Originally published in Financial Nigeria magazine, September 2013 edition.
Nigeria receives the largest amount of foreign direct investment in Africa. Indeed, it is among the top twenty of such recipients world-wide. The major foreign investors in Nigeria are the big multinationals; those international conglomerates that are essentially anti-nation-state in outlook, and who prefer to see the world as a single economic unit. The objective of multinational activity is to transcend the nation-state and even transform it. In the process, some of them, like the big oil-companies, have become today’s multi-states. Some of these multinational companies are actually bigger in economic size than Nigeria.
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The activities of these multinationals in Nigeria have primarily been in the oil and gas sectors, but they are also increasingly involved in trade, banking and insurance among others. Their involvement in the manufacturing sector has been limited. Nevertheless, there is need for appraisal and reappraisal of the cost-benefits of multinational activity in Nigeria.
The multinationals have a monopoly of supply of both capital and technology vis-à-vis local Nigerian economic actors. They also dominate in all the stages of scientific and technological processes in their areas of interest, account for virtually all the research and development, and own most of the patents granted and registered. These asymmetries are reinforced by their superior management, extensive marketing and distribution networks, and control of the dissemination of information and ideas. The absence of countervailing local power, as well as of strong organised labour, ensures that multinationals are well-placed to take decisions that have major impact on the Nigerian economy.
Multinational come to countries like Nigeria in order to exploit the opportunities available with regard to extractive resources, raw material resources, labour and markets. Nigeria has oil and gas, resources in high demand in the developed market economies and China; we offer relatively low labour costs vis-à-vis those available in the parent-countries of the multinationals, and we provide access to raw materials which are diminishing resources in the North. The question then becomes what we get in return for affording these advantages to the multinationals.
A major benefit deemed to accrue from the investment activity of multinationals in a country like Nigeria is the provision of capital. It is something of an article of faith that multinationals are a source of needed financial resources for Nigeria through the transfer of their capital in the investment process, as well as through their privileged access to international capital markets. Theoretically, this would go a long way to bolster capital accumulation in Nigeria, thereby providing one of the basic prerequisites of economic growth.
However, the validity of this much-touted school of thought is doubtful. There is considerable evidence to the contrary, indicative that instead of being purveyors of capital and generators of savings for a country like Nigeria, multinationals promote, on balance, the exportation of capital from the developing to the developed countries.
This contradiction derives from the fact that the multinationals are determined to bring as little capital as possible into Nigeria in the first place. Instead, they prefer to finance their investment as much as possible through the mobilisation of capital in Nigeria’s financial markets and not, as is often assumed, through the importation of foreign capital. Because of their disproportionate strength within the Nigerian economy, multinationals have preferential access to local capital markets. Their subsidiaries in Nigeria are able to borrow from local banks and financial institutions on better terms than local businesses and entrepreneurs; simply because their credit is backed by the world-wide financial resources of the parent-company.
The irony behind local financing of multinational enterprise is that it can be used to acquire existing local firms, or to squeeze them out of business, thereby neutralising whatever modicum of local competition exists between foreign and local firms.
The apostles of multinational activity also claim that they add valuable foreign-exchange to Nigeria’s coffers through their trade effect. The view here is that, given their competitive products that are backed by unique marketing skills, they will earn foreign-exchange for Nigeria from the proceeds of their international trade. In addition, they maintain that multinationals generate foreign-exchange savings for Nigeria by producing domestically goods that would otherwise have been imported.
But here again, close examination reveals that this is, on balance, an insignificant advantage for Nigeria. The reason is that the cost of multinational investment in Nigeria includes the outflow of resources in the form of profits and other external service payments, including fees for managerial or technical services provided by the parent firms; and royalties on the technology allegedly transferred to Nigeria. The evidence reveals that the magnitude of these can often be deleterious to the Nigerian economy.
The truth is that the monopolistic control of technology by the multinationals enables the parent companies to exact rents from their subsidiaries. Multinational transactions involve the payment of licensing fees and royalties by the Nigerian subsidiary to the home-country parent; and it enables the multinationals to charge Nigeria exorbitant rents for technology, and to defray on us a disproportionately high share of the cost of research and development.
Moreover, the phenomenon whereby multinationals trade extensively with themselves introduces an important element of cunning in the setting of the prices of goods shipped from one subsidiary to the other. These price-adjustments often reflect the desire to take advantage of tax-differentials between the different areas of operation. The trick here involves fixing the prices of goods and services imported from the home-country parent to the Nigerian subsidiary (or affiliate) artificially above those prevailing in the international market; while fixing the prices of goods exported by the same Nigerian subsidiaries and affiliates unilaterally below the international level. In effect, the existence of intra-firm trade transactions leaves great scope for the transfer of funds via the over-pricing or under-pricing of goods, the better to maximise the real rate of profit and to camouflage the export of capital from Nigeria.
