Foreign Direct Investment In Nigeria

extraneous comport spend funds In NigeriaThe Nigeria rescue has come through the middle income status according to the valet Bank, with its ample stock of natural resources and institutional development and emersion in the farming. The Stock Exchange market in Nigeria is the second largest in Africa. The gross domestic product Purchasing Power Parity was ranked 31st in the World as at the end of 2011. The balance of recompense showed a trade surplus with the United States which is her largest abroad investor and a recipient of the largest export market for U.S. goods. During theoil boomof the 1970s, Nigeria accumulated a weighty unknown debt to finance key infrastructural coronations. In October 2005, Nigerian authorities had a negotiation with its Paris Clubcreditors and concluded on an agreement in which Nigeria debt was discounted by close to 60%. Nigeria thereby used part of its oil profits to wages the residual 40%, releasing up at least $1.15billion yearly for po verty simplification programmes being carried out. History was recorded in Nigeria after the debts were paid and was now known as the first Afri rat solid ground to pay up all owed debt to the Paris club amounting to an estimated value of $30billion.It is chief(prenominal) to know that Pet characterumplays a large role in the Nigerian economy, business relationship for 40% of Gross Domestic Product (GDP) and 80% of organization meshing. The telecommunication market in Nigeria is one of the World tightest development 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 superlativeographic point based communications with a space satellite which is monitored at the Nigerian National Space explore and Development Agency Headquarters in Abuja. The financial service vault of heaven 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 puffiness has occurred on the Naira and the Central Bank of Nigeria (CBN) has been trying to control the rate to remain be wiped out(p) 10%, in 2011, CBN increased absorb 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 in effect(p) like how it has affected the global knowledge base due to the economic crisis as it was last reported at 23.9 percent in 2011.2.2 Foreign Direct investing in NigeriaA definition contained in the Balance of Payment Manual (Washington, D.C. planetary Monetary Fund, 1997 and 1993) defined Foreign subscribe to investment as investment completed through a recollective lasting management interest of an organization, enterp pass over or professional body operating in a country other than that of the investor in question. And must let at least 10% ownership of the organization considered as FDI (Patterson et al 2004). Usually FDI ar made by large multinational (MNEs) through encyclopedism or merger or the development of a new facility. The broad spectrum of all the MNEs is that they play a preponderating role in Research and Development by bringing new technologies into such(prenominal)(prenominal) 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 attend of FDI into both developed and developing country and its importance on the harvest-tide in such economies and global economy at large. The components of FDI should not be mistaken this implicates equity c apital, reinvested earnings and intra-company loans. Equity capital is the foreign guide on 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 InvestmentThe economic antigenic determinants of inward FDI can be grouped for comforts sake into three categories each reflecting the motive for investing in foreign countries in specific Nigeria. This includes resource seeking, market seeking and efficiency seeking. Resource seeking is a leash 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(prenominal) years the agriculture domain in Nigeria was booming and served as a great form of investment venture in the economy as the earnings accruing from it riseed 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 influx to that sector has been high and therefore contributing just about 40% to Gross domestic product, 90% of exports and 80% of government revenue. The relevance of economic determinant for delineateing market seeking FDI is the market size in absolute terms. Large market can accommodate domestic and foreign thereby helping to boost firms 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 ava ilability of low-cost unskilled labor in Nigeria.2.2.2 Challenges of the Operating Environment for FDISome 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 marketThe 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) EnergyAs a result of the global economic crisis the demand for oil decreased, resulting in oil prices dipping from $140 per barrel in the thi rd quarter of the year to $44, and being the principal source of the countrys 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, Nigerias 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 fitting technical staff was a constraint, kidnapping in the Delta also made recruiting expatriate staff difficult, especially for the oil services companies(iii) Power Numerous slipway 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 ashes a major concern of investors even de suffer the Power R eform Program, no productive result has been achieved (Bello 2011). The inadequate infrastructure has imposed high feat cost for business and thereby militating against growth of the private sector2.3 Foreign Direct Investment FlowsThis 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 WorldThe world economy has gone global due to the liberalization of trade, the breaking of business barriers, expert 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 outstanding element in their dodge 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, dev eloping 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 Africas 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 InflowSource World Development Indicators 2008Fifty-seven new measures affecting FDI were introduced by forty African countries of which forty-nine among these m easures encouraged inward FDI (UNCTAD, 2007). The increase in FDI inflows largely reflected strong military operation 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, FDIinflows 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 demonstrate 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 verso 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 NigeriaNigeria a country luxurious 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 prima(p) West African Countries that has consistently trustworthy FDI in years past as we see in the epithet belowFigure 2.2 Nigeria Foreign Direct Investment stockSource UNCTAD 2012However the level of FDI attracted by FDI has shown no specific significant value in the growth of the economy and is been seen as second-rate (Asiedu 2003) compared with the resources of the country. Furthermore, the empirical relationship between FDI and economic growth has r emained 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 UNCTADs World Investment Report 2004 repor ted that Africas outlook for FDI is promising, the judge 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 beautiful 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 exasperate 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 existingempirical 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 NigeriaNigeria sources of FDI over the years have been incr easing. There are more countries investing in Nigeria than in previous years. Some countries include USA, UK, China, and Netherlands amongst others. Nigerias most important sources of FDI have traditionally been the home countries of the oil majors. The USA, present in Nigerias 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 Nigerias total foreign investment. As China is striving to expand its trade relationships with Africa, it is becoming one of Nigerias most important sources of FDI Nigeria is Chinas second largest trading partner in Africa, next to South Africa. From US$3 billion in 2003, Chinas 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 Centr al 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 belowFigure 2.3 Selected African Countries FDI inflow in comparison with NigeriaSource UNCTAD 20082.5Foreign Direct Investment policies Framework2.5.1Investment Framework and BodiesThe Nigerian Investment Promotion Commission Act laid out the framework for Nigerias 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 upshot is to promote and facilitate investment in Nigeria. In 2006, a single Stop Investment Centre (OSIC) was set up to bring together agencies with statute 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 assigning 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 sha ll be for tax concessions (NIPC 2006-2008 Report).Other Stakeholders that were represented within the One Stop Investment Centre (OSIC) areCorporate Affairs Commission (CAC) who will be responsible for name search and company incorporation registration.Nigerian Immigration operate (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 formsNational Agency for Food and Drug administration and arrest (NAFDAC) has the function of registration of regulated products, issuance of export certificate, authorization to import of unregistered productsStandar d 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 incentivesInvestment incentives are comm exclusively 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 dominance 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(a) 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 Inves tors 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 includeSensitization programme aimed at educating the unrestricted 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 offsetThe 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 eme rgence 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 ofnew inputs and foreign technologies in the production function of the host country. Neoclassical and endogenous growth models have used empirical test to check the supposed 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 pass on because of diminishing returns to capital in the long run. Longrun growth in the neoclassical models arises from exogenous growth of the labor force and exogenous technical progress. In the endogenous growth models FDI raises growth through technological diffusion from the develope d 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 welldeveloped 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.