It is a common sight to see foreign businessmen, investors and firms in developing countries, especially in Africa. The business engagement of these foreign individuals cut across different sectors and business processes such as hotels, food and beverages, construction materials, telecommunication, oil and gas, among others. The wide-held expectation is that the presence of these foreign investors would aid the host nations in significant development of their various infrastructures, creates employment opportunities, industrial development, value creation, linkage creation, Research and Development (R and D) and improves the state of the nation’s knowledge and technology transfer from foreign firms to domestic firms [1]. Yet, what is observable is that many citizens in most countries have almost turn to mere spectators as they watch their minerals and the entire business milieu exploited with little or nothing to show for it.

To bridge such challenges, government of most countries such as Nigeria has stepped in to intervene through the initiation of Local Content Policy (LCP). Conceptually, LCP is defined as a set of policy instrument that is designed by governments of any country to ensure that a certain percentage of factors of production (such as labour, supplies, technology and knowledge) required at each stage of a business or firms processes is sourced domestically [2]. The objective of LCP in any nation is basically to give first consideration and deliberate preference to both citizens and factors of production required in any production process [3]. One of the benefit of allowing foreign investors in any country is due to the direction of Foreign Direct Investment (FDI). Annaek [4] defines FDI as the process whereby investors in one country obtain ownership of assets with the objective of gaining control over the production, distribution and other activities of a firm in a foreign country.

Nigeria is a country that is blessed with various forms of mineral and agricultural resources. Prior to the country’s independence in 1960, almost 70% of Nigerians depended heavily on agriculture for survival [5]. However, after the country’s independence, there were some structural changes in the composition of the nation’s business, both domestically and internationally especially with the discovery of crude oil. Sustained economic growth and development of any nation depends on several factors, notably among them is a nation reliant on both domestic and foreign investment. Investors from Nigeria usually invest in a wide-range of sectors abroad. Their investments ranges from food and beverages, manufacturing, building materials, telecommunication, oil and gas, among others. To guide their businesses that operate in Nigeria, Nigerian government introduced Local Content Policy (LCP). The rationale is, as more and more foreign firms abide with the LCP requirements, the outcome would not only be the improvement of our macroeconomic objectives but the improvement in the nation’s FDI generally. Overtime, these expectations have not been met considering the fact that most of these foreign investors are given incentives such as tax holidays that would have help them to operate favourably competitively against firms that operate in Nigeria. It is because of these inconsistencies between the objectives of LCP and FDI that this study on strategic direction of LCP and FDI of Nigeria (1980-2020) was carried out.

Statement of the Problem

Nigeria is a country that is greatly endowed with natural resources. Countries could develop themselves through domestic or foreign means. Overtime, the existence of these natural resources have actually worked against Nigerian economy as most of her natural resources are exported abroad. Local Content Policy was introduced in Nigeria in order to help regulate the business ownership and operations of these foreign investors, while also enjoying the benefits of FDI. Therefore, it is widely believed that as more and more firms invest in Nigeria, FDI of the country is expected to be significantly improved.

However, there is a growing amount of management literature that are of the view that increase in foreign investors in Nigeria has not lead to a corresponding improvement in the FDI of Nigeria despite reasonable percentage of ownership control and corporate income tax incentives. Different governments have strived to leverage on the influx of these foreign investors to improve our FDI standings through fostering of industrialization and structural transformation, job creation and more importantly, reducing the nations over reliance on oil commodity exports. Regardless of these efforts, increase in the number of Nigerian foreign investors have failed to create the needed links as unemployment in cities where these firms are located continue to increase, inadequate provision of basic amenities from these firms and the continuous importation of intermediate goods needed for their production processes. Altogether, these negates the expectations around LCP and FDI. Thus, a situation where increase in the number of foreign investors do not lead to significant improvement in Nigeria’s FDI is variation from wide held expectations. Such variation, therefore, underpins the need for this study.

