Nigeria is among the best-performing nations in African in the Sub-Saharan region. It has been trying its best to improve trade openness and contribute to heightening its economic freedom. According to the 2018 index, Nigeria is ranked position 104 in terms of economic freedom with a score of 58.4. This is an increase of 1.4 points due to the notable improvement in the freedom of labor and the efficiency of its judiciary.
According to economic performance which is measured by the gross domestic product, Nigeria has been ranked position 12 out of the 47 nations in the African Sub-Saharan region with an economic growth of 2.7 percent. The economic performance of Nigeria is above the expected averages at the regional level but below the expected averages at the world level. Nigeria is a developing nation and it has been growing at a fast pace.
Currently, globalization is taking place in the world of business at a fast pace. Many nations have witnessed the benefits associated with international trade and have motivated their national business to venture into it by supporting them (Rodrik, 2012). The value of international trade is realized at two levels, one is investments by nationals outside the country and two is investments by foreign investors into the nation.
Many businesses have reformed their policies to attract and maintain foreign direct investment in their nations to foster their economic growth and access goods and services which they have no comparative advantage in their production. Foreign direct investment occurs when businesses or rather individuals invest in their nations of interest across their national borders. An investment qualifies to be a foreign direct investment if it controls more than 10 percent of the assets of the foreign company. Foreign direct investment requires a careful scrutiny and analysis of the prevailing micro and macroeconomic conditions of the foreign nation of interest. These conditions include the level of economic growth which is measured by the gross domestic product, unemployment, inflation and interest rates, political stability and the composition of the population.
Foreign direct investment in Nigeria has been contributing much towards its economic growth. Nigeria is one of the best-performing nations in Africa in terms of economic performance and has remained the center of attraction for many investors especially in the energy, hydrocarbon and infrastructure sectors among others. By the year 2017, foreign direct investment declined and as a result recorded a drop of 21 percent to 3.5 billion.
However, due to serious government intervention, foreign direct investment has currently improved by a greater margin to 97.6 billion accounting for 24.4 percent of the gross domestic product of Nigeria (Akinlo, 2016). This is according to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2018. Nigeria has a high potential of attracting and maintaining more foreign direct investments due to massive government reforms in the sector.
Political, Economic, Socio-cultural and Technological Influences
The political system of Nigeria has not been that much stable. However, efforts have been made to create a conducive environment in as much as political stability is concerned. The nation has been peaceful despite the terrorist acts of the Boko Haram group in the nation (Ake, 2015). The current President, Muhammadu Buhari who was a military ruler took over leadership from former President Goodluck Jonathan peacefully during the year 2015. This showed that Nigeria has become a peaceful civilian nation but still much needs to be done. Nigeria with the help of nations like Chad, Cameroon and Niger have been able to eliminate the Boko Haram Islamic Terrorist Group but it has not been able to fully eliminate its attacks.
This scares many investors in various regions of the nation where frequent attacks occur such as Northeast Nigeria. The government of Nigeria has established free trade reforms but they are implemented very slowly. The scarce available resources available are controlled by hungry politicians who only favor their areas. According to the 2018 index, corruption in Nigeria has lowered government integrity and the efficiency of its judiciary to low scores of 14.4 and 39.6 respectively.
Politicians have been in fear that the implementation of the trade openness policies might raise the prices of goods and services and harm consumers who have low levels of income and also compete out most of their companies who depend on the government protectionist policies. These problems associated with political instability should be rectified for Nigeria to attract and maintain more foreign investments.
Despite the existence of some in-competencies arising from the inefficient political system, the economy of Nigeria has been doing well in terms of economic performance. The economic performance of Nigeria, which is measured by the rate at which its gross domestic product grows, has been growing for the past 8 years an average of 2.7 percent. The third quarter of 2018 recorded a growth rate of 9.5 percent a great increase as compared to that of the previous quarter which averaged 2.9 percent. The high rate of Nigerian economic growth has increased its potential of attracting more foreign direct investments.
The unemployment rate in Nigeria has been high for the past 8 years. From the year 2010, the unemployment rate has been averaging 10.3 percent. Currently, the unemployment rate stands at 18.80 percent. The cost of labor is also low. This has highly attracted foreign direct investment as cheap labor is readily available (Innocent, 2014). The inflation rate in Nigeria has been high for the past 10 years averaging 12.48 percent. Currently, the inflation rate stands at 11.28 percent which is lower than the market expectations of 11.33 percent (Bayo, 2016).
Interest rates have also been high but they have been kept stable at a rate of 14.0 percent by the Central Bank of Nigeria (Acha & Acha, 2015). Despite both inflation and interest rates being high, they have been kept stable by the Central Bank of Nigeria enabling investors to forecast future with great certainty. The stability of prices and interest rates has highly attracted more foreign direct investments in Nigeria.
Social-cultural practices do not hinder foreign direct investment in Nigeria. The government has shown great efforts towards eliminating the Boko Haram terrorist activities in the nation (Meagher, 2015). Technology is developing at a fast pace in Nigeria to ease business operations in the country. Many technology centers have emerged of late including blub hub (Kano), Co-Creation Hub (CCC) and Stonebrick hub (Abuja) among others. In a nutshell, considering the political, economic, social-cultural and technological influences, Nigeria has a great potential of attracting and maintaining foreign direct investments.
