CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Historical antecedents indicate that until the First World War, capital to developing countries came directly from countries to their colonies. By 1950’s the United States of America (USA), other industrial nations and multinational agencies started official assistance to less developing countries (LDCs). Currently, the number of claimants to foreign assistance has increased going by World Development Report, WDR, (1990).

Regardless of the above scenario capital flow whether in form of foreign assistance or Foreign Direct Investment (FDI) has generated various debates. Such debates offer reasons for the failure of past efforts.

The role of FDI in LDCs is a controversial issue. Dependency thinkers argue that FDI is a conduct for neo-imperialist exploitation of developing countries by the wealthy countries while some other theorists see FDI as a source of value, practices and economic goods that would help the developing countries to break into the modern world practically and economically (Reserick, 2003).

FDI can be beneficial to the investors and the host country. To investor free flow of capital across national boarder allows capital to seek out the highest rate of return, reduce risk faced by owners of capital, creates new market for investment, among others. While to the host country, FDI creates job for the populace, possibility of technology transfer, improvement in labour skills and management skills, better wages for workers, provision of scholarship, among others, as suggested by Sjoholm, (1999); Ohwona (2001, 2004); Otakpa (2004).

Most countries strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic development. The growth and development of African and indeed Nigeria’s economy depends largely on FDI, which has been described as the major carrier for transfer of new specific innovation. The need

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to step-up Nigeria’s industrialization process and growth calls for more technology spill-over through foreign investment. As a result, African countries and Nigeria in particular joined the rest of the world in seeking FDI as evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which has the attraction of foreign investment to Africa as a major goal, United Nations Conference on Trade and Development (UNCTAD, 2007).

According to Ayanwale (2006) many countries and continent especially less developed countries now see attraction of FDI as an important element in their strategy for economic development. This is most probably because FDI is seen as an amalgamation of capital technology, marketing and management.

However, Dornbush et al (1996) were of the view that investment spending is usually volatile, because it depends on multiple factors and is responsible for much of the fluctuation of GDP over the business cycle. The instability of investment led Keynes (1936) to conclude that the economy is inherently unstable, and there is need for government intervention to activate and regulate the saving and investment behavior of the society.

The great depression of the 1930s left in its wave, the breakdown of autarky and subsequent global financial liberalization. Demir (2009) found that, in most developing countries, the financial liberalization gradually led to sharp fluctuation in key macroeconomic indicators, over the years. National Bureau of Statistics (2004) asserts that Nigeria’s macroeconomic indicators have been fluctuating since 1980, due to the debt crisis and global shock. From early 1980s to the second half of the 1990s, Nigeria annual inflation has average around 30% percent. Subsequently, average inflation came down to one – digit rate. However, since 2001 inflation is back in the two digit domain, with an average of about 18 percent within 2000 – 2002 while average inflation between 2004 and 2008 is about 10 percent.

Batini (2004) advocated that “the combination of liquidity surprise with the ability of federal government to finance large budget deficits by borrowing freely from the CBN at below market-clearing interest rates has severely impaired the CBN in its conduct of

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short-run and long run strategy during the past two decades, and has indeed been a major driver of the instability evolution of inflation in Nigeria since 1950.

Batini further stressed that “emerging market economies like Nigeria face more volatile macroeconomic environment and typically have weaker institutions that enjoy less credibility than their developed economies counterparts”. According to National Population Commission (2006), between 1980 and 2002, Nigeria’s broad macroeconomic aggregates Growth, Terms of trade (TOT), Real Exchange Rate (RER), Government Revenue and spending were among the volatile in the developing world. This has made the economy to be in a low growth trap, made up of low savings – investment equilibrium. Hence, our economy is still far below the minimum investment rate of about 30 percent of GDP required for significant economic development, (CBN, 2004). Addison and Quentin (2007) pointed out that “when compare to other developed economies, Nigeria can be found that most GDP differentials can be attributed to Nigerians higher macroeconomic instability. They also noted that high level of under-development in Nigeria was largely due to macroeconomic instability that depressed investment and economic growth.

In the continent of Africa, one of the pillars, on which the New Partnership for Africa’s Development (NEPAD) was launched is to increase available capital to US$64billion through a combination of reforms, resources mobilization and conducive environment for FDI (Funke and Nsouli, 2003). The effort by several African countries stems from the desire to attract FDI. Sub –Sahara Africa as a region now has to depend very much on FDI for so many reasons, some of which include productivity gain and the introduction of new process as amplified by Asiedu (2001).

Further, the CBN blames the drop in FDI inflow into the country on poor state of infrastructure and the global economic uncertainty. Ifueko (2011) notes that, foreign direct investment is positively associated with GDP and greater inflows of foreign direct investment will spell a better economic performance for the country that government should provide an enabling economic environment for influx of FDI. Aside from that, there must be transparency and accountability in the system.

