Types of instability and effect on FDI
Nexus between insecurity and FDI

Effect on M&A transactions


Foreign direct investment (FDI) is crucial for a country's development and economic growth. However, commentators have posited that in approximately 60 countries over the past decade violence has:

  • significantly and directly reduced economic growth;
  • hampered poverty reduction efforts; and
  • delayed the achievement of millennium development goals.(1)

Developing countries in particular rely heavily on FDI to promote their economies. However, the unrest facing many emerging economies, including Nigeria, is a cause for concern. According to the Armed Conflict Location and Event Dataset (2013), Nigeria was the fourth most violent country in the world (based on the number of violent events) and the seventh most dangerous during the course of its study (from 1997 to March 2013).

This instability has had far-reaching effects on Nigeria's emerging economy, especially in the context of M&A transactions. Foreign investors have been reluctant to participate in a number of potential M&A activities, undoubtedly because of the costs of investing in an unstable country, including those associated with production, logistics, security, insurance and loss of property.(2)

Types of instability and effect on FDI

Political instability
According to commentators, political instability and frequent disorder create an unfavourable business climate, which significantly lowers risk-averse foreign investors' confidence in the local investment climate and thereby deters FDI.(3)

In December 2016 the Nigerian Guild of Editors expressed concern over the upsurge of kidnapping throughout Nigeria, which has deterred foreign investors and had a negative impact on Nigeria's social and economic climate at a time when FDI is critical for improving the nation's failing economy.(4)

The activities of Boko Haram in northern Nigeria have negatively affected:

  • the economy;
  • investor business confidence; and
  • revenue accrued from tourism.

This has resulted in Nigeria having to meet stricter requirements before entering into bilateral relationships.

Emmanuel Edozien, chair of PZ Cusssons Plc, stated that its sales have dropped by 1%, from N72.2 billion to N71.3 billion, which he attributed to the social unrest in the north. According to Martin Woolnough, managing director of Nestle Nigeria Plc, the marketing of its products in the north is being hampered due to instability. In addition, Keith Richards, managing director of Promasidor Nigeria Limited, stated – while commenting on the impact that the instability in the north has had on his company – that consumption has plummeted due to the closing of borders to people entering Nigeria from Chad, Niger, Cameroon and Mali. Further, in its business environment report, the Lagos Chamber of Commerce and Industry stated that many firms have lost approximately 30% of their sales due to the instability in the north, which has prevented them from sourcing raw materials and put projects funded by banks in affected states at risk.(5)

Southern Nigeria is no exception to this instability. It has witnessed an upsurge of militancy, which has caused crude oil production to plummet and drastically reduced gross domestic product (GDP).

The government has a primary duty to mitigate challenges to the nation's security under the 1999 Constitution.(6) Without security, infrastructure development is at the risk of being stifled or ceased altogether, which will make Nigeria's millennium development goals and vision for 2020 unattainable.

Nexus between insecurity and FDI

Scholars have identified strong links between security and development since the end of the Cold War(7) and have argued that development cannot be achieved in nations where there is conflict, crisis or war. This is further supported by the World Bank's 2011 report "Conflict, Security and Development", which states that political and criminal violence disrupt development.

Nigeria ranks among the poorest countries in the world despite its abundance of human and natural resources. This has contributed to the security challenges that the country has faced since it gained independence and has had serious consequences on socio-economic development.

Effect on M&A transactions

Insecurity has reduced FDI, which has led to an economic downturn and resulted in companies looking to strategic M&A transactions to drive revenues, expand their products and reduce costs, in order to achieve external growth and industry consolidation. Conversely, instability can lead to reluctance among foreign companies to engage in M&A transactions with local companies in Nigeria. Thus, instability, even when it leads to increased M&A activity, has a negative influence on GDP.(8)

M&A transactions are a vital part of both healthy and weak economies, and are often the primary way in which companies provide returns to their owners and investors. They enable strong companies to grow at a faster rate than their competitors, which may eventually be eradicated from the market through exclusion and ongoing share erosion.(9)

In August 2016 the National Bureau of Statistics confirmed that Nigeria was in recession (defined by two or more consecutive quarters of negative economic growth).(10) As a result, parties seeking to engage in M&A transactions in Nigeria will want to negotiate and allocate risk in a balanced and economically appropriate manner. Buyers and their counsel often seek full indemnity from sellers against specific liabilities and damages or losses incurred as a result of inaccurate representations and warranties, especially with regard to the volatility of the business environment. Conversely, sellers and their counsel will want to limit their exposure to liability in light of the enormous risk involved in doing business in an unstable environment. Liability can be limited through the use of:

  • indemnification caps;
  • baskets or thresholds;
  • qualifiers;(11)
  • disclosures;(12)
  • de minimis or exception limits; and
  • indemnity insurance.


To fix Nigeria's political, social and economic instability, the government must tackle its root causes – including poverty and unemployment. Further, security agencies should be equipped to gather intelligence and the justice system should be strengthened to enable the speedy prosecution of criminals. This should help to accelerate social, economic and infrastructure development and increase business operations and industrial growth in Nigeria.

For further information on this topic please contact Kate Okoh at TRLPLAW by telephone (+234 9 413 1897) or email ([email protected]). The TRLPLAW website can be accessed at


(1) Stergios Skaperdas, Rodrigo Soares, Alys Willman and Stephen C Miller, "The Costs of Violence", The World Bank, available here.

(2) Anne Wangui Muya and Fred Mugambi, "Factors Affecting Foreign Direct Investment Decisions Among International Companies Investing In Kenya: A Case Study Of Coca Cola Bottlers Mombasa," International Journal of Scientific and Research Publications, Volume 5, Issue 9, September 2015, 1 ISSN 2250-3153.




(6) Chapter II of the Constitution 1999 (as amended) provides the fundamental objectives and directive principles of state policy. Section 14 thereof specifically states that the security and welfare of the people is the government's primary purpose

(7) Nwanegbo, CJ and Odigbo, J, 2013, International Journal of Humanities and Social Science, 
3(4), pp285-291.

(8) "The Cost of Insecurity on Emerging Economies: The Nigerian Experience", American Academic & Scholarly Research Journal, March 2014.

(9) Andrew J Sherman, "Mergers & Acquisitions from A-Z", third edition, American Management Association, New York, 2010, p9.

(10) "Nigerian Economy Officially Enters Recession as Pressure Mounts on Buhari Government", available here.

(11) William Sindall plc v Cambridgeshire CC ([1994] 1 WLR 1016). The court upheld the right to rescind a contract, stating that the target was not liable for damages for misrepresentation as it had taken reasonable steps to provide the purchaser with all of the information that it had.

(12) Eurocopy plc v Teesdale ([1992] BCLC 1067). The court held that the buyer's actual knowledge does not necessarily effectively enable it to bring a claim against the seller for information that is discovered later.