IMPACT OF INCENTIVE MEASURES ON THE FLOW

FACULTY OF BUSINESS ADMINISTRATION

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AGWU, PRINCESS IFEYINWAPG/MBA/12/63736

IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS

FACULTY OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT

Ebere.omeje Digitally Signed by: Content manager’s

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AGWU, PRINCESS IFEYINWA

IMPACT OF INCENTIVE MEASURES ON THE OF FOREIGN PRIVATE INVESTMENTS

FACULTY OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT

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IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS

BY

AGWU, PRINCESS IFEYINWA PG/MBA/12/63736

DEPARTMENT OF MANAGEMENT FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA ENUGU CAMPUS

OCTOBER, 2014

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IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS:

BY

AGWU, PRINCESS IFEYINWA PG/MBA/12/63736

IN PARTIAL FULFILLMENT OF THE REQUIRMENT FOR THE AWARD OF THE MASTER OF BUSINESS ADMINISTRATION

DEGREE IN MANAGEMENT

BEING A PROJECT PRESENTED TO THE DEPARTMENT OF MANAGEMENT,

FACULTY OF BUSINESS ADMINISTRATION UNIVERSITY OF NIGERIA, ENUGU CAMPUS

SUPERVISOR: DR E, K AGBAEZE

OCTOBER, 2014

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APPROVAL PAGE

This work has been approved for the Department of Management, Faculty of

Business Administration, University of Nigeria Enugu Campus, by:

_________________________ __________________ Dr Abgaeze, E.K. Date (SUPERVISOR)

_______________________ _____________________ Dr. C.O. Ugbam Date (Head of Department)

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CERTIFICATION

AGWU, Princess Ifeyinwa, a postgraduate student in the Department of Management, Faulty

of Business Administration with Registration Number PG/MBA/12/63736 has satisfactorily

completed the requirements for research work for the Degree of Master of Business

Administration in Management. The work incorporated in this dissertation is original and has

not been submitted in part or in full for any other Diploma or Degree of this University or any

other Institution of higher learning

...............................................................

AGWU, PRINCESS IFEYINWA

(STUDENTS)

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DEDICATION

This research is strictly dedicated to the Almighty God, the source of my inspiration,

Vision and sense of direction

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ACKNOWLEDGMENT

I give thanks and praise to God Almighty for giving me the ability to complete this project and program. I want to thank my manager at work that supported me during this program, my sibling, colleagues and friends for their encouragements and prayers which were important to the success of this work. Special thanks to my supervisor, Dr Agbaeze E. K, all my lectures for all the diligent work and effort toward developing and broadening my knowledge and most especially to Dr Augustine Ujunwa for his numerous help, I truly value all your intellectual support.

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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.

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TABLE OF CONTENTS

Title Page i

Certification ii

Dedication iii

Acknowledgement iv

Abstract v

Table of Contents vi

CHAPTER ONE – INTRODUCTION

1.1 Background of Study 1

1.2 Statement of Problem 2

1.3 Objectives of the Study 3

1.4 Hypotheses Formulation 3

1.5 Scope of Study 4

1.6 Limitations of the Study 4

1.7 Significance of the Study 4

1.8 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

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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 TEST ING 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

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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

(N million) 33

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

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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.

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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

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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

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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

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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.

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REFERENCES

Abdulrazaq, M.T. (ed) (2002): “CITN Nigerian Tax Guide and Statues 1st Edition”.

Chartered Institute of Taxation of Nigeria.

Anyafo, A.M.O (1996): “Public Finance in a Developing Economy: The Nigerian Case”.

Banking and Finance Publication, UNEC, Enugu.

Aremu, J.A. (2003): “An Overview of Foreign Private Investment in Nigeria”. Being a paper

presented at the proceeding of the Twelfth Annual Conference o the Regional

Research Unit, held at Hamdala Hotel, Kaduna from Sept. 1st - 5th, 2003 by the

Central Bank of Nigeria. Pp. 29 – 136.

Bhatia, H.L. (2001): “Public Finance”. Vikas Publishing House PVT Ltd. New Delhi.

Madupim, R. (2002): “Privatisation: A Tentative Assessment”. A paper presented at

Economic Analysis Workshop held at Enugu. Nov. 27 – 30, 2002.

Okafor, F.O. (1983): “Investment Decisions: Evaluation of Projects and Securities”. Cassel

Ltd 1 Vincent Square, London SWIP 2PN.

Oyeranti, O.A. (2003): “Foreign Private Investment: Conceptual and Theoretical Issues”.

Ukeje, S.A. (2003): “Strategies Towards Attracting FPI in Nigeria: A Private Sector View”.

Being a paper presented at the Proceeding of the Twelfth Annual Conference of the

Regional Research Units. At Hamdala Hotel Kaduna, Sept. 1st - 5th, 2003 by the

Central Bank of Nigeria. Pp. 269 – 304.

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CHAPTER TWO

LITERATURE REVIEW

2.1 TAXATION – A THEORETICAL OVERVIEW

Taxation is a payment in return for which no direct and specific quid pro quo or benefit is

rendered to the payer (Anyafo, 1996:53). It is a fiscal policy instrument used by the

government to achieve its aim in the economy, like controlling of spendable income and

redistribution of wealth. The payer does not receive any definite service form the

government – though benefits are received from the government, not as a result of being a tax

payer.

2.1.1 Objective of Taxation

Some of the key reasons for the imposition of taxes are (Anyafo, 1996: 57; FIRS, 2002:1):

• To cover the cost of general administration, internal maintenance of law and order,

and the social services provided by the government;

• To reduce the disparities that exists between different income groups;

• To control the consumption of goods and services considered to be harmful or/and

non-essential;

• To check inflation by reducing the purchasing power;

• To provide subsidies in favour of preferred sectors of the economy;

• To implement government policies

• To serve as a powerful fiscal weapon to plan and direct the economy, by shaping the

economic growth and development of a country; amongst other objectives.

2.1.2 Principles of Taxation

Classical economists, mercantilists and physiocrats enunciated the cannons or principles

of taxation (ibid:57), a tax system (that is, the set of all taxes for achieving certain

objectives) chooses and adheres to certain principles which are termed, its characteristics.

According to the following people (Anyafo, 1996:57: Bhartia, 2001:40 and FIRS, 2002:2

– 3) principles of taxation is the appropriate criterion to be applied in the development

and evaluation of the tax structure. The tax system of a country should be based on sound

principles. The eight principles or cannons are the desirable characteristics of a health tax

system. They are:

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i) Canon of Equity/Equality: The subjects of every state ought to contribute towards the

support of the government, as nearly as possible, in proportion to their respective

abilities; that is the proportion to the revenue which they respectively enjoy, under the

protection of the state. Equity can be horizontal or vertical. Horizontal Equity refers

to those who are in the same income level, paying an equal amount of tax, while

Vertical Equity means that those with different incomes should pay different amount

of tax. Equity may be ensured by either a proportion or progressive tax system.

ii) Canon of Certainty: By this canon is meant that the tax payer should be protected

from unnecessary harassment. The principle of taxation expressed in this regards, is

that the tax payers ought to be aware of the exact amount of tax that are expected to

be paid, as well as the time and method of payment. The scope of tax should be clear

and not arbitrary.

iii) Canon of Convenience: This canon states that taxes should be conceived in such a

way that the manner and time of payment should be suitable to the tax payers. This

will ensure that the manner and time of payment of a tax is free from difficulty. This

means that it will be necessary to relocate the ways in which the tax payers receive

and spend their incomes with collection of the tax. This provides the rationale for the

Pay As You Earn (PAYE) system of the collection.

iv) The Canon of Economy: This means that the administrative costs should not be

higher than the revenue to be realised. This principle of taxation requires that taxes

should not be imposed if their cost collection was excessive. A tax can be considered

economical if the cost of their collection is not excessive. On the other hand, if the

cost of collection takes a large part of the tax collected, the tax is not economical.

v) The Canon of Simplicity: A good tax system should be coherent, simple and straight

forward. The tax should be clear to the taxpayers and must be accepted by the public.

Ambiguities should be avoided. A properly understood tax system eliminates the

chances of corruption and oppression by tax officials.

vi) The Canon of Flexibility: The tax system should be flexible, especially in a Federal

and democratic country, where there are always changes of government. It is

recognised under the Canon that instead of a rigid tax system, the tax system that is

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responsible to changing realities is preferred. An adjustable tax system would allow

any tax found to be obsolete, to be scrapped and to be replaced with a meaningful and

collectible tax.

vii) The Canon of Impartiality: This principle recognises that a tax should not

discriminate between tax payers under similar circumstance. An impartial tax system

ensures that all persons similarly placed, pay the same tax.

viii) The Canon of Productivity/Fiscal Adequacy: This principle requires that the tax

system should be able to yield enough revenue to cover government expenditure. A

few taxes with high yield are better, in terms of productivity, than a multiplicity of

taxes with low yield.

2.1.3 Features of a Good Tax System

For a tax system to be seen as good, there are some features that it should exhibit. These

features are what Anyafo (1996) and FIRS (2002) calls the salient features of a good tax

system for a developing country. They should satisfy the following:

i) Economic Growth Facilitator: In developing countries, taxes should be an instrument

of economic growth. A good tax system should encourage savings and capital

formulation and should be suitable for the mobilisation of resources for accelerated

economic growth.

ii) Tolerable Tax Burden: A good tax system should ensure that the tax burden of a

community does not exceed its taxable capacity.

iii) Minimum Sacrifice: A good tax system should always aim at minimising the

sacrifice of the tax payer. The logic of this, according to Anyafo (1996:61), is derived

form the law of diminishing marginal utility as applied to money. To carry out this

principle would require that the impact of heavier taxation be shifted to incomes

above a certain level and benefits of tax concentrated on those below this level.

iv) Common Good and Maximum Social Advantage: A good tax system should adhere

to the principle of maximum social advantage. It should, also ensure maximum

benefits to the community as a whole. The proceeds from a tax are not used for

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conferring benefits on the very persons or entities from whom the tax is collected, but

utilised for the enhancement of common good.

Others are that a good tax system should be highly canonical – that is to say, being simple to

administer, avoid multiplicity, ensure adequate public revenue, flexibility and impartiality. A

good tax system, especially in developing countries, should be an employment stimulator –

that is, it should aim at creating an enabling environment, raising the level of employment or

standard of living of the people.

2.1.4 Classification of Taxes

The classification of taxes could be taken form two different perspectives. Anyafo (1996:63)

says that one approach is to categorise tax on the basis of variations in the rate of taxes; while

the other approach is to categorise them on the method of payment. He went further to state

that, when taxes are categorised on the basis of variations in the rates, the following types of

tax systems are recognised; Proportional Tax System, Progressive Tax System and

Regressive Tax System. On the other hand, when taxes are categorised on the basis of the

method of payment. Direct Taxation and Indirect Taxation are recognised.

The other perspective is as per FIRS (2002:4) which states that taxes are classified in

accordance with the tax base. The classifications are as follows:

a) Taxes on Income/Profit, like:

i. Personal Income Tax

ii. Companies Income Tax

iii. Petroleum Profit Tax

b) Taxes on capital, like

i. Capital Gains Tax

ii. Customs Duties

iii. Excise Duties, etc.