Objectives of the Study

The main objective of this study is to assess the strategic direction of LCP and FDI of Nigeria within the period under review. Tax policy was measured using corporate income tax while tariff policy was measured using trade balance (import-export). Specifically, the objectives of the study are:

• To examine the effect of corporate income tax on FDI in Nigeria (1980-2020)

• To ascertain the effect of trade balance on FDI in Nigeria (1980-2020)

Research Questions

The following research questions were developed for this study:

• What effect does corporate income tax has on FDI in Nigeria (1980-2020)?

• What effect does trade balance has on FDI in Nigeria (1980-2020)?

Research Hypotheses

The following null hypotheses were formulated for this study:

• H₀₁: Corporate income tax has no effect on FDI in Nigeria (1980-2020)

• H₀₂: Trade balance has no effect on FDI in Nigeria (1980-2020)

Scope and Limitations of the Study

Local Content Policy was considered using tax policy and tariff policy. In measuring tax policy, corporate income tax was used while tariff policy was measured using trade balance. However, corporate income tax revenue was used instead of corporate income tax rate in order to avoid the problem of colinearity. There are other ways of assessing the impact of LCP in a host country, such as the use of Foreign Indirect Investment (FII). However, the research opted for the use of Foreign Direct Investment (FDI) as it allows the investing country or firm to have more presence and connectedness with the host country. More so, FII measures such as equity eventually results to capital flight, which would not benefit the host economy, in this case, the Nigerian economy. Thus, other forms of determining the impact of LCP in a given country was not considered. The study was equally limited to the accuracy and truthfulness of the sources where the secondary data used in the study were sourced from. Thus, the researcher relied on the accuracy of the data provided by Central Bank of Nigeria (CBN) statistical bulletin, capital market, Organization for Economic Co-operation and Development (OECD) and Federal Inland Revenue Service (FIRS) reports of various years.

Conceptual Framework

Assessing the efficacy of LCP in any country could come in different ways such as through the use of tax policy (measured using corporate income tax) and tariff policy (measured using trade balance) [6,7]. The proxies of LCP and FDI are discussed hereunder:

Company Income Tax

Company income tax are compulsory tax that are levied on the profit of a firm in a given location [8]. Relatedly, company income tax are simply taxable profits on limited organizations such as clubs, societies, associations, co-operatives, charities and other unincorporated bodies [8]. The administration of the companies’ income tax in Nigeria is overseen by Federal Inland Revenue Services (FIRS). The rate administered on each firm would be as defined by the Companies Income Tax Act (CITA). Whether the tax are levied to indigenous or foreign firms, the tax returns serve as an important contribution that firms make to any economy in which they operate. Though most firms see corporate taxes as burden especially when the rate is high, however, the rate of tax charged on company profits determines the direction of Foreign Direct Investment (FDI) in a country [9]. Justman et al. [10] submit that corporate tax are crucial investment decisions before firms could invest in any country, while Haiyamba [11], high company taxes scares foreign investors which affects the attraction of FDI.

Trade Balance

This refers to the difference between the monetary value of a country’s exports and imports in a given period of time [12]. In case of a greater value of exports as compared to imports of a nation, that shows the trade surplus or positive balance of trade, at the same time where there is a greater value of imports as compared to the exports, that indicates the shortage of trade or negative balance of trade of that particular country. In international business, a negative balance of trade leave a bad impression in that regard [12]. However, in an ideal situation (situations where exports are higher than imports), Wagner [13] argued that increased export leads to intense competition among firms, leading to an improved productivity. Furthermore andersen and Ronald [14] identified the channels through which increase positive trade balance affects FDI: (i) it provides access to foreign intermediates and technologies; (ii) it facilitates the dissemination of knowledge internationally; (iii) it expands the market size for new product varieties. Past management literatures contend that the direction of trade balance influences FDI. A negative balance reflects a negative impact of FDI at the macroeconomic level, while a positive balance unarguably leads to sustainable economic development of a nation [15].

