Why Nigeria Needs More Direct Investment to Grow its Economy
In May, the National Bureau of Statistics (NBS) published its Nigerian Capital Importation first-quarter Report, which revealed that Nigeria received $5.85 billion capital inflows in the first quarter (Q1) of 2020.
According to the NBS, the $5.85 billion represents over fifty percent increase when compared to what Nigeria received in the fourth quarter of 2019. However, when compared to the corresponding first quarter period of 2019, the investment flow into Nigeria shows a 31.19% decline.
Nigeria recorded a $24 billion investment inflow in 2019, making it the highest inflow ever recorded. Notwithstanding, the trends continue to show that portfolio investments have a larger share of foreign investment inflow into Nigeria.
In 2019, Foreign Portfolio Investments (FPI) accounted for 68.2% of total inflows, while Foreign Direct Investment (FDI) and other Investment Inflows accounted for 3.9% and 27.9% respectively.
Undoubtedly, Nigeria needs all the investment it can get to revive its economy post-COVID-19, but we cannot deny that there’s been an imbalance in capital importation inflow, which does not benefit the economy on a long term.
If Nigeria continues to have an enormous portfolio investment and a tiny fraction of direct investment year-on-year, the impending investment problem will worsen the case of development in the country. For instance, the IMF in a recent report on Nigeria titled, “Additional Spending towards Sustainable Development Goals” is advocating for a $49bn investment to rehabilitate and upgrade Nigeria’s power sector by 2030.
Is there really a difference between Portfolio and Direct Investment?
Portfolio investment is less favorable when compared to direct investment because portfolio investments are brief-term money making strategies and can be sold off quickly unlike direct investment where investors are in for the long term.
For the sake of understanding, the difference between FPI and FDI is that foreign portfolio investment is about purchasing securities of foreign countries, such as stocks and bonds, while foreign direct investment is about building or purchasing businesses and their associated infrastructure in a foreign country.
In the past, foreign direct investment has proved resilient during financial crises for many countries. For instance, it worked in East Asian countries, where direct investment was remarkably stable during the global financial crises of 1997-98. According to this finance and development report of the IMF, the resilience of FDI during financial crises was also clear during the Mexican crisis of 1994-95 and the Latin America debt crisis of the 1980s. These and many other shreds of evidence are the reason FDI is more favorable than other forms of capital inflows.
When FDI increases in a country, there are lots of benefits to the host country, which includes a transfer of technology and technical know-how, and the furtherance of competition in the domestic market.
Besides that, recipients of FDI often gain new businesses, increasing employment, and employee training which contributes to human capital development in the host country, and last but not least, they generate profits from corporate tax revenues.
A study conducted by Bosworth and Collins in 1999 provides evidence on the effect of capital inflows on domestic investment for 58 developing countries during the year 1978-1995. The sample covers nearly all of Latin America, Asia, and many countries in Africa. The authors distinguish among three types of inflows: FDI, portfolio investment, and other financial flows (primarily bank loans). In that study, Bosworth and Collins found that FDI has a beneficial impact on developing host countries and appears to bring about a one-for-one increase in domestic investment.
In conclusion, since economic theory and empirical evidence suggest that FDI has a beneficial impact on host countries, then obviously, Nigeria needs more direct investment to expand its economy, but to achieve this, it must concentrate on improving the business environment so it can attract more investment.
By Lanre-Peter Elufisan
Lanre Peter is a writer and documentary filmmaker with an interest in Africa's socio-political and economic issues. You can tweet at him @iamLanrePeter