The other classifications by FIRS (ibid) are Direct and Indirect Taxes. Direct Taxation refers

to when the person (or assessed person) bears the burden of the tax he/she pays. It is imposed

directly upon or on the property of the person paying the tax, e.g. they are paid mainly on

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income, capital or property. While Indirect Taxation is such which, both the payers and

burden bearers, and different persons. Examples are Sales Tax, Value Added Tax (VAT),

Customs Duties, etc.

2.1.5 Effects of Taxation

Taxation may have either a negative or positive effect on the individual and the society. It

may be an incentive or disincentive to work or save, depending on whether the tax is direct or

indirect (Aguolu, 2001:3). Taxation can have serious disincentive effect on the wish to work,

since it makes overtime appear to be very much more heavily taxed than the rest of one’s

income.

According to Due (1963:461 0 475), effects of taxation have impact on:

a. Purchasing Power

b. Tax Payer Behaviour

c. Income Distribution

d. Resource Allocation

e. National Income

i) Purchasing Power Effect: Personal Income Tax extracts purchasing power directly form

individuals either before it reaches their hand or shortly after they receive it. Sales or

excise tax, including VAT, tends to shift forward to the consumer and thus extracts from

the purchaser in the form of an addition to the price he pays.

ii) Behavioural Effect: The collection of taxes in various forms may result in modification

of behaviour, by affecting the incentive for various actions, it may lead to the lessening of

the expansion, alter the willingness of persons to work and thus may alter the labour

supply.

iii) Income Distribution Effect: The net effect is that the poor receives considerably greater

real income and the wealthy receives less than would have been the case if the production

of government service is in the private rather than in the public sector.

iv) Resources Allocation: Taxation has some effect upon the relative supply of various

factors. Taxes, which penalise risky under-takings lessens the investor’s willingness to

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venture into such business area. The provision of tax fund governmental services reduces

the output of goods, which are complementary to the services.

v) National Income Effect: Government expenditure and taxes exert some impact upon the

level of national income, both in real and in monetary terms. It happens in two ways:

a. By altering the supply of factors; and by affecting the level of spending, thereby the

extent of attainment of full employment as well as the general price levels. Taxes

withdraw money from the circular flow of national income, in just the same way as

savings and imports.

2.2 NIGERIAN TAX SYSTEM

2.2.1 A Historical Overview of Nigeria Taxes

The evolution of Nigerian Tax System can be traced from the revenue generation system of

the ancient kingdoms that lived in and around the soil regarded as Nigeria today. Kingdoms

like Ancient Ghana (AD 800 – 1235) would have found it impossible to maintain the royal

style of government and provide for the upkeep of the imperial army, without large public

revenue (Stride and Ifeka, 1971:37 – 38). This was provided by the revenue system of the

empire, based on annual tribute in produce, taxes on trade and the spoils of war (Anyafo,

1996:30).

Other kingdom like the Ancient Mali, the Songhai Empire, the Kanem – Bornu Empire, the

Hausa City-States and the Yoruba Kingdoms of the West, all had their systems of taxation.

Contrary to the principle of the Western World, according to Anyafo (ibid: 33), the historical

foundations of income tax legislation were due to different causes and factors. Long before

the advent of the British, the people of the different parts which later came to be known as

Nigeria, upon the amalgamation in 1914, had evidently been used to elaborate systems of

taxation and the payment of tributes to the chiefs and natural rulers.

As regards the modern tax system operational in Nigeria, it evolved systematically from the

various regions, starting with the northern Nigeria.

The North: The history of direct taxation in Nigeria dates back to 1904, when the system of

personal tax was introduced in the Northern Nigeria by Lord Lugard (Aguolu, 2001:5). This

was the Land Revenue Proclamation No. 4; the main objective of this proclamation was to

24

secure for revenue, a certain proportion of taxes on land and produce, by native rulers. It was

an attempt to purify the old systems of direct tributes to the Emirs (Anyafo 1996:34). It was

later revised to the “Native Revenue Proclamation 1906 No 2”.

The South: The Southern provinces of Nigeria were known as the protectorate of Southern

Nigeria, form 1900 to 1914. The government of the Southern protectorate derived

considerable revenue from duties on imports and exports, while they lacked the refined

system of native administration upon which direct taxation had been smoothly superimposed

in the North (ibid: 35). As a result of no refined system of native administration, direct

taxation was introduced in some of the southern provinces, only in 1916, by the then

Governor-General.

The chronological order of tax laws in Nigeria are as follows:

• Customs Duties (Dumped and Subsidised Goods) Act 1989 No. 9: With effect form

16th October 1958, this Act authorised the imposition of duties of customs where

goods have been dumped or subsidised. The Act is Cap 81 of the Laws of the

Federation of Nigeria 1990 (Anyafo, 1996:41).

• Finance (Control and Management) Act 1958 No 33: The Act provides, with effect

from 31st July 1958, the control and management of the public finances of the

Federation and for matters connected therewith. The Act defines public money to

include:

� The public revenues of the Federation, and

� Any moneys held in his official capacity whether temporary or otherwise, and

whether subject to any trust or specific allocation or not, by any officer in the

public service of the Federation or any State on behalf of the government of

the Federation or by any agent of the Government, either alone or jointly with

any other person. This ct is now Cap 144 of the Laws of the Federation of

Nigeria 1990 (ibid).

• Customs and Excise Management Act 1958 No 55 (CAP) 84 LFN 1990: This Act

regulates the management and collection of duties of customs and excise.

Commencement date was 1st April 1958 (FIRS, 2002:11).

• Treasury Bills Act 1959 No 11: With effect from 19th March 1959 the Act authorised

the borrowing of money for the purpose of the Federation, by the issue of Treasury

25

Bills in Nigeria. Section 3(2) provides that the principal sums represented by any

Treasury Bills outstanding at any one time under the provisions of the section, shall

not exceed 150 percent of the estimated revenues returned by the States during the

year then current.

• Income Tax Management Act 1916 No 21 (ITMA): The ITMA 1961 regulates the

taxation of incomes of persons other than companies and for purposes connected

therewith. It commenced on 1st April 1961 and is now CAP 173 LFN 1990.

• Companies Income Tax Act 1961 No 22 (CITA): This Act regulates taxes charged on

the profit of companies. This Act brought together, the provisions of the Income Tax

Act, in so far as they relate to taxation of company profits throughout Nigeria, and

also effected a number of improvements dictated by experience in the administration

of the previous tax laws.

• Companies Income Tax Decree 1979 No 28: This Act imposes a tax on the net

gaming revenue of casinos in the Lagos Territory. It is also known as Cap 45 of LFN

1990.

• Income Tax (Authorised Communication) Act 1966 No 30: This Act became effective

from 2nd April 1966. Under this Act, the President may authorise the Inspector

General or any person, in writing, to inspect, and where necessary to remove any

books, records, returns, etc in the possession of Federal Board of Inland Revenue

(FBIR) or any tax authority, for the purpose of any investigation or enquiry (FIRS,

2002:13).

• Capital Gains Tax Act 1967 No 44: This Act stipulates that chargeable gains;

provides the yardstick for its computation, both for specific and miscellaneous mattes;

provide the administrative machinery for its enforcement. It is also known as Cap 42

of the Laws of the Federation of Nigeria, 1990.

• Income Tax (Armed Forces and Other Persons (Special Provisions) Act 1972 No 51:

This Act provides for the imposition of tax on the income of Armed Forces Personnel,

and Public Officers, employed in the Nigerian Foreign Services, and in respect of

pensions and dividends payable overseas.

Others are:

• Capital Transfer Tax Act 1979 No 12 (CAP 42 of the Laws of the Federation of

Nigeria 1990).

26

• Customs Excise Tariff, etc. (Consolidation) Act 1988, No 1 (CAP 88 of the Laws of

the Federation of Nigeria 1990).

• Oil Terminal Dues Act 1969 No 9 (CAP 33 LFN 1990)

• Industrial Development (Income Tax Relief) Act 1971, No 22 (CAP 179 LFN 1990):

This defines the terms and conditions for a company to qualify as a pioneer company.

• Federal Revenue Court (FRC) Act 1973 No 13: This established the FRC as a High

Court of Justice, with certain powers. The court has original jurisdiction in certain

specified matters including taxation of companies, customs and excise duties,

banking, etc. Right of appeal against her decision goes to the Supreme Court of

Nigeria (FIRS, 2002:13).

• Value Added Tax Act 1993: This replaces the Sales Tax Act of 1986 No. 7.

2.2.2 Tax Administration

Tax administration has to do with the instruments, organs, and authorities of taxation. It

should be borne in mind that prior to 1961; different regions of the country had their own

taxing system. Therefore, Aguolu (2001:5) said that it was not until 1961 that a uniform tax

law came into force for the whole Federation, known as the Income Tax Management Act

(ITMA) of November 1961. This was based on the Raisman Fiscal Commission of 1958,

which was embodied in the Nigerian (Constitution) order-in-council 1960. This has been

repealed and replaced by the Personal Income Tax Act (PITA), otherwise known as the

Decree No 104 of 1993 (ibid).

Aside PITA, there is the Company Income Tax Act (CITA) of 1960, which has undergone

several amendments. According to FIRS (2002:24), the Companies Income Tax Act is a

Federal Law, operated by the Federal Inland Revenue Services. It deals with the taxation of

all Limited Liability Companies in Nigeria, with the exception of those engaged in Petroleum

Operations. CITA 1960 was replaced by CITA No 20 of 1979, which has also undergone

various amdnements, through the Finance (Miscellaneous Taxation Provision) Decree.

Decree 98 of 1979

Decree 4 of 1985

Decree 12 of 1987

Decree 31 of 1989

Decree 55 of 1989

27

Decree 21 of 1991

Decree 63 of 1991

They were all codified into the CITA CAP 60 Laws of the Federation of Nigeria (LFN) 1990

(ibid). Even the CAP 60 has passed through seventeen (17) amendments up to the year 2002.

The latest is Decree No. 30 of 1999.

The next other instrument of Taxation is the Petroleum Profit Tax (Petroleum Profit Act CAP

354 LFN) 1990. Taxation of Petroleum operations started in 1959 with the enactment of

PPT. The Authority responsible for assessment and collection is the P and P department.

Their areas of coverage are (FIRS, 2002:44):

a) PPT from exploration and producing companies

b) CIT from oil servicing companies

c) CIT from oil marketing companies

d) CIT from pioneer companies in respect of non-pioneer income

e) Education tax from all companies that are liable to either PPT or CIT.

PPT is collectable in any location where oil producing or servicing company or pioneer

company is located in Nigeria, while CIT is collectable where the business is registered.

As to the organs and authorities of Tax Administration in Nigeria, there are three types of

governments, namely: The Federal Government, The State Government and the Local

Governments. These are charged with tax administration (ibid:14). Their various

empowering instruments are:

i) The Federal Board of Inland Revenue (FBIR), section 1,2 and 3 of CITA, Laws of the

Federation of Nigeria, 1990.

ii) The State Tax Authority – State Board of Internal Revenue (SBIR). Section 85 a, b, and c

of Personal Income Tax Act (PITA), as amended by Act No 31, 1996.

iii) The Local Government Tax Authority: Local Government Revenue Committee,

Section 85 D and E of Personal Income Tax Act as amended by Act No. 31 of 1996.

