Foreign Direct Investment In Nigeria

The Nigeria economy has attained the middle income status according to the World Bank, with its ample stock of natural resources and institutional development and growth in the country. The Stock Exchange market in Nigeria is the second largest in Africa. The GDP Purchasing Power Parity was ranked 31st in the World as at the end of 2011. The balance of payment showed a trade surplus with the United States which is her largest foreign investor and a recipient of the largest export market for U.S. goods. During the oil boom of the 1970s, Nigeria accumulated a weighty foreign debt to finance key infrastructural investments. In October 2005, Nigerian authorities had a negotiation with its Paris Club creditors and concluded on an agreement in which Nigeria debt was discounted by approximately 60%. Nigeria thereby used part of its oil profits to pay the residual 40%, releasing up at least $1.15 billion annually for poverty reduction programmes being carried out. History was recorded in Nigeria after the debts were paid and was now known as the first African country to pay up all owed debt to the Paris club amounting to an estimated value of $30 billion.

It is important to know that Petroleum plays a large role in the Nigerian economy, accounting for 40% of Gross Domestic Product (GDP) and 80% of Government earnings. The telecommunication market in Nigeria is one of the World fastest growing fastest growing markets with major emerging market operators (like MTN, Etisalat, Zain and Globacom) who based their largest and most profitable centers in the country. The government has recently begun expanding this infrastructure to space based communications with a space satellite which is monitored at the Nigerian National Space Research and Development Agency Headquarters in Abuja. The financial service sector has developed as a result of the combination of international and local banks, brokerage houses, insurance companies and brokers, asset management companies, private equity funds and investment banks. Rampant inflation has occurred on the Naira and the Central Bank of Nigeria (CBN) has been trying to control the rate to remain below 10%, in 2011, CBN increased interest rate, rising from 6.25% to 12%. On 31 January 2012, CBN decided to maintain the key interest rate at 12%, in order to reduce the impact of inflation due to reduction in fuel subsidies. Though the, the inflation rate in Nigeria was recorded at 12.80 percent in July of 2012. The unemployment situation in Nigeria is currently high just like how it has affected the global world due to the economic crisis as it was last reported at 23.9 percent in 2011.

2.2 Foreign Direct Investment in Nigeria

A definition contained in the Balance of Payment Manual (Washington, D.C. International Monetary Fund, 1997 and 1993) defined Foreign direct investment as investment completed through a long lasting management interest of an organization, enterprise or professional body operating in a country other than that of the investor in question. And must have at least 10% ownership of the organization considered as FDI (Patterson et al 2004). Usually FDI are made by large multinational (MNEs) through acquisition or merger or the development of a new facility. The broad spectrum of all the MNEs is that they play a dominant role in Research and Development by bringing new technologies into such country and also they have great influence on the economy they invest in (Balaam and Veseth, 2008). The debate of FDI has increased as a result of the large flow of FDI into both developed and developing country and its importance on the growth in such economies and global economy at large. The components of FDI should not be mistaken; this includes equity capital, reinvested earnings and intra-company loans. Equity capital is the foreign direct investors’ net purchase of the shares and loans of an enterprise in the country of investment other than its own. Re invested earnings is part of an affiliates earning accruing to the foreign investor that is reinvested in that enterprise. And intra-company loans are short or long term loans from parent firms to affiliate enterprise or vice-versa.

