IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS

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.

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  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.

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.

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 (1995 – 2002); 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.

i)         This study therefore will help in determining the impact of the present tax incentive regime, with the aim of finding ways to improve them.

ii)        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.

iii)        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.

iv)       This study will also provide information to the policy moulders of the country,  on how best to pursue the attraction of foreign private investment.

v)        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.

₦5,000.00 – DOWNLOAD FULL PROJECT DOWNLOAD FULL PROJECT Added to cart

---

---

---

---

Related Project Topics :