In this post we will be looking at the meaning of foreign investment, types of foreign investment and procedures, Advantages and Disadvantages of Foreign Investment in Nigeria.
INTRODUCTION.
With Africa being one of the fastest growing continents in the world and Nigeria being a major investment destination for many international businesses, persons and organizations. It is very important that intending investors consult and seek advice from local professionals such as accountants and lawyers, with the latter coming first in hierarchy. This article gives an introduction into the relevant laws and procedures which an investor should consider when intending to do business in Nigeria. Section 20(4) of CAMA provides:
“Subject to the provisions of any enactment regulating the rights and capacity of aliens to participate or undertake in trade or business, an alien or a foreign company may join in forming of a company”.
Also, Section 17 of Nigerian Investment Promotion Commission (NIPC) provides that a non-Nigerian whether company or individual may invest and participate in the operation of any enterprise in Nigeria except those in the negative list. The negative list include: arms and ammunition; narcotic drugs and psychotropic substance; para-military and military wears and accouter. A foreigner may invest in Nigeria by way of Foreign Direct Investment (FDI) which is investments such as ownership of productive assets, such as factories, mines and land or through Foreign Portfolio Investment (FPI), which is the entry of funds into the country where foreigners make purchases in the country’s stock and bond markets.
What Is Foreign Investment?
Foreign investment involves capital flows from one country to another, granting the foreign investors extensive ownership stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management as a part of their investment or an equity stake large enough to enable the foreign investor to influence business strategy. A modern trend leans toward globalization, where multinational firms have investments in a variety of countries. Foreign investment is largely seen as a catalyst for economic growth in the future. Foreign investments can be made by individuals, but are most often endeavors pursued by companies and corporations with substantial assets looking to expand their reach. As globalization increases, more and more companies have branches in countries around the world. For some multinational corporations, opening new manufacturing and production plants in a different country is attractive because of the opportunities for cheaper production and labor costs. Additionally, these large corporations frequently look to do business with those countries where they will pay the least amount of taxes. They may do this by relocating their home office or parts of their business to a country that is a tax haven or has favorable tax laws aimed at attracting foreign investors. Foreign investments can be classified in one of two ways: direct and indirect.
TYPES OF FOREIGN INVESTMENT
Foreign Direct Investment (FDI): When a company, financial institution, or individual invests in foreign countries and owns more than 10% of a company’s stake, it is referred to as a foreign direct investment. It gives the investor controlling power and influence over the companies’ operations and processes. Another way of gaining foreign direct investments is opening plants, factories, and offices in another country. There are two types of foreign direct investment:
- Horizontal Investment: When an investor establishes a similar type of business in a foreign country or when two companies of the same industry (operating in different countries) merge, it is known as horizontal investment. A company pursues this kind of investment to gain market share and become a global leader.
- Vertical Investment: It refers to when a company of one country acquires or merges with a firm in another country, irrespective of their business fields. For example, a manufacturing business of one country acquiring the supplier of raw materials for production of another country. A company indulges in this type of investment to remove the dependency on others and achieve economies of scale.
- Conglomerate direct investment: Conglomerate investment occurs when a company invests or takes over unrelated businesses in other countries. The term “conglomerate” refers to a corporation that comprises several independent businesses. Conglomerate FDI is carried out to diversify business risks, expand into new areas, and reduce total operating costs.
Foreign Indirect Investment: When a company, financial institution, or an individual invests in another country by buying stocks of companies trading in the foreign stock exchange, it is known as foreign indirect investment. However, the said investment should not cross over 10% of the stock in a single company. There are two methods or strategies for this investment:
- Greenfield Investment: – In this strategy, the company starts its business operation in another country from scratch. For example, Domino’s and McDonald’s are US-based companies that started their business in India from zero. Currently, they are leading in their segments.
- Brownfield Investment: – In this strategy, the company does not create its business from scratch. Instead, they choose mergers or acquisitions. Recently, another US-based company, Walmart Inc acquired Flipkart, an Indian company, thus acquiring all its assets and liabilities.
Routes of Foreign Investment
Below are the two routes of foreign investment–
- Automatic route: In the automatic course, foreign companies/institutions do not require any approval of the government or any agencies for investing in another country.
- Approval route: – In the approval route, foreign companies/institutions require approval from government or any specified body of the country where they want to invest.
