Empirical investigation of the impact of Foreign Direct Investment on manufacturing firms and banks in Nigeria Chukwuka Onyekwena The thesis is submitted in partial fulfilment of the requirements for the award of the degree of Doctor of Philosophy from the University of Portsmouth JANUARY 2012 Declaration Whilst registered as candidate for the Degree of Philosophy, I have not been registered for any other research award. The results and conclusions embodied in this thesis are my work and have not been submitted for any other academic award. i Acknowledgements I express my deep and sincere gratitude to my Director of Studies, Dr. Martin Snell and my Research Supervisor Professor Alan Collins for the motivation, enthusiasm, and technical advice throughout this study. I also express profound gratitude to Dr. Francis Teal for providing the NMES data, and Mr Mustapha Ibrahim for providing the NDIC annual reports. I am extremely grateful to my parents Dr. Ernest Onyekwena and Barr Christy Onyekwena for all their support throughout this study. ii Abstract This thesis is based on the econometric investigation of the impact of Foreign Direct Investment on Nigerian manufacturing firms and banks. Unique data obtained from a survey of Nigerian firms conducted by the Centre for the Study of African Economies, University of Oxford, and United Nations Industrial Development Organization was employed for the estimations based on manufacturing firms. For the investigation based on Nigerian banks, this study uses the BankScope data base. Ordinary Least Squares and Fixed Effects techniques were used to estimate the coefficients of foreign presence measures in augmented Cobb-Douglas models for manufacturing firm data, and augmented Dealership models for data on banks. Results of the estimations show evidence of positive effects of foreign presence on domestic manufacturing firms, while no effects were obtained from the estimations based bank data. The differences in FDI effects reflect on the sector-specific characteristics of manufacturing firms and banks in Nigeria. Manufacturing firms in Nigeria operate at low technology levels and are open to foreign direct investment, while the opposite seems to be case of banks in the country. The results therefore support earlier thoughts in literature on FDI which assert that positive spillovers exist were technology gaps between foreign firms and domestic firms exist, or in sectors open to FDI. Important contributions were made in examining the effect of the approaches taken towards the measurement of foreign presence on spillover estimates with particular reference to sampling procedure and data quality. The study therefore concludes that FDI generates spillovers in Nigerian manufacturing firms but attention of empirical investigations should focus on appropriate measurement of foreign presence variables, and the specific characteristics of the sector or industry being examined. iii Table of Contents Declaration ............................................................................................................................................... i Acknowledgements ................................................................................................................................. ii Abstract .................................................................................................................................................. iii List of Figures ....................................................................................................................................... viii Chapter 1 Introduction ........................................................................................................................... 1 1.1 Introduction .................................................................................................................................. 1 1.2 What is foreign direct Investment? .............................................................................................. 5 1.3 Trends in FDI flows ........................................................................................................................ 8 1.3.1 Regional .................................................................................................................................. 8 1.3 Sectoral trends ............................................................................................................................ 15 1.4 Research Questions .................................................................................................................... 17 1.5 Objectives of the Thesis .............................................................................................................. 18 1.6 Contribution of thesis ................................................................................................................. 18 1.7 Structure of thesis ....................................................................................................................... 19 Chapter 2: The Nigerian context ....................................................................................................... 21 2.1 Introduction ................................................................................................................................ 21 2.2 The Nigerian environment .......................................................................................................... 21 2.3. History of FDI in Nigeria ............................................................................................................. 25 2.3.1. Pre-colonial era ................................................................................................................... 25 2.3.2. Colonial era ......................................................................................................................... 27 2.3.3. Post Independence era ....................................................................................................... 29 2.3.4. Indigenization era ............................................................................................................... 29 2.3.5. Investment promotion era .................................................................................................. 31 2.4. An Overview of Nigerian manufacturing industry. .................................................................... 32 2.5. An Overview of Nigerian banking industry. ............................................................................... 38 2.5.1 Historical exploration of Nigerian banking sector ............................................................... 40 2.7 The manufacturing and banking sectors: A significant contrast ................................................. 60 Chapter 3: FDI and policies ............................................................................................................... 64 3.1 Introduction ................................................................................................................................ 64 3.2 Global trends in FDI policies........................................................................................................ 64 3.3 Nigerian government policies and FDI ........................................................................................ 68 Chapter 4: The theory of FDI and spillovers ..................................................................................... 72 4.1. Introduction ............................................................................................................................... 72 iv 4.2 The theory of FDI ........................................................................................................................ 73 4.2.1. Neoclassical Trade theory ................................................................................................... 73 4.2.2 Industrial organisation theory: Internalisation .................................................................... 76 4.2.3 OLI framework by John Dunning .......................................................................................... 78 4.2.4. Types of FDI ......................................................................................................................... 80 4.3. The theory of FDI spillovers in manufacturing firms.................................................................. 82 4.3.1. Demonstration channel ...................................................................................................... 83 4.3.2. Workers’ mobility ................................................................................................................ 85 4.3.4. Linkages (Vertical spillovers) ............................................................................................... 89 4.4 The theoretical background of foreign bank entry effects on bank performance ..................... 91 4.5 Harmonizing FDI spillover and foreign bank effect models ........................................................ 92 Chapter 5: Review of empirical literature ............................................................................................. 96 5.1 Introduction ................................................................................................................................ 96 5.2 Review of empirical literature on FDI spillovers in the manufacturing Industry ........................ 97 5.2.1 Empirical studies on Spillover occurrence ..........................................................................