Theories Of Foreign Direct Investment

Published Date: 02 Nov 2017

Introduction

1.0 Introduction

The concept of globalisation, which refers to a process of continuous increase in political, socio-cultural, and especially economic relations across international boundaries, has made it possible for various foreign investments to be carried out in a location of interest around the world. Investments help in developing the economy of the host country by serving as a major source of capital, increase in GDP, increase in per capita income and at the same time equipping the country with the latest types of technology and providing employment opportunities. In some cases, however, FDI may not necessarily translate into long term benefits to the host country. Srinivasan (2002) defined globalisation as a process whereby state-created barriers are dismantled to create opportunities for growth in economies willing to take part. Thus globalisation is a process which occurs overtime and has always been in existence which could be in different forms of trade, the flow of people and investment between countries.

There has been a tremendous increase in the process of globalisation compared to the early periods, as multinational corporations now invest in more nations. This has made many nations, especially developing countries, to attract foreign direct investment (FDI) as a vital approach for economic development. As shown in Fig. 1, the trend of inward flow of FDI in Africa was $1267m in 1970 which dropped to $906m in 1975; this was as a result of protectionist policies by Africans to protect their infant industries. This policy was introduced with the aim of encouraging the purchase of local goods and services produced by the domestic industries. Most of the countries at that period recorded lower FDI inflows leading to a total of $400m in Africa (UNCTADSTAT). The introduction of such policies, however, had negative impacts on some of the countries, as growth and development was seen to have declined. In trying to recover from these impacts, there has been a remarkable interest to attract FDI to the region, as countries became aware of its importance. As shown in fig 1.1, the flow of FDI was seen to have picked up, increasing to $2,443m in 1985; generated mostly from Egypt due to their large and extremely protected market size (Daly et al. 1999) and reached a high point of $58,565m in 2009 (UNCTADSTAT) see appendix A. Although the inflow may look huge, but when compared to Asia and Europe with inflows of $301,367b and $361,949b respectively, the amount is meagre. The graph also shows the uneven distribution of FDI between African countries

Inward flow of foreign direct investment in Africa, 1970-2009Chart data

Fig 1.1 – Source: UNCTAD STAT

This Research is based on the topic - FDI in Africa; the next frontier? Using Nigeria as a case study. Chapter 1 gives an overview of FDI in Africa, including conceptual framework of some key terms and reviews of theories of FDI upon which this research will be based. Chapter 2 discusses related literature of some analytical trends of FDI around the world with emphasis on Africa and Nigeria and also examines the motives and determinants behind investing, further explaining the impact of FDI on the Nigerian economy. Chapter 3 includes the different research philosophies and approaches used in data collection that will help in achieving the aims of the research. Chapter 4 is the critical analysis of data collected that provides answers to the research questions and chapter 5 provides recommendations and conclusions of this research including personal reflection and suggestions for further research. Subsequently, the last section consists of the references and bibliography of sources consulted and the appendices of relevant data and interviews conducted.

1.1 Conceptualisation

There are some important terminologies which need to be defined as they are relevant and will help in understanding what this research is about.

Foreign direct investment (FDI) is defined as "An investment made by a resident of one economy in another economy, which is of a long-term nature or of lasting interest" (UNCTAD 2009). The investors’ nationality is different from that of the host country and has a significant degree of influence in managing the enterprise. Investments can be in the form of setting up new companies known as Greenfield or integrating or acquiring existing companies with poor performance known as mergers and acquisition. Investment is defined as "the purchase of machine or a new plant (physical investment) or allocating funds to training and up skilling the workforce (human investment)" (McAleese, 2004, pg. 232). Investment can be said to be the act of investing money in order to attain future benefits. This is because money is required before anything can be purchased or before training of workforce. Capital is defined as "all inputs into production that have themselves been produced for example, factory, machines and tools" (Sloman and Hinde, 2007 pg. 21). Thus, it can be said to be a medium of creating wealth. Foreign policy of a country is defined as the "attempts by government to influence or manage events outside the states’ boundaries" (Manners and Whitman, 2000, pg. 2). The policy basically shows how a country tries to interact with other countries based on the country’s national interest.

1.2 Theories of Foreign Direct Investment

There are some widely accepted theories which have been put forward by scholars, aimed at explaining the specifics of foreign direct investment. This section will draw upon some key FDI theories in informing this research. Dunning and Lundan (2008) identified some of these theories as follows;

Risk Diversification Hypothesis – This theory was first proposed by Lessard (1976, 1982), Rugman (1976, 1977, 1979) and Agmon and Lessard(1977). Based on the international equity markets failure which was meant to facilitate reduction of unsystematic risks through diversification of portfolios, the theory tries to explain the motive for FDI. Multinationals engage in foreign investment in order to diversify their risks across geographical areas and are offered additional benefits of multiple sources of generating revenue and increase in the firms’ asset when compared to benefits obtainable in equity markets. However, two questions where raised concerning the theory. The first was whether multinationals performed better than domestic firms in terms of profit on a risk-adjusted basis and the second was to what extent do multinational enterprises serve as an alternative to internationally diversifying portfolio of assets. This theory will be referred to later in this research as it will be used to explore if risk diversification is a motive to invest in Nigeria.

