Business: Foreign Direct Investment and Growth in Nigeria
December 30, 2020
In terms of attracting FDI, Nigeria is the third most popular location on the continent. It is regarded as a promising pole of growth. Foreign investors are particularly attracted to the energy, hydrocarbon, and construction sectors of its economy. Here is the latest overview of its FDI.
Only two other countries on the continent are attracting more investment, i.e., Ethiopia and Egypt.
In 2020, all African economies were shaken by COVID-19, but Nigeria has suffered the most.
In 2020, all African economies were shaken by COVID-19, but Nigeria has suffered the most.
As an oil exporter, it is heavily reliant on commodity prices. As the demand for oil dried up, its revenues and investment flow shrunk. Still, recovery is inevitable.
- Structure of Nigerian FDI
The most recent available estimates of FDI are included in the UNCTAD 2020 World Investment Report. In 2019, Nigeria received USD 3,3 billion in foreign direct investment, and the total stock of FDI reached USD 98,6 billion.
Most of these funds came from the United States, China, the United Kingdom, France, and the Netherlands.
- Diversification of the Economy
In recent years, the government has been taking steps to reduce the country’s dependence on oil. Investment in manufacturing should increase the productivity of the Nigerian economy and speed up its integration into global value chains.
The Federal Ministry of Industry, Trade and Investment has been encouraging coordination and fusion of the three sectors.
The policy of economic liberalization promotes public-private partnerships. Local businesses are encouraged to form strategic alliances with foreign companies. Progress is also reflected by the growth of the Forex sector in the country.
At the moment, Nigeria has the second-largest volume of currency trading on the continent. This is facilitated by the presence of global brokerage brands like Forextime. Local residents can explore different avenues of retail efx investment that includes Forex trading, stocks, and leveraged derivatives like CFDs.
The key advantage of Nigeria as an FDI location is its economy, which is partially privatized. Nigeria is the most populous country on the African continent, and the size of its domestic market is impressive. Investors are also attracted by the national tax system, abundant natural reserves, and cheap workforce.
The country boasts the highest GDP in Africa. Its fossil fuel reserves are significant, and agricultural potential is undeniable. Despite the importance of oil revenue, Nigeria has been able to keep its public and external debt low.
- Obstacles to Progress
At the same time, investment is still hampered by corruption and red tape. The political system is considered unstable and insufficiently transparent. Inadequate infrastructure is another important obstacle.
Specific challenges that increased operating costs in 2020 included the following:
• poor transport connections,
• interruptions of power supply,
• inadequacy of the legal system,
• absence of effective mechanisms for dispute resolution,
• vulnerability to volatility on the energy markets,
• lack of security due to political extremism in northeast Nigeria.
- Undeniable Improvement
Doing business in Nigeria is not easy, according to the World Bank's 2020 edition of Doing Business Report. The country is now in the 131st place worldwide.
However, a year prior, Nigeria ranked 146th, which shows that progress has been made. Improvement is seen in such categories as:
• conditions for startups,
• construction permits,
• electricity supply,
• property registration,
• cross-border trading, and
• contract enforcement.
So far, Nigeria has been featured on the list of top improvers twice. This is partly due to increased investment flows from US-based giants like Facebook and Uber, as well as companies like Emergent Payments and Meltwater Group. Chinese companies are investing primarily in the aerospace, textile, and automotive sectors.
In recent years, the Government has implemented many initiatives aimed at strengthening agriculture, mining, oil production, gas extraction, and export. Industries like clothing are regarded as pioneering and beneficial for the development of the local economy and employment.
These segments are now supported by tax incentives. In the future, the authorities are expected to introduce a deduction of interest on loans for gas companies and allowances for capital investments.
The Bottom Line
The progress made by Nigeria in terms of its FDI is obvious. The country has seen increased investment from large American companies, as well as businesses based in China and Europe.
However, investors are still grappling with many challenges, from power cuts to political instability. Clearly, there is still room for improvement.
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