Other organs involved in tax administration matters are (Anyafo, 1996:114-115):

28

a) Joint Tax Board (JTB), which is provided for by section 27 of ITMA 1961, as

amended. It is to be comprised of the chairman, who shall be the chairman of the

Federal Board of Inland Revenue, appointed pursuant to Section 1 of the Companies

Income Tax Act 1979; one member of each state, being a person experienced in

Income Tax Matters. An officer representing the Federal Public Service Commission;

the Secretary; and the Legal Adviser of the FBIR shall also be the Legal Adviser of

JTB.

b) Scrutineer Committees also provided for by Sections 9 to 11 of ITMA 1961, as

amended. It consists of 6 persons rich in business and local experience.

2.3 INCENTIVES

According to the Oxford Dictionary, incentive is a thing that encourages somebody to do

something. In order words, it is the act of motivation, on the part of government, in order to

encourage tax payers pay their taxes, as at when due. Government uses these incentives

mainly for the purposes of:

a) To boost the economy;

b) To encourage export earnings;

c) To reduce the dependency ration on exported goods;

d) To encourage foreign direct investment.

According to Feldstein (2000), Foreign Direct Investment brings about, first, international

flows of capital, reduce the risk faced by owners of capital by allowing them to diversity their

lending and investment; second, the global integration of capital markets can contribute to the

spread off best practices in corporate governance, accounting rules, and legal tradition;

thirdly the global mobility of capital limits the ability of governments to pursue bad policies;

fourthly, FDI allows for the transfer of technology, particularly, in the form of new varieties

of capital inputs that cannot be achieved through financial investments, also trade in goods

and services. Foreign Direct Investment can also promote competition in the domestic input

that cannot be achieved through financial investment or trade in goods and services. Foreign

Direct Investment can also promote competition in the domestic input market. Foreign

recipients of FDI often gain employee training in the course of operating new businesses,

which contributes to human development in the host country. Lastly, profits generated by

FDI contributed to corporate tax revenues in the host country.

29

According to FIRS (2002:19 – 22, - 39) incentives could come in different ways:

i) Incentives to Manufacturing Business;

ii) Tax Incentives for Export Promotion;

iii) Tax Incentives to Agriculture;

iv) Tax Incentives for Filling of Self Assessment;

v) Tax Incentives for Mining of Solid Minerals;

vi) Tax Incentives for other lines of trade, research and development

2.3.1 Administration of Incentives

The administration of incentives is one of the major causes of either failure or success of any

incentive programme. At times, the purpose of incentive programme, according to Okafor

(1983:58), is thwarted in the course of implementation. Often the administration is engulfed

in civil service bureaucracy with endless and frustrating delays in the processing of forms.

The administration of incentives will be taken a closer look at, when appraising the policies

and incentives for inflow of foreign direct investment. According to Okafor (ibid:53)

incentive schemes are of different forms. Those most commonly adopted in African

countries are company income tax relief, import duty relief, accelerated depreciation or

capital allowances, protective import tariff and excise duty relief.

2.4 FOREIGN DIRECT INVESTMENT

The term Foreign Direct Investment refers to investment form countries, other than, the host

country, where the investment is domiciled, with a controlling or total ownership.

Put in another way, Foreign Direct Investment is not only a transfer of ownership from

domestic to foreign residents, but also a mechanism that makes it possible for foreign

investors to exercise management and control over host country firm. According to Thirlwall

(1994), Foreign Private Investment refers to investment by multinational companies with

headquarters in developed countries. This investment involves not only a transfer of funds,

but also a whole package of physical capital, techniques of production, managerial and

marketing expertise, products, advertising and business practices, for the maximisation of

global profits (Oyeranti, 2003: 11). This is not the same as foreign investment, which is

investment in stocks and bonds, without any controlling influence.

30

There are different factors that are likely to influence foreign direct investment.

2.4.1 Factors that Influence Foreign Direct Investment FDI)

Existing literature on Foreign Direct Investment (FDI) shows that several frameworks have

been employed to analyse the determinants of FDI (ibid: 22). To date, the most

comprehensive framework is the one known as 'eclectic theory' of Dunning (1981). The

theory argues that FDI is determined by three sets of advantages, namely:

(a) Firm Specific (Ownership) Advantages: This set of advantages gives a firm

competitive advantage in global markets, including, technological assets, product

differentiation, management skills, production efficiencies, size and concentration.

(b) Internalisation Advantages: This is the sum of commercial benefits accruing from

an FDI or intra-firm activity, rather than an arm's length or licensing relationship.

(c) Locational Advantages: These occur when the local conditions of potential host

countries, make them a more attractive site for FDI operations than the home country.

These advantages include large markets, lower costs of resources or superior

infrastructure, among others (Vernon, 1966). This locational advantage is what earlier

theoretical and empirical studies classified, as 'pull-factor', according to Akinkugbe

(2003). This 'pull-factor' examines the relationship between the host country specific

conditions and the inflow of FDI.

Considering further the theory of 'pull-factor', Akhter (1993) posits that the host country

specific conditions might embrace a number of socio-economic and political factors within a

country, where FDI is made. These factors tend to determine available business opportunities

and pending political threats within the host countries. Among other socioeconomic and

political factors commonly cited in this strand of the FDI literature include:

• Availability of natural resources

• Infrastructure

• Market Size

• Level of human capital development

• Distance from major markets

• Labour costs

• Openness of the economy to international trade

• Exchange rate

31

• Fiscal and other non-tax incentives

• Political stability

• And others

Other empirical works on the factors that influence FDI are as noted below. Theoretically,

according to Ogamba (2003: 40), Foreign Direct Investment is expected to be influenced by

the size of the market for the products of such investments. Other factors that should

influence FDI, other things being equal, are:

i) availability of raw materials

ii) tariff protection for infant industries

iii) Possibility of arbitraging between the local and foreign product.

Included to the already mentioned factors are domestic investments, low labour and

production costs, political stability and enduring investment climate, functional

infrastructural facilities.

According to Ogamba (ibid), favourable regulatory environment as well as functional

infrastructural facilities are expected to be pull-factors for FDI inflow. Pfefformann and

Madarassy (1992) identified the major determinants of FDI, for the developing economies, to

include: the size of the domestic market, inflation, exchange rates volatility, interest rate and

macro-economic policies. They found that the size of the domestic market and capacity

utilisation are positively related to direct foreign investment; while inflation and volatile

investment rates, have negative effects on foreign investment. High and rising inflation rates

heighten fears of rising costs of imported capital goods and inputs; while an unstable

exchange rate also creates foreign exchange risk and uncertain investment climate.

Various other researchers have severally explored the importance of the size of domestic

market, on the inflow of FDI. They used tested proxies of market demand levels and market

growth rates of host economies, to see if there was a significant correlation between these

proxies. For example, Dunning (1973) indicated that the dominant influences on FDI are the

growth and size of the host country's market; while Root and Ahmed (1978), as well as

Scheidr and Frey (1973), also found a statistical relationship between FDI and market

demand as measured by per capita GDP (GNP) of some developing countries.

32

The influence of political stability, or conversely, political risk on FDI inflows, have also

been tested. Early studies of foreign investment decision process, indicated that political

instability was one of the main factors investors cited, in explaining decision for not investing

in a particular country. For instance, basic and Aharonu (1963), concluded from their

research works, that next to market size and growth, political instability was the most

dominant influence in investment flows. Root and Ahmed (1978) also found that political

stability was a significant variable in direct investment flows. The importance of government

investment, the change in bank credit and capital inflow to the private sector, in determining

private investment was confirmed by Wai and Wong (1992).

Osuagwu (1983) found that the determinants of investment demand in Nigeria from 1960 -

1975 were the expected rate of returns, the supply of funds, absorptive capacity and

government policies. Obadan (1994) also confirmed the importance of market size, trade

policies and raw materials, as important determinants of foreign direct investment, in Nigeria.

This was further elaborated by Anyanwu's (1981) study, which additionally highlighted the

significance of domestic investment, openers of the economy and indigenisation policy. Also

the rising bank lending rate profile in Nigeria, during the 1987 - 1990 periods, was noted by

Ajakaiye (1991) to have discouraged productive investment.

The importance of exchange rate on inflows of foreign private investment has been traced by

Obadan (1994), who noted that its importance as the centre piece of the investment

environment derives from the argument in terms of over-valuation or under valuation, is a

major source of macro economic disequilibria. Consequently, an over-valued exchange rate

will discourage export and negatively affect the foreign private investment environment.

2.4.2 Appraisal of Policies and Incentives for Inflow of FDI

Justifiable concern has often been expressed by developing countries over the promotional

effect of their incentive schemes. Some have openly acknowledged their inability to attract

the desired level or quality of foreign investment, in spite of the generosity of their incentive

programme (Okafor, 1983: 58).

According to Aboyade (1985: 233), there are three broad objectives that fiscal policy is

meant to address, in a simultaneous and integrated manner. First is the task of moderating

resource allocation and adjusting the price mechanism in the direction of greater satisfaction

33

of public wants. The second task is redistribution of wealth and income, between one group

in the society and another. The third is the general guidance of the national economy in terms

of growth and stability.

This section tries to appraise the fiscal policy measures, being taken so far, to attract FDI.

Incentive schemes are of different forms. Those most commonly adopted inAfrican countries

are, company income tax relief, import duty relief, accelerated depreciation or capital

allowances, protective import tariffs and excise duty relief (Okafor, 1983: 53). All these

incentives, if taken a close study at, have the major objective - the decreasing of investment

risks and increasing of expected entrepreneurial profit.

In recognition of the above facts, together with the importance attached to the nations

economic growth process, the government had at various times put in place various policies

and incentives, to attract FDI to Nigeria. This was exemplified in the 1997 budget, where

the government expressed her readiness to enter into investment protection agreements, with

foreign governments or private organisations, wishing to invest in Nigeria; as well as discuss

additional incentives, with prospective investors (Ogamba, 2003: 39). This was what led to

the formation of the Nigerian Investment Promotion Commission (NIPC), as a one-stop

Agency that will facilitate the inflow of FDI. Thus NIPC replaced the erstwhile Industrial

Development Coordination Committee (IDCC).

Added to the above, are the tax-related incentives, such as Pioneer Status; tax relief for

Research and Development (R&D), which provides for a graduated amount of tax

allowances, to be deducted from profit; company income tax, which has been amended, to

encourage potential and existing investors; tax free dividends as well as relief for

investments in economically disadvantaged local government areas.

In the 2002 General Tax Guide for tax Administrators and Practitioners of FIRS (2002: 19),

it was stated that "capital allowance are granted to encourage those who trade or to develop,

modernise and equip their business. In addition, the real commercial profit cannot properly

be determined, without providing allowances for capital wastages". This, in effect, reduces

investment risks and increases real commercial profits.

34

As to the Pioneer Company Status, mentioned above by Ogamba (2003), the FIRS (ibid: 30)

had this to say:

Pioneer Status is conveyed on new firms and is not available to existing

operations. With a tax holiday, new firms are allowed a period of time when

they are exempted from the burden of income taxation. Under the Industrial

Development Income Tax Relief Act, Cap 179 LFN, 1990, as amended, a

company or product may be granted that status of:

i) the industry is not carried on in Nigeria on a scale suitable to economic

development of Nigeria;

ii) there are prospects of further development of such industry in Nigeria,

or;

iii) it is expedient, in the public interest, to encourage development or

establishment of such industry in Nigeria.