2.2.1Determinants of Foreign Direct Investment

The economic determinants of inward FDI can be grouped for conveniences sake into three categories each reflecting the motivation for investing in foreign countries in specific Nigeria. This includes resource seeking, market seeking and efficiency seeking. Resource seeking is a principal determinant because the availability of natural resources in the host country determines if such country is well endowed and if investment is possible. In previous years the agriculture sector in Nigeria was booming and served as a great form of investment venture in the economy as the earnings accruing from it boosted the economic growth of the country. However in recent years, the oil and gas industry has overshadowed the agriculture sector and therefore neglected as resources and funds have been used to improve the oil and gas sector. Petroleum oil since then has served as a huge avenue for foreign investors because of the abundance in the country the inflow to that sector has been high and therefore contributing about 40% to Gross domestic product, 90% of exports and 80% of government revenue. The relevance of economic determinant for attracting market seeking FDI is the market size in absolute terms. Large market can accommodate domestic and foreign thereby helping to boost firm’s production to operate on scale and scope economies and Nigeria has a wide market base. Efficiency seeking determinants can be other forms that reflect the motivation to invest such as that availability of low-cost unskilled labor in Nigeria.

2.2.2 Challenges of the Operating Environment for FDI

Some of the major limitations to attracting investment in Nigeria include unfriendly investment environment, inconsistency in government policies, others are social vices such as insecurity corruption, financial and economic crimes as well as conflicting policies. The challenge therefore is to reverse these:

(i) The Capital market

The Nigerian capital market was also not secured in the tumults of the global economic crisis, in April 2008; the market experienced a downturn in the history of capital market operations in the country. This unprecedented sinking of the stocks forced both foreign and local investors who had opted for the advantage of the optimal return on investments on the stock exchange began to scoot elsewhere in extreme anxiety.

(ii) Energy

As a result of the global economic crisis the demand for oil decreased, resulting in oil prices dipping from $140 per barrel in the third quarter of the year to $44, and being the principal source of the country’s revenue earner. The foreign reserves dwindled from $65billion to $45billion within six months from the third to last the quarter of the year. Apart from the above, Nigeria’s high propensity for imports was also part of the reasons for the fast diminished foreign reserves. In 2006, 2.5millions barrels per day were produced and grew to about 3millions barrels per day. Unfortunately the Niger River Delta violence during this period cut off 600,000 barrels per day. Furthermore, the lack of qualified technical staff was a constraint, kidnapping in the Delta also made recruiting expatriate staff difficult, especially for the oil services companies

(iii) Power: Numerous ways of improving infrastructural development have been embarked upon by government but still to no avail. Development of infrastructure particularly electric energy has been and still remains a major concern of investors even despite the Power Reform Program, no productive result has been achieved (Bello 2011). The inadequate infrastructure has imposed high transaction cost for business and thereby militating against growth of the private sector

2.3 Foreign Direct Investment Flows

This section discusses and explains the pattern of Foreign Direct Investment flow in the World and in Nigeria.

2.3.1Trends and Pattern of FDI in the World

The world economy has gone global due to the liberalization of trade, the breaking of business barriers, technological advancements, capital markets and the growth of international goods and services or ideas over the past decades. Ayanwale (2007), many developing countries see FDI as an important element in their strategy for economic development and this has led to the speedy growth of FDI around the world. In developing countries, Mergers and acquisitions including private- to-private transactions as well as acquisitions through privatization became an important vehicle for FDI (Kyaw, 2003). Therefore, developing countries have made impact on the global economy as a result of large domestic market, cheap and skilled labor, low labor costs and high returns on investment especially in the economics of industrialized states. This has led to many countries improving their business climate to attract more FDI. In fact, one of the pillars for launching the new partnership for Africa’s development (NEPAD) was to accelerate FDI inflows to the region (Funke and Nsouli, 2003). The trend of FDI depicts in the diagram below of the inflow of FDI in the past twenty years as there has been an upward movement from 1990 and a decrease in1999 then rose again in 2003 and continued to rise until the decrease again from 2007 and has remained very low due to the world economic crises that has been ongoing.