The Behavioural theory of the Uppsala school – According to Johanson and Vahlne (1977, 1990), Organisational learning, accumulated experience and personal characteristics of decision makers serves as a catalyst for investing in foreign markets with high transaction costs provided it was economic to do so. The transaction costs represent the cost of doing business which varies among countries and were identified as the difference in the level of culture, economic development, education and language (Hornell et al. 1973; cited by Dunning and Lundan, 2008). The theory will be used as a basis for exploring why some investors have huge investments in several African countries and what constitutes the success factors of such investments.

Internalisation Theory – This theory as put forward in the mid 70’s by Buckley and Casson (1976), states that the external environment available to firms does not provide an effective and efficient one that enables them to fully maximize profit. Thus, for firms to engage in FDI they have to provide an efficient internal market by investing in multiple countries in order to achieve its aim (Shenkar and Luo, 2008). Multinationals engage in internalisation in search of backward or forward integration. Internalization permits subcontracting to subsidiaries and hinders outsourcing to domestic firms in the host country in order to achieve economies of scale. This is a major practice by multinational firms in Nigeria, but the question is, does internalisation favour domestic firms? This theory will help in finding out why some investors in Nigeria prefer to internalise rather than outsource to domestic company.

Three new perspectives on FDI were further developed which explains the activities of firms across borders. They are;

The Integration-Responsiveness Perspective – Engaging in FDI often involves a complex approach which has to do with integrating globally and responding to needs of the local market. Prahalad and Doz (1987) cited by Shenkar and Lou (2008), offered a theoretical framework which could help in achieving the required balances needed by FDI known as the I-R paradigm. Multinational firms organize efficient coordination of economic activities across countries as well as responding to the needs of the host country. In addition to integration and responsiveness, Firms need to have flexible options which will help in adapting to changes that may occur in the market environment (kogut, 1990). Changes could be in the form of political, economic reforms and government policies. Though this theory mostly applies to big firms with investments across countries rather than small firms, it still remains relevant in this research as it will help in finding out if firms in Nigeria, share resources between subsidiaries in other countries through integrating.

Dynamic Capability Perspective – This perspective states that it is a necessary factor to own specific resources or knowledge but that does not guarantee the success of international investment and production (Shenkar and Luo, 2008). It depends on how an MNE deploys and makes use of these resources efficiently that paves way for its overall success. Multinationals require resource commitments which provide opportunities to adapt to changing environments, putting them in a best position to be ahead of others. With the presence of many investors in the country, the theory will investigate the dynamic capabilities of investors and what their different resource commitments are, that has led to the achievement of the business.

The Eclectic or OLI paradigm – This paradigm as put forward by John Dunning, provides a broad framework of the explanations of the activities and determinants of multinational enterprises in foreign markets (Dunning and Lundan, 2008). The activities and determinants of FDI were summarised into three, namely; Ownership-specific advantage (O), Location-specific Advantage (L) and the Internalisation advantage (I), which he referred to as the OLI paradigm theory.

Ownership-specific advantage – Firms intending to invest across national borders, usually possess certain unique assets which are not available or may be available but with higher costs in the host country. The assets are known as ownership-specific advantage and could be both tangible (capital and manpower) and intangible assets for example managerial skills, technology and information, usually transferred at low costs within the firm (Dunning and Lundan, 2008). The assets give the firm a competitive advantage over other firms through the minimisation of costs which leads to generating higher profits in the domestic market environment.

Location-specific advantage – A multinational enterprise selects a host country based on the location advantages which are peculiar to that country. These peculiarities could be in the form of natural resources, government policies, people’s attitude towards investors, market size etc. The location advantage is then combined with the ownership specific advantage the firm has in order to have an edge over competitors.

Internalisation advantage – The internalisation advantage exists when firms use different strategies in order to use their existing ownership and location advantage due to market imperfections. In this case, firms license their production or market processes to subsidiaries, to avoid imperfections which are caused by entry barriers, inability to account for costs and benefits incurred in a particular transaction and high product demand (Shenkar and Lou, 2008). Firms who choose to internalise tend to achieve economies of scale as costs are reduced. Nevertheless, these benefits depend on the countries location advantage. This dissertation will mostly be based on the OLI paradigm theory as it fully explains the activities and determinants of FDI. It will used to explore the ownership advantage multinationals have and what has attracted/not attracted them into investing in Nigeria.

1.3 Research Aims and Objective

This research sets out to discuss and examine FDI in Africa, the next frontier? Using Nigeria as the focal point. The availability and consistent inflow of FDI in Nigeria is the catalyst to economic growth and development of the country. The specific objectives of the study are as follows:

To ascertain the barriers to the inflow of FDI in Nigeria

To explore the major determinants of FDI in the country

To give an insight to the need for consistent inflow of FDI in Africa, especially Nigeria.

To provide recommendations for challenges facing the inflow of FDI

To explore the future prospects of FDI in Nigeria

Chapter Two

Literature Review

2.0 Introduction

Though the literature review on the dynamics of foreign direct investment in developing countries is relatively abundant over the last few decades, it still fails to address the issue which is to be raised in this dissertation. Africa is a continent blessed with varieties of natural resources which includes petroleum, gold, oil, diamonds, iron, silver available in different countries. However, the region has attracted less foreign direct investors from around the world due to reasons which hopes to be explored in this research.

2.1 FDI Trends around the World (1970-2009)

To give a better understanding of the low FDI flows into Africa, it will be important to give a brief review of FDI trends around the world in the past four decades. The flow of FDI in Africa is improving but when compared to other regions, such inflows are considered to be insufficient. Developed countries like America, Japan, Germany, France etc accounted for more than 70% of total world distribution of FDI from the 70s to the 90s, while developing countries (Brazil, Mexico, and Argentina) accounted for 28.8% which declined to 25.82% with Africa having a minute share of 9.5% which declined to 2.3% (UNCTADSTAT, see appendix B). This was because Africa mostly attracts FDI to the primary sector unlike Asia and other regions who were more into secondary sectors leading to high growths as a result of diversified export bases (Dupasquier and Osakwe, 2005). On the other hand, Buthe and Milner (2004) stated that the different policies which have been adopted by Developed and developing countries like the Bilateral Investment Treaties (BITs) and International Investment agreements (IIAs), leads to lower capital mobility barriers and encouraged the flow of investors who felt reassured of better treatments and safe investments. Other factors could also include the high level of infrastructure, a conducive environment and political stability. Salami (2008) stated that the reason why Africa was not attracting much FDI is because people have perceived Africa as highly volatile without being supported by data. He identified the risk in Africa as being similar to other emerging markets.

From the Figure below, by the end of 2009, the share of FDI in Africa rose to 5.3% of global flow as a result of improving policies meant to attract investors, which Asiedu (2003, pg. 2) referred to as "absolute progress but relative decline" compared to Developing economies which rose to 42.93% mainly due to the different financial systems being operated, leading to economic growth and increasing commodity prices (UNCTAD, 2009). However, FDI in developed countries dropped to 50.79% caused by a decrease in the sales of cross border M&As after experiencing a 5 year boom which ended in 2007 (UNCTAD, 2009). If such trends persist, then the implication for Africa/Nigeria will result in backwardness of the economy in terms of lower income, increase in unemployment rate, low growth rate and low development leading to an inability to compete in the competitive global environment.

1266

764

1679

1484

2074

2443

3032

Figure 2.1 – Source; UNCTADSTAT

2.2 Historical Overview, FDI trends in Africa;

2.2.1 Foreign Direct Investment in Africa (1970’s)

Moss et al. (2004) in their research pointed out that the reason why Africa was attracting less FDI was because of the scepticism of the leaders. This scepticism was traced back to history, beliefs and the politics prior to the independence of most of the countries in Africa. The leaders at that time were sceptical about allowing foreign investors into their countries, because of the negative impacts they thought investments will have which includes polluting the environment and an eventuality of domestic firms going bankrupt. In the 70s, during the post colonisation period of many African countries, From Fig. 2.2, the flow of inward FDI into the continent was $1266m in 1970 of which Nigeria had $205m, the total flow of FDI into the continent further declined to $841 in 1971, however, Nigeria recorded $286m of inward FDI flow showing 39.51% increase from the previous year. In 1972 FDI flow to Nigeria and Africa increased which was $305m and $919m respectively (UNCTAD STAT) see appendix C.

The increase in Nigeria’s inflow can be attributed to the oil boom era, which was a period where the price of crude oil was extremely high. Before that time, the country’s major source of revenue was agriculture which was abandoned upon the discovery of crude oil. From 1974 onwards, there were inconsistencies as the flow of FDI kept fluctuating for both Africa and Nigeria. Nigeria experienced such fluctuations as a result of abandoning the agricultural sector during the oil boom era as there was rural – urban migration which left the agricultural sector in the rural areas unattended to, which is known as "the Dutch disease effect". This is referred to as a decrease in a country’s export performance upon discovery of natural resources which increases the exchange rate (Barder, 2006). This further led to the country importing agricultural products which it was known for prior to the era, making the share of GDP of Agriculture which was 48.32% in 1971, decline to 21% by the end of 1977 (www.onlinenigeria.com, 1998-2011). Although, many oil exporting countries in Africa benefitted from the increase in the price of crude oil that resulted in a boost of FDI inflows to $1484m for Africa and $310m for Nigeria in 1979(UNCTADSTAT), the revenue was not used to diversify their economies away from over reliance on commodities. It can be argued this exposed the Nigerian economy to changes resulting from the price of crude, making it a less attractive location for non- commodity FDI.