PROCEDURE FOR FOREIGN INVESTMENT IN NIGERIA
Nigerian laws allow and encourage foreign investment in Nigeria by aliens or non-Nigerians.
Section 20(4) of CAMA provides:
“Subject to the provisions of any enactment regulating the rights and capacity of aliens to participate or undertake in trade or business, an alien or a foreign company may join in forming of a company”.
Also, Section 17 of Nigerian Investment Promotion Commission (NIPC) provides that a non-Nigerian whether company or individual may invest and participate in the operation of any enterprise in Nigeria except those in the negative list. The negative list include: arms and ammunition; narcotic drugs and psychotrophic substance; para-military and military wears and accoutre. A foreigner may invest in Nigeria by way of Foreign Direct Investment (FDI) which is investments such as ownership of productive assets, such as factories, mines and land or through Foreign Portfolio Investment (FPI), which is the entry of funds into the country where foreigners make purchases in the country’s stock and bond markets.
There are various laws regulating foreign participation in business in Nigeria, they include:
- Companies and Allied Matters Act (CAMA), Cap. C.20 LFN 2004 – Sections 148 and 155 of CAMA. Section 148 of the Act requires the production of a document which is by law sufficient evidence of probate of a Will or letters of administration of an estate. Section 155, on the other hand, deals with transmission of shares
- Nigerian Investment Promotion Commission (NIPC) Act, Cap NI 17 LFN 2004 – Section 17 of the Nigerian Investment Promotion Commission Act which requires alien to register with the Commission before commencing business in Nigeria.
- Immigration Act Cap I 1 LFN 2004 – Obtaining business permit under Section 8 of the Immigration Act, 1963.
- Investments and Securities Act (ISA) 2009 – Section 8 of the Investments and Securities Act which empowers the Securities and Exchange Commission (SEC) to keep and maintain Foreign Direct Investments (FDI) and Foreign Portfolio Investments (FPI) in Nigeria.
- Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Cap F.34 LFN 2004.
- Industrial Inspectorate Act Cap. I 8 LFN 2004.
- National Office for Technology Acquisition and Promotion Act, Cap N. 62 LFN 2004.
There are basically three government agencies regulating foreign participation in Nigeria and these are:
• Nigerian Investment Promotion Commission (NIPC);
• National Office of Technology Acquisition and Promotion (NOTAP); and
• Immigration.
It should be noted that this government agencies have respective registration procedures. Documents to be submitted to the relevant government agencies seeking reliefs and approval on behalf of companies include: business permits, expatriate quota and residence permit. On approval, the non-Nigerian is then granted an STR Visa which on arrival in Nigeria will be regularized and then issued a work permit. A wide range of incentives and reliefs have been designed by the government to boost investment opportunities in Nigeria and are offered to foreign investors who qualify for them, they include: pioneer status; duty drawback and suspension scheme; tax relief under the Companies Income Tax (Cit) Act, Cap 60 LFN, 1990.
Advantages of Foreign Investment in Nigeria.
- Employment creation is a significant advantage of foreign investment as it increases manufacturing activities and improves the service sector
- It provides exclusive market access in another nation.
- It enhances a country’s infrastructure and helps develop the backward area by setting up industries or plants.
- It also helps in improving the technologies and operational practices by sharing knowledge.
- When manufacturing is boosted by foreign investment, exports rise.
- An increase in income and job opportunities occurs. Furthermore, an increase in wages enhances a nation’s per capita income.
Disadvantages of Foreign Investment in Nigeria
Disadvantages of foreign investment are as below:
- It poses a risk or causes a hindrance to domestic investments.
- Fluctuation in exchange rates can make foreign investment risky.
- It depends on the political environment, foreign policies and regulations that keep changing in a country.
- The domestic company can lose its control over business and the profit earned.
- The motive of gaining market share through foreign investments may cause domestic and small traders to incur massive losses.
Conclusion
Foreign investment refers to investment from another country. Since it comes from cross-border, more rules and regulations are required. It is beneficial for developing countries because it helps build infrastructure, create employment, share knowledge, and increase purchasing power. At the same time, it is also required in a developed nation for business expansion. In globalization, foreign investment plays a vital role in business expansion. On the other hand, it is harmful to small and domestic businesses because they have insufficient funds to compete against giant corporations.