The pioneer companies enjoy a lot of tax relief in Nigeria, just to attract FDI. These relieves

were elaborated in the afore-mentioned “Tax Guide”. Other pioneer status incentives are:

i) Dividends paid out of pioneer profit, during the tax relief period, are tax-free.

ii) Any aggregate loss incurred during the tax-relief period can be carried forward,

against future trading profits, of the same trade or business, for a maximum of

four years.

iii) During its pioneer period, a company may trade in business, other than its pioneer

enterprises, subject to taxation.

iv) The pioneer status is for a period of three years, which may be extended to a

maximum of five years.

To (iv) above, Okafor (1983: 54) said that tax relief for pioneer industries is granted for a

period of five years in Nigeria, initially there were provisions for extensions, but that

privilege has since been withdrawn. Other fiscal incentives to attract FPI are as follows:

i) Research and Development Tax Incentive: Research and Development as it is in

FIRS (2002: 39) is a means of encouraging industrial technology. Companies and

other organisations that engage in research and development activities for

commercialisation are to enjoy 20% investment tax credit on their quality

expenditure.

35

ii) Expenses on Research and Development are now Tax Deductible: Capital

allowances ranging from 10% to 100%, are now granted in respect of capital-outlaws.

iii) Tourism Deduction: 20% of incomes derived from tourists by hotels, in convertible

currencies, are exempted from tax, provided such incomes are put in reserve fund to

be utilised within five years, for facilities used for development of tourism.

iv) Company Income Tax Incentives: The Company Income Tax Act is a Federal Law

operated by the Federal Inland Revenue Services. It deals with the taxation of all

limited liability companies in Nigeria, with the exemption of those engaged in

petroleum operations. The CITA of 1960 has been by Companies Income Tax Act

No 28 of 1979, which is the most significant enactment on companies' tax. The

exemplified profits from companies as stated in Section 19 (1) of the Companies

Income Tax Act Cap 60 LFN, 1990 are the following:

a) The profit of a company being a statutory or registered friendly society provided

such profits are not derived from trade or business carried on by such society.

b) The profit of any company being a cooperative society registered under any

enactment of law relating to cooperative societies, not being from any trade or

business carried on by that company.

c) The profits of any company founded for the purpose of promoting sporting

activities, provided such profits are fully applied for such purpose.

d) Profits of a trade union registered under the Trade union Acts 1973, provided such

profits are not derived from a trade or business carried on by such trade union.

e) The profits of any company or any corporation established by the law of a state,

for the purpose of fostering the economic development of that state.

v) Tax Free Dividend

(a) Final Tax in Recipient's Hand: Withholding tax on dividend from any

shareholding or investment is now a final tax in the hands of the recipients.

(b) Foreign Dividends: Dividend derived by a company from country outside

Nigeria and brought into Nigeria through government's approved channel, is

exempted from tax.

36

(c) Small Companies: Excluded from is dividend received from small companies in

the manufacturing sector, in the first five years of their operation.

(d) Wholly Export Business: Dividend derived from investments in wholly export-

oriented business are exempt from tax.

(e) Pioneer Companies: Dividends paid by a pioneer are exempted from tax, to the

extent that they are paid out of income exempted from tax under CAP 179LFN,

1990.

(f) Unit Trust: Dividends distributed by unit trusts in Nigeria are free of tax, and no

withholding tax is deducted therefrom, since such incomes have already differed

tax in the first instance.

vi) Tax Relief from Investments in Economically Disadvantaged Local Government:

A company sited at least 20km away from the provision of electricity, water, tarred

road or telephone, for the purpose of its trade, and which has provided the facilities

that the government failed to provide, can claim rural investment allowance, which is

an addition to the initial allowance on such capital expenditure, as follows:

• No telephone: 5% of capital expenditure on assets in use

• No Tarred Road: 15% of capital expenditure

• No Water: 30% of capital expenditure on assets in use

• No Electricity: 50% of capital expenditure on assets in use

• No telephone, tarred road, water and electricity (that is, no facility at all):

100% of expenditure allowances on assets in use (ibid: 33).

Note should be taken that no matter how generous incentive measures are, industrial

incentives likely to produce limited response, if the investment climate is not favourable. No

amount of incentive would, for instance, compensate for a small internal market, a stagnant

economy or political instability (Okafor, 1983: 58).

37

REFERENCES

Aboyade, O. (1985) "Integrated Economics: A Study of Developing Economies",ELBS and Addison-Wesley, London

Aguolu, O. (2001) "Taxation and Tax Management in Nigeria", Enugu MeridianAssociated,

P. O. Box 9377 Enugu, Enugu State Aharoni, Y (1963) "Foreign Investment Decision Process" Boston Division ofResearch,

Harvard Business School Ajakaiye, O. (1997) "The Structural Adjustment Programme and Chances in theStructure of

Production in Nigeria, 1986 - 94" NCEMA Monograph Series, No 9,NCEMA, Ibadan Aider, H. S. (1993) "Foreign Direct Investment in Developing Countries: TheOpenness

Hypothesis and Policy Implications: The International Trade Journal Vol7, pp 655 - 672 Akinkugbe, O. (2003) "Flow of Foreign Direct Investment to hitherto NeglectedDeveloping

Countries". WIDER Discussion Paper No 2003/02 Anyafo, A. M. O. (1996) "Public Finance in a Developing Economy: The NigerianCase" B &

F Publication, UNEC Anyanwu, J. C. (1998) "Determinants of United Stats Foreign Direct Investment inForeign

Countries" Kent State University Press, Kent, Ohio Bhatia, H. L. (2001) "Public Finance". Vikas Publishing House PVT Ltd. 56 MasjidRoad,

Tangpura, New Delhi, India Due, J. F. (1963) "Government Finance: An Economic Analysis" Homewood, Richard D.

Irwin Inc. Illinois Dunning, D John (1981) "Explaining the International Direct Investment Position ofCountries

Towards a Dynamic or Development Approach" Weltwirtschaftlichesarch IV, no 117, pp. 30-64

Dunning, J. H. (1973) "Explaining the International Direct Investment Position ofCountries"

Oxford Economic Papers Vol 25 November FIRS (2002) "General Tax Guide for Tax Administrators and Practitioners (June2002)"

Being a publication of the Federal Inland Revenue Services NigeriaBusinesslnfo.com (2005) "Nigeria and Foreign Direct Investment (FDI)"Being a

paper retrieved from NigeriaBusinessinfo.com on the 1011' of Feb. 2005 Obadan, M. I. (1994) "Direct Investment in Nigeria; An Empirical Analysis" AfricanStudies

Review, Vol. XXV No 1 pp 67 - 81 Ogamba, E. N. (2003) "The Impact of Globalisation on Foreign capital Flows inNigeria" A

thesis presented to the Department of Banking and Finance, UNEC

38

Okafor, F. O. (1983) "Investment Decision; Evaluation of Projects and Securities"Cassel Ltd. 1 Vincent Square, London SW112PN

Osuagwu, H. G. O (1983) "Determinants of Investment Demand in Nigeria from1960 - 1975"

Quarterly journal of Administration (Oct/Jan.) 1983 Oyeranti, O. A. (2003) "Foreign Private Investment; Conceptual and TheoreticalIssues"

Foreign Private Investment in Nigeria; CBN Proceedings of the TwelfthAnnual Conference of the Regional Research Units, pp. 9-38

Pfefferman, G. P. and Madarassy, A (1992) "Trends in Private Investment inDeveloping

Countries" International Finance Corporation Discussion paper No 16The World Bank Root, F. R. and Ahmed, A. A. (1979) "Empirical Determinants of ManufacturingDirect

Investment in Developing Countries" Economic and Cultural Change, Vol 27July pp 751 -767

Stride, G. T. and Ifeka, C. (1971) "Peoples and Empires of West Africa" ThomasNelson &

Sons Ltd, London Thirlwall, A. P (1994) "Growth and Development". 5th edition, Macmillan, London Vernon, R (1966) "International Investment and International Trade in the ProductCycle"

Quarterly journal of Economics, Vol. 80, pp 190 - 207 Wai, T and Wong, C. (1992) "Determinants of Private Investment in DevelopingCountries"

journal of Development Studies (London) Vol. 19 October

39

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

Research is a systematic process of finding out, acquiring and using knowledge (Udo, 2004:

2). Research methodology, therefore, refers to the arrangement of conditions for the

collection and analysis of information, in a manner that aims to combine relevance of the

research purpose with economy of procedure. It also considers the various sources adopted in

gathering information relevant to the study.

To this end, this chapter describes the research methodology of this work, showing the

research design, sources of data collection, method of data collection, population and sample

size, and finally the techniques of data analysis.

3.1 RESEARCH DESIGN

Research design means the structuring of investigation aimed at identifying variables and

their relationship to one another (Asika, 2001; 27). And since this research is empirical and

explanatory in nature, efforts were made to "Evaluate Tax Incentive Packages” which were

used as a fiscal policy measure for attracting Foreign Direct Investments in Nigeria. The

research is also designed to be inductive in nature; this is because the researcher will be

drawing conclusions based on the various data collected and analyses therefrom.

The research was designed to obtain secondary data from published official documents, to

enable it undertake the evaluation of Tax Incentives as a Fiscal Policy Measure for Attracting

Foreign Direct Investment in Nigeria.

3.2 SOURCES OF DATA

Because numerical data are the raw materials of statistical investigation, one of the steps in

any statistical study must be the collection of suitable data (Freund & Williams, 1979; 6).

Secondly, due to the sacredness of data to any research work, coupled with the integrity

question, as to the correctness of the data, the researchershowed great care in the collection of

relevant data for the study, using officially documented secondary data.

Thus the relevant data, based on the scope of the study, were collected from the Federal

Inland Revenue Services (FIRS), the Central Bank of Nigeria (CBN) publications. Other

relevant literatures were used, including empirical works on related studies.

40

Some of the data not displayed in chapter four (Data Presentation and Analysis) are exhibited

in the appendices.

3.3 METHODS OF DATA COLLECTION

Data used in this work were mainly sourced from official bulletins. These were collected

through Desk Research. Extensive use of publications from the Federal Inland Revenue

Services and the Central Bank of Nigeria (CBN) statistical bulletins were made.

3.4 POPULATION AND SAMPLE SIZE

A population consists of all conceivably or hypothetical ly possible observations relating to a

given phenomenon while a sample is, simply, a part of a population (Freund and Williams,

1979: 169). Therefore, for any study according toBailey (1982: 85), it is important to

determine the group of persons or things tostudy. The researcher therefore takes for the

population, the activities in the Nigerian economy, which could be affected by the activities

of FDI.

In the choice of the sample, cognisance was taken of the fact that as long asthe members of

the population have identical characteristics needed for the investigation, any part of the

population could be chosen for the study (Uzoagulu,1998: 64 -65). Hence the samples were

the same with the population being made-up of the aggregate effect of Foreign Direct

Investment inNigeria.

3.5 TECHNIQUES OF DATA ANALYSIS

Data collected in the course of this research were presented and analysed using various

statistical tools and historical method of analysis. Likewise, the hypotheses were tested using

relevant statistical tools.

Data were presented in tabular and graphic forms and analysed using the simple percentage

tool of analysis. The various hypotheses were tested using the relevant tools - Chi Square for

hypothesis I, and Multiple Regression for Hypothesis II.

For the Chi-Square test, and the Multiple Regression, were from a Microsoft Software

package - SPSS (Statistical package for Social Sciences) for accuracy and better presentation.