Therefore, multinationals in developing countries like Nigeria end up by being exporters, as opposed to importers, of capital. Even if profit rates on foreign investment were not excessive relative to domestic rates of return, foreign investment would still create a drain on the inherent capital resources of Nigeria if care is not taken. Foreign direct investment ensures that the multinationals can envisage interminable remittances from Nigeria, without there being any guarantees that these will be matched by new capital inflows. Thus, while Nigeria might gain more initially in capital investment than it losses in remitted income; in the medium-to-long-term, the balance is likely to shift pre-eminently to our disadvantage.
Perhaps multinational companies are better regarded as locomotives for the transfer of technology from developed to the less-developed countries. The conventional view in this regard is that they allow developing countries like Nigeria to profit from their advanced research and development, and that they make available to us technologies that would otherwise be out of our reach.
Access to multinational technology and technological processes is envisaged to improve the efficiency of our production and to transform the quality of labour. It is expected to create new kinds of employment and increase the skill-levels of our local labour force through formal training and on-the-job experience. The managerial skills of Nigeria’s entrepreneurial class would also be greatly sharpened. The use of local sources of materials, components and semi-manufactures would provide for broader economic stimulus, and promote the diffusion of significant aspects of the parent-company’s technology to Nigeria.
However, these textbook assumptions are again greatly diminished by countervailing empirical considerations. The fact remains that the multinationals invest in Nigeria not in order to promote the development of local technological capabilities, but to maximise profits and reduce costs. This means the development of Nigeria is incidental, and not central, to multinational concerns. At best Nigeria’s development is an afterthought to the multinational process, with foreign firms not being averse to the exploitation of our resources without contributing to our development.
The contradiction lies in the expectation that multinationals will operate in the interest of Nigerian stockholders in spite of the fact that they are primarily concerned with the stockholders in their home-countries. Therefore, they are less likely to respect our national priorities, especially when these are not in consonance with the fulfilment of their parent corporate objectives.
By their very nature, multinationals are not inclined to conform to a pattern of national planning, or to operate according to national requirements. This is because if a multinational pursued a strictly “national” policy, it would no longer be a true “multinational.” Being a multinational actually means developing the capacity to circumvent the mechanisms for implementing national goals, in the drive for global profit maximisation. It is this imperative that account for the propensity towards tax evasions, foreign-exchange malpractices and excessive profit repatriation.
Moreover, the irony behind the expectation that multinationals would operate as a vehicle for the transfer of technology to a developing country like Nigeria lies in the fact that the monopoly of technology is precisely what gives the multinationals the basis for exacting their high profit rates. Granted, they can hardly be expected to relinquish this advantage willingly. What this means in actual fact is that multinational companies in Nigeria do little more than educate Nigerians to be good and diligent workers in a process tightly controlled by foreign expertise, without promoting any significant transfer of technology.
As a matter of fact, multinationals tend to make their major contribution of technology and related factors during the early stages of the investment, while the lifespan of the project itself is then devoted to the accumulation of profit. This peculiarity is particularly evident in the extractive industries, such as Nigeria’s oil and gas. In the case of Nigeria, multinational activity is also largely characterised by “enclaving;” since the imported role networks are often anathema to, and not integrated with the economic requirements of Nigeria, but with the requirements of the parent company from whose headquarters in the home-country directives are transmitted.
Although some multinationals come to Nigeria in order to take advantage of our inherent labour abundance and thereby contribute to employment, most employ advanced and inappropriate capital intensive technology which provide little local employment and are dependent on foreign sources of supply. Indeed, the net effect of foreign direct investment on employment patterns in Nigeria may be negative, because of the propensity of multinationals to displace older, more labour intensive, local production. The oligopolistic nature of multinationals ensures that they tend to stifle domestic competition and to threaten existing industries. The tendency has also been for them to use expatriate managers instead of local citizens.
The fact is that the importation of multinational technology stunts the development of local capabilities. Implicitly or explicitly, multinationals promote the technological dependence of developing countries on developed countries. The price of foreign direct investment for the host LDC is often the stifling of domestic research and development. The concentration of research and development in the home-country of the multinational discourages research and development activity in Nigeria and results in our subordination to foreign technology.
Femi Aribisala, a Financial Nigeria Columnist, was the Special Adviser to Professor Bolaji Akinyemi as Foreign Minister of the Federal Republic of Nigeria. He holds a PhD in International Relations from Oxford University. He also writes a popular column on the Christian faith in one of Nigeria’s newspapers.
“Nigeria and the Multinationals is republished with permission of Stratfor.”