Where is the preferred destination for Foreign Direct Investment – Ghana or Nigeria?

The World Bank placed Ghana 13 places over Nigeria in its 2020 international ease of doing business rankings. Nigeria ranks 131st behind Ghana, the 118th in the world. These ratings come at a time when Ghana lost 4 points from its ranking in the previous year 2019 and when Nigeria just gained 15 places from 146th in 2019 to its current 131st worldwide.

The ease of doing business report is released by the World Bank each year. The ratings inform potential foreign investors of the costs they may encounter when setting up their businesses in a country and the likely risks that entrepreneurs and employees alike may face in the course of their business in various countries. All things being equal, investors choose destinations that present greater ease of doing business over those that present greater costs and risks.

World Bank 2020 Ease of Doing Business Ranking

See the data

True to the ranking, Foreign Direct Investments (FDI) contributions to Ghana’s economy is higher in proportion than that in Nigeria, data from the United Nations Conference on Trade and Development (UNCTAD) revealed. With regards to FDI contributions to the country’s Gross Domestic Product (GDP), Ghana trailed behind Nigeria for 6 years (2000-2005) before it took over, and has since led Nigeria for 14 years (2006-2019), Dataphyte’s analysis shows.

FDI As a per cent of real GDP Ghana vs Nigeria – Source: UNCTAD

It had not always been like this. Ghana’s FDI contribution of 1.1% to its GDP in 2000 was lower than Nigeria’s FDI contribution of 1.9 % to its GDP in the same year. This situation reversed six years later when Ghana’s FDI per GDP contribution grew to 2.3% above Nigeria’s contribution of 2.1% in 2006. Ever since then, Nigeria’s FDI per GDP has decreased most of the time, from 1.9% of GDP in 2000 to 0.7% of GDP in 2019, and consistently lagging behind Ghana for 14 years.

Besides this, while Nigeria has accumulated a larger volume of FDI than Ghana over the years, in recent times, the country has been slowing down while Ghana attracts more investment from foreign shores.

Source: UNCTAD

For two consecutive years, 2018 and 2019, Ghana attracted a higher proportion of foreign direct investment to its existing FDI stock than Nigeria did in the same period. In 2018 Ghana added another 9% to its existing FDI (from $33.1m to $36.1m) while Nigeria trailed behind with a 7.2% increase (from $88.9m to $95.3m). In the following year, the total FDI invested in Ghana increased by 6.4% (from $36.1m to $38.4m) while Nigeria’s FDI increased by just 3.5% (from $95.3m to $98.6m).

Going by an international assessment of Nigeria by Santander Group, “Widespread corruption, political instability, lack of transparency and poor quality of infrastructure are limiting the country’s FDI potential”, the trade and investment advisory provider opines. The group also attributes “intense bureaucracy” to Nigeria’s decreasing appeal to foreign investors.

However, in spite of this laudable feat by Ghana, data shows that, overall, Nigeria still leads Ghana in terms of the volume and value of foreign direct investment inflows within the period. The country consistently attracted more greenfield investments than Ghana – a type of FDI where a foreign company launches its business in another country by constructing its operational base from the ground up.

Just as the number of new greenfield investments inflow into Nigeria exceeded the number started in Ghana in those three years, the USD value of new investments in Nigeria also exceeded that in Ghana in the period under review.

Yet, while Nigeria may pride in the nominal size of its FDI, the FDI per Capita of Ghana far exceeds that of Nigeria. That is, the benefit of foreign investment to each person living in the country, considering the population size of each country favours Ghana much more than Nigeria. This means as of 2019, each resident of Ghana stands to benefit $76 from Foreign Direct Investment inflows into that country, while a resident in Nigeria may only benefit $16.

Although Nigeria has an advantage of a large market size which the World Bank noted as one of the factors that enable countries to attract FDI, the data from the Doing Business 2020 report reveals that the business environment is less favourable when compared to Ghana’s.

It is the same disincentive for FDI in Nigeria regarding the corruption perception index. According to Transparency International (TI), Nigeria ranked 144 in 2018 out of 180 countries. Nigeria’s corruption ranking worsened at 146 and 149 in 2019 and 2020, respectively. In contrast, Ghana’s corruption perception was ranked 78, 80 and 75, out of 180 countries, in 2018, 2019 and 2020 respectively.

While the Nigerian government at various times has vowed to end corruption, available data shows a gap between the promises and actions as the country is still rated low by the TI in her corruption perception index.

Besides Nigeria’s poor corruption ratings by Transparency International, a country risk report on Nigeria by Fitch solutions warns: “corruption, unorthodox trade policies and unpredictable border management raises costs and legal risks for investors. Limited fiscal space, slow reform momentum under Buhari’s tenure and political risks will preclude rapid improvements in the business environment”.

Besides the corrupt bureaucracy and business environment, Nigeria’s state of insecurity has become a source of concern for many foreign investors who intend to invest in Nigeria. According to Ozden and Briggs, Nigeria is the most insecure country in the West Africa region. On the other hand, Ghana is regarded as the most peaceful nation in the region.

The implication of this is that investors would most likely prefer Ghana, a more secure place to invest in. Recall, countries like the United States, Canada and the United Kingdom had in the past warned their nationals who intend travelling to Nigeria to reconsider their trip due to the rising level of insecurity in the country.

Irrespective of the factors that may have led to the decline in FDI inflow to Nigeria, a commitment from the government to actively address the issues could set the country back on track to be the biggest recipient and leading destination of FDI in West Africa, and indeed Africa.