Foreign direct investments: a review from the Nigerian perspective

Abstract

As the world economy continues to become more globalized, foreign direct investment (FDI) continues to gain prominence as a form of international economic transactions and as an instrument of international economic integration. In recent years, developing countries like Nigeria with large home markets and some entrepreneurial skills have produced large numbers of rapidly growing and profitable multinational enterprises (MNEs). These MNEs are like their counterparts in other countrirs, looking for markets where they have comparative advantage to invest in. It is therefore important to create the conditions that would attract FDI from such MNEs. In this context, this study outlined the reasons why some Nigerian enterprises decide on outward FDI, their levels of success, and what other countries particularly in sub-­‐Saharan Africa must do to attract FDI from Nigeria. It also examines the flow of FDI to Africa since the 1970s and examined the determinants of FDI with a view to understanding whether the existing policy and operational framework are sufficient for attracting investments. It further discusses the factors that influence FDI, the role of FDI, FDI trends in Africa, sectorial allocation of FDI in Africa, why Africa has lagged behind in receiving FDI, and the various modes of entry. The study ends with clear recommendations for MNEs and policy makers 1. INTRODUCTION Over the last decade and a half, the world has witnessed the phenomenal rise of the Nigerian multinational enterprises (MNEs) in various sectors. MNE in this context is viewed as one that has operating subsidiaries, branches, or affiliates located in foreign countries. It also includes firms in service activities such as consulting, accounting, construction, legal, advertising, entertainment, banking, telecommunications, and lodging (Eiteman et al., 2010). MNEs have global outreach and many of them are owned by a mixture of domestic and foreign shareholders. Many indigenous Nigerian companies have developed beyond expectations and having captured large shares of the Nigerian home markets, decided to tap into global markets with increased competitive. They have expanded into other parts of sub-­‐Saharan Africa including and stretches into Europe, North America, Asia and the Middle East. Instead of waiting to receive foreign direct investment (FDI) from the western nations as is usually the norm, Nigerian companies are on the move, spreading their tentacles into other Afican countries countries and the world over, a hitherto reserved place for the European and American companies. Most of the FDIs by Nigerian companies have been in the financial services sector, for example First Year: 2014 Volume:1 Issue: 3 Bank of Nigeria Ltd has opened offices in South Africa, the Democratic Republic of Congo as well as in London, Paris, Beijing and Abu Dhabi (First Bank of Nigeria Plc 2011). GTBank has offices in Cote d’Ivoire, Gambia, Ghana, Liberia, Sierra Leone, and the United Kingdom, while United Bank of Africa (UBA) has offices in 19 other countries namely Ghana, Benin, Cote d’Ivoire, Burkina Faso, Cameroun, Gabon, Guinea, Kenya, Liberia, Mozambique, Senegal, Tanzania, Uganda, Zambia, Chad, Congo DR, Congo Brazzaville, the United Kingdom and the United States. Other companies with foreign offices include Zenith Bank Plc, Access Bank Plc, Diamond Bank Plc, and Industrial and General Insurance (IGI) with offices in Rwanda and Uganda (Asiedu, 2006). In the oil and gas sector Oando Plc, an integrated energy group has operations across West Africa in Ghana, Togo, Liberia, and licenses for oil exploration from Turkey and Zambia. The company is building sub-­‐Saharan Africa’s largest gas pipeline network and with its foray into power business, the company is poised to contribute several captive power plants to the Nigerian and sub-­‐ regional markets (Oando Annual Report & Accounts 2012). There is also the Sahara Group with offices in Nigeria, Cote d’Ivoire, United Arab Emirates, Switzerland, Singapore, Brazil and the Isle of Man. In the telecommunications sector, Globacom Limited operates in the Republic of Benin and Ghana, and has also acquired licenses to operate in Cote d’Ivoire. It has a reputation as one of the fastest growing mobile service providers in the world and aims to be recognized as the biggest and best mobile network in Africa (Anyanwu, 2012). 2. REVIEW OF RELATED LITERATURE Foreign direct investment (FDI) is a key element in this rapidly evolving international economic integration, also referred to as globalization. According to the Organization for Economic Co-­‐operation and Development (2008) FDI provides a means for creating direct, stable and long-­‐lasting links between economies. Under the right policy environment, it can serve as an important vehicle for local enterprise development, and it may also help improve the competitive position of both the recipient (“host”) and the investing (“home”) economy. In particular, FDI encourages the transfer of technology and know-­‐how between economies, as is the case with China, India, Phillipines, etc. It also provides an opportunity for the host economy to promote its products more widely in international markets. FDI, in addition to its positive effect on the development of international trade, is an important source of capital for a range of host and home economies. The significant growth in the level of FDI in recent decades, and its international pervasiveness, reflect both an increase in the size and number of individual FDI transactions, as well as the growing diversification of enterprises across economies and industrial sectors. Large multinational enterprises (MNE) are traditionally the dominant players in such cross-­‐border FDI transactions. This development has coincided with an increased propensity for MNEs to participate in foreign trade. In recent years, it is believed that small and medium-­‐size enterprises have also become increasingly involved in FDI