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Foreign direct investment and economic development in Sub-Saharan Africa

By ‘Femi D. Ojumu
21 September 2022   |   2:36 am
This 21st Century is besieged by complex and conflicting socio-economic variables, disruptive innovations, technological advances, COVID-19 pandemic aftershocks, regional conflicts and political tensions.


“The largest 100 corporations hold 25 per cent of the worldwide productive assets, which in turn control 75 per cent of international trade and 98 per cent of all foreign direct investment. The multinational corporation … puts the economic decision beyond the effective reach of the political process and its decision-makers, national governments.” — Peter Drucker

This 21st Century is besieged by complex and conflicting socio-economic variables, disruptive innovations, technological advances, COVID-19 pandemic aftershocks, regional conflicts and political tensions.

These factors implicate the imminent supplanting of old orthodoxies partly evidenced in less traditional “9 am to 5 pm” work; high unemployment in developing economies; changing work patterns and an ever-increasing adoption of remote working models and the discounting of the so-called job-for-life across industry sectors. Added to that mix is post-COVID-19 global inflation.

Given these dynamics, this article seeks to explicate the relative importance of Foreign Direct Investments (FDIs) in catalysing economic development in Sub-Saharan Africa and countervailing challenges.

The concept is simple. FDIs are investments reflecting a lasting interest, equity stake and control by a foreign direct investor, domiciled in one economy, in a business that is domiciled in another economy (foreign affiliate). The foreign director investor may be an entirely privately held entity or owned by a government.

For instance, a Nigerian exploration and production company (NXX) may acquire a controlling equity stake via a horizontal FDI in an Angolan mid-stream petrochemical refining company (AZZ), or vice-versa.

Typical FDI inflows entail capital facilitated by a foreign direct investor to a foreign affiliate, or capital received by foreign direct investment from a foreign affiliate. FDI outflows represent similar flows from the other economy’s perspective.

The metrics of FDI flows indicate their recording in net terms. That is, credits minus debits and thus may generate positive or negative FDI outturns. The United Nations Commission on Trade and Development (UNCTAD) establishes that FDI stock is the value of capital and reserves attributable to a non-resident parent enterprise, plus the net indebtedness of foreign affiliates to parent enterprises.

Although there is no singular rationale for FDIs, because the objectives of corporate entities vary according to their unique strategic priorities, nevertheless, several commonalities can be established. One of such is market saturation which imperils profitability in the FDI’s own jurisdiction.

In that scenario, an FDI may consider it a smarter strategy to invest and acquire a significant stake in an offshore entity to enhance its commercial viability and boost profitability.

Another consideration could be the ease of doing business in country B, whereas the foreign direct investor is domiciled in country A. Linked to that FDI ratio, is political stability. Institutions and high-net-worth individuals will typically invest capital and resources in stable political climates underpinned by policy constants.

Therefore, strategic planning is more feasible relative to monetary and fiscal policies, free markets, capital flows and exchange rate mechanisms.

One of the most important justifications, however, is the moral imperative for richer economies to catalyse trade, (not aid!), with developing economies to enhance sustainable development. After all, sustainable development benefits developed and emerging economies, in that the presence of effective and robust educational, healthcare and socio-political systems, undercut a primary driver for the brain drain from emerging to developed economies for one. To put this into some context, the Nigerian Medical Association (NMA) reports that through 2016 and 2018 alone, the country lost in excess of 9,000 doctors to the United Kingdom, Canada and the United States.

Would such a quantum of doctors exit Nigeria then, and many more since, if there were effective healthcare and socio-economic systems, under the right navigation?

FDIs can be established in numerous ways. These include taking major equity stakes via acquisitions, mergers or joint venture partnerships with a foreign company, creating a subsidiary or an affiliate company in an offshore jurisdiction.

By way of guidelines, the Organisation for Economic Cooperation and Development (OECD) recommends 10 per cent as a baseline for an FDI controlling stake in a foreign entity. That policy is, however, flexible and pragmatic recognising that circumstances do exist whereby ownership is not defined by a 10 per cent ownership stake, but lower proportions, which nevertheless, amount to controlling equity interests.

In Nigeria, FDIs necessarily invoke the provisions and regulatory compliance requirements within the Companies and Allied Matters Act (CAMA) 2020.

Section 78 (1) therein provides inter alia: “every foreign company which before or after the commencement of this Act was incorporated outside Nigeria, and having the intention of carrying on business in Nigeria, shall take all steps necessary to obtain incorporation as a separate entity in Nigeria for that purpose, but until so incorporated, the foreign company shall not carry on business in Nigeria or exercise any of the powers of a registered company and shall not have a place of business or an address for service of documents or processes in Nigeria for any purpose other than the receipt of notices and other documents, as matters preliminary to incorporation under this Act.”

