An Analysis of the Oil Industry

Foreign direct investment (FDI) in Africa and in specific Nigeria is a focus of globalization, and considered to be the most contentious and stormily debates in the multinational business today. According to Briody (2004), the sum stock of foreign direct investment (FDI) in Nigeria in 2008 amounts to   $ 34 billion, which resulted to about 40 % of gross domestic product (GDP) in Nigeria (World Trade Organization, 1998). In 2008, the total stock of United States to Nigeria was approximate of $ 3 billion, an increase of 10% from the year 2007.

This algebraic data if true is good, as the total net   of FDI in Nigeria sum up to $ 3.04 billion with U.S representing 15%, China 9%, United Kingdom 8 % and   Germany 7.1%. Under the order which was put into effect by the  Nigerian Investment promotion Commission (NIPC) in  1995, Nigeria government allowed a 100% FDI in all sectors, but with exception of the oil industry which was  only restricted to a joint venture.  According to an economic freedom report released by the World Bank in 2008 stated that "the oil industry accounts for about 1/3 of yearly gross domestic product (GDP), but presents of over 70 % of central government income and 90 % of total exports."The entice of globalization and poverty issues are the main gears of foreign direct investment in Nigeria" (Briody, 2004).   

With the unknown growth in foreign direct investment in Nigeria, many questions have been raised on the importance of economical and political development in promotion of FDI in Nigeria. The World Bank reports reviews that  Nigeria is among the most  largest host of foreign direct investment to  Africa, and most of the FDI are mainly  focused on mining and oil  sectors, which amount to about 36% of total capital formulation  (World Bank , 2008). Certainly, the massive population of Nigeria, market volume factors, location, and plentiful natural resources   has proved to be attractive to many of the investors in the oil sector.   

Foreign Direct Investment is defined by Pakravan (1994) as the concept in which a company from a foreign nation makes a physical investment in another. This may involve establishing an enterprise such as building a factory. Foreign domestic investment basically involves establishment of an enterprise by a foreign investor in a certain nation. Foreign direct investment is mainly consists of a Multinational corporation operating from a host nation and doing business in other countries. An FDI establishment usually consists of an international business in a parent nation that has foreign affiliates in a number of countries. Control over a foreign affiliate investment is a requirement for an FDI to pass as one. According to the International Monetary Fund, control means the ownership of at least 10% of ordinary shares or voting power of the foreign affiliates. An ownership of less than this percentage means that the investment is referred to as portfolio investment (Pakravan, 1994).

Foreign direct investment has various determinants and they can be categorized by two broad categories which are classical determinants and structural reforms. Classical determinants include such aspects as the infrastructure in a given country, the size of the market, economical or macro stability, the institutions as well as the natural resources a country is endowed with. Structural reforms focus on such aspects as the financial liberalization, the privatization in the country and liberalization of trade.

The calculation of the foreign direct investment is done using two approaches which are FDI in relation to the GDP of a given country and FDI in relation to the per capita of a given country.

This paper is an analysis of International business and foreign direct investment, focusing on risk of investing in Nigeria and it mainly consider the following:

1)      What Factors Gave Rise To The Influx of FDI?

2)      Government and/or financial penalties

3)      Massive collapse in a company's share price

4)      Difficulties of raising capital

5)      Uncertainty of government policies

6) Competition of foreign direct investment

What Factors Gave Rise To The Influx of FDI?

Internationally, foreign direct investment is a means of finding way into a foreign market by establishing foreign based plants. This means of economic range from the acquisition of a Nigerian company by foreign investors or putting up new product to carry out business. In the oil industry, manufacturing right is established through a combined venture with the government of Nigeria. For instance Shell BP, Chevron, and Exxon Mobile were granted the rights to extract crude oil, as Nigeria lacked the managerial skills and technology to carry out the exploitation process.

