Let’s paint a picture of foreign direct investment in a minute. They say it to exist when a company invests in a foreign country. This means that although the company has its base in a location (state), it establishes branches in foreign places.
Foreign Direct Investment opportunities
Foreign Direct Investment (FDI) is especially common in low-wage countries with favorable economic structures to support businesses, and a productive workforce, like Africa. We would look at the factors affecting foreign direct investment in Nigeria.
With the biggest economy in Africa, Nigeria has many business opportunities and has attracted a good number of foreign direct investments over the years.
However, there are multiple factors that investors have to consider before committing.
Factors that affect foreign investment?
There are general factors that affect foreign investments worldwide, and each country narrows its peculiar factors from that pool.
Factors affecting FDI are:
Although we will discuss the factors affecting Foreign Direct Investment in Nigeria, let’s take a general look at foreign direct investment around the world.
- Access to raw materials and infrastructure.
- Cost of labor and skills of laborers.
- Transportation and communication links.
As an investor, you should consider the following factors:
1) Wage rate: wages play an important part in foreign direct investment because investing abroad outsources labor to lower wager countries and therefore saves cost.
2) Tax rates: large companies love to invest and operate in low tax countries to save costs.
3) Labour skills: although labour might be cheap, if the skills are absent, then investing in such an area would not be worthwhile. This condition depends on the investment.
4) Size of the economy and its growth potential: foreign direct investment often targets being able to sell goods to the country it invests. Countries with large economies and growth potential often attract foreign investments better.
5) Transportation and infrastructure: the amount of infrastructure and transportation cost also plays a significant role in attracting direct foreign investments. It should be favourable with low transport costs.
6) Property rights and political stability: politically stable countries eliminate certain risks in investment. Unstable political activities could cause sanctions and a weak economy that discourages investment.
Other factors that affect foreign direct investments are clustering effects, price of commodities, exchange rates and access to free trade areas.
Factors affecting foreign Direct Investments in Nigeria
Now moving on to Nigeria as a country. The peculiar factors affecting foreign direct investments in Nigeria are:
1) Credit rating: Nigeria’s sovereign debt has carried a poor or junk rating for decades. This is because it has a higher borrowing cost than countries with an investment-grade rating.
2) Available infrastructure and natural resources: Nigeria lacks enough infrastructure; therefore, it only attracts a few multinationals to its foreign direct investment. Although rich in oil, the revenue is monopolized by a few businessmen and government power brokers.
3) Market size: Nigeria has the largest economy in Africa and a population of over 200 million people. This creates a broad market for investors, as well as a low cost of labor.
4) Deregulation and government policies: the government of Nigeria has adopted several policies over the years, which has encouraged foreign direct investment in the country. An excellent example of this is the IMF monitored liberation of its economy.
5) Political instability.
6) Exchange rate depreciation: the Nigerian currency has depreciated by a large margin within the past decade. It has forced foreign direct investments from countries with higher currency, to run at a loss or significantly increase their profits to compensate.
What policies does the Nigerian government adopt to facilitate foreign direct Investments?
Like we earlier said, the Nigerian government has adopted a good number of policies to encourage and facilitate foreign investments. They are:
- IMF monitored liberation of its economy.
- Incentives for ownership of equity in all industries except key sectors like military equipment, and
- Tax relief and concessions for local raw material development.
As an investor, a proper analysis of the risk and reward of making a foreign direct investment has to be carried out.
Although not 100% favourable, Nigeria has many opportunities and a large market that is under-exploited. As an investor, you can easily benefit from this.