CHAPTER ONEINTRODUCTION1.1. Background of StudyForeign Direct Investment (FDI) plays a very important part in the industrial growth ofdeveloped and underdeveloped countries and help to boost economic growth (United NationsIndustrial Development Organization, 2009). The International Monetary Fund (IMF) Balance ofPayment Manual describes FDI as an investment made to secure a perpetual share in a businessorganization taking its operation in an economy not belonging to the investor, where theinvestor’s sole aim is to contribute in the decision making in the operational activities of thebusiness (Moosa, 2002). Based on this definition, “doing business” indicators and “ease of doingbusiness” must be one of the essential elements motivating greater inflows of FDI (Bayraktar,2011).The environment which is conducive enough for firms in terms of doing business should be ableto attract more foreign investment to the country. While FDI defines investment as activitiesrelating to production its importance for emerging economies is really great. FDI does not onlycontribute to resources that can be invested in the formation of capital, more importantly, it is ameans of conveying technological production equipment, expertise, invention, andorganizational and managerial processes among different parts of the world, as well as locatingthe marketing networks internationally (Mallampally and Sauvant, 1999).Developing countries have been a great beneficiary of FDI inflows into their economies. In 2012,FDI inflow into developing countries was documented as almost above US$790 billion,noticeable by a large magnitude of internal remuneration (US$406 billion) and financialassistance to the official development of the country (US$126 billion) from the Organization forEconomic Co-operation and Development (OECD) donors (World Bank Report, 2014).1
Over the past years, the flows of FDI into sub-Saharan Africa escalated, up to six times of theamount [ CITATION Wor14 l 1033 ]. The flows heightened from about US$6.3 billion in 2000to US$35 billion in 2012. FDI is now a significant means of investment in the development ofAfrica. Nigeria has been privileged to have received a meaningful proportion of the flow of FDI toAfrica. In 1997, Nigeria because of the existence of crude oil it became the best attraction ofFDI round the world with a total inflow of US$1.5 billion. FDI inflows have been growingenormously over the past years; from $1.14billion in 2001 and $2.10 billion in 2004 (Akanegbuand Chizea, 2017). Nigeria’s FDI reached $11billion in 2009 as recorded by the United NationsConference on Trade and Development (UNCTAD, 2009) making the country the nineteenthgreatest receiver of FDI. However evident fluctuations in FDI inflow have been recorded inNigeria over the years, FDI given its potential benefits to an economy may promote the progress of a developingcountry like Nigeria. In the second quarter of 2017, NBS reported that Nigeria had recoveredfrom recession by recording a positive growth rate of her GDP of 0.55 percent. The positiveGDP growth rate was attributed mainly to the growth of various sectors such as the agriculturalsector, domestic finances and insurance systems, infrastructure related sectors like the electricitysector, mining sector etc. The government also put policies in place to aid doing businessactivities in Nigeria. Presidential Enabling Business Environment Council (PEBEC) was set up to make businessprocess smoother and the focus is now on infrastructure and human capital (FRN, 2017).However, a favorable business climate is needed in order to attract foreign direct investment(FDI) and to develop small and medium-size enterprises (SMEs). A bad business environment –that is, one affected by various elements causes heavy costs, delays, and high risks – holds backthe development of the economy and can scare away FDI (Organization for Securiy and Co-2
orporation in Europe, 2006). In the presence of poor business climate, investors abroad will notbe confident to invest their funds in a risky environment which might lead to a minute return oninvestment.The World Bank describes the business climate as an opportunity with incentives fororganizations to invest in a constructive manner, produce employment opportunities and enlargeits operations which is a requirement for a country to stimulate economic growth, and in turncreates opportunities for less privileged people to have jobs that yields higher incomes. Thus, itis evident that a good business climate is important for the economy and contributes significantlyto the progress of the economy. The various factors that contribute to a good business climate can be categorized into economic,social, political and technological factors. The Economic components which affect the businessare made up of the economic system, the framework, and policies of the economy, the structureof the capital