Fig 2.2 – Source: UNCTADSTAT

2.2.2 Foreign Direct investment in Africa (1980’s)

After the oil boom era of the 1970s, many oil exporting countries thought oil prices will remain high for a period of time and therefore went into accepting loans in a bid to improving their financial status from banks, who wanted to make use of the capital generated from the oil producing countries (Ferraro and Rosser, 1994). Nonetheless, the price of the oil soon went down, leaving many of the countries as debtors since most of the Loan was not used efficiently for productive purposes, but to improve the standard of living, leading to the Debt crisis of the 1980s. Greene and Khan (1990) also identified Factors that led to the crisis as over-borrowing, high interest rates, decline in net capital inflow and the type of domestic policies implemented by some of the sub-Saharan

countries. The flow of FDI into Africa at that time, suffered a major set back, as it dropped to $400m while that of Nigeria dropped drastically, having a negative inflow of $-739m in 1980. By 1982, the country was able to pick up, with an inflow of $542m and eventually having fluctuations all through that period. In 1989, the flow of FDI improved to a commendable amount of $1884m so also did Africa experience such fluctuations between 1982 and 1988 subsequently rising to $4,693m in the same year (UNCTADSTAT) see appendix D. However, the Nigerian government still engaged in the importation of agricultural products and external borrowing leading to a large external indebtedness, which further led to the introduction of some economic reforms, among which was the economic structural adjustment programme (ESAP), aimed at improving production of agriculture so as to minimise the rate of importation, reduce the dependency of oil exports and to reduce the level of unproductive investments in the country in order to maintain a sustainable growth. Nevertheless, this reform failed to improve the condition of the country due to the political instability and corruption that lingers in the country till date.

Fig 2.3 – Source: UNCTADSTAT

2.2.3 Foreign Direct Investment in Africa (1990’s)

The FDI trend of inward flows into the continent still remains inconsistent and unequally distributed amongst countries. In 1990, the flow of FDI declined across most of the continent, standing at $2845m, with middle Africa (Cameroon, Angola, Chad, Congo and Gabon) recording $-345m while the eastern part had a 29.24% increase. The inflow had a 103.47% and 72.70% increase in 1994, for Nigeria and Africa respectively showing the same pattern of growth with no decline. Though "Economic growth remained low and as Gross Domestic Product per Capita increased by an average of 1.5% a year during the 80s and 0.4% a year between 1990 to 1994" (UNCTAD 1997a, pg 228; UNCTAD 1997). Thus, in 1997, the reverse was the case, as the flow of FDI declined in Nigeria to $1642m that of Africa stood at $11,033m (UNCTADSTAT, see appendix E) mostly generated from southern and Northern Africa. The decline in the flow of FDI in Nigeria was mainly because of the high levels of corruption by the dictatorial rule of Sani Abacha, which led to the closure of many manufacturing companies and industries and also discouraged foreign direct investment. It was at this period that the African Economic Recovery started gaining momentum as the regional growth output increased to 3.9% in 1996 compared to the 2.8% growth of the 1995, which exceeded the population growth in real per capita income which was persistent for about a decade (UNCTAD, 1997). Thus, the Flow of FDI showed some improvement by the end of this decade.

Fig 2.4 – Source: UNCTADSTAT

2.2.4 Foreign Direct Investment in Africa (21st Century)

The 21st century started with most African countries introducing policy reforms designed to help in attracting the flow of foreign investors into the country. African leaders have continued to look for ways to increase the share of FDI flows into the region which brought about the introduction of the New Partnership for Africa’s Development (NEPAD) launched in July 2001 (Asiedu, 2003). Though the flow of FDI seemed substantial in the 1990s, but when compared to developed countries, then a question is raised as to why the FDI flows are two extreme cases.

"Despite the efforts of African government to attract foreign direct investment by improving their policy frameworks and despite signs of renewed economic activity in Africa, Africa has been largely bypassed by the recent foreign direct investment boom" (UNCTAD 1999, P.1 cited by Elizabeth 2003).

An evidence of this was seen in the total flow of FDI to the continent as it declined from the previous year to $9,829m in 2000. Between 2000 and 2004, the pattern of the flow of FDI in Nigeria was oscillating which reflected the introduction of some major reforms which were the privatisation of public enterprise and bank consolidation. According to Azubuike (2009), the privatisation programme was aimed at attracting and retaining foreign investments in the country. Also, it was meant to improve operational efficiencies of public enterprises and their contribution to the economy. However, many argued that privatizing public enterprises did not help in reducing the problems of unemployment in the country. Mahmoud (n.d.), pointed out that it was important for the country to pursue policies that would benefit both the economy and the extreme poor instead of privatizing, though aimed at enhancing economic growth some segments are left at a detriment. On the other hand, Jerome (2008), argued that privatization leads to technical and operating efficiency of companies, capital investment spending and dividends but that though there were cases of employment losses, it remained at a modest level. On the other hand, Consolidation of banks during this century was expected to improve the financial activities of banks and avoid subsequent crisis and failures in the banking industry, part of which was the 25 billion naira recapitalization. Though, Gunu (2009), pointed out that there was a reduction in employment during the bank reform and suggested that banks should expand the number of domestic branches in order to create employment. Seeing the importance of the reform from a different point of view, Ningi and Dutse (2008) thought that the bank consolidation reform created opportunities for financial institution leading to a transformation of the Nigerian economy but will only be effective if authorities reinforce supervision and regulatory intervention. Though the Flow of FDI into the country between 2004 and 2006 recorded an impressive 556% growth, it later declined in 2007 with oscillations till 2009 (UNCTADSTAT) see appendix F. On the other hand, the Inflows into Africa had a growth of 261% from 2001-2008, but by 2009 it declined by 18.9% (UNCTADSTAT). The decline in 2009 was as a result of the global financial crisis in which Boorman and Christensen (2010) said the crisis affected the continent through numerous channels with varying impacts in different countries. They said oil exporting countries were affected by lower commodity prices and those with current account deficits suffered the loss of private capital flows and reduced global demand. The impact of the crisis on the Nigerian economy was a reduction in external competition, financial inflow mainly FDI and depreciation in the value of the naira (CBN, 2010). Conversely, estimates have been made, showing that there will be gradual improvement in the flow of FDI which will eventually gain momentum in 2011 (UNCTAD world investment prospects survey, 2010).

