Globalization and free trade 1

Foreign Direct Investment in Nigeria:

An Analysis of The Oil Industry

Malu Ifeanyi

Research and Writing 303CD

Professor Mendelson

December 13, 2006

Foreign Direct Investment in Nigeria: An Analysis of the Oil Industry.

Foreign direct investment (FDI) in Nigeria is a study in globalization, and one of the most controversial and hotly debated discourses in international trade. Statistics shows that the total stock of FDI to Nigeria in 2003 amounts to $24 billion, which accounted for about 43 percent of gross domestics’ products in Nigeria (U.S. State Department report, 2005). In 2003, the stock of U.S. FDI to Nigeria was estimated at $2.1 billion, up from $1.8 billion in 2002. The total percentage decreased dramatically in 2004 to $955 million down from $1.1 billion in 2003.

This statistical data if true is promising, because the total net of Nigeria’s FDI stood at $1.04 billion with the United States representing about 15 percent, United Kingdom 9.5 percent, Germany 7.3 percent and China at about 7.1 percent. Under the decree of the Nigerian Investment promotion Commission (NIPC) promulgated in 1995, Nigeria allows for 100 percent foreign direct investment in all sectors with the exception of the oil sectors which is limited to a joint venture. According to the World Bank 2006 index of economic freedom report, “the oil sectors accounts for about one third of annual GDP, but provides over 70 percent of federal government revenues and 90 percent of exports.”The lure of globalization and the issues of poverty are one of the main drivers of FDI to Nigeria. With the unprecedented growth in FDI in Nigeria, legitimate questions are been asked about its importance to Nigeria’s political and economic development. The World Bank reports also states that Nigeria is one of the largest recipients of FDI to Africa, and most of the FDI are mainly concentrated in the oil and mining sectors, which accounted for about 36 percent of gross fixed capital formation (World Bank index, 2004).Indeed, the huge population of Nigeria, market size factors, location as Africa’s investment nerve center ,and abundant natural resources proved extremely attractive to foreign investment in the oil sector where both fiscal and monetary econometric policy were contaminated by the unstable political thinking and profit sharing.

FDI is defined by the U.S. Department of commerce as the “acquisition of plants and equipment in a foreign country, U.S. parent companies equity in, and net outstanding loans to their foreign affiliates”. The Department also defines a company as directly foreign owned when a “foreign person hold a 10 percent interest in the company; (2) the parent company acquires or contract a new plants and equipment overseas; (3) the parent company shifts funds abroad to finance an expansion of its foreign subsidiary; or (4) earnings of the parent company’s foreign subsidiary are invested in plants expansion.”

This paper is an analysis of foreign direct investment in Nigeria, and it answers one fundamental question: Does the influx of FDI promote economic development? As a result, this paper is divided into four sub questions: To wit:

(1)  What factors gave rise to the influx of FDI?

(2)  What are the negative effects of FDI to Nigeria’s economic growth?

(3)  Are the domestics firms competitive?

(4)  Is the World Bank a vehicle for Change?

(5)  What are the measures and programs used to curb influx of FDI?

What Factors Gave Rise To The Influx of FDI?

Globally, foreign direct investment is a way of entering a foreign market by developing foreign based plants or manufacturing facilities. This type of economic connectedness stemmed from the acquisition of a Nigerian firm by a foreign investor or the building of new plants in Nigeria in order to generate profits in a global market. In the oil industry, production is granted through a joint venture with the Nigerian government. To illustrate, Exxon Mobile, Shell BP and Chevron acquired the rights to extract crude petroleum, and market the finished products partly, because Nigeria lacked the technology and management skills.

Indeed, the world is shrinking at a greater pace with the introduction of the internet, faster methods of transportation, and the end result is the inflow of capital to Nigeria from FDI, yet the economy of Nigeria deteriorates, the gross domestic products declines, life expectancy grew shorter and the rate of poverty increases to an alarming dimension.

According to Peter T. Bauer(1985) “the exponents of Western guilt further patronize the Third World by suggesting that its economic fortunes past, present and prospective, are determined by the West…that the economic future of the Third World depends largely on Western donations”(P. 84).

Robert Carbaugh (2004) writes that “investment flows from regions of low anticipated profits to those of high anticipated profits, after allowing for risks” (P.292).Carbaugh contends that investment inflow from rich nations to a poor nation such as Nigeria make economic of scale less stable, exposed workers to the risk of financial crisis, and multinational are only interested in making larger profits.

Moreover, the misguided economic policies of the Nigeria government tend to increase or decrease the rate of FDI. Bauer writes that “successive Nigerian government have spent millions of pound and Naira (local currency) on totally uneconomic project, and called this spending investment” (P.249).In his own remarks, Scott R. Pearson writes that “government economic policy in Nigeria prior to the civil war(1968-1970) was oriented toward a free market, and incentive were established to encourage private investment”.(P.35).

What Are the Negative Effects FDI to Nigeria’s Economic Growth?

Corruption and the political fallout from frequent change of government are some of the negative effects of FDI in Nigeria. Other variables can be summarized as thus:

(1)Political and Socioeconomic

(2)Environmental, Legal and Cultural

(3) Labor and Competitive

According to the World Trade Organization report (1998), Nigeria is Africa’s most populous nation with an estimated population of 140 million. Historically, Nigeria has abundant oil reserves beneath the seafloor, and the knowledge of these untapped natural resources prompted the civil war, political instability, and the secession of Biafra runaway republic from Nigeria in May 1967(Pearson, P.137). The awareness and production of crude oil was not the only factors responsible for the civil war, but oil may very well have been the extra ingredient that finally precipitated the military conflict (P.139).