Foreign Direct Investment (FDI)

FDI is defined as cross-border expenditures to acquire or expand corporate control of productive assets [16]. Similarly, FDI is seen as an investment made by an individual with the aim of exercising long-term ownership and controlling interest (at least one-tenth of the equity) in the host country [17]. Altogether, FDI simply implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Mostly, the movement of FDI is done in several ways. The head office of a firm may be in the investing country while the operations are in the host country; an already existing foreign firm may spread its business, in terms of branches, to another country; and foreign firms registering a company in another country without having any connection in the lending country [18]. When the deciding factors are available and functional, the ownership of businesses and other operations of foreign investors, unarguably enhances the propensities of economic growth and development of a country through increased employment opportunities, boost export and adequate transfer of products, technology and knowledge [5,19].

Theoretical Framework

There are management theories that support Local Content Policy (LCP) and Foreign Direct Investment (FDI). This study used the theory of industrial location. The theory of industrial location, also known as the least cost theory or pure theory was propounded by Alfred Weber in German language in 1909 but was subsequently translated into English in 1929. In the theory of industrial location, Weber was trying to find out why firms move from one location to another and what possible factors determine such movement. Thus, he postulated that influence of transport, influence of labour cost and influence of industrial agglomeration as prevailing factors why firms move from one geographical location to another. Weber’s theory of industrial location was premised on certain assumption such as: the region/area under consideration must have a self-supporting economy; there is a perfect competition in the market; fixed raw materials confined to particular places; ubiquitous raw materials, uniform demand for a product at all stations, among others.

The stylized fact in the theory of industrial location is that, investors/firms move from one geographical area to another due to cost of transport, labour and industrial agglomeration. In the case of Nigeria, the country is endowed with cheap labour, transportation cost and ready-made market for foreign products. The cost of production in many developed countries cannot be compared to that of Nigeria. In many cases, the cost of labour in Nigeria and other African countries is equated to slavery. Low cost of labour and other factors of production directly imply good fortune to any investor/firm. To that end, Nigerian business environment has continued to witness the increase of Nigerian investors/firms that operate internally in the country. Situations where such investors/firms cannot relocate completely to Nigeria, they have ended up in forming subsidiary firms in the country. Altogether, these measures help such investors/firms to have reasonable control of certain businesses in different sectors of the economy, which has a strong influence on the FDI direction of Nigerian economy. Thus, the theory of industrial location fittingly explain rationale for strategic direction of LCP and FDI of Nigeria.

Empirical Review

Past management studies have been carried out in this direction. In this section of the study, few of such studies are reviewed as shown hereunder.

Baba [20] assessed local content policy and its significance for FDI in the oil and gas industry in Ghana. It employed a random sampling qualitative methodology through the aid of a well-structured open ended and closed ended questions. On the whole, the study identified that the local content policy has not been able to significantly achieve its intended purpose since its inception hence, strict implementation and adherence is on the low key. It was recommended that there should be an establishment of local content funds to support indigenous SMEs to enhance their competitiveness and eliminating fronting of foreign companies and local content policy should be strengthened such that foreign investors and local industry players are clear on their overall scope of work so that unnecessary expectation would be reduced to avoid any conflict between industry participants.

Izuchukwu and Ofori [21] examined why south-south Foreign Direct Investment (FDI) is booming in Nigeria from 1992-2010. The study applied expo-facto research design. The collected secondary data were analyzed through the application of Autocorrelation Function, Unit-root test and Granger Causality test. The results of the analysis affirmed that China FDI inflow is bidirectional with Gross Domestic Product (GDP) indicating a significant contribution in the economy growth of the country. In line with the findings, creation of enabling investment climate and adequate macroeconomic policies in the country was recommended in order to ensure better productivity and sustainability of investment.

Monday [22] carried out a study on LCP, human capital development and sustainable business performance in the Nigerian oil and gas industry. The results showed that Local Content Policy had significant impact on the development of human capital in the Oil and Gas Industry. The study concluded that the Local Content Policy had achieved significant success in enhancing the development of human capital which in turn positively influenced business performance of indigenous companies in the Oil and Gas Industry in Nigeria.