Fig. 2.5 Source - UNCTADSTAT

In summary, the graph below shows what the trend of FDI into Africa and Nigeria looks like from 1970-2009. Thus, it will be important to further discuss what actually motivates firms to invest in foreign markets. See appendix G

Fig. 2.6 Source - UNCTADSTAT

2.3 Motivations of FDI

A pertinent question to ask is why investors seek to invest in foreign markets outside their home countries? The reasons are often referred to as motivations of FDI and they have been analyzed by many scholars, and they are Odenthal (2001), Dunning (2008), Floyd and Summan (2008), Luiz and Charalambous (2009) and Franco (2009):

Natural Resource Seeking Investment – One of the main reasons which drive investors to invest in foreign markets is to exploit natural resources endowments that a particular country has, that are not available in their home country so as to take advantage of lower costs.

Market Seeking Investment– Due to the high competitive environment which has evolved as a result of globalisation, many firms get attracted to new markets that are promising in order to be able to compete within the environment.

Efficiency Seeking Investment – The reason for this type of investment is to take advantage of cost-efficient productions which are supplied to various markets, after a resource-based or a market based investment has been established at a particular location. Such cost advantages are usually in the form of abundant natural resources, availability of workforce, economic policies and the cost of doing business in that country.

Strategic Asset Seeking Investment – This is a type of investment where foreign firms acquire the assets of a domestic firm with the aim of sustaining the long-term strategic goals of the company. The foreign firm in this case may not be in search of a larger market or natural resources, but interested in increasing the physical assets of the company which includes the company’s global portfolio and specialised human workforce.

It should be noted, however, that every FDI investment could be motivated by one or more of these factors. After investors have been motivated to invest in a certain location,

there are certain factors which actually determine if they can invest in that location of interest.

2.4 Determinants of FDI in Africa

Despite the abundance of natural and human resources in the continent, there still remains a question of unequal distribution of FDI. The reasons for the unevenness as identified by Basu and Srinivasan (2002) is the rate at which some countries reached economic growth, which can be reflected by the availability of quality infrastructure and amount of income acquired per person, and also the availability of natural resources. Dupasquier and Osakwe (2005) also said that there is an uneven distribution of FDI stating that in 2001, Nigeria, South Africa, Morocco, Algeria and Angola were the major attractions for FDI. However, by 2008 the top FDI destinations had increased to South Africa ($9 billion), Nigeria ($20.3 billion), Angola ($15.5 billion), Egypt ($9.5 billion) followed by Libya, Tunisia, Algeria, Democratic Republic of Congo and Sudan (African Economic Outlook 2011). This shows that there are certain factors that investors look at before considering where to invest, though many of these countries have introduced incentives which include liberalization policies and privatisation programs aimed at boosting the flow of FDI.

Motalleb (2007) in his research where he used the regression analysis to find out the determinants of FDI by comparing low and top recipient countries, said that factors which were responsible for the attraction of investors includes countries with high GDP growth rate, equipped with modern infrastructure which includes internet and telephone and also have business friendly environment consisting of lower start-up cost. Similarly, Constant and Tien (2010), discovered that countries with high Gross national income per capita and low exchange rates are important factors which attract FDI. They further said that another factor which determines the flow of Investors is the duration of length of the leader, saying that the longer a leader stays in power, the higher the possibility of becoming an autocratic or dictatorship which tends to discourage Investors. Another study on the factors attracting FDI to Nigeria stated that availability of natural resources, openness of the economy and macroeconomic risk factors are important determinants of FDI (Dinda, 2009). These authors have some similarities which are infrastructure and political stability though some other authors have raised a question about these factors. Onyeiwu and Shrestha (2004) disclosed that infrastructure and political rights have no relationship with FDI flows, because Nigeria and Angola both have poor infrastructure and political instability but still major recipients of FDI. Therefore some of these determinants identified may not be applicable to African countries.

Research on Nigeria such as Wafure and Abu (2010), found that despite the political instability in Nigeria, the oil sector still attracts foreign investors, further stating that the determinants of FDI in Nigeria are the market size, exchange rate depreciation, deregulation and political instability. Also, Nwankwo (2006), also discovered that a strong market, natural resources availability and macroeconomic stability attracts FDI to Nigeria but that democracy and political instability discourages FDI. However, some of these determinants according to Pigato (2001) are conventional (availability of natural resources, macro economic and political stability). He found out that new factors exists which are; great demand for skilled human capital with the ability to cope with modern technologies offered by foreign investor, a transparent/judicious regulatory economy and good supplier networks of local firms as investors may need to subcontract a part of their production process to such firms. Since foreign investors usually deal in businesses with an enormous amount of capital base, a transparent and judicious economy reduces the risk of eventually going bankrupt. Another new opinion is that of Opara-Opimba and blancheton (2010) where they observed that corruption, a major problem in Africa, can not discourage foreign investors.