Nigerian natural resource competitive advantage
Nigeria has a vast number of natural resources which it has a comparative advantage in producing. They include Petroleum, natural gas, coal, tin, niobium, iron core, zinc, limestone, and lead. This has made Nigeria competitive in its mining and oil and gas sectors. As a result, Nigeria has been participating in the export market by selling its resources for which it has a competitive advantage in producing. They include petroleum and petroleum products, aircraft parts, chemicals, aluminum toys, vegetable products, and cashew nuts among others (Gylfason, 2014).
The leading Nigerian export partners include India with 14.1 percent, Spain 10.3 percent, Netherlands 10.3 percent South Africa 8.4 percent, Brazil 5.1 percent and others share 51 percent. Due to its natural resource competitive advantage, Nigeria has opportunities for investment in its mining sectors especially the oil and gas sectors (Oliver, 2017). Various opportunities are also available in the infrastructure sectors which is poor especially the electricity and energy sectors. Opportunities are also available in the Nigerian export processing zones such as the chemicals sector. Considering the available natural resources, Nigeria has various opportunities in the production of its natural resources such as mining sectors among others.
Foreign currency and exchange influences
The foreign currency exchange rate of the Nigerian currency Naira has been high for the past three years. Its value is low compared to that of the other African developing nations in the same rank such as Kenya. Despite its value being relatively low, it has been maintained stably by the Central Bank of Nigeria to match the prevailing economic conditions (Imimole & Enoma, 2017). The foreign currencies in Nigeria are the US dollar and the EURO. The foreign exchange rate of the Nigerian Naira against the US dollar has averaged 306NGN for the year 2018.
On the other hand, the foreign exchange rate for the Nigerian Naira has averaged 350NGN for the year 2018. The Nigerian foreign exchange rates have not been fluctuating much for the year 2018. The stability of the Nigerian currency Naira has attracted more foreign direct investors into the economy. This is due to the fact that investors can plan their future activities with greater certainty and without the fear of loss in the future.
Nigerian trade policies, barriers and incentives
The government of Nigeria highly values foreign direct investment and has come up with various trade policies to attract and maintain more foreign direct investment in the country. Foreign investors have now been allowed to own shares of foreign companies 100 percent. Later on, foreign investors were only allowed to own 40-60 percent of company shares. This policy is exceptional of the oil and gas sectors whereby ownership should be shared according to agreements made with the Nigerian government involvement.
Nigerian government prevents the anticompetitive behavior of the Nigerian business according to the Nigerian Investment Promotion Commission. This has enabled much in improving efficiency in production hence improving the economic growth of the entire nation. National security sectors such as military and weapons are highly protected by the government and no foreign investment is allowed in these sectors. These reformed government policies have highly attracted foreign direct investment in Nigeria.
There are still some trade barriers which hinder foreign direct investment in Nigeria. They include both the tariff and non-tariff barriers (Bröcker & Rohweder, 2016). Capital goods and drugs are levied zero duty, raw materials 5 percent, finished goods 20 percent, intermediate goods 10 percent and imports to strategic sectors are levied 35 percent. Commodities such as foods and drugs require inspection before being allowed into the country. Due to poor inspection services in Nigeria certificates of imports clearances are declined to deter the imports. The complex new business registration process is involved whereby various charges are incurred at different stages before a final business license is granted by the Nigerian Investment Promotion Commission (NIPC).
The government of Nigeria has various incentives which attract foreign direct investments. Foreign investments are allowed a tax exemption of 3 years (Asiodu, 2017). Investment in certain sectors which are responsible for the government such as infrastructure (roads and electricity) are only taxed 20 percent of the total cost. Investments made in areas which are economically disadvantaged are exempted from tax for 7 years. Investments which utilize the minimum set local raw materials target are given a 20 percent tax credit. The various incentives implemented by the government of Nigeria have highly attracted foreign direct investments in the stated areas.
Nigerian existing levels of foreign direct investment
Foreign direct investment in Nigeria has been contributing much towards its vast economic growth. It has been increasing over the past 5 years with a major decline during the end of the year 2017. According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2018, during the year 2017, the Nigerian foreign direct investment declined by 21 percent to 3.5 billion.
During the year 2018, foreign direct investment has improved by a greater margin to 97.6 billion accounting for 24.4 percent of the gross domestic product of Nigeria (Wafure & Nurudeen, 2015). This increase was due to various tax incentives introduced by the government, the availability of cheap labor and the utilization of various available natural resources. Improvement of foreign direct investment in Nigeria is anticipated in future due to continued implementation of government reforms and incentives.
Summary and recommendations
From the research findings, Nigeria has a great potential and opportunity for foreign direct investment. The political system of Nigeria has remained peaceful despite attacks from the Boko Haram group which the nation has tried its best to eliminate. The economy of Nigeria has been growing at a fast pace averaging a 2.7 percent growth rate for the past 8 years. Recently the economic growth stands at 9.5 percent. Interest, foreign exchange and inflation rates have been high but they have been kept stable by the Central Bank of Nigeria.
This has enabled investors to plan for their future with great certainty. The unemployment rate in Nigeria has been high and currently stands at 18.8 percent despite many Nigerians valuing quality education. This shows that cheap quality labor is readily available in the nation. Various incentives introduced by the government have highly contributed towards improving foreign direct investment in Nigeria which currently stands at 97.6 billion. The government should work towards eliminating trade barriers to attract more foreign investors. Costs and complexity of new business registration should be eased. The process of checking imports standards should be made transparent and efficient. Corruption should be highly discouraged by arresting the offenders and judging them accordingly irrespective of their class (Eker, 2015).
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