market, the means of factors of production, business processes, and socio-economicinfrastructure [ CITATION Pay16 l 1033 ]. When Burberry perceived the increase in rain weardemand, he took advantage of this opportunity to enlarge its consumer supply. Burberry’s exportbusiness also pumped up magnificently owing to the Japanese and American urge for highlyranked luxury goods (Burberry, 2012).The social environment of a nation tends to affect the operational efficiency of a country as itmakes decision on the society’s system of values (PayPerVids, 2016). Environmental factorsreveal an enterprise’s culture of work, division of labor, working groups, and so on. For instance,the demand made helps to decide the type of goods to be sold; this demand is regularlyinfluenced by the behavior, the cultural pattern, values and other factors of the people. A country's political environment greatly contributes to the business. The political environmentof any country has a great impact on the business. This political climate is engendered by policy3
movement, state dogma, cumulative impact of complicated policy process, the stability of thenation’s political agenda, its external relations, and all its officials’ image both locally andglobally (Shaikh 2010). For instance, a nation's agenda which hinders the expansion ofmultinational corporations will instantaneously terminate the company's corporate activities, andthus its expansion. Lastly, the technical factors influence enterprise in terms of technologicalfinancing, technological facilities implementation, and market effects of technology. Anyadvancement in technology therefore has an enormous influence on the business of a country.The kind and essence of the services and products to be manufactured and the type and nature ofthe capital assets to be used in an organization are dictated by the sort of technology theorganization employs (Mühlbacher, Dahringer and Leihs, 2006).In empirical studies, measuring the quality of the business climate was popularly carried outusing indices constructed to reflect the quality of the business climate. The PRS group'sInternational Country Risk Guide (ICRG) database includes the World Bank Doing Business andthe investment profile index, which is one of the indices.Nigeria is listed 169 between several 190 nations in the ease of doing business, as per the WorldBank's 2017 Doing Business Fact sheet. The document entitled "Doing Business 2016: SmarterSmall and Medium-sized Industry Regulations" focused the overall rating on 10 key metrics:running a business, handling of business licenses, registering premises, acquiring credit,guarding shareholders, paying taxes, boundary-border trading, regulating interstate commerce,resolving liquidity problems and obtaining electrical power. This cannot be over-emphasizing thevalidity of the report as a tool for enterprise since the very first release in 2004 and itsimportance on the flow of investment in the country (FDI). While Nigeria is undoubtedly thebiggest economy in the sub-region on the globe, it did not do so well the rankings. South Africaand Kenya were ranked above Nigeria at 68.89% and 58.24% respectively, which fell below theregional average of 49.66 at 44.69%. It is incredible that Nigeria gradually improved on the ease4
of doing business rankings prior to the actual crash of oil prices that resulted in the foreignexchange downturn. For example, in the area of access to credit ranking, the country hassignificantly improved as it moved from 125 in 2014 to 52nd in 2015. But this all seems to havecompletely changed.Therefore, in the light of Nigeria’s performance as regards business climate, and Nigeria’s questfor increased FDI inflow which the country continues to seek for, the study aims to examine theimpact of business climate on FDI inflow in Nigeria. Business climate in particular in this study,will be measured using the investment profile index of the International Country Risk Guide(ICRG) while FDI inflow will be measured using Net FDI inflow.1.2 ` Statement of the Research ProblemThe Nigerian administration, having identified the private sector as the key sector for economicgrowth and development requires increased amounts of Foreign direct investment inflow.Consequently, various policies have been designed to promote FDI inflow to Nigeria. But still,the quantum of foreign direct investment (FDI) to the country is low in light of Nigeria’s needfor higher levels of FDI, given its benefit, to support the economy. This is evidenced by theslow-down in FDI by 80.38 percent in a decade as highlighted by Omanufeme (2018), alsohighlighted by Bolaji and Babajide in 2018 FDI fell by 21 percent to $3.5 billion in 2017 and by48 percent to $2.9 billion in the third quarter of 2018 while one of the reason is the increase inforeign portfolio other reason was attributed to poor investment climate relating to a poor