Foreign Direct Investment in Nigeria
For years the economy of Nigeria, Africa's most populace nation, was held back by political instability, poor government policies, a lack of infrastructure, and endemic corruption. This started to change in the 2000s. In halting steps, Nigeria has moved toward a more stable democratic form of government. In 2007, for the first time in the history of the country, following general elections there was a peaceful transfer of civilian power. Since then, the government has pursued market-orientated reforms, including the removal of subsidies, privatization of some state run businesses, lower trade barriers, and deregulation. The government has tried to rid itself of corruption, albeit with decidedly mixed success. There has also been some attempt to improve the country's poor transportation and power infrastructure.
The reforms have had a positive impact. The GDP of Nigerian measured in constant 2005 U.S. dollars increased 2.75-fold from $67 billion in 2000 to $183 billion in 2013. When estimates of the “informal” or “black economy” sector are taken into account, the GDP may have been 50 percent larger again in 2013. Since 2004, Nigeria has grown at 7 percent per annum compounded, faster than the West African average. Powering this growth were high oil prices. Nigeria is a significant oil producer, and high oil prices have helped improve government finances, but the industrial and agricultural sectors of the economy are also growing.
Foreign direct investment emerged as one of the major engines of growth. For years, foreign investors stayed away from Nigeria, scared off by political instability and high levels of corruption, but that too is starting to change. Encouraged by better economic management, and the promise of a large domestic market, inward foreign investment in Nigeria increased from $1.2 billion in 2000 to a peak of almost $9 billion in 2011 before slipping to $5.6 billion in 2013. This surge in investment made Nigeria the top destination for FDI in sub-Saharan Africa. Among recent investors has been General Electric, which announced in 2013 that it would put over $1 billion into Nigeria over the next five years. The investments include building a manufacturing plant to support the power generation and oil extraction industries, and a service center for supporting GE equipment. GE believes that its investment will create 2,300 jobs.
Foreign retailers will also probably make major investments in distribution infrastructure such as cold storage facilities and warehouses. Currently, there is a chronic lack of cold storage facilities in India. Estimates suggest that about 25 to 30 percent of all fruits and vegetables spoil before they reach the market due to inadequate cold storage. Similarly, there is a lack of warehousing capacity. A lot of wheat, for example, is simply stored under tarpaulins, where it is at risk of rotting. Such problems raise foods costs to consumers and impose significant losses on farmers.
While the majority of investments are still targeted at Nigeria's large energy sector, there are signs that this too is beginning to shift. A case in point is Procter & Gamble, which in 2012 invested $250 million to construct a state of the art plant to manufacture disposable diapers in Nigeria. Explaining the investment, a P&G spokesperson noted that “Nigeria has a very strong, dynamic and growing population of now over 167 million people with over 40 percent less than 15 years old. By 2050, Nigeria is projected to have the third largest population in the world. This represents a rapidly growing number of consumers and a wonderful opportunity to serve.” The P&G spokesperson also indicated that the company would increase its investment if the government was successful in further lowering import tariffs and consumption taxes, and resolved some of the infrastructure problems that were currently holding back the country.
Sources: K. Aderinokun, “Nigeria: We Want to Make Nigeria the Hub of Procter and Gamble's West African Operations,”All Africa,August 21, 2012; N. Mazen, “General Electric Plans $1 Billion Investment in NigePower,”Bloomberg,January 31, 2013; CIA,The World Factbook: Nigeria,updated January 7, 2014; Staff reporter, “Well below Par,”The Economist,November 29, 2014.
Case Discussion Questions
1. What factors held back the flow of FDI into Nigeria for most of the country's history as an independent nation?
2. Why did foreign direct investment into Nigeria start to accelerate after the mid-2000s?
3. How do you think FDI might benefit the Nigerian economy? Is there any potential downside to Nigeria from more FDI?
4. Nigeria is largely dependent on oil exports to drive its economy forward. Given the sharp fall in global oil prices that occurred in 2014, what impact do you think this will have on FDI into Nigeria?
5. Nigeria's government is currently fighting a vicious insurgency mounted by Boko Haram in the country's remote and sparsely populated northeast. Should this be of concern to potential foreign investors, most of who invest in the country's populated southern regions?
6. Imagine that you work for a large consumer products company selling basic household goods. List the pros and cons of investing in Nigeria. Under what circumstances would you recommend investing?