What kind of FDI does Nigeria need?

Most of Nigeria’s success over the next few years will be hinged on its ability to attract investment. So far, the policies implemented by the Tinubu administration have signalled the government’s willingness to create a sustainable environment for businesses to thrive. For instance, foreign exchange (fx) reforms signal easier repatriation of investors’ funds to their home country.

But the consolation for Nigerians is that the increased cost of living caused by these reforms will ease once investors are convinced and flood Nigeria with their foreign investments.

However, only some types of foreign investment are ideal for Nigeria today. Therefore, the Nigerian government must be intentional about the investments they attract.

For instance, the quickest form of foreign investment is through portfolio investments (FPI), where investors bring their money to invest in bonds and stocks. But this is “hot” money because investors are likelier to take their funds out of a country when they sense economic trouble. After all, FPIs are easier to dispose of than foreign direct investments (FDI).

Selling your stocks on the Nigerian stock exchange requires a brief phone call to your stock broker (provided there are also willing buyers). But, disposing of your FDI requires willing buyers for your assets like the physical building or machinery used for the business. Hence, FDIs are much harder to divest out of the country.

Based on the trend in the last decade, Nigeria has attracted more portfolio than direct investment. This explains why the country suffers significant foreign exchange shocks, mainly during economic downturns.

In 2016 and