It is obvious that the determinants of FDI across countries vary and are numerous. Therefore in the course of this dissertation the researcher intends to find out what investors look at in host countries before considering whether to invest or not by carrying out research which involves conducting face to face interviews with some of the investors in Nigeria.

2.5 Asia and FDI in Africa

Between 1996-2000 most of the sources of FDI flows into Africa, were from the United States of America, United Kingdom, France, Germany and Portugal, of which USA accounted for approximately 37% of the inflows (Dupasquier and Osakwe, 2005). In the last decade, major investment interests have been on Africa, most of which are from Asia (china, India, Malaysia and Japan). The China-African relations started in January 2006, with the release of a white paper of the China’s Africa policy, which was followed by the visits of many Chinese executives to Africa (Naidu, 2006). Formally a closed economy and now a major player in the global economy, one would marvel about its interest in Africa. According to Acharaz and Nowbutsing (2010), the reason for china’s investment interest is mainly natural-resource seeking because of the continent’s endowments in mineral resources and oil, rather than efficiency seeking investment. Similarly, Pease and Clark (2007) stated that the china FDI motivations are for natural resource seeking investment, as well as increasing its position as global leader in developing countries. Though, the Chinese have announced their relationship with Africa as a win-win situation, the interest is still questioned by many researchers. Zafar, (2007) cited by Acharaz and Nowbutsing (2010) states that china’s interest is motivated by self-interest and greed. Likewise, many African leaders are sceptical about the intentions of the Chinese, believing that they may not keep up with their promises, emphasizing that there is a deliberate attempt to target corrupt governments which includes Nigeria, Angola, Sudan and Zimbabwe (Parenti, 2009).

The Asians were involved in 126 green field investments and 26 cross border Mergers and acquisition from 2002 - 2005 (UNCTAD 2007). Thus, in Nigeria, the investments from china have been in the telecommunication, construction, oil and gas and manufacturing sector. This partnership between the countries have experienced a boom in many of this sectors especially the launching of first Nigercomsat in 2007 (Ogunkola et al, 2008). However people have criticised Chinese firms as being closed without creating employment opportunities for the local workers and lack of technology transfer, because most of the Chinese firms come into the country with their own expertise or finished products (Ogunkola et al, 2008). This attitude shows that the so called win- win situation is just a mere statement that the country does not intend to keep up with. Thus, for the relationship between the two countries to be beneficial, the government must enforce laws/policies that will sustain a balanced investment benefits for both countries. Having benefitted from positive inward FDI flows to China, it is argued it is in a strong position to help Africa attract and developed from its FDI inflows.

2.6 Impact of FDI on Nigerian Economy

Though the benefits of FDI is said to help develop the host country’s economy by serving as source of capital, increasing the GDP of the economy, transferring and equipping the country with the latest type of technology and creation of employment for the local workforce, it still remains uncertain as to whether such benefits have been favourable for Nigeria. In line with this, much research has been carried out on the impact of FDI on the Nigerian economy. Ayanwale (2007) asserts that despite the shortage of skilled labour, FDI has had a positive impact on the economy especially the communications sector, suggesting that the government should ensure proper channelling of FDI into the mainstream of the economy in order to further benefit from investments. The question here is do all sectors contribute to the development of the economy? To answer this, UNCTAD (2009) revealed that FDI in the telecommunications, oil and transportation sectors have had positive impacts on the economy while that of the manufacturing sector has remained inert with no much impact on the country. Omisakin et al. (2009), discovered that a 10% each increase in FDI and trade openness will lead to a 3% and 7% increase in economic growth. Thus, concluding that both FDI and trade openness have positive impacts on economic growth and suggesting that the country should encourage more trade openness. Also, Nabine (2009) using the granger causality test, discovered that the China-Nigerian Investment relationship has a positive impact on the economy as a result of the workforce dynamism china seeks, thus, calling for the Nigeria economy to develop strategies that will benefit the country. However, some authors are of the opinion that FDI does not have a positive impact on the economy. Ayadi (2009) states that the low levels of human capital and infrastructural development in the country has not helped FDIs in the country to generate a larger market that will help in attracting more FDI. Consequently these factors have led to an insignificant contribution on the Nigerian economy.

2.7 The key points and gap in the literature

Several key points that are of interest and that will be taken forward in this study have emerged out of the literature review. A summary of these points are provided below:

The political environment in Nigeria has been and continues to make the country unattractive to non-commodity FDI due to the high economic and political risk associated with it. In addition, the ulterior partnerships between the government and investors have created an environment that is highly corrupt and unfriendly to legitimate investors. This study will seek to explore this issue further by interviewing several key stakeholders.

