FOREIGN DIRECT INVESTMENT AND THE MANUFACTURING SECTOR IN NIGERIA

FOREIGN DIRECT INVESTMENT AND THE MANUFACTURING SECTOR IN NIGERIA

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CHAPTER ONE

INTRODUCTION

Economists are quick to support the free flow of capital across national borders because it allows capital to seek out the highest rate of return since international ventures seek higher profit as per the capital arbitrage theory propounded by Samuelson (1948). Nigeria is believed to be a high-risk market for investment although blessed with abundance human resources. The co-existence of vast wealth in natural resources and pervasive poverty referred to as the “resource curse” or ‘Dutch disease’ (Auty, 1993) appears to bedevil the country. In 2011 the country ranked 170 out of 213 countries with respect to the Gross National Income Per Capita; the country had US$1,200 (World Bank, 2011). Many analysts and experts have suggested the use of foreign direct investment (FDI) as a variable injection to kick- start the Nigerian economy. This is because; FDI is not only the transfer of ownership from domestic to foreign companies, but also a device for improved corporate governance and attendant transparency in business practice. International investment also provides opportunities for global transfer of technology and human capacity development, in addition to the promotion of competition in the domestic input market. Despite the contributions to corporate tax revenues to the host country from profits generated from FDI, the highly capital intensive technology engendered can exacerbate the unemployment situations in labour surplus host countries. In addition, the creation of monopolies in areas where the entry barriers have been raised in some cases may crowd out domestic operators. The importance of FDI in the growth dynamics of countries has created much interest amongst scholars and lots of researches have been focused on the impact of FDI on the economy.

The manufacturing sector plays a catalytic role in a modern economy, and has many dynamic benefits that are crucial for economic transformation. That is, the manufacturing sector serves as a catalyst for economic growth and development as well as the bedrock of every economy. In advanced economy the manufacturing sector is a leading sector in many respects. It is an avenue for increasing productivity in relation to import substitution and export expansion, creating foreign exchange earning capacity, raising employment and per capita income, which widen the scope of consumption in dynamic patterns. Furthermore, it promotes the growth of investment at a faster rate than any other sector as well as wider and more efficient linkage among different sectors (Ukoha, 2000). That is why most countries including Nigeria, strive to attract foreign direct investment in the manufacturing sector because, of its acknowledged advantage as a tool of economic development. The growth of industries in Nigeria may

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be investigated through the study of such vital indices of growth, of value added, employment in modern establishment and capital formation in the sector, capacity utilisation and changes in trade structure. A cursory look at some concentrations of industrial development in Nigeria, may lead to a misleading picture of a high rate of industrialisation in Nigeria. For a country with the size and potential of Nigeria, manufacturing is essential if the country is to achieve rapid economic and social development. This recognition of the importance of the manufacturing industries, in the growth process is linked with the choice of an appropriate strategy of industrial development such as the attraction of FDI. The choice of this study period covering 1970-2012, forms about 80 per cent of the existence of Nigeria as an independence nation since 1960, provides an opportunity for a comprehensive assessment of the role of FDI on the manufacturing sector in Nigeria.

1.1       Background to the Study

The classical economists are of the view that most developing countries are endowed with numerous natural resources which when refined could serve as engine of growth and development. They argued that, because of the low income base and the high propensity to consume their levels of savings are low, which further translate to low capital formation and low productivity hence, the existence of high rate of poverty. These groups of thinkers, therefore, suggested that to break this vicious circle of poverty, FDI must be encouraged to complement domestic investment so as to provide these developing countries with their desired growth and development.

One of the remarkable trends in the world economy over the past three decades has been increasing global economic integration. This is significantly symbolized by the rising wave of foreign private investment, since the days of the “Washington Consensus”, which titled the stock of development literature in favour of globalisation. As structural thinking on development gave way to neo-liberal resurgence, conventional wisdom shifted towards the view that foreign investment was good for development. Consequently, developing countries had to depend less on dwindling official resource flows to assist the process of economic development. Thus, many developing countries had to turn to foreign private resources in order to fill the resource gap in their quest for economic development. (Adejumo, 2013).

With respect to economic development, the lessons of experience offered by the British and later industrial revolutions, have made industrialisation a chief strategy. The relationship between

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industrialisation and development is surprisingly diverse and many reasons have been put forward why developing economies are so committed to it. However, the international economic system shaped and directed by orthodox economic doctrine of market determinism, strongly influences the industrial progress of developing countries in direct and indirect ways. In the light of this relationship, it is pertinent to note that the international environment represents both constraints on and opportunities for the expansion of third world industrial production (Rajnesh Chandra, 1992) The effect of international economic environment on third world industrialisation reached its peak, when the global economic order stipulated non-negotiable tripod set of conditions, among others, that qualify developing economies for global integration, and for partaking in the development benefit this is deem to offer. Codified in John Williamson’s well known Washington consensus, stabilisation, privatisation, and liberalisation became the arrow-head of economic policy agenda for industrial development, in mush of the periphery of the world economic system. This inspired a wave of economic reforms in Latin America and Sub-Sahara Africa and fundamentally reshaped the policy landscape in those developing regions.

Recent experiences with opening capital accounts in emerging and developing economies however, have proved to be a mixed blessing, as it is becoming increasing clear that not all types of capital imports are equally desirable. It is therefore frequently advised that such countries should primarily try to attract foreign direct investment (FDI), and be very careful about accepting other sources of finance (Prasad, 2003). Empirical researches however, suggest that while the evidence of negative effect from FDI is inconclusively, evidence of its positive effect is overwhelming (Graham, 1995).

