Critical Appraisal of Foreign Direct Investment FDI in Nigeria

Critical Appraisal of Foreign Direct Investment FDI in Nigeria

Chapter One

1.0 Introduction

The traditional economic theory teaches that capital starved, but generally labour surplus developing countries, should be the net importers of financial resources from advanced countries.  This pattern of movement will be informed by the returns on new investment opportunities, which are considered higher where capital is limited (Oyeranti 2003:10).  Flows of funds in the opposite direction from individuals and business organizations are considered perverse and exceptionable.

Financial resources enter into a country through any of the followings:

• Foreign direct investment, official flows from bilateral sources (eg. OPEC, Organisation for Economic Cooperation and Development-OECD) and multilateral sources (such as the World Bank, International Development Association-IDA, International Monetary Fund-IMF, International Financial Corporation-IFC) on concessional and non-concessional terms.

• Commercial Bank Loans (excluding export credits)

All of these come in form of investment, loans, grants or aids.  

According to World Bank (1997), Foreign Direct Investment is the investment made to acquire a lasting management interest, usually at least 10% of voting stock, in an enterprise operating in a country other than that of the investor. 

International Monetary Fund‟s Balance of Payments Manual defines foreign direct investment (FDI) “investment made to acquire a lasting interest in foreign enterprises with the purpose of having an effective voice in its management”.  The World Trade Organisation (1996) also observes that foreign direct investment occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset.  The resultant capital relocation will boost investment in the recipient country and according to Summers (2000:16) brings enormous social benefits.  It is the process of investing, by foreigners, in the economy of another country.  These funds are generated outside the investment recipient country.  FDI can be in form of build, operate and transfer (BOT), turn-key, leveraged buy out, venture capital or starting a new company from the scratch.

Foreign direct investment is viewed as a major stimulus to economic growth in developing countries. Its ability to deal with major obstacles, namely, shortages of financial resources and technology, skills acquisition and training, as well as contribution to corporate tax revenue in the host country, has made it the centre of attention for policy-makers in low-income countries in particular. However, only a few of these countries have been successful in attracting significant FDI flows.  

1.1 BACKGROUND OF THE STUDY

Nigeria, like other African countries, recognizes the contribution of FDI to economic development and integration into the world economy.  Nigeria since pre-independence era till date has being making considerable efforts to improve its investment climate through liberation, deregulation, privatization and enabling laws and incentives.  Among these are:

1.         The Aid to Pioneer Industries Ordinance and the Income

Tax (Amendment) Ordinance Act of 1952

2.         Industrial Development (Income Tax Releif) Act of 1958

3.         Companies Act of 1968, Banking Act of 1969, Petroleum

Act of 1969, etc

4.         National Office of Industrial Property Act 90 of 1979

5.         Nigerian Enterprises Promotion (Issues of Non-voting

Shares) Act 1987

6.         The Nigerian Enterprises Promotion Act No. 54 1989

7.         Nigerian Investment Promotion Commission, etc However, the much-expected surge in FDI into Nigeria has not occurred.  This is particularly worrisome, as Nigeria possesses almost all the attributes of a good FDI destination.  These include size of market, availability of natural resources, low labour cost and high productivity, incentives, high level of human capital development, major markets proximity, etc.  

Nigeria needs FDI because it is favoured over other forms of private capital flows. Portfolio equity and debt are subject to reversals in financial crises period, while FDI is more resilient. (Lipsey: 2001).2

FDI is critical to the country as it is the key source of large pool of capital necessary for the development of the country.  However, despite several fiscal incentives by the government, foreign direct investment has remained dismal (The Punch 2002)

        The cost of not having foreign direct investment is high.  A decline in investment reduces the expansion of output, variety and quality, leading to a reduced market share and potentially declining non-price competitiveness.

Critical Appraisal of Foreign Direct Investment FDI in Nigeria

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