July 24, 2021

Private enterprise: Attracting foreign direct investments


Foreign Direct Investments

By Timi Olubiyi

In the Nigerian context, a foreign direct investor is an individual or entity resident abroad that has acquired, either directly or indirectly, at least 10% of the voting power of an enterprise resident in Nigeria.

The direct investor could be any of the following in real terms: an individual, a group of related individuals, an incorporated or unincorporated enterprise, a public or private enterprise, a group of related enterprises, or any of the mentioned combinations. Foreign Direct Investment, FDI, is an investment from a party abroad into a business or enterprise in Nigeria to establish a lasting interest.

Simply put, FDI is when a company or individual abroad has lasting investment interest, which is obtained by at least 10% of the voting power in a business in Nigeria. The Lasting interest of the investor differentiates FDI from other forms of foreign investment, including foreign portfolio investments where investors passively hold securities in Nigeria from a foreign country.

A greater number of countries strive to attract FDI because of its acknowledged benefit as an instrument of economic development. Historically, Nigeria is one of the countries in Africa with vast demand for goods and services in form of FDIs, sitting in the third place behind Egypt and Ethiopia, according to the United Nations Conference on Trade and Development, UNCTAD, 2019 World Investment Report.

However, Nigeria has been able to attract some appreciable FDIs over the years. To a greater extent, one of the Federal Government measures to motivate FDI is noticeable in the Ease of Doing Business Policy. The policy has been beneficial to SMEs largely and it has helped in driving the inflow of FDIs into the country.

The Central Bank of Nigeria provides FDI in US Dollars and from the data gathered it has increased from less than US$ 1billion in 1990 to US$ 1.2billion in 2000, US$ 4.5 billion in 2006 and as of 2019 the FDI inflow into Nigeria wasUS$ 3.3 billion. The contribution of FDIs to SMEs in Nigeria is significant and it keeps increasing year-on-year.

Therefore, for SME operators to attract international investors it will require effort, time, and a lot of confidence. Nevertheless, it can be an important avenue for the development and expansion of business operations and also stimulate dependable joint ventures, private equities, mergers, and acquisitions. Some of the main investing countries in Nigeria include the USA, China, the United Kingdom, the Netherlands and France, among others.

FDI can either be conducted horizontally or vertically in terms of strategy. With the horizontal approach, a business expands its domestic operations to a foreign country. That is, the business conducts the same activities but in a foreign country. For a good understandingof horizontal FDI, a typical example is the involvement of Shoprite outlets in Nigeria.

Whereas the vertical FDI involves the expansion of businesses into a foreign country by moving to a different level of the supply chain. In other words, a firm conducts different activities abroad but these activities are still related to the main business. Using the same example, Shoprite building, and managing malls and other real estate products.

Horizontal investment is the most common and occurs when a company (investee) merges with another company (investor) that offers the same products or services from a different country to become stronger in that market.

This article is looking at the Inward-flow of FDI which refers to investments received by local businesses from foreign entities or individuals. An example of such is any investment made in Nigeria by different foreign individuals or entities from abroad.

There is a large body of knowledge on the benefits local businesses can derive from FDIs, some of which are profitability stimulation, development of human capital, more boosts in employment opportunities and job creation, enhanced competitiveness, access to management expertise, improved employee skills,transfer of technology, knowledge transfer, and above all it will contribute to business expansion and profitability.

More importantly, the increase in FDI inflows to a business the more the creation of several positive economic effects. Foreign direct investment offers an important source of capital and it can complement domestic investments of the local businesses.

Additionally, foreign direct investments offer advantages and benefits to foreign investors as well, such as market diversification, boosting competitiveness, tax incentives, lower labor costs, taking advantage of large market size, preferential tariffs, and high demand for goods and services due to the population of Nigeria.

Furthermore, since Foreign Direct Investment sometimes flows through trade partners, mergers and acquisitions, and joint ventures, this can bring better managerial and organisational skills into local SMEs. Nonetheless, attracting international investors to your business can be a daunting task anyway, though if you create time and effort, it will reap the desired gains.

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Attracting foreign investment can be simple if your company does it the right way. However, the most important parts of attracting international investors are a strong business model, good business structure and culture, impressive infrastructure quality, huge market size, return on investment, and innovation. These are some of the factors that usually attract foreign investment to a local business.

SME operators should consider the following guidelines and advice to attract FDIs into their prospective businesses: Compile significant data that shows the business’s success and trend in your current financials.

Projections on how you plan to continue that success with adequate supportive data should be gathered. Documentation of how your business will work under the proposed new arrangement and the commercial viability should be prepared. As an experienced SME operator consider having a list of potential pitfalls and how you plan to navigate them for the investor to understand the inherent business risk and their mitigants.

As an SME operator, you should also be able to show what an investor could gain investingin your business, which is the return on investment. Having detailed information about how investing in your business is beneficial to the investors should similarly be gathered, if possible, prepare an information memorandum. FDIs will expect you to know everything about your business and how it will function with additional shareholders or equities, so work on this.

You should also educate yourself on the cultural and business norms of the countries of your prospective investors, as ignorance or miscommunication can be tragic for a business relationship.

The big question is can the investor easily take profits out of the country and repatriate, or are there local restrictions? All government regulations, policies, and approval needed should be compiled and make sure you have all the process detailed and you can provide an accurate timeline for getting documentation sorted.

Above all, adopt aggressive investment promotion on social media and use international networking events and agents to search for investors and build up interest. Make sure all needed information on your business is full and concise for review by your prospective investors.

With these aforementioned tips, your business can find an effective foreign investor to help your business grow. However, if you have specific concerns about enhancing or on how to build an effective strategy to attract FDIs to your business, you may need to urgently reach out to a professional for essential advice. Good luck!

Dr. Olubiyi, an entrepreneurship and small business management expert, wrote via: email: [email protected]