41

REFERENCES

Asika, N (2001) "Research Methodology in Behavioural Sciences". LongmanPublishers Pic, Ikeja, Lagos

Bailey Kenneth, D (1982) 'Methods of Social Research" Collier Macmillan Ltd;London Freund, J. E. and Williams, F. J. (1979) "Modern Business Statistics" 2nd ed. PitmanLtd.

London Nwabuike, P. 0. (1986) "Fundamentals of Statistics" Chika Printing Press, Enugu Udo G. 0. (2004) "A Guide to Modem Research Methods". Institute ofDevelopment Studies,

University of Nigeria, Enugu Campus Uzoagulu, A. E. (1998) "practical Guide to Writing" John Jacobs Classic PublishersLtd.

Okpara Avenue, Enugu

42

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND TESTING OFHYPOTHESI S

4.0 INTRODUCTION

In this chapter, the data collected for the study is presented and analysed. Also the various

hypotheses formulated are also tested with appropriate test instruments, for their validity.

The major limitation which the researcher encountered at this stage is the dearth of complete

relevant information related to the topic under study.

Data were collected through desk research using secondary data from the CBN publications

and Federal Inland Revenue Services publications. The tools of analysis had been discussed

in chapter three. But for emphasis, the chi-square and the multiple regression tools will be

used where necessary, from the Statistical Package for Social Sciences (SPSS).

4.1 DATA PRESENTATION

The table presented below is the summation of cumulative foreign private investment in

Nigeria by Origin, as is presented in Table D.5.3 of the statistical bulletin (CBN, 2002: 367 -

369). What are represented are only the totals of the investment of different sections of trade

partners of Nigeria, with their percentage distribution.

43

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

United Kingdom

United States

Western Europe

Others

Years Total %

Distribution of Total

Total % Distribution of

Total

Total % Distribution of

Total

Total % Distribution of Total

1970 444.4 44.3 230.0 22.9 224.8 22.4 104.0 10.4

1971

592.0

44.8

337.4

25.5

261.0

19.7

132.4

10.0

1972 769.7 49.0 286.6 18.2 367.0 23.4 147.8 9.4

1973 860.9 48.8 308.0 17.5 415.2 23.5 179.6 10.2

1974

832.9

46.0

300.0

16.6

459.8

25.4

219.5

12.1

1975

857.5

37.5

535.2

23.4

590.1

25.8

304.7

13.3

1976

947.2

40.5

376.2

16.1

653.1

27.9

362.5

15.5

1977 1072.8 42.4 287.2 11.3 737.0 29.2 432.4 17.1

1978 1195.3 41.7 342.4 12.0 847.6 29.6 477.7 16.7

1979 1103.6 35.0 565.2 1.9 976.0 31.0 507.7 16.1

1980

1421.2

39.3

566.2

15.6

1107.2

30.6

524.9

14.5

1981 1429.2 38.0 438.6 11.7 1350.0 35.9 540.1 14.4

1982

1993.8

37.0

1171.

6

21.8

1557.6

28.9

659.8

12.3

1983

2606.8

43.8

973.0

16.4

1654.2

28.3

685.5

11.5

1984

3043.4

47.4

964.9

15.0

1659.1

25.8

750.9

11.7

1985

3594.4

52.8

860.2

12.6

1601.1

23.5

748.5

11.0

1986

5073.9

54.5

1381.

5

14.8

1829.9

19.6

1029.3

11.1

1987 5508.1 55.1 1198. 12.0 2053.4 20.5 1233.6 12.3

1988 4724.9 41.7 2734. 24.1 2512.8 22.2 1366.7 12.1

1989

6254.6

57.4

642.8

5.9

2440.6

22.4

1561.9

14.3

1990

6828.6

65.4

209.3

2.0

1509.7

14.5

1888.5

18.1

1991

7247.6

59.2

826.7

6.8

2840.1

23.2

2982.3

24.4

1992

7808.0

38.1

6010.

1

29.3

3581.1

17.5

3107.4

15.1

1993

11441.3

17.1

12051

.8

18.0

39445.8

59.0

3848.1

5.1

1994

12578.0

17.8

13439

.4

19.0

39178.4

54.0

5518.8

7.8

1995 15794.1 13.2 18482 15.5 97463.4 64.9 7651.3 6.4

1996 16988.9 13.9 18673 15.2 78712.7 64.5 8226.2 6.7

44

1997

17221.5

13.4

22442

.0

17.5

80150.3

62.4

8518.2

6.8

1998 31367.9 20.6 21573 14.2 82279.2 54.0 17171. 11.3

1999 32603.5 21.1 20084 13.0 83558.3 54.2 17942. 11.6

2000

32799.3

20.8

21939

.6

13.9

84466.1

53.6

18350.

4

11.7

2001

35452.3

22.0

22626

.6

14.1

86175.1

52.9

19089.

4

11.9

2002

36841.4

22.1

22446

.9

13.5

86324.4

51.8

21818.

9

12.6

Source: CRN Statistical Bulletin Vol. 13 Dec., p 367 - 369

Table 4.1b below represents cumulative Foreign Private Investment in Nigeria by Type of

Activity, that is, whether it is Mining or Manufacturing or Agriculture, etc. The figures

presented are the totals of the various activities and the percentage distribution for that year.

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

million)

Mining &

Quarrying

Manufacturing &

Designing

Agriculture & Co.

Transport&

Communication

Years

Total

% age

Total

% age

Total

% age

Total

%

age 1970 515.4 51.4 224.8 22.4 11.1 1.1 13.8 1.4

1971

694.0

52.5

378.8

28.6

15.4

1.2

12.0

0.9

1972

859.7

54.7

356.6

22.7

9.4

0.6

12.2

0.8

1973

925.3

52.5

409.0

23.2

7.9

0.4

11.6

0.7

1974

818.1

45.1

520.4

28.7

20.7

1.1

21.9

1.2

1975

959.6

41.9

506.2

22.1

19.2

0.8

22.8

1.0

1976

918.9

39.3

550.7

23.5

21.9

0.9

16.2

0.7

1977 1090.8 43.1 703.8 27.8 75.0 3.0 30.6 1.2

1978

421.3

14.7

1263.4

44.1

117.6

4.1

55.6

1.9

1979

466.8

14.8

1402.51

44.5

120.8

3.8

60.5

1.9

1980 677.4 18.7 1503.9 41.5 120.5 3.3 62.2 1.7

1981

526.0

14.0

1705.7

45.4

120.5

3.2

60.8

1.6

1982 974.0 18.1 1922.5 35.7 120.5 2.2 68.9 1.3

983 511.2 8.6 2128.1 35.8 120.5 2.1 77.3 1.3

1984 702.8 10.9 2119.3 32.9 127.8 2.0 80.6 1.3

45

1985 744.0 10.9 2278.1 33.5 128.5 1.9 85.9 1.3

1986

2510.4

27.0

2810.2

30.2

126.0

1.4

80.4

0.9

1987

2260.2

22.6

3122.3

31.2

128.2

1.2

75.6

0.8

1988 3403.0 30.0 3637.0 32.1 117.3 1.2 1606 1.4

1989

636.7

5.8

5406.4

49.6

128.9

1.2

158.2

1.5

1990

1091.6

10.5

6339.0

60.7

134.8

3.2

240.5

2.3

1991

810.0

6.6

8692.4

71.0

334.7

3.1

373.2

3.0

1992

6419.2

31.3

9746.3

47.5

382.8

1.9

391.5

1.9

1993

27686.9

41.5

12885.1

19.3

386.4

1.8

426.4

0.8

1994 26680.0 37.7 14059.9 19.9 1214.9 1.7 429.6 0.6

1995 56747.3 47.5 27668.8 23.2 1208.5 1.0 374.9 0.3

1996

56792.3

46.3

29814.3

24.3

1209.0

1.0

485.6

0.4

1997

59221.4

39.3

31297.2

24.4

1209.0

0.9

672.6

0.5

1998

59970.5

38.2

34503.9

22.6

1209.0

0.8

689.2

0.5

1999

58855.4

18.2

36282.1

23.5

1209.0

0.8

820.3

0.5

2000

60710.9

38.5

37333.6

23.7

1209.0

0.8

820.3

0.5

2001

1611.9

38.3

37779.6

23.5

1209.0

0.8

955.3

0.6

2002

61611.9

37.0

39953.6

24.0

1209.0

0.7

1736.3

1.1

Source: CBN Statistical Bulletin Vol. 13 Dec 2000 pp. 371 - 372

46

Table4.1b(Contd.):

Cumulative Foreign Private Investment in Nigeria by Type of Activity (N million)

Building &

Construction

Trading & Biz Services

Miscellaneous Service

Years Total % age Total % age Total % age

1970 13.8 1.4 206.6 20.6 17.6 1.8

1971 15.4 1.2 187.2 14.2 20.0 1.5

1972

34.3

2.2

242.7

15.4

56.2

3.6

1973 45.0 2.6 294.7 16.7 70.7 4.0

1974 64.2 3.5 321.3 17.7 45.5 2.5

1975

111.2

4.9

572.4

25.0

96.1

4.2

1976 122.5 5.2 624.8 26.7 84.0 3.6

1977 121.4 4.8 365.8 14.4 144.3 5.7

1978

224.3

7.8

5505.225

18.2

258.5

9.0

1979

294.3

9.3

550.5

17.5

257.7

8.2

1980

367.8

8.5

693.2

19.1

255.1

7.0

1981

325.9

8.7

767.2

20.4

251.8

6.7

1982

422.5

7.8

1483.6

27.6

390.8

7.3

983

443.9

7.5

2274.6

38.2

386.3

6.5

1984 439.0 6.8 2622.5 40.9 335.6 5.2

1985 453.2 6.7 2677.9 39.7 418.9 6.2

1986

501.6

5.4

2753.0

29.6

529.8

5.7

1987 462.6 4.6 3396.5 34.0 559.1 5.6

1988

492.7

4.3

3133.7

27.6

383.3

3.4

1989

481.8

4.4

34972

32.1

594.7

5.4

1990

743.6

7.1

1710.4

16.4

123.7

0.2

1991

1471.6

12.0

1252.2

11.9

682.0

5.6

1992

1406.0

6.9

1482.5

7.2

682.2

3.3

1993

71.2

0.1

1864.5

2.8

22638.0

33.9

1994

1 707.0

2.4

2247.6

3.2

24381.1

34.5

1995 1553.0 1.3 2990.7 2.5 28848.0 24.2

1996

1864.3

1.5

2668.7

3.0

28766.7

23.5

47

1997 1259.8 1.0 3625.7 2.8 31046.2 24.2

1998 3888.3 2.6 10460.5 6.9 41689.5 27.3

1999 3995.9 2.6 10927.3 7.1 42100.4 27.3

2000 3995.9 2.5 11201.3 7.1 42237.6 26,8

2001 4211.9 2.6 120163 7.5 43657.6 27.1

2002

4293.1

2.6

1230.3

7.4

45509.6

27.3

Source: CBN Statistical Bulletin Vol. 13 Dec 2000 pp. 371 - 372

Table 4.1c presented below, shows only the summations of the Flow of Foreign Private

Capital in Nigeria by origin. It was arrived at by summing all the inflows, outflows and net

flows from United Kingdom, USA, Western Europe and other Countries. Below is its

presentation.