Figure 2.1: World Foreign Direct Investment Inflow

Source: World Development Indicators 2008

Fifty-seven new measures affecting FDI were introduced by forty African countries of which forty-nine among these measures encouraged inward FDI (UNCTAD, 2007). The increase in FDI inflows largely reflected strong performance and relatively high economic growth (UNCTAD, 2008). 30% of total FDI inflows were accounted for as reinvested earnings as a result of increased profits of foreign affiliates, notably in developing countries. In Africa, FDI

inflows increased from $18 billion in 2004 to $36 billion in 2006. This was due to improved prospects for corporate profits, increased interest in natural resources and a more favorable business climate. As regards this, many studies have been conducted to ascertain these; however, the results do not give accurate evidence of the impact of FDI on the economy of developing countries. For example, Lumbila (2005), Sylwester (2005) and Ndikumana and Verick (2008) show that there is a positive effect of FDI on economic growth, while others such as (Fry, 1993, Dutt, 1997; Hermes and Lensink, 2003) gave contrary conclusions. Further, other studies suggest that the effect of FDI on economic growth may depend on whether the country has minimal level of absorptive capacity that is a prevailing environment that can attract FDI such as educated workforce, institutional infrastructure and liberalized markets (Borenztein et al., 1998; Carkovic and Levine, 2002; Le Vu and Suruga, 2005).

2.3.2Trends and Pattern of FDI in Nigeria

Nigeria a country well-endowed with natural resources and a very large market sizes qualifies to be a major recipient of FDI in West Africa and indeed one of the top leading West African Countries that has consistently received FDI in years past as we see in the figure below:

Figure 2.2: Nigeria Foreign Direct Investment stock

Source: UNCTAD 2012

However the level of FDI attracted by FDI has shown no specific significant value in the growth of the economy and is been seen as mediocre (Asiedu 2003) compared with the resources of the country. Furthermore, the empirical relationship between FDI and economic growth has remained unclear despite numerous studies that have examined the subject of interest. However, recent evidence supports that the relationship between FDI and growth may be country and period specific. Asiedu (2001) submits that the determinants of FDI in one region may not be the same for other regions. Although it has been generally acknowledged that FDI is an important aspect of the recent wave of globalization across countries. FDI inflow to diverse regions of the world has been increasing dramatically. The total world FDI as at 1990 stood at US$204443370862.543 and grew dramatically to US$815219446619.453 (World Bank 2012). Only few countries have been successful in attracting significant FDI flows. But West Africa as a whole has not benefitted particularly from the FDI boom. In West Africa, FDI amounted to 14012.54758974US dollars in 1990 and has been increasing gradually and currently stands at 110394 US dollars (UNCTAD 2012). Although UNCTAD’s World Investment Report 2004 reported that Africa’s outlook for FDI is promising, the expected surge is yet to be manifest.

Nigeria is one of the few countries that have consistently benefited from the FDI inflow to West Africa and has turned out to be one of the most attractive countries in West Africa in terms of FDI inflows with a value of $69242million in 2011 amongst others such as Ghana with $12320miilion, Liberia with $546smillions, Cote d Ivoire with $6408millions and Niger with $3123millions. Nigeria share of FDI inflow to West Africa in 2011 covers about 63%. As percentage of GDP, foreign direct investment has increased substantially since 1990 till 2001 but began to drop since 2002 and currently stand at 29.16%. Although the value of FDI inflow into Nigeria has been on the increase. This is attributable to the economic reforms and the resulting of macroeconomic stability, which have instilled great credibility in the Nigerian economy. However the FDI contribution as a percentage to Gross domestic Product has fallen but the Nigerian economy has experienced strong growth in recent years. Real GDP growth averaged 7.8 percent from 2004 to 2007, and growth of 6.4 percent in 2007. Sectorally, there was a surge of FDI flows in the primary sector, mainly oil and gas.

In 2008 Nigeria was at the top of the ten Africa FDI recipient nations with over US$20billion. The ethnic conflicts and youth restlessness in the Niger delta affected the level of the crude Oil production. The election tension and these socio-political conflicts aggravated the problems of insecurity and hence the improbability in the domestic business environment which in turn impacted negatively on the inflow of FDI. Towards this the Federal Government has improved the security in that region and the youths in that region are being empowered to participate in productive ventures. In addition, the services sector particularly, transport, storage and communications continued to attract FDI since 2006. Oil accounts for nearly 40 per cent of GDP, but from 2001 to 2006-except in 2003-real growth in other sectors outpaced growth in the oil sector. For example the telecommunication sector experienced strong growth after its privatization.