The Nigerian government with the help from international organisations such as the World Bank have attempted to improve the policy and regulatory environment. This study will explore the nature and effectiveness of these reforms and how they have impacted inward FDI.

Economic instability and underdevelopment infrastructure are argued to have discouraged FDI inflows. This issue will also be explored further, by interviewing various stakeholders.

Previous research on this topic were based mostly on other developing countries and their own indigenous country analysis while those done using Nigeria as a case study were more focused on the determinants of foreign direct investment and its impact on the economic growth.

The purpose of this study therefore, is to bridge the gap between the existing study and the various changes that have occurred in the last few years. This study intends to examine what has actually motivated investors into the country, the future prospects of FDI in Nigeria and the determinants of foreign direct investment putting into cognisance the various recent reforms which include the economic reforms, banking reforms and the business regulation reforms.

Chapter 3

Methodology

3.0 Introduction

A research methodology is the "analysis of, and the rationale for, the particular method or methods used in a given study and in that type of study in general" (Jankowicz, 2005, pg. 224). Thus, the methodology explains how the researcher intends to carry out the research, what methods and why they have been chosen, and the philosophy informing that particular research initiative. In this chapter, the methodologies used for collection and the analysis of data, is discussed and used to draw out the final recommendation and conclusion of this dissertation.

3.1 Research Questions

African nations are interested in attracting FDI. The motivations for attracting FDI are different but can be summarized as: trying to overcome scarce resources such as capital, encourage entrepreneurship, have access to foreign markets, acquire efficient managerial skills, transfer of technology and innovation, and the creation of employment which is one of the major problems in the region (Bartlett et al, 2004).

The Nigerian government has also shown some level of interest and is trying to benefit from FDI by employing various policies that will help in achieving economic growth and development and the overall improvement in the standard of living of its people, though some of these policies have failed to work. Therefore the main research questions are;

To understand why investors are interested in investing (motivations) in the country?

To explore what the determinants for FDI in Nigeria are?

To understand the challenges investors face in the country and what the perceived solutions are?

To explore the policies which have been introduced to attract more FDI

To determine the future prospects of FDI in Nigeria

3.2 Significance of the Study

Foreign Direct Investment (FDI) exerts considerable influence on the rate of industrial development of any economy including Nigeria, by their sheer collective volume of output. The importance of FDI to the development of Nigerian economy had long been realized by the government.

In the light of the above, this research study has the following significance to scholars, government, policy makers, and the general public at large:

Highlight the public on the role FDI plays in the economic growth and development of Nigeria.

Cast light to the public on the fact that the topic is a laudable and strategic one, which would help in the development of the third world economies, especially Nigeria, when applied properly using the correct benchmarks, indices, and parameters.

This work will also serve as a resource for those doing future work on this topic and will add to the pool of printed materials on this topic.

It will also serve as a tool for the government of Nigeria in aiding economic growth and development.

3.3 Research philosophy

The nature and scope of a research determines the type of philosophies to be used. According to Saunders et al. (2007) the research philosophy is very important as it helps in guiding the researcher about important assumptions which helps in developing knowledge related to the research topic. Thus it will be necessary to give a brief description on the various types of research philosophies as it permits the reader to understand why a particular philosophy has been chosen by the researcher. Each of the philosophies are distinct from one another and therefore if not carefully chosen, can change the research process.

Interpretivism - This philosophy states that it is appropriate for researchers to conduct research among different people which gives a better understanding of views about the proposed research question (Saunders et al, 2007). Accordingly, human beings have a mind of their own which gives them the ability of interpreting things as a result of experience they had or events they witnessed. Thus, the researcher adopts an empathetic attitude as it involves a qualitative method of data collection.

Positivism – This research philosophy "advocates the application of the methods of natural sciences to the study of social reality and beyond" (Bryman and Bell, 2007). Saunders et al (2007) noted that the philosophy involves the use of existing theory to develop hypotheses which stands to be tested and confirmed/rejected. It involves a quantitative method of data collection.

Realism – This philosophy shares two characteristics with positivism in terms of applying natural and social sciences to data collection and explanation and a commitment that reality exists which is separate from peoples description (Bryman, 2008).

Having explained the three main philosophies above, this dissertation adopted the interpretivist philosophy, which will help in the analysis of data as well as achieving the aims and objectives of this research. This method was chosen because the research involves conducting interviews among different people to hear their opinions on the questions raised about FDI.

3.5 Research Approach

The research approach refers to the way the researcher intends to develop the study. Saunders et al. (2007) stated that it is perfectly possible for the two approaches to be combined within a single piece of research. But for the purpose of this research, the researcher chose to use a qualitative approach.

Qualitative approach – This is a process of drawing conclusions from data collected (Bryman and Bell, 2007). The research commenced with these approach which involved carefully investigating a small sample of investors and policy makers in order to have a broad idea of their perception on the questions raised about FDI in Nigeria. The approach is also referred to as inductive because "the researcher seeks to build up theory that is adequately grounded in her data" (Saunders et al, 2007, p 487). The various steps involved in this approach have been summarised as follows

General Research Questions Steps in Qualitative Research

Selecting Relevant Sites

Collection of Relevant Data

Interpretation of Data

Conceptual/Theoretical work

Findings and Conclusions

Source – Bryman and Bell (2007, pg. 406)

3.5 Research Design

The research design is defined as "the blueprint for the collection, measurement, and the analysis of data" (Blumberg et al, 2008 p.195). The two fundamental methods in which data can be collected are; primary and secondary.

