the advantage of one country and the detriment of another.
Higher costs
When investors invest in foreign counties, they might notice that it is more expensive than when goods are exported. Often times, more money is invested into machinery and intellectual property than in wages for local employees.
Economic non-viability
Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
Modern-day economic slavery and colonization
Foreign direct investment somehow encourages modern-day slavery and colonization. Nigeria with a history of colonialism, are exposes and made vulnerable to foreign companies’ exploitation. Businesses owned by Lebanese, Indians, Chinese, are guilty of mistreating their Nigerian workers.
Poor performance
Multinationals have been criticized for poor working conditions in foreign factories.
Profit repatriation
The companies and investors are likely not going to reinvest the profits in Nigeria, rather will repatriate them to their own country, leading to large capital outflow from Nigeria. As these profits are repatriated in foreign currency, it will have adverse effect on the value of the Naira.
Conclusion
Despite some of the disadvantages, Nigeria is in dire need of foreign direct investment to speed up her economic growth, and for job reaction for her teeming youthful population. World Bank report on Africa in October, 2021 reveals that Africa offers high return on climate-smart investments especially in the areas of infrastructure, energy, agriculture, environment. Such investment also has potential of providing hundreds of million sustainable jobs. So foreign direct investment in Nigeria is a win-win.
On the other hand, Nigeria should encourage more domestic investments to accelerate economic growth in the country, rather than depending on foreign direct investment as the main driver of the country’s economic growth.
To address some of the disadvantages of FDI in Nigeria, the Nigerian government should:
- Develop sustainable economic policies devoid of inconsistencies to encourage both domestic and foreign direct investments
- Ensure implementation of local content act
- Ensure there is code of conduct to checkmate excesses of multinational companies, limit repatriation of profits and ensure that some fractions of their profits are reinvested in the Nigerian economy.