In reality, the world is developing at a greater speed with the innovation of the internet, faster methods of production, transportation and the end outcome is the inflow of income to Nigeria from foreign investors. This greatly promoted the influx of foreign direct investment.       According to Bauer (1985)  "the proponent of Western guilt further support the developing countries by stating that their economy riches prospective, present and past are pre-determined  by the foreign donations"    Bauer (1985)  states that "investment flows from areas of low projected profits to those of high expected profits, after giving room to various risks". Carbaugh asserts that capital inflow from wealthy countries to a poor countries such as Nigeria make trade of scale less firm, expose employees  to the risk of financial predicaments, and multinational firms are only concerned in making larger profits.

Government and/or financial penalties.

The government of Nigeria has imposed many penalties on the foreign direct investors in the oil industry. These penalties varies according to political and economic variables of a given financial. In 2003 economics commission was set to overlook on the matter of poverty eradication and illiteracy reduction by the year 2010. The panel results were expected to control the rise of foreign direct investment to Nigeria, and minimize the negative impact of FDI.

Government also employed Protectionist policies to stem the wave of foreign direct investors in the oil industry. Government policies and tariff will help in shifting the supply curve to the left and will also protect the domestics' workers from foreign competitors, therefore helping the local firms in establishing monopolies in the world market.   The World Bank report shows that the 2005 tariff choice was "reduced by 50% from 0.310% to 0.160% (World Bank, 2008) Tariffs can be definite, compound or ad valorem. Nigeria uses all of the above forms of tariffs as a way of protecting the local firms from the rise of FDI in the oil industry.

Massive collapse in a company's share price

Nigeria has greatly benefited from the oil wealth in the past years. in recent years the government greatly benefited from boom of prices of oil that began in 2003 and came to an end in 2nd half of 2008. This rise in oil prices resulted to increase in foreign direct investment in the country over the five years. However,   increase in cases of corruption in Nigeria has resulted to mixture of blessings in the oil sector. Many foreign investors in the country experienced a massive collapse in the share price of oil resulting to fall in stock market and banking stock in the country. For instance according to a report by World Trade Organization (2005), two  foreign investors on the oil industry  pulled out of the market in 2008 due to collapse in oil  share price.

Difficulties of raising capital

The illiquidity ratio that has continuously occurred in the Nigeria oil industry has considerably slowed down the economic activities therefore increasing the uncertainty about the prospective of the economy. This has led to shrunk in bank credit to the multinational corporation, to extent where some oil businesses have closed down as a result of deficit finance.

Uncertainty of government policies

Due to the failure of government of Nigeria to tap abundant oil wells led to raise globalization which eventually led to expansion of foreign direct investment to other sectors in the economy such as technology, mining and manufacturing. To enter multinational oil cartels, Nigeria government is supposed to turn to price control mechanism and other measures as stipulated by international association headquarters in the capital of developed nations. The risk of debt reformation, currency devaluation reforms are a requirement to world bodies such as Organization of Petroleum Exporting Countries (OPEC), General Agreement on Tariff and Trade (GATT), and International Monetary Fund (IMF) (Briody, 2004). Briefly, the function of these global organizations which habitually bring out uncertainty in Nigeria should be addressed and analyzed in order to show the relation between Nigeria, foreign direct investment and economical development.

Competition of Foreign Direct Investment.

Indeed, oil local industries in Nigeria have not shown much competition to the foreign firms. The major reason for this is due to non competitive strength by the locals, as they lack adequate funds for purchasing the required machinery and advancement in technology.

The entry of foreign direct investors to Nigeria is in itself a principle case for sincerity and free trade between trading nations and Nigeria. According to Adam Smith (1776), trading nations are likely to gain from each other. Momentarily, protecting the domestics firms from harsh competition, Pearson  (1970)  argues, will provide the domestics firms a possibility to develop and become more resourceful producers.

In conclusion, they are many risks that continue to be experienced by multinational firms and the foreign direct investors in Nigeria today. The government of Nigeria should try as much as possible to minimize some of these risks such as harsh policies and tariffs that are likely to chase away foreign investor in the country. Consequently Nigeria should remove all bureaucratic drawbacks t hat are experienced in the process of applying for foreign direct investment. The Economic Intelligence Unit of WTO reviewed that Nigeria government services are "stuffed, corrupt and ineffective" and the process of registration authorization with the investment promotion Commission and for FDI always take longer period of time.