IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS

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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 (1995 – 2005) 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.

TABLE OF CONTENTS

Title Page                                                                                                                    i

Certification                                                                                                                ii

Dedication                                                                                                                   iii

Acknowledgement                                                                                                       iv

Abstract                                                                                                                       v

Table of Contents                                                                                                        vi

CHAPTER ONE – INTRODUCTION

  1. Background of Study                                                                           1
  2. Statement of Problem                                                                              2
  3. Objectives of the Study                                                                          3
  4. Hypotheses Formulation                                                                3
  5. Scope of Study                                                                                    4
  6. Limitations of the Study                                                                          4
  7. Significance of the Study                                                                              4
  8. Definitions of Terms                                                                              5

References                                                                                                            6

CHAPTER TWO – LITERATURE REVIEW

2.1 Taxation – A Theoretical Overview                                                           7

2.1.1 Objectives of Taxation                                                                                       7

2.1.2 Principles of Taxation                                                                            7

2.1.3 Features of a Good System                                                                               9

2.1.4 Classification of Taxes                                                                           10

2.1.5 Effects of Taxation                                                                                11

2.2 Nigerian Tax System                                                                                 12

2.2.1 A Historical Overview of Nigerian Taxes                                            12

2.2.2 Tax Administration                                                                                15

2.3 Incentives                                                                                                              17

2.3.1 Administration of Incentives                                                                 18

2.4 Foreign Direct Investment                                                                          18

2.4.1 Factors that Influences Foreign Direct Investment (FDI)               19

2.4.2 Appraisal of Policies and Incentives for Inflow of FDI                            20

 References                                                                                                                 26

CHAPTER THREE – RESEARCH METHODOLOGY

3.1 Research Design                                                                                           28

3.2 Sources of Data                                                                                                    28

3.3 Methods of Data Collection                                                                      29

3.4 Population and Sample Size                                                                29

3.5 Techniques of Data Analysis                                                                       29

References                                                                                                      30

CHAPTER FOUR – DATA PRESENTATION, ANALYSIS AND TESTING OF HYPOTHESIS

4.0 Introduction                                                                                             31

4.1 Data Presentation                                                                                         31

4.2 Data Analysis                                                                                                        43

4.3 Testing of Hypothesis                                                                                  52

References                                                                                                      56

CHAPTER FIVE – SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.0 Introduction                                                                                                57

5.1 Summary of Findings                                                                              57

5.2 Conclusion                                                                                                            60

5.3 Recommendations                                                                                       60

Reference                                                                                                                    62

Bibliography                                                                                                               63

LIST OF TABLES

Table 4.1a: Cumulative Foreign Private Investment in Nigeria by Origin (N million)           32

Table 4.1b:Cumulative Foreign Private Investment in Nigeria by Type of activity

Table4.1b(Contd.):Cumulative Foreign Private Investment in Nigeria by Type of Activity (N million)                                                                  35

Table 4.1c: Flow of Foreign Private Capital in Nigeria                                    36

Table 4.1d: Nigeria’s Balance of Payment                                                      38

Table 4.1e: Inflation Rate                                                                            39

Table 4.1f: Nigeria Gross Domestic Product at 1984 Constant Factor Cost (N million)       41

Table 4.1g: Registered Unemployed and Vacancies Declared                    42

Table 4.1a: Cumulative Foreign Private Investment in Nigeria by Origin (N million)           44

Table 4.1b:Cumulative Foreign Private Investment in Nigeria by Type of activity (N million)                                                                                           45

Table4.1b(Contd.):Cumulative Foreign Private Investment in Nigeria by Type of Activity (N million)                                                                                     46

Table 4.1c: Flow of Foreign Private Capital in Nigeria                                    48

Table 4.1c: Flow of Foreign Private Capital in Nigeria                           51

Table 4.3a                                                                                                               53

Table 4.3b                                                                                                          54

CHAPTER ONE

  1.                                     INTRODUCTION
  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 over 90% 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 FederalGovernment 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 tadx 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 crystallised 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.

STATEMENT OF PROBLEM

IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS