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FOREIGN DIRECT INVESTMENT AS A TOOL FOR ECONOMIC GROWTH:

CRITICAL ISSUES FACING NIGERIA

Countries attract foreign direct investment (FDI) because it is a package of resources,


including not only inexpensive capital, but also new and modern technologies,
advanced managerial expertise, and efficient marketing skills. There is a general
concession amongst academics, economists, policy makers and administrators, that
there is a direct and positive correlation between the level of capital inflows, including
FDI, to a developing country, and its level of economic and infrastructural development.
Understanding the determinants of FDI and its impact on the economies of host
countries is, therefore, indispensable if it is to be used to advance economic
development and ensure sustainable economic growth.

The United Nations Conference on Trade and Development (UNCTAD), in one of its very
recent publications, posits that “foreign direct investment has the potential to generate
employment, raise productivity, transfer skills and technology, enhance exports and
contribute to the long-term economic development of the world’s developing countries.
More than ever, countries at all levels of development seek to leverage foreign direct
investment for development”. (UNCTAD’s Review of the 2008 World Investment
Report). In the same vein, the International Monetary Fund (IMF) concludes that
“foreign direct investment has become increasingly important in financing growth and
investment in the developing world. Such inflows dwarf official sector financing, and will
continue to remain an important engine of growth in a majority of the emerging market
countries”. (Foreign Direct Investment in Emerging Market Countries – Report of the
Working Group of the Capital Markets Consultative Group, IMF Sept 2003).

Professor Theodore Morgan, a Marcus Wallenberg Professor of International Business


and Finance, School of Foreign Service, Georgetown University, Washington, D.C.,
United States, puts it succinctly in a research study for the World Trade Organization,
when he wrote that “a careful assessment of the impact of FDI on the growth and
welfare of recipient countries in the developing world does not simply yield ‘mixed
results’. A careful assessment of the impact of FDI on the growth and welfare of
recipient countries in the developing world yields...very positive results’’ (Prof Theodore
H. Morgan, FDI and Development: What is The Role of International Rules and
Regulations? WTO, 2007).

It is therefore not a coincidence that Nigeria recorded an impressive steady economic


growth of between 6 and 7% during the period 2000 to 2007, a period that witnessed
massive growth of FDI inflows to the country. From 1990 through 2000, Nigeria’s
inward FDI flow averaged only $1.477billion. In 2004 and 2005, however, Nigeria
recorded an inflow of $2.127billion and $4.978billion respectively. By 2006 and 2007,
the country’s FDI inward flow peaked at $13.956 and $12.454billion respectively. By
the end of 2007, our total FDI stock stood at an ‘impressive’ $62.791billion. (IMF’s 2008
World Investment Report, Foreign Direct Investment Overview of Selected Years,
Country Statistics).

Two critical issues, however, confront us in Nigeria immediately in the area of


attracting FDI to advance our economic development and ensure sustainable economic
growth.

First is the current global financial crisis. As the world reels in serious economic crisis,
with many investing nations, companies and individuals going bankrupt or on the verge
of bankruptcy, it has become increasingly obvious that world capital flows, including
FDI, would be seriously affected in the coming year. The International Institute of
Finance (IIF), the global organisation of financial institutions, and the World Bank have
variously projected that foreign capital flows in 2009 would be seriously affected by the
current financial crisis. The International Institute of Finance projects that the world’s
net capital flows would “be just $165 billion in 2009, down from $466 billion in
2008...this estimate for capital flows in 2009 is...a decline of 82 percent from the boom
year of 2007 ($929 billion)” (www.iif.com). This projection, if it becomes a reality, would
result in a drastic reduction (and possibly result in economic stagnation and
retrogression) in the economic development of emerging market economies, including
Nigeria.

In an environment of dwindling oil income, badly damaged capital market, and a


national currency on a free fall, the import of scarce capital flows becomes a potent
catalyst for economic disaster. Already, executing our 2009 budget is already
generating anxiety in the polity as the income projection of $45/barrel oil price is
becoming increasingly too ambitious. Financing a budget deficit of over N1trillion is
creating some insomniac problems for our policy makers and administrators, and talks
are on about incurring further debts to finance the deficit.

The second critical issue that is of immediate concern is the percentage of world capital
flow that we attract. While Nigeria’s total FDI stock as at the end of 2007 was
$62.791billion, this however represents less than 1.5% of total developing countries FDI
stock of about $4.247trillion during the same period, and an insignificant 0.413% of
total world FDI stock of $15.211 trillion in the same year. Nigeria’s FDI stock is also
significantly less than that of other comparative developing countries, such as India,
South Africa and Southern Africa, which had a total stock of $76.226billion,
$93.474billion and $123.100billion respectively by 2007. (UNCTAD’s 2008 World
Investment Report)

A comparative analysis of the World Bank’s statistics on private infrastructure projects


(PIP) also reveals an investment trend skewed against Nigeria vis-a-vis other
developing countries of comparative parameters. From 1990 to 2007, the total number
of public-private investment (PPI) projects in Nigeria was 50, with a total investment
amount of $17.133billion. Comparatively, during the same period, India, South Africa
and Mexico had a total project number of 306, 32 and 176 respectively, with total
investment amounts of $96.130billion, $25.341billion and $86.126billion. (World Bank,
PPI Database).

The severity of the above-stated investment imbalance becomes more pronounced


when it is realised that the projects involved are in energy, telecom, transport, water
and sewage sectors - sectors generally considered as the ‘growth sectors’ of any
economy.

Our objective, therefore, at FDIB Limited in organizing this conference, is to find ways
to open up our economy as a destination for FDI and help address this foreign
investment imbalance. Nigeria, with its massive population, vast natural and human
resources and progressively stable political climate, deserves to have as much (if not
more) foreign capital inflows for sustainable economic development, as the rest of the
world. We believe very strongly that achieving the goal of increased FDI inflow is the
responsibility of every capable Nigerian entity – corporate, government or individual –
including us at FDIB Limited.

By:
Ade Ebimomi
Consulting Economist/CEO,
FDIB Limited.
(Foreign Direct Investment Brokers & Consultants)
fdib.ng@gmail.com
Phones: 09-8702430, 08062200894, 08054191381