Table 4.1c: Flow of Foreign Private Capital in Nigeria

Years

In flow (N million)

Outflow (N million)

Net flow

(N million)

1970

251.0

129.4

121.6

1971

489.6

170.0

319.6

1972

432.8

184.5

248.3

1973

577.8

385.2

192.6

1974

507.1

458.8

48.3

1975

757.4

282.0

475.4

1976

521.1

474.8

46.3

1977 717.3 519.7 197.6

1978 664.7 332.9 331.8

1979

704.0

414.1

289.9

1980

786.4

319.4

467.0

1981 584.9 447.1 137.8

1982

2193.4

568.5

1624.9

1983 1673.6 116.9 556.7

1984 1385.3 850.5 534.8

1985

1423.5

1093.8

329.7

48

1986 4024.0 152.4 2499.6

1987

5110.8

4430.8

680.0

1988

6236.7

4891.1

1345.6

1989 4692.7 5132.1 -439.4

1990 10450.2 10914.5 -464.3

1991 5610.2 3802.2 1808.0

1992

11730.7

3461.5

8269.2

1993 42624.9 9630.5 32994.4

1994

7825.5

3918.3

3907.2

1995 55999.3 7322.3 48677.0

1996

5672.9

2941.9

2731.0

1997

10004.0

4273.0

5731.0

1998

32434.5

8355.6

24078.9

1999

4035.5

2256.4

1779.1

2000

16453.6

13106.6

3347.0

2001 4937.0 1560.0 3377.0

2002

8988.5

781.7

8206.8

Source: CBN Statistical Bulletin Vol. 13 Dec 2002 pp. 359 - 360

Below is table 4.1d which shows the state of Nigeria's Balance of Payment from 1994 to

2002. It was arrived at by picking only the overall balances as shown on Table D.2.1, pp 340-

341 of Statistical Bulletin (2002).

49

Table 4.1d: Nigeria's Balance of Payment

Years

Overall Balance

1994

-42623.3

1995 -195316.3

1996

-53152.0

1997 1076.3

1998 -220675.1

1999 -326634.3

2000

314139.2

2001

24729.9

2002

-525691.5

Source: CBN Statistical Bulletin Vol. 13 Dec. 2002 pp. 340 – 341

Fig 4.1: Nigeria’s Balance of Payment Table 4.1e below sows the inflation for the periods 1970 adapted by the CBN from the Federal Office of Statistics records.

-600000

-500000

-400000

-300000

-200000

-100000

0

100000

200000

300000

400000

1994 1995 1996 1997 1998 1999 2000 2001 2002

Nigeria's Balance of Payment

Overall Balance

50

Table 4.1e: Inflation Rate

Years Inflation Rate (%)

1970

13.8

1971

16.0

1972

3.2

1973

5.4

1974

13.4

1975

33.9

1976

21.2

1977

15.4

1978

16.6

1979

11.8

1980

9.9

1981

20.9

1982

7.7

1983

23.2 1984

39.6

1985

5.5

1986

5.4

1987

10.2

1988

38.3

1989

40.9

1990

7.5

1991

13.0

1992

44.5

1993

57.2

1994

57.0

1995

72.8

1996

29.3

1997

8.5

1998

10.0

1999

6.6

51

2000

6.9

2001

1st Quarter

11.9

2nd Quarter

16.6

3rd Quarter

18.4

4th Quarter

18.9

2002

1st Quarter

18.8

2nd Quarter

16.4

3rd Quarter

14.8

4th Quarter

12.9

2003

1st Quarter 10.5

2nd Quarter 10.1

3rd Quarter 10.7

4th Quarter 14.0

Source: CBN Statistical Bulletin Vol. 13 Dec. 2002 p. 330

Below is table 4.1f, which represents Nigeria's GDP at 1984 constant factor cost. The figures

were arrived at by aggregating the various totals of the Activity Sectors as presented in pp.

242 - 246 of the CBN Statistical Bulletin (2002).

52

Table 4.1f:

Nigeria Gross Domestic Product at 1984 Constant Factor Cost (N million)

Year Total GDP

1981 70,395.9

1982 70,157.0

1983 66,389.5

1984 63,006.4

1985

68,916.3

1986

71075.9

1987

70741.4

1988

77752.5

1989

83495.2

1990

90,342.1

1991

94614.1

1992 92431.1

1993

100015.1

1994

101040.1

1995 103502.9

1996

107020.0

1997

110400.0

1998

112950.0

1999

116140.0

2000

120640.0

2001 125720.0

2002 129820.0

2003 136470.0

Source: CBN Statistical Bulletin Vol. 13 Dec. 2003 pp 249 - 253

Table 4.1g shown below is the Declared Registered Unemployed and Vacancies for the years

1984 to 2002. They were arrived at by going to the total figures, that is, total unemployed,

total vacancies, and total placements. When the cumulative totals of 'Lower Grade Workers'

and professionals are subtracted from their cumulative placements, the net figures of

unemployed are arrived at.

53

Table 4.1g: Registered Unemployed and Vacancies Declared

Lower Grade Workers

Professionals and Executives

Year

Total

Vacancies

Declared

Placement

Total

Vacancies

Declared

Placements

Net

Unemployed 1984 120945 12612 3865 2514 657 26 119568

1985

96580

11156

2139

4165

748

145

98461

1986

85158

13050

2378

6123

606

148

88755

1987 145084 16502 4988 15100 444 175 140365

1988

116162

14154

2506

16293

591

281

1180020

1989

96055

14052

3474

14281

3091

678

84416

1990

89752

7637

1917

10182

3695

986

97031

1991

110513

14529

2924

12624

3989

164

11414

1992

75143

3864

985

22206

3088

10

93276

1993

75387

3735

1251

108153

12605

79

182210

1994

72277

3786

859

28123

3307

8

99533

1995

81730

4182

1119

32942

3708

49

113504

1996

85441

7873

2020

67252

250

91

150582

1997

85832

7831

2134

66461

83

2

150157

1998

84727

6895

1352

99376

38

15

182736

1999 86024 7313 1611 63669 138 75 148007

2000

85368

6583

923

104960

115

110

189295

2001

85928

7437

1854

84359

127

93

168340

2002

85648

7010

1389

94663

121

102

178820

Source: CBN Statistical Bulletin Vol. 13, Dec. 2002 pp. 328 - 329

54

4.2 DATA ANALYSIS

OBJECTIVES ONE AND TWO

Taking a look at the Tax Environment of Nigeria; and examining the present

TaxIncentive Regime

The researcher in the course of his study was able to identify various tax incentives that were

meant to encourage manufacturing and economic growth. The tax environment of Nigeria is

also friendly, both to the foreign entrepreneurs and to local entrepreneurs. Worth of note are

the revised incentive packages that took effect from 1990 and the Export Promotion Zones

Act of 1992.

All these increased the incentives for investors venturing into manufacturing, mining and

quarrying, agriculture, research and developments (R$D). Refer to the appendix III.

OBJECTIVE THREE

The Trend of Foreign Direct Investment in the Country

The need for external capital inflow arises, when desired investment exceeds actual savings.

Historically indicate that until the First World War, capital to developing countries came

directly from Great Britain and France, to their former colonies (Ogamba, 2003: 31). Later,

the United States, other Industrialised nations and multinational agencies started official

assistance to less developed countries.

In studying the trend of FDI in the country, tables in the 'Cumulative Foreign Private

Investment in Nigeria by Origin', 'Cumulative Foreign Investment in Nigeria by Type of

Activity', and 'Flow of Foreign Private Capital in Nigeria' will be analysed. These are

represented by tables 4.1aand 4.1b, shown below.

55

Table 4.1a:

Cumulative Foreign Private Investment in Nigeria by Origin (N million)

United Kingdom

United States

Western Europe

Others

Years

Total

% Distribution

of Total

Total

% Distribution

of Total

Total

%

Distribution

of Total

Total

% Distribution

of Total

1970 444.4 44.3 230.0 22.9 224.8 22.4 104.0 10.4

1971

592.0

44.8

337.4

25.5

261.0

19.7

132.4

10.0

1972 769.7 49.0 286.6 18.2 367.0 23.4 147.8 9.4

1973 860.9 48.8 308.0 17.5 415.2 23.5 179.6 10.2

1974 832.9 46.0 300.0 16.6 459.8 25.4 219.5 12.1

1975

857.5

37.5

535.2

23.4

590.1

25.8

304.7

13.3

1976 947.2 40.5 376.2 16.1 653.1 27.9 362.5 15.5

1977 1072.8 42.4 287.2 11.3 737.0 29.2 432.4 17.1

1978 1195.3 41.7 342.4 12.0 847.6 29.6 477.7 16.7

1979 1103.6 35.0 565.2 1.9 976.0 31.0 507.7 16.1

1980

1421.2

39.3

566.2

15.6

1107.2

30.6

524.9

14.5

1981

1429.2

38.0

438.6

11.7

1350.0

35.9

540.1

14.4

1982 1993.8 37.0 1171.6 21.8 1557.6 28.9 659.8 12.3

1983

2606.8

43.8

973.0

16.4

1654.2

28.3

685.5

11.5

1984 3043.4 47.4 964.9 15.0 1659.1 25.8 750.9 11.7

1985

3594.4

52.8

860.2

12.6

1601.1

23.5

748.5

11.0

1986 5073.9 54.5 1381.5 14.8 1829.9 19.6 1029.3 11.1

1987 5508.1 55.1 1198.5 12.0 2053.4 20.5 1233.6 12.3

1988 4724.9 41.7 2734.8 24.1 2512.8 22.2 1366.7 12.1

1989

6254.6

57.4

642.8

5.9

2440.6

22.4

1561.9

14.3

1990

6828.6

65.4

209.3

2.0

1509.7

14.5

1888.5

18.1

1991

7247.6

59.2

826.7

6.8

2840.1

23.2

2982.3

24.4

1992 7808.0 38.1 6010.1 29.3 3581.1 17.5 3107.4 15.1

1993

11441.

3

17.1

12051.8

18.0 39445.8 59.0

3848.1

5.1

1994

12578.

0

17.8

13439.4

19.0

39178.4

54.0

5518.8

7.8

1995

15794.

1

13.2

18482.9

15.5

97463.4

64.9

7651.3

6.4

56

1996 16988. 13.9 18673.2 15.2 78712.7 64.5 8226.2 6.7

1997 17221. 13.4 22442.0 17.5 80150.3 62.4 8518.2 6.8

1998 31367. 20.6 21573.0 14.2 82279.2 54.0 17171.8 11.3

1999

32603.

5

21.1

20084.1

13.0

83558.3

54.2

17942.7

11.6

2000 32799. 20.8 21939.6 13.9 84466.1 53.6 18350.4 11.7

2001

35452.

3

22.0

22626.6

14.1

86175.1

52.9

19089.4

11.9

2002

36841.

4

22.1

22446.9

13.5

86324.4

51.8

21818.9

12.6

Table 4.1b:

Cumulative Foreign Private Investment in Nigeria by Type of activity (N million)

Mining & Quarrying

Manufacturing &

Designing

Agriculture & Co.