In spite of the surplus of studies on FDI and economic growth in Nigeria, the existing

empirical evidence on the causal relationship between foreign direct investment and economic growth and the associated benefits is very inconclusive. In spite of a seemingly positive association between FDI and economic growth, the empirical literature has not reached a consensus on the direction of this impact, however, suggesting that foreign direct investment can be either beneficial or harmful to economic growth. The principal driving force for this work is that for developing economies, and for Nigeria in particular, the issue of economic growth is an important one.

2.4Sources and sectorial distribution of Foreign Direct Investment in Nigeria

Nigeria sources of FDI over the years have been increasing. There are more countries investing in Nigeria than in previous years. Some countries include USA, UK, China, and Netherlands amongst others.  Nigeria’s most important sources of FDI have traditionally been the home countries of the oil majors. The USA, present in Nigeria’s oil sector through Chevron Texaco and Exxon Mobil, had investment stock of USD3.4 billion in Nigeria in 2008, the latest figures available. The UK, one of the host countries of Shell, is another key FDI partner – UK FDI into Nigeria accounts for about 20% of Nigeria’s total foreign investment. As China is striving to expand its trade relationships with Africa, it is becoming one of Nigeria’s most important sources of FDI; Nigeria is China’s second largest trading partner in Africa, next to South Africa. From US$3 billion in 2003, China’s direct investment in Nigeria is reported to be now worthwhile.

Different sectors have received different amount of FDI in Nigeria. The total volume of FDI captured through the Central Bank of Nigeria is US$7,750billion. This represented about 11% increase over 2007 figure of US$6,935billion. The non-oil sector attracted US$7,109billion which represents about 91% of the inflow with the services sector being the major beneficiary with about 82% of the total inflow into the economy. The banking and finance sector accounted for about 9%. The country remains the highest destination of investment within the Economic Community of West Africa (ECOWAS) region by attracting about 50% of the total volume into the region. It is evident to note that when compared to other countries in Africa in terms of total stock of FDI attracted over the last ten years. Nigeria is ranked second to South Africa as we see in the figure below:

Figure 2.3: Selected African Countries FDI inflow in comparison with Nigeria

Source: UNCTAD 2008

2.5Foreign Direct Investment policies Framework

2.5.1Investment Framework and Bodies

The Nigerian Investment Promotion Commission Act laid out the framework for Nigeria’s investment policy in 1995. Under the Act, foreign ownership of 100% is allowed in other industries apart from Oil and Gas industry where investment is constrained to existing joint ventures or new production-sharing agreements. The essence is to promote and facilitate investment in Nigeria. In 2006, a One Stop Investment Centre (OSIC) was set up to bring together agencies with mandate as regards investment and streamline the process of investing in the country. Furthermore, the Commission is required to encourage, promote and co-ordinate investment in the Nigeria Economy. The law allows the Commission to grant approvals on fiscal concessions on industry interrelated incentives such as: Export oriented industry, Local raw material utilization, and Pioneer industries, Implant training, Research and development, Investment on infrastructural facilities, Investment in economically disadvantaged areas; provided that the fiscal incentives for which approvals are given shall be for tax concessions (NIPC 2006-2008 Report).

Other Stakeholders that were represented within the One Stop Investment Centre (OSIC) are:

Corporate Affairs Commission (CAC): who will be responsible for name search and company incorporation registration.

Nigerian Immigration Services (NIS): will be in charge of Expatriate Quota Positions, Regularization of Permanent Work Permits, and other immigration facilities.