On the face of it, that provision is onerous and represents a veritable antithesis to the ease of doing business. But then again, should FDIs wittingly or unwittingly constitute a basis for the stifling of enterprise and local businesses? No! And this is where the provisions of section 80 (i) and subsections (a), (b), (c) and (d), intermediate, by seeking to facilitate FDIs whilst meeting the overarching policy aim of stimulating Nigeria’s economic landscape.

The latter provisions enunciate the mechanics for a foreign company to apply to the trade minister for exemptions from the provisions of section 78 supra if that company belongs to one of the following categories: (a) foreign companies other than those specified in paragraph (d), invited to Nigeria by, or with the approval of the Federal Government, to execute any specified individual project; (b)foreign companies which are in Nigeria for the execution of specific individual loan projects on behalf of a donor country or international organisation; (c) foreign government-owned companies engaged solely in export promotion; and (d) engineering consultants and technical experts engaged on any individual specialist project under contract with any of the governments in the Federation or any of their agencies, or with any other body or person, where such has been approved by the Federal Government.

Attractive as FDIs may be to a foreign affiliate’s economy, a fine balance always has to be struck by government and regulatory authorities to ensure that the claimed benefits are in fact achievable. The assessment parameters therein will seek to evaluate in advance, and periodically, that FDIs; do not and will not create monopolies and oligopolies thus harming competitiveness and innovation; will facilitate genuine skills transfer; will create sustainable employment; optimise fiscal revenues in the foreign affiliate’s economy; will facilitate lawful and transparent capital inflows and outflows in a manner which mutually benefits the economies of the foreign direct investor and its foreign affiliate; plus, make a net positive contribution to the foreign affiliate’s gross domestic product.

To illustrate the point, after months of complex cross-border mergers and acquisitions negotiations between Nvidia, an American software company, and ARM, a UK micro-chip designer in 2020, the UK’s Competition and Markets Authority (CMA), upon detailed analysis, took the view that the deal would harm competition within key market segments of the semiconductor industry. The proposed $40 billion deal was scrapped in 2022!

According to UNCTAD’s World Economic Report, the global value of foreign direct investments in 2021 was approximately $1.58 trillion. By the end of 2020, the world’s top 10 recipients of foreign direct investments were the United States, United Kingdom, China, Hong Kong (Special Administrative Region), Singapore, Switzerland, Netherlands, Germany, Ireland and Luxembourg.

In Sub-Saharan Africa (SSA), South Africa has consistently been the largest recipient of foreign direct investment. Through 2019, 2020 and 2021, the country received $4.6 billion, $3.1 billion and $40.9 billion respectively.

Within the same period, Ghana received $3.88 billion in 2019, $1.88 billion in 2020 and $2,6 billion in 2021. Ethiopia received $2.5 billion in 2019, $2.4 billion in 2020 and $4.3 billion in 2021. Nigeria, in turn, benefitted from foreign direct investments to the tune of $3.3 billion in 2019, $2.4 billion in 2020 and $4.8 billion in 2021.

The outlier effects of the COVID-19 pandemic imperilled foreign direct investments in each of the four SSAs, as it did globally. Nevertheless, a striking observation is that South Africa alone, in 2021, attracted $40.9 billion in FDIs, which is more than the combined total ($31.26 billion) of FDIs in Ghana, Nigeria and Ethiopia through 2019, 2020 and 2021. This begs a number of questions. Is the ease of doing business less complicated in South Africa than in the other 3 SSA economies? Are there more stable socio-economic policies in that country relative to the SSA economies? Are the political systems more stable and is corruption less rife? The answers to those posers, on the evidence of the foreign direct investment metrics alone, can only truly be yes.

It follows, therefore, that the concluding recommendations in respect of attracting greater FDIs to the sampled four African economies (Ethiopia, Ghana, Nigeria and South Africa), which in this treatise constitute a proxy, for all the other SSAs must include; transparently and iteratively reducing regulatory bottlenecks; demonstrably tackling corruption; simplifying monetary and fiscal policies including simplifying exchange rate mechanisms; embedding a culture of policy consistency, as distinguished from policy inertia, irrespective of the dynamics of political timetables because government is a continuum; whilst heightening and demanding effective visionary leadership which inspires democratic legitimacy. The conclusion is straightforward: optimise FDIs as an economic driver across the SSAs and beyond.

That way, information symmetry and performing markets, which reinforces FDIs, are more likely to be accomplished for the greater good as implicit in Peter Drucker’s statement above.

Ojumu Esq is the Principal Partner, of Balliol Myers LP, a firm of legal practitioners based in Lagos, Nigeria.