“On the whole, China depends more on domestic investment and consumption than on exports to generate its growth.” –Cambridge Dictionary
The word Foreign Investment has dominated the economic space dialogue for a long time. It has been packaged in such a way that many people believe that without it, a developing country like Nigeria stands little chance of becoming a first world economy. The two major types of foreign investment are Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). The former refers to foreign capital that is remitted from one country to the beneficiary country usually to set up businesses in the local economy. The foreign capital, therefore, must be invested either in an existing business or in a new one (green field). On the other hand, Foreign Portfolio Investment refers to foreign funds remitted solely for the purpose of acquiring stocks and government bonds.
This kind of foreign capital is also referred to as “hot money”. The reason for referring to it as hot money is that Foreign Portfolio Investment has a pattern of behaviour. It votes with its feet at the slightest provocation. If it senses that some unfavourable conditions are going to occur, before you say Jack Robinson, the funds would have left the country. Recently, we have had a preponderance of this kind of money dominating foreign currency inflows in Nigeria. Because of its volatility, it is very difficult for a country to plan on the back of foreign portfolio investment.
Recent reports have decried the drastic drop in foreign direct investment flows into the country. The decline had started much earlier before the pandemic worsened the situation last year. With specific reference to the numbers, net FDI into Nigeria dropped from $4.45b in 2016 to $3.50b in 2017. It further went down to $2.0b in 2018 and then rose to $3.3b in 2019, before dipping again to $2.6b in 2020. With all the talk, and even though FDI has witnessed a declining trend, it is doubtful that it has in recent times, been a significant contributor to investment in the Nigerian economy.
In relation to GDP, for the year 2020, Nigeria’s FDI to GDP ratio was 0.6%. This shows the insignificance of this category of investment to the economy. Hardly would you see in the literature any negative comment about FDI. In fact, the narrative has been that the country and in fact states must prepare themselves as beautiful brides for FDI. In fact, some Governors have wasted a lot of taxpayers’ money traveling from one country to another, ostensibly in search of FDI. The result, or more appropriately futility, of such trips, is all captured in the numbers posted above. But then, states should pay attention to those factors like, ease of doing business, corruption perception indices, and global competitiveness indices; if they are to attract significant foreign capital.
May I add quickly that one should not get me wrong, because all those indices are necessary for any country including Nigeria, to attract, not just foreign investment, but for local competitiveness also. In the whole narrative, scant attention is paid to some of the challenges with FDI. All we are made to understand are such well-worn arguments like: FDI helps in the transfer of technology, it creates jobs, it helps to maintain a healthy balance of payments for a country and that it encourages competition. While all these arguments may not necessarily be untrue, not a whole lot is said about the big risks associated with potential net capital outflows from host country, stifling competition given the strength of foreign capital, disruption in the healthy development of research and development in the country, culture and sometimes the interference in the political process of the recipient country.
Many people tend to confuse foreign investments with foreign remittances. The difference is that while foreign investment could form part of foreign remittances if the investment is in cash, foreign remittances are not necessarily foreign investment. A lion share of foreign remittances is meant for consumption and other expenses which are not investments. For instance, many Nigerian families are dependent on relatives who send money from outside the country, periodically for their upkeep. Much of the frenzy about declining foreign capital has to do with the sharp drop in foreign remittances occasioned by the Covid-19 Pandemic. Again, the phenomenon of foreign remittances is not our major concern today.
Foreign (investment) Capital, just like its local counterpart, seeks out markets that are conducive to it. It does not go where it is not welcomed. It feels welcome, not when seekers mouth platitudes and hyperbolic statements about how open they are for business. They do not respond when leaders take flights to organise dress rehearsals and beauty parades or road shows, making promises that are sometimes far from reality. In fact, foreign capital tends to have more up-to-date information about local markets than the local market players themselves. It has a way of hearing what local markets are not saying instead of listening to what they are saying. The interesting thing is that it is also good in leading the markets to believe what they want to believe and will only realise that they were not convincing only when it would have been too late to do anything about it.
While we are not despising road shows and marketing, our argument is that foreign capital has one major purpose: profit. Once it feels that the purpose would not be safely realised, it will take flight. Ever wondered why some countries would be at war and major oil companies would still make their way into the oil fields to drill oil despite the war? The answer is that investors are known to be rational and would only invest in a market that guarantees maximum returns on investment. That is the number one rule in investment.
The so-called benefits wittingly or unwittingly, occur along with the investment. It is like saying that associated gas is a benefit that comes with oil production. That statement could be true if the country knows how to and has capacity to utilise associated gas. Where neither the knowledge nor capacity exist, the gas could either be flared or reinjected. In like manner, where technology is required for production and somehow, the economy is able to copy or steal it, such benefit is described as “transfer of technology”.
