African governments have sought to overcome the challenge of low productivity and the inability to accelerate industrialization by infusing foreign capital in the form of Foreign Direct Investments (FDIs). Indeed, FDIs can help African nations boost their industrial production capacity, create more job opportunities, and generally grow economies. However, if not properly regulated, foreign capital can also trigger considerable economic damage to recipient countries by undermining domestic entrepreneurship. Here is why.
The influx of foreign capital prevents local firms from competing effectively with their foreign competitors who have far greater access to capital at better interest rates from their countries of origin. As such, local firms are unable to produce local equipment or manufacture products at competitive prices – a situation which invariably leads to the marginalization of local entrepreneurship. It is worth mentioning that this situation also leads to capital flight as foreign companies repatriate their earnings, thereby depleting the scarce foreign currency reserves of recipient countries in the process and depriving them of the opportunity to reinvest benefits in the economy.
The unregulated inflow of global capital also contributes to making local firms experience low patronage (insufficient level of demand or customer support for a product, service, business, or establishment) for locally manufactured products, thereby diminishing citizens’ joy and pride for homemade goods.
In Nigeria for instance, a number of indigenous manufacturers who have been able to resist the weighty pressures of global capital are confronted with the struggle to overcome low patronage. Consider, for instance, Innoson Vehicle Manufacturing (IVM) Company Limited, one of the notable indigenous car manufacturers in Nigeria. Products from the company include heavy duty vehicles, middle and high-level buses, special environment friendly vehicles, saloon automobiles and SUVs, all designed and made suitable for African road conditions. The company has more than 7,000 employees in Nigeria and factories in different parts of the country. IVM intends to make his automobile company’s brand acceptable across Africa. However, although Innoson vehicles competes favorably with foreign vehicles imported into Nigeria, in terms of quality and price, a large number of Nigerians who have shown their admiration for his vehicles are not able to afford them. As a result, Nigerian roads are flooded with foreign vehicles, mostly used and damaged cars, often called ‘‘second-hand’’.
The historical dominance of foreign capital in Nigeria
British firms such as United African Company, John Holt and Peterson Zerchonics and the French Compagnie Francaise de l’Afrique Occidental, Societe Commerciale de l’Ouest Africain and Union Training Company, were massively protected and promoted by the colonial government to control the Nigerian economy. These firms controlled about 70% of Nigeria’s import and exports during the colonial period. The British Bank of West Africa (now called First Bank) and the Barclay Bank (now called Union Bank) dominated the financial market. In such a context, indigenous manufacturing was systematically marginalized to guarantee unfettered access and control of local resources, human and material, to these firms.
Furthermore, the educational, commercial and administrative policies of the colonialists conditioned Nigeria to depend on foreign aid, foreign technology and all forms of external assistance. When nationalist movements and protests against colonization climaxed, the colonialists hurriedly recruited, for partnership and control, their chosen local (Nigerian) elites whom they trusted would not jeopardize their business interests in the post-colonial era. By promoting local chiefs at the helm of its tentacles, colonialism survived. Worse still, the sources of wealth of these local business elites that were crafted by the colonial state were not connected to productive economic ventures. Local business elites found satisfaction in unproductive (though lucrative) sectors like real estate, land speculation, import and export, transportation. It is therefore not surprising that massive industrialization in Nigeria remains a pipe dream to date.
Regardless of the adverse impacts of massive capital outflow by foreign companies and the substantial drop in domestic savings, world finance institutions continue to ignore requests by African countries for more engagements in trade rather than donations in foreign aid. Painfully, capital flight not only depletes domestic financial resources, it also creates huge risks to local economy considering its role in undermining the stability of monetary policies, price stability and money supply. Capital flight creates a lot of uncertainty because it is, in itself, a demonstration of lack of confidence in the domestic economy, even though it continues to exploit and milk local resources with reckless abandon.
Addressing the adverse impacts of foreign capital in Nigeria
On account of many decades of neglect by the colonial state as well as furtive economic sabotage perpetuated through neocolonialism, Nigeria’s local entrepreneurs and manufacturing sector need special government intervention. In this regard and as the practice is in many countries of the world, selective application of neoliberalism is essential, particularly in the provisioning of government subsidy. Indeed, most capitalist and economically advanced nations are known to selectively apply neoliberal assumptions in consonance with their national interests.
While neoliberalism urges for the removal of subsidies, America is touted as the world’s largest agriculture subsidy provider. America provides massive subsidizes to its farmers and unduly grants them commercial advantage over foreign competitors. The US government also raises tariff barriers (a type of protectionism) to ensure foreigners, including Third World crop farmers and exporters, do not enjoy the American market.
Similarly, India, Japan and several European nations are also involved in the selective application of neoliberal ideas of free trade, open-market access and removal of subsidy mantra. Not even the World Trade Organization (WTO) has been able to redress these unfair international trade engagements in which developed countries export their highly subsidized food products to poorer nations.
African entrepreneurs cannot compete favorably in the global market if their governments are not providing subsidies. Worst still, products made by Africans cannot compete healthily with those of foreign investors, not on account of quality superiority but majorly due to heavy subsidies readily offered to foreign investors by their home governments.
In developing countries like Nigeria, foreign capital seeks complete deregulation which locks out possible state intervention in business and markets. It blocks government interest in attempting to support ill-equipped local investors, unfunded or poorly funded indigenous firms or even protect the poor masses whose purchasing powers are decimated by the removal of government subsidies. Unfortunately, unregulated and open market ideologies are indirect ways to unleash the predatory tendencies innate in foreign capital and thus perpetuate age-old economic dependencies.
With special support from the government, the Nigerian manufacturing industry can lead the way towards the diversification of their local economy away from oil.
In addition, providing basic infrastructure and social amenities including reliable power supply, good road networks, and access to both sea and airports is of the essence. If the Onitsha River Port in Nigeria is revitalized, it will encourage local manufacturers like the Innoson Vehicle Manufacturing Company, as imported materials could easily be moved to where they are needed, thereby reducing the shipping cost. Thus, rather than increase tariffs on essential social amenities, the government should consider granting subsidies, owing to existing infrastructure deficits in the country.
Furthermore, the high cost of borrowing to invest in equipment, upgrade facilities and expand business operations should be reviewed, downward, to attract more local entrepreneurs, help reduce the cost of production and thus boost national productivity and income. In May 2023, the Manufacturers Association of Nigeria called for reduction in excise duty, reduction in utility tariff, reconsideration of the proposed hike in electricity tariff, review of the high rate of exchange for the dollar and other fiscal policies that could hamper their operations.
Indeed, the continuing threats by the Manufacturers Association of Nigeria to exit the country on account of the above economic factors would disproportionately widen the space for excessive profit maximization by foreign financial institutions and corporations.