IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS: THE STUDY OF NIGERIA’S TAX INCENTIVE POLICY MEASURES

IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS: THE STUDY OF NIGERIA’S TAX INCENTIVE POLICY MEASURES (2000 – 2009)

ABSTRACT

Attempts at attracting foreign direct investment in Nigeria have been based on the need to maximise the potential benefits derived from them, and to minimise the negative effects their operations could impose on the country. To this effect, the federal government of Nigeria has over the years, been employing different incentive measures, both fiscal and monetary, for the purposes of attracting investors to develop the economy. How successful have these incentives been? In this study, “Impact Of Incentive Measures On The Flow Of Foreign Private Investments: The Study Of Nigeria’s Tax Incentive Policy Measures (2000– 2009)” the researcher set out achieve four objectives to assess the Nigerian tax environment; to examine the incentive regimes of the federal government of Nigeria; to study the trend of foreign private investment in the country, with the objective of ascertaining its economic impact; and finally, to appraise the effect of the various incentives on foreign private investment in Nigeria. The research found that there are several built-in incentives to attract foreign private investments into Nigeria; that the manufacturing and agricultural sectors were more favoured in the incentive measures; that the incentive measures were able to boost the inflow of foreign direct investments; that this increased inflow however, could not translate to visible improved living standards, nor reduce inflation and the unemployment status of the nation.

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF STUDY

According to Medupim (2002:1), foreign private investment accounted for 70% of the total industrial investment, in Nigeria, at independence. This also constituted over90% of investment in such basic industries as chemical production, and vehicle assembly plants and no less than 90% of other manufacturing sub-sectors. Foreign Private Direct Investment (FPDI) dominated banking, insurance and mining before the indigenization programme (Ukeje, 2003:285).

However, the indigenization programme of 1972 and 1977 drastically reduced foreign private investment in Nigeria. Ever since then, there have been concerted efforts by the Federal Government of Nigeria to industrialise and attract Foreign Direct Investment, over the years. This is because, according to Okafor (1983:53), direct foreign investment often means much more than capital inflow. It also constitutes a source of new product ideas, technology, professional expertise, etc. These efforts take the form of incentive schemes, which come in different forms. But common in African and the company income tax relief, import duty relief, and all other tax incentives (ibid).

Howbeit, in order to attract enough foreign private investment, the macro economic environment must be attractive to foreign investors also. Issues like industrial infrastructure, sizeable internal market, and political stability together with a friendly tax environment, all culminate to influence foreign private investment into any country.

The Nigerian scenario is such that, since after the indigenisation programmes, successive governments have been trying very hard to woo foreign investments into the country. This was crystallized by the Federal Government repealing the Nigerian Enterprises Promotion Decree (NEPD) of 1977, in the year 1995, and in its place promulgated the Nigerian Investment Promotion Decree (NIPD) No 16 of 1995, and the Foreign Exchange Decree No 17 of the same 1995. All with the intention of liberating the economy, as to open it up to foreign direct investments.

Added to the above were the carving out of Industrial Zones, and Export Promotion Zones. Various tax incentives have also been put in place, coupled with the relaxation of fund repatriation. The deregulation of the economy, and the privatisation of the non-performing public corporations, has also been embarked upon.

To what extent then, has all these moves been fruitful? The aim of this research is to investigate how incentive measures are used by government for attracting Foreign Private Investment in Nigeria and the extent of its success. To accomplish this, this project paper is presented in five chapters – chapter one introduces it, chapter two deals on the review of related literature, while the methodology of the research is presented in chapter three. Chapter four handles the data presentation, analysis and the testing of hypotheses. Chapter five summarises the findings of the research, draws conclusions and makes recommendation.

1.2       STATEMENT OF PROBLEM

Attempt at attracting foreign direct investment into Nigeria have been based on the need to maximise the potential benefits derived from them, and to minimise the negative effect their operations could impose on the country (Aremu, 2003:44). The ways of attracting this FDI, especially by the developing countries, like Nigeria, is tax incentives (Anyafo, 1996:53). This taxation is defined as a compulsory levy payable by an economic unit to the government, without any corresponding entitlements to receive a definite and direct quid pro quo from the government (Bhatia, 2001:37).

To this end of attracting FDI, the Federal Government of Nigeria has negotiated and signed tax treaties with a few Foreign Governments, pursuant to section 38 and schedule 7 of Personal Income Tax Act (PITA) and section 34 of Company Income Tax Act (CITA). These statutes feature a wide array of tax holdings and exemptions which are intended to boost investment. For instance, the Industrial Development (Income Tax Relief) Act makes provision for the granting of relief to pioneer companies (Abdulrazaq, 2002:5). Other tax incentives to encourage Foregin Direct Investment are also in place.

With all the tax incentives lavishly given by the government, what has been the response to foreign direct investment? How has the implementation of these incentives affected the net flow of foreign capital? How has the net effect of attracting foreign direct investment been favourable to the economy? Are there some other measures required by the government, so as to have the desired net effect?