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Nigeria, being an active participant in Africa economy, intends to develop her economy by embarking on policy that will attract FDI. The Nigerian Enterprise Promotion Decree (NEPD) of 1971 was to regulate FDI but not to promote it due to the indigenization intention of the government. Only a maximum of 60% foreign participation was allowed. This resulted in a decline in foreign investment and slowed down the pace of economic activities in all sectors of the economy (UNCTAD, 2007).

Some of government polices targeted to attract FDI are: the Structural Adjustment Programme (SAP) of 1986; Industrial Development Coordinating Committee (IDCC) of 1988; Nigeria Investment Promotion Commission (NIPC) of 1995; and the Export Processing Zone (EPZ) of 1999 were put in place. All these policies are intended to attract FDI.

Nigeria rebased its GDP from 1990 to 2010, resulting in an 89% increase in the estimated size of the economy. As a result, the country now boasts of having the largest economy in Africa with an estimated nominal GDP of USD 510 billion, surpassing South Africa’s USD 352 billion. The exercise also reveals a more diversified economy than previously thought. Nigeria has maintained its impressive growth over the past decade with a record estimated 7.4% growth of real gross domestic product (GDP) in 2013, up from 6.5% in 2012. This growth rate is higher than the West African sub-regional level and far higher than the sub-Saharan Africa level. The performance of the economy continues to be underpinned by favourable improvements in the non-oil sector with real GDP growth of 5.4%, 8.3% and 7.8% in 2011, 2012 and 2013, respectively. Agriculture – particularly crop production – trade and services continue to be the main drivers of non-oil sector growth. The oil sector growth performance was not as impressive with 3.4%, -2.3% and 5.3% estimated growth rates in 2011, 2012 and 2013, correspondingly. Growth of the oil sector was hampered throughout 2013 by supply disruptions arising from oil theft and pipeline vandalism, and by weak investment in upstream activities with no new oil finds. Going forward, there are prospects of strong economic growth although downside risks remain entrenched. Such prospects are expected to hinge on continued recovery of the global economy, favourable agricultural harvests and a possible boost in energy supply arising from the power sector reform, as well as on expected positive outcomes from the

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Agricultural Transformation Agenda. Comprehensive economic and structural reforms are also expected to improve economic growth. Nevertheless, the country’s ongoing GDP rebasing may influence the growth figures, possibly making them lower going forward since the expected result is a larger economy. Risks to Nigeria’s economic growth are the sluggish recovery of the global economy, security challenges in the northeastern part of the country, continued agitation for resource control in the Niger Delta and possible distraction from the ongoing reforms as a result of the upcoming 2015 general elections. Negative growth of the oil sector may also continue to drag down overall growth until a lasting solution is found to the challenge of oil theft and weak investment in exploration due to the uncertain state of play in the sector as a result of non-passage of the Petroleum Industry Bill.

One of the most remarkable landmarks in the development of economic co-operation and regional integration in the Economic Community of West African States (ECOWAS) was the adoption of the five-band Common External Tariff (CET) in October 2013, which will become operational on 1 January 2015. The highlight is a reduction of the most-favored nation import tariff (MFN) from 12.0% to 11.5%. This is a milestone achievement given the earlier controversies and disagreements amongst ECOWAS member states since the commencement of negotiations in 2004. Reduction of the MFN import tariff should contribute to relaxing trade restrictions, harmonizing and strengthening the common market of ECOWAS member states, a necessary condition for a customs union and common trade policy with a view to deepening economic co-operation and integration in the sub-region. Success hinges on full compliance by all members, which entails the need of effective monitoring to ensure that the rules of origin are not violated. There is also need to build capacity to undertake such monitoring and implementation of the CET at both national and regional levels. There are concerted efforts to implement the CET by ECOWAS member countries. Nigeria tends to protect the agricultural sector in accordance with the ECOWAS Common Agricultural Policy in agreement and consistent with its Agricultural Transformation Agenda. Merchandise exports and imports continued to be dominated by the oil sector in 2013. The share of oil exports remained at an average of 96.7% of total exports. The share of refined oil-product imports, on a steady increase from 26.7% in 2008 to 35.8% in 2012, settled around 30%

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in 2013. The imports share of total trade declined slightly to an estimated 23.2% in 2013 from 25.2% in 2012. Risks include the continued challenges within the oil sector: sluggish global economic demand due to slow recovery, discoveries of alternatives to oil and gas such as shale oil and the invention of alternative-energy-consuming automobiles such as electric and hybrid vehicles.