Transport &

Communication

Years Total % age Total % age Total % age Total % age

1970

515.4

51.4

224.8

22.4

11.1

1.1

13.8

1.4

1971

694.0

52.5

378.8

28.6

15.4

1.2

12.0

0.9

1972 859.7 54.7 356.6 22.7 9.4 0.6 12.2 0.8

1973

925.3

52.5

409.0

23.2

7.9

0.4

11.6

0.7

1974

818.1

45.1

520.4

28.7

20.7

1.1

21.9

1.2

1975

959.6

41.9

506.2

22.1

19.2

0.8

22.8

1.0

1976 918.9 39.3 550.7 23.5 21.9 0.9 16.2 0.7

1977 1090.8 43.1 703.8 27.8 75.0 3.0 30.6 1.2

1978 421.3 14.7 1263.4 44.1 117.6 4.1 55.6 1.9

1979

466.8

14.8

1402.51

44.5

120.8

3.8

60.5

1.9

1980

677.4

18.7

1503.9

41.5

120.5

3.3

62.2

1.7

1981

526.0

14.0

1705.7

45.4

120.5

3.2

60.8

1.6

1982

974.0

18.1

1922.5

35.7

120.5

2.2

68.9

1.3

983

511.2

8.6

2128.1

35.8

120.5

2.1

77.3

1.3

1984 702.8 10.9 2119.3 32.9 127.8 2.0 80.6 1.3

1985 744.0 10.9 2278.1 33.5 128.5 1.9 85.9 1.3

1986

2510.4

27.0

2810.2

30.2

126.0

1.4

80.4

0.9

1987

2260.2

22.6

3122.3

31.2

128.2

1.2

75.6

0.8

1988

3403.0

30.0

3637.0

32.1

117.3

1.2

1606

1.4

57

1989

636.7

5.8

5406.4

49.6

128.9

1.2

158.2

1.5

1990

1091.6

10.5

6339.0

60.7

134.8

3.2

240.5

2.3

1991

810.0

6.6

8692.4

71.0

334.7

3.1

373.2

3.0

1992

6419.2

31.3

9746.3

47.5

382.8

1.9

391.5

1.9

1993

27686.9

41.5

12885.1

19.3

386.4

1.8

426.4

0.8

1994

26680.0

37.7

14059.9

19.9

1214.9

1.7

429.6

0.6

1995

56747.3

47.5

27668.8

23.2

1208.5

1.0

374.9

0.3

1996

56792.3

46.3

29814.3

24.3

1209.0

1.0

485.6

0.4

1997 59221.4 39.3 31297.2 24.4 1209.0 0.9 672.6 0.5

1998 59970.5 38.2 34503.9 22.6 1209.0 0.8 689.2 0.5

1999 58855.4 18.2 36282.1 23.5 1209.0 0.8 820.3 0.5

2000 60710.9 38.5 37333.6 23.7 1209.0 0.8 820.3 0.5

2001

1611.9

38.3

37779.6

23.5

1209.0

0.8

955.3

0.6

2002

61611.9

37.0

39953.6

24.0

1209.0

0.7

1736.3

1.1

Source; CBN Statistical Bulletin Vol. 13 Dec 200<2pp. 371 - 372

Table4.1b(Contd.):

Cumulative Foreign Private Investment in Nigeria by Type of Activity (N million)

Building &.

Construction

Trading & Biz Services

Miscellaneous Service

Years Total % age Total % age Total % age

1970

13.8

1.4

206.6

20.6

17.6

1.8

1971

15.4

1.2

187.2

14.2

20.0

1.5

1972 34.3 2.2 242.7 15.4 56.2 3.6

1973

45.0

2.6

294.7

16.7

70.7

4.0

1974

64.2

3.5

321.3

17.7

45.5

2.5

1975

111.2

4.9

572.4

25.0

96.1

4.2

1976

122.5

5.2

624.8

26.7

84.0

3.6

1977

121.4

4.8

365.8

14.4

144.3

5.7

1978 224.3 7.8 5505.225 18.2 258.5 9.0

1979 294.3 9.3 550.5 17.5 257.7 8.2

1980

367.8

8.5

693.2

19.1

255.1

7.0

58

1981

325.9

8.7

767.2

20.4

251.8

6.7

1982

422.5

7.8

1483.6

27.6

390.8

7.3

1983

443.9

7.5

2274.6

38.2

386.3

6.5

1984 439.0 6.8 2622.5 40.9 335.6 5.2

1985 453.2 6.7 2677.9 39.7 418.9 6.2

1986 501.6 5.4 2753.0 29.6 529.8 5.7

1987

462.6

4.6

3396.5

34.0

559.1

5.6

1988 492.7 4.3 3133.7 27.6 383.3 3.4

1989 481.8 4.4 34972 32.1 594.7 5.4

1990

743.6

7.1

1710.4

16.4

123.7

0.2

1991 1471.6 12.0 1252.2 11.9 682.0 5.6

1992

1406.0

6.9

1482.5

7.2

682.2

3.3

1993

71.2

0.1

1864.5

2.8

22638.0

33.9

1994 1 707.0 2.4 2247.6 3.2 24381.1 34.5

1995

1553.0

1.3

2990.7

2.5

28848.0

24.2

1996 1864.3 1.5 2668.7 3.0 28766.7 23.5

1997 1259.8 1.0 3625.7 2.8 31046.2 24.2

1998

3888.3

2.6

10460.5

6.9

41689.5

27.3

1999

3995.9

2.6

10927.3

7.1

42100.4

27.3

2000

3995.9

2.5

11201.3

7.1

42237.6

26.8

2001

4211.9

2.6

120163

7.5

43657.6

27.1

2002

4293.1

2.6

1230.3

7.4

45509.6

27.3

59

Table 4.1c: Flow of Foreign Private Capital in Nigeria

Years In flow (N million)

Outflow (N million) Net flow (N million)

1970

251.0

129.4

121.6

1971

489.6

170.0

319.6

1972

432.8

184.5

248.3

1973

577.8

385.2

192.6

1974

507.1

458.8

48.3

1975

757.4

282.0

475.4

1976

521.1

474.8

46.3

1977

717.3

519.7

197.6

1978

664.7

332.9

331.8

1979

704.0

414.1

289.9

1980

786.4

319.4

467.0

1981

584.9

447.1

137.8

1982

2193.4

568.5

1624.9

1983

1673.6

116.9

556.7

1984

1385.3

850.5

534.8

1985

1423.5

1093.8

329.7

1986

4024.0

152.4

2499.6

1987

5110.8

4430.8

680.0

1988

6236.7

4891.1

1345.6

1989

4692.7

5132.1

-439.4

1990

10450.2

10914.5

-464.3

1991

5610.2

3802.2

1808.0

1992

11730.7

3461.5

8269.2

1993

42624.9

9630.5

32994.4

1994

7825.5

3918.3

3907.2

1995

55999.3

7322.3

48677.0

1996

5672.9

2941.9

2731.0

1997

10004.0

4273.0

5731.0

1998

32434.5

8355.6

24078.9

60

1999

4035.5

2256.4

1779.1

2000

16453.6

13106.6

33470

2001

4937.0

1560.0

3377.0

2002

8988.5

781.7

8206.8

To further understand the trend of FDI in Nigeria, cognisance could be taken of the role

which tax incentive packages played. As noted in FIRS (2002: 32), tax incentives are

designed to encourage investment in certain preferred sector of the economy and sometimes

they are geared towards attracting inflow of foreign exchange to complement domestic

supplies, for rapid economic development.

The current incentive structure was installed in 1990, which granted 5 year pioneer status in

the first instance, and an additional renewable 2 years, for companies venturing into

manufacturing. Other incentives for manufacturing were:

1. 10% investment allowance for plant and equipment

2. Rural investment allowance, ranging from 5% to 100% expenditure allowances on

assets used

3. Incentives for export promotion under EPZ

EFFECT OF TAX INCENTIVES ON FDI TREND

The effect of tax incentive packages on the trends of FDI could be seen on Table 4.1b above.

In the years 1990 - 1992 when increased incentives to manufacturing and processing became

effective, the manufacturing sector received the highest share of FDI - 60.7% in 1990, 71.0%

in 1991 and 47.5% in 1992. Mining and queuing which had maintained the lead in the 1970's,

went to a negative (-6.6%) drop, during the same period. Agriculture had a boost in sectoral

FDI of 3.2% and 3.15 for the years 1990 and 1991 respectively. The same went with

Transport and communication, which also peaked at 2.3% and 3.9% for the corresponding

years of 1990 and 1991 respectively.

The possible explanation could be that with the coming into effect of the 1990's incentive

regimes, Manufacturing whose incentives about doubled - coming from that administered by

Nigerian Investment Promotion Commission (NPIC) and the EPZ administered by Nigerian

Export Processing Zones Act (NEPZ); attracted many foreign investors and also drew those

61

who were formally involved in Mining and Quarrying. This was to enable them reap the extra

profit at less costs, which the incentives offered.

Also, as could be seen from table 4.1 a, the United Kingdom and other nations increased

their percentage share of FDI, while the United States dropped to a negative percentage (-

6.8%) share of FDI. This could have a possible explanation/ that the countries which

dropped, where not favoured by the sectoral incentives. However, after the initial shocks,

they started increasing their percentage share, especially, the Western Europe which

maintained the lead from 1993 to 2002, ranging from 51 % to 65%.

From table 4.1 c, it could be seen that after the drops of the 1989 and 1990 inthe net flow of

FDI - N439.4m and N-464.3m respectively; the net flow startedimproving, though not in a

steady note. This could be explained by the fact that,due to the noticed drop in FDI, the

incentive package were put in place, whichstarted revitalising the net flow of FDI.

OBJECTIVE FOUR

To appraise the effect of the various tax incentives on Foreign Direct Investment

(FDI) in Nigeria

in appraising the effects of the various tax incentives on FDI in Nigeria, the result of

Hypothesis I, which states that "tax incentives encourages FDI in Nigeria" will be used. Table

4.1c below was used in the test, where the trend of the net flow of FDI was matched against a

dummy mean incentive packages. Reason being that, from 1970 - 2002 of our data

presentation, the Federal Government had been using tax incentives to attract Foreign Direct

Investment into the country.

62

Table 4.1c: Flow of Foreign Private Capital in Nigeria

Years In flow (N million) Outflow (N million) Net flow (N million)

1970

251.0

129.4

121.6 1971

489.6

170.0

319.6

1972 432.8 184.5 248.3 1973

577.8

385.2

192.6 1974

507.1

458.8

48.3 1975

757.4

282.0

475.4 1976

521.1

474.8

46.3 1977

717.3

519.7

197.6 1978

664.7

332.9

331.8

1979

704.0

414.1

289.9

1980

786.4

319.4

467.0

1981

584.9

447.1

137.8

1982

2193.4

568.5

1624.9

1983

1673.6

116.9

556.7

1984

1385.3

850.5

534.8

1985

1423.5

1093.8

329.7

1986

4024.0

152.4

2499.6

1987

5110.8

4430.8

680.0

1988

6236.7

4891.1

1345.6 1989

4692.7

5132.1

-439.4 1990

10450.2

10914.5

-464.3 1991

5610.2

3802.2

1808.0 1992

11730.7

3461.5

8269.2 1993 42624.9 9630.5 32994.4

1994 7825.5 3918.3 3907.2 1995

55999.3

7322.3

48677.0 1996

5672.9

2941.9

2731.0 1997

10004.0

4273.0

5731.0

1998

32434.5

8355.6

24078.9

1999

4035.5

2256.4

1779.1

2000

16453.6

13106.6

33470

2001

4937.0

1560.0

3377.0

2002

8988.5

781.7

8206.8

63

In the hypothesis I test, the result or outputs on table 4.3a and 4.3b, the chi-square test

which was used to test the relationship between tax incentives and flows of FDI. The

level of significance was less than 0.05 (<0.05) which indicates that the distribution of

the observed frequencies differed from the expected frequencies or hypothesised

distributions (This could also be seen in section 4.3 below).