3.5.1 Secondary Data

This is referred to as "Information which already exists in some form or other but which was not primarily collected, at least initially for the purpose of this research" (Lancaster, 2005 p. 66). This type of data which includes internal sources such as UNCTAD databases, country reports and external sources such as published journal articles, academic text books, CBN annual reports and web-based sources of information were used earlier in this research in the introduction and literature review chapters to help build a basis for the theory to develop. However, this method was not very effective in answering the research questions due to changes that have been made on economic and policy reforms overtime in the country.

3.5.2 Primary Data

Primary data did not exist prior to the research but was created as part of the dissertation during the process of research (Lancaster, 2005). These types of data can be collected through different techniques like experimentation, interviewing, surveys and observations. The type of technique chosen depends on the research to be carried out. Thus, the method through which data was collected in order to provide accurate results was the use of interviews.

Semi Structured Interviews - Bryman (2008) defined this method of data collection as an interview which involves having a guide of questions to be covered during the interview, without necessarily following the same order of the questions and allows the interviewee have a leeway in their responses. This type of face to face interview was very helpful for the researcher as some of the interviewees were very elaborate, which gave an in-depth investigation and understanding of the issues raised about FDI in Nigeria.

Two types of interviews were conducted which involved five investors and five policy makers in Nigeria.

Interviews with investors and policy makers were conducted in their various offices in two states; Abuja and Akwa Ibom state, after scheduling appointments and informing respondents of what the interview was about and why it was being conducted. Abuja and Akwa Ibom states were chosen because of the easy accessibility to the participants by the researcher. The appointments were very helpful as respondents were able to create valuable time out of their busy schedules. Informing them of what the dissertation was about was also a brilliant idea because the respondents got themselves prepared, which had positive influences on data collection.

3.5.3 Sampling

The research was based on purposive sampling which enabled the researcher sample participants in a strategic way because of their relevance in providing adequate data needed for the questions being posed (Bryman, 2008). It allows generalization and valid inferences to be drawn after carefully analyzing data gathered from respondents (Singh and Bajpai, 2008). The samples used in this research were 5 investors from countries all over the world and 5 Nigerian policy makers.

Interviews with Investors

The interviews where conducted with five investors whose originating countries were Germany, China, Lebanon, England and Italy and have been in Nigeria for over 5 years who understand the activities of investors in the country. Interviews were conducted so as to find out what challenges investors face, what the barriers of FDI are, the benefits of FDI and some other questions directed at providing answers for research questions. See appendix H for the questions asked during the interviews.

Interviews with policymakers

Selections of five respondents were based on purposive sampling because of their relevance to the subject matter. They are the commissioner of works and transport, Akwa Ibom state, commissioner of industry and commerce, the Speaker state house of representatives in Akwa Ibom State, the head of Economics department (University of Uyo, Akwa Ibom state) and the Director of international cooperation. The interviews were conducted in order to find out their opinion about FDI and what policies exist and what the future of FDI in Nigeria is. See appendix I for policymakers’ questions.

The researcher made use of a recording device during these interviews because "it helped to correct the natural limitations of the researchers’ memory and the intuitive glosses that is placed on what people say in interviews" (Bryman, 2008. pp 451). It also allowed an accurate collection of data from respondents.

After the interviews, data gathered where transcribed which was used for data analysis. See appendix J for transcripts of some of the interviews conducted with policy makers and Investors.

3.6 Limitations

Due to time constraint, the research was only carried out with investors and policy makers in Abuja and different local governments in Akwa Ibom State. If other investors in other parts of the country were contacted, it would have added to the pool of material gathered.

Scheduling appointments was quite difficult due to the busy schedules of the investors and policymakers.

The Regional manager of the Chinese firm in Nigeria did not understand English very well, which the researcher did not know until commencement of the interview. Though the interview was still very helpful, the researcher thought that not being very fluent in English hindered him from providing more information.

3.7 Research Ethics

At the commencement of each interview, the researcher introduced herself and indentified the auspices under which the research was carried out and the reasons why the research is being carried out. They were also informed about the voluntary participation of the interview and were made to choose whether to remain anonymous or would like their names to be included in this dissertation of which all of them declined anonymity.

Before each interview began, the interviewees were told that the interview would be recorded, reasons for recording were also made available and were informed about destroying the recorded interview once transcribed. It was also made clear to them that they had an option of not answering any questions they were not willing to answer.

Having said this, the researcher provided a consent form for each interviewee to go through and sign before the interview started. See appendix K.

Thus in this research, the following ethical principles as identified by Diener and Crandall (1978) cited by Bryman (2008) have been adhered to and they are;

This research does not provide any harm to participants.

An informed consent form about the research process was issued to participants.

All participants’ privacy was not invaded during the course of the research.

The researcher represented the research as what it is, therefore there was no form of deception.