Nigeria Customs Service (NCS): has the role of issuance of import and export guidelines procedure for citing excise factories goods clearance facilitation and generation information on fiscal policy issues.

Federal Inland Revenue Services (FIRS): is responsible for tax registration, payments of stamp duties, issuance of tax clearance certificate and issuance of tax forms

National Agency for Food and Drug administration and Control (NAFDAC): has the function of registration of regulated products, issuance of export certificate, authorization to import of unregistered products

Standard Organization of Nigeria (SON): is responsible for facilitating all aspect of standardization activities, approvals or permit for use of standards and provide guidelines for investors. Amongst others.

2.5.2 Other Policy incentives

Investment incentives are commonly intended to provide tariff, fiscal and other concessions to enterprises that meet certain criteria such as choice of sector, size, location and employment creation etc. This applies both to foreign and domestic investors. Thus, for the main aim of attracting identified strategic investments, the NIPC by its mandate is expected to execute full authority in the administration of the numerous incentives to encourage investment activities. However, this has not been the case as some Federal Ministries and agencies are also performing this function and leading to misplaced obligation. This requires coordination and streamlining for effectiveness and efficiency. The recent Presidential Committee on Problems of Investors is doing its best in overcoming most of the constraints and attempt are being made to review the incentive regime and make them responsive to the yearnings of investors.

Other investment promotional activities include:

Sensitization programme aimed at educating the Public on its activities and to seek public support for its programmes.

Hosting business and investment forums like successfully organized the 1st Nigeria-Brazil Business and investment Forum which held in Sao Paulo, African Petroleum, Energy and Mining Forum in Beijing, Nigerian – Argentine Business Investment Forums and other conferences being organized to promote investment like International Business Leaders Conference (NIPC 2006-2008 Report).

2.6 Linking Foreign Direct Investment and Economic Growth

The link between Foreign Direct Investment and Economic Growth has been a subject of debate for many decades and has been subject to empirical scrutiny. There have been new found facts about this link due to the emergence of the globalized world in recent times. This is due to the acknowledgement of Multinational Corporation, capital accumulation and large investment in trade in developing countries. Foreign direct investment is bundle of capital stock and technology, and can augment the existing stock of knowledge in the host economy through skill acquisition and diffusion, labor training and the introduction of new managerial practices and organizational arrangements (De Mello 1997). Three literatures have added to the subject of FDI-led growth. First, previous studies based on the assumption that there is only one causality from FDI to GDP growth and have been criticized in more recent studies (for example Kholdy 1995). In other words not only can FDI cause negative or positive effect on growth but growth can affect the flow of FDI. Secondly, the new-growth model has resulted in some reappraisal of determinant of growth in modeling the role played by FDI in growth process. Thirdly, the new development in econometrics theory such as time series concept of integration and causality testing has further expanded the ongoing contest of the relationship between FDI and economic growth.

Foreign direct investment can impact growth directly and indirectly. The impact of FDI can be seen to directly impact growth through capital accumulation, and the incorporation of

new inputs and foreign technologies in the production function of the host country. Neoclassical and endogenous growth models have used empirical test to check the theoretical benefits of FDI. In the neoclassical growth models FDI promotes economic growth by increasing the volume of investment but FDI affects growth only in the short run because of diminishing returns to capital in the long run. Long‐run growth in the neoclassical models arises from exogenous growth of the labor force and exogenous technological progress. In the endogenous growth models FDI raises growth through technological diffusion from the developed countries to the developing. This permanent knowledge transfer from FDI accounts for the diminishing returns that result in long run growth. The endogenous growth literature has identified country conditions that must be present for FDI to have a positive impact on growth such as the complementarity between domestic and foreign investment, adequate levels of human capital, open trade regimes, and well‐developed financial markets. Some of the most important endogenous growth empirical research has been discussed in the literature review section. It is now necessary to look at the impact of FDI on growth in the economy and the analysis on whether FDI has an effect on economic growth; this will be discussed in the next chapter.