THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC DEVELOPMENT 

(A CASE STUDY OF SHELL NIGERIA PLC)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through; incorporating a wholly owned subsidiary or company, acquiring shares in an associated enterprise, through merger or an unrelated enterprise and, participating in an equity joint venture with another investor. Foreign direct investment incentives may be in form of low corporate and income tax rates, tax holidays, other types of tax concessions, preferential tariffs, special economic zones, investment financial subsidies, soft loan or loan

guarantees, free land or land subsidies, relocation and expatriation subsidies, job training and employment subsidies, infrastructure subsidies, research and development support and derogation from regulations, usually for very large projects (Obadan, 2004).

 Attempts at attracting FDI into Nigerian economy have been based on the need to maximize the potential benefits derived from them; and to minimize the negative effects their operations could impose on the country. As a result of the persistent global panic, unemployment has been on the rise, jobs are being lost, there is shortage of liquidity and acute scarcity of credit has remained visible in the financial institutions. For Nigeria to generate more foreign direct investment, efforts should be made at solving problems of government involvement in business; relative closed economy; corruption; weak public institutions; and poor external image.

Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. According to CBN (2006), the amount of FDI inflow into Nigeria reached US$2.3 billion in 2003 and it rose to US$5.31 billion in 2004 (138% increase) this figure rose again to US$9. 92 billion (87% increase) in 2005. The banking reform engendered the interest of foreign banks in the Nigerian market making foreign direct investment (FDI) into Nigeria grew by 134% to N1.123 trillion (US$9.6 billion) in 2007. Out of a total US$36 billion of FDI that went into Africa, Nigeria received 26.66% of the inflow. The Vanguard Newspaper of May 19, 2008, reported that a total of US$12.5 billion of foreign investment inflow was recorded in the economy at the end of 2007, and that this was an indication that “Nigeria is a beautiful bride for foreign investors”. This has not also been so, however.

In Nigeria, FDI is defined as an investment undertaken by an enterprise that is either wholly or partly foreign-owned. The Investment Code that created the Nigerian Investment Promotion Commission (NIPC) (Decree No. 16 of 1995) and the Foreign Exchange (Monitoring and Miscellaneous Provision) Decree, also enacted in 1995, gives full backing for FDI in Nigeria. Nigeria has a high potential to attract significant foreign private investment inflow. Most countries strive to attract FDI because of its acknowledged advantages as a tool of economic development. Africa 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 component. Openness to trade and available human capital, however, are not FDI inducing. FDI in Nigeria contributes positively to economic growth. Although the overall effect of FDI on economic growth may not be significant, the components of FDI do have a positive impact. The FDI in the ICT sector has the highest potential to grow the economy and is in multiples of that of the oil sector.

Foreign Direct Investment (FDI) refers to a movement of capital that involves ownership and control of a firm inanother country for instance, the purchase of common chores in a Nigerian incorporated company by a French citizen involves ownership and an element of control.  This is because all shares in an organization have same voting rights.

For the purpose of this classification such is recorded as FDI if the share acquired involves more than 10% of the outstanding common shares of the Nigerian company.

In this research and generally, Foreign Direct Investment is classified in the context of Multinational Corporations (MNC).  The MNC is sometimes referred to as Multinational Enterprises (MNE) is Transnational Corporations (TNC) or Transnational Enterprises (TNE).

According to the chairman of BOD’s of Chemical Co, a multinational form in the united state origin “the emergence of a world economy and the multinational corporation have been accomplished land in land”. He sees multinational enterprises moving towards what he called “a global company”, a firm that have no nationality but belongs to almost all countries.

As said earlier direct investment bring about management skill and the technical know how to next country. The laudable effect of FDI are at the macro-economic level, for example, employment stimulation, increased output and economic growth.

 In the first instance, the tax collected from the multinational subsidiaries is direct gain to the host country.