Additionally, the mutual distrust among the three largest tribal clans (Hausas, Ibos ,and Yorubas) , regime change, street crimes, bribery, lack of the rule of law, the long standing, deep seated tribalism ,and the level of underdevelopment in the oil rich regions deters the influx of FDI ,and often led to the spate of kidnapping of foreign oil workers. The British Broadcasting Cooperation reports in 2005 that oil workers and foreign expatriates have been abducted in Nigeria’s oil producing delta region in a renewed effort to deter foreign direct investment to Nigeria (BBC World News, 2005). As troublesome as these questions of negative impact have been for the fledgling state of Nigerian economic predicament, the undeniable gain for investors in the oil industry is the control of prices globally, the share of economic profits and positive net income .

The ecological and environmental issues of onshore oil exploration were masked by the benefits of FDI; yet health problems persist among oil workers and residents of oil producing communities. Along the creeks and streams in the communities are extensive damages to farmlands and fish farms due to oil spillages.

Accordingly, the failure of successive Nigerian government to harness or tap the abundant oil wells led to the globalization of the industry, and the spread of FDI to other sectors of the economy such as mining, manufacturing and technology. To penetrate the international oil cartel and other organizations, Nigeria is expected to succumb to price control mechanism, and austerity measures formulated by international organizations headquartered in the capital of advanced nations. The economic independence of Nigeria are questioned, and the risk of debt restructuring, currency devaluation or balance of payment reforms became a condition necessary for full membership to such world bodies as the Organization Of Petroleum Exporting Countries (OPEC), International Monetary Fund (IMF), the General Agreement on Tariff and Trade (GATT), and the United Nations Conference on Trade and Development (UNCTAD) Briefly, the activities of these world organizations which often sparked controversies in Nigeria will be discussed and analyzed to show the relationship between FDI to Nigeria and economic development.

OPEC

The Organization of Petroleum Exporting Countries is a group of nations endowed with abundant crude petroleum deposit, and members tend to support higher prices in order to increase profits. Robert J Carbaugh (2004) writes that “OPEC’s market power stemmed from a strong and inelastic demand for oil combined with its control of about half of the world oil production and two-thirds of world oil reserves” (P.235).OPEC came into existence as a result of a conference held in Iraq in 1960, and the immediate reason for the emergence of the oil cartel was the fall in royalties in the 1950s due to a decrease in the price of oil.

As Peter, R.D. Wilson (1996) noted, “it is no coincidence that Nigeria, the cartel member most prone to break the rules, produces oil which competes directly with that produced by Britain.”(P.85). He stated that Nigeria is keen to sell as much as it can even if it means early depletions of its oil deposit in order to generate funds for economic development(P.85).

Karim Pakravan(1984) writes that OPEC members led by Nigeria and Libya started giving out discounts to buyers in order to revive their sales , and attract foreign investment. (P.41).Pakravan contends that despite those reductions, OPEC production hit a low of less than 17 mbd in March and April of 1982(P.41).

In “The Political Economy Of Global Energy” R.K.Pachauri (1985) writes that “global energy development since world war 11 have been marked by a growing dependence on oil caused both by the rate of economic growth much higher than achieved earlier and by a shift to oil from coal and other sources” (P.12). He noted that the demand for oil and prices in the long run will increase relative to income elasticity and the redistribution of FDI. OPEC oil price rose from $3 to about $12 per barrel in 1974 and by 1981, the price of oil averaged almost $37 per barrel in Nigeria and ballooned to $59 per barrel in 2006,but the profits accrued to Nigerian account remain unchanged.

IMF

The emergence of the International Monetary Fund in 1944 was to regulate the financial relationship of its members, provide assistance to balance of payment and act as a consultative organ. Article 1 of IMF document states inter alia:

(i)  To promote international monetary cooperation

(ii)  To facilitate expansion and growth of international trade

Williams(1994) argues in his book that the commonly held view that IMF policies tend to be counterproductive, especially for the Third worlds poor is a widely held one, and from the perspective of the Third world the decision- making structure in the IMF discriminates against them (P.51-73).

UNCTAD

United Nations Conference of Trade and Development was created by the developing nations as a means of remaining relevant in international trade. Williams writes that the creation of UNCTAD in 1994 stemmed from the displeasure of the developing countries with the working of the international bodies (P.181). Statistical data compelled by UNCTAD reveals that the FDI inflows to Nigeria in 2001 was estimated to be $1277 million , and the outflows of the same year was $94 million with 60.5% inward stock and 9.4 % of outward stock of GDP in 2003.

GATT

The General Agreement on Tariffs and Trade is a 60-year- old treaty designed to address the tariffs and other protective barriers in international trade. Nigeria is a signatory to GATT since its inception and has participated in many round of trade negotiation to reexamine the impact of trade and tariff on FDI.

The stated goal of international organizations in Nigeria has been a controversial issue among student and labor union. In mid 1998, the National association of Nigerian Students (NANS) staged a demonstration against the influx of multinational cooperation, and the effects of globalization. The union members contend that FDI brings cheap labor , creates artificial employment in the short run, increase the rate of inflation and underemployment in the long run. The union cited the conflicts between the oil companies and youths in the oil producing regions and underdevelopment as sources of disagreements. The genesis of the disputes between the oil companies and youth groups stemmed from lack of development, unemployment, lack of social amenities and environmental degradations. According to the World Bank, environmental degradation can arise from lack of development, widespread poverty and increase in population (Williams, P.132). Critics of FDI to Nigeria contend that the contribution to Nigeria’s economic development is quite small compared to the profits associated with the firms’ activities in the host nation. Williams argues that the “foreign exchange gain may also be small if a large percentage of the income generated locally is repatriated in the form of interest, dividend and profits” (P.133). However, supporters contends that FDI to Nigeria brings a highly trained manpower and technology, well-tried production plants based on the development of economic of scale.