In Nigeria, manufacturing sector grew slowly over the years; for instance, the share of manufacturing sector in GDP has been declining over the decades, from 7-11 per cent in 1970s and 1980s. Between 1990 and 1996, manufacturing sector recorded a negative annual growth rate of 1.6 per cent. Consequently, the contribution of the sector to GDP fell to only 3 per cent. Rapid growth was experienced in the late 70s, which corresponds to the “oil boom” years in Nigeria. As at 1980, the sector was at its peak of about 11 per cent. With the fall in the price of crude oil and high debt profile, the sector contribution to GDP fell drastically to 2.4 per cent as at 2010. Manufacturing capacity utilisation in the late 1970s was as high as 78.70 per cent, and nosedived to as low as 43.80 per cent in the 1980s, between 2000 and 2005, it oscillated around 34.60 per cent and 58.78 per cent.

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The Nigeria manufacturing value added fell in 1985 from 5,954.697 million to 1,357.907 million in 1989, which adversely affected industrial output to fall from 12,448.317 million to 2,999.709 million. During this period there was no incentive for industrial development. Manufacturing value added also declined by 40.8 per cent and overall investments expenditures of manufacturing enterprises declined by 0.8 per cent in 1997. In addition, the manufacturing sector was characterised by increasing cost of production, emanating from high tariff, increased cost of energy input, reliance on poor and inadequate public sector infrastructures, rising cost of import and sharp depreciation of exchange rate.

The UNCTAD world investment report 2006 shows that FDI inflow to West Africa is mainly dominated by Nigeria, who received 70 per cent of the sub-regional total and 11 per cent of Africa total. Out of this, Nigeria’s oil sector alone receives 70 per cent of the inflow. On the average, the stock of FDI in the manufacturing sector over the period of analysis compare favourably with the mining and the quarrying sector with an average value of 32 per cent, while FDI in the mining and the quarrying sector has been diminishing, from about 51 per cent in 1970-1974 to 30 per cent in 2000-2001. The stock of FDI in trading and business sector rose from 16.9 per cent in 1970-1974 to 32.6 per cent in 1985-1989, before nose-diving to 8.3 per cent in 1990-1994. However, it subsequently rose to 25.8 per cent in 2000-20001. Agriculture, transport, communication, building and construction remained the least attractive hosts in Nigeria. However, the transport and communication sector, seem to have succeeded in attracting the interest of foreign investors, especially the telecommunication sector, while the banking sector is highly regulated with re-occurring limits placed on foreign participation, make it less desirable for foreign investors. The privatisation of the power sector has just begun; foreign investors are expected to invest in the near future.

In terms of growth rate, FDI inflow dropped from 95.6 per cent in 1971 to -31.21 per cent and -17.23 per cent in 1976 and 1984. Although the growth of FDI increased by 182.68 per cent in 1986, the value soon fell by 24.76 per cent in 1989 and further to -89.87 per cent in 1996. Since the year 2000, the growth of FDI has remained positive, except in 20001 when the value was -70.00 per cent. The recent surge in FDI inflow to the country is attributable to the reduction in the nation’s debt profile and renewed confidence of foreign investors in the Nigeria economy (CBN, 2006).

In 1960s and 1970s when imperialism and dependency hypothesis flourished, FDI was viewed as a vehicle for continued political and economic domination of Nigeria. Hence, the policy thrust of

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government was to limit foreign direct investment in the country through the Nigerian enterprise promotion degree (NEPD) promulgated in 1972 and as amended in 1977. NEPD, otherwise known as the indigenization decree, regulated FDI flows in Nigeria, only a maximum of 60 per cent foreign private participation was allowed. This resulted in a decline in foreign investment and slowed down the pace of economic activities in all sectors of the economies (Ndebbio and Ekpo, 1994).

In an attempt to create a suitable climate for investment and growth within the economy and stimulate her economy recovery from prolonged and severe recession, the Nigerian government introduced the Structural Adjustment Programme (SAP) in July 1986. But as we know, SAP was a colossal failure and this impacted negatively on macro-economic indicator including FDI.

The immediate post-sap era, was characterized by intense political conflicts that paralysed every sphere of the Nigerian nation. The development limited the achievement of the reform under SAP. The inauguration of a democratic government in May 1999, the country then began a gradual progression towards creating a political and social environment supportive of corporate social responsibility (CSR) and ultimately sustainable development.

Policies that were put in place to attract FDI are: The establishment of the Nigerian Investment Promotion Commission (NIPC) in 1990s, Nigerian Enterprises Promotion Act No. 54, Foreign Exchange Monitoring and Miscellaneous Provision Act 1995 (it was enacted to liberalise foreign exchange transactions and thereby command a freer flow of FDI), Investment and Security Act 1999, and Nigeria Export Processing Zone Authority (NEPZA) etc.

The figure given below shows FDI inflows over the years. We can notice that FDI flows in Nigeria since 1970s have maintained a downward trend with less than $200.00 million between 1970 and 1980, it oscillated between about $100 million to $2300 million between 1980 and 2000, since then it has been on the increase. In 2005, inflow reached its peak of 108%, from about $5 billion to $ 13 billion. This astronomical increase in FDI inflow can be linked to the dramatic rise in FDI flows from emerging countries in Asia such as China, India and Malaysia. Another reason is the rapid increase in the price of crude oil prices, which increased investment in the petroleum extractive industries. Nigeria is deemed to have been reaping the benefit of its return to democracy, as the country seems to be achieving strong economic growth in recent times. FDI flows in Nigeria are quite concentrated in the oil sector, as the

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vast reserves of oil and gas attracted MNCs into the extractive industries and not to the manufacturing sub-sector. However, a combination of events and policies are likely to lead to a significant decline in the FDI flows to Nigeria. The first is the global economic crisis which affected MNCs across the globe. However, the recovery in 2010 is likely to overturn the decline as a result of the recession.


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