 Second, direct investment makes for advanced skill of the labour force of the host country. As the multinational corporation are in certain about their future needs in skilled labour and personal turnover especially in every technological advancing labour beyond its immediate need, this training could either be in scientific, technical or managerial skill, leading to higher rate of wage at no cost really. This is in turn would lead to an increase in the production capacity of the economy of the host country. This increase in the production capacity of the economy would lead to an outward stript of the production of the possibility frontier of the host country as the result of the spillovers of the activities of the subsidiaries.

 Usually, foreign occupy the top managerial and technical positions in the multinational cooperation; thus reflecting their attitude towards the real and potential absence of human relations in countries where their presence is felt.

1.2 STATEMENT OF PROBLEM

The undeveloped countries like Nigeria suffer not only from low income and unstable growth, but also from regional disequilibrium, economic instability unemployment, depending on foreign countries, specialization in the production of raw materials and economic, social, political and cultural marginality.

Underdevelopment is an element in the process of development of the international system underdevelopment and developments are two facts of a single process of which both internal and international structures are causes. International treacle brings about polarization because the low income countries are assigned the production of primary production (raw materials) which are processed in the home countries because of worsening and unstable terms of trade, because the economics of the low income countries lack the force work force, the entrepreneurship and physical/institutional infrastructure to seize export opportunities and because of generally monopolistic arrangement by which profits flow out from the underdeveloped countries to the developed.

In Nigeria for unsnarl, there is that popular and commonly held view that manufacturing multinationals have done greater lower than good to the host communities as a result of their operations in these communities wheel has led to loss of economic and social quality and environmental degradation.  It is not out of place for one to say that these MNC’s have threatenical the health of the indigenes by the use of dangerous chemical, pollutants etc.  These and more are the problems that will be looked into which necessitated this research work.  It will try to examine the nature and pattern of foreign direct investment that is International Corporation in Nigeria manufacturing rector with a particular reference to Shell Nigeria Plc as a case study.   

1.3 OBJECTIVE OF THE STUDY

1.    To determine the Nigerians drive benefit from multinational corporation in term of transaction and entrepreneurial.

2.    To determine if multinational corporation contribute to the growth of gross domestic product (GDP) in the Nigeria economy.

3.    To determine of Multinational Corporation help in solving balance of payment problem in the Nigerian Economy.

4.    To determine if multinational corporation maintains cordial relationship with in the host society.

1.4    RESEARCH QUESTIONS

1.    Do Nigerians derive benefit from multinational corporation in term of transaction and entrepreneurial?

2.    Does multinational corporations contribute to the growth of gross domestic product (GDP) in the Nigeria economy?

3.    Can Multinational Corporation help in solving balance of payment problem in the Nigerian Economy?

4.    What impact does entrepreneurial make in the economy?

5.    How did Multinational Corporation maintain cordial relationship with in the host society?

1.5 RESEARCH HYPOTHESIS

HYPOTHESIS I

Ho: Multinational corporations do not contribute to the growth of gross domestic product (GDP) in the Nigeria economy.

Hi: Multinational corporations contribute to the growth of gross domestic product (GDP) in the Nigeria economy.

HYPOTHESIS II

Ho: Multinational Corporation do not help in solving balance of payment problem in the Nigerian Economy.

Hi: Multinational Corporation help in solving balance of payment problem in the Nigerian Economy.

1.6 SCOPE OF THE STUDY

Foreign Direct Investment (FDI) analysis is clouded by a lot of controversy, variety of interpretation and numerous emotive value judgments.  This recreant opinion about the activities of MNC’s in the developing countries is as typical as the topic itself.  Owing to the divergent opinions that exist, it would be practically impossible to give a total survey of the current debate on the topic.

However, this work will make positive efforts to extract in favour of or against MNC’s in developing nations.  Furthermore, it is outside the scope of this work to discuss the consequences of Foreign Direct Investment (FDI) for the investor nations.  The study area in which data were collected for the study is limited to Shell Nigeria Plc.

