CEM INSIGHT, GOVERNANCE | Investment friendliness of a country is, to an extent, judged by the volume of capital importation into the country. An understanding of this is that the more friendlier a country’s investment climate is, the more the capital importation into the country.
However, not all capital inflows into a country is a true measure of investment friendliness of that country. Out of the 3 components of capital imported into a country, Foreign Direct Investment is the main focus compared to the other two which are portfolio investment, other investment
Volume of Foreign Direct Investment (FDI) has been globally regarded as a true reflection of confidence foreign investors have in a country. This is the inflow that represent the willingness of an investor to establish a long term interest in a country.
Movement of FDI which is being tracked across the globe is known to be influenced by certain factors, chief of which is political stability/governance strength. Others are wage rate, tax rate, transport and infrastructure and size of local market. We also have commodities and access to free trade areas.
fDi Intelligence have published two reports that underscore the place of political stability and strong governance institutions in attracting FDI, and the developmental impact FDI has on a country over the other form of capital importation.
In the fDi Intelligence’s analysis of the latest Ibrahim Index, many of African countries including Nigeria, are found to backslide further in governance level. Many of these countries are also found to have lost ground in volume of FDI inflow.
“Much of Africa is less safe, secure and democratic than in 2012,” states the report. Factors holding back the continent’s governance levels include a “wave of democratic backsliding”,
Ibrahim Index is a biannual compilation by the Mo Ibrahim Foundation which assesses governance in all 54 African countries based on 81 indicators spanning security, rule of law, inclusion and economic opportunity.
In a sense, factors that affect FDI flow are also factors that affect the development of a country, put in another form, are factors that measure the level of industrial and socio-economic development of the country.
According to the report, Nigeria is one of the countries, including Zambia and Mozambique that saw both their governance score and FDI inflows decline over the decade to 2021. In real figures, FDI in Nigeria reflect a line of response to the state of the nation’s political climate within the decade.
FDI moved from $0.30 Billion in 1998 to $1.00 Billion in 1999 when the country returned to democracy from military rule, signaling a confidence in the new dispensation. This figures kept an upward trajectory till it hits $2.01B in 2003.
With a little decline to $1.87B in 2004, it climbed to $4.98B in 2005 and continued to climb to hit its all time high of $8.84B in 2011. Since this peak, the foreign direct investment figures began to drop until it touched $0.78B in 2018.
One would then understand why less developed countries are less attractive to foreign investors. One of the major reasons they have remained underdeveloped is their approach to political and governance institutions.
FDI has been found to impact development, which has further underscored the need for less developed countries to take a definite decision to create structures and processes, respect those structures and processes and establish strong and stable political environment.
fDi Intelligence in its recently published poll report, experts say that Greenfield foreign direct investment (FDI) is perceived as the type of foreign capital with the greatest advantages for developing countries, followed by foreign portfolio investment (FPI) and cross-border merger and acquisitions (M&A).
According to the report, fDi Intelligence said that 59% picked greenfield FDI as the type of foreign capital with the greatest advantages for developing countries while 12% picked FPI and cross-border M&A.
Foreign concessional debt drew five responses, commercial debt three, foreign aid two, and ‘others’ another two, the survey shows.
Transparency in electoral processes, regard for rule of law, accountability in governance and value for citizens are some of the factors that give credence to government of a country. These are not imported from the space. Nigerian leaders and their counterparts in other African countries should change their mindset and accept national development as the singular objective of politics and governance.
Reverse of these factors create undue governmental intimidation, political recklessness and treasury looting that has kept Africa in this developmental backwardness making it a perpetual beggar for grants and aid.