In recognition of the above, the researcher intends to study the present tax incentive regime in Nigeria, with the aim of ascertaining how far they have encouraged foreign direct investment in the country.

 1.3       OBJECTIVES OF THE STUDY

The benefits of direct foreign investment can impact positively on both domestic private and public investment (Ukeje, 2003:284). The other benefits are: increase in national real income; increase in labour employment and labour productivity; increase in innovation – managerial ability, technical manpower and technological know how; increase in quality of goods and services produced (ibid), amongst other benefits.

However, the ways of attracting this foreign direct investment, especially by developing countries like Nigeria is tax incentives according to Anyafo (1996:53).

To what extent, therefore, are these benefits accruing to Nigeria, with her present tax incentive regime? To ascertain this fact, the researcher therefore, is saddled with the following objectives:

1. To assess the Nigerian tax environment;
2. To examine the incentive regimes of the federal government of Nigeria;
3. To study the trend of foreign private investment in the country, with the objective of ascertaining its economic impact;
4. To appraise the effect of the various incentives on foreign private investment in Nigeria;
5. Finally, to make recommendations on areas that might need a further review based on the findings of the study.

1.4       HYPOTHESES FORMULATION

In furtherance of the above study, and in a bid to achieve the afore-stated objectives, the following hypotheses will be postulated and appropriately tested for their validity.

Hypothesis I

Ho: Incentive measures have not encouraged foreign direct investment in Nigeria

Hypothesis II

Ho: Foreign private investment has not encouraged economic development

 1.5       SCOPE OF STUDY

Over the years, the Federal Government of Nigeria has rolled out different incentives, both fiscal and monetary, to attract foreign direct investment in the country. Different sectors of the economy have different incentive packages, mapped out for them. In recognition of the vastness of the topic under study, the researcher therefore will be restricted to the present tax incentive regime and will cover the period 2000 – 2009.

Furthermore, the sector of the economy that will be considered of interest, with regards to attracting foreign direct investment in Nigeria will be mainly the manufacturing industry.

1.6       LIMITATION OF THE STUDY

Tax incentive as a fiscal policy measure for attracting Foreign Direct Investment in Nigeria: An Evaluation (2000 – 2009); is a topic that needs a wide range of official secondary data. This demands time, human and financial resources, which were not in abundant supply to the researcher.

Thus, this study had for its limiting factors, the following:

Time: This has always been a limiting factor for a research of this kind, because the researcher will always strive to complete his work within the time frame of his work.

Finance: Researcher has always been a cost intensive venture, as the researcher will have to travel to gather materials, spend money to photocopy materials and to produce the final work, whereas the supply of it is limited.

Dearth of Data: The major limitation of this study is the dearth of data and information as to the present tax incentives and their effects on one side, and the non availability of data on the foreign direct investment into the country.

1.7       SIGNIFICANCE OF THE STUDY

The attraction of foreign private investment into the country has been a big concern to successive governments. To this effect, various fiscal policy measures have been put in place to achieve the aim of attracting foreign direct investment. It is believe that when foreign direct investment is attracted into the country, other benefits aside capital inflow will accrue to the country.

1. This study therefore will help in determining the impact of the present tax incentive regime, with the aim of finding ways to improve them.
2. It will also help enlighten the readers on the various forms of incentive, thereby dispelling ignorance as to the intentions of the Federal Government on the present incentive regime.
3. This study is also significant, in that it will throw more light to the industrialists, who will be equipped to make full use of the present incentives, to achieve growth.
4. This study will also provide information to the policy moulders of the country, on how best to pursue the attraction of foreign private investment.
5. Finally, the research will be a useful addition to the existing literature on tax incentives, and attraction of foreign private investment. Thereby serving as a resource material to all who may wish to further the study on the subject or its related area.

1.8       DEFINITION OF TERMS

Foreign Direct Investment (FDI) and Foreign Private Investment (FPI):

According to Oyeranti (2003:1), it is common in the literature to observe that FDI and FPI are used interchangeably. This perhaps explains why the International Monetary Fund defines Foreign Direct Investment as, “investment made to acquire a lasting interest in a foreign enterprise, with the purpose of having an effective voice in its management”.

This definition is also adopted by the researcher, for the purposes of this work.

Tax: Tax is a compulsory levy payable by individuals and organisations for no direct service rendered to the payer.

Tax Incentives: These are measures geared towards reducing the impact of taxation on the payer, whether temporarily or permanently.

Fiscal Policy: Fiscal Policy is the
influence of economic activities, through variation in taxation and government expenditure.

In this study, “Impact Of Incentive Measures On The Flow Of Foreign Private Investments: The Study Of Nigeria’s Tax Incentive Policy Measures (2000– 2009)” the researcher set out achieve four objectives to assess the Nigerian tax environment; to examine the incentive regimes of the federal government of Nigeria; to study the trend of foreign private investment in the country, with the objective of ascertaining its economic impact; and finally, to appraise the effect of the various incentives on foreign private investment in Nigeria.

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