While this column does not argue that foreign investment should be ignored or discouraged, it is our considered opinion that the promotion of foreign investment should not take such priority that local investment would be relegated to the background, as a result. In fact, we dare say that there is no evidence that any country has genuinely developed primarily on the back of FDI. This is because of the interest of foreign capital which would hardly be in tandem with local interests. The job of developing local economies should firmly, be the responsibility of local investors.
The search for foreign capital is only useful to the extent that consumption has been patterned to be import oriented. An export-oriented market would be exchanging local products with foreign currency and therefore would not necessarily be dependent on foreign capital to survive. Therefore, the first impetus to local investment is that the economy encourages local consumption and discourages foreign consumption. How to achieve this should not be by legislation or fiat, but by the effective use of the market forces and moral suasion to move economic agents to the desired objectives. Experience has shown that economic agents are almost always resistant to force but respond rationally to market forces.
Governments must also lead the way by investing appropriately in the economy. Government’s investment should not be in business but in its enablers. Government should concentrate on those factors that support and boost business.
One of the major enablers of business is education. Education is important to expose the majority of the populace to rational and critical thinking. It also helps in building skills. A situation where a majority of the populace is either poorly educated or not educated at all, makes it difficult for them to understand arguments like the ones we are making now, talk-less of implementing them. So, we need to hit the reset button on education from primary to tertiary level, rejig the curricula to be in tandem with modernity, ensure adequate provision of teaching skills and facilities and retain excellence in our educational institutions. And I dare challenge us that this is not rocket science. We have the required skills and financial resources to do it, if we agree that it is a priority.
Another area of investment that is as important as education is infrastructure. Clearly, this cannot be overemphasised. A major reason why things do not seem to work in Nigeria is our criminal neglect of infrastructure over the years. We seem to have adopted a culture of refusing to maintain anything. Our penchant for awarding contracts has been elevated to such a level that our roads would start with potholes and graduate to craters and we would all ignore them waiting for a time to award contracts for the rehabilitation and resurfacing of the roads where large amount of money would be disbursed to ensure that pockets of corrupt officials are lined while the rest of the populace would be left to pay the price.
Failed, failing or outright lack of infrastructure is a disincentive to investment, be they local or foreign. Access is one of the major challenges of both agriculture and industry. Aside the risk that it poses to economic agents, there is the additional challenge of increasing the production cost which makes output uncompetitive. Infrastructural deficit is largely responsible for a situation where the cost of a product imported from China comes out cheaper than a similar product made in Nigeria. The outcome is that our product, which by the way, may be of inferior quality than the one made in China, may be produced at a much higher cost, and in a perfect market, would stand no chance of competing with its counterparts from other economies. When we factor in the cost of inefficient power supply, water supply and insecurity, what we would have is a net divestment from the economy.
The Coronavirus Pandemic has further exposed the very poor state of Nigeria’s healthcare delivery system. Public health, which is so important and has been taken for granted elsewhere, remains a major challenge in Nigeria. There is no doubt that this is a major disincentive to investment. We had dwelt on this in a previous column and will not want to go back to it, except to highlight that despite our outcry, not much seems to have been done about it and there is nothing to show that governments at both the Centre and states, see this as a priority even as more deaths are being recorded daily.
The reason why we spent some time on the disincentives to investments or better still, incentives to divestment is that the economy will only do well on the alter of the gross capital formation of the country. Our economy which still prides itself as the largest in Africa with the largest population cannot be said to be growing. In normal times, before recession, while the economy was growing at less than 2% per annum, the population was growing at over 3% per annum. That means that in economic terms, we have been declining. The only way for the economy to grow is that more investments must be made by the economic agents. This investment, we advocate should be local. And there are a lot of areas where investments can be made locally to add value to the economy.
Agriculture remains an area with very limited barriers to entry and requiring modest initial capital for simple crops. Other areas like livestock, haulage and logistics, fashion, media, real estate, trading, and financial services are a few of the areas that are seeking for investments. By investing in these areas, we could double our GDP in a few years, we could create 30% more jobs within a period of 2 to 3 years, we could reduce poverty level by 25% in 3 years, we could reduce insecurity drastically and we could begin to see growth in an otherwise recessed economy. If we do not focus on ramping up productivity and having more people participate in economic activities, the recovery of the economy could be a bit longer and more torturous.
Our conclusion is that we need not keep distracting ourselves looking up to ‘foreign investors’ to grow our economy. The answer lies within, and we must endeavour to seek out those local diamonds in the rough that need polishing. We must use them to regenerate this economy and solve our economic and social problems. We must learn to chop our own wood, and as Henry Ford advised, it will warm us twice.