Adedeji et al. [23] examined the role of local content policy in local value creation in Nigeria's oil industry: A Structural Equation Modeling (SEM) approach. Structural Equation Modeling (SEM) technique was applied to analyze the data obtained from a survey of 209 local oil and gas firms in the Niger Delta. Our findings confirm that LC policy has a positive and significant impact on local value creation. However, we found that local value created in the Nigerian oil industry as a consequence of LC policy is lower than the expected target. It was recommended that the implementation of the policy needs to be closely monitored to ensure its efficacy towards increasing economic development.

Research Design

The researcher made use of ex-post facto research design since the fact on company income tax, trade balance and FDI has already occurred. In social science literature, the use of ex-post facto research design entails seeking for possible relationship between factors by observing an already existing condition. Thus, ex-post facto research design is basically used to assess the influence of one variable on another.

Model Specification

Simple linear regression model was adopted in this study. The rationale for using this model in this study is to explain the causal relationship between each independent variable has on the dependent variable. The linear regression model is represented thus:

Y = a₀ +β₁X₁+e₀

                                                                                                      (1)

Y = a₀ +β₂X₂+e₀

                                                                                                      (2)

Where: 

Y:          The dependent variable (FDI), 

X₁-X₂:   The explanatory variables or the independent variables (corporate income tax and trade balance respectively)

a₀:         The constant term

β₁-β₂:      The parameter estimates while e₀ represents the error term

Data Analysis and Findings

Testing of Hypothesis: Two null hypotheses were used for this study. The hypotheses were all tested using simple linear regression. The results of the analysis are presented below:

Hypothesis One

H₀₁: Corporate income tax has no effect on FDI in Nigeria (1980-2020).

The Table above (Table 1-3) represents the results of the regression analysis. The results overall showed that Corporate Income Tax (CIT) do not have significant affect FDI within the period under review. R-square value of 0.11 shows that 11 percent of the changes in FDI can be explained by the changes in CIT. This implies that, an increase in CIT among Nigerian foreign investors/firms would only continue to reduce FDI in Nigeria. This is further evidenced with the F statistics value of 0.420 with a corresponding p-value of 0.521 (p-value>0.05) and a beta value of -0.103.

Table 1: Model Summary

Table 2: Goodness of Fit

Table 3: Coefficients^a

Hypothesis Two

H₀₂: Balance of trade has no effect on FDI in Nigeria (1980-2020).

Tables 4-6 above depicts the results of the regression analysis carried out. There is an R square value of 0.019. Equally, an F statistics value of 0.634 with a corresponding p-value of 0.432 (p-value>0.05) simply indicate that the overall model is not significant and does not exhibit excellent fit. This is further buttressed with a beta value of -0.139. 

Statistically, this indicate that BT negatively affect Nigeria FDI by -13.9. This shows that for any increase in BT among Nigerian foreign investors/firms, FDI of Nigeria would significantly decline by 13.9%.

Table 4: Model Summary

Table 5: Goodness of Fit

Table 6: Coefficients^a

This study centered on strategic direction of Local Content Policy (LCP) and FDI between Nigeria of (1980-2020). Evidences from the analyses showed that there was no positive and significant effects between the independent variables and the dependent variable. In terms of CIT, government of Nigeria do not tax Nigerian foreign investors/firms appropriately; most time, they are even given tax incentives. This boost their business operations while our FDI suffers. In BT analysis, Nigerian investors/firms that operate in Nigeria still rely heavily on importation of intermediary goods for their production process which do not favour our FDI. Conclusively then, LCP as practiced by Nigerian foreign investors/firms operating in Nigeria, negatively affect the FDI of the nation.

Recommendations

Based on the analysis in this study, the following recommendations:

• Government of Nigeria should ensure that tax incentives to Nigerian foreign investors/firms are reduced. This would help in reducing their operations and numbers in the country

• Measures such as embargo should be placed on such investors/firms from importation of intermediary good from outside countries, especially intermediary goods that could be easily sourced in Nigeria. This would boost the nations export as against the imports

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