This means that the Ho is rejected, while the Ha is accepted. This implies that tax

incentives encourage FDI in Nigeria. This could further be seen from the analysis of

'Objective Two', where FDI increased from 1991, after dropping to negative figures in

1989 and 1990.

4.3 TESTING OF HYPOTHESES

Due to non-uniformity of data types, and the hypotheses to be tested, the chi-square

and the multiple-regression tools were used. For ease and finesse of presentation, the

MSE Statistical Package for Social Sciences (SPSS) was used for the test. Below are

the results.

HYPOTHESIS ONE

Ho: Incentive measures do not encourage Foreign Direct Investment in Nigeria

Ha:Incentive measures encourage Foreign Direct Investment in Nigeria

Since this was a test for relationship and difference, the chi-square test wasused.

64

Table 4.3a

Year Observed N Expected N Residual

1970 122 5178.4 -5056.4

1971 317 5178.4 -4861.4

1972 248 5178.4 -4930.4

1973 193 5178.4 -4985.4

1974 48 5178.4 -5130.4

1975 475 5178.4 -4703.4

1976 46 5178.4 -5132.4

1977

198

5178.4

-4980.4

1978

332

5178.4

-4846.4

1979

290

5178.4

-4888.4

1980

467

5178.4

-4711.4

1981

138

5178.4

-5040.4

1982 1625 5178.4 -3553.4

1983

557

5178.4

-4621.4

1984

535

5178.4

-4643.4

1985

830

5178.4

-2348.4

1987

680

5178.4

-4498.4

1988

1346

5178.4

-3832.4

1991 1808 5178.4 -3370.4

1992

8269

5178.4

-3090.6

1993

32994

5178.4

27815.6

1994 3907 5178.4 1271.4

1995 3907 5178.4 43498.6

1996 2731 5178.4 -2447.4

1997 5731 5178.4 552.6

1998

24079

5178.4

18900.6

1999 1779 5178.4 -3399.4

2000

3347

5178.4

-1831.4

2001 3377 5178.4 -1831.4

2002 8207 5178.4 3028.6

Total

155353

65

Test Statistics

Table 4.3b

Year

Chi-Square

Asymp. Sig.

669727.89

29

.000

0.0 cells (.0%) have expected frequencies less than 5. The minimum expected cellfrequency

is 5178.4, X20.05 = 42.557

INTERPRETATION

The result shows how low the significant value (less than 0.05) was, which indicates that the

observed distribution does not conform to the hypothesised distribution, which means that

the observed distribution differs from hypothesised distribution. Hence there is a

relationship between the two variables of TaxIncentives and Flow of Foreign Direct

Investment.

Therefore, we reject the Ho and accept the Ha, which states that:Tax Incentives encourage

Foreign Direct Investment in Nigeria.

HYPOTHESIS TWO

Ho: Foreign Private Investment does not encourage development

Ha: Foreign Private Investment encourages development

In this hypothesis, the under listed variables were used as proxies for development indicators:

1. Reduction in inflation

2. Increase in employment

3. Increase in standard of living

4. Increase in per capita income

5. Favourable Balance of payment Account

Thus, Balance of Payment, Inflation Rate, Unemployment (Registered) andNational GDP at

1984 constant factor were used as the independent variables;while the net FDI was used as

the Dependent variable.

66

The input and output of the test is shown on appendix I. In the testing of this hypothesis, the

multiple regression was used for theanalysis while the ANOVA was used for the result

testing. Due to the earlier notedproblem of dearth of complete relevant data, the analysis was

restricted to the years1994-2002.

INTERPRETATION

In determining the result of the test, it should be noted that if the significant value of the F

statistic is less than F0.05, then the independent variable will do a good job by explaining the

variation in the dependent variable. But if the significant value of F is larger-than 0.05, the

independent variable does not explain the variation in the dependent variable.

In this case, the dependent variable is the FDI, while the independent variables are the

Development indicators as stated above.

F < F0.05, therefore we reject the Ho and accept the Ha.

F = 1.955

F0.05 = 2.92

67

REFERENCES

CBN (2002) Statistical Bulletin Vol. 13

FIRS (2002) "General Tax Guide for Tax Administrators and Practitioners" (June2002) being

a Publication of the Federal Inland Revenue Services

Ogamba, E. N. (2003) "The Impact of Globalisation on Foreign Capital Flows inNigeria"

being a Thesis presented to the Department of banking and Finance, UNEC

68

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.0 INTRODUCTION

In this paper, the researcher critically took an Evaluation of Tax Incentives as a Fiscal Policy

Measure for Attracting Foreign Direct Investment in Nigeria. Four objectives of study were

analysed, and two hypotheses tested.

This chapter, therefore, is set forth to interpret the research findings, which is a key

component in a research process. On the basis of the findings, conclusions will be drawn and

recommendations made.

5.1 SUMMARY OF FINDINGS

OBJECTIVE ONE

Looking at the Tax Environment of Nigeria

The researcher noticed that the Federal Government had always used various incentives to

attract industrial and economic development to the nation. The tax environment of Nigeria

since 1970 has been favourable to Manufacturing, Mining and Quarrying, Agriculture and

Agro-allied Industries, and to Research and Development. In the Tax environment, it was

also noticed that there are three tiers of tax authorities, though they derive their creation from

the Federal laws. They include:

• The Federal Tax Authority, which is administrated by the Federal Board of Inland

Revenue (FBIR), empowered by sections 1, 2, & 3 of CITA, LFN 1990

• The State Tax Authorities, which is administered by the States Board of Internal

Revenue (SBIR), and empowered by sections 85A, B & C of personal Income Tax

(PITA) as amended by Act No 31 1996

• The Local Government Tax Authority, which is administered by the Local

Government Tax Authority, empowered by the Local Government Revenue

Committee, sections 85 D & E of PITA as amended b y Decree no 31 of 1996.

It was also noticed that there are three major types of taxes, with their various incentives.

These are:

• Personal Income Tax, which is governed by the provisions of PITA No 14 of 1993

69

• Company Income Tax, which is governed by CITA 1960, but was replaced by CITA

No 28 of 1979, which also had undergone various amendments. The latest being

Decree no 30 of 1996.

• Petroleum Profit Tax, which is governed by PPT Act CAP 354 LFN 1990

OBJECTIVE TWO

To examine the present Incentive Regime

The researcher noticed that all the three major types of taxes – Personal Income Tax,

Company Income Tax and Petroleum Profit Tax, all had incentive packages attached to them.

These ranged from some incomes exempted from tax, like the officers emoluments of the

President, the State Governors, income of any Trade Union registered under the Trade Union

Act, etc. Other incentives accompanying Personal Income Tax are: deductions allowed

capital allowances, and some other personal relief and allowances.

Company income tax also have their own incentive packages, with the authorities recognising

that tax incentives are designed to encourage investments in certain preferred sectors of the

economy and sometimes to attract inflow of foreign exchange, to complement (FIRS, 2002:

32).

The incentives are to various activities, like:

• Pioneer Companies – a tax holiday of up to 5 years, in the first instance and a

renewable additional 2 years are granted

• Investment Allowance

• Rural Investment Allowances, which ranges from telephone, tarred road, no water, no

electricity and a cumulative of above facilities not being present, which may attract up

to a 100% expenditure allowances on assets used

• Tax incentives for manufacturers of locally made spare parts, tools and equipments

• Export processing zone incentives

• Enhanced capital allowances; amongst others

70

OBJECTIVE THREE

To study the Trend of Foreign Private Investment in the

Country

In studying the trend of Foreign Direct Investment (FDI) in the country, the researcher

made use of the various data presented on Table 4.1 a, 4.1b and 4.1c. It was noticed

that the net flow of FDI had some set backs in the years 1989 and 1990. Thereafter,

there was an improvement which was brought about by the various improved incentive

packages, of which tax incentives were included.

Also it was noticed that the manufacturing sector had to overtake the Mining and

Quarrying Sector, which hitherto had been taking the lead. Agriculture also improved

greatly, taking the second place, in receiving the highest share of the FDI. All these

achievements could be explained by the effects of tax incentives of the 1990's, which

favoured the Manufacturing and Agricultural sectors.

OBJECTIVE FOUR

Appraising the Effects of the Various Incentives on FDI in Nigeria

To achieve this objective, the researcher relied on the result of Hypothesis One, which

rejected the Ho and accepted the Hi. Therefore, the effect of the various tax incentives

on FDI in Nigeria is that they encourage FDI in Nigeria.

However, though tax incentives encourage FDI in Nigeria, the effect of FDI to the automatic

development of the economy was not noticed, as was revealed bysome economic indication

used in hypothesis two. These are:

• Inflation rate

• Employment/unemployment rate

• Level of standard of living

• The state of the balance of payment

The result indicated that "Foreign Direct Investment has not encouraged development". It

was noticed that inflation rate was on the increase, unemployment was also on the increase,

the national GDP and the Balance of Payment were not improving.

These go to buttress the fact that development and economic growth are determined by a

cumulative of various macro-economic factors rather than the inflow of FDI only.

71

5.2 CONCLUSION

As was noted earlier, tax incentives are designed to encourage investments in certain

preferred sectors of the economy and sometimes to attract the inflow of foreign direct

investments to complement domestic ones, for rapid economic development (FIRS, 2002:

32). But tax incentives alone has proved not capable of achieving the twin objectives of

encouraging FDI and economic development, as was deduced from the findings of the

research.

Therefore, the researcher has come to the conclusion that tax incentives actually have boosted

the inflow of foreign direct investment (FDI) in the country. However, foreign direct

investment has not been able to single-handedly influence economic development in Nigeria

in real terms, not having reduced inflation rate, nor increased employment. It has also not

improved the standard of living, nor increasing the per capita income or a favourable balance

of payment for the nations.

5.3 RECOMMENDATIONS

The recommendations made in this study are premised on the fact the researcher

arrived at the conclusion that increase in foreign direct investment could not influence, in

positive terms, the economic indicators that were used in determining the level of economic

development and well-being of the nation. To this effect, the following recommendations are

offered by the researcher:

(i) That the current tax incentive measures and regime be maintained

(ii) That other factors which encourage economic development andimprovement of

the standard of living be embarked on

(iii) That government should promote good corporate governance in every arm and

tier of government, including the corporate society since this will enhance the

effective management of the nation's resources

(iv) That the Federal Government should pursue policies that will reduceinflation,

like avoiding extra budgetary spending and deficit budgeting

(v) Governmentshould sincerely pursue her privatisation exercise, in such amanner

that will reduce unemployment and not vice versa

72

(vi) That government should endeavour to pursue stable macro-economic policies,

upon which meaningful planning could be made by both indigenous private

business and foreign businessmen

(vii) Government should also endeavour to pursue policies that will sustainthe

democratic experience, upon which the economy will improve.

The researcher is of the opinion that if the above recommendations are followed, the gains

of increased direct investment will manifest in, better living standards, reduced inflation

and unemployment, favourable balance of payments for the nation and better values for

life.

73

REFERENCE

FIRS (2002); "General Tax Guide for Tax Administrators and Practitioners". Being a

publication of the Federal Inland Revenue Services

74

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