1.7             SIGNIFICANCE OF THE STUDY

The research will be beneficial to all organizations especially Shell Nigeria Plc and their staff as it emphasized on the impact of Foreign Direct Investment and its impact on the economy in which it operates.

It will help useful the government in way of encouraging foreign investment in the economy.

It will equally be useful to small scale business, large corporations, and universities, college of education and to the researchers.

1.8 LIMITATION OF THE STUDY

There is no gain saying that there are no limitations in research work generally. Any shortcoming that arises in this study is as a result of factors which are beyond the researcher’s control.

Therefore, it will be of more importance to highlight certain militating factors that tend to narrow or limit my scope of study. This project research would have been easier if not for these limitating factors:

1.     Time factor: time was not on the researchers to consult various sectors of the economy to review employees or given out questionnaire to various institutions on the effect of government revenue policies.
As we all know, time is never our friend. The time scheduled for the completion of this research thesis was too short. As a result, generating information/data was strenuous as it coincides with final year examination period, which needed attention.

2.     Finance: this is another barrier that limited the researcher’s work.

3.     Available resources: was unavailable for the research work.

1.9 DEFINITION OF TERMS

VARIABLE: A variable is anything that can take on differing or varying variables. The values can differ at various times for the same object or person, or at same time for different object or person.

ECONOMIC GROWTH: Economic growth is the increase of per capita gross domestic product (GDP) or   other measure of aggregate income. Economic growth is concerned with the long run. The business cycle is the short-run variation of economic growth.

GOVERNMENT EXPENDITURE: Government expenditure is the government spending. Government expenditure is financed through a variety of methods. Governments use taxes to fund programs and expenditures. Governments engage in deficit spending where government may borrow based on future projected budgets in order to fund programs. Governments may also choose to take loans from foreign countries to finance expenditure. The main component in a government’s fiscal policy are how money is spent and from what source.

FOREIGN DIRECT INVESTMENT: Foreign direct investment is the long term participation by one country into another country. It involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI. There are outward FDIs and inward FDIs.

INFLATION RATE: Inflation rate is a measure of inflation. It is also as the rate of increase of a price index for consumer price index. Inflation is a rise in consumer prices and increasing the cost of living. It is also the percentage rate of change in price level over time. The inflation rate is one of the most important economic forces consistently weighing on the value of a nation’s currency.

1.10 HISTORICAL BACKGROUND OF SHELL NIGERIA PLC

Shell Nigeria is the common name for Royal Dutch Shell's Nigerian operations carried out through four subsidiaries—primarily Shell Petroleum Development Company of Nigeria Limited (SPDC). Royal Dutch Shell's joint ventures account for more than 21% of Nigeria's total petroleum production (629,000 barrels per day (100,000 m3/d) (bpd) in 2009), from more than eighty fields.

Shell started business in Nigeria in 1937 as Shell D’Arcy and was granted an exploration license. In 1956, Shell Nigeria discovered the first commercial oil field at Oloibiri in the Niger Delta and started oil exports in 1958. Prior to the discovery of oil, Nigeria like many other African countries strongly relied on agricultural exports to other countries to supply their economy. Many Nigerians thought the developers were looking for palm oil.

In the 1990s tensions arose between the native Ogoni people of the Niger Delta and Shell. The concerns of the locals were that very little of the money earned from oil on their land was getting to the people who live there, and the environmental damages caused by the recurring sabotage of pipelines operated by Shell. In 1993 the Movement for the Survival of the Ogoni People (MOSOP) organized large protests against Shell and the government, often occupying the company production facilities. Shell withdrew its operations from the Ogoni areas. The Nigerian government raided their villages and arrested some of the protest leaders. Some of these arrested protesters, Ken Saro-Wiwa being the most prominent, were later executed, against widespread international opposition from the Commonwealth of Nations and human rights organizations.